Six Sigma Approach

Delivering products and services with speed, customer satisfaction and lower cost through operations excellence is essential to achieve and sustain superior shareholder returns in businesses and governmental enterprises. Operating excellence is becoming an even bigger priority in service segments because so much of their costs are tied into operations. In fact, many analysis reveals that 30-80% of the costs in a service business are pure waste. Eliminating this waste can not only reduce costs, but more importantly allows a business to become faster and much more responsive to its customers, driving revenue growth.

Companies as diverse as Xerox, Caterpillar, Eli Lilly, Alcan, Best Buy, Washington Mutual, GEICO and BMW have worked with George Group to develop a Lean Six Sigma capability. Why? Because it helps them…

• Execute: Lean Six Sigma creates a powerful linkage from strategic priorities to operational improvements and facilitates the transformation of a business.
• Create value: Lean Six Sigma drives real, tangible value creation: Since 2000, our client index has tripled in value while the S&P 500 has declined.
• Build customer loyalty: Lean Six Sigma generates line-of-sight targeting of customer needs, driving improvement in the areas that matter most to your customers.
• Achieve sustainable management capability: Lean Six Sigma is an approach that is highly sustainable, woven into the fabric of the business with capability created from the executive suite to frontline employees.

Approach :

1. Learning to Recognize Process Waste in Financial Services
2. Fast Start Collecting Data on Financial Service Process
3. Designing Financial Services with DMEDI
4. Reducing Delays in Service Processes with Rapid Setup
5. Balancing Roles and Responsibilities in Six Sigma
6. Check Imaging Improvements with Lean Six Sigma
7. Minimizing Risks: How to Apply FMEA in Services

Fast Start Collecting Data on Financial Service Process

n any financial service process that is being studied for the first time, it is common for Six Sigma teams to spend one-third to one-half of their project time on data collection alone. It simply takes a lot of time to figure out what data is needed, to develop a reliable data collection process and to analyze the results. Here are three tips that can help teams get a fast start on data collection.

1. Monitor Some Baseline Metrics

Every improvement project will have its own unique data needs, but there are a number of metrics that are useful for determining overall process health, such as:

Work-in-Process (WIP)/Things-in-Process: The amount of work that has entered the process but has not been completed.

Average completion rate: The average number of work items that are completed in a given time period (a day, an hour, etc.).

Demand variation: The amount of fluctuation in the demand for the output of the process. The amount of work that arrives at a given activity is measured in terms of units/day and as an average completion rate per unit. Variation can be used in queuing theory to estimate the resulting delays that this variation causes.

First-pass yield: The percentage of "things-in-process" that make it all the way through the process the first time without needing to be fixed or re-handled in some way. First-pass yield is a good overall indicator of how well the process is functioning. It also reflects both Lean and Six Sigma goals: in order to have a high first-pass yield, the process must operate smoothly (i.e., with good process flow) and with few errors.

Approvals or handoffs: Two characteristics almost always seen in slow processes are (1) a lot of approvals before work can be completed, or (2) a lot of handoffs back-and-forth between people or groups. In contrast, Lean processes operating at high levels of quality are characterized by many fewer approvals and handoffs. While having low numbers of approvals or handoffs doesn't guarantee having a Lean process, this is relatively easy data to collect and will almost certainly drop as the process improves.

Defects/Sigma capability: The Sigma level in Six Sigma is, of course, the rate of defects that occur per defect opportunity. The key is to come up with definitions that: (1) everyone in the team will interpret the same way, and (2) are consistent with other definitions used in the organization. For example, when filling out a new customer account form, is every keystroke counted as an opportunity for someone to make a mistake? Or is the whole form one "opportunity"? Do typos count the same as omissions? It is best to focus on things that are important to customers. There are a lot of ways that a form, a report or a service can be technically "defective" in some way without it mattering to internal or external customers. For example, perhaps different employees do the work in a slightly different sequence. If "sequence" affects quality as perceived by the customer, then doing the steps in the wrong order is a defect that should be tracked. If sequence does not affect the customer, then there are probably bigger fish to fry elsewhere.

Cycle or lead time: How long it takes for any work item to make it through the process from beginning to end.

Setup, downtime: Any delays or productivity losses that occur when people switch tasks.

Measure these things early in a project, then again once improvements have been made to determine the impact. If the process being measured has a lot of steps and/or a lot of throughput (volume of work), consider measuring on a sample basis at first (e.g., randomly sample key steps).

2. Observe the Process

In the words of Yogi Berra, "You can observe a lot by watching." There simply is no substitute for impartial observation as a way to confirm what really happens in a process. Impartial observations are critical in identifying waste and inefficiencies built into how work is currently done.

In an office environment, it's hard to "observe" the work itself, since it can take the form of e-mails, reports, phone calls or inputs to screens – some work products may exist only in a virtual sense. As a result, process observation in service environments means watching people and what they do. And there's the rub. Not many people like someone sitting at their shoulder, watching their every move.

For that reason, process observation in financial services often works best with trained observers, especially if they are seen as neutral parties (i.e., they come from a different work area, they are a trained Black Belt who has not worked in the area before, etc.). Also, office staff needs to be involved in setting the goals for the observation ("What will be learned from this?") and in deciding when the observation will happen, which staff will volunteer to be observed, and so on.

The example below is a form that Lockheed Martin found invaluable in the early stages of improvement projects. It was used for verifying (or refuting) everyone's ideas about what they think is happening, and for helping them zero-in on areas that need attention.

Example of Form Used for Process Observation

3. Collect Data by Participating in the Process

What better way to evaluate a particular service than by acting as a customer of that service? This can be done most easily by having a selected group of employees physically walk the process pretending to be an item of work – an incoming customer call, for example. What happens to the record of the call? Who works on it next? What happens at that work station? Where does it go after that?

Another approach is shared by Roger Hirt, a Black Belt with the City of Fort Wayne, Ind., who recalls one project where a team wanted to improve the quality of response to citizen calls. Instead of doing an after-the-fact survey of callers, they used the increasingly common practice of "secret shoppers," people who interact with the process just as real customers would. First, they provided the secret shoppers with standard scripts relating to different types of inquiry and complaint calls. They had these people call the city department at different times (so they would talk to different staff), then looked at how the staff had handled the calls. They discovered a lot of inconsistency in how staff recorded and categorized information, with the result that citizens weren't always provided with correct answers or responses. This information allowed the department to develop training for everyone who received calls. A second secret shopper trial showed dramatically improved results.

