An Integrated DEA and BSC

Science Road Publishing Corporation
Trends in Social Science
ISSN: 2251-967X
TSS 10(1) 2-7, 2014
Journal homepage: http://www.sciroad.com/tss.html
Performance Evaluation of Banks:
An Integrated DEA and BSC1
Bizhan Nosrati Barandagh
Student of Industrial management, Science and Research branch, Islamic Azad University, Saveh, Iran
(Corresponding Author)
Zeinolabedin Amini Sabegh
Department of Public management, Islamic Azad University, saveh branch, Saveh, Iran
Abstract
In today’s competitive world most of manufacturing and the service companies have been forced
to take off managerial approaches such approach that can be mentioned is one of new method of
performance evaluations that is called data envelopment analysis techniques that has important
function at improvement of evaluation of an organization. The challenges of this technique is
choosing proper indicator for introducing input & output variables for DEA so for modification of
this challenge a balanced score card approach is used that as a new tool of performance
assessment provides this possibility to explain variables of the research for using at DEA
technique based on holistic insight and regarding various organizational aspects (financial,
internal process, customer, growth and learning) so in this research we are aimed to introduce
completion technique of DEA-BSC for testing efficiency of banks.
Key words:performance assessment, choosing variable, DEA,BSC
1. Introduction
The process of performance assessment is a process that provide this possibility to organization to
identify problems and do the right action before the problem becomes greater ( kueng, 2000). The
problem of performance assessment of branches of bank is a challenging decision making problem
that the decision maker and managers of branches have always confronted.This problem requires
multi-criteria decision that is related to mission and overall goals of banks, strategic paterens and
probabilityof its technical and business success (halkos & salamouris,2004). Different methods
have been provided for performance assessment that organization’ managers regarding the aim of
assessment and type of organization takes the benefit of an especial method or model and or with
combining some model, designing their required model (Barghi & iranzadeh, 2009). It is a new
method for performance assessment of DEA; DEA model is a favorable tool for testing efficiency
of some agencies with similar manufacturing structure that besides considering efficiency of
companies it is able to provide favorable result to managers. This method determines benchmark
companies as goals for inefficient companies also suggest strategic procedures and efficiency
improvement in the field of companies’ development (Shange & sueyoshi. 1995). Major models of
DEA are divided into two models of CCR and BCC. Each model can be considered by using two
input and output procedures (yinsheng, 2000). On the one side choosing proper indicators at
validity of considering DEA technique has high significance (Joo et al. 2011) that for modification
1
data envelopment analysis and balanced score card
@2014 Science Road. All rights reserved
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Bizhan Nosrati Barandagh and Zeinolabedin Amini Sabegh, Trends in Social Science, 10(1), 2014
of this challenge balanced scorecard approach provides this possibility that choosing input and
output of the research for applying at DEA to be explained based on a holistic insight and
regarding different financial organizational aspects, internal process, customer, growth and
learning (Khaki et al, 2012). In fact in BSC-DEA technique BSC is used as a tool for designing
indicators of performance assessment and DEA is used as a tool for performance assessment. The
structure of this paper is as fallow firstly theoretical principles of the research including
Benchmarking, DEA, balanced scorecard, combination of DEA, BSC, discussion of research
history, has been considered and finally the result will be presented.
2. Methods
2.1 Benchmarking
Benchmarking is a management approach to implement the best practices found in similar
industries or even in different industries in order to improve the performance of an organization.
Originally, benchmarking was designed by Xerox Corporations in 1979 to overcome quality and
cost problems created by challenges from Japanese copier machines (Jackson, 2001). Nowadays,
benchmarking is widely used to achieve competitive advantages by implementing best practice
into organizations (Hinton et al., 2000).
2.2 DEA
Sherman and Ladino define efficiency as "the ability to produce outputs or services with minimal
resources" (Sherman & Ladino, 1995). Efficiency reflects the notion that how well an organization
uses its resources in order to produce the best performance in a point of time (Mehrgan, 2008).
One of the common tools to measure and evaluate performance is data envelopment analysis.
