The Six Sigma Renaissance? What the Future Holds for Six Sigma in Financial Services

Process standardization and quality improvement had been neglected in the financial service industry for decades. When the manufacturing industry needed to become more efficient and reduce waste, the financial service industry was flourishing and therefore, found itself not in need for major improvement initiatives. When this situation changed, everyone suddenly started to look for a quick fix and Six Sigma, which had already been so successful in the manufacturing industry a method of Quality control, was seen by many as the golden path.

Countless financial services companies have followed this path and have implemented Six Sigma in the last decade. Some have been very successful and happily announce their multi-million dollar savings. However, many others keep very quiet about their returns or have stopped their engagement in Six Sigma all together because they didn’t attain the expected return on their investment. This is reflected in the coverage of Six Sigma in the financial service sector – there is only a handful of books available on the topic, while there are hundreds on the use of Six Sigma in manufacturing.

Why Six Sigma has been so successful in the manufacturing industry, but only worked for a small group of FS firms? More importantly, how can the financial service sector make better use of Six Sigma?

Strengths and Weaknesses of Six Sigma in Financial Services

Without question, Six Sigma is a well accepted quality enhancement method which has been applied with great success in the manufacturing industry for decades. However, Six Sigma methods cannot just be transferred from the manufacturing industry to the financial service industry without any changes. Let us review the main strengths and pitfalls of Six Sigma, when transferring it to the financial service industry.

Strengths:

1. Unique customer focus

Focus on the customer is one of the main strengths of Six Sigma. By linking quality improvement initiatives to customer needs, Six Sigma teams ensure that the improvement has a positive impact on the customer. Particularly in the financial service industry, where the interaction with the customer takes place on a daily basis, customer focus is of utmost importance. When implementing Six Sigma in finance processes, customer needs have to be given highest priority. Short-sighted focus on cost or headcount reduction will not bring the long term benefits Six Sigma promises.

Only a close cooperation with customers and a clear focus on customer needs can lead Six Sigma to success in a financial service environment.

2. Six Sigma framework and tool kit

Many financial service organizations have not engaged in structured process improvement until recently. Therefore, they often lack standardized processes, organized quality and engineering departments and a general understanding of what quality improvement means to them. Six Sigma provides, with the DMAIC cycle, a structured framework to guide users throughout the improvement efforts and ensures that the project develops in the desired direction. Additionally, Six Sigma comes with a whole tool kit of brainstorming, analysis and prioritization tools that help to unfold its power. This structured approach, combined with the Six Sigma tools are particularly valuable for teams with a financial service background.

3. Data-driven and statistical methodology

Some may argue that financial service process improvement greatly benefits from its data richness. However, in my experience exactly this data overflow is one of the main problems for successful project selection and completion in this industry. Too many improvement efforts are based on ill selected data and the general assumption that the problem root cause is already known before the project even starts. This causes projects to fail and the improvement efforts to loose their reputation. Six Sigma offers a more statistical approach to measuring and analyzing data, thereby minimizing the risk of quick assumptions and allowing projects to be wisely selected and executed.

Weaknesses:

1. Resistance from people

I experienced that resistance towards change is even greater in the service industry, than in manufacturing. The average white-collar worker seems to be extremely unaware of the waste in his daily work and is, to my surprise, very resistant towards others outlining this waste to him. Now this most likely originates from the fact that processes in the service industry are invisible, following an unwritten process through electronic data exchange and peoples’ heads. Seeing and accepting waste in such a virtual environment is more difficult than in a factory, where bottlenecks and process defaults are physically existing. This resistance leads to many project failures and makes it very difficult to implement Six Sigma.

2. High initial investment and slow return on investment

The financial service industry is famous for its fast-paced culture, striving from one budget to another. However, for anyone looking for short term return on investment, Six Sigma is not the right cure. Six Sigma requires a high level of initial investment for implementation and the first years of Six Sigma introduction into an organization are particularly costly. During this period Six Sigma experts and employees have to be trained or recruited and senior management focus on Six Sigma implementation is required. Additionally, return on investment is often not realised in the short term.

From an organization-wide perspective, achieving a break-even from implementing Six Sigma takes a considerable amount of time as initial investment is high and results from improvements might only become apparent after several months.

Recommendations and Outlook for Six Sigma in Financial Services

Six Sigma is more a culture than it is a methodology. In order to make it work, you have to prepare your whole organization to embrace the values and ideas behind the concept. If you are looking for a quick fix to make the next budget, then Six Sigma is definitely not the right thing for you. The same holds for organizations that have not yet had any or only limited engagement with quality and process improvement. If you still have a lot of low hanging fruits out there, then go for Lean and 5S first.

However, if you are willing to take your organization through a true transformation, to standardize and re-engineer processes and to make a long-term commitment to Six Sigma, then go for it. Success cases from the financial service industry and many years of successful implementation in the manufacturing industry prove that Six Sigma is indeed a very effective method to bring your organization to the next level.

Both of the weaknesses outlined in this article can, with the right commitment, be reduced to a minimal. Once you have made the initial investment of time, effort and money, Six Sigma will reward you with a very worthy return on your investment.

In my opinion, particularly the ever increasing importance of outsourced finance services brings a never before seen centralization and standardization to financial organizations. This allows for large scale projects and makes the return on investment more favorable, than implementing Six Sigma in small decentralized offices. The most recent developments in the financial industry and the harsh competition following the financial crisis have further strengthened the need for more cost efficient solutions and better quality. At the same time, many players in the financial service industry have already hit their climax in getting process improvement from Lean. That's why I predict that Six Sigma will see a renaissance – this time not in manufacturing, but in financial services.