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Course Syllabus OPMG-UB-15
INSTRUCTOR: Michael Pinedo, Room KMC 8-59

Phone: 212-998-0287; Email: mpinedo@stern.nyu.edu

COURSE DESCRIPTION This undergraduate elective course focuses on products and processes in financial services. It analyzes the design and the operations of the different distribution channels (branches, ATMs, call centers, www, etc.) of the various types of financial institutions and considers productivity measurements as well as performance measurements. It goes into quality control issues and analyzes operational risk. It concludes with the design and implementation of decision support systems in practice. Requirements and Grading: The grading in this course is based on homework and assignments, a project and an open book take-home final exam. Assignments. There will be 6 assignments during the course. Each assignment has to be done individually and will be a minimum of 1 page write-up and a maximum of 2 pages. A sample of past assignments is given in the last part of this syllabus. Project. The projects have to be done in groups of two. It may be a project at the site of one of the group members work or it may be a study of a current operational issue in the financial services industry. A progress report on the project is due by the spring break. (Progress report should be 4-5 pages.) These progress reports will give me some opportunity to give comments and advice on the project. In the last session of the course, each group will give a 10-12 minute Powerpoint presentation of their project. (Examples of final reports of past projects can be found on the website of the course.) Final Exam. Take home and open book. However, it should be done within a time frame of three consecutive hours. You have to find these three hours within 10 days after the last day of class.

The grade is based 30 percent on the homework, 40 percent on the project and 30 percent on the final.

Required Course Material:

"Creating Value in Financial Services'' edited by Melnick, Nayyar, Pinedo, Seshadri. (In what follows this text is abbreviated as MNPS). There is a case packet that you can buy at the bookstore. The cases are listed in the appendix of this syllabus There is a course packet with additional materials that will be handed out in class. The contents of this course packet are listed in the appendix of this syllabus.

Schedule of Classes
This course consists of 24 sessions that are divided into 9 modules. MODULE I Overview of Financial Services and Forces of Change (Feb. 6): Overview of the types of financial services companies: retail banks investment banks brokerage houses insurance companies asset management companies

Session 1a

Overview of types of products and services (consumer products, commercial products). Overview of types of processes. Product-Process Matrix: where do the financial services companies fit in within this matrix. Discussion on the forces of Change in the financial services industry. The following transparencies are from a McKinsey presentation: Operations in Financial Institutions The following paper comes from IBM Business Consulting Services: From Banks to Banking II: The Journey Has Begun

Session 1b

(Feb. 6): Recent trends in financial services:

Mergers and Acquisitions. Objectives of recent mergers and acquisitions: diversification of product offerings, cross-sales, global reach, operational synergy. Success of mergers depends often on the succesful integration of operations. Importance of Operational Due Diligence. Read: Chapters 3 and 4 in MNPS (by Ingo Walter and David Rogers). Read: from the Casebook: Economics of Retail Banking Note (Harvard case) . Prepare case for discussion: 1. Commerce Bank (Harvard Case)


Strategic Issues (Feb. 13): Service Strategies Selection of products and niches (consumer products, commercial products, scale, scope) Service Strategies Customer Relationship Management (CRM)

Session 2a

Read Chapter 5 in MNPS (Monahan on relationship management) Read Sections 2, 3, 4 in the Course Packet Link: Bank Deposits gets Interesting

Assignment 1 to be handed in.

Session 2b

(Feb. 13): Process Designs Process design (selection of distribution channels). Discussion on potential of cross selling. Discussion on separation versus integration (chinese walls).

Read: Chapter 23 in MNPS (Wayne Cutler) Read: Chapter 22 in MNPS (Harker Frei) Prepare case for discussion: FleetBoston Financial - On line banking Links: 1. Could Mobile Banking go Global? 2. Will the Banks Control On-Line Banking?


