Revenue or Cost?
I spent over seven years in manufacturing before making the transition to healthcare and then finally to financial services. My first job after finishing an engineering degree, with GE Plastics, was to try and determine how to increase output. Fast-forward to my last two years at GE and I was an MBB managing a $50 million dollar year-over-year cost reduction budget. Six Sigma, in the world of manufacturing, and to some extent healthcare, was about cost reduction. So when I made the shift to financial services it took a while to realize that cost reduction was not the best Six Sigma strategy. Revenue enhancement projects were significantly more rewarding (financially), and easier to identify. I will focus on one main reason (there are several) behind this difference and that is the cost breakdown in these two sectors:
Labor and material are some of the largest cost contributors in manufacturing. Staff on the production line can make upwards of $60-$75 K / year and this does not include overtime. As for material – I would rue the day that we would reject a machine at our final inspection point. Talk about a big loss after all the labor and material that was put into producing a machine. So it made good sense to focus the Six Sigma effort on simplifying a process or reducing process waste. Compare that to a lending institution or a bank: their largest expense is not labor (unless they are extremely decentralized) or material, but cost of funds.
So instead I have learnt to focus on “Time to Cash” or “Cross-Selling” or “Conversion” projects. These projects are purely focused on revenue; they are focused on the occurrence: once you get a customer in-house, how to make sure that you keep them and get the most value from the relationship. The difference between cost reduction vs. revenue enhancement projects in financial services is the difference between saving several thousand (if you are a large enough institution, several hundred thousands) or millions!
S. Shaffie ProcessArc, Inc. - Financial Services Six Sigma
Comments
Sheila, Thanks!
-- QualityColorado
Posted by: QualityColorado | June 19, 2007 02:28 PM
Sheila, thanks for the insightful article. Can you provide a little more insight into how you went about selecting projects that had the most potential for revenue enhancement? For instance, what did you mean by "time to cash" and "conversion". Cross-selling is not an option for our company.
Thanks.
Hi Bobby,
Sorry for the late reply.
Time to cash = the amount of time it takes for a lead to go from the "identification" stage by sales to "closure" in operations...so it can be from the time a customer walks into a bank to open an account to the time that they conduct their first ATM transaction (which is when you start generating one form of revenue) or from the time that someone applies for a loan to the time that the deal is closed. The faster these "transactions" take place the quicker the organization can recognize revenue.
%conversion - is an operational metric. It measures the probability of a lead turning into a deal. So if the sales team submits 100 deals to UW and only 50 close, the %conversion is only 50%. The goal of %conversion is to identify where and why deals are lost so that they can be addressed.
Honestly the easiest way to determine what projects to select is by examining business goals vs. their actual performance, thereby determining if anything can be done to improve it.
Thank you for the questions. Please let me know if I can help clarify anything.
Kindly,
Sheila
Posted by: Bobby | August 7, 2007 12:11 PM