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
most important initiatives in bank management today. One
urgent problem for banks is how to link up employee
performance to bank profitability so that resources can be
optimally allocated and fully utilized to meet competition and
support increasing demand of quality products / services from
customers. Mining customer data to measure Productivity
and enhance Teronnance Management is not only feasible la
this information era but also in line with the transformation of a
bank into a Customer driven organization. In this article, we
propme a data mining approach to performance management in
the banking industry.
Keywords: Performaace Managen ent (PM); bank;
profitability
I. INTRODUCTION
The globalization, intensified competition and rapid
.hanges in the socio-economic environments have created
serious challenges for banks to survive in the 21st century.
One urgent problem for banks is how to link up employee
performance to bank profitability so that resources can be
optimally allocated and fully utilized to meet competition and
support increasing demand of quality products / services from
customers. Consequently, Performance Management (PM)
becomes one of the most important initiatives in bank
management today.
Performance management is the process to translate plans
. into results (Cokins, 2004, and it is about whos going to do
what, by when and how will we know the job has been well
done? (Parsons, 2001). The focus of PM is to measure
employee performance, department productivity, and
management effectiveness. Traditionally, the PM function is
managed by the Human Resource (HR) department.
Among academics, Data Envelopment Analysis @EA)
(Charnes, 1994) is the most popular operational research
technique to evaluate branch performance in banking industry
(Thanassoulis, 1999). However, as far as we know, none of
the banks in Hong Kong use it for PM because DEA results
can be very ambivalent (see Metiers, King-Metters and
Pullman, 2003 for managerial concerns about DEA). In
addition, PM requires more than measurements and DEA
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
sales staff, and the peer / superior l 3 6 0 degree rating method
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for the supporting staff. The major problem of these methods
is that millions of bank customers have no say at all in the
evaluation process and this is against the trend to build a
CustomerFocused Organization.An employee evaluated as
very good by the peer may not be regarded as very good
by customers. Moreover, sales quota determination is always
controversial. Employees with poor ranks may not accept the
evaluation results and always regard these methods as
subjective, biased and unfair.
Every bank wants to transform into a customer driven
organization and every employee understands hisher salary
ultimately comes from customers. There is no debate that
customer voices should be collected and used in PM.
However, a bank can have millions of customers. Collecting
millions of customer opinions daily is infeasibIe, but a survey
on several thousands of customer opinions in a year i s not
reliable to differentiate good performance from bad
performance. Fortunately, most banks have invested billions
of dollars in information technology to meet their Customer
Relationship Management (CRM) initiatives in the past
decade and produced remarkable results to enhance
effectiveness of their marketing activities. Customer voices
are actually computerized in every second of everyday into
bank customer databases. These voices, which are loud and
clear about their needs and satisfaction, have not yet been
incorporated in existing performance evaluation mechanism
even though the marginal cost of using such information is
almost zero.
II. THEOIUTICAL FOUNDATION
Mining customer data to measure Productivity and
enhance PerformanceManagement is not only feasible in
this information era but also in line with the transformation of
a bank into a Customer Focused Performance Management
System (CFPMS). This system relies on massive customer
information supplemented (see Figure 1) with workflow data,
survey data, and peer ratings as the integrated basis to
evaluate the performance of bank departments and
employees.
F I G m 1 FOUNDAT~ONS
OF CFPMS- TRANsACnONS AND A m

te&-adlmMre
We propose to use the input-output analysis (Leontief,
1986) as the basis to quantify the interrelationship among all
departments within a bank and deduce productivity score for
each department. We present here a simplified version of
Input-Output model to illustrate the sophisticated relationship
among efficiency, resource allocation and competition as the
first step to develop a "Customer Focused Performance
Management System (CFPMS)" for banks. To illustrate the
model, we assume two banks A and B selling only one
product in the market and each bank has three departments,
where department 1 and 2 are supporting departments, and
department 3 is the product department (i.e., sales
department). Let Xu be the number of man hours provided by
department i to support deparhnent j. Then the relationship of
departments is formulated as an input output table below.
Dept I 2 3 performance.
2
3
XZI
x3I x32 2 1
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where (aj,
dj)are requirements of banks A and B to produce
one unit of attraction. 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), we illustrate how the market share of A is
related to its efficiency production capability (ah,),
resource allocation and competition from Bank B (vb).
This simple model, which can later be extended to allow n
product departments and m supporting departments, can be
analyzed in input output framework (Leontief,l986) to derive
performance measures using various sources of customer data,
departmental workflow data and survey data.
m. IMPLEMENTATION FRAMEWORK
The tasks of developing the CFPMS include:
A. Data Engineering.
Voices of all customers embedded in the customer
database are directly or indirectly used in the performance
evaluation of all departments and employees within a bank.
