This first case study focuses on the application of Six Sigma to Lending - it is all about increasing revenue. We are currently working on the second one which is about Retail Banking and hopefully by the third one we can get to back-office brokerage processes.
We would love to hear from you...let us know what you think. The link to the case study is below:
http://www.asq.org/economic-case/markets/pdf/case-study-improved-response-time.pdf
Sheila Shaffie - Financial Services Six Sigma
To a person who has been involved in Six Sigma for some time, this is likely to be a mantra; a sort of Golden Rule not to be violated under any conditions. To others, some might think it is a statement born out of common sense, while yet others are surely saying that something that cannot be measured is precisely something that should be improved to the point that it can be measured. In a sense, all of you are correct, but there are pitfalls to navigate.
Starting with the basics, it’s essential to understand that the single fundamental assumption in Six Sigma methodology is that the inputs and outputs of any process as a whole and even the individual steps of a process can be precisely observed, measured, and reported. If any part if missing, then you don’t have a Six Sigma project in the true sense, because you cannot state the problem in terms of a measurable defect, you cannot calculate the potential improvement, you cannot state the expected outcome the project in a measurable way, and consequently, you will never know if the project was ever truly successful, or even if the project has reached a conclusion of some kind, successful or otherwise.
I remember a project I supervised while working for a commercial lender. We had observed for some time that there was tremendous variation in the cycle times for loan origination. This was creating inefficiencies in a number of areas with direct impact to the income statement, including employment costs, treasury cost, and cash management to name a few. As we discussed the best way to tackle the problem, the greatest challenge facing the Black Belts was the fact that all employees were salaried employees, and while the company did have macro data regarding total cycle time, we did not have any data at all about the time spent on each step in each stage of the process. If it was you in this situation, what would you do to overcome this problem?
Without some way to gather data about how much time each person touching the process spent at each step in each stage of the larger process, it was impossible for us to undertake a DMAIC project to reduce variation in the cycle times to originate our loan products. (Incidentally, we wanted to reduce that cycle time overall as well—a Lean concept, but I want to keep thing simple for this example.) Consequently, we lost a full year of time as we had to develop a data gathering mechanism and procedures to accumulate the missing data to support the subsequent development of the DMAIC project.
Gathering data about a process is almost always a tedious and expensive proposition for a company. Technology can overcome some of these negative points, but only if the systems supporting the process in question were designed to gather, store and report data about the process. If not, you are facing an uphill battle to get the data you will need. You will encounter ardent resistance from those employees impacted by the changes in process required to gather data, as it typically adds steps to the process and increases the complexity and need for attention to detail in their jobs. You will also encounter resistance from managers who either do not understand the need for the data or are too short-sighted to care. These are the most dangerous situations, because you will typically experience pressure to make improvements in these areas where you have no data, and will feel you need to do something to show results for your group. Don’t give in to this temptation! It is the greatest mistake that you can make.
So the most important question you can ask yourself or your group if you are leading a project selection discussion is whether the necessary data is available to support a DMAIC project. If not, can the data be obtained within an acceptable budget? If the answer is still no, then you cannot proceed, no matter how desperately you would like to improve a process. Your choices are limited to devising a data-gathering mechanism with acceptable costs, or designing an entirely new process or supporting technology that will meet your data needs. Incidentally, this is why it is so essential for the Six Sigma team to be involved in the design and implementation of any new process or technology in the company.
Shahbaz Shahbaz - ProcessArc, Inc.
Financial Services Six Sigma Consulting
Where is the accountability in the financial sector? A few weeks back I read an article by Landon Thomas Jr. in the Sunday NY Times titled What’s $34 Billion on Wall St.? The story focused on Dow Kim and Thomas G. Maheras – two highly successful - before the sub-prime mess that is - executives at Merrill Lynch and Citigroup, respectively. The two gentlemen swiftly exited from their institutions in January of 2008, when the enormity of their gambling became known. However, rather than laying low for a while and allowing the short-term memory of the public to work its magic, Mr. Kim “has been crisscrossing the globe in recent months raising money for his new hedge fund…” and Mr. Maheras “has had serious discussions with several investment banks…about taking on a top management position”.