Collecting data this way is a sensitive issue. On one hand, the idea is to be assured that the secret shoppers are getting service similar to what real customers would experience. But on the other hand, employees may be disturbed if the data collection comes as a complete surprise. Project Black Belts and improvement teams will have to make a judgment call about how much to tell people ahead of time.

Conclusion

These tips demonstrate that collecting data in service environments involves much more than simply getting out a stopwatch or counting errors on a form. A project team will make more progress if it plans to observe the process in question, pay attention to where and how the data is collected, and be creative in finding ways to evaluate customer experience with a particular service.

Check Imaging Improvements with Lean Six Sigma

Moving information electronically offers tremendous opportunities for cost efficiencies and improved levels of customer satisfaction for the banking industry. But paperless processes also carry heightened risks for failure. A single process breakdown, when automated within a high-speed electronic world, can result in problems for hundreds of thousands of customers. One such process is check imaging -- potentially a huge opportunity for reduced costs and happier customers, but if poorly executed, a huge legal liability. This is a banking issue of global proportions. Deutsche Bank's Alex Brown projects that a quarter of the world's large banks will be implementing check imaging within the next two years.

In this case study Lean Six Sigma was used as the method of extracting the benefits of the imaging process, while negating the potential headaches that can occur in a poor process.

What is Lean Six Sigma? Many people have heard of Six Sigma and know that it deals with reducing defects, improving quality and eliminating variation. Lean is a discipline focused on improving process speed and eliminating waste. Lean Six Sigma is the synergistic union between the two, as quality improves speed and speed improves quality. By integrating Lean speed and Six Sigma quality, the rate of improvement in quality, cost and speed increases much faster and goes much further than either discipline could achieve separately.

Reducing the Risk with Paperless Transactions

The required rate of improvement in this case study was urgent. The stakes were high for the client. Undoubtedly, the business case for imaging checks is strong. Supplying customers with electronic images of canceled checks instead of returning the actual checks significantly improves costs by reducing outlays for staff, transportation and postage. Additionally, the case for imaging relates to improved customer service, transaction speed and fraud prevention. Moreover, it is a stronger business case today than it was a few years ago. Fraud has increased -- it currently costs the industry between $12 billion and $16 billion a year, according to Carreker Corp. And the cost of electronic storage is now from one-tenth to one-twentieth as expensive as it was just four years ago, according to Bank Administration Institute (BAI).

But poor execution of check imaging carries a huge downside. It can impact a bank in three broad areas: Customer retention, cost and legal ramifications. In this case:

• Unhappy customers -- Image mismatching, i.e. when a customer's check is incorrectly matched to another customer's account, was causing customers to turn away. The service failed to meet customers' expectations and was causing concern about security. As customers began to use the service more, delays in accessing their checks became an issue.
• Higher costs -- The value proposition for imaging is rooted around its impact on efficiency and cost. In this case, the high degree of mismatching was requiring the efforts of an entire full-time team to rectify the issues.
• Potential lawsuits -- The Privacy Act and the Patriot Act have increased the need for information to be accurately stored and appropriately communicated. Violating the Privacy Act- albeit in error – leaves financial institutions open to lawsuits from those individuals and corporations whose information went astray.

Identifying Levers for Improvement

In the beginning the client was not focused on mismatching, but rather simply defects within the imaging process. They knew they had a problem, but not sure where. There were three main areas of focus that determine quality in the imaging process:

• Images are available.
• Images received are correct (alternative: mismatched images).
• Images are legible.

A Pareto analysis was used to graphically depict the contribution of each type of defect to the total. The output: 62 percent of defects fell under the mismatch category.

Figure 1: Pareto Analysis of Image Defects

As illustrated in Figure 1 above, the greatest opportunity lay in solving the issue of mismatches.

What kind of opportunity exists in banking today? To have a Six Sigma level of image integrity means 99.9997 percent are properly indexed. Currently, banks are between three and four sigma. In other words, for every one million items a bank processes per day 6,210 to 66,800 images are defects and up to 41,416 images are mismatched.

From Root Cause to Solution

In this case study, the key was to identify what lay behind the mismatching errors. The team documented two root causes. The first root cause was network failures. The second variety was created when there was a major hardware malfunction at the time of capture and the sorter operator did not follow proper recovery procedures.

The first action was to implement a Critical to Customer safeguard, ensuring the errors did not pile up at the customers' doors. The team concluded that by implementing a tracking number checkpoint, mismatches would be caught during capture -- in other words, before they reached the customer. The mismatches could then be quickly rectified. The second action was to implement improved training and sorter operator incentives so as to ensure proper recovery procedures at the time of malfunction.

The team also built a Value Stream Map of the process which included key performance data such as wait times, setup times, rework loops and processing times. Creating the map highlighted wasted time and effort that usually isn't apparent, even to people embedded in the process. Each step was categorized into value-add or non-value-add, and the team was able to identify and eliminate significant waste and dramatically decrease cycle time by removing non-value-add steps in the process. All told, the team was able to cut the cycle time by 50 percent, raising productivity levels and driving out $500,000 in cost.

Designing Financial Services with DMEDI

As banking operations and check processing enters the 21st Century, so too the ways financial institutions design processes enters a new age. Long gone are the days of trial-and-error in bringing new products, services or technologies to market. Companies need to be able to implement solutions effectively -- the first time -- to provide superior customer service, while decreasing cost and boosting shareholder value.

In recent years, many financial organizations have turned to some form of Six Sigma or Lean Six Sigma in their search for tools to help them decrease defects and rework while increasing process velocity. But the basic toolkit associated with these methodologies does not incorporate the type of rigor needed when you want to invent a new service, product, or process (or overhaul something that is already in place). One methodology is powerful enough to handle the task. It is Design for Lean Six Sigma (DFLSS).

Design for Lean Six Sigma (DFLSS) is a complement to Lean Six Sigma's DMAIC methodology. The basic difference between DFLSS and DMAIC is DMAIC focuses on bettering existing processes while DFLSS focuses on new processes or complete overhauls of existing processes. DFLSS concentrates a great deal of effort on designing a process to reach Six Sigma levels before it's implemented, creating a completely new, Six Sigma-capable process from the start.

The key issue when you design a new service or process is that there are a lot more unknowns than when you tweak what you already have. You don't really know what customers want. You don't really know which models or approaches are workable. You may not have existing capabilities to provide the needed functionalities.