Distribution Channel Design (Feb. 27): Overview of Distribution Channels Service Process Design matrix (video) channel choice (branches, mini-branch, kiosks, ATMs, call centers, www, sales force) points of access convenience

Session 3a

Read Chapter 14 in MNPS (Karmarkar paper) Read Section 6 in Course Packet

Optimizing Distribution Channels (IBM) Optimizing Distribution Channels II Free White Paper: Four Strategies for Fixing Distribution Impact of E-Commerce on Financial Services

Electronic commerce and financial services Applications of queueing in financial services

Read Chapter 11 in MNPS Link: Banking: The IT Paradox

Session 3b

(Feb. 27): Channel Capacity and Pricing Setting capacity and prices in various channels

Read: Chapter 11 in MNPS (Dewan-Mendelson paper) Read: Section 7 in Course Packet (Pricing Analysis for Merrill Lynch) Prepare: case for discussion: Charles Schwab Inc. (A) (Harvard)

MODULE IV Distribution Channel Operations (Front-Office Operations) (Sessions 4 & 5)

Session 4a

(March 6): Applications of Queuing in Financial Services Queueing Theory Networks of queues and call center applications Simulation

Prepare First City National Bank Case Queueing Analysis of the FCN Bank Read Sections 8 and 9 in Course Packet by Kolesar (on ATMs) and Larsen (on psychology of queues)

Session 4b (March 6): Queuing in Call Center and Call Center Management

Call centers and priority queuing Skills-based routing

Read Chapters 18 and 19 in MNPS (Pinedo, Seshadri and Shanthikumar paper) Read Sections 10 and 11 in Course Packet (on call center management and skills based routing) Links: 1. Bank of Montreal Managing the Bank of Tomorrow 2. Skills Based Routing: A Challenge for Call Centers Skills Based Routing: A Challenge for Call Centers Assignment 2: to be handed in

Session 5a

(March 20): Call Center Case Study

case for discussion the Nationsbank case (Insead).

Categorization of Customers Taking advantage of cross sales opportunities (March 20): Human Resource Issues and Personnel Scheduling

Session 5b

Read Chapter 17 in MNPS (Larsen-Pinker paper)


Internal Business Processes

Session 6a

(March 27): Processing Securities Transactions; On-Line Retail Brokers and Internet Banking Types of Securities Operations Procedures Bank Brokerage Firm Relationships

Prepare case for discussion: the Wells Fargo Online Case

Session 6b

(March 27): Check-Clearing Operations

Read Sections 12 and 13 in the Course Packet For an overview of McKinsey's view on internal business processes look at this presentation. Assignment 3 to be handed in.

MODULE VI Productivity Measurements and Performance Measurement (Sessions 7 & 8)

Session 7a

(April 3): Data Envelopment Analysis

Read the DEA treatise, Section 14 in the Course Packet Read the Harker-Zenios paper, Section 15 in the Course Packet

Session 7b

(April 3): Productivity of Bank Branches

Read Section 16 in the Course Packet (the Oral Yolalan paper on Bank branches in Turkey) Links: 1. Cutler Presentation

Session 8a

(April 10): Optimization Framework including Quality

Read Section 17 in the Course Packet (the Athanasopoulos paper) (The Capabilities, Quality, Performance (C-Q-P) Optimization Framework)

Session 8b

(April 10): Productivity and Performance Case Study

Prepare case for discussion: London Life Balanced scorecards (Ivey Case) Assignment 4 to be handed in.

MODULE VII Quality Control in Financial Services - Reliability Design and Optimal Redundancy.

Session 9a

(April 17): Quality Control in Call Center Management

Chapter 20 in MNPS (Patel paper)

Session 9b
Prepare Links:

(April 17): Data bases and credit card operations.

for discussion the case: AT&T Universal Card Services (Harvard)

1. Lloyds TSB Transforms its Cards Business and Reaches for Top Slot 2. Operational Loss


Operational Risk Analysis (Sessions 10 & 11) (April 24): Operational Risk factors

Session 10a

Read Sections 18 and 19 in the Course Packet Links: 1. Report of the Operational Risk Committee of the International Association of Financial Engineering 2. Goldman Sachs Presentation

Session 10b

(April 24): Statistical Analysis

Read Sections 20 and 21 in the Course Packet

Distributions for frequency of losses (Poisson) Distributions for severity of losses (lognormal)

Link: A Case for Quantification

Assignment 5

to be handed in.

