Efficiency, size, benchmarks and targets for bank branches: an application of data envelopment analysis
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Ef®ciency, size, benchmarks and targets for bank branches: an application of data envelopment analysis AS Camanho and RG Dyson University of Warwick, UK This paper describes an application of data envelopment analysis (DEA) to the performance assessment of Portuguese bank branches. The analysis shows how DEA can complement the pro®tability measure currently used at the bank. The use of an ef®ciency-pro®tability matrix enabled the characterisation of the branches' performance pro®le. Consistent with the bank's development objectives, the analysis focused on the relation between branch size and performance. Two alternative target setting strategies were explored. One eliminates pure technical inef®ciencies by focusing on the selection of appropriate benchmarks. The other attains the branches' most productive scale size through the elimination of scale inef®ciencies, with minimal changes to branches' scale size. Keywords: data envelopment analysis; banking; ef®ciency; benchmarks; size; target setting
Introduction The purpose of this paper is to describe an application of data envelopment analysis (DEA) to the performance assessment of branches of a Portuguese bank. This bank currently uses two different methods to analyse the performance of its branches. The ®rst, called system of incentives and motivation (SIM), focuses on the branches' volume of business. Every four months, each branch is assigned business volume objectives. These objectives are speci®ed for each of the products and services considered of strategic importance by senior management, such as current and savings deposits, investment funds, credits or insurances. The SIM proved to be a valuable tool for establishing a clear incentive scheme for branch staff. The staff of the best performing branches receive a monetary bonus. The second more recent method is called earning analysis system (EAS) and determines the pro®tability at the branch level. EAS information provides the bank with a clearer picture of the key costs and revenues for branch activities. However, both the SIM and EAS have limitations as methods for performance assessment. SIM is particularly valuable as a method to stimulate staff, but does not take into account the costs of delivering services. Also, setting targets for sales motivation or bonus is different to planning a branch network for ef®cient operation. In contrast, pro®tability measures alone, such as EAS, ignore the branches' ef®ciency and potential for improved performance. Also, they are dif®cult to explain and be accepted by branch staff. The primary aim of the study was to develop an Correspondence: Dr RG Dyson, The University of Warwick, Coventry CV4 7AL. E-mail: [email protected]
enhanced performance measurement method to assess and improve branches' performance. The use of an ef®ciencypro®tability matrix enabled the characterisation of the branches' performance pro®le. Pro®tability was not included
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