The use of lean operations in the financial services sector

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1. Executive Summary

Lean philosophies are furthermore based on the prevention of any form of wastes. The seven wastes, based on the work by Ohno (1978) include the waste of overproduction, waste of time on hand (waiting), waste in transportation, waste of processing itself, waste of stock on hand (inventory), waste of movement and waste of making defective products (Ohno 1988, pp. 19-20). For financial service providers, these 7 forms of waste can be refined. As a result of deviations during the processing of applications and transactions, erroneous processing (rejects) may occur. This results in an increased processing time per

2. Introduction

Lean operations or lean management (LM) is a concept of strategic corporate management, which is substantially shaped my developments of the Japanese automotive industry. These were essentially initiated by the work of Ohno at Toyota and lead to a realignment of the Japanese post-war industry. Work by Womack, Jones and Roos (1990) lead to an adoption of these ideas into western industrial production. Lean principles are generally connected to the prevention of waste, wrong allocation of resources and inefficient use of resources. According to Womack and Jones (2003, pp. 19-25), they can be roughly divided into: determination of value added and value stream, orientation along a continuous value flow, use of pull principles and finally the striving for perfection. US and European manufacturing companies then began adapting lean principles under the title just-in-time (JIT) management in order to continue being competitive with the Japanese industry (Pepper & Spedding 2009, p. 138). While initially being used mostly in the manufacturing industry, LM methods have currently also become popular in the service sectors. Considering that manufacturing now accounts for less than 10% of the labour force and the service sector becoming more and more influential particularly in the UK, LM application continues to grow across the entire economy and with it the service sector. An important concept and essential part of lean process improvement efforts within companies is represented by the Six Sigma concept, or Lean Six Sigma (L6S) which is a frequently advocated combination of both philosophies. Development over the last decade has shown that L6S has become an integrated LM approach (Hopp & Spearman 2004, p.136) which has started to focus on nonmanufacturing processes (De Koning, Does & Bisgaard 2008, p.4). This report discusses the use of lean operations (LO) and particularly L6S in the financial services sector. Initially, the activities within the sector are described, followed by an outline of the current level of lean activities within the sector. Subsequently, the level of success of lean within the sector is critiqued and approaches and their applicability contrasted in comparison with more traditional lean approaches and alternative approaches to operations. Finally, recommendations for the use of LO within the finance sector are given.

3.  The Financial Services Sector (FSS)

3.1  Characterization

The financial services sector (FSS) is the part of the economy originating from the fluctuation of capital within the financial industry. Financial service institutions account for a significant part of a country's economy and range from insurance companies to banks, investments firms and brokerage houses. Capital is traded in various ways such as investments, debt instruments, funds and derivates (Smith 2004). Interaction with customers occurs when applications for credit cards are made, home loans are taken out or pay checks are deposited in a bank. For a couple of years, the financial services sector has been subject to a transformational process and the climax has yet to be determined. The financial crisis intensified the change and resulted in a reconsideration of the entire sector. This profound change, the financial world is exposed to is based on drivers such as the increasing globalisation, liberalisation of capital transactions and market entries and integration of international financial centres, stock and bond-markets. Following the financial crisis, high numbers of mergers and acquisitions are a symbol for this change. Particularly noteworthy are the acquisitions of HBOS by Lloyds TSB and Merrill Lynch by the Bank of America.   Further important drivers are the complex and untransparent value chains and processes. The cause of which are lacking or ineffective process management, gaps in the controlling and shortcomings in the strategic direction. Moreover, administration efforts and associated costs are rising and the companies' risk management is inadequate, leading to further costs (Pakravan 2011, p.25). Furthermore, a deregulation of financial markets is reported which facilitates market entries and is aimed at more increased market transparency. Additional essential aspects are the reformed competitive structures. Based on the falling significance of the branch system and the more and more similar services, service providers that are new to the industry are enabled to enter the banking and insurance market. Examples are direct banks such as First Direct as well as banks or insurance providers of big car manufacturers or of supermarket chains like Tesco ( This increase in transparency together with other changes such as demographics is accompanied with a changed customer behaviour and decreased customer loyalty. Due to the risen transparency and advances in information technology, customers are able to easily compare prices and terms of offers and a high fraction of customers does so as study by Hedley et al. (2005, p.1) suggests. In conclusion, it becomes apparent that the pressure on the financial service providers is increasing and that they are in need of appropriate managerial tools which help them to optimise processes, reduce costs, be more efficient and hence remain competitive.

