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Management article
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Reference no. BH051
Published by: Indiana University
Published in: "Business Horizons", 2000

Abstract

A cornerstone of manufacturing practice has been to separate complex tasks into simple ones for economies of scale, and service industry practice has followed a variation of this principle by splitting up high and low customer contact activities to cut costs. Low-contact activities are removed from front office jobs, standardized, and centralized in some remote back office to achieve scale economies. Here, the authors question this principle; the choice of how to organize back office work carries strategic implications. Their model provides four approaches illustrating different strategies, based on data from a study of retail bank lending operations and using examples from other service industries. The decoupling of front- and back-office operations hinges not only on cost but whether the service firm''s strategy is one of cost leadership, dedicated service, premium service, or cheap convenience. Each distinct strategy poses a different set of trade-offs and important managerial issues. Decoupling can be eschewed to decrease costs, or embraced to enhance responsiveness in the front office.

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Abstract

A cornerstone of manufacturing practice has been to separate complex tasks into simple ones for economies of scale, and service industry practice has followed a variation of this principle by splitting up high and low customer contact activities to cut costs. Low-contact activities are removed from front office jobs, standardized, and centralized in some remote back office to achieve scale economies. Here, the authors question this principle; the choice of how to organize back office work carries strategic implications. Their model provides four approaches illustrating different strategies, based on data from a study of retail bank lending operations and using examples from other service industries. The decoupling of front- and back-office operations hinges not only on cost but whether the service firm''s strategy is one of cost leadership, dedicated service, premium service, or cheap convenience. Each distinct strategy poses a different set of trade-offs and important managerial issues. Decoupling can be eschewed to decrease costs, or embraced to enhance responsiveness in the front office.

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