Managing Bank Productivity Using Data Envelopment Analysis (DEA)

Author(s): H. David Sherman and George Ladino

Source: Interfaces, Vol. 25, No. 2 (Mar. - Apr., 1995), pp. 60-73
Published by: INFORMS
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Managing Bank Productivity Using Data

(DEA)
Envelopment Analysis
DAVID

H.

Northeastern University
404 Hayden Hall

SHERMAN

George

na.
153 East 53rd Street
New York, New York 10043

embank

Ladino

02115

Massachusetts

Boston,

One bank used data envelopment

analysis (DEA) to substan
tially improve its branch productivity and profits while main
taining service quality. It identified over $6 million of annual
expense savings not identifiable with traditional financial and
linear-programming-based
benchmarking
resources
the
considers
all
each
plicitly

new
fairly
ex
DEA
technique,
uses and the ser
branch

vices

objectively

operating

ratio

it provides.

the best-practice
the
the changes

the best-practice
reorganization
A

banking

cent reduction

system

in its 33-branch

analysis

It compares branches
the
branches,
less productive

less productive
branches
need

level and to improve

of an 80-branch
resulted

of personnel

in a

with

30-per

no reduc

tion in service

quality [Sherman 1989]. By

a bro
its
branch operations,
streamlining
kerage firm freed up more than 20 percent
of its annual

costs and used

operating
and
these savings to expand marketing
new branch operations
for future business
development

[Bank Technology

Copyright ? 1995, Institute forOperations Research

and theManagement Sciences
0091-2102/95/2502/0060$01.25
This paper was refereed.

INTERFACES

25: 2 March-April

system.

Report

FINANCIAL

to identify

branches,
to make

and
to reach

their profitability.

a series of acquisitions,
1992]. Following
350-branch
tristate commercial
bank
achieved
did

results

these financial

identify
gains?

similar

service

such opportunities
In each

case,

[Iida 1991]. How

organizations
for productivity

management

em

manage
ployed a fairly new productivity
ment
data
technique,
envelopment
analy
sis (DEA).
The DEA model

used was

PROGRAMMING?LINEAR, APPLICATIONS
INSTITUTIONS?BANKS

1995 (pp. 60-73)

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first reported

BANK PRODUCTIVITY
and Rhodes
Cooper,
[1978]
Banker et al. [1989], Callen
(appendix).
[1991], and Sherman
[1989] describe other

by Chames,

DEA models

that address specific applica

tions and analytic objectives.
new tool for service
DEA is a powerful

service.

Unlike

service

business

tive factors

generated
few

of

quality

concern,

manufacturing

has a number

of subjec
its productivity
and
In a bank, this includes

that affect

service quality.
customers' needs

and behavior

in receiving

the service, the service provider's

judgment
the service, and the
and skill in providing
In the
changing mix of services provided.
case of a northeastern
call Growth
areas

for

bank, which

Bank, DEA

we will

was

Bank

an

experiencing

The managers

its branch

gion.

system

They

to expand
the existing 33

a wider

They hoped
sources they needed

could help

identify
applying
to improve branch productivity
and
the
achieved
level
by
profits beyond

ways

Bank's

The managers

March-April

personnel.

were

firmly

1995

61

committed

and

offices.

to Growth

to

expenses.

Manage

to determine

the ideal staffing

and support cost level

sought
level, office layout,
for each branch based
of services

varied

among

sales-service,
more

such as supplies,

costs,

marketing

ment

mix

to expand the system

costs
for
the
existing network.
by saving
was
Mr. Sherman
hired to determine
DEA

to plan more

branches

for new

operating

utilities,

existing

some of the re

to obtain

Growth

of well-run

branch

sacrificing
qual
that the costly resources for
operations were utilized efficiently.

operations
ity to ensure

whether

In
inefficient.
ity but were not necessarily
to reducing costs of existing
addition
to develop
wanted
branches, management

resource used by
(the dominant
office space, and other direct
branches),

service

without

branch

that primarily provided

check-cashing
functions
low profitabil
reported relatively

sonnel

re

geographic

to streamline

wanted

cus

Bank
Applying
In our review, we explicitly considered
all the resources used to support branch
activity. These included three types of per

wanted

beyond

to cover

branches

corporate

these highly profitable branches had sub

stantial operating
inefficiencies.
Branches

DEA

ex

tended period of sustained growth reflect

efforts to adapt and mar
ing its successful
ket its financial services in a competitive
market.

large

tomers. Management
did not know how to
locate the more efficient branches.
In fact,
in our analysis we found that several of

effectively

improvement.

