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Relative Resource Manager
Relative Resource Manager
7
The Front-Office, Back-Office Interface
Applied for a loan recently in Tennessee? If it was with Bank of America, the loan
decision was probably made in Tampa, Florida, by a lending officer you will never
see nor know the name of. Your insurance claim was probably processed in India,
as described in the Service Operations Management Practices: The WayBack, Back
Office: Offshoring. This chapter discusses the strategic decisions and operational
management behind decisions involving backoffice work. The pertinent issues are
especially obvious when deciding to move work to a distant location. Many changes
often need to be made: The nature of the work, compensation systems, and intrafirm
relationships are likely to be different.
Service firms can be distinguished from manufacturers by the relatively high
level of customer contact involved. Despite all the activities in a service firm
that require the presence of the customer, a host of activities can or must be
performed without the customer present. In banking, insurance, educational
institutions, and other similar industries the application approval process usu
ally occurs without the customer present and is often conducted by employees
the customer may never speak to or see. Also, many physical products associ
ated with a service firm are prepared outside of the customer’s view. Examples
include such diverse industries as food services, printers, or professional serv
ices like architecture and law. We label the work performed in service firms that
does not require the presence of the customer as backoffice work, and work that
does require the customer as frontoffice work.
Throughout the service economy there has been a shift in where, how, and by
whom such backoffice work is performed. In many industries work that does not
115
116 PA R T 2 Designing the Delivery System
require customer contact has been “decoupled” from frontoffice jobs. “Decoupling”
means that separate job descriptions with different employees are formed around the
backoffice work, and those employees are often removed from the physical sites that
deal with customers.
In general, many industries have been racing headlong toward more and more
decoupling in recent years. This chapter describes what is happening in practice and
explores the fit between a decoupled service delivery system and the firm service
concept. Four decoupling strategies are also developed and illustrated.
C URRENT P RACTICE
A number of reasons explain the exodus of lowcontact tasks from the point of serv
ice. A few examples are described here for the purpose of motivating the discussion.1
Consider the historical development of processing deposits in retail banks as an
example of a decoupled activity. Some time ago, when one presented a check to a
bank teller for deposit, the teller inspected the items, verified the deposit total, and
1. The following articles written by practitioners solely about retail banking are all supportive of decoupling, with some
considering it the only real strategic option for the industry: Burger, 1988; Cronander, 1990; Gilmore, 1997; Pirrie et al.,
1990; and Reed, 1971. (John Reed went on to become CEO of Citibank.)
CHAPTER 7 The Front-Office, Back-Office Interface 117
gave a receipt. Then, during downtime or after closing, checks and deposit slips were
encoded by branch personnel with dollar amounts. At the other end of the transac
tion, when checks written by a customer were presented for payment, clerks or bank
tellers in a branch sorted the checks by customer, compared bank statement infor
mation against the checks, and stuffed and mailed statements on a monthly basis.
The physical processing of exception items, such as stop payments and overdrafts,
were also handled at the branch. The only activities still handled now at the branch
level for most banks include inspecting items and giving receipts—even verifying
deposit totals is performed centrally.
Postal facilities face a problem similar to that of banks: mail must be sorted in a
similar fashion to checks. Due to extensive automation and decoupling the U.S. Postal
Service successfully met a steadily increasing mail volume with a relatively constant
labor force. From 1970, when the extensive push for postal reorganization began, to
the present day, mail volume increased well over 100% whereas personnel increased
less than 5%.
