Reacting to the last several months of turmoil in the capital markets, I want to discuss an area where Lean Six Sigma professionals who work in banking and financial services should focus their attention, acquire new skills, and start having an impact –?? enterprise risk.
A couple of years ago, one of my former colleagues investigated the contribution of Lean Six Sigma to shareholder value at a small group of well-known banks. He researched public statements by these companies to quantify their self-attributed savings. He then developed a crude expected shareholder value multiplier based on price-to-earnings ratio. Multiplying self-attributed savings, which he assumed flow to the bottom line, by the shareholder value multiplier led my former colleague to conclude that Lean and Six Sigma created at least $4-6 billion in shareholder value for these banks.
Conventional wisdom leads me to believe that recent turmoil in the credit markets wiped out these gains. The stock prices of many investment banks, asset managers, commercial banks, mortgage finance companies, monolines, and other major participants in structured finance are trading new two-year lows. While each firm and industry segment has its own unique issues, weak risk management is a common storyline.
Looking ahead to the trends for 2008 and 2009, strengthening risk management practices is an imperative and a mammoth challenge for banking and financial services companies and their executives. The global interconnectedness, complexity and volatility of capital markets necessitate a holistic, innovative approach. Conventional practices do not stand up to the challenges in 2008 and beyond.
Curing the current ills will depend on fortifying balance sheets, and regulatory intervention will increase the pressure on business and operating models. Banking and financial services firms can look forward to:
My own background has convinced me of the need to extend the disciplines of Lean Six Sigma to processes for creating governance structures, compliance monitoring, and managing operational risk. Perhaps banks will benefit from a higher degree of knowledge integration (e.g., transplanting gauge methods to credit risk management).
In many respects, the current state of banking and financial services is the product of thousands of decisions about risk taking. Clearly, reward seeking won out, and we now face a period of living through the consequences of risks not being properly managed. Lean and Six Sigma are proven tools for optimizing reward by eliminating waste, creating capacity and reducing variation. Resilience and reliability are a new frontier for Lean and Six Sigma, and the focus is squarely on transforming how risk is managed.
How Lean and Six Sigma contribute to the field of risk management is a story waiting to be told. For starters, I encourage Lean Six Sigma professionals to build the relationships, internal networks, and critical mass necessary to transplant their best practices to the risk management and compliance functions at banks and financial services firms. In conjunction, I recommend seeking new knowledge about relevant aspects of credit, financial and operational risk, as well as regulatory trends that will weigh heavily on operating models and expenses.
Lean and Six Sigma is a knowledge-based profession, and its value comes from connecting best practices to problems, so performance can be improved. Clearly, for banks and financial services firms, enterprise risk is a huge problem to be solved in 2008.