Lean Six Sigma remains a popular and effective tool to improve efficiency in financial services operations. However, many financial institutions are finding that identifying and reducing incremental defect variability does not fully maximize the full spectrum of improvement opportunities. To achieve a larger return on investment, many organizations are turning to Design for Six Sigma (DFSS) to re-examine, radically recreate and often build new processes.

The Potential for Bigger Returns

Richard Paxton, co-founder and CEO of Seattle-area consulting firm The Alacer Group, said that the interest in DFSS as a preferred approach to process design and reengineering has grown significantly over the past few years. “In financial services, a typical DMAIC project can deliver somewhere between $500,000 and $600,000, whereas DFSS projects can be upward of $20 million,” he said. “The key is knowing where and how to apply the technique.”

Paxton has been in the financial services industry for more than 10 years. Previously, he was senior vice president of Operational Excellence at JPMorgan Chase, and senior vice president, Global Quality & Productivity Process Excellence at Bank of America.

“Ten years ago, many financial institutions were wary of using DFSS tools and thought of them primarily for application in manufacturing industries,” Paxton said. Additional apprehension centered around a misperception that massive technology deployments had to be part of DFSS solutions. Today, he added, DFSS is being embraced for its ability to provide robust designs for reengineering existing processes and products and developing new ones.

“Financial services today are very similar to large technology organizations; relying upon a complex network of interrelated processes and systems to deliver quality products and services for their customers,” Paxton said. “By taking an end-to-end view, and designing across functional boundaries, new levels of performance and quality can be realized. This is where DFSS is a perfect fit, and can help bridge the gap between business and technology.”

Similar to Lean and DMAIC, DFSS does take time, and moves with a unique feel and pace. Depending upon the scope and level of integration, a large-scale design and build can take 12 months to complete, Paxton said. His firm recently finished a project where they completely redesigned a core business process for a large financial institution. The project included the implementation of a new workflow environment, support processes, user interfaces and system integrations. From start to finish, the project took 18 months to complete. The payoff, though, was substantial – a flawless launch, increased capacity in the front office and significant back office efficiencies, Paxton said.

In another recent DFSS project, one of The Alacer Group’s large national banking clients found potential fraudulent activity and incoming suspicious activity reports (SARs) had increased 10-fold. Quality issues and high variability costs associated with these SARs had resulted in $80 million in annual vendor and contracting expenses.

Working with a local processing specialist, and with compliance and legal staff, a process team used the DFSS approach for process design to streamline SAR processing and optimize staffing models. The design was also built to accommodate future SAR types and regulatory changes.

As a result of the DFSS improvements, the client experienced $6 million per month in expense savings and was formally recognized by regulators for having a “best in class” SAR processing process. An additional $8 million in annual savings through a vendor was also identified, Paxton said.

Identifying Root Cause, Redesigning the Process

Another tactic for tackling financial services issues is to start with the Define, Measure and Analyze phases of DMAIC up front to identify root causes, and then apply DFSS to redesign the process to better meet the needs of the customer. “By understanding how and where defects in a process are generated, you can design out the opportunity for defects to occur and design in controls,” Paxton said.

For instance, Alacer recently analyzed the mortgage process for secured lending products at a Fortune 10 organization. The process was highly inefficient, cumbersome and lacked standardization, resulting in rework, increased risk exposure and loss of business. The project team began by analyzing the end-to-end process through the application of DMAIC and Lean to identify defects and waste. After the income verification process and credit guidelines were identified as the two most important improvements via DMAIC and Lean analysis, the DMADV (Define, Measure, Analyze, Design, Verify) roadmap of DFSS was then selected to design a new automated income verification process.

By adopting new support processes and modifying credit guidelines, the client’s end-to-end mortgage processing time was reduced by 30 percent and overall risk exposure was lowered, freeing up $500 million in capital for funding new loans.

“Over the years, the functions of banking have remained the same – sales, fulfillment, and service,” Paxton added. “What has changed is the way they are delivered. What will differentiate financial institutions in the future is their ability to deliver products and services customers want, how they want it and at a level of efficiency that makes sense for the business. Using DFSS, in conventional and unconventional ways, can help organizations deliver value for their customers and their bottom line.”

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