SIX SIGMA TRAINING: A NEW METHOD OF IMPROVING LENDING PROCESSES IS GAINING POPULARITY AMONG AUSTRALIAN BANKS

Banks have been avid users of technology to reduce both the time and the cost of the lending process in a deregulated environment. These improvements have been expedited
by increased competition from regional banks and smaller mortgage originators with lower cost structures.

The costs involved in bringing about the improvements have also been significant and will continue to be, as increasing competition demands further efficiencies.

Reflecting on the improvements made by the financial institutions, how much of the cost was spent on researching the current process and how will the proposed improvements affect the process? Was data collected to accurately measure process performance and how much did it cost?

These are fundamental questions that should be asked when any major process improvement is made. Many process improvements, however, are made on the basis of “gut feel”, anecdotal evidence or on advice provided by an external consultant with a vested interest in the outcome.

Going forward, a different approach is required, one that uses data-driven decision making to drive the process improvement.  The “Six Sigma Certification” methodology is not a new concept. It was originally developed in the 1980s by Motorola in an effort  to improve product quality.

Following the success in Motorola, it was subsequently adopted by Allied Signal and General Electric to improve the build quality of its products, as well as reducing production and administrative costs.

In the 1990s this method was adapted to transactional processes by financial institutions such as GE, JP Morgan  and American Express with significant success.

The use of Six Sigma training is still a relatively new concept in Australia, with only a handful of companies adapting it  to a purely transactional environment. Suncorp was the first Australian financial institution to  deploy Six Sigma training, starting the program in early 2001. Since initial deployment, some 50 Black Belts and three Master Black Belts have been trained and placed within key business lines in the company.

Significant savings have already been realized in the early stages of the program, however, a major benefit has been measurable improvements in quality that have had a positive impact on customer satisfaction.

What is Six Sigma Certification?

In its purest sense, Sigma is the term for standard deviation –  a statistical measure of variation. The term Six Sigma is applied to a process when the number of defects occurring is less  than 3.4 defects per million opportunities – a defect rate of 0.00034 per cent.

Achieving Six Sigma status entails exponential improvement. In most financial institutions, administrative and service functions would most likely operate at around two to three sigma, that is, 100,000 to 400,000 defects per million opportunities or an error rate of 10-40 per cent.

The fundamental aim of a Six Sigma training program is to reduce variability within a process, for example, the time taken to produce mortgage documents.

The first impression of Six Sigma training is that it is a technical program involving statistical analysis. In fact it is a different approach to management, whereby existing methods, ideologies and processes are challenged.

Six Sigma classes use three important tools to improve a process. They are understanding what the customer wants, the use  of metrics to measure components of the process and using the knowledge of the people involved in the process.

Six Sigma certification deployment structure

A fully deployed Six Sigma program should deliver benefits  in excess of $1 million annually per Black Belt. A Black Belt project can expect to produce savings of around $250,000  per project. In some cases, the savings are in the millions.  In other cases, savings may be minimal, but the benefits  are non-financial such as increased customer satisfaction,  or mitigation of risk.

A key criterion to the success of Six Sigma is to have a  top-down commitment from management. If this top-down endorsement of Six Sigma training is not evident, then commitment from staff towards the program will be perfunctory at best.  In addition, key staff must be educated at all levels.

The training is not only limited to Black Belts, but middle management who will champion the concept and line  staff who will be involved in project teams.  Improving the lending process

For a typical financial institution, the action of selling and processing a loan is the singular most important process.  But what is more important: selling the loan product or processing the loan application? Both are equally important. In the customer’s view, the process commences when the customer first contacts the bank and ceases when the loan
is settled and funds are dispersed. The process involves any number of steps but at a high level includes the application, the credit decision, the loan documentation and settlement.

At a high level, the lending process is quite simple. At a lower level, it can involve more than 40 steps and more than a half  a dozen “hand-offs” to other departments. The critical factor  in a process is the number of errors or defects occurring and what rework has evolved to correct errors.

A customer seeking a loan from a financial institution is concerned with three primary factors: the length of time it takes for the bank to approve the loan, the length of time  it takes to settle the loan and whether the loan has been settled in terms of the customer requirements.

Other elements such as price and quality usually form a subset of these three critical factors. Customers usually do not define the quality of a loan product, but will readily
recount the lending experience in terms of whether there  were any delays or problems.

