BackOffice Design Chapter 7 FrontOfficeBackOffice Interface Main concern

Back-Office Design Chapter 7

Front-Office/Back-Office Interface • Main concern: aligning functional and corporate service strategies – Organization: • • Introduction to misaligned strategies Academics Practitioners/Consultants Prescriptive model - Aligning de-coupling and strategy - Includes marketing, HR, operations • Analysis of the retail bank lending market Chapter 7 – Back-Office Design 1

Strategic Service Vision • Service Concept definition: results provided for customers – General service concepts – Cost – Speed – Flexibility – Quality • Service Delivery System Chapter 7 – Back-Office Design 2

Strategic Service Vision • Does a Service Delivery System support the intended Service Concept? – Equipment, training, policies, procedures… Low Costs Fee Reversal Policy Chapter 7 – Back-Office Design High Service Staffing Levels Flexibility Systems Technology 3

Academic Literature • Productivity – Levitt (1972) “Production-line Approach to Service, ” HBR – Levitt (1976) “The Industrialization of Service, ” HBR • De-coupling of Front- and Back-office – Chase (1978, 1981) Customer Contact Model, HBR, Ops. Research Chapter 7 – Back-Office Design 4

Basic Principles of De-coupling • Customer contact model – Richard Chase, USC • Services categorized by level of customer contact High Contact Pure Services Manufacturing (medical) centers) Low Contact Mixed Services Quasi- (branch banks) (distribution Efficiency: f(1 – contact time/service creation time) Potential for efficiency increases as customer contact time/service creation time decreases Chapter 7 – Back-Office Design 5

Decoupling • Method – Decouple high contact and low contact “service factory” operations – Buffer low contact operations from customers • Employ contact reduction strategies in the low-contact areas – customer contact for exceptions only – reservations/appointment systems – drop-off points (ATMs) – task standardization Chapter 7 – Back-Office Design 6

Decoupling – Employ contact enhancement strategies in the high-contact areas • customer-oriented layout • people-oriented contact workers • partition back office from public view Chapter 7 – Back-Office Design 7

Managerial Differences Center High Contact: Low Contact: Branch Facility Location near the customer near supply, transportation, labor Facility Layout customer-oriented production efficiency Production orders cannot be with backorders smooth production planning Worker Skills public interaction technical Quality Control variable standards numerical measurement Support stored Capacity set to peak set to average work load Chapter 7 – Back-Office Design 8

Two Models of Human Resource Practice Coupled De-coupled Selection criteria Trainability College for platform H. S. for tellers, back-office Training emphasis Broad Immediate task customer focus Compensation At or above market Above market for some, below for others Group incentives Individual incentives Returns for longevity Job Design Cross-training Narrow, specialized Enhanced discretion High control for most Part-timers For retention For cost-control Chapter 7 – Back-Office Design 9

Practitioner Literature - “De-coupling is good. ” • Banking – Burger (1988) Bank Systems and Equipment – Cronander (1990) Texas Banking – Gilmore (1997) Real Estate Finance Journal – Pirrie, et al. (1990) Banking World – Reed (1971) “Sure It’s a Bank but I think of it as a Factory, ” Innovation Chapter 7 – Back-Office Design 10

Practitioner Literature • Other Services • Government: – Connors (1986) Office • Hospitals: – Greene (1990) Modern Healthcare • Newspapers: – Sharp (1996) Editor & Publisher, 129(29) Chapter 7 – Back-Office Design 11

Service Blueprint for Fast Food Operations Counter Line of Visibility Make Patties Chapter 7 – Back-Office Design Grill Assemble 12

De-coupling and cost • Does de-coupling always lower costs? • Why does de-coupling often lead to lower costs? – De-coupling and task focus • Frederick Taylor and Henry Ford Chapter 7 – Back-Office Design 13

De-coupling and Rounding of Small Numbers • 20 individual units – Each needs 0. 75 of a person • Staffing level: 1 person each, 20 total 1 central unit: 1 15 1 1 1 … Chapter 7 – Back-Office Design 14

De-coupling and Variance Reduction • 20 individual units: average day -1 person, good day -2 people • Staffing level: 2 people each, 40 total 1 central unit 2 25 2 2 2 … Chapter 7 – Back-Office Design 15

