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Operations, Quality, and Profitability in the Provision of Banking Services

  • Andreas Soteriou

    (Department of Public and Business Administration, University of Cyprus, Nicosia, Cyprus)

  • Stavros A. Zenios

    (Department of Public and Business Administration, University of Cyprus, Nicosia, Cyprus)

We develop a framework for combining strategic benchmarking with efficiency benchmarking of the services offered by bank branches. In particular, a cascade of efficiency benchmarking models is developed guided by the service-profit chain. Three models---based on the nonparametric technique of Data Envelopment Analysis---are developed in order to implement the framework in a practical setting: (i) an operational efficiency model, (ii) a service quality efficiency model, and (iii) a profitability efficiency model. The use of the models is illustrated using data from the branches of a commercial bank. Empirical results indicate that we gain superior insights by analyzing simultaneously the design of operations together with the quality of the provided services and profitability, rather than by benchmarking these three dimensions separately. Relationships are also established between operational efficiency and profitability, and between operational efficiency and service quality.

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File URL: http://dx.doi.org/10.1287/mnsc.45.9.1221
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 45 (1999)
Issue (Month): 9 (September)
Pages: 1221-1238

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Handle: RePEc:inm:ormnsc:v:45:y:1999:i:9:p:1221-1238
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  1. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
  2. Allen N. Berger & Loretta J. Mester, 1997. "Inside the black box: what explains differences in the efficiencies of financial institutions?," Finance and Economics Discussion Series 1997-10, Board of Governors of the Federal Reserve System (U.S.).
  3. Frances X. Frei & Patrick T. Harker & Larry W. Hunter, 1998. "Inside the Black Box: What Makes a Bank Efficient?," Center for Financial Institutions Working Papers 97-20, Wharton School Center for Financial Institutions, University of Pennsylvania.
  4. A. Charnes & W. W. Cooper & E. Rhodes, 1981. "Evaluating Program and Managerial Efficiency: An Application of Data Envelopment Analysis to Program Follow Through," Management Science, INFORMS, vol. 27(6), pages 668-697, June.
  5. Frances X. Frei & Ravi Kalakota & Leslie M. Marx, 1997. "Process Variation as a Determinant of Service Quality and Bank Performance: Evidence from the Retail Banking Study," Center for Financial Institutions Working Papers 97-36, Wharton School Center for Financial Institutions, University of Pennsylvania.
  6. Sherman, H. David & Gold, Franklin, 1985. "Bank branch operating efficiency : Evaluation with Data Envelopment Analysis," Journal of Banking & Finance, Elsevier, vol. 9(2), pages 297-315, June.
  7. Berger, Allen N. & Humphrey, David B., 1997. "Efficiency of financial institutions: International survey and directions for future research," European Journal of Operational Research, Elsevier, vol. 98(2), pages 175-212, April.
  8. Allen N. Berger & John H. Leusner & John J. Mingo, 1994. "The efficiency of bank branches," Finance and Economics Discussion Series 94-26, Board of Governors of the Federal Reserve System (U.S.).
  9. Aleda V. Roth & William E. Jackson, III, 1995. "Strategic Determinants of Service Quality and Performance: Evidence from the Banking Industry," Management Science, INFORMS, vol. 41(11), pages 1720-1733, November.
  10. R. D. Banker & A. Charnes & W. W. Cooper, 1984. "Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis," Management Science, INFORMS, vol. 30(9), pages 1078-1092, September.
  11. Banker, Rajiv D. & Thrall, R. M., 1992. "Estimation of returns to scale using data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 62(1), pages 74-84, October.
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