The preferred improvement model used for these situations goes by a number of names: some organizations call it DMEDI (for Define-Measure-Explore-Develop-Implement), some call it DMADV (for Define-Measure-Analyze-Design-Verify), and some just use the more general terms of Design for Six Sigma or Design for Lean Six Sigma (DFLSS). Though the labels differ, all are strategies for executing projects that require a significant amount of new design.

Define: The project team comes together with its sponsor to develop a well-defined charter that has clear ties to the business strategy and line-of-sight linkage to significant financial benefits

Measure: The team focuses on understanding the Voice of the Customer, information that will be used to design best-in-class products and services

Explore: The team innovates to develop multiple solution alternatives and selects the most promising concept, as well as confirms a high-level design

Develop: The team uses Lean and Six Sigma tools and simulation to create a robust design

Implement: The design is piloted, a control plan is developed, and the new product or service is launched

Define

The objective of the Define phase is to develop a well-defined charter for the project team that includes: a product/service description, business case, project goals, project scope, a high-level project plan, and team members. The charter should be sufficiently detailed so that the business objectives and the scope are clear to both the team and the management.

In addition, there are two major elements of risk to be considered in a DFLSS project. First, the risk that the project will not meet its objectives, which would primarily be a risk to the schedule and to benefits (technical, cost, schedule, and market risk). Second, there are the risks that the project poses to other elements of the business.

Measure

The purpose of Measure is to understand the Voice of the Customer (VOC), and to translate customer feedback into measurable design requirements.

The first step in capturing the Voice of the Customer is determining the appropriate customer segment. While in theory anyone in the world could buy your services, there is a particular subgroup, or segment, that is most likely to buy. If you're interested in achieving maximum performance, you want to focus your products and services on the customer group where it is most likely to resonate in the marketplace.

Focus on the customer segment(s) that align with the company's business strategy, are attractive from a size and profitability standpoint, and align with the business's capability to satisfy them.

Start the VOC process by taking advantage of existing and available information within the business. Every company has customer contact sources that can provide a baseline for service/product design. Some sources to look at are complaints, compliments, returns or credits, contract cancellations, market share changes, customer referrals, closure rates of sales calls, market research reports, completed customer evaluations, industry reports, available literature, competitor assessments, web page hits, or technical support calls.

Once you understand the gap between the customer information you already have and what you need, use proactive methods to gather additional information. The most common techniques are interviews, focus groups and surveys.

Translating needs into requirements -- If you survey customers and ask which features they would like to see in your services, they will undoubtedly say, "All of them!" However, customers don't value all features equally. That's why the DMEDI process exploits a tool known as Quality Function Deployment (QFD) that helps you understand customer priorities. The secret to QFD's success is that it establishes design requirements that are:

• Measurable (quantifiable) so you can tell whether or not you've met them.
• Solution-independent, meaning the requirements aren't linked to predefined solutions that the design team might have in mind (allowing for much greater creativity).
• Directly correlated to customer needs, so you know that you're addressing issues that are important to customers.
• Easy to understand.

To achieve these goals, QFD walks through a series of steps:

1. Identifying customer needs from the VOC data you gathered
2. Prioritizing those needs
3. Establishing design requirements that address all customer needs
4. Prioritizing those design requirements (to help focus the design effort)
5. Establishing performance targets

These steps are linked together deliberately, so that at the end you can trace a path directly from customer needs to specific elements of the design.

The team also will assess the impact of failing to meet the targets and specifications, including an assessment of different risks (to the customer, to the business) and whether the organization's current competencies are well matched to meet the performance targets.

Because there is such a learning curve in the Measure phase of a project, teams often discover quick wins: changes that look to be a sure thing, are easily reversible, and require little or no investment. The team should take advantage of quick wins as soon as possible, and begin accruing financial benefits.

Explore

After defining requirements, the team needs to answer the question: What is the best way to meet our customer needs at a conceptual design level?

This is where innovation occurs. Usually, teams will discover that there are conflicts between customer needs and the company's ability to meet those needs, conflicts between different design parameters, or conflicts between cost and performance. Often, trade-offs or compromises are made -- though finding solutions to resolve these conflicts rather than compromise leads to more innovative products and services.

The tool used here is a component of QFD called "functional analysis." Every service or product has certain things that it must do in order to perform acceptably from a customer's viewpoint. Functional analysis breaks the service down into its key tasks. For example, rather than brainstorm concepts for an imaging service at a system level, the team would identify the functions (prioritize paper items, scan paper to create images, validate scans, forward images) and then brainstorm solutions for each of the functions (e.g., prioritize paper images -- on-us listing, transit listing, equipment, software).

The goal is to prioritize the functions that have the strongest link to the Voice of the Customer, because those will be the foundation of any new design. You also can use the House of Quality to flow down the high-level design targets into smaller design elements.

After generating many interesting concepts, the team will need to narrow the field to the one or two most promising alternatives. (Notice the key assumption that the team has multiple concepts to consider!) You want to be sure that all feasible alternatives have been explored before deciding on a single concept. World-class innovations don't come from a one-horse race. If the investigation of concept ideas only brought about one or two options, it is strongly recommended you develop a plan to create additional options before moving forward.

Develop

The Develop phase is where the detailed design occurs. In addition to designing the core service, attention should be paid to developing information technology elements of the project, establishing a plan for human resources, developing sites/facilities, and purchasing materials that will be required for implementation.

As the solution is developed, the team should take advantage of lean tools to maximize speed and minimize waste in the new process. In particular, Value-Added Analysis is beneficial to many projects. The process map of the to-be service is reviewed and each step analyzed and assigned to one of three categories:

• Customer Value Add -- Tasks that the customer would be willing to pay for (i.e., adds value to the service, provides competitive advantage).
• Business Non-Value Add -- Tasks required by business necessity (i.e., financial reporting) but that do not provide value to customers.
• Non-Value Add -- All other tasks (i.e., approvals, all rework loops, waiting).

Implement

The objective of the Implement phase is to successfully conduct a pilot, transfer ownership of the project to the new process owner, and implement the new service. One of the key benefits of the Six Sigma methodology is the rigor around implementation and process control. Everyone has worked on a project that started off well only to watch it fall apart when the solution was implemented. With solid up-front work in the Implement phase, these issues can be avoided.