Growth

unrepresentative

models

many

highlighted

disproportionately
high profits,
clusters of large transactions by a

reflecting

and find substantial

sacrificing

Branch
operations weakened.
statements
limited
profit-and-loss
provided
lending

of
insight into the operating productivity
each branch. Some small urban branches

It is a particularly
difficult
organizations.
a
to improve its
service business
task for
operations
effectively
cost savings without

on productivity
gains to improve
as
profitability, which had been declining
focusing

complex

on the volume

and

to offer. Staffing
but all had ( 1 )

it intended
branches,
platform
transactions,

staff responsible
loan

services,

and new

accounts,
( 2 ) one branch man
teller per
ager, and (3) customer-service,
sonnel responsible
for high volume,
less
such as deposits,
transactions,
complex
bank checks, bond transactions,
and

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for

SHERMAN, LADINO
traveler's
At

checks.
the

time,

through
was

management

tios, such as transactions

per teller, cost per

size measured
in

and branch

transaction,

ra

using

terms of deposits,
to address productivity
and establish
these
staffing levels. While
are commonly
used in banking,
to be sensi
they did not help management
tive to the type and mix of transactions nor
more

complex

as new

actions,

such

cations,

and ATM

accounts,

strength
sis is its ability

to consider

use of multiple

resources

explicitly
to provide

analy
the
multi

did not know

Management
to locate

efficient

appli

servicing.
of data envelopment

The

how

loan

It
pie services while
comparing branches.
is a highly objective benchmarking
tech
nique particularly well suited to such

first

More

demonstrated.

general

as bank
[1985]
applica

has also been

bility to bank performance
demonstrated
and
Forsund,
by Berg,
et
Chames
al.
Jansen [1990],
[1990], and
Yue

[1992].
has provided
productivity

to banking, DEA
to improve
into
ways
insights
in government
services

In addition

1989],
[Sherman
services
nization
Sherman

1994]

health maintenance

orga

and
[Chilingerian
and security brokerage

ser

vices

[Bank Technology
Report 1992].
Unlike many benchmarking
approaches

that

rely

on

managers

to observe,

compare,

identify best-practice
techniques, DEA
helps the user to identify best practices
to be identified
that are too complex
and

The

operations.

best-prac

is the one

that uses
provider
the least resources to provide
its volume
or
and mix of service at
above the quality
standard
cline

as

of the business.
the

less

costs de

Service
service

productive

of service
Many managers
would describe benchmarking
practice

analysis

concepts already
Closer examination

these

branches,

service

complex

opera

organizations
and best

as basic, widely
accepted
used in their businesses.
indicates

that the tradi

techniques used to identify and pro

best practices are not very effec
mulgate
the operations
of
tive, largely because

the more

service organizations
as Sherman
and Gold

to
in

tional

branches.

multi-office

ana

traditional

tions are improved to the best-practice

level, guided by DEA.

trans

nonteller

and

It enables management
lytic techniques.
determine
the best practices
objectively
tice service

measures

to consider

observation

service

are

organizations

to allow

them

curately.

DEA

to identify

too

complex

best practices ac
an objective way to

provides
in these service or
best
practices
identify
and
has
ganizations
consistently
generated
new insights that lead to substantial pro
ductivity
gains
identifiable.
While

that were

traditional

identify ways

not otherwise

approaches
to marginally

success

improve
a
this ap
business,
operations
throughout
a
to
achieve
quantum
proach seeks
leap in
of
service
the
system.
productivity
delivery
fully

analysis uses fractional

to gain insights that
linear programming
are otherwise
invisible and that bear little

Data

envelopment

resemblance

to traditional

applications

of

this widely used technique.

some organizations
While
this approach
profitability,
to redeploy

may employ
to boost short-term

primarily
Growth Bank's
cost savings

INTERFACES25:2 62

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objective

to expand

was
the ser

BANK PRODUCTIVITY
vice distribution
customer

and to improve

system

service

to enhance

market

This peer group, referred to as the best

practice reference set, most directly indi

share

and

long-term profitability.
Data envelopment
the
analysis compares
actual operating
results of each service unit

with

those of all other

identifies

service units

the less-productive

and

less-pro
as one that

groups
ment's

five

of

units
of the less-productive
to
DEA
the
units.
best-practice
compared
obtains these insights by explic
uniquely
the volume and mix of re
itly considering
inefficiency

sources

used

and mix

and the volume

of

services

provided by each service unit. The

units are relatively efficient
best-practice
by a DEA productivity
=
1.00). The inef
rating of 100 percent (E
units are identified
ficient less-productive
by a productivity
rating of less than 100
and are identified

(E <

percent

Specifically,

1.00).
DEA

determines

best-practice?most

the follow

productive

to the best-practice

pared

amount

?The

of

excess

units

ductive
sources;

?The
most

service

units;

resources

outputs

units without

We

used

transaction

1).

ex
expenses
operating
and
and
rent,
square
cluding personnel
feet of office space. It identified about 20
services provided by each branch. We in
(FTEs),

equivalents

15 of these

cluded

in the study

combined

into five sets of services.

