A Refocus on Customers
The focus of Six Sigma changed again in 1998. While ecstatic with the bottom-line impact Six Sigma was having on the company, senior management was disturbed with feedback from key customers. The quote that appeared in the 1998 Annual Report was: “When do I get the benefits of Six Sigma? When does my company get to experience the GE I read about in the GE Annual Report?”
Up until this point most projects had been focused on opportunities for GE to generate internal savings. While many of these process improvements ultimately affected customers positively, at that time it was certainly fair to say that Six Sigma had done more for GE's stockholders than for its customers.
In 1998 the direction was to focus more projects on direct customer issues, such as product delivery processes. In addition, primary emphasis was placed on reducing variation in such processes, not just fixing the average. The 1998 Annual Report is one of very few instances of a Fortune 500 CEO providing a detailed explanation of why focus on the average is insufficient, and why one must reduce process variation as well.
Application to Finance
In November 1998 I became the Quality Leader of the corporate audit staff (CAS), a part of corporate finance. While maintaining a core competency in financial auditing, CAS devotes considerable effort to driving corporate initiatives (e.g., Six Sigma, globalization, services growth, eCommerce), compliance issues, acquisitions, and other critical business issues. It obtains additional influence from the fact that it is a key leadership development program in GE, with a number of key business leaders being graduates of CAS.
The head of CAS wished to accelerate the staff's Six Sigma efforts, and make sure that they were in a position to be true Six Sigma leaders, particularly in financial applications. I admittedly knew virtually nothing about finance, but had a core belief that Six Sigma could (and should) be applied everywhere. Personally this was somewhat of a challenge to prove my belief.
While some auditors initially balked, both the leader of CAS and his replacement made it clear that Six Sigma would be implemented in a way to ensure success.
This leadership commitment won 80 percent of the battle. I was able to focus entirely on deployment, without wasting any time trying to win people over. This reinforced my belief that there is no substitute for leadership!
Details of CAS's Six Sigma efforts have been well documented (see Agrawal and Hoerl 1999, and Hoerl 2001). Suffice it to say that Six Sigma went from being added work to being a means to do better finance. CAS (in partnership with GE businesses) pioneered use of Six Sigma in a variety of application areas, such as digitization (eCommerce), cash flow, collections, product delivery, reserves, the auditing process, hedging of foreign currencies, compliance, acquisition integration, and many others. The list given here illustrates some financial applications of CAS's Six Sigma projects.
The best news was that we were reaching people early in their careers, which meant that they would be carrying this continuous process improvement mindset to each of their subsequent positions within the company, perhaps to senior management. By the time I left CAS in 2000 I was wondering why I had spent so many years in manufacturing and engineering.
Reducing average and variation in days outstanding of accounts receivable (collecting money faster).
Optimizing timing of invoice payment in accounts payable (paying in time to collect discounts, but otherwise holding on to the money as long as the terms allow).
Managing costs of public accounting firms (investigating why we sometimes pay more per hour than other times, and why we sometimes have highly paid accounting people, i.e., partners, doing lower level work).
Skip tracing in collections (determining financially optimal strategies for finding consumers who have skipped on accounts [credit cards, leases, etc.]).
Determining the best way to factor inventory (pay a third party to hold it on their books), taking into account several criteria, such as net income, cash flow, and so on.
Determining the best way to factor accounts receivable (selling our accounts receivable to a third party to enhance cash flow, while maintaining profitability).
Closing the books faster (frees up time of finance resources).
Improving the audit process to be more accurate (fewer missed issues) and faster.
Reducing the number of manual account reconciliations (relates to several other applications).
Improving the acquisition process (faster, fewer resources, fewer mistakes).
Realizing revenue from long-term service agreements faster (accounting rules require equal revenue realization over the life of the contract unless you can provide evidence that your costs will not be equal).
Hedging foreign currencies (improving the manner in which we convert foreign currencies to U.S. dollars). Since all financial measures are generally reported in dollars, this can have a huge impact on the bottom line for international companies.
Reducing variation in cash flow (sometimes cash flow follows profitability, sometimes it doesn't. Why?). Because of so much creative accounting today, analysts often want explanations if cash flow is not increasing at the same rate as earnings.
Credit scoring (improving our ability to predict which individuals or businesses are good credit risks, and which aren't).
Journal entry accuracy (a rule of thumb suggests that most businesses have a 3–4% error rate in journal entries, resulting in a lot of rework later).
Financial forecasting accuracy (enough said!).
Improving accuracy and reducing cycle time of standard financial reports (cycle time relates to freeing up finance resources, as well as getting more timely info).
Filing federal, state, and local taxes (typically to reduce cycle time, and ensure that we are not overpaying).
Managing the pension fund better; i.e., obtaining higher rates of return (the federal government requires certain reserves, but if we manage the pension fund well, we can take the amount overfunded to the bottom line).
Payroll accuracy, including deductions for taxes and benefits (enough said!).