Conclusion

Design for Lean Six Sigma is the logical step for a company pursuing excellence in designing new products and services. Lean Six Sigma focuses on delivering both Lean speed and Six Sigma defect-free quality. Design for Lean Six Sigma takes the next step by focusing on new development to eliminate unwanted complexity and deliver streamlined, customer-focused, defect-free services.

Balancing Roles and Responsibilities in Six Sigma

Any new initiative in a financial services business will require some job shifting. Some people will have to stop what they have been doing and take on different responsibilities; some may be required to add new responsibilities onto an already crowded slate. Both types of reassignments are common with Six Sigma and Lean Six Sigma. Organizations not only have dedicated resources, such as Champions and full-time Black Belts, but also have people who must squeeze Six Sigma work in with their ongoing job responsibilities.

The problems of a poorly integrated Six Sigma infrastructure are legendary. Talk to anyone who has been involved in Six Sigma for several years or more and they will likely be able to tell war stories about Black Belts who acted as if their work was more important that anything else happening in the company, or managers who sabotaged Six Sigma efforts, fearing that devoting time and resources to projects would hinder their ability to meet quarterly or annual goals.

There are no simple answers to how Six Sigma or Lean Six Sigma can or should be woven into a company. A key element, however, is how the company assigns and balances roles and responsibilities. One simple way to approach the issue is to look at each of the major types of decisions that Six Sigma and non-Six Sigma staff will have to make, and determine what responsibility those with each different role should have in each decision.

A typical model used for this purpose is called RACI (pronounced ray-see), which stands for:

• Responsibility - People who are expected to actively participate in the activity and contribute to the best of their abilities.
• Accountability - The person who is ultimately responsible for the results.
• Consultation - People who either have a particular expertise they can contribute to specific decisions (i.e., their advice will be sought) or who must be consulted for some other reason before a final decision is made (e.g., finance is often in a consulting role for projects).
• Inform - People who are affected by the activity/decision and therefore need to be kept informed, but do not participate in the effort. (They are notified after the final decisions are made.)

Companies face a number of key decisions as they complete a RACI analysis. One of them is what the balance of power will be between Black Belts and teams. Black Belts are put in a delicate situation: On the one hand, they have a lot of knowledge that teams and line management can use to make the project a success. On the other hand, if they impose their knowledge on those they are supposedly helping, they are sending the message that Six Sigma means "do it my way." As a rule, Black Belts should be positioned in the role of support staff, not decision-makers. That is because they are not experts in, nor do they have any ongoing responsibility for, the work of the organization. This and other RACI principles are outlined in Table 1, along with the risks if the principles are ignored.

Table 1: RACI Principles
Design Principles	Risk If Violated
Black Belts are subordinate to the business.	If Black Belts are held accountable for results, their agendas may replace that of the P&L managers they are supposed to support. Eventually, they will be perceived as elite specialists and resented. Six Sigma can become isolated and eventually ineffective.
Program governance and resource allocation authority must be concentrated in one person/role - preferably a full-time Champion.	If there is no single, executive-level person held accountable for overseeing Lean Six Sigma, constantly managing the project pipeline and making the required judgment calls when conflicts arise, a company will end up with sub-optimization of effort, weak accountability for program results and a depleted project pipeline after the initial rush.
People with a lot of influence must participate in the Six Sigma program's direction-setting - project selection, Black Belt selection, resource contribution, and how to address organizational barriers.	It is critical to have full engagement of the organization in Six Sigma, beginning with key influencers and then cascading out from there. If that does not happen, if people not directly involved with the program are kept in the dark, the company will end up with compliance, not commitment, to the Lean Six Sigma philosophy. Ultimately, the link between strategy and execution also will break down.
Accountability should be pushed down in the organization as low as possible.	If the organization's executives hold onto all or most of the accountability, employees will continue looking upward for approval/permission – resulting in gridlock and reinforcing the notion that nothing has truly changed. The company also may end up with poor decisions because those at the top lack the local knowledge of the people who work with the processes every day.
RACI must be published publicly and discussed with all those affected.	Going through the exercise of developing a RACI chart will gain meaning only when the outcomes are acted upon. Otherwise, the company will have wasted time on something that winds up being a non-implemented planning tool.

It is important to note that Table 1 offers general principles that work in most circumstances for most organizations. However, every organization is unique, and one must find a balance between sticking with the principles – which are known to work – and accommodating special circumstances in the particular organization. Accommodating those special circumstances is especially important if ignoring them will generate resistance to any change.

Table 2: RACI Method for Clarifying Lean Six Sigma Roles
Activity >	Deployment Ownership	Project Identification	Project Selection	Project Execution	Project Results	Team Support	Sustain Changes
Executive Team	A	R	A
Champion	R	A	R			R
P&L Managers		I			A	R	R
Process Owner		C		R	R	R	A
Black Belt		C		R	R	A
Team Leader/Green Belt				R	A
Etc.

A chart like Table 2 can help in working through and summarizing RACI decisions. (Obviously, the specifics will likely vary for every organization because each may have different roles or divide up the decision tasks or activities differently.) This excerpt of a RACI table shows how it can clarify roles, or levels of participation. List only one "A" (accountability) for each activity. The division between "responsibility" and "accountability" is often not clear, and most organizations discuss the issues at length to reach consensus. For example, since Black Belts are positioned as support for teams, they cannot be held accountable for team results – though they can be held accountable for providing expert support. (The project sponsor usually has the "A" for project results.)

Whether RACI or some other tool or model is used, the important thing is to not just leave the assignment of responsibilities to chance. Organizations can avoid innumerable conflicts by taking the time to make deliberate choices about who will be responsible for what.

Minimizing Risks: How to Apply FMEA in Services

It will probably come as little surprise that something called Failure Modes and Effects Analysis (FMEA) evolved at the National Aeronautics and Space Administration, an environment where the interest in preventing failures is extremely high. FMEA was later popularized by the automobile industry and in recent years has become more widespread among Six Sigma practitioners. It is now seen routinely even in transactional functions.

What is FMEA?

FMEA is a system for analyzing the design of a product or service system to identify potential failures, then taking steps to counteract or at least minimize the risks from those failures.

The FMEA process begins by identifying "failure modes," the ways in which a product, service or process could fail. A project team examines every element of a service, starting from the inputs and working through to the output delivered to the customer. At each step, the team asks "what could go wrong here?"

