The functional integration of

operations management in banks

A framework for research
Thomas Ilin
Cranfield School of Management, Cranfield University, Bedford, UK
Available online from 14th February 2008

Abstract
Purpose This paper responds to emerging concerns from banking practitioners and media about
service operations mismanagement in banking. It presents a general review, discussion and
empirical analysis of relevant academic literature on cross-functional integration from the service
operations management (SOM) and service management (SM) domains, together with a proposed
framework for use in further research.
Design/methodology/approach Empirical analysis of literature themes by industry, content
analysis of key papers exploring their usage of the term function, and critical analysis of the
literature from a new functionalist perspective.
Findings The focus on strategic intentions in SOM and SM academic literature fails to address
emerging concerns in the banking industry regarding problems arising at functional execution
levels of management. Research into this gap in knowledge may help to explain the factors
contributing to banking performance shocks and their relationship to operational inadequacies
exposed during economic turbulence.
Research limitations/implications Although the implications of this conceptual paper can be
translated to the financial services industry in general, the examples presented here are from
banking.
Originality/value The notion of an integration imperative is introduced to address an identified
gap in current knowledge that is limiting research opportunities. From which the SOM Functional
Integration Framework is proposed for further research into the enterprise-wide cross-functional
integration of operations management in banking.
Practical implications A functional integration framework provides banking operations
managers with an improved ability to locate operational inadequacies, and thereby identify
opportunities to increase operational resilience.
Keywords - Banking, Cross-Functional Integration, Credit Crunch, Operational Excellence.
Paper Type - Conceptual.

Introduction
Emerging challenges caused by operational turbulence in the banking industry are
creating an urgent need to improve current knowledge about the functional
contributions made by service operations management (SOM) to banking performance.
This section summarizes observations by banking practitioners and media on that topic,
from which propositions are derived for academic discussion and research.
Headlines in the business press confirm an increasing vulnerability of banks to
performance shocks due to operational inadequacies (Hutton, 2007). These shocks
expose weaknesses in the way banks deal with such matters as product innovations, new
market opportunities, risk concentrations, regulatory compliance demands, and trading

Electronic copy available at: http://ssrn.com/abstract=1290841

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volatility (Cohen, 2007). Their impacts on performance are refocusing current industry
attention beyond service delivery to include the functional areas of banking operations
that contribute to managing financial assets, liabilities, offerings, risks, liquidity and
regulatory compliance. Anecdotal evidence suggests that the effects of operational
challenges are less traumatic for banks that take a more collaborative and proactive
approach to SOM (White, 2007; Ilin, 2006a).
Events during the so-called global credit crunch following the sub-prime lending
debacle in 2007 demonstrate these changing dynamics well. They show that however
excellent a banks service delivery may be, if it fails to proactively accomplish other
important day-to-day operational tasks (as distinct from tasks such as strategy
formulation), the bank could suffer performance shocks that may even lead to its total
collapse in extreme circumstances. Observations in the banking media seem to suggest
that banks with exemplary performance are distinguished operationally by what is
done, and who does it (White, 2007, Cohen, 2007; Hutton, 2007; Ishmael, 2007;
Aldrick, 2007). The how of managing banking operations appears less important.
Perhaps that is because SOM in banking is relatively immature by comparison, for
example, to the manufacturing industry. There is no consensus yet regarding what
SOM is in banking, below the level of strategic roles, hence the observed variations in
approach amongst banks. Whereas, how things get done in banking SOM is well
known, often standard across an organization, highly automated, and similar throughout
the banking industry. It seems that variations occur mostly in the omissions and
inclusions of what is done to manage banking operations, along with who is assigned
responsibility for it. If that is true, then perhaps these variations affect performance in
some predictable way.
Consequently, SOM issues and variations in approach are analysed by this paper from
the perspective of: the functional integration of operations management in banks.
That perspective focuses on both the what and who of operating a banking
enterprise, with consideration also given to evidence of functional execution, to
distinguish reality from strategic intention. The key definitions from functionalism (see
Further Literature Recommendations) used throughout this paper are:
Definition #1: A function is an ongoing and continuous collection of activities
involving one or more entities, related to an aspect of the missions or objectives of an
enterprise, identified by names or phrases that are based on nouns or gerunds (words
ending in ing) that describe a common purpose (adapted from Martin, 1990, CSL,
1993; Modell, 1996). Examples are Planning, Risk mitigation, Bond trading, and
Asset management. It describes what is done.
Definition #2: A process is a coherent set of activities to be carried out in some order,
that can be executed repeatedly, involving one or more entities, with a definable
beginning and ending point, having identifiable inputs and outputs, achieving one or
more goals of a function, identified by a verb or verb phrase that describes what must be
accomplished (adapted from Martin, 1990, Ould, 2005). Examples are Calculate
interest, Assess credit risk, Derive asset fair-value, Create hedge transaction. It
describes how something is done.
Processes are defined here to clearly distinguish them from functions, but they are not
included in the scope of this paper focusing on SOM functional integration in banks.

