by Ethan Schaerer & Dr. Phil Samuel
Group
Financial Services Industry
F“Life is inherently risky. There is only one big risk you should avoid at all costs, and that is the risk of doing nothing.” 1
- Denis Waitley
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inancial services institutions face a plethora of challenges emerging from Mergers & Acquisitions, the need attract and retain talent, inadequate or wasteful internal processes, exposure to global markets and the burden to comply with legal and regulatory requirements. Fueled by recent record profits and payouts, relentless demands from investors and pressure from the scrutiny of Wall Street analysts on companies to continually outperform previously achieved financial gains are overwhelming. Driven by ambitious growth targets, many CEOs have resorted to quarterly injected corporate steroids boosts that can temporarily lift revenues but usually fail to achieve sustainability.
Doing business in a world of growing risk and complexity requires a sound strategic blueprint, swift execution, doubling efforts to woo investors and the promise to deliver. The exposure to risk and risk mitigation in the financial services industry is not a new practice. The entire industry is built around it. However, what has changed is the virtual disappearance of geographic boundaries, increasingly complex processes due to constantly changing customer needs, increasingly dominant role of regulations, the volatility and growing interdependence of local markets, and the volume and speed of transactions.
While these challenges pose a constant risk to the industry, the financial services industry, unlike others, has been quiet in its pursuit of Performance Excellence to solve their multiple problems. However, despite some initial skepticism, a number of leading organizations have found their secret ingredient to growth and operational efficiency by fully embracing performance improvement initiatives such Six Sigma, Lean, Design for Lean Six Sigma, and others to accelerate broad–based structured innovation.
This paper will discuss six challenges and opportunities arising from:
:: Legal & Regulatory Compliance
:: M&A
:: Human Capital (talent acquisition and retention)
:: Enabling IT Systems and Processes
:: Growth through Customer Delight
:: Risk Mitigation
Good Intentions with Paralyzing Effects . . .
Virtually all financial institutions are subject to extensive regulation imposed by governmental agencies, supervisory authorities and selfregulatory organizations. Internal controls as well as stringent public reporting requirements have introduced an unprecedented level of awareness and accountability for senior management. Based on a recent survey, AMR Research predicts the cost of compliance over the next five years to reach the approximately $80 billion mark.
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Although relevant and well intended, the simultaneous demands of Basel II, Sarbanes-Oxley, US Patriot Act, and others have undoubtedly led to an initiative overload. Consequently, it is not surprising that executives continue to struggle with this delicate balancing act and constantly changing power play among new growth opportunities, existing customers and compliance issues.
The general trend from prescribing specific rules to a more guidance regulatory environment can be confusing in which terms such as “reasonable risk” and “safeguarding of resources” are used frequently. Despite tremendous efforts to comply with these increasingly complex and often paralyzing corporate governance regulations and associated costs, there is significant exposure that may adversely affect you and your organization’s profitability and perceived reputation.
Through the application of process and value stream mapping, complex enterprise-wide procedures can be streamlined to gain additional transparency and control and simultaneously free up resources. In addition, newly developed best practices can be easily replicated and automated and thus, facilitate more transparent and efficient reporting. Naturally, this will ensure short and longterm productivity of your processes, systems and people. While not initially intuitive, some companies have successfully used Lean Six Sigma to identify non-value added activities, costly, unnecessary procedures, and overly strict control systems to eliminate bureaucracy and ensure continuous flow compliance throughout an entire business process.
Considering global exposure, an organization must pursue a comprehensive approach to corporate risk management that encompasses long-term strategic initiatives that allows for the active integration and reflection of the organization’s core values and beliefs in its day-to-day operations. Only then are corporate assets and resources appropriately hedged and most importantly - protected.
David vs. Goliath
“In peace prepare for war, in war prepare for peace. The art of war is of vital importance to the state. It is a matter of life and death, a road either to safety or to ruin. Hence, under no circumstances can it be neglected… those who know themselves and know their enemies will always win. Those who know themselves but not their enemies will win half the time. Those who do not know themselves and do not know the enemy will never win.”