Here are a few simple examples of failure modes related to the process of providing hot coffee at a truck stop:

• One of the inputs to that process is a "clean coffee pot." What could go wrong? Perhaps the water in the dishwasher is not hot enough, so the coffee pot is not really clean.
• The first step in the process is to fill the brewing machine with water. What could go wrong? Perhaps the water is not the right temperature or the staff puts in too much or too little.
• An output from the process is a hot cup of coffee delivered to the customer. What could go wrong? The coffee could get too cool before it is delivered.

Of course, all failures are not the same. Being served a cup of coffee that is just hot water is much worse than being served a cup that is just a bit too cool. A key element of FMEA is analyzing three characteristics of failures:

1. How severe they are
2. How often they occur
3. How likely it is that they will be noticed when they occur

Typically, the project team scores each failure mode on a scale of 1 to 10 or 1 to 5 in each of these three areas, then calculates a Risk Priority Number (RPN):

RPN = (severity) x (frequency of occurrence) x (likelihood of detection)

The idea is to focus improvement efforts on the failures that have the biggest impact on customers. The highest scoring failure modes are those that happen a lot, that are bad when they happen, and/or that are unlikely to be detected. Difficult-to-detect errors obviously are more likely to get through to customers.

The team then completes the FMEA analysis for the highest-scoring failure modes and for any that get the highest severity scores, even if they do not score that high overall. Obviously, a business wants to make sure any possible disaster is prevented, even if it is unlikely to occur. "Completing the analysis" means looking at the potential causes for the error mode, identifying ways to detect the problem, developing recommended actions, and assigning responsibility for monitoring the process and taking action when warranted.

In the truck stop scenario, for example, here is a complete set of FMEA data for just one failure mode:

Process step: Fill coffee pot with water
Potential failure mode: Wrong amount of water
Effect of the failure: Coffee too strong or too weak
Severity score: 8
Potential cause: Faded level marks on pot
Frequency score: 4
Current method of controlling the failure: Visual inspection
Likelihood of detecting: 4
RPN = 8 x 4 x 4 = 128
Recommended action: Replace coffeepot
Person responsible: Mel

FMEA Case Study

A project was done in a transaction processing department to reduce process cycle time and reduce defects. In the Analyze phase of DMAIC, the team identified several root causes, including duplication of efforts, excessive hand-offs and significant non-value-added work activities (such as filling out forms for other departments). In the Improve phase the team identified changes it could make that would remove non-value-added work to reduce hand-offs, and it developed ideas for several job aides to reduce defects. Before the team launched the pilot of these solutions, the Black Belt decided it would be worthwhile to have the team complete a FMEA on the redesigned procedures.

During the FMEA analysis, the team realized that one of the steps it wanted to remove from the process – which it had defined as non-value-added – was actually an important input to the finance department downstream in the process. (The finance department played a support role in making sure certain controls were in place to limit the risk the company faced from processing the transactions.) Implementing the new process as designed by the team would have seriously disrupted the finance group and the company could have been exposed to significant risk. By exposing this potential problem before launch, the team was able to adjust its solution so that the information was still provided to the finance department, though in a more streamlined manner, and still meet the original project goals.

Practical Uses for FMEA

The case study shows that FMEA is a good idea whenever changes to the workplace are planned. More generally, it can be used at either end of a DMAIC or Design for Six Sigma project:

• At the beginning of a project, FMEA can help a team better scope the opportunity by defining the types of failures and narrowing the focus to a specific type of problem.
• In the Improve phase, FMEA can help uncover potential problems (especially unintended consequences) with suggested solutions, thereby allowing timely adjustments.
• In the Control phase, FMEA helps identify what measures need to be in place to make sure that failures will not happen in the future.

Project teams trying FMEA for the first time are advised to keep it simple. Think of it as structured brainstorming – a technique to get teams thinking about potential failures it has not thought of before. Bring together people from different work areas and disciplines. FMEA works best in a team environment with cross-functional representation. Subject matter expertise is critical.

Reducing Delays in Service Processes with Rapid Setup

A P&L manager who is preparing a monthly report starts gathering the information he needs. He realizes that this month's sales figures are not broken out by region, so he calls accounting and asks for the regional split as quickly as possible. He also discovers that he has updates on only three of the four Lean Six Sigma projects in his unit. The Black Belt for the missing project is on the floor that day, so he spends a few minutes tracking her down and getting a verbal update. Then all he has to do is get the month's wages/benefits figures from human resources, and he's ready to work on that report.

Dave, one of the more experienced technicians in IT, knows more about PCs than nearly anyone in the company. PCs are used by every department except the graphic design group which uses Macintoshes. So, even though Dave spends 95 percent or more of his time supporting the PC users, he still has to answer a handful of calls each month from the Mac users. He describes the experience as having to "reconfigure" his brain so he can switch from thinking in Windows to thinking in OS X.

Marcie in personnel is the gatekeeper of incoming job applications, which arrive by mail, by fax and via the company's website. She finds it more convenient to wait until she has a stack of at least 20 applications to log into the database all at once, rather than doing them as they come in.

These examples reflect what happens in most companies – constantly tracking down information to finish a task, mixing duties which are only rarely performed with regular duties, batching work items because it seems more convenient and efficient that way.

Lean Six Sigma practitioners recognize that although each of these job practices are common in service functions – and usually accepted as "the way work is done" – they each represent non-value-added work that increases delays and extends work in progress. Thus, they also impede the quick completion of value-added work.

In Lean terminology, the three situations described above are all considered "setup problems" that delay or interrupt people as they try to complete their value-added work: In the first case, there are delays as the person tracks down the information. The IT support employee is less efficient at work he performs infrequently because of the learning curve, having to switch his brain from one way of thinking to another. Job applications are delayed because the gatekeeper prefers to work in batches.

The Rapid Setup Method

The tool for attacking setup time is the four-step rapid setup method. The principle of this method is to eliminate anything that interrupts or hinders productivity. Here's how it works in financial services:

Step 1: Identify and tabulate any process-related work that fits into one or more of the following categories:

1. that delays the start of
2. causes interruptions to value-added activities
3. that starts off at reduced output rates (likely due to learning curve issues)
4. that is very similar or identical to another task in the process

Category 4 is the hardest for people in service functions because there is so much waste and non-value-added work that is taken for granted. Supervisors, or in the case of a project, team members must learn to objectively observe people as they perform the tasks of a process and note anything that prevents them from performing the value-added work. If it a person is examining their own work, they must try to develop an awareness of when they have to slow down or stop doing value-added work in a process. Then they should ask themselves why they had to stop. There will always be interruptions, but only process-related items are being considered here. For example, a buyer completing a purchase order may get a phone call from another employee requesting information. The processing of purchase order may be interrupted, but that delay is not caused by something inherent in the purchase order process.

