The Alfred P. Sloan Foundation has given the University of Pennsylvania's Wharton School the largest grant ever awarded for the study of productivity in the financial services industry.

Patrick Harker and Larry Hunter are two of the key faculty members involved in the research program. Mr. Harker is UPS transportation professor for the private sector and professor of operations and information management. Mr. Hunter is Joseph Wharton lecturer in management.

In the following discussion, which Wharton supplied in this format, they review their early findings and their research plans.

Q.: Why is Wharton undertaking a study of the financial services industry, and what do you expect to find?

HARKER: Econometric studies of efficiency indicate that differences in firm performance - technically termed "X-efficiencies" - dwarf differences in performance attributed to economies of scale or mix of product line.

Using standard econometric techniques, researchers are unable to explain the causes of these differences. Industry consultants and practitioners attribute these differences to "management factors."

Put another way, academics and practitioners are saying it is the capacity of the management team to use resources effectively to create sustainable shareholder value that accounts for the major differences among high performers and others who operate similar businesses in similar markets.

While this explanation makes intuitive sense, as researchers interested in the overall competitiveness of the financial services industry we intend to go beyond the conventional wisdom to uncover the reasons why firms perform differently.

Q.: You indicated that your research focuses particularly on the application of technology and the design of human resources systems. How do these two issues relate to the questions of productivity?

HARKER: The financial services industry accounts for one-sixth of the dollars spent globally on technology and information systems. At the same time, many believe that technology has not paid off on the bottom line.

While there is evidence to suggest there are tangible benefits, one has to ask if the benefits to shareholders and the economy overall are consistent with the level of investment made.

In our research, we intend to look at this issue from a number of different perspectives, including the way firms use their technology dollars, how technology investments are planned and managed, and the degree to which technology strategies are aligned with and support firms' business and financial strategies.

Q.: Why has Wharton included an emphasis on human resource systems in its research plan?

HUNTER: The lessons learned in managing productivity in manufacturing demonstrate the importance of aligning human resources systems with strategy and technological investment.

In fact, many manufacturing firms have adopted new approaches to human resource practices that create more effective performance by enabling employees to take ownership of the quality and effectiveness of the work of their units.

These practices in turn lead to measurable improvements in quality and productivity.

We do not see these same patterns in the financial services industry. The question is why. Will these same approaches work equally well or better in financial services firms, or is there something unique about the industry that belies the use of techniques such as gain sharing, work teams, and employee empowerment?

Our hypothesis is that these same concepts can be used in financial services, if aligned with the firm's strategies and management practices.

We intend to determine the areas in which these approaches, perhaps modified to be appropriate for financial services firms, will work the best, and where the nature of the job and the operating environment are such that they will not produce better results.

Q.: How will Wharton's research differ from the numerous studies on productivity conducted in the past?

HUNTER: Our research begins by investigating keys to value creation in financial services firms.

We then look to explain variation in organizations' ability to create value. We believe differences in performance stem from implementation of different choices in technology, human resource practices, and distribution channels.

On the basis of very preliminary work, we have identified four keys to value creation that must be addressed and explained to understand the differences in performance.

These four factors will not be news to the industry. But is important to determine how important these factors are, how they relate to one another, and how they relate to the decisions made by management to create competitive advantage.

We see four factors that drive competitive performance: convenient delivery of services, accurate provision of services and information, effective and consistent cost containment, and effective implementation of the firm's risk strategies and philosophies.

We also believe the ability to "align" management philosophies, management implementation decisions, and strategy to create these values is a key factor in differentiating performance. The marketplace and investors ultimately determine whether firms deliver on these factors.

Q.: Convenient delivery is a well-understood concept in financial services. What is meant by the term accuracy?

HARKER: We struggle with the right term to describe these issues.

The industry uses the term "quality" to describe many of these concepts. We believe the issue is more complex than the term conveys.

It includes the capacity to correct mistakes and resolve problems effectively and easily. It includes accuracy in the way transactions are undertaken, reported, and booked.

In many ways, what we think customers and bankers seek in their efforts to address quality issues is the concept of precision -- executing the transaction or the activity precisely as intended or expected.

We intend to dig much deeper to understand what this term means in the financial services industry from both the perspectives of the banker and equally important, the customer.

Q.: Cost containment is a way of life in the financial services industry.

HARKER: We agree. However, we also believe that except for cost benefits that come from mergers and consolidation, the industry will not be able to squeeze much more cost savings out of its businesses without changing the way they are structured.

This is the fundamental issue that is driving the enormous popularity of reengineering. It is a complex issue.

In many ways, banks need to improve their basic engineering skills -- the way they design operations and operating practices. In addition, these large investments in technology require superb project management skills, and redefining jobs and training.

In our research, we intend to examine banks' ability to engineer their businesses and manage the implementation of these investments, as well as the overall effectiveness of the operating design they adopt.

Q.: How does risk management fit in this equation?

HUNTER: Keep in mind that our focus is on management practices and execution. What we intend to examine is the degree to which firms carefully plan and manage the execution of their risk management strategies -- do the systems, functions, human resource practices, etc. align to support effective implementation of this key strategy?

Q.: You have identified an enormous agenda. Where will you start?

HARKER: We had the same concern, so we asked the industry where we should start. With few exceptions, they advised us to look at retail delivery systems. That seems to be one of the most important battlefields for ensuring competitive differentiation today and in the future.

Q.: What is the next step for the Wharton team? what name here? Over the coming months we intend to conduct 12 detailed case studies of the way in which well-performing banks and less efficient banks address these issues.

Once we feel confident we have a firm grasp of the issues and the priorities, in terms of their importance in explaining differences in performance among banks, we will conduct a comprehensive survey of practices of banks and then other types of financial services firms -- insurance companies, finance companies, and investment banks.

Overall, Wharton's mission is to build sustainable capability as a center of research for the competitiveness of financial services firms.

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