The

services

transactions
represented
teller
and
by
platform personnel
provided
and included groups of transaction
types
similar by bank management.
For example, we combined deposits, with
and

by

in

utilizing

added

re

set of best-practice
service units
similar to the less-productive
units.

1995

as

cashed

in

of

group

or

withdrawal,

transaction.

transactions

terms

one

into

cashed

one

that these

resources

as

We

are similar
used

on

aver

age to be treated as one group of transac

tions. The DEA productivity
rating could
be skewed for branches
that have deposits
consisting

less-pro

checks

treated each deposit,

enough
used

and

March-April

service

in this study based on manage

assessment
of key branch activities

sumed

com

each of the less-productive

units;
excess
amount of
?The
capacity or ability
increase

five

and

identified five key re

Management
sources used by each branch: teller, plat
full-time
form, and manager
personnel

check

service

less-productive

to

resources

(Figure

and

of service units;

group

and objectively.

explicitly

drawals,

?The

as a lead tool to review

considered

ing:
?The

being

it considers all key

productivity
services and all resources used by the

units. It
comparison with the best-practice
units (those that
identifies the best-practice
are not less efficient than other units being
the magnitude

are

because

branch

evaluated)

resources

by the inefficient DMU.

Resource
Inputs and Service
Specifying

can produce
its volume, mix, and quality
of outputs with fewer resources based on

and measures

excess

that

Outputs
We used DEA

units?those

that are operating

inefficiently.
ductive service unit is defined

cates

used

those

near

of many
retail

checks,

business

for example,
centers,

because

these deposits
require more resources than
a simple deposit of one or two checks. We
excluded

other

service

63

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transactions

because

SHERMAN, LADINO
Services
provided
by each branch:

used
Resources
branch
each
by
Customer
service
(tellers)

Deposit,
Withdrawals,
Checks cashed

service

Sales

Bank Branch - Type A

(platform)

Bank checks
Traveler
checks
Bonds - sold,
redeemed,
coupons

Manager
Expenses
(excluding
personnel
rent)

Night deposits

&
-

Bank Branch

Office
square

Loansmortgage
and consumer:
Referrals

Type B

feet

Applications
Closings
accounts:

New

Time, Savings,
of
Certificates
-

Bank Branch

Figure 1: All branch

services

used

for

types (A, B, and C) use the same set of resources

the DEA

different

amount

of

different

volume

and mix

branch

include

types

each

of Growth
analysis
of the resources
and
of

urban,

these

services,

the service

box visits ).
We collected
service

volume

each branch.

used

and

some of the cyclicality

issues that might
or one
use
one
month
the
of
arise with
could

quarter, though
insights
each quarter
be gained by analyzing
with DEA.
Before
sults, we

proceeding
reviewed

ratings with

to use

the DEA

the branch

bank management

branch
all

of
on

mall

whether

to provide

productivity.
the services.
its

customer

Each

all branch
uses

branch

Each

branch

demand.

a
a

provides

Examples

of

branches.

excluded

services

tion groupings might

assessments
ductivity

or

transac

the

be biasing the pro

of branches. The

managers
thought this was not a signifi
cant issue for this set of branches.

for the previous year for

Use of a full year eliminated

other

offers

shopping

(such as safe-deposit

data on resources

Bank's

depending

and

suburban,

to be of insignificant
they were believed
volume
(such as wire transfers) or because
records to
the bank did not have adequate
include

deposit
Type C

re

productivity
to judge

DEA
We

Branch
used

Productivity
the DEA model

Results
summarized

in

the appendix with the inputs and outputs

described.
The DEA results identified the
relatively efficient
the less-productive

branches,
best-practice
branches
(Table 1),
of the excess resources

and the magnitude

used by less-productive
branches
(Table
was
Bl
Branch
less
2).
productive with a
DEA productivity
rating of 66 percent,
suggesting

