A Return to Quality in the Financial Services Industry

When it comes to quality, companies often do not know what they don't know

Executives tell us they have quality under control. They've established quality organizations, implemented processes with "quality-built-in," or leveraged Lean and Six Sigma initiatives to focus on continuous improvement. Yet the media is saturated with high-profile stories of major quality breakdowns: a major oil company pollutes the Gulf; an automaker's cars appear unstoppable; peanuts and eggs cause Salmonella scares. How can this be? The answer is simple: When it comes to quality, companies often do not know what they don't know.

Despite a growing emphasis on quality, few companies have reached a level of excellence in quality management that allows them to look beyond major predictable risks to mitigate the trivial errors that interrupt day-to-day operations. Indeed, in our experience across industries, seemingly minor problems can contribute to quality issues. Some examples:

• A bank employee responsible for confirming and recording the exchange rates from more than 90 currencies to U.S. dollars made a mistake when hardcoding the rates. The problem went undetected for many days as exchange rates shifted, causing the bank to incur hundreds of thousands of dollars in losses.
• A critical exception report went unchecked at a credit card acquiring processor because the responsible person was at home sick. The company did not have sufficient work transition procedures in place to ensure the individual's responsibilities were covered. As a result, the company suffered millions of dollars in fraud losses.
• A financial services firm incurred a multi-million-dollar incident just after a U.S. holiday weekend. The firm traced the reason to an error that resulted from the combination of numerous staff members taking vacations prior to the long weekend, their replacement by temporary labor, and the unique circumstances involved when U.S. markets are closed but other worldwide markets are open.
• A retail pharmacy found that a large number of its prescription filling mistakes stemmed from simple visual errors. Pharmacists often mixed up patients with similar names (James Smith versus John Smith, for example) and medications with similar names (prednisone versus prednisolone). These seemingly simple errors can have life-threatening implications for patients and can result in large liabilities for the pharmacy.
• More recently, several major banks have had to halt foreclosure processing because reviewers charged with validating the completeness of documents were not following proper policies and procedures (the 'robot-signing problem'). This has created both financial and reputa-tional risk for these major institutions, as well as frustration and uncertainty for borrowers

Figure: External forces compound quality issues

External forces are compounding these problems (see figure). These forces include the magnification of publicity around such events, including the voice of the consumer that flows through Facebook, YouTube, Twitter and other social media websites and the incessant 24-7 news cycle. Additionally, the growing complexity of business—globalization, complex supply chains, proliferation of products and micro-segmentation, among others—makes it more difficult to prevent and detect quality problems.

Perhaps the greatest external force causing these and other quality issues, however, is the relentless pressure to cut costs, especially through the most recent economic downturn. Companies are cutting staff and spreading people too thin while eliminating entire quality departments.

Five Steps to Improving Quality

It is not easy to address quality problems, especially when it is difficult to measure the value of quality management. We have helped our clients implement several measures to improve the quality of their operations and their products:

Introduce simple checklists. Ensure standardized processes are followed. Conduct an audit of all processes to confirm that standard operating procedures are up-to-date, comprehensive across operations, and followed. Simple checklists have proven to be powerful quality-control tools as they help enforce standard procedures and eliminate the potential for skipping critical steps. Recently, a mortgage bank began using a short checklist to validate the quality of correspondent loans; the bank attributes its higher success rate in the correspondent channel to this checklist.

Build controls into processes. Injecting "in-flight" quality reviews into major processes will ensure that outputs are correct, particularly in areas that have regulatory implications. All too often, companies employ multiple reviews on critical processes but the reviews all check the same output or elements in the same way. This slows down processing and diffuses accountability. We saw this at a retail pharmacy where pharmacists checked and rechecked prescriptions, but still had a high error rate. The company reduced its error rate by using fewer but more effective controls. The key is to ensure that each check has a specific purpose and is focused on reducing errors and rework.

Manage capacity. Validate that capacity constraints will not create quality issues and understand what causes workload fluctuations, including transaction volumes and special events. For example, using Dow Jones volatility, Tuesdays and Wednesdays are the busiest days for pharmacy visits, so such fluctuations should be factored in by building capacity models, conducting capacity planning and developing methods to handle both short- and long-term workload spikes.

Back-test outputs and controls. Periodically perform back-tests on processes to validate the integrity of systems and data, the accuracy of outputs, and compliance with controls. Physically walking through the process will provide visibility into the inputs and methods used and will highlight system connectivity issues, hand-offs and manual interventions, all of which introduce potential for errors. We recently helped an asset manager build a process to regularly back-test the firm's management fees to verify the accuracy and validity of the calculations and data inputs used. This testing, when used regularly, will help identify in real time vulnerabilities in processes, systems and controls, and uncover surprises before they occur.

Heed near misses. While most companies react to large-scale problems when they are exposed, the leaders in quality management track and analyze all incidents rigorously, no matter how minor. The goal is to learn from all mistakes and to understand the company's potential risk exposure. This includes evaluating which small mistakes should be considered "near-misses" for bigger incidents. For example, an asset manager that recently missed a manual wire transfer from a concentration account to a redemption account did not incur any fees for the mistake. But, had the direction of cash flow for the wire been reversed, the company would have been exposed to overdraft fees. Firms that focus on quality document the details of all errors—both large and small—to facilitate the escalation process, monitor corrective actions and enable rigorous analysis to uncover longer-term weaknesses. Lessons are shared throughout the organization so future mistakes can be avoided.

The Smaller the Better

The plans mentioned in this paper require neither a large dedicated quality organization nor a major burden on operations. In fact, having too many people or functions involved can lead to diminished returns as excess oversight can diffuse accountability and thus amplify problems.

Excellence in quality can be achieved with a small team of specialists that has both investigative and operational skills. Clearly delineating roles and responsibilities among operations, risk management and quality management is crucial. For example, a small quality group might focus solely on detecting risks, while operations handles all quality control checks and manages corrective actions in the wake of an error. One worker and a part-time worker on the quality team for every 100 people in operations is about the right ratio. In fact, a bank implemented this type of quality program and reduced its calculation error rate to less than 1 percent (from about 5 percent) in just three quarters while simultaneously reducing the overall occurrence and dollar impact of adverse quality incidents.

No organization can expect to operate with zero mistakes. Each company must set its own realistic quality targets that make sense from a cost-vs-benefit perspective, considering its full quality risk exposure. And while it might be impossible to prevent all unpredictable mistakes, it is possible to create a high-quality environment where fewer things can go wrong.

Authors

Uday Singh is a vice president in the financial services practice. He is based in the New York office.

Emily Schlosser is a consultant in the financial services practice. She is based in the New York office.

Copyright 2011, A.T. Kearney, Inc. All rights reserved.