Magazine Summer 2013 Research Feature

Analyzing Performance in Service Organizations

A technique called balanced benchmarking provides managers with a sophisticated mechanism by which to assess and manage the effectiveness of different branches or units.

H. David Sherman and Joe Zhu Reading Time: 16 min 

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Image courtesy of Flickr user jphilipson.
A balanced benchmarking analysis of U.S. professional sports teams found that National Football League franchises tend to be more efficient than those in Major League Baseball, because of the NFL’s policies on revenue sharing and salary caps. Image courtesy of Flickr user jphilipson.

In his 2003 book Moneyball: The Art of Winning an Unfair Game, Michael Lewis described how the Oakland Athletics baseball team used statistical analysis to identify undervalued players.1 One lesson from the baseball world of “moneyball” is that we can’t always trust our intuition about how employees will perform. Savvy business managers know that their intuition can often be misleading, if not downright incorrect. And just as sports teams have increasingly relied on rigorous quantitative analyses, so have many businesses.

In particular, a growing number of service businesses have been investigating the use of a sophisticated linear programming technique called DEA, or data envelopment analysis. (In this article, we use the term “balanced benchmarking” to denote DEA.) The technique enables companies to benchmark and locate best practices that are not visible through other commonly used management methodologies. (See “The Basics of Balanced Benchmarking.”)

When it was first introduced in the 1980s,2 balanced benchmarking was an academic tool for measuring and managing the relative efficiency of peer organizations. Balanced benchmarking required the adaptation of various computer programs, so its use in the 1980s was limited to a small group of academics and practitioners with linear programming expertise. Early users were able to apply and generate results from balanced benchmarking that demonstrated its effectiveness, but its inaccessibility limited its independent adoption and application by managers. However, shortly after 2000, balanced-benchmarking algorithms were adapted for Excel software — making it accessible to users with little or no knowledge of linear programming.3

Balanced benchmarking is unique both in its ability to identify paths to improve productivity and in its value as a complement to other analytic techniques. Balanced benchmarking simultaneously considers the multiple resources used to generate multiple services, along with the quality of the services provided. For example, bank branches can use six or more types of resources and provide 20 or more types of services, all of which are considered with balanced benchmarking.

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About the Authors

H. David Sherman is a professor of accounting at the D’Amore-McKim School of Business at Northeastern University in Boston. Joe Zhu is a professor of operations and industrial engineering at the School of Business at Worcester Polytechnic Institute in Worcester, Massachusetts.

References

1. M. Lewis, “Moneyball: The Art of Winning an Unfair Game” (New York and London: W.W. Norton & Co., 2003).

2. A. Charnes, W.W. Cooper and E. Rhodes, “Measuring the Efficiency of Decision Making Units,” European Journal of Operational Research 2, no. 6 (November 1978): 429-444.

3. To apply balanced benchmarking, visit www.deafrontier.net and also refer to J. Zhu, “Quantitative Models for Performance Evaluation and Benchmarking: Data Envelopment Analysis With Spreadsheets,” 2nd ed. (Boston: Springer, 2009), chap. 1.

4. D. Grewal, M. Levy, A. Mehrotra and A. Sharma, “Planning Merchandising Decisions to Account for Regional and Product Assortment Differences,” Journal of Retailing 75, no. 3 (autumn 1999): 405-424.

5. K.R. Sharma, P.S. Leung, H. Chen and A. Peterson, “Economic Efficiency and Optimum Stocking Densities in Fish Polyculture: An Application of Data Envelopment Analysis (DEA) to Chinese Fish Farms,” Aquaculture 180, nos. 3-4 (November 1999): 207-221.

6. G.N. Gregoriou, K. Sedzro and J. Zhu, “Hedge Fund Performance Appraisal Using Data Envelopment Analysis,” European Journal of Operational Research 164, no. 2 (July 16, 2005): 555-571.

7. B. Golany, Y. Roll and D. Rybak, “Measuring Efficiency of Power Plants in Israel by Data Envelopment Analysis,” IEEE Transactions on Engineering Management 41, no. 3 (August 1994): 291-301.

8. K.W. Einolf, “Is Winning Everything? A Data Envelopment Analysis of Major League Baseball and the National Football League,” Journal of Sports Economics 5, no. 2 (May 2004): 127-151.

9. T.R. Sexton, A.M. Leiken, A.H. Nolan, S. Liss, A. Hogan and R.H. Silkman, “Evaluating Managerial Efficiency of Veterans Administration Medical Centers Using Data Envelopment Analysis,” Medical Care 27, no. 12 (December 1989): 1175-1188.

10. H.D. Sherman and J. Zhu, “Service Productivity Management: Improving Service Performance Using Data Envelopment Analysis (DEA)” (Boston: Springer, 2006).

11. R.S. Kaplan and D.P. Norton, “The Balanced Scorecard: Translating Strategy Into Action” (Boston: Harvard Business Press, 1996).

i. The efficiency score of 85.7% represents the potential fraction of resources that the inefficient unit can use to become as efficient as a combination of the best practice units. Essentially, the 85.7% rating means the unit can reduce resources by 14.3% [100%−85.7%].

ii. H.D. Sherman, “Improving the Productivity of Service Business,” Sloan Management Review 25, no. 3 (spring 1984): 11-23; Sherman and Zhu, “Service Productivity Management,” chap. 2; and Zhu, “Quantitative Models.”

Acknowledgments

H. David Sherman dedicates this article to the late Prof. William W. Cooper, who inspired this work, was a principal creator of data envelopment analysis, and was David’s dissertation chair and a dear friend for more than 30 years. Bill Cooper will long be remembered for his creativity, his willingness to advise colleagues and his enthusiasm for developing new scholars, even into his ninth decade.

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Comments (3)
Charles Rizzo
I was curious what excel applications are available to perform a shared benchmarking analysis ?
Asheesh Chopra
Good article but i could not fully see a difference between this and a through KPI (Key Performance Indicator) analysis. Maybe the difference is in the detail.
Praveen Kambhampati
Interesting Article. I think the current day relevance of a Data Envelopment Analysis goes to the transaction level of how individual service resources are performing and their tactical tools and smartness in increasing efficiency. Thanks to the sophistication and Big Data Analysis this should be possible and I'm sure Bill must' ve done some excellent work based on prevailing sophistication. 
The results of organizational balanced Benchmarking on various branches may give known results. The value addition of any Benchmarking exercise should yield more unknowns to an organization. Today the unknowns and uncontrollable for the service lot include factors like resource capability, transaction variations, delays in service delivery, to mention a few. Other factors like motivational constraints are again dependent on salary slabs, work to pay imbalances, leave differentiation, attrition rates, availability of skilled resources, training cost and cost of hiring. Many of these factors are known but tough to control for the service organizations. In the middle of such uncertainty the effectiveness of a balanced benchmark  exercise needs to be looked at from a risk perspective. Because comparing a London Operation to a Tokyo operation needs to dig deeper into both the broader perspective of cultural and economic readiness and the detail of the resource equipment in terms of  tools and techniques of sophistication implemented on a common or comparative framework of transactions. 
This would create an urge for the organization to look for constraints beyond their awareness, creating an opportunity and success criteria for the balanced benchmarking exercise.