Banking Industry: Management of Operations - Example

Operational management issues for services – the case of the banking industry Table of contents 0 Introduction 3 2.0 Banking industry – management of operations 3 2.1 External factors that affect operations of banks – overview 4 2.2 External factors that affect operations of banks – analysis of impact. What specific challenges does a typical head of operations face in the banking industry? 4 2.3 What actions are heads of operations (or equivalent) taking or what actions could they be taking to respond to these specific challenges, in terms of the different dimensions of their role. 6 3.0 Conclusion 9 4.0 References 9 1.0 Introduction The evaluation of organizational effectiveness can be a quite difficult task depending on the type of industry involved and the conditions in the organizational environment. In any case, organizations that are able to control all aspects of their operations are considered as successful even if their performance in financial terms is not high. In this paper the issues related to the operations management in the services sector are explored. Reference is made, as an example, to the banking industry. The review of the industry’s operational needs has led to the following assumption: the challenges that the head of operations in the particular industry has to face are many while their effects are significant, especially due to the nature of this industry’s activities. In this context, identifying the operational risks early should be a priority for the head of operations in all firms of the banking sector. On the other hand, measures commonly used by head of operations in other industries could be also proved valuable in the banking sector, as explained below. It is concluded that managing operations in the banking industry can be a difficult task while the time required for covering damages caused by operational failures can be extended, a fact that could severely threaten the viability of a bank, either in the short or the long term. 2.0 Banking industry – management of operations The services sector is usually described by focusing on the ‘intangibility of the output of the operations system’ (Greasley 1999, p.2); at this point, the services sector is differentiated by the goods sector, at the level that ‘goods are tangible while services are not’ (Greasley 1999, p.2). Another characteristic of services, as described above, is their ‘activation on demand’ (Greasley 1999, p.2). Indeed, goods are produced and then they are made available to the public while with services a different route is followed: services cannot be offered before a customer asks for them. Indeed, services are provided only under the terms that a relevant order is placed by customer (Greasley 1999, p.2). The above characteristics of the services sector should be taken into consideration when trying to evaluate the external factors that influence the operations of firms in the banking industry. 2.1 External factors that affect operations of banks – overview Banks, like all organizations, are expected to face certain risks and challenges as of their daily operations. These risks are differentiated according to the part of the operations affected each time: reference can be made, for example, to ‘processes or to people’ (Hong Kong Institute of Bankers 2013, p.6). In regard to this paper, emphasis should be given to banks’ external environment. In fact, it has been proved that external factors can highly affect the operations of banks. External factors of such type are the following: ‘a) criminal acts, b) natural disasters and c) political/ regulatory causes’ (Hong Kong Institute of Bankers 2013, p.6). The changes of technology can be considered as another external factor that can highly influence operations in the banking sector (Barros 2005). The practical aspects of the above factors are analyzed in the section that follows so that the role of these factors in banks’ operations is made clear. 2.2 External factors that affect operations of banks – analysis of impact. What specific challenges does a typical head of operations face in the banking industry? In the context of the banking industry a typical head of operations has to face a series of challenges. As of the external factors related to business operations the head of operations in a bank should be primarily able to ensure the security of operations from criminal acts (Collardi 2012). These criminal acts can have various forms, as for example: a) violation of the organization’s IT systems for damaging or for stealing critical data (Collardi 2012), b) damage of the organization’s infrastructure or material, such as machinery, documentation and so on; such damage can be caused by revenge or in the context of another criminal activity, such as burglary (Collardi 2012) and c) alteration of these firms’ financial reports so that shareholders are not informed on actual organizational performance (Collardi 2012); this is the case of mismanagement which is considered as fraud (Collardi 2012). At the next level, natural disasters are able to influence the operations of businesses in all sectors; in the banking sector also, the intervention of natural disasters in daily operations can be extensive. For example, a quite strong storm in the region where a bank is established can lead to floods, a fact that would severely threaten the infrastructure of the bank especially if the phenomenon lasts for quite a long (Barros 2005). It could be argued that natural disasters cannot highly threaten the operations of banks since these organizations are usually established in urban areas where the risks from natural disasters are rather low, compared to rural regions (Barros 2005). The above argument could be opposed on the following basis: today natural disasters have become stronger than in the past, being able to affect equally rural and urban environments (Barros 2005). This problem has been caused because of the following practice: regions that are highly exposed to natural disasters have been used in the context of urban development under the need for extra space for covering the housing needs of a region (Barros 2005). When referring to the external factors that influence the operations of banks particular emphasis should be given to the political and regulatory environment of these organizations. According to Williamson (1988) the laws regulating banking services are often too broad, failing in making distinction between activities that can be developed solely by banks and those that can be developed by other firms operating in the financial services industry. The lack of specific lines between the ‘brokerage and banking industries’ (Williamson 1988, p.408) is an example of the above problem. In this context, if the head of operations in a bank is not fully aware of the regulations/ laws related to the banking sector it is possible for important operational mistakes to be made; the excess of credit provided to organizations controlled by the state can be such case (Hussain 2000). At the next level, mistakes of this kind can lead to high fines, by the relevant authorities; the damage caused on a bank because of such fines can be quite high depending on the level at which laws related to banking operations have been violated (Hussain 2000). In addition, in most countries regulations related to the financial services sector are likely to be changed continuously; in this context, it could be quite difficult for the head of operations in a bank to be fully aware of the regulatory framework related to the bank’s operations (Greasley 1999). As for technological factors, these refer to the changes of technology used in the services sector; these changes include the technological systems used in various phases of daily business operations, meaning not just IT systems but also infrastructure, such as machines used for controlling the access to work areas (Barros 2005). 