- The Art of War, Sun Tzu
The recent wave of global financial reforms that have effectively introduced more favorable terms and increased collaboration among
“The ideal CEO of 2010 may be a slightly different person than today’s CEO. If there’s one common thread in this evolution, it’s the ability to manage complexity, which increases from year to year.” 2
- 10th Annual Global CEO Survey, PwC
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global economies will likely fuel the already accelerated the rate of consolidation, through mergers and acquisitions, strategic alliances and cooperation.
Effectively limiting their operating profitably as a result of deteriorating operating conditions and maturing markets, a number of financial entities have seen their net worth erode. Unsuccessful attempts to revitalize and replenish their capital base, many smaller institutions have been forced to relinquish ownership to their more dominant counterparts in an effort to either survive or help strengthen their financial positions.
Emerging economies continue to be the focus of new revenue streams in today’s grueling “grow or die” business environment. Soaring initial acquisition costs, high risks, and corporate merger pains no longer present a deterrent to organizations. Nearly unlimited access and use of global capital lure competitors to leverage their size and financial strength to serve clients more effectively by offering more innovative products at a lower price with potential higher returns.
On the other hand, by-products of these mammoth mergers are increasingly isolated organizational functional silos supported by layers of excessive complexity and wasteful processes. To some institutions, the concept of providing excellent customer service and continuous flow is completely foreign and absent thus, requiring the average customer to navigate through a seemingly endless and frustrating electronic labyrinth of “Yes’s” and “No’s” without much personalized help and quick answers.
Regardless of the pursuing M&A type of structure, companies seek to gain competitive advantage through economies of scale, right-sizing efforts, acquisition of new technology and its patents, improved market visibility, and geographic diversity. Managing mergers activities while combining corporate cultures is one of the toughest challenges. While some skepticism about the value-creating potential is unwarranted, research suggests that 50% to 80% of M&A’s fail to generate the desired financial returns. 3
During each stage of a merger or acquisition growth campaign, organizations must have in-depth knowledge and understanding of the degree of which strategically important cross-functional entities and subsequent processes are integrated with customers. For example, due-diligence during sometimes hostile pre-merger activities is vital to identifying and leveraging synergies, opportunities for improvement, and the identification of potentially catastrophic obstacles that hinder a seamless alignment of enabling management systems with a customer-centric strategy. While undergoing a major strategic initiative, one particular financial powerhouse focused on branch office redundancy and rework resulting in client dissatisfaction as well
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as $7 million in excess expenses. Analysis using Lean Six Sigma, identified locations and types of incidences that caused much of the redundancy. Improvements included consolidating branches within regions and an 80% reduction in branch redundancy and rework was realized.
While still recovering from naturally occurring merger pains, one of the most important aspects of the post-merger integration process is the need for a common goal and language and most importantly, an atmosphere of urgency. Often times, loss of agility due to sheer size, operational confusion and territorial claims are the driving factors for a typical temporary decrease in employee moral and a subsequent noticeable drop-off in performance. Speed and an aggressively implemented transition plan, actively supported by senior management ensure momentum and much needed guidance that quickly addresses potential threats to the new venture.
In 2001, Bombardiers’ Six Sigma practices helped accelerate the company’s entire acquisition of DaimlerChrysler Rail Systems. According to then acting Vice President of Six Sigma, Desmond Bell, “its real impact has been in helping put the new organizational structure in place and mobilize the management team.” 4
LSS can serve as a bridge to overcome possible cultural differences and instill an urgent need for structured improvement and integrate corporate culture that harnesses synergies by eliminating waste and redundancies among the merged entities. LSS principles focus on optimizing value and throughout the entire M&A process from the initial self assessment & readiness stage to the immediate pre-, to post-merger, and integration phase. Integrating lean thinking, replication of best practices, standardization of processes, the consolidation of infrastructure and the effective integration of one of your most valuable assets, empowered employees, must become an integral part of your merger activities to accelerate top-line business growth.