Results of numerous studies indicate that DEA technique is successfully used in the banking
industry, medicine, schools and agriculture …. It also represents the application of DEA technique
in measuring companies' financial performance (Joo etal, 2011). The biggest advantage of this
technique is that it can compare multiple criteria of multiple units. The other advantage of this
nonparametric method over parametric ones is it does not estimate form of the function in
financial statement analysis; and in fact, it does not need to estimate form of the function in ratio
analysis and translating all the numbers into a unit number called efficiency criteria. This will
facilitate comparisons (Halkos & Salamouris, 2004). The original DEA models are divided into
two types of CCR and BCC models. Each of these models can be examined using two approaches
of input orientation and output orientation. Input oriented models are the ones that their input will
decrease by constant output. Output oriented models are the ones that with constant inputs,
outputs will increase. Either of these models can be solved in two ways. The primary model which
is known as multiple model is in the form of maximization. The secondary model, usually in the
form of minimization, is known as envelopment model (Yinsheny, 2000). According to DEA
technique in measuring efficiency, it is assumed that there are n number of DMU with m inputs
and s outputs; and the efficiency score of DMUj can be calculated through solving the model
suggested by Charnes et al (1978):
R
∑
{
MaxE 0 =
ur0 yr 0}
r =1
I
∑
{
(1)
vi 0 xi 0 }
i =1
St:
R
{
∑
u r 0 y rk }
r =1
I
{
∑
≤ 1
(k=0,1,2,3,…,n)
(2)
v i 0 x ik }
i =1
u r 0 , v i 0 ≥ δ (i=1,2,3,…n)
(r=1,2,3,…,n)
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Bizhan Nosrati Barandagh and Zeinolabedin Amini Sabegh, Trends in Social Science, 10(1), 2014
In which:
Yrk: is the r output level from k unit. (k=0, 1, 2, 3… n)
Xik: is the i output level from k unit. (k=0, 1, 2, 3… n)
Ur0: is the weight of r output (output price of r) for the unit under investigation
Vi0: is the weight of i input (input price of r) for the unit under investigation
δ : A very small amount that is defined to be positive.
The majority of studies in the field of data envelopment analysis, due to the nature of DEA
technique in relative efficiency measurement, are observed in levels of modeling processes (Joo et
al, 2007).
2.3 BSC
Kaplan and Norton (1992) are the first who introduced the idea of BSC as a new method for
measuring the performance of a system. Norton and Kaplan emphasized on the importance of
strategy execution more than the strategy itself (Kaplan & Norton, 1996). The idea of BSC is to
look into non-financial items affecting the efficiency of a business unit. In the past, financial
factors were only considered for performance evaluation. However, BSC explains the indices
toward four outlooks of growth and learning, internal processes, customer and finance and intends
to balance financial goals as a result of past performance (past view indices) and three other
indices (future view indices) (Abran & Buglione, 2003). Fig 1 shows the details of the financial
and non-financial parameters.
Kaplan and Norton also explained that there is a cause and effect relationship among goals and
indices of these four perspectives. A proper scorecard creates cause and effect relationship among
the current activities and the success of the organization in a long time for a prolonged period.
Since the development of organization is based on its intangible assets, the balanced scorecard is
an important tool for their control and management. Note that to reach the financial outcomes (in
financial perspective); the customers must be esteemed according to customer's perspective, which
is attained only by matching the operational processes with the customers' requirements based on
internal processes perspective. Work environment for the personnel and encouraging them for
creativity, learning and development in the organization (McPhail et al., 2008) the idea of using
integrated BSC-DEA was used for different organizations in the past. (Banker et al. 2004)
implemented integrated BSC-DEA method for over 50 local exchange carriers operating in the
United States of America, based on operating data collected from year 1993 to year 1997. They
considered return on asset (ROA) as a financial performance indicator and three non-financial
performance indicators including number of access lines per employee, percentage of digital
access lines and percentage of business access lines, for the US telecommunications industry.