3.2  Classification of Lean activities in the context of the finance sector

Generally, all companies follow the same goal: making long-term profits with the satisfaction and hence retention of customers. The companies who want to be successful in the financial sector need to minimize their costs and increase equity capital by acting in a profit-oriented way. According to Allred and Addams (2000, p.54), the retention of customers will play an increasing role. Reichheld and Sasser (1990, p.105) state that the longer an enterprise can retain a loyal customer, the more the customer will buy each year and the more he is prepared to spend on an existing product. In this regard, quality management is imperative and lean tools including L6S are widely applied methods of fostering quality, raising customer satisfaction and increasing profitability of the enterprise. Because no company is able to generate capital growth without customers, the satisfaction of customers is directly related to the profit situation of the company. In the focus of lean projects is particularly the customer, the process and the quality. The question is whether these lean tools are able to deliver solutions for finance companies. According to De Koning, Does & Bisgaard (2008, p.15), L6S does provide effective solutions which can lead to a greater economy, better efficiency and increased quality in the FSS. An example by Stober (2006) showed that the implementation of L6S into a US healthcare insurance company resulted in a defect rate (erroneously charged accounts) of close to zero and reduction of cycle times from two weeks to three days (Stober 2006, p.6). Defects and necessary rework can be described as a form of waste. The notion of waste prevention goes back to the work of Ohno (1978). The so called 7 wastes of muda include the waste of overproduction, waste of time on hand (waiting), waste in transportation, waste of processing itself, waste of stock on hand (inventory), waste of movement and waste of making defective products (Ohno 1988, pp. 19-20). For financial service providers, these 7 forms of waste can be refined. As a result of deviations during the processing of applications and transactions, erroneous processing (rejects) may occur. This results in an increased processing time per employee. The delayed forwarding of documents and applications between the individual sites can furthermore lead to an excessive increase in transport time. This in turn also leads to longer processing times. Detty and Yingling (2000, p.35) describe the under-utilization of employee knowledge as an additional form of waste. Here, suggestions and process optimisation approaches aren't sufficiently made us of. The financial service providers need to reduce process insufficiencies, not in order to create competitive advantages but to prevent competitive disadvantages (De Koning, Does & Bisgaard 2008, p.2). An illustration of the different forms of wastes is the basis for the derivation of field of applications in the financial sector.

3.3  Lean activity casestudies

Motivated by the substantial success of the manufacturing industry, L6S has started to gain currency among (mainly US) financial service providers. The users include prominent firms such as JP Morgan Chase, Citigroup, Merrill Lynch and Bank of America (Davies 2006, p.94). This section of the report will outline lean activities in 2 European firms based on case studies in the literature. Wide ranging quantitative research and surveys about the use of lean which covers the financial service sector in the UK is still lacking.

3.3.1  Case-study A: GE Money

Delgado, Ferreira and Branco in their 2010 research present the implementation process of L6S in GE Money (GEM) Portugal, part of the General Electric (GE) group and provider of services such as real estate, private loans, mortgages and homeowner services. At the time of the research, GEM had been using L6S for 10 years. Part of their LM efforts is the creation of L6S teams who receive intensive training in the use of L6S tools. These teams, which consist of process owners, project managers and department managers engage in a form of kaizen event, internally named “lean week” (Delgado, Ferreira & Branco 2010, p.518). Activities during this week include brainstorming, value stream mapping (VSM) and are mainly based on the DMAIC cycle, which stands for Define (D), Measure (M), Analyze (A), Improve (I) and Control (C). Customer-focus is stressed throughout the entire process in order to be able to meet and foresee their demands, by developing products and services. Applied tools include quality function deployment (QFD), which contrasts supplier offers, voice of customer (VOC) for the analysis of customer requirements, failure mode and effects analysis (FMEA), used to control different stages of the cycle process and finally various software-based simulation tools such as Crystal Ball. Results within the company show higher productivity of the business, directly related to the use of L6S and the optimization of processes as well as improved revenues due to satisfied customers and decreased costs as a result of more efficient processes (Delgado, Ferreira & Branco 2010, p.521). More specific improvements include the decrease of time a car loan needs to be processed, a simplification of application forms and reduced lead-times to 1/10th of the initial duration.