Cost Problems • Cost Problem – Back office: • (Queuing math) centralization is good. • Bigger means less idle time, higher employee utilization – Front office staffing: • Bigger is also better • Convenience strategy • Cost Problem – Large minimum break-even points – Break-even based on labor reduction Chapter 7 – Back-Office Design 16

De-coupling and Flexibility • Bank employee moved from coupled to decoupled job: – “The computer system is suppose to know all the limitations, which is great because I no longer know them. ” • Bank manager – “As we have more and more processing in the black box, few people know what a bank is really like. Some guys are walking encyclopedias of banking information, but they are a dying breed. Do we need people who really know all the processes? Is there a risk? ” Chapter 7 – Back-Office Design 17

De-coupling and Service Quality • Service Gaps – de-centralized service Management Policy Service Provider Customer • Service Gaps – centralized service Management Policy Customer Chapter 7 – Back-Office Design High contact worker Low contact worker 18

De-coupling and… • Service Quality – Quality of conformance – decision consistency improved – Task quality and the “Renaissance man” • Speed – Speed of Task versus speed of Process – Task speed improved due to focus – Process speed can be worse due to hand-offs Chapter 7 – Back-Office Design 19

De-coupling • Benefits − Cost (task focus, variance reduction, technology) − Service quality – conformance quality − Speed of Delivery – task speed • Disadvantages – Cost (increased idle time in front-office, duty overlap) – Service quality – personal service, empathy – Speed of delivery – process speed – Flexibility Chapter 7 – Back-Office Design 20

Modeling Services De-coupling Service High Service Focused Professionals Cheap Convenience Cost Leader Strategic Operational Focus Cost Low High Level of De-coupling Chapter 7 – Back-Office Design 21

Management Practice Level of De-coupling Cost Leader Cheap Convenience Focused Professionals High Service High Low Competitive Advantage Low costs Locational convenience/low cost Personalized service at moderate cost Premium level of personalized service Reason to De-couple Scale economies Maintain cost competitiveness Quality control; disaggregation of high-and low-contact Centralize only when it is cost prohibitive not to Activities to De-couple All back-office work Centralize back-office Back-office activities work in excess of “regionalized, ” not front-office idle time centralized Activities requiring expensive capital goods Cost minimization; conformance quality Maximize flexibility, response time, or service quality Operational Strategic Cost minimization; Focus Conformance quality Chapter 7 – Back-Office Design Maintain sufficient flexibility, response time, or service quality at lower cost than High Service 22

Management Practice Cost Leader Cheap Convenience Focused Professionals High Service High-Contact Product Line Narrow Very narrow Broad Very broad Training Narrow, focused on task within process, low cross-training Broad. All employees Narrow, but focused should be able to on an entire process perform each function. Broad, but with specialization across functions High-contact Worker Responsibility Service customer requests; Low offsite responsibilities Service customer requests; Low off-site responsibilities Increasing number of customers largely through off-site activity Increasing customer relationship depth; High off-site responsibilities High-contact Worker Compensation Salary/hourly Commission on sales Salary with commission on unit performance Purpose of Automation Standardize activity; Labor replacement Reduce job complexity Enhance marketing Enhance service Chapter 7 – Back-Office Design 23

Activities in Processing a Retail Loan Solicit Application Document Signing Line of Customer Visibility Application Processing Credit Decision Chapter 7 – Back-Office Design Payment Processing Bad Debt Collection 24

Modeling Services De-coupling Service Strategic Operational Focus Cost High Service Bank of Green Hills Cheap Convenience Nashville Bank of Comm. Low Focused Professionals Union Planters Cost Leader First Union High Level of De-coupling Chapter 7 – Back-Office Design 25

Industry Analysis Retail Lending – Nashville, TN Cost Cheap High Focused Leader Convenience Service Professional Am. South Nash. Bk of Comm Sun. Trust Union Planters First American South. Trust Bk. of Green Hills First Union (changing to focused professional) Nations. Bank Chapter 7 – Back-Office Design 26

Summary • Practitioner/Academic view of De-coupling • De-coupling as part of a coherent strategy De-coupling High de-coupling Strategic Focus Service Professional Cost Low de-coupling Classification Focused Cost Leader Service Cost Chapter 7 – Back-Office Design High Service Cheap Convenience 27