Structure for a Bank - Coursework Example

 Structure for a bank Introduction: The nature of banking services has been changing over the years. Whereas earlier, the major function of banks was to extend credit and accept deposits (Friexas and Rocher, 1997). With improvements in technology, banks are now offering services such as internal record keeping, operation of computer systems, invoicing, accounts payable and receivable as well as a diverse range of new financial services (Sagner, 1994). The organizational structures in banks have been bureaucratic, where rules are spelt out by the management and employees have only limited decision making power. But in the new technology fuelled business s environment, where the focus of a bank’s operations have shifted from a regional/local set up to a global framework and where there is an ever expanding sphere of organizational functions that are being performed by banks, such a strictly bureaucratic, hierarchal framework may hinder and slow down operations. As a result, banks may not be able to respond promptly and efficiently to the needs of customers and may not be able to function competitively in a global market. It appears that amore networked structure with diffusion of authority throughout the organization may be more effective in ensuring that banks are able to function more effectively within the new requirements of the business environment and the expanded scope of functions. The Banking environment: The organizational structure of banks has traditionally been bureaucratic, based upon Weber’s classification of bureaucratic systems, with organizations conforming to legal domination (Mommsen, 1992:46). According to this system, organizational authority derives from the system of legal order, wherein rules are implemented within the organization and are obeyed in the belief that they are legitimate. The authority to make decisions and assume leadership positions is derived from the base of rationality, which is often equated to efficiency (Simon et al, 1950:490). Under the rational organizational paradigm, where the structure is essentially bureaucratic, all decision making in the organization is in the hands of management, and individual employees working within the organization allow their decision making to be guided by the guidelines provided to them by management officials. There is little scope for individual creativity or innovation. The level of networking that may be required among bank employees in a global environment may also be much higher and the traditional organizational framework based upon the rational paradigm may restrict such a diffusion of decision making authority and networking among employees. With the development of information technology, international and online banking is becoming increasingly prevalent, as a result of which most banks have to globalize and attempt to standardize and simplify their service suppliers (Lovelock, 1999). There is also a greater need for cultural sensitivity, not only in marketing a bank’s varied package of services globally, but also within the organizational set up, where there is increasing diversity of employees and a higher level of interaction among individuals of different cultural, racial and ethnic backgrounds. One example that may be cited is the increasing levels of automation of banking services and a reduction in the number of personnel required to manually provide banking services to customers. By allowing for direct, ubiquitous links to anyone, anywhere, the Internet lets individuals and companies build interactive relationships with customers and suppliers, and deliver new products and services at low cost. There is an increase in the number of products that banks provide, most of which are “systems-dependent,” which means they are “fundamentally different from older, traditional products” and are “all vitally linked to systems technology” (Steiner and Teixeira, 1990, p. 23). As a result, skills that may have served an employee well under the traditional systems may no longer be as relevant if the employee does not also possess the associated technological skills required to function effectively within the new business environment. But with the increase in systems dependent services, there is also scope for increase in intranet and web based services within the organization, to promote a better flow of information and enhance decision making. It is possible to effectively utilize the facility of networking to respond promptly to changing customer needs, if employees are trained well. In view of such developments, it has become even more vital for banks to develop an organizational structure where employees do not feel undervalued or ill equipped to cope with the challenges of the changing banking environment. Empowering employees is likely to enhance the competitive advantage that a firm can enjoy in the global marketplace. According to Macmillan (1983), the gaining of competitive advantage involves an understanding of barriers to response, intelligence and infrastructure systems and requirements, general management challenges as well as extensive planning practices. Several companies have successfully achieved a competitive advantage through the restructuring of their human resource management systems, as pointed out by Schuler and Macmillan (1984:247). In the Bairnco Corporation, bonuses were linked to performance for top level executives and the company was able to almost double its sales from $270 million to $442 million in the short span of two years. In the case of Lincoln Electric, workers receive a share in the profits, which imbues workers with a high motivation to produce. Recommended organizational structure for a bank in today’s environment: In view of changes in the global environment as detailed above, traditional; bureaucratic frameworks may not be adequate; however where banks are concerned, some level of top down control or a vertical structure may be essential, due to element of risk inherent in management of financial systems. The rational system is geared towards the achievement of economic efficiency and cost savings (Simon 1976), which is an important objective for financial institutions. An organizational structure which is completely horizontal with high levels of networking, allowing high leverage in decision making to individual employees, could result in a loss of necessary controls. At the same time, existing bureaucratic systems where decisions are made solely by managers may reduce employee motivation and thereby detract from the productivity of the organization. For example, Herzberg argues that employees are more likely to be motivated at their jobs by factors such as achievement and the work itself rather than simply money.” (Herzberg 1968). According to Maslow’s Hierarchy of Needs Theory (1970), which is a five tier system, an individual has two kinds of needs – the lower order needs which are satisfied externally, such as physiological and safety needs, and the higher order needs which are satisfied internally such as social needs, esteem and self actualization needs. Therefore, within a banking organization, a centralized decision making framework and the need to adhere to rules formulated by others could constitute a dampening effect on motivation of the employee. According to Vroom (1964), an employee has certain expectations on the job, which need to be satisfied. His theory is