Sean Park Portrait
Quote of The Day Title
In the beginner's mind there are many possibilities. In the expert's mind there are few.
- Shunryu Suzuki

Psst. Pass on to Citi. They missed the memo…

Milton Waddams (Office Space, 1999) When I read this story on Citi taking it’s mortgage finance business offline for a couple weeks due to faulty processes (thanks to @felixsalmon for the pointer), for some reason the image of Milton from Office Space pops into my head…

According to the June 22 letter, the review identified “valuation concerns” where “appraisal documentation is missing or incomplete,” or where property-assessment methods were “insufficient/lacking.”

Other missing information included employment confirmations, phone numbers, credit reports and rent verification, the letter said. The review also found “income calculation errors.”

Another fine example of six sigma in banking. Imagine if Dow and Dupont ran their chemical plants like this. Holy crap. Or Boeing built planes this way. Yikes. But then again, in those industries lives are at stake. Banking. [shrug] Just money. Ok a few billion hundred billion. But still, it’s not like anyone died. Sheesh.

Hmmm. In 2002 – yes 2002, seven years ago(!) – I wrote:

In a recent speech, Jack Welch, the former chairman of General Electric, made exactly this point: “…[if] you put six sigma in an investment bank, they would all gag!” In case you think he was just engaging in some gratuitous banker bashing, consider this: six sigma quality means havingfewer than 3.4 defects or errors per million operations in a service process. That is 99.99966% perfection.

Contrast this benchmark with the assurance once made to me — by a senior syndicate manager of one of the largest and most respected global bond underwriters — that it was perfectly normal and necessary to expect and reserve for 5%-10% errors in the allocation of a jumbo multi-tranche bond deal! Assuming an average of 200 individual orders (including splits) on a typical new issue, to reach six sigma quality levels you would need to have fewer than four errors over 5000 issues!

…And therein lies the next major opportunity for capital markets bankers over the next decade: to use technology not only as an enabler of innovation (as has been the case over the past 15 years) but as a driver of industrial efficiencies.

The guys in IT thought it was an interesting take on things (with $ signs in their eyes) but the ‘business’ side, well, let’s just say it didn’t strike a chord. Banks were special. Bankers were (even more) special. All that re-engineering and total quality management and painful restructuring and shifting centres of power…all good for manufacturing and you know, “other” industries. The ones they advised and financed and funded LBOs of… but not banking. Banking is “different.” You wouldn’t understand…What. A load. Of. Crap.

Cuyahoga Rive Fire (conservationreport.com) Well now they are paying for it. We all are paying for it. Rivers didn’t catch on fire but the financial system was well and truly polluted. But there is a bright side. The bright side is that there has never been a better time to come in and build businesses in banking and financial services that have an engineering DNA, businesses that are natively adapted to an industrialized and digital way of doing business. Indeed some of the pioneers in this mold have already enjoyed tremendous success (Markit Group comes to mind.) Others are emerging. And the incumbents have never looked less frightening (even if, especially because, they are now too big to fail.)

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Permalink||Comments|Filed under 'Banking, Management, Peak Hierarchy, YCMTU'
  • cfarley
    A trader in Chicago, who deals in soymash and is somewhat self-loathing, once told me "Commodities kill people." He is talking about the feedback from (say) an attempted cornering of corn futures into higher real prices for mere mortals, for whom the marginal cost of food is very high (i.e. emerging markets). So yeah, I'm not quite sure banking and trading decisions can't kill people.
  • Of course there are processes in banking where a six-sigma level of failure is appropriate (anything commoditised for example), but there are also bleeding edge processes where it is unrealistic to expect such a low failure rate, and probably counter-productive to try to achieve it - it would be a significant drag on innovation.

    If you're making family saloons then go for six sigma. If you're designing and building an F1 car then you probably aim to finish around 95% of the races. Banks do both.
  • Well yes, but... Whenever I did hear a cogent argument against my suggestions it was always along these lines. Banks are special: we're Formula 1s. Only they're not. They might run a Formula 1 team, but 95% of what they do is "building saloons". And I'd suggest that the Formula 1 parts are probably better off run as boutiques rather than as 'factory teams'.

    I spent a lot of time in the industry talking about the innovation/commoditization curve and how it needed to be managed: Y-axis was increasing complexity and novelty, x-axis was increasing volume and lower margins. Formula 1 was the top left (high complexity/high margins/low volume/low industrialization); saloons was bottom right (low or mastered complexity/low margins/high industrialization); in the middle was the "Death Zone". I saw it as management's job to optimize the two extremes and try as hard as hell to have as little business in the Death Zone as possible and when unavoidable (ie during migration from Formula 1 to saloon) to focus on minimizing cost and speeding transition. Certain executives got very upset when I said at one offsite that GS was mainly positioned in these two extremes while most of DrKW's business was nicely positioned in the middle of the Death Zone. I think I have been vindicated.

    The danger inherent in your point is not that it is wrong, but that it is a red herring that many many more banks/bankers will glom onto to justify their lack of discipline and skill in industrializing their businesses: "Oh but we're a Formula 1..." when clearly they are in fact a Corsa. I think banks are thousands of miles away from the risk that the pendulum has swung too far the other way "stifling innovation".
  • Totally agree, and of course it's the pace at which processes can be pushed from the top left to the bottom right that determines your success. Things cannot live in the top left indefinitely and the journey through the Death Zone needs to be rapid.
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