As service offerings/features expand over time, tasks may grow up that are nearly identical. When tasks that are similar to other tasks are discovered, the question must be asked: Can they be combined to eliminate a setup? If so, the change should be implemented as quickly as possible.

Step 2: See if any of the interruptive/delaying work can be offloaded – in other words, handled outside the process, so that the information/material is waiting when needed, rather than causing a wait.

The goal is to be able to zip through all the value-added work in a process without any delays or interruptions. Looking at problems identified in Step 1, a project team must ask why those problems appear, and figure out how to eliminate that source of delays or interruptions. The question team members need to answer is: "Why do we have to stop the process to take this step?"

Step 3: Streamline or automate any interruptive/delaying tasks that cannot be offloaded.

In any process, there will be some delaying or interruptive factors that are deeply woven into a process. The team should be creative in trying to find ways to either eliminate or drastically reduce the amount of delays that these tasks inject. For example, many pizza chains today just ask for a phone number the second time a person orders. They have eliminated the need to ask for a name, address and directions a second time.

Several streamlining approaches can be used when the cause of the delay or interruption is a "learning curve" issue associated with infrequently performed tasks. One is to funnel all the requests of a certain type to one person to increase the frequency (e.g., If 10 calls a month for Mac support come into the IT department described above, have one tech handle all 10 calls rather than spreading the calls among all the techs.) Or there are often ways to provide visual or automatic reminders that eliminate the need for people to remember the specifics of obscure processes (such as having pull-down or pop-up menus on a computer screen). Or a third party with the needed expertise might be hired to handle infrequent calls.

On the batching issue: Only batch if the setup problem cannot be solved. Another choice is to reduce process complexity so there are not so many setups in the first place.

Step 4: Bring the process under statistical control.

The setup is not complete until the output of the process is "in spec" and under statistical control. That means the amount of variation in lead time is within predictable limits of +/- 3 . An automatic reporting system should note any deviations outside this limit. As the new process is observed in operation, the team should look for ways to reduce variability in how the steps are complete or in the time it takes to complete them.

Big Bang for Few Bucks

One of the best aspects of the four-step rapid setup method is that the investment can often be almost entirely in intellectual capital (people's brain power), with little or no financial capital (new equipment, software, etc.). The creative thinking can often be done in one or two brainstorming sessions, with some follow-up tests of the new methods.

But even if there are modest investments, the results are worth it. Process cycle time can be slashed by anywhere from 10 to 60 percent. Imagine how happy an organization's customers will be if services are delivered in half the time it takes now.

Learning to Recognize Process Waste in Financial Services

One of the biggest challenges for Six Sigma practitioners in financial services is developing the ability to recognize waste.

Imagine an "overnight pack" entering Bank One's wholesale lockbox process for processing remittance payments. By the time it has been through every step, up and down the elevators, back and forth between departments, it would have traveled one-and-a-half miles. Hard to believe? The lockbox staff also thought so, at first. But as they traced the physical flow of the value stream, everyone was floored. "Well, I guess maybe it could travel that far!"

What is even more astonishing is how much that distance could be shortened. Bank One's team came up with a workspace design that required just 386 walking steps to complete the entire process – an 80 percent reduction in transportation.

Most departments or companies that provide financial services are in the same position as Bank One. They accept things like traipsing up and down hallways as simply part of "how work is done around here." But success with Six Sigma means developing new eyes, then critically and regularly re-examining what is being done and how it is being done. The goal is to identify the steps in processes that are value-added in the eyes of customers. That is, steps which customers would value and be willing to pay for if they knew about them. Everything else is waste. A company will never be able to recoup the time, resources and dollars spent on waste.

To help Six Sigma practitioners in financial services begin developing a "waste-sensing" ability, here are seven types of process waste that someone is doing right now somewhere in virtually every company:

Waste No. 1: Over-Processing

Adding more value to a service or product than customers want or will pay for - The basic theme of over-processing is doing more work than is absolutely necessary to satisfy or delight customers. There are two elements to over-processing:

1. Not knowing what customers want. For example, including return envelopes for loan payments is seen as value-added by customers who pay by check, but waste by customers who pay through automatic transfer.
2. Redundancy. Consider a process that involves a number of approval steps or handoffs. Would customers think that each of those steps is adding value? Rather than requiring five managers to sign off on a decision, why not develop a process and guidelines so one manager can make the call?

Waste No. 2: Transportation

Unnecessary movement of materials, products or information - Too much physical back-and-forth movement is one of the problems that plagued Bank One's original lockbox process. Excess transportation is important because every move from one activity to another adds time to a process – and world-class organizations are passionate about reducing time.

Yet in many service processes, it is not uncommon for paperwork to loop back several times…waiting in queues in a virtual or actual in-box every time it goes through again. Transportation in service processes almost always manifests itself as materials constantly being collected or delivered, or the actual or virtual chasing of information ("Who has that expense figure? Marcy? Okay, I'll ask Marcy…. Marcy says Hector has it…"). At one end of the spectrum, eliminating excess transportation can involve combining steps to eliminate loops. Cutting the hand-offs in half generally cuts the queue time in half. At the other end is the option to rearrange the workspace to match the flow of the process.

Waste No. 3: Motion

Needless movement of people - While "transportation" refers to the movement of the work, "motion" involves movement of workers. Both are much harder to see in service environments than in manufacturing. Motion may show up as people constantly switching between different computer domains or drives, or simply having to perform too many keystrokes to accomplish a computerized task. Solutions can involve everything from rearranging people's desks, to purchasing ergonomic furniture and equipment, to using software that performs tasks offline so information is waiting for the staff rather than vice versa.

Waste No. 4: Inventory

Any work-in-process that is in excess of what is required to produce for the customer - The evils of inventory were first recognized in manufacturing because that is where the inventory itself is most visible. It is hard to ignore a room full of half-completed assemblies – a very visible reminder of thousands of dollars the company could be putting to better use.