that it could provide

INTERFACES25:2 64

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its current

BANK PRODUCTIVITY

Branch

DEA

Best-Practice

Productivity

Branch

Rating

Reference

B2

66%
100%

Bl
B2

mix

B16

37%

B16

B7

B25

46%

B16

B19

B5

92%

B2
B16

B16
B7

B17
B19
B26

B16
B16

B7

B7

97%
66%
100%
79%
55%
99%
81%

B16

B19

B16

B7

B2

B16

B16

B7

B15

47%

B16

B7

B16
B17
B18
B19

100%
100%
74%
100%

B20
B21
B22

100%
79%

B8
B9

BIO
Bll
B12
B13
B14

B24
B25
B26

73%

Table

66%

97%
77%
73%
86%
71%
1: For

by the DEA
In fact,
rating of 100 percent.
productivity
23 of the 33 branches were using excess

B26
B7

B17

B24

B17

set

for

services
productive

with

fewer

B16

B19

B2

B16

using

or

30 percent

and cost reductions.

The re
provements
sults also indicated that less-productive

B25

were

to par
compared
For
branches.

inefficient

specifi
to branches B2, B16,
cally in comparison
and B19 (referred to as the best-practice
branch reference set for Bl in Table 1).

B17

These

that are most

B16
B16

B19
B19

B2
B16
B16 B19
B2
B19
B2
B16
B16 B19

B17
B17

B26
B26

B17

sources,

to the less-productive
of services and re

and they are used to identify the

characteristics
that make
operating

specific
the less-productive
We

B19
B7

branch more

also

calculated

to

costly

is the

that

less

amount

the

resource

branch

than

similar

in their mix

the branches

operate.

branches identified with

their volume and mix of
resources

sets indicate

reference

branches

sav

of

type the bank

ings by specific
could achieve if the 23 less-productive
branches
increased their productivity

to

the level achieved

branches
should
and mix

by the 10 best-practice
branch Bl
(Table 2). Specifically,
to
its current level
be able
provide
of services with

tomer-service

4.5 fewer

full-time-equivalent
1.8 fewer sales service

personnel,
fewer managers,
expenses,

1995

10 were

resources.

indicated that the bank

findings
im
could make substantial productivity

B16

branch.

March-April

and

excess

ticular sets of best-practice

example, branch Bl is inefficient

less-productive

set of best-practice
DEA that provide

indicated

These

ity rating
with
other
every
a
A rating
cent
branch.
indicates
best-practice
a
100 percent
indicates
of less than
less-pro
ref
The best-practice-branch
ductive
branch.
erence

resources
more

the DEA
branch,
productiv
on
each branch
comparing
A rating
branch.
of 100 per

each

is based

B3 had a DEA

Branch

branches,

practice

100%

B27
B28
B29
B30
B31
B32
B33

only
it ac

The analysis showed

that
such as B2 and B7 were best

branches

B16

67%
100%
100%

B23

B19

resources.
B26

branches

63%

of the resources

indicating
rating of 37 percent
productivity
that it was using about 63 percent excess

B19

B4

48%
100%

of services with

66 percent
tually consumed.

Set

B3

B6

and volume

about

and

$222,928
1,304

fewer

65

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All use subject to JSTOR Terms and Conditions

cus
(FTE)
FTEs, 0.3

less in operating
square feet. In

Actual Resources Used

Full-Time Equivalent (FTEs)

H
m
T?
>
n
m
en
Ni
H1

ON
ON

Less
Productive
Branches

Customer
Service

Sales
Service

(tellers)

Bl
B3
B4
B5
B6
B8
B9
Bll
B12
B13
B14
B15
B18
B20
B22
B26
B27
B28
B29
B30
B31
B32
B33

Potential Resource
Full-Time Equivale

(platform)

10.0
3.0
4.0
9.0
3.0
4.5
3.5
7.5
2.5
9.0
3.5
2.0
4.0
7.0
7.5
3.5
5.5
6.0
7.0
15.0
5.5
3.0
17.5

5.0
2.5
2.5
7.0
2.5
3.5
2.0
3.5
2.0
6.5
4.0
2.0
2.5
4.0
3.5
3.0
5.5
5.0
4.0
13.0
6.0
2.0
18.0

Less Productive Branches?23

branches
Total Resources Used
143.0
All Branches?33
branches
203.1
Total Resources Used

Manager

Office

Expenses excluding
personnel &
occupancy

1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0

Square
Feet

& 652,566
468,637
350,477
1,059,526
235,974
353,235
341,994
768,338
269,998
1,112,090
433,868
253,902
571,090
666,133
929,668
411,922
545,976
914,990
568,054
1,402,615
679,451
367,828
3,191,789

Customer
Service

Sale

(tellers)