I don’t point this out to re-iterate the obvious, rather it dawned on me that as consultants in the sector, we have to dig, slice, probe, and wrestle to create share holder value and help our clients realize savings that are in the millions of dollars. It takes a Herculean effort to convince executives to adopt a Quality methodology. And it should. Laying out dollars in promise of future savings or revenue increase ought to be an exercise that comes with a near guarantee. It is disheartening to see that those Quality efforts are not complimented with similar rigor when investment vehicle decisions are made (for all the responses that I know will come saying that investing should not have constraints, I say balderdash). Contrasting our efforts in delivering shareholder value is the brazenness of executives who seemingly dismiss losses of the kind incurred by Mr. Kim and Mr. Maheras.
I despise those ‘I told you so’ columns appearing after every debacle hits and the media feeding frenzy ensues. But it should be standard industry practice to demand accountability from those who are investing our dollars in lieu of rewarding their losing of $34 Billion. Charles Prince and Stanley O’Neal are partially to blame - if for no other reason - for failing to assess the risks (theoretically their core competency) associated with an endeavor of this magnitude. In any other sector, Mr. Kim and Mr. Maheras would be outcast as untouchables, but on Wall Street they apparently are celebrities.
I wonder how many Six Sigma projects must be undertaken to recover this kind of loss?
Shahbaz Shahbazi - ProcessArc, Inc.
]]>But really the crux of the problem stems from a point we discussed over a year ago: that we are operating in an industry lacking standardization (i.e., what it takes to get certified, training content, job descriptions…), which also happens to be experiencing rapid growth. And this puts the pressure on you to truly define for the recruiter the candidate qualification standards. Because while there is typically a 90-120 day “return policy” on candidates, by the time someone realizes that this person doesn’t have the right skill set the damage is already done. Or worse yet, it took you so long to find out that the candidate is under-qualified that you may just chose to live with it.
I think for the next blog we will provide some of the basic requirements for each type of candidate. In the meantime, don’t let the recruiter define what you should be looking for in a BB, GB or MBB.
Sheila Shaffie - ProcessArc, Inc.
]]>While Black Belt roles are meant to be stretch assignments – almost like corporate boot camp – their hard work (or lack thereof) needs to be assessed and recognized accordingly. The BB position is not an easy one: it involves constantly uncovering issues which some managers may not take to too kindly. As a BB you have to diplomatically gain consensus on recognizing the issue, come up with a fix and then hope that the area manager ensures control of the improvements.
These same series of concepts apply to the team members involved in the project. I think it is even more critical to recognize them: they have full time jobs, yet go beyond the call of duty to support the BBs and the Six Sigma corporate initiative. While recognition will boost the Six Sigma initiative, create more buy-in and improve morale, it has another benefit. It helps identify people who didn’t fully support the project (potential risk for future projects) or did not possess the level of talent that was originally assumed (will need to be replaced).
But the most gratifying part for a BB and MBB is calculating the financial benefits delivered for the given year. And please, if the numbers are good, i.e., you met or exceeded your target, advertise it. If you didn’t meet your targets, hopefully it is not a surprise, but if it is the MBB/BB need to determine its root cause and mitigate it for future projects.
By completing the steps above you can be assured that you have completed part of your due diligence on your Six Sigma initiative – ensuring future success: making certain that you have the right people on the team, they are kept motivated and that the financial targets are met & communicated.
Sheila Shaffie - ProcessArc, Inc.
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.
Shahbaz Shahbazi - www.processarc.com
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:
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.
]]>In the article we were provided with some of the findings that the researchers came away with and quite frankly I am wondering why these “indicators” were selected to measure customer service (the reason dawned on me later on…and I will explain). For example one of the Sandler O’Neil & Partners researchers told a banking representative that he was banking at a rival institution (as a means to solicit feedback). The representative then made a disparaging comment about the other bank – this was deemed poor customer service. Another example of ‘bad’ customer service – as determined by the researchers was being handed a “94 page brochure”. While these may not be shining examples of good service, they hardly qualify as explanations for why a customer may leave a bank or have a complaint.