Electronic copy available at: http://ssrn.com/abstract=1290841

Practitioner
Literature
Research from
converging disciplines

Academic
Literature

Operations
Management

Financial Services
(including regulation)

The functional
integration of
operations
management in
banks
3

Organization
and Role
Theories

Banking OM
cross-functional
Integration
literature

Functionalism

Service
Literature
Content overlap

A function should be identifiable and definable, in terms of activity, responsibility,

and accountability. It may also be measurable, but not necessarily (Modell, 1996).
Functions define what is done and by whom. They may be grouped into functional
areas, and they can be arranged hierarchically in a functional decomposition. However,
they should not be confused with organizational areas (Berio and Vernadat, 2001),
which may or may not be functionally structured (i.e. organized according to shared
activities, as opposed to some other notion such as a matrix or project-based structure).
Functions that are being linked by industry observers to disruptions in banking
performance include: the dynamic tracking and prediction of movements in the fair
value of assets, efficient settlement of new types of business transactions, maintenance
of adequate liquidity, identification of risk exposure concentrations, and assurance of
timely risk mitigation (Cohen, 2007; Hutton, 2007; Ishmael, 2007). All of these
functions are operational in nature. However, banks appear to vary significantly in what,
if anything, is done to manage them across the enterprise. Furthermore, organizational
responsibility for operational functions may be fragmented, collaborative or
concentrated. Potentially giving rise to circumstances in which a function exists,
responsibility is assigned, but execution still fails.

Research Opportunities
It would therefore appear that an improved understanding of variations in the
operational functions performed by banks, and who (if anyone) performs them, is a
prerequisite of understanding the operational capabilities and inadequacies of individual
banks. That in turn may offer insights into how the banking industry can become more
operationally resilient to future economic turbulence.

Figure 1.
A unified approach to the
literature.

Banking
Academic

Table I.
Analysis of SOM and SM
cross-functional paper topics
by industry.

Topic
Performance
Resources and Capacity
Review
Strategy
Quality
Process Change
Integration - External
Integration - Internal
Technology
Techniques
Risk and Resilience
Organization
Innovation
Adaptation
Operational Agility
Capabilities
Competition
Excellence
Lean Operation
Marketing
Globalization
Information
Regulation
Market Analysis
Grand Total

Industry
c)
e
ia
if i
t iv
s
ed
ec
ic
t
tr a
p
M
s
s
i
-s
d
gi
in
an
on
Lo
m
(n
d
ns
ts
r
l)
Ad
g
an
try
d
tio
ra
Ar
t
de
in
l
s
a
n
n
e
g
re
a
ne
ta
ur
en
ic
Or
n
io
iv
du
ity
in
ct
m
d
Ca
io
g
ry
ge
To
In
ut
ot
al
un
t
(
m
a
n
n
t
n
o
f
r
b
i
r
h
a
i
l
d
a
m
i
u
o
e
p
c
ri
k
is
lt
ss
n
om
f
a
t
n
v
s
t
m
v
a
u
n
t
r
w
a
o
s
a
La
M
Ho
Pe
Go
Cr
He
Au
Ed
Gr
Co
Ba
Ad
Di
Re
1
2
16
3
5
4
1
1
33
1
1
7
2
13
1
1
1
27
1
22
2
1
26
1
1
10
4
1
17
1
1
11
2
1
1
17
2
7
1
1
3
1
15
1
1
1
9
1
13
1
6
1
1
3
1
13
1
9
1
1
12
7
1
1
9
1
4
1
6
3
2
1
6
1
1
3
5
2
2
1
5
2
1
2
5
1
2
1
4
1
1
1
3
1
1
1
3
1
2
3
1
1
2
2
2
1
1
2
1
1 SOM and SM
1
1 cross-functional
4
2
16
5 127
9
1
3
39
13
2
6
1
2 230 papers

In summary, the implications of views being expressed by banking practitioners and

media observers can be translated, using this papers functional integration perspective
on SOM, into the following academic research proposition:
Research Proposition: Understanding variations in the enterprise-wide integration of
SOM at functional execution levels of management in the banking industry, as shown
by the functional inclusions, omissions and role assignments of SOM at individual
banks, may help to explain key factors contributing to banking performance shocks and
their relationship to operational inadequacies during times of economic turbulence.
The objective of this paper is to propose a framework for researching such variations in
the operational approaches of banks.