Lost in Translation
E (effectiveness) = Q (quality of solution) x A (acceptance) x D (deployment)
Whatever your organizations’ goal may be; translating a vision into practice largely depends on people. A stable infrastructure coupled with sophisticated product and service portfolios supported by flawlessly integrated processes and systems are important factors in fulfilling a customers’ financial destiny, yet the ability to develop and retain profitable and loyal relationships is at the heart and soul of most financial services organizations.
Research suggests that 75 percent of the problems companies face when making improvements is due to their inability to manage change. Further, empirical evidence indicates employee resistance to be one of the leading obstacles to corporate change. Given the
“The merger transition process itself has been, without qualification, the smoothest and fastest I have seen in my career. From the beginning, we planned and executed the transition and all associated projects with strict adherence to a disciplined Six Sigma approach, improving processes, driving down costs and enhancing quality and productivity along the way.”
- CEO, Bank of America
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nature of human beings, this is not surprising. The mathematical formula, E = Q x A x D, offers more than just a theoretical prescription for change. This simple, yet powerful analogy can be applied and leveraged to any change management process. In this equation, either one of the variables (Q, A, D) hold the same value. However, the complexity arises from the interdependence of each factor and subsequent output. For example, a seemingly perfect business solution may be rejected and fail to yield the desired results if you are unable to convince the critical mass. At the same time, a well designed and widely accepted but poorly deployed and executed initiative will most likely have a disappointing impact. On the other hand, you will enjoy the full benefits of change when all factors are simultaneously deployed and maximized.
Undoubtedly, the radically changing political and economic conditions have altered the very face of doing business. While global in scope, companies once considered people and resulting diversity mostly as cost and liability; the focus has now shifted to embracing a more diverse workforce as a way of gaining a competitive advantage. How? In many instances, a “one-size-fits-all” approach is no longer an appropriate and feasible option since new innovative and culturally sensitive sources of revenues have to be identified and leveraged in creating sustainable business environments. While not always easy to capture, the knowledge and diverse experience from your workforce present an extremely valuable resource for ideation and innovation.
“Every interaction an employee has with a customer represents an opportunity to build that customer’s emotional connection-or to diminish it.”
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While satisfaction levels with international sourcing of service activities often leave much to be desired, labor arbitrage and economies of scale present attractive cost reduction opportunities for a number of companies. The challenge still remains. Regardless of your sourcing strategy, the pursuit of the Holy Grail in customer service transcends cultures, time zones and national boundaries. Therefore, customer facing employees must be carefully recruited, developed and equipped with the appropriate tools and decision making authorities to fulfill the all important task of increasing consumer delight.
In a survey involving 250 financial services executives, conducted by PwC in 2006, revealed that fewer than 30% of respondents believe their staff is fully “engaged and enabled” to deal with customers efficiently and effectively. To any seasoned executive, this trend is alarming considering the fact that customer facing employees have the potential to permanently ruin those highly valuable and delicate relationships. But who’s fault is it really? Naturally, people cannot be the sole factor for this obvious disconnect.
The beauty of business rests in the simple fact that customers don’t care about averages. What really matters is need of matching often non-communicated but desired customer expectations with final
Financial Services Industry
delivered and perceived product values. Therefore, conventional, fragmented performance improvement initiatives no longer provide intrinsic value.
More importantly, to support the entire “end-to-end” customer experience, processes must seamlessly organized and designed in such a way that they easily overcome functional silos and combine individual tasks into a harmonious whole. In other words: “the difference between process and task is the difference between whole and part, between ends and means… customers care about results, and results are created by processes, not by disconnected individual tasks. Process management is the road to delivering better results and enhancing customer satisfaction.”
Several critical corporate elements have been identified that will attempt to answer the previously raised question. The first step involves creating lean organizational structures and enabling environments in which functional silos are abolished, ideas captures, and knowledge shared and leveraged. Only then, teams can thrive & excel. Second, identify and address critical gaps and capture core value and key attributes in the customer critical value chain. Third, identify and align skills sets with needs and establish ownership – most likely, smart job design will lead to an increase in talent retention and reduce turnaround. Fourth, establish aggressive and smart objectives and develop appropriate incentives & rewards that are yet socially responsible.
