Inside the Black Box: What Makes a Bank Efficient?

A decade of econometric research has shown that X-efficiency dominates scale and scope as the drivers of inefficiency in the U.S. banking industry. However, this research falls short in explaining the causes of the high degree of X-efficiency in the industry. This paper summarizes a four-year research effort to understand the drivers of this inefficiency. Key findings from this research, based on the most comprehensive studies to date of management practices in the retail banking industry, give insight into the drivers of X-efficiency. The paper provides a comprehensive framework for the analysis of X-efficiency in financial services. This paper was presented at the Wharton Financial Institutions Center's conference onRetail Banking, Services, Efficiency, Technology Management, Human Resource Management

Performance in Consumer Financial Services Organizations: Framework and Results from the Pilot Study

Financial services comprise over 4 percent of the gross domestic product of the United States and employ over 5.4 million people. By offering vehicles for investment of savings, extension of credit and risk management, they fuel the modern capitalistic society. While the essential functions performed by the organizations that make up the financial services industry have remained relatively constant over the past several decades, the structure of the industry has undergone dramatic change. Liberalized domestic regulation, intensified international competition, rapid innovations in new financial instruments and the explosive growth in information technology fuel this change. With this change has come increasing pressure on managers and workers to dramatically improve productivity and financial performance. This paper summarizes the first year of a multi-year effort to understand the drivers of performance in financial services organizations. Financial services are the largest single consumer of information technology in the economy, investing $38.7 billion dollars in 1991 (National Research Council, 1994). While this investment has had a profound effect on the structure of the industry and the products it provides, its effect on financial performance of the industry remains elusive. Why this "productivity paradox" (Brynjolfsson and Hitt,1993) exists is an important part of this project. The authors describe the differences in productivity in services from manufacturing. In the service world, the consumer co-produces the product with the firm, ofte nadding labor to the creation of the service. In addition, the scope of the service enterprise typically is quite vast, with components of the service production process being both producers and deliverers of the service. In addition, the quality of the services provided is forever changing. Thus, the authors suggest that productivity gains from human resource improvements or technology investments may not show up in standard performance measures, but may rather be used to improve the quality of the service provided. What appears to be a stagnation in productivity may actually be an increase in value delivered to the customer. Delivering value to the customer may provide the institution with sales opportunities and much needed information about the institution's customer base. The pilot survey conducted by the authors examines the relationship between technological advancement and the relational part of service delivery by studying time spent with the customer in relation to technological sophistication and time spent on the entire delivery process. The authors adopt the view that processes are the central "technology" of an organization. As with any technology, the process must be maintained. After a process has reached its useful life, it should be scrapped or rebuilt. Thus, the authors suggest that researchers should take a life-cycle view of processes when undertaking efficiency studies. The authors rely heavily on a process-oriented methodology in their analysis of performance drivers in financial services. The study does not focus on traditional measures of productivity or financial performance. Rather, the authors base comparisons on intermediary measures which evaluate the drivers of performance from the perspective of all participants in the co-productive process. This pilot study starts with consumer financial services and in particular, retail banking. The authors review the relevant literature on financial services performance and then propose a conceptual framework for the study. The framework assumes that industry conditions and firm strategy are given. The authors focus is to examine the components of performance that managers can affect, given a strategy and industry operating conditions. Thus, their initial focus is guided by their desire to direct attention to issues of implementation and their effects on performance. The authors attempt to bridge the gap between traditional productivity measures and difficult-to-measure financial performance by developing a set of value creation components as an intermediary set of performance indicators. Based on pilot interviews, these indicators reflect effective performance in ways that are more meaningful than the more traditionalmeasure of productivity, as they are the goals toward which bank management strives. The key values the study attempts to measure are customer convenience, precision, efficient cost structure, adaptability and market penetration. The survey conducted by the research team benchmarks two types of management decisions that are presumed to drive these outcomes. The first set of management choices are implementation choices, human resources choices, technology implementation processes and product/servicedelivery processes. The second set of choices relates to management infrastructure, resource management processes, the information architecture of the firm, the performance management and control systems and the organizational structure of the firm. Based on interviews and the work of previous productivity studies, the research team developed a pilot survey focused on the practices of the functional areas, business lines, product groups and the retail distribution network. The pilot measured the outcomes and choices made by managers in seven large commercial banks. The pilot results will lead to a large scale survey of practices for the entire retail banking sector. Based on early pilot results, the researchers concluded that managers in consumer financial services firms typically assume that improvement in one area of performance is largely at the expense of decreased performance in other areas. The authors believe this is only partly true. Based on the pilot results, the authors believe that better management practices can move outcomes in a number of areas simultaneously. Through effective process design, use of technology and management of human resources, institutions can improve performance in multiple categories. The successful financial services organizations will be those which find processes and practices that enhance multiple measures of performance. The results of the large scale survey of practices will be available in early 1996.