based upon three factors: valence, expectancy and instrumentality, which will determine the motivational force of the employee and if his/her expectations are satisfied to the maximum by the HR department, it will ensure maximum pleasure to the employee and enhance performance. Employees in banks who find themselves unable to cope effectively in an increasingly technological environment, and are not provided training, may be poorly motivated to perform well at their jobs. But motivating employees is crucial in a competitive global environment, in order to ensure that maximum levels of productivity are attained. Therefore, employees must be provided incentives and support in the workplace such that they are able to perform their duties well, while their creativity and innovation is also recognized and rewarded. In view of the above, it appears that a bank would perform better under a more open organizational paradigm which allows for employee empowerment. While rationality and economic efficiency still needs to be the bottom line in such an organization, a dynamic organizational system which is more focused on customers, allows greater decision making powers and rewards employees is likely to be beneficial for productivity. Since a bank is dealing in diverse services, it is better to separate these into separate divisions, for example, credit card services, mortgage services, deposits, etc and allow divisional heads greater authority to make decisions. For instance, the Korea Exchange Bank instituted a change in its organizational structure whereby its organizational framework was divided into three distinct divisions.(www.keb.co.kr). The bank also ensured that steps were taken to improve employee productivity by streamlining the human resources department and communications. This is a very important aspect of a revised organizational framework for a bank – the introduction of an intranet as well as an increase in the level and quality of communications among staff can help to prevent delays in processing of transactions. They can also bring about increased accessibility for customers and ready access of relevant information to answer customer queries. The third important factor that must be taken into consideration in revising organizational structure is the inclusion of employee appraisal systems, wherein innovation and good performance by employees is recognized and rewarded. Maxwell suggests the creation of a four quadrant matrix with two axes, which is to be used as a way to measure all staff members on profitability and performance. Employee ranking along these quadrants should produce 10% in the quadrant of low-performer-low-potential, and 20% of employees in the high-performer-high-potential quadrant with the rest of the 70% employees ranking along the other two quadrants.(Maxwell, 2004). The majority of the employees who do not fall into the high or low performer category are the ones who may benefit from additional training in technological systems and customer service, so that they can improve their contribution to organizational performance. Maxwell’s quadrant matrix will also help to identify the low performers, who may need to be replaced. A dynamic and open organizational structure allows a bank to respond quickly to the changes in its environment, especially when decision making authority is channeled down to lower levels as well. This may also include hiring new employees who are equipped with the necessary skills to deal with challenges in the environment. By encouraging innovation and new ways of strategic thinking in employees, a bank can respond more effectively to the problems posed by rapid changes in the environment, such as government regulations or changing customer needs. Conclusions: On the basis of the above, a dynamic open organizational structure is to be recommended for banks, with the most important and major decisions being retained by top level personnel. Changes to be instituted include (a) separation of different services into different divisions (b) allowing greater decision making powers to divisional heads (c) encouraging and recognizing employee innovation (d) identifying the high and low performing employees and training the median level employees (e) training of employees to cope in a technological environment. All of these measures are likely to aid a bank in improving its competitive advantage in a global marketplace. Banking services are no longer restricted to regional geographic areas, but are accessible internationally through the Internet. As a result, traditional bureaucratic frameworks which are cumbersome and foster delay in response to customers are not desirable. Customers are more discriminating and demanding in a global context, especially since there is increased availability of financial services and banks are moving into provision of diverse services to customers. The organizational structure of the bank must therefore be geared towards ensuring a high level of customer responsiveness. At the same time, there is also a need to improve employee motivation, since it is employees who ensure productivity of an organization. Decision making powers need to be diffused to lower levels in the organization and increased networking among employees and managers is vital, to ensure that information that is available through technology is circulated throughout the organization and available to each employee. Training the employees and making information available to them will also ensure that they are able to respond effectively and quickly to customer concerns. All of the measures as suggested above could therefore help to enhance the productivity and performance of the bank as an organization. References: * Freixas X, and Rochet J (1997) Microeconomics of Banking, London: MIT Press * Fallon, Ed, 2004. “Korea Exchange Bank: Message”, http://www.keb.co.kr/IBS/english/inside/profile/ceo/message/index.jsp; May 24, 2008 * Herzberg, F. (1968) One More Time: How Do You Motivate Employees, pp 85-95 in Harvard Business Review: Breakthrough Ideas: 15 Articles That Define Business Practice Today: Harvard Business School Publishing, Boston USA * Lovelock, C.H (1999), ‘Developing marketing strategies for transnational service operations’, Journal of Services Marketing, vol.13 No.4/5, pp.278-89. * Maslow, A.H, 1970. “Motivation and Personality” 2nd Edition. New Jersey: Prentice Hall. * Mommsen, Wolfgang J, 1992. “The political and social theory of Max Weber: Collected Essays”, University of Chicago Press. * Sagner, James, 1994. “Protecting your organization as the banking environment changes – financial managers and banking institutions”, Healthcare Financial Management, March 1994, Available online at: http://findarticles.com/p/articles/mi_m3257/is_n3_v48/ai_15263702; Accessed: May 24, 2008 * Schuler, Randall S and Macmillan, Ian C, 1984. “Gaining competitive advantage through Human resource Management Practices”, Human resource Management, 3: 241-155 * Simon, Herbert A, 1946. “The proverbs of administration”, Public Administration Review, 6: 53-67 * Simon, Herbert. 1976. “Administrative Behavior: A Study of Decision-Making Processes in Administrative Organization.” New York: The Free Press. * Steiner, T., Teixeira, D, 1990. "Technology in Banking", Dow Jones Irwin. * Vroom, Victor. “Expectancy theory” Retrieved May 24, 2008 from: www.valuebasedmanagement.net/methods_vroom_expectancy_theory.html Read More