THE BUSINESS OPTIMUM

MODEL©

(B.O.M.)©
SERVAAS DE KOCK
CAPE TOWN

2008
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The name of this model also relates

to the word ‘bomb’ – if you use this
model, the results can ‘explode’ to
optimum levels. But if you don’t
use the model, the business can
‘implode’ with a lot of negative
results.

© Copyright 1995 S.W.L. de Kock

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 3

THE BUSINESS OPTIMUM MODEL (B.O.M.)©

This model consists of three components or variables that are used to measure
different facets of the performance of the activities of a branch, bank or business.
In this paper the example of a Bank and Branches will be used.

1. Efficiency index©
This index measures the joint result of the profitability, productivity, cost-
effectiveness, resource allocation, input/output ratio and total efficiency of
a branch or bank. The results are shown in appendix 1. The index should be as
high or as large as possible. Any value lower than 1 is regarded as low and must
be increased.

Factors that are measured include operating income, operating expenditure, net
income, average assets and the staff numbers for a branch or bank or total staff
cost.
High 2

Efficiency 1

Low 0

2. Branch/Bank Size or Contribution©

This table and value in appendix 2 provide an indication of the relative size of a
branch or bank. In the past a branch grading system was normally used, but in
the absence of a grading system, this information is used to compare branches
or banks with one another. The model is designed to compare brands as well.

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 4

The higher the value, the greater the contribution or size of the branch or bank.
The results are shown in appendix 2.

Factors to consider are:

• Operating income (before or after bad debt)
• Operating expenditure
• Net income (before or after bad debt)
• Number of staff members or staff cost
• Total liabilities
• Total value of cheque accounts, long-term loans etc.
• Total value of bonds

Products with a low contribution are an indication of areas that can be improved.

Branches or Banks should therefor grow and become bigger through the
following:
• Operating income As high as possible
• Operating expenditure As low as possible
• Net income As high as possible
• Number of staff members or staff cost As low as possible
• Total liabilities As high as possible
• Total value of cheque accounts, long-term loans, etc. As high as possible
• Total value of bonds As high as possible

0 3 6

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 5

Small Large
Branch/Bank size or contribution

3. Business Optimum©
It is not enough to know whether a branch is efficient/effective and growing. The
optimum level for each branch should also be established. This is calculated
as follows:

Business Optimum© = Efficiency Index© X Branch Size or Contribution©

The greater or higher the Business value, the bigger or better is the optimum for
the branch or bank. This is shown in appendix 3.

To be able to increase the optimum for a branch, its efficiency and branch size or
contribution must both be increased. It can be graphically demonstrated as
follows (Figure 1):

BUSINESS OPTIMUM©

2 1
2 1
Small branch Big
Bigbranch
branch
High efficiency High efficiency
High efficiency
Efficiency 1
Index© 4 4 3
Small branch Big branch
Low efficiency Low efficiency

0 3 6
Branch/Bank size or contribution©
Figure 1

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 6

The combined results are shown in Graph A.

In the first place, a branch or bank should establish its position on the graph.
Secondly it should decide what it intends to doing with respect to efficiency and
branch size, contribution and growth.

A branch or bank should never just grow at lower margins, rates, prices or
income. Enough income must be generated at higher rates, margins, prices and
through cross selling, while costs/expenditure should be kept as low as possible.
Quality growth is also particularly important over the long-term.

A bank or branch should always become more efficient/effective and

productive by emphasizing outputs and not inputs. Banks or branches should
generate higher income and profits with fewer people, assets and liabilities.
Keeping operating expenditure as low as possible should also be emphasized.

The combination of efficiency and growth (size) provide the optimum for a branch
or bank; and is an indication of its relative economic and business value to a
region, industry or sector.
These factors can be measured monthly for banks and branches – even for a
single branch or bank, and the results will be determined over time.

The method can also be used for any business, practice or even a school or
church.

4. Optimum staff quota

By using the above three factors and the model, the shift or decrease/increase of
staff, and therefore staff cost, can be determined. Appendix 4 shows what the
quota for a branch or bank should be, on the basis of the branch’s potential,
ability to generate income and to absorb costs. Each branch can have its specific
circumstances, but this “optimum quota” is a scientific indication of what the

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 7

quota for the branch or bank should be. Sometimes staff will have to be moved
between branches/regions so that the most effective application of manpower
can be achieved. In practice every bank or branch has normally a fixed quota or
manpower budget that may not be exceeded.

