Developing a Comprehensive Performance Measurement System in the Banking Industry: An Analytic Hierarchy Approach

By Kwak, Wikil | Journal of Commercial Banking and Finance, Annual 2003 | Go to article overview

Developing a Comprehensive Performance Measurement System in the Banking Industry: An Analytic Hierarchy Approach


Kwak, Wikil, Journal of Commercial Banking and Finance


ABSTRACT

Developing a meaningful performance measurement system in a service organization such as a commercial bank is a challenging task for management because we must focus on results rather than activities because their outputs are hard to define. In addition, it is better to use multiple guidelines, including nonfinancial as well as financial criteria, to measure performance in the new dynamic business environment after recent deregulation.

The objective of this study is to provide a practical model for a comprehensive performance measurement system that incorporates strategic success factors in the banking industry. The model proposed in this study will have a broader set of measures that incorporate traditional financial performance, such as return on assets, as well as nonfinancial performance, such as the quality of customer service. Using Saaty's Analytic Hierarchy Process (AHP), the model will demonstrate how multiple performance criteria can be systematically incorporated into a comprehensive performance measurement system in a banking company.

INTRODUCTION

The objective of this study is to design a practical model for a comprehensive performance measurement system that incorporates strategic success factors in the banking industry. A performance measurement system proposed in this study can be used to evaluate top managers of a main bank or managers of a branch office.

Performance measurement should be closely tied to goal setting of an organization because it feeds back information to the system on how well strategies are being implemented (Chan & Lynn, 1991; Cheng & Li, 2001). A balanced scorecard approach (Kaplan & Norton, 1992) is a hot topic currently in this area, but it does not provide systematic aggregation of each level as well as different levels of managers' performance for the overall company. In other words, there is no systematic linkage between financial and non-financial measures across different levels of management hierarchy. A traditional performance measurement system, which focuses on financial measures such as Return on Assets (ROA), however, may not serve this purpose well for middle or lower level managers in the new competitive business environment either.

The model proposed in this study will have a broader set of measures that incorporate traditional financial performance measures such as return on assets and debt to equity ratio as well as nonfinancial performance measures such as the quality of customer service and productivity.

Using Saaty's Analytic Hierarchy Process (AHP) (see Saaty, 1980; Harker & Vargas, 1987), the model will demonstrate how multiple performance criteria can be systematically incorporated into a comprehensive performance measurement system. The AHP enables decision makers to structure a problem in the form of a hierarchy of its elements according to an organization's structure or ranks of management levels and to capture managerial decision preferences through a series of comparisons of relevant factors or criteria. The AHP has been applied recently to several business problems (e.g., divisional performance evaluation (Chan & Lynn, 1991), capital budgeting (Liberatore et al., 1992), and real estate investment (Kamath & Khaksari, 1991), marketing applications (Dyer & Forman, 1991), information system project selection (Schniederjans & Wilson, 1991), and activity-based costing cost driver selection (Schniederjans & Garvin, 1997)). The AHP is relatively easy to use and its commercial software is available. This study will be the first analytical and comprehensive performance evaluation model to cover a broader base of measures in the rapidly changing environment of today's banking industry. The following section presents background. The third section discusses methodology. The fourth section presents a numerical example. The last section summarizes and concludes this paper. …

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