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A Data Mining Approach to Performance Measurement

in the Banking Industry
Kin-Nam Lau ’,Chongyan Gao *
1
Marketing Department, Chinese University of Hong Kong, Hongkong
’Business School, Southwest Jiaotong University, Chengdu, 610031 China
1
knlau@baf.msmail.cuhk.edu.hk, gchongyan@gmail.com
Abstract- Performance Management (PM) becomes one of the for the supporting staff. The major problem of these methods
most important initiatives in bank management today. One is that millions of bank customers have “no say” at all in the
urgent problem for banks is how to link up employee evaluation process and this is against the trend to build a
performance to bank profitability so that resources can be ”CustomerFocused Organization“.An employee evaluated as
optimally allocated and fully utilized to meet competition and “very good” by the peer may not be regarded as “very good”
support increasing demand of quality products / services from
customers. Mining customer data to measure ’’Productivity’’ by customers. Moreover, sales quota determination is always
and enhance ‘Ter€onnance Management” is not only feasible la controversial. Employees with poor ranks may not accept the
this information era but also in line with the transformation of a evaluation results and always regard these methods as
bank into a “Customer driven organization”. In this article, we “subjective, biased and unfair”.
propme a data mining approach to performance management in Every bank wants to transform into a “customer driven”
the banking industry. organization and every employee understands hisher salary
Keywords: Performaace Managen ent (PM); bank;
profitability
ultimately comes from customers. There is no debate that
customer voices should be collected and used in PM.
I. INTRODUCTION However, a bank can have millions of customers. Collecting
millions of customer opinions daily is infeasibIe, but a survey
The globalization, intensified competition and rapid on several thousands of customer opinions in a year i s not
.hanges in the socio-economic environments have created reliable to differentiate good performance from bad
serious challenges for banks to survive in the 21st century. performance. Fortunately, most banks have invested billions
One urgent problem for banks is how to link up employee of dollars in information technology to meet their Customer
performance to bank profitability so that resources can be Relationship Management (CRM) initiatives in the past
optimally allocated and fully utilized to meet competition and decade and produced remarkable results to enhance
support increasing demand of quality products / services from effectiveness of their marketing activities. Customer voices
customers. Consequently, Performance Management (PM) are actually computerized in every second of everyday into
becomes one of the most important initiatives in bank bank customer databases. These voices, which are loud and
management today. clear about their needs and satisfaction, have not yet been
Performance management is the process to translate plans incorporated in existing performance evaluation mechanism
. into results (Cokins, 2004, and it is about “who’s going to do even though the marginal cost of using such information is
what, by when and how will we know the job has been well almost zero.
done?” (Parsons, 2001). The focus of PM is to measure
employee performance, department productivity, and II. THEOIUTICAL FOUNDATION
management effectiveness. Traditionally, the PM function is
managed by the Human Resource (HR) department. Mining customer data to measure “Productivity” and
Among academics, Data Envelopment Analysis @EA) enhance “PerformanceManagement” is not only feasible in
(Charnes, 1994) is the most popular operational research this information era but also in line with the transformation of
technique to evaluate branch performance in banking industry a bank into a Customer Focused Performance Management
(Thanassoulis, 1999). However, as far as we know, none of System (CFPMS). This system relies on massive customer
the banks in Hong Kong use it for PM because DEA results information supplemented (see Figure 1) with workflow data,
can be very ambivalent (see Metiers, King-Metters and survey data, and peer ratings as the integrated basis to
Pullman, 2003 for managerial concerns about DEA). In evaluate the performance of bank departments and
addition, PM requires more than measurements and DEA employees.
cannot provide specific plan for each unit to improve
performance.
The PM practices did not change too much in the past
decade, Employee evaluation in banks today still mainly
relies on the result-based method (e.g., sales quota) for the F I G m 1 FOUNDAT~ONS
OF CFPMS- TRANsACnONS AND A m
sales staff, and the peer / superior l 3 6 0 degree rating method

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02005 IEEE
0-7803-897 1-9/05/$20.00