(pla

4.5
1.9
2.3
0.7
1.6
1.5
1.2
3.3
1.1
0.1
0.7
1.1
2.0
3.0
5.2
1.0
1.9
1.8
1.7
4.0
0.8
0.9
3.3

3,818
1,728
1,941
5,640
2,200
1,350
2,346
3,243
1,422
5,400
1,700
1,486
1,420
3,180
1,865
3,092
2,781
2,187
6,686
9,963
3,133
1,637
8,000

109.5

23.0

$16,550,122

76,218

144.0

33.0

$20,997,872

103,508

Customer
Service

Sale

(tellers)

(pla

Total Potential Resource Savings

Savings as % of Total Resources

Table 2: The DEA

as efficient

as
and

branches,

results

indicate

the resource savings

45.5
22.4%

that would

resources
the best-practice
Actual
branches.
used
and best-practice
branches
for all less-productive

branch

(DEA productivity

percent

for

customer

service

to 33.7

percent

for operating

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All use subject to JSTOR Terms and Conditions

for

reported
combined.

rating < 100 percent) and total potential

FTEs

be achieved

are

each

Potential

savings

expenses

if each less-pro

less-product
savings

for these branches.

(excluding

personnel

BANK PRODUCTIVITY
iden
branches
total, the 23 less-productive
tified should be able to reduce customer
sales

service,

and

service,

managers

could be reduced
feet. Table

2 also

of resources

used

indicates

the actual

level

and the total resources

used

branches and
by the less-productive
that the
by all 33 branches. This suggests
resource
for this 33
reductions
potential
branch

system range from 22 percent for

customer service-teller
FTEs to 33-percent
in operating

reduction

expenses

rent and personnel).

All of these changes
without
while

reducing

(excluding

the DEA Findings

Implementing
Enhance
Branch Productivity

practice branches. An analysis of transac

ratios
tion cost data and other operating
and less-productive
for best-practice
branches
the excess resource
substantiated

did not

branches.
service

transactions
branch.

productive
added

amount

of

branches
of

provided by each less

It also indicates the
that

service

could

be

pro

in addition to the
by these branches,
resource savings suggested
in Table 2,
For
branches.
compared with best-practice

vided

additional

15,000

and checks
checks,

eight

Bl could handle

branch

example,

and

bonds,

2,000

added

traveler's

additional

ducing

about

bank
and

checks,

while

night deposits
to attain
the resources needed

efficiency
branches.

level of the best-practice

We based these potential

provements

March-April

on the resource

1995

with

Branches

provided by
transac

high

were

We

with

less complex than some

transactions per teller.
field visits and reviews of

lower

conducted

branch

showed
operations, which
ferences in operations
distinguished
and

practice

less-productive

that dif
best

branches.

For

example, we found that the role of the

branch manager
differed among offices.
the DEA results, we could focus on
Using
differences

between

the manager's

role in

branches
and in less-produc
best-practice
tive branches. While
the branch manager's

withdrawals,

deposits,

cashed,

take into consideration

in service mix

inefficiency might arise from lower

of the sales-service
productivity
platform
and
from the fact that their
personnel

by these
the number

provided
3 indicates

Table

ratios,

tions per teller were not necessarily

the
as
one
most efficient,
think at first.
might

transactions
of services

These

Their

million.
volume

DEA.

located with

utilization

the branches.

The total potential savings

identified were about $9

a basis
provided
ra
the branch operating

use of
the subsequent
to elucidate
other techniques
the work pat
terns associated with
best
the well-run

the differences

the

increasing

to

information

for reevaluating
tios and motivated

however,
be possible
of service and

would

quality
or even

maintaining

actually used rather than simply

theoretical best-practice

The DEA

and the space utilized

by about 29,000 square

$7 million,

on abstract
standards.

by

In
45.5, 45.6, and 8.1 FTEs, respectively.
the expenses
could be reduced by
addition,
about

branches

re
the

im

levels other

job was

defined

consistently

for all

different
displayed
to managing
and re
styles and approaches
branch
that
in
resulted
warding
employees
branches,

differences
branches.

managers

in morale

and teamwork

Several managers

67

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within

in the best

Service

Actual

H
m
w
>
n
m

Bl
B3
B4
B5
B6
B8
B9
Bll
B12
B13
B14
B15
B18
B20
B22
B26
B27
B28
B29
B30
B31
B32
B33

ON
00

addition
tion

229,590
136,350
94,960
153,820
101,620
125,160
61,090
177,710
100,710
191,850
125,460
54,080
153,940
123,320
209,700
83,770
184,520
170,740
135,440
499,750
195,010
82,720
623,550