2.3 What actions are heads of operations (or equivalent) taking or what actions could they be taking to respond to these specific challenges, in terms of the different dimensions of their role. The actions that a head of operations could take for facing the challenges mentioned above would be depended on the theory used for explaining the operations system of the organization, i.e. bank, involved. For example, the systems theory promotes the idea that each organization should be considered as a system ‘that converts input, such as raw materials and money, to output, i.e. products or services’ (Summers 1998, p.3). In the context of the systems theory a head of operations in a bank could just try to ensure that the inputs to the operations system would be of such quality and quantity that the adequacy and quality of output, i.e. services, would be secured. In any case, the balance between input and output in regard to a bank’s operations system would be judged according to the area of operations involved. For example, if referring to criminal factors, the head of operations has to make sure that the quality of the material used in the firm’s Closed Circuit Television system is high so that the performance of the particular system is ensured (Barros 2005). On the other hand, if referring to natural disasters, a head of operations should make sure that the measures taken for protecting the bank from floods or other natural disasters are carefully designed and have been already tested in similar conditions (Williamson 1988). Different priorities would be set by the head of operations if a different theory would be employed. For example, it would be possible for the operations of a bank to controlled and managed using the leadership theories: a) the power theories of leadership emphasize on the potential of a leader to ‘exercise his power on his followers’ (Parker 2012, p.148), b) the participative theories of leadership highlight the importance of the participation of followers in the decision-making process, as such power can highly motivate followers (Parker 2012) and c) the transformational leadership theories; these theories emphasize on the potential of leaders to motivate their followers ‘to perform beyond their expectations’ (Parker 2012, p.148). These theories would be particularly helpful for the head of operations in a bank. Indeed, using the transformational leadership theories the head of operations would be able to persuade employees to continuously increase their performance in regard to the management of the bank’s IT systems. These systems need to be continuously updated and employees would be able, and willing, to support the operations of these systems in all their aspects (Parker 2012). On the other hand, Nankervis et al. (2005) supported that operations management is a complex process, incorporating various elements. In this context, the head of operations in each organization has to respond to a high range of issues, such as ‘service design, quality management, layout planning, HR management, innovation and supply chain management’ (Nankervis et al. 2005, p.215). In regard to the above issues, Mahadevan (2005) noted that the role of the head of operations in each organization can be quite demanding; it is also explained that the head of operations can be respond to the demands of his role by using a systematic approach (Mahadevan 2005, p.5). This approach is based on the development of an integrate plan for facing operational management issues. Such plan would include the following parts: a) extensive research for identifying the business operational problems, b) introduction of ‘measures of performance’ (Mahadevan 2005, p.5) and c) the use of appropriate tools/ techniques for evaluating the appropriateness of specific measures, in regard to the problems identified through the processes mentioned above (Mahadevan 2005). Another approach that could be possibly used by the head of operations would be the ‘resource and competence based approach’ (Brown et al. 2013, p.70). The above approach promotes the idea that in each organization operations management has a specific priority: the help the organization to develop a competitive advantage towards its rivals (Brown et al. 2013). Using this approach, the head of operations in a bank would not emphasize so much on the performance of the bank’s daily operations but rather on the identification of innovative techniques that would make the bank’s operations unique, compared to competitors. 3.0 Conclusion In the services sector the role of head of operations can be quite challenging. Indeed, the review of the external factors that influence the daily operations of banks revealed that the issues that a head of operations in a bank has to face can be many. In the literature, different approaches have been suggested for helping the head of operations in the banking industry to respond to the demands of his role. Still, the effectiveness of these approaches is not secured at the level that drawbacks cannot be eliminated. In this context, a combination of these approaches could be suggested for ensuring the success of a plan that aims to address the needs of a bank’s daily operations. In addition, the following fact should be made clear: the performance of a bank’s operations cannot be simply evaluated by referring to the financial results of these organizations. In other words, the performance measures set by these organizations’ head of operations should not be only financial; non-financial measures, such as quality of communication with customers and customer loyalty should be also employed when designing the operations management framework of these firms. 4.0 References Barros, P. (2005). Integration of European Banking: The Way Forward. London: Centre for Economic Policy Research. Brown, S., Bessant, J. and Lamming, R. (2013). Strategic Operations Management. London: Routledge. Collardi, B. (2012). Private Banking: Building a Culture of Excellence. Hoboken: John Wiley & Sons. Greasley, A. (1999). Operations Management in Business. Cheltenham: Nelson Thornes. Hong Kong Institute of Bankers (2013) Operational Risk Management. Hoboken: John Wiley & Sons. Hussain, A. (2000) Managing Operational Risk in Financial Markets. Oxford: Butterworth-Heinemann. Mahadevan, B. (2009) Operation Management: Theory and Practice. Delhi: Pearson Education India. Nankervis, A., Miyamoto, Y., Taylor, R. and Milton-Smith, J. (2005) Managing Services. Cambridge: Cambridge University Press. Parker, D. (2012). Service Operations Management: The Total Experience. Cheltenham: Edward Elgar Publishing. Summers, M. (1998). Analyzing Operations in Business: Issues, Tools, and Techniques. Westport: Greenwood Publishing Group. Williamson, P. (1988). The Investment Banking Handbook. Hoboken: John Wiley & Sons. Read More