Inventory in service areas is just as big a problem, but more insidious because it is not as readily apparent. Look for physical piles of forms (in in-boxes, for example), a list of pending requests in a computerized email program, callers on hold, people standing in line at a branch, and the like. This excess inventory is often the result of overproduction. (See Waste No. 7) The goal, from a Lean standpoint, is to have on hand only what is needed immediately or in the short-term. (To find solutions to inventory problems, read up on Lean practices such as pull systems and triaging.)

Waste No. 5: Waiting

Any delay between when one process step/activity ends and the next step/activity begins - One of the biggest evils in today's marketplace is to make customers wait for delivery of a product or service – because chances are a competitor will be able to get it to them quicker. Anything in a process that makes a work item wait to be processed should be eliminated. Because so much of the work in a service process is invisible to the naked eye, process-mapping techniques (flow charting, value-stream mapping) are essential for identifying delays in a process.

Waste No. 6: Defects

Any aspect of the service that does not conform to customer needs - Producing work that customers are not going to pay for – or that makes them seek out other companies to do business with – is one of the more obvious forms of waste. Six Sigma practices have long been structured around minimizing the possibility of producing defects. In services, that translates to preventing the possibility of missing information, thus improving the chance of making deadlines.

One clue to studying defects is to recognize that their impact is usually felt far downstream from where they occurred. A customer service staff, for example, is likely to receive the complaint calls from customers upset about something that happened in an entirely different part of the process. The defect has to be traced back to where it happened – where the incorrect information was put into the computer system, for example – in order to find a solution that will last.

Waste No. 7: Overproduction

Production of service outputs or products beyond what is needed for immediate use - In one of Lockheed Martin's procurement centers, buyers purchased items for 14 or more different facilities. The way the computer system was initially set up, it was incredibly cumbersome for the buyers to switch from one facility to another. So they naturally processed all the requests from one center before moving on to the next, even if there were urgent or priority requests in queue from other facilities. As a result, non-priority requests from one center would be processed before priority requests from another facility. This batch processing and delivering a service before it is needed by the customer is a type of overproduction common in services. The solution to overproduction is to examine the process and see why the staff does not work in a way that reflects actual customer needs, then make changes accordingly. (At Lockheed Martin, the solution was to change the computer system so buyers could see priority requests from all facilities simultaneously.)

The better Six Sigma practitioners in financial services are at recognizing these forms of waste, the more effective improvement efforts will be.

Product Learning Guides

Investment Basics Tutorial ( click here) Learning how to invest is like learning a new language. Once you pick up the basic terms and concepts, you can move step-by-step toward more sophisticated topics.

Equities Tutorial ( click here ) The stock market offers a full spectrum of risks and rewards. Get familiar with different types of stocks, learn the basics of buying and selling, and find out how much risk is right for you.

Fixed Income Tutorial Savvy investors know that equities aren't everything. A sound portfolio strikes a balance between potential risk and reward. Fixed-income securities can be an excellent way to diversify.

Mutual Funds Tutorial Mutual funds can help you spread out risk and lower your investment costs. You may also appreciate the fact that professionals are managing your money. Life Insurance Life insurance can help carry out your hopes and dreams for the future—even after you’re gone. An important part of a sound financial plan, life insurance provides a death benefit to your beneficiaries and can replace some of the income you would have earned. This can help preserve your savings, investments, and other assets for the purposes you intended, such as education funding or paying off a mortgage. Explore these sections for help in determining the right amount and type of life insurance for your needs: Why do you need life insurance? How much do you need? Which type of insurance is right for you? Choosing the policy that’s right for you How much will it cost? How do you purchase a policy? When to review your coverage Annuities Variable Annuities Variable Annuities: Plan for retirement with a wide range of investment options, professional portfolio management, a tax deferral, income options and death benefits. Variable annuities have potential to keep up with and even outpace inflation. Fixed Annuities Fixed Annuities: For more conservative investors, a safe and steady way to grow assets at a fixed rate of interest with a tax deferral. Immediate-Income Annuities Immediate-Income Annuities: Make one purchase payment and begin receiving annuity payments soon after. You choose the payout period, including a lifetime income. Modified Guaranteed Annuities Modified Guaranteed Annuities: Provide tax-deferred earnings with long-term fixed rate options. Also known as Market Value Adjustment (MVA) annuitie

Understanding Rural Needs

Rural households have quite complicated decisions to make in terms of which enterprises to pursue, whether to produce for the market, which technologies to adopt, where to sell produce, how to react to problems, how to manage multiple demands on limited cash resources and how to build up assets for security or larger investments. In terms of managing money, it is essential to calculate carefully, especially if some borrowing is contemplated, and the poorer people are, the more important this is. We need to help people improve these skills to reduce their vulnerability and, at the same time, create more effective and reliable clients for rural financial institutions.

To help rural householders to improve their financial planning skills, it may be necessary to start with

• Enterprise development: how to give advice on market research, business planning and finance
• Farming: how to provide guidance on marketing and financial decision-making in agriculture
• Group activities: working together to solve problems; joint enterprise initiatives
• Health: how non-health experts can communicate essential health messages to their clients
• Literacy: how to help clients develop the skills needed for effective business management
• Marketing: moving products profitably from point of production to point of consumption
• Money management: how to help people understand budgeting, keep accounts and take informed borrowing decisions
• Savings groups: how to set up and run savings groups or village banks

The MBP Guide to New Product Development

The Microenterprise Best Practices guide (<== click here) for new product development is designed for staff of financial institutions and non-governmental organisations interested in developing new products and services for their clients. The guide provides a systematic approach that organisations can follow to evaluate, design, test and launch a new product. It includes both technical guidance and practical exercises.

The actual time required for an organisation to follow the process outlined in this guide will depend on its specific circumstances, e.g., availability of time and money and the difference between the new product and current products. However, it generally takes 2 months for market research and design of a prototype and another 4-6 months for pilot testing. Worksheets and exercises are provided for all the phases and activities of the product development process. Institutions may not be able to work through them methodically but should devise a work plan and select the tools that are most needed.

Innovative Products and Adaptations for Rural Finance

This paper was one of the lead papers in the conference “Paving the Way Forward for Rural Finance” in June 2003. The paper reviews the characteristics of households and agricultural enterprises as well as the conditions for sustainable development of the financial institutions that serve them.

The paper presents the main innovations in lending procedures (such as warehouse receipt, long term loans for investment, credit bureaus and credit scoring, etc...), savings (such as outsourcing the collection of savings), remittances and technology used in the rural finance industry (such as ATMs and PDAs). Innovations are evaluated based on their contribution to expanding the frontier of rural finance.

