Joseph C. Paradi

Best practice analysis of bank branches: An application of DEA in a large Canadian bank

Abstract This paper presents a best practice analysis of the Ontario based branches of a large Canadian bank. Consistent with managerial goals, the analysis focuses on the performance of branch personnel; it considers as outputs both transactions and maintenance work. To sharpen our efficiency estimates, we use DEA AR models with output multiplier constraints based on standard transaction and maintenance times. A model that adds similar constraints on the input multipliers, based on personnel salary, is used to find the cost efficient branches, and estimate “allocative” efficiency. Special emphasis is placed on quantifying and discussing the impact of model choice on the results. Post-hoc statistical tests are performed to investigate the impact of several external factors on personnel efficiency as well as the effects of efficiency on quality and profitability.

Commercial branch performance evaluation and results communication in a Canadian bank––a DEA application

Abstract In this paper, we focus on evaluating the performance of the commercial branches of a large Canadian bank using data envelopment analysis. Two production models are considered in this country-wide evaluation. One model, looking directly at resource usage, is most useful to the branch manager. The other model, incorporating financial results, is more geared towards senior management. We introduce non-discretionary factors to reflect specific aspects of the environment a branch is operating in, such as risk and economic growth rate of the region. Both input and output multipliers are constrained by incorporating market prices as well as managerial preferences, in order to get effectiveness measures. The cost-minimisation study led to valuable results pertaining to the performance of individual branches. Notable is the methodology introduced here that shows how to present graphical and numeric outcomes to managers. Gap maps, pie charts and target tables are produced for each branch to provide performance goals for the managers. Useful information has also been obtained at the district level. Output oriented models were analysed to reflect the Banks recent emphasis towards growth in some areas.

Evaluating alternative DEA models used to control for non-discretionary inputs

Evaluation of performance using DEA requires models consistent with the underlying technology. There have been a number of models proposed for analyzing performance in the presence of non-discretionary inputs. Banker and Morey (Operations Research 34 (1986) 513-521) provided the first DEA model to measure technical efficiency. Other single- and multiple-stage models that incorporate DEA have been developed. This paper discusses the various approaches and provides a simulation analysis to compare the relative performance of each.

Measuring overall efficiency and effectiveness using DEA

This paper presents a framework where data envelopment analysis (DEA) is used to measure overall efficiency and show how to apply this framework to assess effectiveness for more general behavioral goals. The relationships between various cone-ratio DEA models and models to measure overall efficiency are clarified. Specifically it is shown that as multiplier cones tighten, the cone-ratio DEA models converge to measures of overall efficiency. Furthermore, it is argued that multiplier cone and cone-ratio model selection must be consistent with the behavioral goals assigned or assumed for purposes of analysis. Consistent with this reasoning, two new models are introduced to measure effectiveness when value measures are represented by separable or linked cones, where the latter can be used to analyze profit-maximizing effectiveness.

Information systems project prioritization using data envelopment analysis

Large organizations continually struggle with problems related to allocating their development dollars to various competing projects. Project prioritization is at the heart of these issues because there are always more demand than money available, so choosing the right projects is important. This situation is further aggravated by the omni-present political environment where some managers get their projects done because they have the political power to get them on the agenda. This paper presents a new model within the data envelopment analysis framework for prioritizing information system (IS) projects. The criteria used to judge the importance of projects are the inputs and outputs of the model. A set of sample/artificial projects is created for which the criteria and priority score are defined by decision makers. Each real project is compared to the set of defined projects and receives a score. The new model is tested on a real case of prioritizing IS projects at a large financial institution. The proposed model provides fair and equitable ranking, it is complex enough to model the problem reasonably and accurately and yet simple enough to be understood by the user community. More importantly, a new project can be prioritized at any time without affecting the priority of already assessed projects.