LSS examples:
Credit Managers spend approximately 40% of their time in administrative tasks. This contributes to excess extension filings and the inability of staff to reach turnaround goals. Analysis revealed that roles and responsibilities are not clearly defined. Clear definitions of roles and responsibilities reduced the amount of administrative duties allowing managers and staff to reach goals and reduce the number of extensions.
Roles and Responsibilities; $200,000 Commercial Analyst Retention; $3,500,000
Turnover costs for Commercial Analysts (CA) were considerable. Analysis revealed top reasons for CA turnover within 14 months of hire. Further analysis determined several actions the company could implement to increase the likelihood of CAs staying with the firm longer than 14 months. Standardization and improvements in the CA Rewards and Recognition Registration process was the largest factor to keeping CAs with the firm. A 50% reduction in turnover was achieved.
Financial Services Industry
The Love of Financial Leadership
“We
are living, once and for all, in the Age of the Customer. There has never been a better time to be a customer - or a tougher time to be a supplier.”
- Rekha Balu Senior Writer, Fast Company
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While many large financial institutions have adopted and capitalized on a more integrated banking model, the consequence of increased competition arising form a gradual convergence of many of the industry’s products and services is alarming. Virtually all costumer segments demand excellent service at a push of a button while their loyalty is largely based on financial return and “end-to-end” customer experience.
According to Retail Bank International, US banks lose 10 to 20% of their retail customer base every year and the associated revenue loss due to customer churn is a major concern to any financial institution. In this era of value creation, new innovative sources of revenue have to be identified and exploited without alienating and jeopardizing your current customer base or business model.
The irony still remains, 75% of all new products that “established” companies put into their markets fail. Using Design for Lean Six Sigma (DFLSS) and axiomatic design principles have proven to be effective in altering this negative trend and provide the empirical foundation for problem solving.
In business environments where generic products and services no longer provide a feasible alternative, the concept of customer pull can turn into competitive advantage. At Wells Fargo, in-depth design discussions, observations using ethnography and other voice of the customer techniques revealed some new exciting prospects that had not been previously exploited and are ultimately establishing profitable relationships, creating value that is sustainable and often difficult to imitate.
DFLSS Example:
Utilizing Innovation and DFLSS helped a financial institution in increasing their Europe, Middle East and Africa credit card sales by $3.3 MM during the first 12 months.
Whether practiced or not, the concept of “Total Customer Delight” is the lifeblood of any financial organization. Doing business as usual is no longer sufficient. In this transaction-intensive and highly regulated environment, mistakes are costly.
Estimates from the Butler Group indicate that the minimum direct cost derived from poor technology related incidents account for US $85 billion. Lost productivity alone from service outages or application performance issues costs the UK banking industry US $190 million each year.
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Unforgiving attitudes in addition to ever increasing customer expectations demand world-class performance delivery and reliability at a six sigma level and better. When “out of service” is not an option, enabling processes and systems must be flawlessly scoped, designed and thoroughly tested to support the entire customer experience.
Six Sigma Example:
Trading Error Reduction; $12,500,000
Trading errors result in client dissatisfaction and millions of dollars in unnecessary expenses. Analysis revealed “distraction,” “incorrect price” and “miscommunication” as significant causes of trading errors. Improvements included, fully automating the data entry process, simplifying the workplace to eliminate other distractions, and measuring accountability.
Total Customer Delight – Mission (Im)Possible?
The growing dependence of financial institutions on IT systems and associated telecommunications infrastructure is a key source of risk. High processing capacity, performance and global access to instant, secure and accurate data demand optimal efficiency at a manageable cost.