Session 11a

(May 1): Characteristics of effective controls

Prepare the Allied Irish Bank (AIB) Case. Allied Irish Bank Graphs Transparencies of presentations given at a recent operational risk conference

Cole.pdf Preccia.pdf Sabatini.pdf Sumi.pdf Broderic.pdf Lively.pdf Guldiman.pdf Wilder.pdf

Session 11b

(May 1): Decision support systems for operational risk analysis

Link: Leading Software Contenders (Speaker from Goldman)



Conclusions (May 8): Future Developments

Session 12a

Universal Banks; Financial Supermarkets Read Section 22 in the Course Packet Links: 1. Financials Transformations - Delivered Globally 2. Britannic Money offers customers the ultimate personalized financial one-stop shot

Assignment 6 to be handed in

Session 12b

(May 8): Course Review

1. Describe what "operational due diligence" implies in the mergers and acquisitions of financial services. How does it compare in importance with other forms of due diligence (e.g., financial due diligence)? 2. Describe financial products and processes in 1980, 2000, and 2010. (Make a distinction between consumer products and processes and commercial products and processes.) 3. How does the evolution of technology affect the product-process matrix? 4. a. Give a formal (possibly mathematical) definition of the operational synergy between two financial products. b. Develop a so-called ``operational synergy'' matrix of financial products. An entry in this two-dimensional matrix represents the amount of synergy obtained with marketing the two products simultaneously. Develop a matrix for consumer products as well as for commercial products. 5. Choose three financial consumer products (e.g., checking account). a. Describe all the possible customer activities associated with each product. b. Describe all distribution channels a customer may use with each product. Can you map the activities to distribution channels? Which distribution channels overlap? 6. How does customer loyalty depend on the type of product and on the type of distribution channel? 7. Explain the reasons for the acquisitions in financial services over the last 20 years. a. How can they be explained from the operational strategy point of view? b. Were the operational synergies being realized? 8. Explain the reasons behind the divestitures in the financial services industries. What are the operational causes and effects of these divestitures? 9. Consider the diagram that indicates the distribution channels as a function of the WEALTH and of the AVERSION TO TECHNOLOGY. Explain all the lines separating the disctribution channels (in your discussion of the lines discuss also the slopes of the lines). 10. Choose a type of financial institution. List all its products and all its distribution channels. a. Draw a graph that links each product to its distribution channel(s). b. Discuss of each link in the graph whether it is suitable for selling the product (e.g., opening the account) or suitable only to service the product. c. Discuss of each link its cost (or profit potential).

Case Packet:

1. 2. 3. 4. 5. 6. 7. 8. 9.

Commerce Bank (Harvard Case) FleetBoston Financial Online Banking (Harvard Case) Charles Schwab Inc. (A) (Harvard Case) Nationsbank (INSEAD) Wells Fargo Online (Harvard Case) London Life Balanced Score Cards (Ivey Case) AT&T Universal Card Services (Harvard Case) Allied Irish Bank Case (NYU Case) SmithpThompson Case (NYU Case)

Course Packet:
1. Operations in Financial Services: Syllabus -Modules I and II 2. Chapter 3: Service Strategy 3. Designing Services that Deliver 4. The Idea in Brief: Loyalty Based Management 5. Performance Measurement of CRM in Financial Services 6. Switching Cost and Brand Loyalty in Electronic Markets: Evidence from On-Line Retail Brokers -Module III 7. Optimizing Distribution Channels: The next Generation of Value Creation 8. Pricing Analysis for Merrill Lynch Integrated Choice -Module IV 9. Perspectives on Queues: Social Justice and the Psychology of Queueing 10. Stalking the Endangered CAT: A Queueing Analysis of Congestion at Automatic Teller Machines

11. Call Center Management to Create Performance Analysis 12. Skills-Based Routing and Scheduling -Module V 13. Optimization of Bank Transit Check Clearing Operations 14. A Capacity Planning Model for the Claims Handling Process -Module VI 15. What Drives the Performance of Financial Institutions 16. Chapter 12: Supplement: Data Envelopment Analysis (DEA) 17. Case Study: An empirical study on Measuring Operating Efficiency and Profitability of Bank Branches 18. Service Quality and Operating Efficiency Synergies for Management Control in the Provision of Financial Services: Evidence from Greek Bank Branches -Module VIII 19. Chapter 13: Managing Operational Risk 20. Basel Committee on Banking Supervision: Consultative Document- Operational Risk 21. An LDA Based Advanced Measurement Approach for the Measurement of Operational RiskIdeas, Issues and Emerging Practices 22. Made-to-Measure: Operational Risk Capital -Module IX 23. mySAP CRM for the Banking Sector