Other paperprocessing industries experienced similar migrations of work con
tent away from branch facilities. In a manner somewhat parallel to the decoupling
described in the postal and banking industries, many firms decoupled their mail and
accounts receivable processing functions to reduce costs. Governmental offices must
by nature be dispersed throughout various regions, yet backoffice record keeping is
becoming more decoupled. Hospitals also engaged in decoupling and centralizing of
backoffice management. “Shared Service Centers” comprising decoupled general
corporate functions such as human resources and corporate treasury and finance
appear to be in vogue. As an example, the accounting, payroll, human resources, and
other recordkeeping functions for the New York Times newspaper are conducted in
such a shared service center located in Virginia.2
The Internet and other modern communication advances are pushing traditional
paperprocessing industries even further toward decoupling. As noted in the Service
Operations Management Practices: The WayBack, Back Office: Offshoring, the abil
ity to electronically move information, rather than mailing paper, allows decoupling
on an unprecedented scale.
The ability to move operations from the frontoffice to the backoffice and cen
tralize those service activities appears to be held back merely by lack of imagination,
and perhaps a supportive consumer market. For example, some medical diagnoses
now are made in telephone call centers by nursing staff. With the aid of technology
such as twoway television and electronic stethoscopes, patients in remote locations
can be “seen” by physicians in central locations. In another example, the socalled
“local” (and to customers, supposedly “live”) television weather report for 50 stations
across the United States is actually performed and taped in Jackson, Mississippi
(Thomas,1994). Though the weather forecaster cannot look out the window to deter
mine accuracy, the broadcasts are convincing as local phenomena, at times even
including taped rehearsed banter that appears to the viewing audience to be sponta
neous live repartee between a weather forecaster and a news anchorperson.
2. Examples of decoupling in each of the areas mentioned are contained in: Connors, 1986; Greene, 1990; Keith and
Hirschfield, 1996; Queree, 1994; and Sharp 1996.
118 PA R T 2 Designing the Delivery System
requires some highcontact elements and others that are low contact, those activities
should be separated into different jobs done by different personnel. Several basic rea
sons are cited for this approach.
Efficiency
Decoupling improves efficiency on several fronts. First of all, production can flow far
more smoothly when tasks are taken away from customer contact areas where cus
tomers’ requests could potentially interrupt those tasks. Secondly, when one per
forms a small number of tasks over and over again, that person becomes highly
proficient and efficient in performing those tasks. This same basic logic led to the effi
ciencies of the assembly line: Utilize division of labor to achieve efficiencies. Thirdly,
these segregated, specialized tasks can now be centralized to achieve scale
economies. These types of changes should lead to both improvements in confor
mance quality and cost, just as they did in manufacturing.
This general theory indicates that workers should not be segregated solely by job
duties; they should be separated geographically as well. The cost benefits from sep
arating the lowcontact activities stem from their greater potential efficiency over
highcontact activities. The way to achieve this potential efficiency is to physically
buffer the lowcontact activities from customers, essentially by sealing them off from
the environment of random customer arrivals and nonstandard customer demands.
In practice, many large backoffice operations of service firms are housed in
unmarked buildings so that public contact is channeled to appropriate venues. The
cost benefits that accrue to this policy include highly efficient labor practices in low
contact areas and facility location costs reduced by locating lowcontact facilities
away from higherpriced retail settings.
Conformance Quality
Conformance quality refers to the service being the same tomorrow as it was
yesterday and getting reliable results from a process. When complex jobs are decou
pled, and a single individual performs only one task, that task inherently experiences
less variance.
Given the advantages of cost, conformance quality, and a better fit for personnel,
backoffice service decoupling appears to be an obvious recommendation. Both aca
demic and practitioner literature converge on decoupling as a clear strategy to
improve services.
Strategic
Operational
Focus
Coupled Decoupled
Level of Decoupling
Source: Reprinted from Journal of Operations Management, Vol. 18, No. 6, R. Metters and V. Vargas, “A Typology of
De-Coupling Strategies in Mixed Services,” pp. 663-682, copyright ©2000, with permission of Elsevier Science.
