Operational Excellence

Why Operational Excellence in Financial Services?

From 2000 to 2003, with the economy and markets in a state of depression, many financial businesses focussed actively on cost reduction programmes, but since 2004, the uplift in economic conditions has led to a noticeable shift in focus from cost cutting towards service enhancement and improving the customer experience. There is likely to be a continuing change of mindset in the financial services industry towards process orientation and understanding processes end-to-end from the customer’s perspective. Furthermore, executives have recognised the value of these approaches in ensuring managers make better decisions – decisions based on fact and empirical analysis, rather than assumption and gut feel. With a strong focus on operational risk, and with many retail financial services institutions suffering from heavy bad debt losses in 2006, the ability to rely on data and strong analysis in the underwriting and management of credit is becoming an increasing priority.

Six Sigma or Four?

As we are all customers of numerous financial services providers, we should all be familiar with the characteristics of the market today. Regulatory change has made it easier to understand and compare financial products. Dissatisfied customers are a common phenomenon. Worse still, they are becoming increasingly sophisticated! The internet has made it easier to compare prices/rates/fees/premiums/benefits and of course therefore it is easier to invest/apply/insure and switch service providers. The companies who achieve operational and service excellence in their customer facing processes will be the winners in the longer term. But there is absolutely no need to strive for the level of Six Sigma to achieve this. This is one of the most important differences between services and manufacturing. In production processes, it is natural to strive for zero defects. Anything less can be costly to both profitability and brand reputation. However in many cases within the services environment, this level of accuracy is not required. Whilst providers would want to achieve Six Sigma in the accuracy of bank statements or reconciliations, these are often not the problem areas that lead Financial Services companies to adopting Six Sigma. It is in processes such as account opening, credit card or ISA applications processing and policy renewals that service levels are typically below par. If a financial services provider could achieve four Sigma (99.4%) in its primary customer facing processes, it would undoubtedly dominate its market.

Business Process Management

The evolution towards data-driven Process Management in Financial Services businesses is characterised by a shift away from the traditional functional or departmental organisation towards a cross-functional process alignment and end-to-end management accountability. In most cases this will require operational and managerial restructuring. A process-oriented business structure enables increased flexibility, greater efficiency and relies on the availability and use of accurate and transparent data to monitor process performance. In a business where process management methods are used, ownership of continual improvement is vested in the process owners and is driven by the use of process performance measurements, such as dashboards, customer scorecards and detailed financial reporting.

Venturehaus typically works with a client organisation to implement a data-driven process management system in an operational improvement programme. As a result, the company’s management is able to manage business and operations with significantly greater levels of awareness and clarity, and the ability to act quickly on timely information. Effective measurement, controls and management information, used properly within a business, can play a significant part in delivering competitive advantage. This ensures the business is consistently focused on continuous improvement.

The move to Lean

Another trend becoming apparent has been the move towards Lean – the operational approach, based on the Toyota Production System, of removing waste and focussing on value. Unlike Six Sigma, which relies more on a top down and infrastructure based deployment model, Lean is generally driven ‘bottom up’ by the operational staff. Lean is less ‘methodology and tools’ and more ‘principles and approach’, hence it provides companies with a powerful means of empowering staff to change business processes and culture in a relatively simple and common sense manner. It requires considerably less training, and hence is generally self-funding as an initiative from the start. Through a series of ‘Kaizen Events’, companies are able to identify and implement process improvements within rapid timeframes (Action Plans of <8 weeks) as opposed to more time consuming Six Sigma projects (3 – 6 months).

Conclusion

Consequently, it would be fair to conclude that Operational Excellence is destined to gain further traction in the Financial Services industry in Europe, but in the context of a growing realisation that in service and transaction businesses, it is truly a different ball game. Companies deploying Operational Excellence methods are becoming increasingly knowledgeable and thoughtful of how they should launch their improvement programmes, supported by the growing number of successful case studies in this sector that have steered a different path to the traditional company-wide Six Sigma roll-out. As was so often said at GE, these are great management practices which should be integrated into business as usual. In Financial Services – Operational Excellence should simply be the way we work.