5. Outstanding features of the model

5.1 Aid to branch managers, regional managers and top management
because it is an Executive Information (management) System. Strategic
planners and other decision makers will also undoubtedly benefit from the
B.O.M.©
5.2 A simple, understandable and comparable model that has been
implemented and used in some banks and businesses for the past couple
of years.
5.3 Available as a computerised model.
5.4 B.O.M.© can be used per branch, sub-region, region, province, and
different banks, as well as for other businesses.
5.5 It measures factors like profitability, productivity, resource utilisation,
ROA, cost effectiveness, input/output ratio, cost/benefit analysis and
efficiency simultaneously and separately. It also determines the size,
contribution and potential of a branch or bank.
5.6 It is easy to represent statistics graphically in order to not only provide an
analytical/statistical image, but also a visual model.
5.7 An efficiency and /or growth strategy can also be arrived at, as well as the
establishment of an optimum strategy for different branches, regions or
banks.
5.8 This model is not only a statistical one, but as was said before, it can be
used as an active management-, operational- and strategic aid. It allows
for a differentiated strategy (See point 5.7).
Two researchers, with respect to statistical correctness, correlation factors
and possibilities for regression, statistically evaluated this model.

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 8

5.9 It clearly identifies specific problems, focus areas, and priorities for each
branch, region and bank.
5.10 It offers peer group and other comparisons between branches, brands,
regions and banks and is also a very useful tool for benchmarking and
rating.
5.11 The model is totally flexible and can be adjusted and developed further to
include other unique variables.
5.12 The model can be used for a ‘what if’ analysis, as well as for predicting
tendencies.
5.13 It combines the ‘hard issues’ (results), as well as ‘soft issues’ (people) for
future action and further investigation for training, manpower development
and performance management.
5.14 In my opinion, and as far as I could determine, this is a first and unique
model – not only in South Africa, but also in the world. It also portrays a
very African flavour in its graphical form.

Servaas de Kock

Address: 7 Geelhout Street

Durbanville
7550

Telephone: (021) 976-7646 (Home)

(021) 976-7646 (Work)
082 452 5565 (Cell)
sdekock@iafrica.com

JAN 2008

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 9

Appendix 1

EFFICIENCY INDEX©

NR BRANCH EFFICIENCY INDEX©

1 Pretoria 1.282
2 Cape Town 0.983
3 Durban 0.976
4 Johannesburg 0.912
5 Bloemfontein 0.776

Appendix 2

BRANCH SIZE OR CONTRIBUTION©

NR BRANCH BRANCH SIZE OR

CONTRIBUTION©
1 Pretoria 20.08%
2 Cape Town 18.43%
3 Durban 24.15%
4 Johannesburg 23.01%
5 Bloemfontein 14.33%
Total Region 100.00%

Appendix 3

BUSINESS OPTIMUM©

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 10

NR BRANCH EFFICIENCY BRANCH SIZE BUSINESS

INDEX© OR OPTIMUM©
CONTRIBUTION©
1 Pretoria 1.282 20.08 25.742
2 Durban 0.976 24.15 23.57
3 Johannesburg 0.912 23.01 20.985
4 Cape Town 0.983 18.43 18.12
5 Bloemfontein 0.776 14.33 11.12
Value of all regions 99.537

Appendix 4

OPTIMUM COMPLEMENT

NR BRANCH BUSINESS EFFICIENCY AVER % COMPLEMENT OPTIMUM DIFFERENCE

© ©
OPTIMUM INDEX CONTR NUMBER COMPLIMENT
1 Pretoria 25.74 1.282 20.08 574 654 80
2 Cape Town 18.12 0.983 18.30 623 600 -23
3 Durban 23.57 0.976 24.15 777 786 9
4 Johannes- 20.985 0.912 23.01 754 749 -5
burg
5 Bloem- 11.12 0.776 14.33 527 466 -61
fontein
100% 3255 3255 0

© Copyright 1995 S.W.L. de Kock

All rights reserved