Method
This paper takes a unified approach to the literature (Figure 1). It analyses SOM and
SM cross-functional paper topics by industry (Table I), with special emphasis on
banking articles. In addition, applicable contributions are cited from other academic and
practitioner disciplines, identified by searches using keywords derived from the research
proposition.
The paper proceeds with a review of SOM and SM literature on relevant topics,
followed by a critical analysis discussion. From which an argument is presented for
extending the research imperatives identified by Johnston (1994), to introduce the
notion of an integration imperative.
Then, by including contributions from other disciplines, a framework is proposed that
is argued to have the potential to move future research in new directions.

Literature Review (core disciplines)

Service Operations Management
The importance of cross-functional integration is well established in the SOM
literature. Chase and Hayes (1991) proposed three broad categories of change: from
closed system to open system; from procedures focus to customer focus; and
from islands of activity to total enterprise integration. In the latter category they
address the challenges of coordinating activities around a common purpose, as in
getting departments to work together. They advocate, for example, that the internal
supplier-customer duties and actions among operating units should be clearly
acknowledged and rewarded in an organizations performance measurement and reward
system. Although the first two categories of change have large bodies of work
associated with them, integration of OM activities into the total enterprise has received
surprisingly little attention in either SOM or the broader OM literature.
Chase (1991) further contends that service is the fifth competitive priority in
manufacturing strategy. He argues that after having designed a service delivery process,
in order to link performance to factory objectives it is necessary to get cross-functional
support, because service innovations tend to span departmental boundaries. He lists
departments such as R&D, personnel, production, and MIS. Although this list is still not
enterprise-wide, it acknowledges that more than a customer-based view is needed.
Service Management
Johnston (1994) explains this lack of attention to cross-functional integration in the
SOM literature when he describes how the development of OM led to the emergence of
service management (SM) as a recognized field, which he suggests is a cross-functional
body of literature reflecting the multi-functionality of service management. It is
amongst this literature that cross-functional research about SOM can be found.
Figure 2 presents a diagram of the key stages of SOM development according to
Johnston (1994). It shows his strategic and service imperatives, alongside the
integration imperative proposed by this paper, in recognition of a small but growing
number of academic contributions to the SOM cross-functional integration literature.
This diagram illustrates Johnstons view of the evolution of OM research from a focus
on internal efficiency into what he calls the strategic imperative, concerning itself
with the formulation and implementation of corporate strategy as urged by Skinner
(1974, 1985). It also illustrates Johnstons observation that the SM literature is only
focused on partial integration between OM, Marketing and Human Resources
Management, due to its customer-facing bias. Johnston (2005a) calls this bias the
service imperative. He attributes servicization of OM to a movement away from
product-dominated views towards a service orientation (Sasser, Olsen, and Wyckoff,
1978). Gummesson (1994) calls this services marketing myopia, when he writes
about general management paradigm shifts connected to services, particularly in SM.
He defines the shift to a service paradigm as a shift in focus from the means and
producer perspective to the utilization and customer perspective. Johnston (1994)
concludes that the subject of OM must shake off its inward-looking and efficiency
orientation, and respond more to the strategic and service imperatives. At the same time

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Service
Operations
Management
Organized Activity
(1) focused on
internal
efficiency

Pre-Factory times

Smith (1776)

Work Efficiency

Scientific Management Taylor (1911)

Blackett, Dantzig,
et al (1940s)

Operations Research

von Bertalanfy Systems Approach

(1950), et al

Thompson (1987)
The Strategic Imperative

Open Systems Approach

Skinner (1974)

Figure 2.
Summary of SOM/SM
development.

(2) increasing integration

of OM with other
functions and disciplines

Chase and
Hayes (1991)

The
Integration
Imperative

The Service Imperative

Sasser et al (1978)

(3) Partial
Integration

OM MKT
HRM

Service
Management

(4) integration with total enterprise

SM is challenged by him to include and recognize operational issues in its crossfunctional literature.
A landmark study by Nie and Young (1997) was one of the early attempts to respond
to the call for this type of research in SOM. It looked at the relationships between
functional goal consensuses, the use of coordinating mechanisms, and organizational
performance. They used data collected by a survey of 28 banks from 8 western states of
the USA to confirm that the pattern of functional-level decisions and actions determines
the degree to which planned strategies are implemented. However, they failed to extend
the functional boundaries explored in previous literature by once again emphasizing the
relationship between operations and marketing. Their justification for doing so was to
argue that these two functions perform most of the value-adding activities (Porter,
1985). It was the combinations of high level interdependency between these functions
and conflicting functional level goals that particularly interested them.
Integration choices
Then, Roth and Menor (2003) broke new ground with their SOM research
frameworks. In their Architecture for Service Delivery Systems they proposed three
strategic design choices: structural; infrastructural; and integration, based on the
work of Giffi, Roth and Seal (1990). They describe integration choices as revolving
around the issues of external integration, internal integration and adaptive mechanisms.
External integration deals with the service supply chain relationships developed with
upstream suppliers, and downstream users of the service. Internal integration deals with
the strategic fit between operational and business performance, between functional