While I care about wait time when standing in line, I don’t feel that rating the appearance of an institution will give us an indication of their customer service level. Yes, a good lawyer could make a case for appearance having much to do with customers being content…but here we are not in a court of law or an attorney’s office.
Unfortunately the article didn’t really help define Service Excellence and how to measure it. And frankly they couldn’t because the researchers’ hands were tied, here is why:
To measure Excellence you need the voice of your customers – especially the ones that left you or did not select you & industry benchmark data (what your competitors are doing)
When you think about a bank branch, given the thousands of transactions initiated therein - wire transfers, money orders, new account opening - the majority of them are completed in the back office. It is there that errors are caught or generated because of poor data collection. These errors most often lead to customer complaints or transaction errors.
And so to really measure Service Excellence you need access to process and customer data. An investment bank conducting an undercover study will not have this information – they only see and experience a small part of the picture: the branch. Unfortunately, this forces the researcher to rely on cursory and somewhat meaningless measures to define the performance of a bank.
Shahbaz Shahbazi - www.processarc.com
]]>Prior to the customer visit, a cross functional team developed a list of questions to drive at the root cause of the flat performance. A date was set for the interview, and a team of people from the lending firm visited the brokers. The first question posed to all brokers was “what do you like most about working with our firm?” And regardless of the customer (broker) visited the answer surprisingly was the same: “I like being recognized as one of your top 20 brokers. I particularly like the incentives that come along with being a top producer for you.” The natural next question was “then why have you not increased your business with us?” The very simple response was (abbreviated of course): “because you have not changed your targets and regardless of whether I give you $1MM or $3MM you pay me the same amount.” Well, there we had it – the market size was increasing, the brokers were doing more business, but because our targets for the brokers had stayed static for the past 18 months the incentives had also stayed static. What the customer was telling us quite plainly was that they were only working as hard as they needed to attain the targets/goals that had been defined for them.
The assumption that a target will function as a constant in the marketplace is erroneous but this epiphany will not visit you unless you ask, probe and talk to your customer. We always harp on data driven decisions and metrics as a means to control/monitor…but through this simple exercise we were reminded that these metrics have to stay relevant in order to drive the desired behavior.
Sheila Shaffie - www.processarc.com
This piece is not really about the overall findings, but more about some of the specifics. Overall, the survey found that most large to mid-size financial institutions have some cursory knowledge of Quality, and a smaller subset has either started an initiative or is planning to launch one in 2008. This was very good news and the executives at these firms should be applauded.
What shocked me right out of the happy zone was the finding that over 75% of university professors either did not think FSSS was any different than manufacturing Six Sigma, or they were not aware of its specific application in the market currently.
If a financial organization chooses not to adopt a particular methodology, it is a simple matter of choice: The executives are either,
i) Ignoring market trends
ii) Simply unaware, or
iii) Do not find the methodology valuable
Conversely, when transitioning this logic to the educational realm, the facts and consequences change. I explain in more detail below:
For a university professor to not be aware of this methodology is simply unacceptable and the implication spells trouble. Instructors at the university level are expected to be well informed and have ready access to trends in their area of expertise. If, as our survey shows, a majority of them are either unaware or cannot distinguish between methodologies, then what specifically are they teaching? How can this person purport to educate the next generation when they are unaware of a significant movement within their area of expertise. As for those professors claiming that FSSS is no different than any other form of Six Sigma, I can only say that they are WRONG. It can be argued that their claim is driven by pure self-interest, but I would only make that allegation on a case-by-case basis.
I will elaborate more on the repercussion of the two above scenarios in my next blog.
Shahbaz Shahbazi - ProcessArc, Inc.
]]>On one side we have the challenge of controlling efficiency ratios. These executives have taken an active role in identifying and eliminating inefficient products and services. And they recognize that for them Six Sigma is not about cost reduction but better defining and delivering service excellence.
On the other side of this issue we have the group that needs to focus simultaneously on improving their efficiency ratios AND service level. Of course there are interdependencies between these two challenges (inefficient processes almost always lead to poor service). But this group fortunately recognized that their starting point with Six Sigma had to be with stabilizing their processes – which would give them incremental improvements in service. Once the processes are improved then they can focus on the customers demanding top notch service.