Solicit Document
Application Signing
Retail lending involves customers seeking a loan for themselves personally, rather
than for a business. Typically, the purpose of the loan is to purchase a large capital
good, consolidate debts, or finance a vacation. After a loan interview, a significant
amount of work is required that a customer does not need to be a part of before
monies are disbursed. Due to the ubiquitous marketing of “15minute” loan deci
sions, a general misunderstanding surrounds the work required in lending. In reality,
quick loan approvals are only “conditional” approvals, and a number of activities
must take place prior to loan closing. For virtually every loan, applicant credit history
must be checked, employment and income must be verified in writing, a host of legal
documents must be prepared, and a loan approval decision must be made. For loans
involving collateral, the value of the collateral item requires inspection and appraisal,
and the collateral ownership and various insurance coverages need verification.
Customer contact again is required for signing documents. Also, significant postloan
processing includes insurance documentation updating, files and collateral docu
ments maintenance, payoff quotations, and, in some cases, contacting delinquent
borrowers and initiation of repossession/foreclosure, most of which is performed
without facetoface customer contact.
The specific decoupling strategies indicated in Figure 7.1 are now described in
greater detail.
For the personal investing industry, financial planning firms represent this quad
rant. A typical brokerage would not advise purchasing real estate; it receives no com
mission for the transaction. Financial planners, however, cover more than stocks and
bonds. In medicine, focused firms are increasing along two dimensions: cost leaders
and high service. The wellknown Shouldice Hospital Corporation cut its costs and
turnaround time by focusing solely on simple hernia operations requiring a standard
ized procedure. In contrast, birthing centers increase the turnaround time of patients
and focus on individualized patient desires. As a foil to cost leader Dunkin’ Donuts
policy of decoupled cooking, Krispy Kreme makes doughnuts on each retail site, and
lights up a neon sign that can be seen from passing traffic stating “hot doughnuts
now” when each batch is ready.
In a high service bank each branch is like a bank unto itself. For retail lending,
the branch loan officers personally handle virtually all aspects of retail loan process
ing (Figure 7.2) from soliciting applicants to collecting bad debts. The authority to
approve the loan resides in the same person who solicited the application, the same
person who must initiate foreclosure/repossession if loan payments are not made.
This personal touch stands in marked contrast to the task of loan approval at cost
leader banks where the goal is to displace labor with technology. The goal at high
service banks is to develop and maintain a strong personal relationship that can last
several years. Highcontact service personnel are expected to know their customers’
names and preferences. Community involvement plays an important role in attract
ing new customers. Pay for loan officers is largely salary based, but significant
bonuses can be awarded based on overall branch performance. These banks also pay
for officer memberships in local community organizations. Most branches are “full
service,” meaning that each branch can perform commercial and retail activities,
whereas their more decoupled competitors are often dedicated units to either com
mercial or retail activity.
A study by Leath (1998) indicated that these banks enjoy an advantage in
response time due to their coupled nature. Because handoffs between departments
are not necessary, work can proceed unimpeded for an important customer.
O PERATIONAL I MPLEMENTATION
The previous sections detail the potential advantages and disadvantages of decou
pling, and provide a construct for aligning human resource, marketing, and opera
tions decisions. The extent to which a firm can benefit from decoupling backoffice
activity depends on how it is implemented. Here, we explore three issues in imple
mentation: (1) strategic congruence, (2) designing backoffice jobs to assist the inter
face between front and back offices, and (3) the speed of implementation.
Strategic Congruence
It is not unusual for different functions in a service enterprise to have different strate
gic outlooks, such as a revenue maximization orientation for one area versus a cost
minimization orientation in another. These differing views must be reconciled,
though, for a firm to succeed.
Strategic congruence presents an especially vexing problem for organizations
with decoupled activities. As a backoffice area is decoupled, it may be tempting to
manage the decoupled activity for cost control, ignoring the effects of such manage
ment on the rest of the business. Given the necessarily myopic views of the differing
factions of product managers, program administrators, and functional area managers
CHAPTER 7 The Front-Office, Back-Office Interface 129
that persist in any large organization, strategic congruence is difficult to attain. By its
nature, decoupling creates more departments and requires more administrators,
which makes achieving a congruent strategic framework among tactical decisions
more difficult.
