Financial Services Six Sigma

A 4.5 billion dollar bank in Wisconsin announced third quarter earnings earlier this month.  The earnings were down 48 cents a share from last year.  The bank also announced an increase in their quarterly loan loss provision to $2.6 million.  This dollar amount represents an increase of $1.1 million versus the same period last year.

I point to this bank simply as an example of the trend within the financial services sector. A slowing housing market, all around softening of the economy and an increase in non-performing assets are the driving factors the bank provided for increasing their loan loss provision.   While this is a proactive step that many banks can and should take there are more focused and data driven actions that can mitigate portfolio risk and loss:

• Review and modify Underwriting (UW) policies and guidelines.  Most banks - in a rush to capture as large a piece of the pie as possible - modified their UW guidelines during the rapid growth of the last five years. This has led to a sector-wide increase in risk exposure.
• Increase focus and data gathering in the Collection, Workout and Liquidation departments.  The Collections department has the earliest exposure to signs of potential problems.  It should become common practice that a customer with a late payment of 15 days (or sooner) be contacted.
• Look for trends and common characteristics in liquidated deals.  For example, are all liquidated deals concentrated in one region or sector? Do they all have credit scores below a certain level? Equity injection levels...? Once the common characteristics have been identified, they can be used to audit the portfolio to quickly identify deals that may be at risk at a future date.

In short, active management of the portfolio and an increased focus in the servicing department can help reduce anticipated losses.

Shahbaz Shahbazi - ProcessArc, Inc. 

Posted by Shahbaz Shahbazi at 05:35 PM | Permalink | Comments (0)

Today there are multitudes of "success stories" and case studies discussing how Six Sigma has resulted in substantial financial benefits.  Conversely, there is little information about where and how to begin the Quality journey.  Before going down the path of explaining how to start, one point needs clarification - in our world a Quality initiative is synonymous with a Six Sigma initiative.  While some Quality methodologies like Lean, TQM...are just tool kits used to resolve business challenges, Six Sigma is a Quality culture, i.e., it has a unique language, management philosophy, and training.  Here are the 4 major milestones for starting:

1. Determine where in your organization you want to start improving things.  Just remember that there is no ideal starting point. The division or functional area that you select should have measurable improvement opportunities.  These improvement ideas can come from the area managers, executives, your customers (what they complain about most) or a quick audit of your financials (area with highest base cost or fastest rate of cost increase).

2.  Ensure executive commitment.  Irrespective of the magnitude associated with the "roll-out" -  working on 1 or 10 projects - this undertaking will require resources and funding.  The company executives have to be aware of (and also accept) the risks and rewards of this journey.  This step will require them to get nominally educated on the methodology which will in turn minimize cultural resistance to change and maintain project momentum (few people will be inclined to push back if the CEO has given her/his blessing to the project).

3.  Select top talent and train them.  Pick your "high potential" associates for this phase.  Given the required investment in training and that you will assign them to resolving tough business challenges, the candidate should be a top talent.  As for training, ensure that the partner you have selected to deliver the training has specific and relevant experience in financial services.

4.  Execute to projects with speed.   The quicker you get to tangible benefits, the higher the probability of overall success of the Quality initiative.  Successful project execution will also lead to a culture of continuous improvement.

There are obviously numerous sub-steps in each of the above milestones but this should provide  an overview of how to start.

Sheila Shaffie - ProcessArc, Inc. 

Posted by Sheila Shaffie at 08:38 PM | Permalink | Comments (1)