areas, and between structural and infrastructural choices. Adaptive mechanisms focus
on intellectual assets critical to the delivery of services, such as people, system
knowledge, and learning. One of their example research questions for integration is:
How will interfaces with other functional areas (e.g. ancillary services like finance) be
bridged? However, this paper argues that in banking an answer is first needed for the
question: What are the functional interfaces with other areas? On the subject of the
relationship between performance and cross-functional integration, and the tendency of
SOM literature to focus on operations and marketing, they point to Heskett, Sasser and
Schlesinger (2003, 1997), who emphasize the criticality of thinking beyond SM in their
notion of the value profit chain. Finally, in their research agenda theme #4, Roth and
Menor (2003) call for the functional boundaries of SOM research to be further enlarged
and made truly cross-functional by including extended supply-chains. They conclude by
observing that truly integrative work incorporating an operations perspective is sparse
and much needed.
Limited scope of research
Johnston (2005a,b) updates his lament over the emphasis on what he refers to as
customer operations in the current OM literature. Beginning with his previous
assertion that SM arose as a new field of literature because other functional areas
realized they had important things to say about operations, he goes on to describe the
SM era of services literature as being cross-disciplinary in nature, but still emphasizing
a limited triad of functions: Marketing, Operations, and Human Resources
Management. Leading him to argue for the beginning of a new era he calls the return
to roots. He suggests that the previous trend towards cross-functional work seems in
reverse, and that we are witnessing some tensions between the functions. He therefore
calls for a return of research efforts to core disciplines, such as: the link between
operational issues and performance drivers; the measurement of improvements in
operational performance; the development of performance improvement tools, such as
guarantees, complaints and service recovery; service technology; managing service
capacity; and so on.
In their four-decade summary of the development of SOM, Hieneke and Davis (2007)
chronologically place research emphasis on cross-functionality as having already
occurred in their second decade. Although they agree with Johnston (1994, 2005a,b)
that the literature focused on the operations and marketing functions, they make no
distinction between SOM and SM literature as he does. They conclude by predicting
that the current (fourth) decade of SOM literature will be about technology-enabled
service systems and human resources management.
On the other hand, Metters and Maruchek (2007) do also recognize a separate SM
literature, and reflect on the need for further cross-functional SOM research to be
encouraged. Although, they see that ambition challenged by the lack of consensus on a
general categorization of services operations. They cite Chopra, Lovejoy and Yano
(2004) who indicate that many research needs are industry specific. In the absence of a
general paradigm, specific sub-areas of SM literature are emerging, such as financial
services. They ask do we examine services strictly at the process level, or do we
consider the needs and cross-functional interactions within the context of an industry?

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8
Table II.
Implied definitions of the
term function.

Implied definitions
s
on
iti
ic
c
in
p
st
i
f
i
i
t
r
c
e
is
de
is
ct
er
d
/D
ra
ct
ie
ea
ra
pl
n
ha
a
o
c
Ar
m
i
h
i
t
c
ce
ss
e
s
za
nt
e
ity
ur
ni
re
es
ne
ic
tic
si
tiv
so
rv
ga
oc
ac
ffe
Bu
Or
Pr
Ac
Re
Se
Pr
Di
X
X
X
X
4
X
1
X
1
X
X
X
3
X
X
X
X
4
X
X
2
X
X
2
X
X
2
X
X
2
X
X
X
X
X
5
X
X
2 Sample journal articles
X
1 from
X
X
2 Literature Review
(core disciplines)
7
13
6
1
1
2
1
e
lin

Papers
Chase and Hayes, 1991
Gummesson 1994
Johnston, 1994
Nie and Young, 1997
Roth and Menor, 2003
Chopra, Lovejoy and Young, 2004
Johnston, 2005a
Johnston, 2005b
Heineke and Davis, 2006
Rhee and Mehra, 2006a
Rhee and mehra, 2006b
Machuca, Gonzales-Zamora and Aguilar-Escobar, 2007
Metters and Maruchek, 2007
Implied definition usage