They reported that management team must trade off contemporaneous ROA when increasing the
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Bizhan Nosrati Barandagh and Zeinolabedin Amini Sabegh, Trends in Social Science, 10(1), 2014
percentage of business access lines. (Chen 2008) performed an investigation on investment risk
for performance evaluation of different banks located in Taiwan. He evaluated the management
risk based on five perspectives of BSC including financial, customer, internal processes, growth
and learning and risk and then evaluated the output data by using DEA. (Harel et al, 2006) in two
different works used BSC-DEA model for evaluating R & D projects. In the first work, they
developed a methodology for R&D portfolio analysis in which effectiveness, efficiency, and
balance considerations were integrated. The methodology was based on relative evaluation of
entities, which includes projects or portfolios.( Harel et al. 2008) added uncertainty perspective to
traditional perspectives of BSC and implemented their proposed BSC-DEA model to for ranking
50 projects. (Valderrama et al. 2008) integrated BSC-DEA model for evaluating R & D projects.
In this model, innovation perspective considered as fifth perspective and five separate models
were defined. (Asosheh et al. 2010) proposed integrated BSC-DEA model for evaluating
information technology (IT) projects where uncertainty perspective was added to BSC model as an
additional perspective. The uncertainty perspective includes various measures such as processes
risks, human resource risks and technology risks.
2.4 Integrated BSC-DEA model
2.4.1 BSC-DEA concept
This thesis integrates the balanced scorecard (BSC) and data envelopment analysis (DEA) to make
a relational efficiency evaluation model. In the integrated DEA-BSC model, the input and output
measures are grouped in cards, which are related to BSC s perspectives. The proposed model is
based on DEA, which quantifies the qualitative concepts embedded in the BSC approach. The
contribution of the presented model is both conceptual-the integration.
Figure 2 gives a general view of integrated BSC-DEA model.
Figure 2.the application of DEA into the BSC approach
According to Cooper (Cooper et al, 1999), integrated DEA–BSC model is trying to accomplish:
Achieving strategic objectives (effectiveness goal)
Optimizing the usage of resources to generate desired outputs (efficiency goal)
Balance between different aspects of the organization (balance goal).
Obtaining Cause and Effect in Perspectives
Najafi and his team workers (Najafi et al., 2009)
2.4.2 Measurement processes of BSC-DEA
With the help of Najafi paper (Najafi et al., 2009); I have considered four steps for the processes
of measurement and performance rating in this thesis:
The identification of organization (Creation of appropriate BSC) is the first step. In this step,
organization s strategies are identified by using BSC. Then we design the measurements in every
perspective. The measurements should be in balance and with different perspectives.
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Bizhan Nosrati Barandagh and Zeinolabedin Amini Sabegh, Trends in Social Science, 10(1), 2014
Efficiency rating is the second step. The measurements created by BSC will be divided into two
groups of inputs and outputs to be used in DEA model. Then we use DEA whether in a horizontal
evaluation (during the time period) and, or vertical evaluation (in comparison with similar units in
the chronological period).
Modification and Improvement is the third step. Having the results of DEA, we identify the
potential for modification and improvement.
Setting the benchmarks is the final step. DEA determines the measurement goals and places them
as benchmarks for the next performance evaluation.
If the organization achieves the determined goals, it will be efficient. In the next periods, the
organization s situation is compared with the expected conditions of the previous period. In this
comparison, new efficiency goals will be determined (Najafi et al., 2009).
3. Conclusions
Nowadays one important problem in banks is assessing their performance. Banks have significant
function for achieving major economic goals and helping the implementation of strategic projects.
Regarding lack of proper tools for evaluating companies performance in thisresearch based on
theoretical background of the research we aimed to introduce DEA-BSC technique for assessment
of bank’s efficiency not only from financial dimension but also from 4 aspects of financial,
customer, growth and learning and internal process. The result shows that DEA-BSC technique by
introducing reference units presents a field for Benchmarking of these units with the aim of
presenting strategic suggestions for helping managerial decisions in order to increase development
of methods of supplying capital and economic markets of the country by developing banks’
efficiency.
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