The performance management model will be extended. resource allocation and competition as the database are directly or indirectly used in the performance first step to develop a "Customer Focused Performance evaluation of all departments and employees within a bank. IMPLEMENTATION FRAMEWORK departments within a bank and deduce productivity score for The tasks of developing the CFPMS include: each department. Workj7ow Analysis. Then the relationship of customer satisfaction measure. Similarly. Data Engineering. resource allocation and competition from Bank B (vb). Let Xu be the number of man hours provided by the waiting and service time as one of the proxy variables for department i to support deparhnent j. satisfaction. Employee bonuses and salary adjustments are determined by their performance scores. B. speed. dj)are requirements of banks A and B to produce one unit of attraction. Management System (CFPMS)" for banks. The building blocks of the proposed sysb-m are illustrated in the flowchart below: .e.). data allows us to produce specific recommendation plan to each department and each employee to improve their future Dept I 2 3 performance. and determine their evaluation criteria (e. departmental workflow data and survey data. Input-Output model to illustrate the sophisticated relationship Voices of all customers embedded in the customer among efficiency. We propose to use the input-output analysis (Leontief. etc through data cleansing. The balanced score card for each employee within a department will be derived from customer data. We present here a simplified version of A..1010 - . Productivity score of a department will be evaluated by comparing the resources used and its contributions to customers. Objective scoring on productiviq and pe@ormance. sales from customer perspectives. estimated and applied to compute the department productivity score which will subsequently be used to allocate resources and determine their budgets. C. We further assume the market share of bank A (Ma) is proportional to the attraction of A: Ma = exP(Va )4exP(Va)+exp(Vb)) Mb = exp(vb)/(exp(va)+exp(Vb)) '(4) From (3) and (4). and mining so that we are able to evaluate the department outputs department 3 is the product department (i. performance score of an employee is determined by comparing hisher salary with hidher contribution to the department. we will calculate department). Extended Performance Management Model. which can later be extended to allow n product departments and m supporting departments. we assume two banks A and B selling only one Data engineering is the process to convert raw customer data into actionable customer information about their needs. Mining on massive customer departments is formulated as an input output table below. This simple model. To illustrate the model. impact). workflow data and peer ratings Io determine the contribution of a particular employee to bank profit relative to hisher salary. D..l986) to derive performance measures using various sources of customer data.g. product in the market and each bank has three departments. data fusion and data where department 1 and 2 are supporting departments. For example. where (aj. 2 3 XZI x3I x32 2 1 We study inputs and outputs of departments. we illustrate how the market share of A is related to its efficiency production capability (ah. can be te&-adlmMre analyzed in input output framework (Leontief. 1986) as the basis to quantify the interrelationship among all m.

the integration of the input output analysis (i. Moreover. since alI tansactions are estimating the waiting time/ service time of each branch visit. n IV. tb 3 models and experience in the banking industry can be tralsplanted tci cther service industries to help them strengthen their aanagement effectiveness in the international arena.e.g. yet this is an urgent matter to individual performance score for all employees in each Banks in China to transform themselves into a "Customer branch.1011 - . PERFORMANCE MEASUREMENTS B. Moreover. By examining the change in product utilization.From the sales perspective. given such valuable customer On one hand. and support the campaign.. service provided the exact number of customers that they serve by hour. In fact. and also identify all internal resources provided by other banks know how satisfied each customer is with the bank departments. the integration of massive customer knowledge.e. banks can easily trace the revenue generated banks know how comfortable each customer is with their from each new insurance customer over certain time period services. date by retail credit risk department and branch) have been used to and branch. The process is illustrated in figure 4 below: On the other hand. Frontline employee and branch target level (say. Stage 2 model)" in a bank setting has not yet been attempted by any academic researchers. Therefore. If the ideal is successful. f rank I Sales I Effort I Service I mPEI Combine 1 Rank I Score Score Score Score 1 .. acquisition campaign by direct mailing which is planned and marketing campaigns ) can be evaluated by mining massive executed by the insurance marketing department in bank customer data : headquarter. . By counting the number of complaints. In other words. regardless of how much revenue a 5% A time stamp and a branch code are associated with each acquisition rate can contribute to the bank in short / long term customer transaction in a branch visit. Prom the productivity view. Stage 1 model) with the "Customer Driven Balanced Score Determination (i.. After we derive the totally new to practitioners. for each branch. mining so that banks are able to design a more realistic sales quota for each sales person according to the sales potential of V.. In most banks today. but also add a new chapter in the performance management area and stimulate more creative FIGURE 4 THE CONSTRUCITON OF BRANCH PERFORMANCE SCORE research in the future. Campaign P e l f o m n c e Here are some examples to illustrate how the performance As an example. results will not only provide concrete guidelines for oth&+Chinesebanks to follow in their road to modernization. the sales persons have better capability to target information with workflow data and peer ratings to measure the right products to right customers at the right time so as to and improve employee performance in the service industry is maximize their sales performance. banks do have the capability to product and the price. branch and marketing activities (i.e. the campaign is regarded as successful if the campaign response rate can exceed certain A. computerized. the. efficiency. banks know and how much other internal resources ( e. banks can include all cost and revenue factors from the database to deduce the total number of service transactions provided by derive a more accurate estimate on the return of each activity any particular frontline employee and compare their relative conducted by different supporting departments I staff.. we can aggregate them to produce performance score driven organization" in order to meet the WTO challenges. 5%). consider the evduation of a customer of frontline employee. detailed knowledge on Therefore. their performance in terms of contributions to individual customers can now be recovered through data bank profit can be deduced. CONCLWSION hisher clients..

Cooper. “Data Envelopment Analysis and Its Use in [3] [3] Leontief..Seiford.Oxford 3anking”. M. 1994. [6] [6] Thanassoulis. 11-40.. Inc. Wessily. “Input Output Economics”. REFERENCES [4] [4] Meaen. “Service Operations Management”.. 1-13. Ill [I1 A. Pullman. pp. pieces”.Thomson. 2003.&mnt‘ approaches to measmment within fie Analysis“.1012 - . pp.June 1999. R. Interfaces Vol 29: 3 M a y . w. King-Mettem. A.job.. K... E. Asian [2] [2] Cokins. University Res. John Wiley & Sons.. 2001. service sector & service sector/ white collar institutions”. . “Data Envelopment 151 151 parsoPS.“Performance Management:finding the missing Productivity Organization. 1986. Gq. L e w h L. 2003. Kluwer. 2nd edition..*.