Data engineering is the process to convert raw customer data
into actionable customer information about their needs,
satisfaction, etc through data cleansing, data fusion and data
mining so that we are able to evaluate the department outputs
from customer perspectives. For example, we will calculate
the waiting and service time as one of the proxy variables for
customer satisfaction measure. Mining on massive customer
data allows us to produce specific recommendation plan to
each department and each employee to improve their future
B. Workj7ow Analysis.
We study inputs and outputs of departments, and determine
their evaluation criteria (e.g., speed, impact).
C. Extended Performance Management Model.
The performance management model will be extended,
estimated and applied to compute the department productivity
score which will subsequently be used to allocate resources
and determine their budgets.
D. Objective scoring on productiviq and pe@ormance.
Productivity score of a department will be evaluated by
comparing the resources used and its contributions to
customers. Similarly, performance score of an employee is
determined by comparing hisher salary with hidher
contribution to the department.
Employee bonuses and salary adjustments are determined
by their performance scores. The balanced score card for each
employee within a department will be derived from customer
data, workflow data and peer ratings Io determine the
contribution of a particular employee to bank profit relative to
hisher salary.
The building blocks of the proposed sysb-m are illustrated
in the flowchart below:
 f rank
IV. PERFORMANCE MEASUREMENTS
Here are some examples to illustrate how the performance
of frontline employee, branch and marketing activities (i.e.,
marketing campaigns ) can be evaluated by mining massive
customer data :
A. Frontline employee and branch
A time stamp and a branch code are associated with each
customer transaction in a branch visit. Therefore, banks know
the exact number of customers that they serve by hour, date
and branch. By counting the number of complaints, and
estimating the waiting time/ service time of each branch visit,
banks know how comfortable each customer is with their
services. By examining the change in product utilization,
banks know how satisfied each customer is with the bank
product and the price. Prom the productivity view, banks can
deduce the total number of service transactions provided by
any particular frontline employee and compare their relative
efficiency.From the sales perspective, detailed knowledge on
individual customers can now be recovered through data
mining so that banks are able to design a more realistic sales
quota for each sales person according to the sales potential of
hisher clients. Moreover, given such valuable customer
knowledge, the sales persons have better capability to target
the right products to right customers at the right time so as to
maximize their sales performance. After we derive the
individual performance score for all employees in each
branch, we can aggregate them to produce performance score
for each branch. The process is illustrated in figure 4 below:
FIGURE 4 THE CONSTRUCITON OF BRANCH PERFORMANCE SCORE
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I Sales I Effort I Service I
mPEI
Combine 1 Rank I
Score Score Score Score
1
...
n
B. Campaign P e l f o m n c e
As an example, consider the evduation of a customer
acquisition campaign by direct mailing which is planned and
executed by the insurance marketing department in bank
headquarter. In most banks today, the campaign is regarded as
successful if the campaign response rate can exceed certain
target level (say, 5%), regardless of how much revenue a 5%
acquisition rate can contribute to the bank in short / long term
and how much other internal resources ( e.g., service provided
by retail credit risk department and branch) have been used to
support the campaign. In fact, since alI tansactions are
computerized, banks can easily trace the revenue generated
from each new insurance customer over certain time period
and also identify all internal resources provided by other
departments. In other words, banks do have the capability to
include all cost and revenue factors from the database to
derive a more accurate estimate on the return of each activity
conducted by different supporting departments I staff.
Therefore, their performance in terms of contributions to
bank profit can be deduced.
V. CONCLWSION
On one hand, the integration of massive customer
information with workflow data and peer ratings to measure
and improve employee performance in the service industry is
totally new to practitioners, yet this is an urgent matter to
Banks in China to transform themselves into a "Customer
driven organization" in order to meet the WTO challenges.
On the other hand, the integration of the input output analysis
(i.e., Stage 1 model) with the "Customer Driven Balanced
Score Determination (i.e., Stage 2 model)" in a bank setting
has not yet been attempted by any academic researchers. If
the ideal is successful, the, results will not only provide
concrete guidelines for oth&+Chinesebanks to follow in their
road to modernization, but also add a new chapter in the
performance management area and stimulate more creative
research in the future. Moreover, 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.
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151 151 parsoPS,job.,*;&mnt approaches to measmment within fie
Analysis, Kluwer, 1994. service sector & service sector/ white collar institutions. Asian
[2] [2] Cokins, Gq.,Performance Management:finding the missing Productivity Organization. 2001, pp. 11-40.
pieces, John Wiley & Sons, Inc., 2003. [6] [6] Thanassoulis, E., Data Envelopment Analysis and Its Use in
[3] [3] Leontief, Wessily. Input Output Economics, 2nd edition,Oxford 3anking, Interfaces Vol 29: 3 M a y - June 1999, pp. 1-13.
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