The need of integrating and aligning cross-modular IT systems and architecture with your business and service streams present a natural opportunity for elements of Lean Six Sigma and process innovation. Further, the need to seamlessly integrate heterogeneous technological landscapes coupled with shorter cycles of technology innovations, require unique measures that ensure efficiency and the replication of best practices. Identifying and addressing bottle necks, reducing processing time/downtime, and ensuring accuracy and continuous flow is paramount for an enterprise to react appropriately to its changing customer and market demands. Equally important is the necessity to replicate already realized gains and solutions across an entire organization that leverages critical momentum to achieve a domino effect that equals 1+1=3.
At the same time, enabling systems and IT platforms that span across continents pose a major threat to the security of your most valuable non-tangible asset – your customers’ data and their trust. Despite ground-breaking advances in enterprise software architecture, the real time integration of disparate applications and systems with middleware platforms, can be a nightmare and provide a constant headache to IT. In today’s highly interrelated web of technologies, a single point of failure can cause an entire system to collapse.
“To attain that level of satisfaction, and attract, retain and expand customer relationships, we know we have to focus the energy and resources of the company on the basic work processes that drive every customer experience.”
- Bank of America Annual Report 2004
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“IDC
estimates the cost of downtime to a bank averages $1.6 million per hour in lost revenue and productivity.”
Consequently, any disruption of your business, liability to your clients, regulatory intervention or reputation damage could slash the lifeline your business and simultaneously provide an opportunity for others to leverage your weakness.
Example:
Reducing Overall Defects by 88%
At Bank of America, Six Sigma projects focusing on hardware and software failures honed in on root causes and effectively reducing overall defects across electronic customer channels by 88%. 12
During this time of “click-and-mortar” integration, the creation of virtual markets and new distribution channels characterized by low transaction costs and diminishing marginal returns have revolutionized the nature of financial services. While not totally eliminating personal interaction, the growing popularity of internet-based transactions is radically transforming long-established customer relationships into virtual partnerships.
Using Lean Six Sigma tools, one bank found that adding real-time transaction viewing to its current online banking site prompted 24% of its online banking customers to visit the branch less often, 38.5% said they would make fewer calls to the call center, and 45% said they would increase their use of online banking and bill payment features. The results: a 7% increase in online banking sessions, and an 11% reduction in calls from people who use online banking. Still not convinced?
What can LSS do?
:: systematically align product/service channels to maximize ROI by customer segment
:: accurately anticipate and address potential failures before they occur and impact end user or business performance
:: define and enable rapid response mechanisms to speed problem resolution
:: significantly accelerate the deployment of new applications through smart design
:: facilitate capacity and stress test planning for soft/hardware infrastructure to ensure system stability 24/7
Leadership in Action
Conducting business is inherently risky. Understanding individual risk events as they relate and impact cross-enterprise exposure is paramount. Proactively assess, monitor, and more importantly provide an integrated and timely response to events that occur beyond
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your risk tolerance should be second nature. While your risk appetite and risk acceptance largely determines your business strategy and operating boundaries, zero exposure to risk represents an oxymoron and is nearly impossible in your pursuit of value. Not surprisingly, recent developments in the financial market have catapulted the need for sound risk controls into corporate consciousness and triggered a cultural shift from basic awareness and risk avoidance to a fully integrated best practice risk strategy.
While examining risk scenarios however, an appropriate infrastructure and intelligent mechanisms must be in place to provide a reasonable and timely risk response that either includes risk acceptance, risk avoidance, reduction and/or risk sharing.
Due to the nature today’s risk scenarios, traditional discussions on risk are no longer relevant. A simultaneous virtual and physical attack on the world’s most powerful financial institutions and networks could easily trigger a financial collapse with consequential worldwide devastating economic effects. With an increase in the number of individuals and cyber gangs that are capable to successfully penetrate technology defenses, ignoring to protect some the weakest links and most vulnerable areas of your core technology and communications infrastructure can be deadly. Effectively addressing potential cyber terrorist attacks in an attempt to deter industrial espionage and other threats is no longer a secondary priority.