3.3.2  Case-study B: Insurance Company 1a

De Koning, Does & Bisgaard 2008 provide a case-study of an insurance company which aimed at a quicker issuance of insurance policies. The issuance of information requests during the processing of insurance policies was identified to be the bottleneck of the process and a L6S project was launched in order to engage this problem. Process capability analysis revealed several shortcomings throughout the process and it was agreed to standardise the process and improve communication flows. The new process was finally shaped by standardised communication frequencies and channels, only written communication with customers, information request checklists for different insurance types and standardised templates for written communications with customers (De Koning, Does & Bisgaard 2008, p. 10). Furthermore, quality control for the issuance process was introduced and the duration of information requests, the information request number and the deviation from the norm was closely monitored. Furthermore, all tasks were thoroughly defined. All applied changes lead to a reduction of average information requests from 5.5 to 2.6 and average waiting time from 21.5 to 12.3 days. Savings amounted to 260k Euros per year. 

3.3.3  Case-study B: Insurance Company 1b

A second project was launched to reduce the number of defects in the insurance issuing process which lead to an excessive amendment rate. Project capability analysis revealed that the majority of defects were caused by culture as well as too little knowledge of the process. After detection of the main causes, a row of measures was introduced. These included the introduction of a visual management system which illustrated the amount of errors made by the employees, scheduled meetings once a week in order to discuss issues and errors, appointment of an experienced employee as a mentor as well as reports of errors which were utilised for feedback or rewards (De Koning, Does & Bisgaard 2008, pp.10-12). The overall result of the project was a decrease of internal errors to 8% and annual savings of roughly 180k Euros.

3.4  Critique

Based on the literature it is shown that the use of lean management in the FSS has got high potentials and if applied can lead to great savings. Waste, defects, rework and time spent on redundant work is easy to find in the FSS and lean thinking can offer best-practice solutions in order to deal with these problems (De Koning, Does & Bisgaard 2008, p.15). Lean approaches chosen by the described financial service providers included L6S, an efficient way of combining more traditional lean methods with control and quality management tools which aims at a long-term sustainability of improvements. Delgado, Ferreira & Branco (2010, p.521) claimed that in the course of lean projects in the examined financial companies, control tools became more qualitative than quantitative in order to be quicker and easier to use. This may be a natural development, but could also be an indication for a certain lack of training. Davies (2006 p.99) held that lean training in FSS companies takes longer than in experienced manufacturing companies. Hence, FSS companies may have to put a special emphasis on training in lean tools. Further applied methods include the standardisation of processes, kaizen events, appointments of mentors or facilitators, value-stream mapping, visual management, process capability analysis, DMAIC methodologies and the embedding of continuous improvements in company culture. These methods are traditional lean methods, There are some key lessons learned from these cases. First of all, it shows that neither Lean nor Six Sigma alone is best suited, but that the combination can provide practical and useful solutions for financial services. Secondly, it shows that Lean Six Sigma can bring about significant results and improvements. It helps 16 H. de Koning, R.J.M.M. Does and S. Bisgaard organisations to survive, directly by creating improvements in the processes (cost reductions), but also indirectly by developing the organisational ability for innovation. Thirdly, despite past efforts, there is still room for significant operational improvements in the financial services industry. This industry has not yet reached the level of efficiency experienced by typical modern manufacturing operations. Indeed, many improvements made in the financial services environment are at the level of making sound process descriptions, standardising the best operating procedures and instituting uniform processes across different sites, groups and locations. Consequently, we see that Lean Six Sigma is applied somewhat differently in financial services than in the industry. Not in terms of the method used, but in the use of specific tools, the application diverges. The design of experiments, for instance, is hardly used in financial services. Value stream mapping, eliminating the standard forms of waste, introducing visual management, 5S, mistake proofing and line balancing are important improvement tools in financial services.

3.5  Recommendations

A key recommendation and success factor for the use of lean management within the sector is support by upper management. Furthermore it is of importance that LM is being consequently communicated throughout the organisation, which is likely to impact positively on the organisational culture. The use of specific lean tools also supports the cultural change. For the application of LM in the FSS it is vital that the methodology is embedded into the corporate strategy. The results clearly show that there is a positive correlation between success of projects and strategy embedding. Davies (2006 p.97) pointed out that the basis of optimisation projects should always be the corporate strategy. In order to follow a lean philosophy it is recommended to act in accordance to the DMAIC methodology. This guarantees a clear and structured project as well as clear objectives and milestones. Furthermore the training of employees in the application of lean principles is paramount. Only the professional competence of employees ensures efficiency and long-term improvements. In this regard, six sigma black-belt training should be considered as an effective means of lean improvements.