3: The DEA

Table

volume

Bank
Checks
Bonds
Traveler
Checks

Deposits
Withdrawals
Checks
Cashed

LessProductive
Branches

to

making
for each

tions these branches

19,126
6,222
6,777
26,600
6,038
14,164
9,591
19,021
4,122
31,579
6,984
4,222
11,973
16,071
13,276
13,206
16,304
23,127
20,713
32,294
21,808
9,111
38,758

results
the

Transaction

indicate

resource

less-productive

could handle

Potential

Volume

Service

Ba

Loans:
Applications
Closings
551
289
1,781
90
328
14
55
336
68
1,307
383
39
206
569
422
255
658
997
369
320
410
370
57

Night
Deposits

New
Accounts

4,348
2,887
2,650
8,022
1,644
4,488
2,809
5,747
2,408
10,626
3,220
1,171
6,278
4,252
6,094
5,309
5,107
7,707
3,662
7,447
6,215
5,648
12,378

12,326
3,777
4,523
18,090
3,401
8,258
5,995
11,893
2,616
19,651
4,332
2,896
7,425
10,301
8,835
8,062
9,474
13,833
12,739
17,599
13,408
6,133
19,229

that the less-productive

in Table

reported
savings
branch
is reported.

in addition

to reducing

branches

Ch
Bo
Tr
Ch

Deposits
Withdrawals
Checks
Cashed

of Growth

15,019
10,018
6,755
0

7,619
5,623
2,935
11,493
7,260
0

2
2

5,653
2,827
7,870
5,671
12,017
3,702
12,039
1,903
9,503
23,999
7,273
3,966
47,152

Bank could inc

as efficient
2 if they became
The
service
volume
potential

as

expansion

their resources by the amounts

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the

repo

BANK PRODUCTIVITY
branches

practice

on

more

relied

This analysis

cross

to handle shifts in
of personnel
and had more
team-based work

training
demand

styles. Also,

we

ences

use

in

the

between

discovered
of

differ

notable

part-time

employees

and

less-productive
best-practice
Some of the best-practice
had very aggressively
recruited

branches.
branches

to handle

among

ductive

periods. We found that more

offices had physical
layouts that
for cross-training
of staff and
customer

Some

the work

services

the legal issues addressed

The bank reduced

taxed

flow.

branches

could have been

lending personnel
more effectively
by in-house
legal
staff. Administrative
and technical prob
duties consumed
lem-solving
time in some branches. This

considerable
time could

munication

request, we
for each category
staffing models
branch based on the best-practice

services

and computer
time,
2 indicates, branch B33

reported
lion of excess

to have more

than $2.5 mil

support expenses.
Initially
or
this to be a computation
error.
to
data
Further study led
the surpris

we

believed

that this excess

ing conclusion
was

consumption

real

and

had

resource
gone

unno

ticed because
bility

of the size and high profita

of the branch.

analysis provided details of time

in each branch
each
spent by
employee
on such ac
(obtained via questionnaires)
Activity

tivities
training,

as

loan

solicitation,

transaction

supervision,

processing,

business

and inquiries. We
development,
the questionnaire
data to profile

tabulated

spent by each
activity within

type of employee
each branch. We

on each

and evaluated

these distributions

relative

to the DEA

March-April

analysis.

1995

by

20 percent.

about

have

varied. As Table

For

its staff by

some were so costly that we had

unevenly:
to find alternative ways
to provide
them.
support costs, including telecom
Notably,

was

not re

other professionals
completed more effectively.

example,

efficient

to balance

less-pro

that personnel
spent more

found

or which

sponsible,
could have

branch

ability

and

in less-productive
branches
time on tasks for which
they were

handled

greater

We

dif

unanticipated

best-practice

branches.

vice-volume

allowed

revealed

peak operat

personnel
ing periods. Some of the less-productive
re
branches used only full-time personnel
more
in
time
idle
low-ser
sulting
during

part-time

ferences

the time

reviewed

been used more

transactions
As

for service
effectively
and marketing
activities.

a final step,

a specific man
established
optimal

to meet

agement

identified
models

of service
branches

by DEA. The bank used

as benchmarks
for existing

branches

and

as models

new

for

these

branches.

concluded

management
Ultimately,
reported to the board of directors
total potential
savings
were about $9 million.
branch

identified

and

that the
DEA

with

Actual

changes
that could be imple

operations
within
the next year would
in annual savings of over $6 million

mented

in

result
of the

costs
(approximate)
operating
for these branches.
(The bank could not

$30 million

some of the savings identified with

DEA in the short run, such as square feet
reductions.
the changes
) It implemented
achieve

we

suggested.