As a broad example of mismatched strategies, a cost leader discussed earlier,
AmSouth Bank, advertises itself as “the relationship people,” even though all local calls
to a local branch are automatically switched to a decoupled call center—which is often
located in a different state—and local branch personnel have no lending authority.
Compensation also presents a difficult issue. For cost leaders, employees largely
service walkin traffic and are not expected to become prominent community mem
bers who bring in business by force of personality. Consequently, commissions are
largely a function of random daily traffic and the economic status of the local com
munity. Commissions do serve a purpose in these institutions: They give an incen
tive to adequately perform duties and to sell more products to a customer who walks
in. Accordingly, commissions should be a relatively small percentage of salary.
all of these factors. According to Hammer (1990, p. 113–114), “The fact that a worker
sees only a piece of the process calls for a manager with a broader vision . . . [when
workers] provide endtoend management of the process, . . . the need for traditional
managers [is reduced].” Further, having responsibility for an entire process helps
employees see their duties as an identifiable unit, which provides a more intrinsic
motivating influence.
Implementation Speed
For firms that desire to move toward decoupling, two opposing forces affect the speed
with which it is done. From both a financial perspective and presenting a consistent
face to the customer, it is best to decouple and centralize quickly and completely
throughout a network. Having a positive net present value on decoupling projects
may depend on the timing of personnel reduction.
But an opposing force argues for gradual implementation. One of the benefits of
dividing front and backoffice work is that many workers are intrinsically better
suited to one or the other. It is reasonable to assume that many workers who are cur
rently employed in the front office are there because they favor interpersonal skills
over technical ones. Decoupling activity means shifting staff from the front office to
the back office, either by moving current workers with mismatched skills or by whole
sale layoffs and new hires. Neither prospect is particularly attractive.
As an example of such a dilemma, in 1983, Crocker Bank, then the thirteenth
largest U.S. bank, began centralizing many branch loan and deposit functions. At the
time, more than 100 trainees were going through an 18month program to become
branch operations managers, essentially a backoffice position, but one that physi
cally takes place in the branch. Because of the decoupling taking place, it was clear
that no new operations managers would be needed, so all the trainees were imme
diately switched to a frontoffice retail lending training program. Either these trainees
had highly malleable personalities or, more likely, they were poor candidates for new
retail lending positions.
Summary
The decoupling of backoffice service activity provides a strategy recommended by
researchers and heavily used by practitioners for some time. Much of this decoupling
is pushed by technological advance and results in far higher productivity. Advantages
from decoupling include both financial advantages from labor specialization and the
pooling effect of combining the work from many individual units. Further, advantages
associated with a better fit between job descriptions and worker personality types
can be realized.
Many disadvantages, however, are also possible. Decoupling should lower costs
and increase productivity, but due to increases in idle time, increases in total work
needed to be done due to duty overlap, the lack of actual personnel reduction that
takes place, and selfserving behavior, these supposed advantages may not occur.
Further, the key competitive strategies of quality, delivery speed time, and flexibility
may be impaired.
The disadvantages of decoupling can be exaggerated by improper implementa
tion and a lack of strategic focus. Here, four general strategies use decoupling to
achieve different strategic purposes.
CHAPTER 7 The Front-Office, Back-Office Interface 131
Review Questions
1. What are the main reasons service firms decouple backoffice tasks from
the front office?
2. Why should decoupled backoffice tasks be centralized?
3. What service concepts does decoupling support or not support?
4. How can decoupling add to a firm’s cost structure?
5. How does a decoupled system affect delivery speed?
6. How does the speed of implementation of a decision to decouple make a
difference to a firm?
Selected Bibliography
Burger, K. 1988. Leveraging Bank’s Operations Dollars Powers Superregional Growth. Bank
Systems and Equipment, 25(5), 68–71.
Chase, R. 1978. Where Does the Customer Fit in a Service Operation? Harvard Business
Review, 56(6), 137–142.