2006 in Numbers 13
:: 50 billion the number of e-mails dispatched every day world-wide; in 2001 the traffic was less than 12 billion
:: 88 per cent of e-mails are junk including about 1 per cent which are virus-infected :: 32 the average number of e-mail messages received per person per day. This is rising by 84 percent each year
In an effort to prevent yet another, “digital” Pearl Harbor, Six Sigma and DFLSS principles backed by state-of-the-art technology solutions can specifically identify your greatest exposure to a potential attack, employ monitoring mechanisms, develop countermeasures and save-fail disaster recovery and control plans.
The Risk of Drowning in an Ocean of Initiatives
In an attempt to attain a high rate of profitability and shareholder value within this dynamic environment, many financial firms have resorted to a variety of functionally isolated and dis-
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connected initiatives that range from global sourcing to automated transactions and a more comprehensive product and service portfolio. While some those measures can be effective, a lack of “handson” leadership and momentum can result in an early disengagement of the people involved and eventual dismissal as yet another “flavor of the month.”
In this transaction intensive environment, a more comprehensive “end-to-end” enterprise control framework encompassing all aspects of the customer value chain is the key to sustainability. In search of an “all-in-one” answer that fosters a self sustaining organizational climate, the benefits derived from LSS and structured innovation provide the necessary discipline and principles that effectively remove business barriers, tackle complex and far reaching problems, and organically generate measurable gains in customer delight and value.
LSS offers more than just a traditional operational improvement approach. It provides a method that identifies and translates customer and market demands into strategically important initiatives and objectives, enables focus, nurtures innovation and delivers a powerful framework to Total Performance Excellence.
Bibliography
1 Quoteopia.com
2 10th Annual CEO Survey: www.pwc.com
3 Why Do So Many Mergers Fail?” Knowledge @ Wharton, March 30, 2005
4 Strategic Six Sigma: Best Practices from the Executive Suite, John Wiley & Sons, Inc., New Jersey 2002, p. 16
5 Chief Executive Officer’s Report to Shareholders, Kenneth D. Lewis, CEO, Bank of America, 2005
6 “Winning the Battle for Growth: Building the Customer-centric Financial Institution,” PwC, 2006
7 Fleming, J.H. et. al. “Manage Your Human Sigma,” Harvard Business Review, July/August 2005
8 Michael Hammer, “Business Processes in Financial Services,” Microsoft White Paper, September 2003
9 Clayton Christensen, The Innovators Dilemma: The Revolutionary Book That Will Change the Way You Do Business, 1st Harper Business, New York, 2000
10 The Benefit of Monitoring Applications, Butler Group, 2005
11 IDC, June 2004
12 “Six Sigma . . . at a Bank? Six Sigma Forum Magazine, February 2004
13 The Times, 2006
BMG is a global leader in the results-driven execution of performance excellence through Lean, Six Sigma and Innovation. The company blends experienced resources proven methodologies and powerful technologies to help organizations achieve strategic objectives while “in-sourcing” core competencies. With a loyal clientele exceeding 200 active businesses, BMG has more than 150 employees in 12 countries. For more information, visit www.BMGi.com.
Authors
Phil Samuel is a thought leader in performance improvement methodology studies including Six Sigma, Lean, Design for Six Sigma, change leadership, innovation and strategic planning. An integral part of BMG’s management team since 2005, he brings more than a decade of experience to his role as a Vice President and Senior Engagement Leader.
Phil advises companies during the assessment phase, provides executive level training and mentoring, and leads BMG’s innovation practice, helping clients insource creativity and increase productivity.
Ethan Schaerer is one of BMG’s leading Innovation and Total Performance Excellence consultants specializing in the development and implementation of enterprise-wide performance improvement initiatives. Prior to joining BMG, Ethan was with PricewaterhouseCoopers (PwC) and Hewlett-Packard Consulting Services. Ethan’s expertise in the area of Change Management and organizational and operational change strategy. His experience includes risk assessment, process improvement, re-engineering, designing process metrics, organizational development, business strategy, development and deployment.
Design: Colin Moore