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Featured Customizing Process Improvement for Financial Services

Customizing Process Improvement for Financial Services

Post the subprime mortgage crisis, the growth of the financial services market has become stagnant; companies are reeling under immense pressures to sustain their profit margins. It has become imperative for the financial services sector to reduce operational costs by improving operational efficiencies and effectiveness. Financial services businesses can improve by elevating their quality of service, reducing cycle times, improving productivity, reducing waste and eliminating rework. Process improvement methodologies, such as Lean Six Sigma, are ever more relevant for this industry.

Characteristics of Financial Services

Financial services, like the manufacturing sector, provide ample opportunities for process improvement in their operations, but because of their unique nature, the existing traditional process improvement methodologies and tools need to be customized to target the specific challenges of financial services.

The following characteristics contribute to the unique nature of the financial services industry (Figure 1):

  • Complex: Financial service operations are typically not transparent and often complex with workflows spanning multiple departments and locations.
  • Intangible: The processes are predominantly requests to process information.
  • Inseparable: Services are produced and consumed simultaneously within financial sector. Clients are directly involved in the consumption of services via front offices.
  • Perishable: Financial services are often consumed when they are offered and they cannot be stored for future sale.
  • Variable: Each service unit is a unique event in itself and every event is experienced exclusively by each customer. A considerable amount of variation, therefore, is perceived while a financial services company delivers the same service to different customers.

Financial Services Characteristics

Financial Services Characteristics

Challenges within Financial Services

Most of the challenges within financial services are attributed to their unique nature. Following section illustrates the challenges within the financial services.

Measurement of quality of service: As outcomes of services are often intangible and are experienced uniquely by each customer, it is difficult to define unique parameter to consistently measure the quality of the services within the financial sector. For example, consider the service of investment advisory. It is ultimately an information processing request in which the customer experience is determined by the type of interaction they have with the bank’s official, and each customer will experience the interaction differently as it is an interaction-intensive task.

Long wait time: In the manufacturing sector finished goods are kept as inventory (made to stock) for consumption by the customer, but in financial services because of the perishable and inseparable nature of outcomes, customers often have to wait in queue for long time to consume services. For example, consider the case of a busy ATM in a city center. Since money withdrawal is a self-service request, customers often have to wait in line for their turn to fulfill their requests.

Low process efficiency: Since outcomes are perishable and inseparable from their production, WIP (work in progress) constitutes a significant portion of the overall cycle time of financial services operations. Hence, on average, financial services processes have low process efficiency. The table below summarizes different kinds of wastes that are found in the financial services sector.

Wastes in Financial Services
Waste Type (as Defined by Lean) Definition Example
Transport Excessive movement of work items or information
  • Paper-based mail communication rather than email
  • Multiple handoffs for approvals
Inventory Idle material or information
  • Requests and forms waiting to be processed
  • Paper storage rather than digital storage
Motion Excessive movement of people
  • Desktop files not organized
  • Switching between computer terminals and databases
  • Employees looking for information
Wait Delay within or between processes
  • Applications waiting for approval or signoffs
  • System downtime leading to delays in processing
  • Customer waiting in queue to make requests
Over-processing Adding more value than what is required by customer
  • Excessive scrutiny or paperwork for home loan
  • Same data required at multiple places in application forms
  • Gathering existing information from customer
Over-production Producing more than what is required by customer
  • Dispatching multiple account statements
  • Printing documents before they are required
  • Sharing redundant information
Defects Errors, mistakes or rework
  • Incorrect data entry
  • Incomplete data in application forms

High failure demand: Financial services operations experience numerous instances of failure demand. Failure demand is a demand that exists only because the initial demand was not properly satisfied at the first instance. For example, in bank call centers, a large proportion of calls received are either inquires pertaining to requests made previously or inquiries to correct earlier work. Failure demand results in rework, slows done overall service operation and leads to customer dissatisfaction.

Improvement Opportunities in Financial Services

The presence of large variations and wastes within the processes of financial services makes an excellent case for the application of a process improvement methodology such as Lean Six Sigma. To address the unique challenges of the financial services, the following customizations are recommended:

Cycle time as critical to quality: Due to the dearth of suitable parameters with which to measure quality of services within financial services operations, process cycle time is often selected as the metric for judging process performance from the customer perspective. For example, the outcome of most of the advisory or information processing requests in financial services depends upon the unique customer experience with individual bank officials. In the absence of a suitable metric to measure experience consistently, cycle time of the process is utilized to measure process performance.

Data transformation: In the manufacturing environment, data pertaining to product parameters such as weight, height, length, temperature and pressure often follows a normal distribution. Parametric tests, therefore, are used to analyze these types of data.

