1. Back-Office Design Chapter 7

2. 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

3. 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

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

5. 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

6. Basic Principles of De-coupling Customer contact model – Richard Chase, USC Services categorized by level of customer contact High ContactLow Contact Pure Services Mixed ServicesQuasi-Manufacturing (medical) (branch banks)(distribution centers) 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

7. 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

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

9. Managerial Differences High Contact:Low Contact: BranchSupport Center Facility Locationnear the customernear supply, transportation, labor Facility Layoutcustomer-orientedproduction efficiency Productionorders cannot besmooth production planning storedwith backorders Worker Skillspublic interactiontechnical Quality Controlvariable standardsnumerical measurement Capacityset to peak set to average work loadwork load Chapter 7 – Back-Office Design 8

10. Two Models of Human Resource Practice CoupledDe-coupled Selection criteriaTrainabilityCollege for platform H.S. for tellers, back-office Training emphasis BroadImmediate task customer focusfocus CompensationAt or above marketAbove market for some, below for others Group incentivesIndividual incentives Returns for longevity Job DesignCross-trainingNarrow, specialized Enhanced discretionHigh control for most Part-timersFor retentionFor cost-control Chapter 7 – Back-Office Design 9

11. 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 Its a Bank but I think of it as a Factory, Innovation Chapter 7 – Back-Office Design 10

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

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

14. 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

15. 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 1 1 1 … 1 central unit: 15 14 Chapter 7 – Back-Office Design

16. 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 25 2 2 2 2 … Chapter 7 – Back-Office Design 15

17. 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

18. De-coupling and Flexibility Bank employee moved from coupled to de- coupled 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

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

20. 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

21. 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

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

23. Management Practice Cost LeaderCheap ConvenienceFocused Professionals High Service Level of De-coupling HighLowHighLow Competitive Advantage Low costsLocational convenience/low cost Personalized service at moderate cost Premium level of personalized service Reason to De-couple Scale economiesMaintain 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 workCentralize back- office work in excess of front-office idle time Back-office activities regionalized, not centralized Activities requiring expensive capital goods Operational Strategic Focus Cost minimization; Conformance quality Cost minimization; conformance quality Maintain sufficient flexibility, response time, or service quality at lower cost than High Service Maximize flexibility, response time, or service quality Chapter 7 – Back-Office Design 22

24. Management Practice Cost LeaderCheap ConvenienceFocused Professionals High Service High-Contact Product Line NarrowVery narrowBroadVery broad TrainingNarrow, focused on task within process, low cross-training Broad. All employees should be able to perform each function. Narrow, but focused on an entire process Broad, but with specialization across functions High-contact Worker Responsibility 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 complexityEnhance marketingEnhance service Chapter 7 – Back-Office Design 23

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

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

27. Industry Analysis Retail Lending – Nashville, TN CostCheapHighFocused LeaderConvenienceServiceProfessional AmSouthNash. Bk of CommSunTrustUnion Planters First American SouthTrust Bk. of Green Hills First Union (changing to focused professional) NationsBank Chapter 7 – Back-Office Design 26

28. Summary Practitioner/Academic view of De-coupling De-coupling as part of a coherent strategy De-couplingStrategic FocusClassification High de-couplingServiceFocused Professional CostCost Leader Low de-couplingServiceHigh Service CostCheap Convenience Chapter 7 – Back-Office Design 27