SATURDAY, AUGUST 19, 2017
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Operations Finance Six Sigma Proves Its Value in Funds Management

Six Sigma Proves Its Value in Funds Management

Six Sigma is a systematic data-driven approach that works across most processes, products and industries. It focuses on improving process performance to enhance customer satisfaction and bottom-line results. Yet, some organizations take a look at Six Sigma and conclude that it will not work for them.

Why? Because the organizations know that Six Sigma was developed in and for manufacturing environments, and it is not clear to them how the methodology applies to a service environment or a support function like finance. Of course, Six Sigma does apply in all kinds of transactional businesses. For example, Six Sigma was instrumental in increasing the return on investment (ROI) in a funds management function, as outlined here.

The Problem

The funds management department of a leading telecom service provider was charged with improving the cumulative ROI of the treasury operation by 0.25 percent within five months. The goal included increasing the existing reserves, worth $360 million, by an additional $1 million.

One of the biggest challenges was to gain commitment for the project from the team and other key stakeholders. During an initial meeting, the project Champion asked a couple of very basic questions:

  • “DMAIC/DFSS does not really apply to finance, and especially funds management, does it?”
  • “We are already the benchmark in our field, so what do we have to improve?”

The simple answer to these questions is that Six Sigma is applied wherever there is a customer who benefits from the output of a process.

The Approach

Several steps were undertaken to begin the project. First, the project team created a threat-versus-opportunity matrix and conducted a stakeholder analysis. The funds management department did not have a well-defined process map, so the team documented a high-level process map to define the key suppliers, inputs, processes, outputs and customers (SIPOC). After identifying the moments of truth with the help of the SIPOC, a well-defined cross-deployment flow chart was drawn, clearly identifying the roles and responsibilities of key stakeholders.

The next step was to identify the possible risks in each step of the portfolio management process through the use of a failure mode and effects analysis (FMEA). Once the risks were identified, the team brainstormed to define risk mitigation plans. Ideas were generated and then evaluated based on risk, liquidity, rate of return, investment horizon and corporate ethics. Prioritization of the risk mitigation plan elements yielded the following key action steps:

  • Investment in short-term floating rate funds
  • Investment in liquid funds
  • Investment in quarterly fixed maturity plans

As a result of these actions, the cumulative ROI increased by 0.15 percent To achieve the target of 0.25 percent ROI, the team had to think in a completely unconventional way. The concept of “wishful thinking provocation” was introduced.

Wishful Thinking Provocation

Wishful thinking provocation required the team to create a desired end result and then subsequently, to generate ideas to reach that goal. For example, a wishful thinking provocation target might include the statement, “My pen automatically corrects my spelling mistakes.”

Wishful Thinking Provocation Roadmap

The funds management project team faced a specific challenge in its quest to further increase the ROI. The financial risks involved in the funds management process are high. As a result, the project team was required to obtain approval from the board of directors to change the investment mix of the various portfolios. The restrictions were so stringent they precluded investment in the shares of group companies. The team’s wishful thinking provocation was stated as, “The company board of directors does not impose regulations on investment selection.” During the idea-generation phase of the project, the team suggested the following ideas to increase the ROI:

  • Investment in equities/equity-based mutual funds
  • Investment in inter-corporate deposits (ICDs)
  • Breaking of fixed deposits and investing in other possible options
  • Redemption from mutual funds and investment in other possible options

One of the benefits derived from the wishful thinking provocation process was the clarification of existing investment rules. The team was under the impression that there is a clear restriction from the board of directors that breaking fixed deposits and mutual funds was not allowed. However, after reviewing the regulations in detail, the team found that no such restriction exists. However, it was noted that breaking these investments results in a large penalty. The investment restriction, in effect, was the assumption that the penalty would outweigh any investment gain.

The team analyzed the gain potential and determined that breaking, then changing, the investments would yield a positive net return.

Results Achieved

The team implemented its solution and met its goal of improving ROI by 0.25 percent, yielding the desired financial benefit of increasing reserves by $1 million. In addition, the team realized the power of creative thinking over conventional wisdom. And in doing this, the team proved that Six Sigma is indeed relevant within a funds management operation.

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Comments

Chris Seider

I would have loved to see some of the measure/analyze/improve/control tools utilized.

ROI increase is obviously great but can one say it was because of the team or market returns? Money market funds, in the US, and bond yields have increased in Europe and elsewhere so that in itself would increase the ROI?

I’m not challenging the increase in ROI but would love to have seen more tool description on the team’s approach.

Nice article.

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