Industry-specific focus
Rhee and Mehra (2006a) chose the industry-specific route by researching the banking
industry for similar reasons to Nie and Young (1997). The purpose of their research was
to broaden the scope of strategic fit notions to include performance effects due to crossfunctional integration in retail banks. Out of the body of literature that focuses on the
functional integration between operations and marketing, and its effects on
performance, they proposed a conceptual model of the moderating relationships
between functional integration, competitive strategy, proactiveness, and organizational
performance. Rhee and Mehra (2006b) then tested that model with data gathered by a
survey of retail banking executives of 81 responding banks out of 530 banks selected
from a list of the Top 1000 US Banks. After analysing the strategic choices made, the
proactiveness of business units in functional participation, and the level of crossfunctional discussion in relation to key strategic activities, they found that proactiveness
and competitive strategy substantially affect a retail banks performance based on the
strength of integration of its operations and marketing areas.
However, as with other research in this literature, their focus on cross-functional
integration is not enterprise-wide, failing to go beyond the limitations of customer
operations described by Johnston (2005a,b). Furthermore, they researched the
performance effects of functional integration from the perspective of functional
proactiveness at the level of competitive strategy. Thereby placing their work in the
strategic imperative literature (Johnston, 1994). Their results consequently show the
performance effects of how operations and marketing functions integrate decision
making about what the strategy says a retail bank should do, and about strategyrelated management choices. They do not address the performance effects of managing
the execution of operational functions in banks.
The Integration Imperative
The strategic imperative described by Johnston (1994) is still dominant in the SOM
and SM literature. Meanwhile, current research is just beginning to address integration
as recommended by Chase and Hayes (1991). For progress towards their vision of

OMs total enterprise integration it will be necessary for research to move beyond the
current focus on strategic issues and away from the customer-facing service delivery
bias.
Machuca, Gonzales-Zamora, and Aguilar-Escobar (2007) report a clear predominance
of strategic issues over tactical/operational issues in OM journal publications and
pipeline research. They express a concern that research into tactical/operational issues
may be failing altogether in SOM. Furthermore, their results show that the financial
institutions research sector places particular emphasis on strategic issues.
Perhaps it is therefore fitting that, according to the emerging operational challenges
mentioned in the introduction of this paper, OM in banking now seems compelled to
embrace a new integration imperative. Early indications define this imperative by a
shift in research towards what Nie and Young (1997) call the functional level where
strategy is implemented. This new imperative has the potential to explain OMs
functional involvement in executing business strategy, at a level of granularity that
exposes actual contributions to organizational performance, not just strategic intentions.
It may never be possible to track actual contributions as they occur, in real time.
Nonetheless, it should be possible to infer how they generally arise through a study of
the functional integration of OM, validated by some agreed evidence of functional
execution, referencing a standard function model of banking enterprises.

Discussion
Hrebiniak and Joyce (1984) confirm the importance of making a distinction between
organizational areas and their functions (i.e. collections of activities). Furthermore, a
well established literature on enterprise modelling from systems theory defines such
terms unambiguously. However, ambiguity persists in SOM and SM literature around
the two concepts, and it is arguably the principal barrier holding back research into
cross-functional integration because it results in a failure to distinguish clearly between
the integration of activities, and the integration of those who perform activities. In
particular, usage of the term function is confused, inconsistent and misleading. To the
extent that within a single paper, a function can be given multiple implied meanings
such as a business area, an organization unit, an activity, a process, and a
practice (Table II). If there is lack of clarity in researchers minds about these terms,
then their findings and interpretations are vulnerable to challenge.
Consequently, research in this area fails to make a distinction between what is done
and who does it (Figure 3). That constitutes a major gap in the literature regarding the
the research proposition of this paper. More precision in the use of terminology would
help to make broad improvements in the value of new research contributions. For
example, when empirical research in this literature examines how the strategic choices
and goals made jointly by operations and marketing functions affect performance (Nie
and Young, 1997; Rhee and Mehra, 2006a,b), it implies an organizational meaning for
the term function. Data is gathered from organizational departments by survey
questionnaires and analysed using categorizations such as the strategic groups of
business units (defenders, prospectors, analysers, reactors) from Miles and Snow
(1978). But it is not clear if their results show the effects on performance of
collaboration between organization units or the integration of functions they perform
(i.e. the making of combined strategic choices). Research that distinguishes between
functional and organizational aspects of cross-functional integration would provide new

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10

Dimension 1
FUNCTION
HIERARCHY
(i.e. what?)

planning
function
associations

operations
management
functions

strategy
formulation
function

standard
organization
structure
(by line of
business)

process
level
functional
decomposition

Figure 3.
The two dimensions of
functional integration.

strategic decision making

processes

Dimension 2
ORGANIZATION
HIERARCHY
(i.e. who?)

operational execution processes

enterprise processes

insights. It would be possible, for example, to isolate the distortion effects of different
organizational structures. That in turn opens up the prospect of being able to
independently research the effects of functional contributions, organizational roles,
variations in organizational structure, or any of their combinations. This is particularly
important for the banking industry, where organization units are often assigned
overlapping roles in performing operational functions, and where new operational
functions exist that are unique to the industry. Truly cross-functional integration
research is impossible without establishing this distinction.
Too often, the quality of empirical research in the banking domain of this literature
also fails to convince because it uses generic, partial and outdated taxonomies from
SOM which have no special relevance to banking. Menor, Roth and Mason (2001)
illustrates this point. They use a number of categories originated by research from the
1980s (published in Roth and van der Velde, 1991) for comparison between service
group clusters, few of which are banking specific.
For example, in the section comparing survey data on strategic choices they have a
category called Integration Technologies, under which they have two generic subcategories: Increase internal control over electronic data transfer networks, and
Integrate operations with customers (comprehensive information/funds transfer, etc).
Neither of these sub-categories is specific to banking. Furthermore, what were the
criteria for selecting these two from other equally relevant possibilities, such as:
Increase controls over external third party service automation, Integrate operations
with market platform technologies, Integrate operations with regulators, and
Integrate operational risk management support technology? A more comprehensive
model of up-to-date categories based on operational functions in banks would have been
preferable in their paper.
The concept of performance implied throughout this literature is also too narrow. It
has a customer-facing or service delivery bias which directs focus towards the
marketing and operations functions (Johnston, 2005a,b; Gummesson, 1994; Heskett et

