As competition among providers in the financial services arena increases, so does product proliferation as a means to maintain competitive advantage. Unfortunately, product proliferation has led to operational complexity. In turn, complexity leads to increased costs and variable service quality levels, which adversely affect customers. Adding to these issues are rising pressures on margins, stringent government regulations, and pressure to reduce or eliminate customer fees. Several forward-thinking financial institutions, varying in size from community banks to large multinational corporations, have responded by adopting Six Sigma.

The potential impact on the financial services sector, and ergo the United States economy, of not adopting this methodology may very well be similar to the plight of manufacturing in the 1970s. United States companies lost market share to Japanese competitors who were using Total Quality Management (TQM) and Lean methodologies to improve their performance and product design. Similarly, today, a multitude of pressures on financial services firms may cause transaction processing and back-office functions to be performed overseas if U.S. firms do not bring their overall operational cost under control.

Although the current financial services competitive climate seems to be mirroring manufacturing’s past, the path to applying Six Sigma as a corrective will not necessarily be the same. Financial services firms must keep in mind four key tenets or truisms as they undertake the quality journey. These same tenets are also the reasons why manufacturing Six Sigma, which is a compilation of disparate, complex tools, cannot be applied—in its original form—to a financial services environment:

1. Manufacturing is driven by a visible or tangible product. The critical driver in financial services is information.
2. In manufacturing, processes negotiate hundredths of a millimeter to improve a product. There are no such tight “tolerances” in financial services at this stage.
3. On the whole, manufacturing Six Sigma is maturing beyond the “detection” stage and is now well on the path to “prevention.” Financial services Six Sigma is still in its infancy.
4. Manufacturing processes are highly automated. Despite its IT infrastructure, financial services relies heavily on human input/manipulation.

What Is Financial Services Six Sigma?

Six Sigma is a methodology that uses human assets, data, and statistics to reduce operational cost and risk while increasing customer service. Six Sigma analyzes and measures business processes in terms of defects (rework, wait time, and rejects, for example).

The statistical base to this methodology helps organizations understand the magnitude of process deviation from customer expectation or original design intent. Six Sigma helps identify and eliminate the root causes of variation, such as lack of process standardization, passing incomplete transactions to the next step, or passing inaccurate information on to the next tier.

The hidden cost of variation—defects and waste—is typically in the millions of dollars. This variation often derives from a lack of information. Six Sigma guides organizations in identifying what they don’t know while emphasizing what they should know. It then provides a roadmap for taking corrective action to reduce the errors and rework that cost the organization money, opportunities, and customers.

Robust processes, which produce low error rates, have a direct impact on overall productivity, customer satisfaction, and profitability.

So Why Doesn’t Manufacturing Six Sigma Apply to the Financial Sector?

Table 1 outlines the key differences between the manufacturing and financial services environments. Furthermore it explains the significance of each difference in terms of its impact to the application of Six Sigma.

Table 1

Manufacturing Six Sigma is a compilation of complex tools designed to address the tight tolerances (hundredths of a millimeter in variation) in the manufacturing process. It also inherently assumes that the process being used to develop a product is fully visible and standardized among all of its users. And so its goal, in the way that the tools are designed and used, is to prevent an error from occurring.

On the other hand, the central goal of Six Sigma in financial services is to first develop the infrastructure to detect an error and then move on to preventing it. Because financial services processes are not as visible as those in manufacturing, and those processes by default rely significantly more on human interaction, the central focus of financial services Six Sigma is to stabilize the process. Through stabilizing the process, error detection and, ultimately, prevention become possible.

About the Authors

Sheila Shaffie and Shahbaz Shahbazi are co-founders of ProcessArc, Inc. (www.processarc.com), a Six Sigma consultancy providing services solely to the financial services sector. Both are GE trained and certified Master Black Belts. They can be contacted at sheila.shaffie@processarc.com and shahbaz.shahbazi@processarc.com.

Copyright © 2005, ProcessArc, Inc.