Management
staff according

realigned each branch's

to the model
for that type

69

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SHERMAN, LADINO
it realigned
Simultaneously,
job
to
the
responsibilities
adopt
approaches
used in the best-practice
branches. This
of branch.

staff reduc
process resulted in substantial
tions in most of the less-productive
offices
to review
and also motivated
management

increased
some

which

services,

minimized

these op
accomplished
no noticeable
decline

and redefine

erating changes
in the quality or volume
One interesting result

branches.

that was

staff by about 20 percent within

one year after the completion
of the DEA
some
This
did require
analysis.
employee

ratio

process
the bank

measures

was

tablishing.
The branch manager
levels suggested by
some
DEA indicated that
branches
should

spent

quire

manager,

management

reactions

to this information.

branches

that were

other,
manager,
zation.
for

creating
In cases

agement

branch

geographic

augmented
to include

organi

man

its expectations
added marketing

manager
forts to expand service volume.
The bank moved
the managers
branches

to weaker

branches

of the
ef

of strong
to import

their team-building
and other best-practice
the physi
The bank redefined
techniques.
cal layout
incorporated

for new

branches:

office-space

its new

guidelines

leases
that

their oper
it viewed

and many
review.

this

complete

and

travel dol

After

we

com

pleted the DEA results, the group noted

that it had not visited this one outstanding
The members

observed

that had

they had these results before their field

their se
visits, they could have improved
lection of sites to visit. Today, management
has acknowledged
that branch as a model
to
branch. Every individual promoted
now
to
is
branch manager
required
spend
training

at that branch.

Conclusion
Growth

Bank's

its banking

infeasible

reasons,

to evaluate

several weeks
to

several weeks

a shared branch

this was

where

or

business

two

In a few

a satellite

lars

branch.
to

located near each

to have

it decided

particu

The group selected what

as the best and the weakest
branches

of this practice. While

of the branches ultimately
did re
had

ations.

reconsideration

one

as

identified

half of the branches

many

is that one branch

larly strong branch in terms of productivity

using DEA. Before we applied DEA, an in
ternal consulting
group had visited about

at the right size ini

the branches
some of the excess
The
bank
hired
tially.
to staff new branches
it was es
personnel
staffed

All
less than one manager.
operate with
a level that
branches had one manager,
was considered
to be the minimum
prior
this analysis. The DEA results motivated

of service.

to be an aver
initially considered
on
traditional profit and
age branch based

branch

layoffs, a painful and demoralizing

that could have been averted had

and

for such

responsibility

The bank
with

the objectives
of the well-run
The bank reduced its total

costs

reduced

branch

services.

It centralized

of usage.

flexibility

nance

system
and

branches,

objective
beyond

to expand
the initial 33
to fi

wanted

management

this expansion,

was

in part, by streamlin
The managers

ing existing operations.

could have used the traditional methods
observation,

flow-chart

process

of

analysis,

and ratio analysis, but they were

looking
for a technique
that could provide substan
tial savings without

sacrificing

quality

of

service.

Using

DEA, management

INTERFACES25:2 70

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located

real

BANK PRODUCTIVITY
opportunities
apparent with

to improve operations
not
other analytic techniques.

The managers

did not view

data

available

for

problems
as

accuracy

con

other

results that
tions, we might have obtained
an
in
different
direc
unpredictable
tion, and they might have led to more ac

curate and detailed

insights about branch

to improve
and other ways
While other applications
of

this type have led to similar results, each

needs to be evaluated based on
application
the available

data, the quality of the data,

and the potential
impact on the results. On
re
this application,
its successful
balance,
and

sults,

ment

management's

assess

qualitative

of the results vis-?-vis

the data used

and the way itwas measured

all suggest
that the results provided
reliable insights
into Growth Bank's branch operations. Ap
service
plying DEA to more complete
resource data or to other breakdowns

and

pense
our DEA

which

can

banks

analysis.
data

Using

number

envelopment

branch

of

analysis,

operations
transactions

complex

and use

riety of factors

one

involving
with

a va

to

that information
that will

specific improvements
pinpoint
result in considerable
cost savings. We
used DEA

to demonstrate

branches

were

not

the most

that several

the most

considered

could be even more

profitable

profitable because
they
efficient and to highlight

certain highly efficient practices

that were
otherwise
hidden. Growth Bank was able
to save about

$6,000,000

in expenses.