al, 2003, 1997), and excludes other functional contributors. There is a tendency in the
literature to emphasize value-adding activities in a firms value chain (Porter, 1985).
However, the banking industry has important value-preserving activities that are not
acknowledged by Porter. For example, business performance is measured by Rhee and
Mehra (2006a,b) using net interest margin, fee income, return on assets, and return on
equity. However, there are other performance indicators related to activities in banking
which are equally important, and in some market conditions more important, such as:
risk levels (operational, credit, concentration, etc), liquidity, capital adequacy, bank
rating (Moody, Standard and Poor, etc), asset write-downs, and competitor
benchmarking. When these are factored into performance considerations, new
crossfunctional dependencies arise between operations and the functional areas of
treasury, risk, finance, compliance and asset management. At different times, any of
these can have effects on performance that can seriously compromise or eclipse the
performance results generated by value-creation alone. This bias is probably more
noticeable because SOM in banking participates in many activities that have no
counterpart in other service industries, or manufacturing. SOM functions can be
critically important, even though they may sometimes only be the final converters of
opportunity and risk into profit and loss in support of the banks normal role as a risk
machine, by facilitating transactions that are initiated by many other functions.
The nature of SOM functional dependencies in banking often demands that crossfunctional integration activities are performed in close collaboration. Therefore truly
enterprise-wide cross-functional integration of SOM, in both a what? and who?
sense, is arguably more important for banking performance, and indeed banking
efficiency in general, than is currently understood.
Finally, a common weakness found in this literature is the lack of willingness of
researchers to look beyond the normal academic disciplines associated with SOM or
SM research.
Discussion Issues
When considered from the viewpoint of this papers research proposition, unresolved
issues from the foregoing discussion can be summarized as:
(i) How can the ambiguity around organization units and functions be removed?
(ii) Is it possible to improve on the quality of generic, partial and outdated
taxonomies being used for empirical research in banking?
(iii) How could a comprehensive model of up-to-date operational functions be
developed for researching variations in the operational approaches of banks?
(iv) How can the effects of variations in organizational structure be isolated or even
eliminated when researching cross-functional integration?
(v) How can an operational approach be defined for banks, based on cross-functional
integration?
(vi) How may it be possible to establish the functional contributions of OM to bank
performance, in the context of different operational approaches in banks?

The functional
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Banking
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Further Literature Recommendations (applied disciplines)

A Multi-disciplinary approach

12

Although there are many calls from SOM and SM cross-functional integration
literature for greater interdisciplinary involvement in what they sometimes call this
transfunctional research area (Machuca et al, 2007; Roth and Menor, 2003;
Karmarkar, 1996; Buffa, 1980), there are still few papers that have attempted to apply
that advice.
Contributions from three other disciplines are included in this paper to get a wider
academic perspective on the research proposition. In the following sub-sections each
discipline and its relevance is described briefly. It is, of course, impossible to do more
than simply give a flavour of the potentials offered by each, while explaining this
papers selective application of their offerings.
Functionalism
The term function is freely used throughout both the practitioner and academic
literature reviewed in this paper. However, the meaning intended is nearly always
simply implied by the context of its use.
To remove that ambiguity, this paper recommends the application of the sociological
paradigm of functionalism (Spencer, 1896; Durkheim, 1893; Parsons, 1968), in the form
of its derivatives in systems theory (von Bertalanffy, 1950) and structured analysis
(Yourdon and Constantine, 1979; Demarco, 1979; CSL, 1993) to provide crossfunctional integration research with useful definitions and techniques for analysing the
component functions of a bank. It is the emphasis of these techniques on analysing
what is done (Martin, 1990) that is of special relevance to this paper.
Organization and Role Theory
A long time before Pfeffer (1993) argued that the study of organizations is
paradigmatically not well developed; researchers were already exploring the
relationship between business operations and organization structure. For example,
Hickson, Pugh, and Pheysey (1969) found that manufacturing operations technology did
not determine the form taken by the structure of an organization, as was previously
thought. Even before then, when the empirical work of Pugh, Hickson, Hinings and
Turner (1968) showed how to construct a descriptive model of the structure of an
organization for comparative analysis, the importance of the relationship between
management roles and OM was already recognized.
Then Chase and Tansik (1983) took a different view, by advocating the use of a
normative model in the design of service organizations. In their customer contact model
they showed how the operations of a service organization could respond structurally to
the physical presence of the customer.
An alternative to changing the organizational structure of operations in achieving
responsiveness is functional collaboration. This can take many forms, and has been
researched from an equal variety of perspectives. For example, Ring and Van de Ven