Unfortunately, this point is invariably overlooked as the focus remains squarely on price, product and cost cutting in back office functions.

Six Sigma certification is not about increasing employment costs or implementing technology solutions in back office functions. Instead, it focuses on whether a process is performing at an optimum level given the current resources being applied.  All too often, “hidden factors” are employed to correct deficiencies in a process which are not evident to management. Claims such as “few errors ever occur in this department” or “documents that are dispatched to the customer have an error rate of less than 1 per cent’’ conceal the true problem.

What is often happening is that the department is spending  up to 40 per cent of its time correcting errors and another 20 per cent checking for defects before a hand-off to another department or to the customer.

To quote Mikel Harry and Richard Schroeder:

 “The pursuit of Six Sigma requires that processes be measured differently…[an] organization’s leadership needs to question process capability, product design and overall quality rather than outputs and budget.” Therefore we must address the process and prescribe “medication” to improve the performance. Simply looking  at the final result without discovering what is driving the process is far too narrow a view.

Assessment of customer demands

An important aspect of Six Sigma training is to determine what the customer wants. The customer’s expectation establishes a benchmark which any process should meet as a minimum.  This is simple but it is often ignored by financial institutions, which often spend more time assessing what the competitor  is doing, rather than what the customer is demanding.

Six Sigma projects are selected based on the gap analysis between the customer’s expectation and the current process performance. If this gap is significantly divergent and has created a significant cost to the organization in terms of lost sales, inefficient processes and such, then a project could  assist in rectifying the process.

Assessing the expectation of the customer will invariably address two issues: the quality of a product and the time taken to service a customer.

In a transactional environment such as a financial institution, these two issues are critical. The ability to approve a loan within an agreed or acceptable time frame, to provide the correct product or to ensure the call center answers every phone call within ten seconds is vital in the delivery of financial services. A Six Sigma project team will involve specialists that are involved in every part of the lending process. The team is managed by a Black Belt to ensure that the problem is clearly addressed within the given time frame.

As part of the project, customers are surveyed to understand what the process has and has not delivered. This is a vital  step. Dissatisfied customers represent the greatest threat to any organization, with fewer than 5 per cent of disgruntled customers ever complaining directly to the organization. However, every one of them will tell another ten people  of their dissatisfaction.

Knowledge management and Six Sigma within an organization, knowledge is one of those assets that  is difficult to quantify, particularly in terms of dollars. Knowledge can take on many forms.

 

To quote Zohdy Rateb in a recent article:

 “Knowledge is the accumulated experience and useable information that exists within an organization.” The importance of Six Sigma in unlocking knowledge is paramount to the very success of the project. Too often employees and their knowledge are ignored when organizations seek to improve processes.

Programs such as Six Sigma training are able to leverage off this knowledge base. Including these people in a project team allows them a vehicle in which to take ownership of the problem, and thereby assist in rectifying the problem. As part of the project, Black Belts will work with subject  matter experts to gain process knowledge and determine best practices. Too often this knowledge has been locked up or not called upon when looking to make process improvements.

Consequently, senior management has been left to wonder why there has not been a measurable improvement after  re-engineering a process. Empowering subject matter experts as part of a project team is usually one of the most powerful tools that a Black Belt can use.  Invariably, solutions will procure best practices from one area  and replicate them across a whole division or department (thereby improving process performance and reducing variation). Commitment is the key

The information provided here concerning Six Sigma is general
and designed to provide an overview of the capabilities of such a program.

As with any program, the level of success is proportional to the level of commitment of a company to embrace organizational change that such a program creates.

 

 

Six Sigma training terminology

Master Black Belt
Lead and mentor Black Belts to ensure that the Six Sigma program delivers quantifiable benefits to the organization. Their major responsibility is to ensure  the transfer of Six Sigma knowledge to the Black  Belts and to drive Six Sigma within the organization.

Black Belt
Responsible for the completion of Six Sigma projects. Black belts become effective full-time project managers within the organization. They are usually appointed  to the position for a two-year term.

Green Belt
Involved in the Six Sigma program on a part-time  basis assisting Black Belts on project work and managing smaller projects.

Project champion
Oversees the project within a line of business ensuring that the relevant parties are on board  and removing “road-blocks” where necessary.

Project team members
Are selected from within the business to assist  with understanding the problem. Team members  are usually subject matter experts on particular parts  of the process. It is important that team members  are selected from all areas affected by the process.