Chase, R. 1981. The Customer Contact Approach to Services: Theoretical Bases and
Practical Extensions. Operations Research, 29(4), 698–705.
Connors, J. 1986. Massachusetts Department Centralizes Records System. Office, 103(6),
126–128.
Cronander, J. 1990. Centralization versus Decentralization: What to Do with Back Office
Operations. Texas Banking, 79(10), 29–33.
Gilmore, D. 1997. Lending and Centralization: Is This the Future? Real Estate Finance Journal,
12(4), 89–90.
Greene, J. 1990. Decoupling Paying Off at NotforProfits. Modern Healthcare, 31–32.
Hackman, J., and R. Oldham. 1980. Work Redesign. AddisonWesley Publishing Co.,
Reading, MA.
Hammer, M. 1990. Reengineering Work: Don’t Automate, Obliterate. Harvard Business Review,
68(4), 104–112.
Keith, D., and R. Hirschfield. 1996. The Benefits of Sharing. HR Focus, 73(9), 15–16.
Leath, J. 1998. Study Identifies Best Practices in Core Processes of Consumer Lending.
Journal of Retail Banking Services, 20(1), 35–39.
Metters, R., and V. Vargas. 2000. A Typology of Decoupling Strategies in Mixed Services.
Journal of Operations Management, 18(6), 663–682.
Pirrie, D., De Feo, J., Scott, I., Abramson, F., Comber, S., Myhill, S., Berry, J., Legg, S., and G.
Lockhart. 1990. The Bank of the Future: Lloyds Bank; Barclays; Bank of Scotland; TSB
Bank; The Toral Bank of Scotland; Birobank; Abbey National; National Westminster
Bank; Midland Bank. Banking World, 8(12), 19–31.
Queree, A. 1994. Shared Financial Services. Corporate Finance, 113, 37–39.
Reed, J. 1971. Sure It’s a Bank But I Think of It as a Factory. Innovation, 23, 19–27.
Sharp, J. 1996. Service from Afar. Editor & Publisher, 129(29), 30–31.
Thomas, E. 1994. You May Not Know Your Weatherman Is in Jackson, Miss. The Wall Street
Journal, (November 2), A1.
Wessel, D. 1995. A Man Who Governs Credit Is Denied a Toys “R” Us Card. The Wall Street
Journal (December 14), B1.
Wilson, M. 1995. The Office Further Back: Business Services, Productivity, and the Offshore
Back Office. In, P. Harker (ed.), The Service Productivity and Quality Challenge. Kluwer
Academic Publishers, Boston.
132 PA R T 2 Designing the Delivery System
CASE STUDY
CASE STUDY
employees were invited to apply for the new jobs they felt best fit with their talents.
First Union also recruited heavily from outside the banking industry, hiring those
with a knowledge of how to sell, rather than a knowledge of banking. “There will be
a fair number of people who decide they do not want to sell,” Georgius said, ”but
our company has got to move on.”
An example of the way Future Bank is supposed to work is personified in the way
Barbara O’Connor now makes her living. “A key to Future Bank is people like Barbara
O’Connor. She has an office at a First Union branch, but her real office is her car.
Working from a notebook computer, she scans names and prepares presentations as
she drives to offices and homes around Atlanta. She books appointments on her cell
phone. Banks have always had some employees catering to the rich, but her target
market is people with about $75,000 in income whom she can persuade to consol
idate their financial affairs at First Union. When she hooks a prospect, she turns new
customers over to a service representative who does actual banking tasks, freeing her
to hunt for new money. O’Connor draws no salary and is paid purely on commis
sion, with no limit to the amount she can earn.”
Source: D. Greising (1998), “Fast Eddie’s Future Bank,” BusinessWeek, March 23, 75–76.
Questions:
• What implementation difficulties lay ahead for First Union?
• How will consumers react? Which consumer markets are being approached/
withdrawn from by this strategy?