Level 1
Corporate
Finance

Trading &
Sales
Retail
Banking
Commercial
Banking
Payment and
Settlement

Level 2
Corporate Finance
Municipal /
Government Finance
Merchant Banking
Advisory Services
Sales
Market Making
Proprietary Positions
Treasury
Retail Banking
Private Banking
Card Services
Commercial Banking
External Clients
Custody

Agency
Services
Asset
Management
Retail
Brokerage

Corporate Agency
Corporate Trust
Discretionary Fund
Management
Non- Discretionary
Fund Management
Retail Brokerage

Activity Groups
Mergers and acquisitions, underwriting, privatisations,
securitisation, research, debt (government, high yield), equity,
syndications, IPO, secondary private placements.

Fixed income, equity, foreign exchanges, commodities, credit,

funding, own position securities, lending and repos, brokerage,
debt, prime brokerage.
Retail lending and deposits, banking services, trust and estates.
Private lending and deposits, banking services, trust and estates,
investment advice.
Merchant/ commercial/ corporate cards, private labels and retail.
Project finance, real estate, export finance, trade finance,
factoring, leasing, lending, guarantees, bills of exchange.
Payments and collections, funds transfer, clearing and
settlement.
Escrow, depository receipts, securities lending (customers)
corporate actions.
Issuer and paying agents.
Pooled, segregated, retail, institutional, closed, open, private
equity.
Pooled, segregated, retail, institutional, closed, open.
Execution and full service.

(1994) used a transactional approach to examine the developmental process of

cooperative inter-organizational relationships (IORs).
When the above-mentioned body of work is applied to the unresolved discussion
issues, it provides insights into how the assigned and assumed management roles of OM
go about achieving strategic objectives through collaboration across an organization
structure. It remains for this paper to link those insights to an improved notion of
functional integration, so that a framework representing a banks overall OM approach
to functional execution can be developed.
Financial Services Regulation
Compliance with financial services regulations requires banks to report their results in
terms of standard taxonomies, based on explicit definitions with prescribed calculation
algorithms for reported results. Such schemes present exciting opportunities for detail
empirical research that are rarely matched in other industries, or across service sectors
in general. Researchers in SOM often find themselves having to discover or invent
taxonomies, ending up with tenuous relevance to any particular industry. Perhaps this is
why Chopra et al (2004) cite the financial services industry as a potentially rewarding
context for researching specific cross-functional interactions. Data is available in the
form of filed regulatory returns using taxonomies already in place for compliance that
allows comparisons to be easily made between banks.

The functional
integration of
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management in
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13

Table III.
Business lines and activity
groups from Annex 8 of
Basel Committee, 2005.

Banking
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14

Sometimes regulatory taxonomies are directly applicable to research, as with lists of

risk types and exposure measurement approaches (Basel Committee, 2005), or with lists
of financial services, activities and instruments (EC, 2004 annex I sections A, B and C;
Ilin, 2006b). In other situations some interpretation needs to be applied, as with the
compliance reporting relationship between business lines and activity groups (Table
III). For example, it is possible to construct a standard organization hierarchy for a bank
based on that relationship, to which actual organization structures can be mapped,
thereby eliminating the effects of variations in actual structures on research findings.
In this way, prudent adoption of regulatory taxonomies can contribute to improving
the quality of empirical research when addressing the unresolved discussion issues of
this paper.

Research Implications
A Synthesis of Findings
Turning to the insights of the literature reviewed in previous sections presents new
research implications for solutions to the unresolved discussion issues. For example:
By taking a functionalist perspective on issue (i), and using the definition of a
function adapted from systems theory, future research can apply the two dimensions of
functional integration (Figure 3) to maintain a clear distinction between the terms
function and organization unit.
Issue (ii) is resolved in the banking industry by using the taxonomies provided by
financial services regulations. In that way valid comparisons between banks can be
made in terms of taxonomies familiar to the industry, with the consequent advantage of
also being able to use data already collected for compliance reporting. Why re-invent
the wheel?
Issue (iii) requires a function model of banking to be developed for completing
Dimension 1 of Figure 3, as suggested by functionalism, to a level of decomposition
appropriate for particular research objectives. This could be based on the activity
groups found in regulatory taxonomies.
Dimension 2 of Figure 3 would then require actual organization structures to be
linked to that function model via translation to a standard organization structure based
on the regulatory taxonomy for line of business. Then making associations as
suggested by organization and role theory, using functional roles, responsibilities,
collaboration involvement, and so on, would resolve issue (iv).
With issues (i) to (iv) addressed as described above, a solution for issue (v) becomes a
matter of defining a multi-variate interpretation of a SOM approach from this universe
of discourse.
From which it ultimately becomes possible to research the relationship between OM
approaches and performance in banks by comparative analysis between multivariate
entities using a technique such as Data Envelopment Analysis (for issue (vi)).
Universe of Discourse Metamodel
When a research area encompasses many notions that have complex interactions, it
becomes increasingly difficult to create an overview with the type of freeform diagrams