From Measurement to Management: the Influence of IT on Service Operations

The state of service management practice and the developments in IT-efficiency research prompt the call for managerial relevance, normative theory building and the conceptualization and measurement of the impact of Information Technology (IT) on service efficiency. Drawing on theoretical insights from economic and behavioral literature, this article deduces a work system centered model of the service outlet and proposes a measurement methodology (ITIMPACT) geared towards the development of a business intelligence tool. The measurement follows a two-step methodology that first assesses compared-to-best efficiency, using Data Envelopment Analysis (DEA), and subsequently explains efficiency differences using a regression framework. An inter-disciplinary approach bases the first step on econometric logic, while the second takes its foundation in behavioral sciences, and information system research.Service industry;

The Costs and Benefits of Privatization in Argentina: A Microeconomic Analysis

Since the beginning of the 1980s, the world has undergone a major shift in thinking about the appropriate economic role of the state. Privatization of state-owned enterprises (SOEs) has been at the heart of this change. The track record on privatization, however, is still very limited. This holds true for Argentina, which undertook an extensive privatization effort. But has it improved the welfare of Argentine workers and consumers? How has the transfer of local water and sewerage firms to private hands impacted health indicators such as child mortality? Given the massive layoffs involved, have post-privatization gains in profitability come at the expense of workers? Analyzing data for both financial and non-financial firms, this paper answers these and other questions to set the record straight on privatization in Argentina.

DEVELOPMENTS IN THE ROMANIAN BANKING SYSTEM

The evaluation of the present offer of banking products and services in the developed countries as well in the emerging ones shows the extent to which they fulfill or not the principles specific to social responsibility and ethics in economics. The Romanian banking system, currently one of the markets with the lowest penetration in EU has posted sustained growth for the past years. Client confidence in financial institutions is increasing, and the system’s dynamics is attracting new foreign players, which have an easier market access since Romania’s EU entry. Competition is expected to heat up, resulting in pressure on margins and diversified product portfolios, which ultimately benefit the end consumer.banking system, banking strategies, distribution channels

Determining the indirect value of a customer

The issue of accountability in marketing has led to a substantial and growing body of work on how to value customer relationships. Net present value methods (customer lifetime value / customer equity) have emerged as generally preferred ways to assess the financial value of customers. However, such calculations fail to take account of other important but indirect sources of value noted by previous researchers, such as advocacy. This paper examines the development and application of three processes to determine indirect value in business-to- business and business-to-consumer contexts. The research shows that indirect value has a measurable monetary impact not captured by conventional financial tools, and that understanding this changes the way in which customers are managed

Credit Availability for Potential Irrigators in North Dakota

Agricultural Finance, Resource /Energy Economics and Policy,

Mergers Among German Cooperative Banks. A Panel-based Stochastic Frontier Analysis

Based on an unbalanced panel of all Bavarian cooperative banks for the years of 1989-97 which includes information on 283 mergers, we analyze motives and cost effects of small-scale mergers in German banking. Estimating a frontier cost function with a time-variable stochastic efficiency term we show that positive scale and scope effects from a merger arise only if the merged unit closes part of the former branch network. When we compare actual mergers to a simulation of hypothetical mergers, size effects of observed mergers turn out to be slightly more favorable than for all possible mergers. Banks taken over by others are less efficient than the average bank in the same size class, but exhibit on average the same efficiency as the acquiring firms. For the post-merger phase, our empirical results provide no evidence for efficiency gains from merging, but point instead to a leveling off of differences among the merging units.banking, mergers, efficiency, stochastic frontier