Measuring the performance of hierarchical organizations: An application to bank efficiency at the regional and branch levels

Abstract

The measurement of performance has long been of central interest to both managers and management accounting researchers. As noted by Otley (1999), performance management is a preoccupation of management control systems researchers. In this study, we are concerned with coherence considered at two levels: (i) between the hierarchical organization and performance evaluation, and (ii) throughout the decision-making process between a hierarchical organization's various levels of decision-making. We do this by developing a system of performance measures from a prescriptive approach and a methodological basis rooted in operational research. Such a system of performance measurement ensures consistency between the different levels of a hierarchical structure. More specifically, we propose a means of measuring performance that captures both the overall performance and the contributions of the separate levels within an organization's hierarchy. The proposed measurement is based on an extension of standard frontier efficiency models to the situation where the “business units” being evaluated consist of two different levels within a hierarchical organization. Generally, the lower-level unit is responsible for “operations,” which can be assessed by using a measure of technical efficiency; higher-level units are assumed to make “strategic” decisions, which can be assessed by using a measure of allocative efficiency. We motivate and illustrate our method using data on 1585 branches of a major French bank.