Bank / Firm

Organizational Association Type

Functional Role Type

has

Organizational Association

Organization Unit

Operations Function

parent / child

executes
implements

The functional
integration of
operations
management in
banks

Evidence

Function Integration

confirms execution

operationalizes

15

responds to

Strategy

sets

Time Period

intends

Challenge

Evidence Type

Strategic Response
to

Operational Response

to

Strategic Objective
is supported by

used to depict simple frameworks. A common feature of the integration imperative in

future SOM and SM literature may well be a trend towards more formal methods of
modelling.
Figure 5 in the appendix of this paper shows an entity-relationship diagram (Chen,
1976) of key entities in the universe of discourse for this paper. Annotations on the
diagram name areas representing terms that are relevant to the research proposition,
while the overall diagram is a metamodel of the relationships between component
entities of these terms drawn from the literature review sections.
The SOM Functional Integration Framework
Out of this universe of discourse metamodel, it then becomes possible to extract a
subset of concepts defining a SOM Functional Integration Framework. Figure 4 shows
that subset re-arranged for empirical analysis in the form of a star-schema data structure
using a multi-dimensional entity modelling technique from the information engineering
discipline.
In that star-schema, the proposed dimensions of a SOM Functional Integration
Framework are: Bank, Organization Unit, Operations Function, Functional Role Type,
Strategy, Challenge, Time Period, Evidence and Evidence Type. All of which are
entities from the universe of discourse, except for Evidence. This latter dimension is a
simplified translation of the Functional Role sub-type, Performed Functional Role,
from the metamodel. The Evidence Type dimension enables evidence of functional
execution to be associated with an Organization Units functional role. In this way the
actual SOM Integration executed can be distinguished from any strategic intention.

Figure 4.
Entity-relationship
diagram of the SOM
Functional Integration
Framework.

Banking
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16

Summary
Banking performance is widely acknowledged by industry experts in the business
media as being vulnerable to the effects of economic and operational turbulence. Many
of these effects are managed by SOM, and have an indirect but important relationship to
service delivery. They are known to expose vulnerabilities at functional execution levels
of management, due to differences in the approaches of banks to the functional
integration of SOM enterprise-wide.
A functionalist perspective reveals ambiguity in the literature around the concept of a
function, and this is argued to be a barrier that limits progress in cross-functional
integration research. Through the proposed notion of a new integration imperative,
based on a clear definition drawn from systems theory of the term function and its
related terms, a framework is proposed that enables future research to move from an
emphasis on strategic intentions to exposing actual contributions of SOM to bank
performance.

Concluding Remarks
Future Research
By refocusing on functional execution, future papers in this series will extend the
SOM Functional Integration Framework presented here to show more of its relationship
to business performance. Forming the basis of future empirical research that aligns
current understanding of operational functionality, agile capabilities, organizational
configurations and business ethics to explore operational excellence in banks.
Potential Business Opportunities
Improving managerial understanding of what must be done in banks to achieve
exemplary performance can be more than a competitive advantage. During turbulent
times, such as those currently being experienced by the financial services industry, that
understanding may be a matter of survival. The implications of allowing existing
practices to continue may soon become only too evident.
If operational excellence becomes a regulatory compliance obligation, the SOM
Functional Integration Framework could prove to be a pivotal concept in its realisation.

Performance Strategy

Strategic Objective

Strategic Objective Performance Measure

Performance Measure

Strategy
Strategic Response

Organization Unit Performance

Challenge

Time Period

Turbulence

Operational Agility

Capability

Functional Capability

Performance

Strategic Objective Capability

Functional Role Performance

Function Model

SOM Approach

Other Function

Functional Role Performance Contribution

Operations Function

Business Function

Cross-functional integration
Functional Role Type

Performed Functional Role

Functional Role

Assigned Functional Role

Bank

Organization Unit Performance Measure

Other Unit

Organization Unit

Operations Management Unit

Organizational Association Type

Organizational Association

Organization Structure

Appendix

The functional
integration of
operations
management in
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Figure 5.
Entity-relationship diagram
of the Universe of Discourse
Metamodel.

Banking
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18

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