Financial performance analysis of Ontario (Canada) Credit Unions: An application of DEA in the regulatory environment

Abstract Models are developed to detect weaknesses in Credit Unions in Ontario, Canada, so that potential financial failures can be predicted. Four data envelopment analysis (DEA) models are presented and compared with the equity to asset ratio, and with the government regulators extensively modified “ Z -score” model. The equity/asset ratio is shown to provide as good a prediction of failure as any of the other models, and is not improved upon by the much more complex Z -score model. The best DEA model provides results comparable to the equity/asset ratio when a slack adjusted efficiency score is used to measure efficiency, particularly for Credit Unions with larger asset sizes. However, DEA also provides indications of where opportunities lie for improvements by weak units by providing specific information, relevant to managers. Hence, for each Credit Union, comparison is made with a peer group of efficient entities that the inefficient institutions management can emulate to improve their performance.

Marginal Rates and Two-dimensional Level Curves in DEA

Of great importance to management, the computation of trade-offs presents particular difficulties within DEA since the piecewise linear nature of the envelopment surfaces does not allow for unique derivatives at every point. We present a comprehensive framework for analyzing marginal rates, and directional derivatives in general, on DEA frontiers. A useful characterization of these derivatives at given points can be provided in terms of the ranges they can take; equivalently, the bounds of these ranges correspond to derivatives “to the right”and “to the left” at these points. We present two approaches for their computation: first, the dual equivalents calculation of minimum and maximum multiplier ratios / finite differences, and then a modified simplex tableau method. The simplex tableau method provides a more general application of the method introduced by Hackman et al. (1994) to generate any two-dimensional section of the isoquant and is a practical tool to generate level plots of the frontier. By giving a complete picture of trade-offs and allowing a better visualization of high dimensional production possibility sets, these tools can be very useful for managerial applications.

Banking on the Internet and its applications

As the Internet becomes one of the most important communication networks in the world, many financial institutions (FIs) have developed their home pages to introduce their products and services to the public on the World Wide Web. However, many large banks do not provide online Internet services where sensitive and confidential information is involved mainly for security reasons. Although security issues seem to be a concern for the large banks, the picture is different for the smaller ones. Many small financial institutions offer online services which include opening new accounts and processing loan applications. These institutions also plan to add new services to their Internet offerings such as downloading information including electronic cash onto a smart card. The paper considers how, in general, small FIs are ahead of the big ones in using the network power of the Internet as a tool for business expansion.

Knowledge worker performance analysis using DEA: an application to engineering design teams at Bell Canada

Knowledge worker productivity measurement is a very difficult undertaking, but implementing improvement suggestions is even more challenging for management. Data envelopment analysis (DEA) was used to examine the productivity, efficiency, and effectiveness of one such knowledge worker group-the Engineering Design Teams (EDT) at Bell Canada, the largest telecommunications carrier in Canada. Two functional models of the EDTs were developed and analyzed using input oriented constant returns to scale (CRS) and variable returns to scale (VRS) DEA models. First left free, the multipliers were then constrained using DEA Assurance Region models based on economic prices and managerial preferences. This study offers an excellent example where inefficient decision making units (DMU)-i.e., EDTs-could be made more efficient by improving their scale efficiency simply by reassigning work amongst the units. Bell divides its EDTs along provincial boundaries into Ontario and Quebec teams and each EDT is responsible for a specific geographic area in the province assigned to it. The results of the DEA analysis indicated that redrawing the geographical boundaries of the market area served by the EDTs could move both increasing and decreasing returns to scale EDTs toward CRS behavior. Substantial performance improvements are possible over the entire system, resulting in significant savings in costs without people dislocation or branch closings.

Applications of DEA to measure the efficiency of software production at two large Canadian banks

This paper presents two empirical studies of software production conducted at two large Canadian banks. For this purpose, we introduce a new model of software production that considers more outputs than those previously cited in the literature. The first study analyses a group of software development projects and compares the ratio approach to performance measurement to the results of DEA. It is shown that the main deficiencies of the performance ratio method can be avoided with the latter. Two different approaches are employed to constrain the DEA multipliers with respect to subjective managerial goals. As is further shown, incorporating subjective values into efficiency measures must be done in a careful and rigorous manner, within a framework familiar to management. The second study investigates the effect of quality on software maintenance (enhancement) projects. Quality appears to have a significant impact on the efficiency and cost of software projects in the data set. We further show the problems that may result when quality is excluded from the production models for efficiency assessment. In particular, we show some of the misleading results that can be obtained when the simple, traditional, ratio definition of productivity is used for this purpose.