A forty five minute presentation slot is not always sufficient to effectively present the essence of Six Sigma (especially when the attendees have had a very basic exposure to this “new methodology”). But as long as these decision-makers understand and appreciate the core philosophy of Six Sigma I think we are safe from being compartmentalized as simply undertaking a “cost cutting” effort.
Sheila Shaffie - ProcessArc, Inc.
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At a highly anticipated Loan Operations conference, I attended a presentation by a vendor for an imaging software solution. What the presenter showed attendees was very exciting in its potential for delivering incremental efficiencies. Imagine eliminating data entry redundancies, missing data points, copying/faxing/emailing...reducing human errors and time required to transfer information.
What the presenter FAILED to do was inform everyone in the room of this simple fact: To gain full benefit from this software the user would have to first design an efficient process and then incorporate the IT solution. The software solution, as presented, would not magically fix broken processes; rather it would incorporate all inefficiencies into the NEWLY digitized flow.
The scenario I describe above is one that I see increasingly as I survey the marketplace. And to be frank, I find gross misrepresentations of the true capabilities inherent in certain software packages. No software can think for you, no software can redesign a poor flow. And while imaging can offer many benefits to financial organizations needing to share customer information among multiple sites, one stark reality remains: the imaging software will simply render the hard-copy information into a digitized format. So, if you have an old process to get your loan application from the broker through committee, underwriting…. The imaging software will replicate that old process. It will not tell you where you have opportunity for reducing errors, where there is risk of missing critical information…you get my point. Caveat emptor!
]]>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!
Sheila Shaffie - ProcessArc, Inc,
www.processarc.com
But in this case while the benefits of deploying Six Sigma at National City cannot and should not be denied, the article was further proof that practitioners are guilty of adding to the confusion and disinformation around Six Sigma (forget about the reporters who insert their biases). I don’t think of myself as a Six Sigma purist, but I was frustrated as I read through this article. My frustration stemmed from the fact that by making a few ill-informed statements (feeble attempts at differentiating National City from other organizations deploying Six Sigma) and giving their iteration of financial services Six Sigma a new moniker the author wanted us to go away with the impression that National City has created a very unique quality platform.
The most disingenuous quotes in this piece were based on the claims that National City’s quality program is “quite different” and that “no one in the financial services industry is bringing this whole pie together the way we envision”. These statements were based on National City incorporating employee “collaboration” (actually a LEAN principle more commonly known as Kaizan) with LEAN management (if this sounds a bit convoluted to you, you are on the mark: these are the same thing) and manufacturing Six Sigma.
So the bottom line here is that National City merged Lean with Six Sigma and called this amalgamation “Fusion”. At the end of the day, it doesn’t matter what you call it, call it apple pie, call it quiche, but don’t give the marketplace the illusion that you now have a new version of Six Sigma. Any quality practitioner knows that a Quality deployment will require an in-depth knowledge of a multitude of tools. But what differentiates the good one from the many is their understanding of how and when to use what tool. Then again, maybe if I give the methodology we use a new name I will be considered newsworthy.
]]>A mid-size money management firm, in launching an operational efficiency initiative, picked the Automated Client Account Transfer (ACAT) process as their pilot project. This refers to the process used to transfer funds into the firm, be it from a new customer or an existing one. When we initially documented the process - aside from the fact that it was cumbersome and inefficient (over 75 steps, 7 inspection points, 40% reject rate between back office and branch, etc.) - the overall cycle-time averaged 10 days. So from the time the customer requested a fund transfer to the time they firm actually booked said funds, the process took an average of 10 days (with instances as long as 20 days). To resolve this issue we used three key mechanisms:
- Six Sigma principles to baseline and redesign the process
- Imaging technology to reduce cycle time and catch errors at the point of inspection
- Training department to communicate changes and train the front and back office in the new process
The end results were:
- 100% elimination of reject rate
- Reducing number of steps by 75%
- Reducing cycle time by 40%
All this translated to over $1,000,000 in incremental revenue – the money management firm now gets billions of dollars in house faster. Or what people in the sector call Hard Dollars. Hopefully this will serve as a good example of where to focus your cycle time reduction projects.
Sheila Shaffie – www.processarc.com
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