Process Improvement Project Opportunities in Financial Services

  • Increase straight-through processing (STP) rate in transactions
  • Reduce lead time for approval of applications
  • Reduce payment processing and settlement cycle time
  • Reduce check issuance and reconciliation
  • Reduce policy renewal lead time
  • Improve collection and recovery process
  • Reduce cost of inquiry

In financial services process, in contrast, cycle time often does not follow a normal distribution. Data points are skewed because there is a natural limit at zero for cycle time, while a normal distribution has positive probability throughout the entire real number line (i.e., from negative to positive infinity). There few outliers with large cycle time; hence, cycle time data follow either a lognormal or exponential distribution. Data must therefore be either transformed to normal form using Box-Cox data transformation, or a nonparametric test should be used to analyze data.

First-time resolution: Failure demand is the most common type of waste within the financial services. Often customers are asked to provide existing information before their requests are processed. Process improvement solutions in financial services should aim for first-time resolution of the requests. There should be constant endeavor to reduce failure demand and improve the first-pass yield of the processes.

Visual management: Visual management techniques such as workflows and dashboards can help in uncovering bottlenecks and wastes within the financial services processes. Consider the case of the consumer lending process. The bulk of the loan origination process happens in the front office, while the loan underwriting is processed by the middle office, often situated at a different location. This widespread process flow makes financial processes more complex and less visible. Visual management techniques enhance the transparency of financial services operations.

IT as enabler: Information processing constitutes the bulk of the activity within financial services operations. Consequently information technology such as BPM (business process management) tools should be used to automate workflows and thereby improve the efficiency of the overall service operation.

Plethora of Opportunities

In summary, though the characteristics of financial services might differ from the manufacturing sector, financial services offers a plethora of opportunities for the application of process improvement methodologies such as Lean Six Sigma.

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Leave a Comment



I like Abhishek’s approach to characterizing financial services. However, for three reasons I disagree with his conclusion that “existing traditional process improvement methodologies and tools need to be customized to target the specific challenges of financial services.”

1. Finance processes are not unique:
In my experience (having worked in numerous manufacturing and service industries and supported almost all functions within organizations), all five factors (complexity, intangible, inseparable, perishable, variable) occur in many services other than finance, e.g., legal, HR, IT, procurement, marketing, sales, QA, RA, R&D, and management. Designing a marketing program can be more complex than designing an invoice; all service transactions require request for information; many software products are designed to be inseparability; restaurants provide perishable outputs; if all other types of services were not variable, statistics would not required.

2. Finance services are not all the same:
In working to reduce the amount of time to do monthly closing, 1-hour to 2-day kaizen events led to improvements through the reduction of waste (Muda) and unevenness (Muri). Simple process mapping was all that was required.

3. No evidence that these characteristics require any methodological changes:
Most importantly, to claim that tools need to be customized, the author needs to show for even one example,a) how an uncustomized tool would not work and b) what customization is required for it to work. The claim of uniqueness did not occur in my six years experience at GE Capital nor is it supported otherwise:

• Rather than use cycle time as a proxy for actual customer metrics, ask customers what their needs are or why they want specific financial services. Defining customer requirements is a key early task in traditional process improvement.
• Nonparametric analyses are part of traditional process improvement—because many metrics are not continuous/quantitative.
• First time yield is the traditional requirement for measuring any performance—as rework is considered a waste.
• Visual management has been applied for decades in manufacturing and other services—kanban in manufacturing is >50 years old.
• IT enabling exists everywhere—marketing, QA, legal, HR, etc.—for the same reason: information processing is a requirement for all processes.

He mentions, for example, “the dearth of suitable parameters with which to measure quality of services within financial services.” Perhaps he is unaware of the dearth of such parameters in most small business of any kind, in most transactional services, and in nonprofits. In another example, he says “cycle time often does not follow a normal distribution.” Perhaps he is unaware that most cycle times are not normal by the mere fact that the normal distribution extends to negative infinity and cycle time cannot be negative. (As an aside, I would not recommend transforming data.)

Each of his opportunities occurs in other types of services, not just finance. Consider: Reduce lead time for approval of applications. Make it a software application and it’s an IT service; change applications to applicant, and it’s an HR service; change to “court decision” and it’s a legal service; or, change to “vendor qualification” and it’s a procurement service. The same can be done for the six other opportunities.

IMO and experience, it isn’t the type of service that requires one to modify traditional approaches, but the type of problem, e.g., delays, errors, suboptimal performance. All occur in every type of service.


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