APPENDIX:

The Data Envelopment

Model
Used
Analysis
We used the DEA linear programming

model

by Chames,

developed

Cooper,

and

Rhodes [1978]:
objective:
s

of

these data might have increased the in

to improve the
sights about ways

volume,

less easily than they can the ex

reductions
that were the focus of

can analyze

transac

excluded

were

performance
the branches.

manage

If the bank had had

the results.

founding
data

and

specification

with

service

panding

L
max

hk

urYrk

r~w

ViXik

branches.

An
is to

to use

alternate way
on

focus

tial while
current

the

service

keeping
level. This

the DEA model

expansion

the resource
is particularly

poten

use at the
interest

ing in growing markets when management

is interested in knowing
the extent to
which

vice volume
sources.
Growth

can handle

branches

before

This was
Bank,

increasing

increased

ser

additional
needing
to
interest
of less

re

as itwanted

the number

to expand by
of branches, financ

ing part of the cost through savings in the

existing branch network. This alternative
DEA

focus provides

March-April

1995

information

about ex

where
k is the branch or decision-making
unit (DMU) being evaluated
in the set of
=

1,

. . . , n DMUs.

Constraints:
s

Unity:

I
1 > = ^-;

1, . . . ,n.

constraints:

Positivity
0 <

ur;

r =

0 <

Vi)

We

urYrj

1,

. . . , s

1,

. . . , m.

algebraically

reformulated

71

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this from

SHERMAN, LADINO
the above

form for use with

fractional

standard

linear-programming

s =

for each of the 33

evaluate productivity
of the
denominator
the
branches.
Setting
to
1
and
function
restating
objective
equal
to a linear equation,
the unity constraint
we

can restate

r= \

2
r=\

wrYrj

?=1

results.

The objective
function of this model
or efficiency
maximizes
the productivity
E
is
for
branch
k.
This
rating
subject to the
the same set of w and
constraint
that when
are applied to all 33 branches
?i coefficients
being compared, no branch will be more

1;

in the DEA

tive value

to

fiiXik

pro

outputs

(five in this appli

infinitesimal
positive number
constrains
the input and output coef
ficients to be positive,
the pos
eliminating
a
zero
that
will
be
rela
sibility
they
given

Wr^rk,

subject
m

or

services

of

by the branches

which

Ejt

number

cation).
= An

maximize

The

duced

as follows:

the DEA model

(five in this applica

used by the branches

tion ).

to

software

M;X/y

< 0;

than 100 percent

and

cient

efficient

are

values

and

positive

the coeffi

nonzero.

and

For

W\,

. . . , Wr >

>

0,

to other
further description
and references
see Seiford
versions of the DEA model,

Ml/

/ Mm ^

>

0.

References

[1993].
Bank

Where
=
Efc the measure
ciency of branch
of

1,

. . . , 33

others.
=
The
Yrk

or effi
in the set

of productivity
"k," the branch
branches

rated

to

relative

of

service

The

amount

used by branch
observation.
=
The
Yrj

produced
of

R.; Chames,

I.; and

output

amount

of

resource

"k" during
of

by branch

service

input

"i"

the period
output

"/" during

of

"r"

the period

= The amount of resource

input "i"
Xij
used by branch "/" during the period of
observation.

= The coefficient or
to
wr
assigned
weight
in the solution
service output r computed
to the DEA model.
=
to
Iii The coefficient or weight
assigned
resource

in the solution
input i computed
to the DEA model.
m = The number of resources or inputs

W.

Cooper,

A.

Swarts,

W.;

'An

1989,

Vol.

introduction
some

with
envelopment
analysis
Research
and their uses,"

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models

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parametric
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pp. 35-56.
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Chames,

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making

units,"

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2, No.

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BANK PRODUCTIVITY
J. and

Chilingerian,
"Evaluating
cians
toward
Care

Iida,

1994,
physi

Health
advantage,"
Vol.
5
12, No.

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16-19.

pp.

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efficient

competitive

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"US

seeks
savings
Bancorp
American
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156, No.
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data

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pp.

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bank

performance:
to Missouri
banks,"

with

of Bank
297-315.
analysis
A primer
Federal

Reserve Bank of St. Louis Economic Review

pp.

(January/February),

The editor has

31-44.

received

a letter from an

that their
officer of a large bank verifying
a similar
using DEA followed
"experience
to the one

pattern
the

article.

plementing
Sherman's
substantial
as other
branch

. We
.

that was

described

recently

completed

in
im

the findings from Professor

analysis which has generated
real dollar cost savings as well
insights

into ways

to improve

productivity."

March-April

1995

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