Financial Services Six Sigma

Six Sigma Pricing by Navdeep Sodhi and Manmohan Sodhi is a successful effort by all accounts.  This is a Six Sigma book in the most generic sense, yet it isn’t like most other subject-specific books in the Quality marketplace.  The central reason I make this statement is because the authors are very systematic in laying out the content of the book and do a fine job conveying their intellectual intentions.  Following an eerily regimented (read logical) approach to the subject matter, the authors successfully illustrate how business leaders in addition to MBA students can benefit from their pricing logic.

The authors are very clear about the objectives of this undertaking: they state early in the book that their effort is not to be misunderstood as yet another rally in support of Six Sigma.  Rather, they distinguish themselves from the multitude of authors and experts who are either waving the banner of Six Sigma or are busy condemning it as the reason for all the ills in corporate America (no comment on how one can blame a methodology – a set of statistical tools – for the foibles of corporations).  To clarify, I quote from the book:

When we set out to write this book, our goal was not to capitalize on the current popularity of Six Sigma, but to capitalize on the ideas behind Six Sigma that predate this methodology.  These ideas will survive Six Sigma when some other methodology replaces it in popularity (pg xxi).

Clearly, this book has pedagogic intent as its driving force. The authors want to impart their experience with a rather complex subject matter to corporations and business students.  When pricing is the topic of discussion today, it is most often concerning strategy and the impact of external forces.  It is the feeling of the authors that seldom do organizations approach pricing from an “internal” viewpoint.  Having experienced the highly intense world of medical equipment pricing, I couldn’t agree more with this assertion.  By employing the term “internal” the authors are referring to the core processes within a company as they are bringing a product to market.

To drive their point  into even more relevance, the authors make this claim: the discipline employed by firms as they control the cost side of business has been lacking in large part on the revenue side.  In their opinion this creates leakage from top line sales.  Neither defects in the form of excessive discounts or opportunistic high prices that lead to customer dissatisfaction and eventual loss in future sales are acceptable.  Rather, it is shown to the audience that implementing mechanisms (utilizing Six Sigma) that control the actions of setting and maintaining price can go a very long way in increasing long term profitability.

The case made by Navdeep and Manmohan Sodhi is simple and compelling.  Pricing, much like other functions withing a corporation needs to follow a systematic and data-driven path.  As every company needs to show a stable and uniform face to their cusotmers, rigorous pricing of products and services is left to staff with good intentions but lacking the core knowledge and training.  Six Sigma Pricing both makes the case and shows the way for appropriate managers.

S. Shahbazi ProcessArc, Inc. - Financial Services Six Sigma

Posted by Shahbaz Shahbazi at 09:07 AM | Permalink | Comments (2)

A few blog posts back (“Metrics driving bad behavior”), I talked about a Six Sigma project focused on increasing sales.  The Six Sigma team had selected brokers (customers) who had maintained the same level of relationship, i.e., were sending the same number of deals even though the total market size was increasing.  If you recall, the team conducted site visits with these brokers.  Their key finding for the root cause of this behavior was linked to the compensation metrics (which had stayed static for the past 18 months) & an increase in competition.  Here is how this team solved the problem and the corresponding results:

1. The brokers were segmented into 4 distinct categories based on their deal volume: Super, large, medium and small.  There was agreement amongst the team members that a $1 Million broker should have a very different level of service and compensation plan than a $250K one.

2.  The compensation model for the “super” category was designed differently from the others. The main premise supporting the model was as follows:  They are the largest brokers, and hence provide the largest growth potential for the firm (it is easier to go after 10 brokers to hit your targets, than 50).  The primary focus was to lock out the competition so that the majority of the brokers' leads would be funneled to the firm.  Hence, the more deals the firm was getting, the more they could give back to the broker.  An aggressive deal target was designed for this category of brokers backed by a very generous compensation plan.  But there was a catch – it was designed as an all or nothing package - the broker had to meet the target to get the compensation; the plan was not tiered.

3.  The other three categories were given a tiered compensation plan with an option to provide either:
- A certain dollar amount of deals, or
- Ensure that the firm received a fixed % of their total deals

This option was provided as the smaller brokers would not be able to hit the dollar target. 

The results:

1. 80% of the super brokers hit their aggressive target – to increase incoming volume by 25%.
2. The total deals received from the other categories increased by 15%
3. The dealers’ performance is now being monitored weekly and targets adjusted quarterly
   

On a final note, I have to point out that the toughest part of this project was not collecting or analyzing data but having to take a risky decision based on the expertise of the sales director and team.  No amount of data could really have proved that their “super” broker model was going to work.  It was a risk they took; that for the time being is paying off (may require tweaking or revamping in 2008).  But sometimes taking these types of risks are part of the development of a Black Belt and the Six Sigma initiative as a whole.  While data-driven decision making is paramount, there are occasions where common sense and the knowledge of business leaders can be impactful.

S.Shaffie ProcessArc, Inc. - Financial Services Six Sigma 

Posted by Sheila Shaffie at 11:08 AM | Permalink | Comments (1)