The paper also presents an important section that deals with the issues of design and introduction of innovations in financial products. The author explains that there are two phases during the innovation process, these phases are: the discovery phase and the design and implementation phase. To be successful innovation requires support of the organization.

The paper also presents the main reasons that can cause failure of any innovation:

• lack of commitment of the institution
• lack of control over the process and its outcome
• faulty communication of the innovation
• wrong assessment of demand
• internal misunderstanding or resistance to new products
• unrealistic projections and;
• lack of internal control.

The paper ends with recommendations for institutions, governments and donors

Beyond basic credit and savings: Developing new financial service products for the poor

As the microfinance revolution continues, increasing numbers of financial institutions are seeking to diversify the financial services they offer to their clients. In particular there is a growing awareness that improved client-friendly savings facilities provide an essential service for the poor, while at the same time providing more capital for the institution. This paper examines the experience of BURO Tangail, a Bangladeshi microfinance institution committed to providing flexible and responsive financial services to its clients and operating in what is perhaps the most competitive market in the world of microfinance.

The following steps are followed by BURO Tangail when developing a new product:

1. Research and identify needs and opportunities.
2. Design and pilot test.
3. Monitor and evaluate the pilot test.
4. Make revisions and scale-up the implementation.

The paper describes a number of interesting ideas from BURO Tangail and other sucessful financial institutions. For example, the use of Customer Consultative Groups and giving products easily recognisable trade marks and product names such as "Savings of the rural community"(BRI) or "Save to increase your chances" (BAAC).

A Technical Guide to Rural Finance: Exploring Products

Financial products are at the heart of a financial service provider's business - they are what is "sold" to clients. Like any other business, therefore, a financial service provider must be market-driven and aim to identify and meet customers' needs on a profitable basis. Customers may be private individuals or businesses and their financial service needs will range from needing somewhere safe to keep surplus money to being able to borrow to meet a cash shortfall or being able to send money to a relative in a rural area. Someone providing financial services, therefore, has to decide whether to offer their customers one product or several products and how much to charge in order to make a sustainable business.

1. A Technical Guide to Rural Finance: Exploring Products

Traditionally, policies towards rural finance have been centered on the extension of credit, often subsidized and directed, to rural areas, and have ignored the reality that rural people demand a diverse array of financial services, including savings, money transfers, insurance and credit. Today’s financial systems approach to rural finance recognizes that a wide menu of financial services (priced to cover costs) is needed, as part of a broader farmer support package, in order to reach out to the greatest number of people in rural areas. Successful microfinance organizations have had to tackle, not only the problems of delivering products and services to low-population rural areas, but also to take into account the wide diversity and seasonality of their client’s income sources (beyond simply agricultural production and on-field labour).

This guide by the World Council of Credit Unions (WOCCU), draw on cases of innovative practices in rural finance in Central America, Brazil, Ecuador, Kenya, Uganda, Rwanda, and the Philippines, and makes a number of recommendations relating to the successful operation of sustainable rural finance institutions. Recommendations include the need to:

• Assess the demand of rural clients for multiple financial services;
• Identify and examine all income sources and expenses of their clients at the household level; and
• Assess environmental credit risks associated with production and market cycles.

The guide also reviews a range of rural finance products and delivery mechanisms including:

• Long-term agricultural investment loans, short-term rural enterprise and farm loans;
• Lending against warehouse receipts and group-based lending;
• Buyer and supplier credit;
• Savings;
• Leasing;
• Insurance – including credit, savings, funeral and crop insurance options;
• Remittances – exploring how to best to link remittance receivers to formal financial institutions.

This is a short document which provides a useful introduction to the subject of financial products that meet the needs of rural populations.
Please click the title for further reading

2.

Roles of Financial intermediary

One of the most important roles of a financial intermediary is to facilitate consumption transformation, which enables the purchase of goods to be rearranged over time. People and firms need to be able to keep surpluses safely until they are required. Many studies have shown how important saving is, even to the poorest people.

From an institutional point of view, being able to mobilise deposits from people enables the whole process of intermediation to take place, as the funds can be lent to people who have a spending opportunity that they cannot satisfy from their immediate resources. There is an important obligation on intermediaries, however, to ensure the safety of deposits and in most countries legislation is in place to control deposit-taking institutions and protect people’s savings.

Insurance is a risk management strategy. Loans may help a household to increase its income but they do not reduce the household's vulnerability or exposure to risks. Easily available savings may help to address this need as households can build reserves from which they can draw in emergency or to smooth cash flow imbalances. However, this still does not help if they are exposed to risks which cause losses that are beyond their means. Insurance products enable the risks faced by households to be pooled and thus provide protection against larger losses.

This paper has been written primarily for managers and directors of microfinance institutions that either offer insurance or plan to develop an insurance product for low-income households. It suggests that the provision of insurance might create a win-win situation where clients experience a reduction in vulnerability to risk and MFIs benefit from an improved bottom line. Key points are:

• insurance is a promising response to risks which cause losses that are beyond the means of the poorest and pools the risks faced by low-income households,
• in the drive for sustainability or profitability, MFIs are diversifying their lines of financial products and insurance has the potential to improve profitability by reducing loan losses and replacing clients' need to draw down savings for emergencies,
• MFIs can benefit from an additional source of capital for lending or fee-based income as agents.

The paper is divided into three main sections:

1. The first chapter examines risks faced by low-income households, e.g., life cycle needs, death, property, health,disability and mas, covariant risks. A framework is developed which classifies the risks on the basis of degree of uncertainty and relative size of loss.
2. The second chapter reviews potential risk management strategies, including informal individual and group based coping strategies and formal credit, savings and insurance products.
3. The third chapter looks at insurance from the provider's perspective, including matching supply and demand and the different types of insurance products.

The paper concludes that insurance involves pooling risk over a number of participant groups and is not like a savings product. Insurance may be secondary to saving enough money to protect from economic shocks and is most appropriate for uncertain and expensive losses. Developing insurance products should involve experts.

Leasing is a medium term financing instrument which can be used for financing fixed and moveable assets, such as farm machinery, equipment, buildings, land, means of transport, etc. The core principal of leasing is the separation of ownership and use of a productive asset: The owner (lessor) hands the asset over to the lessee for an agreed period of time against a periodic payment which covers capital costs, depreciation and a profit margin.

The key benefit of leasing is the relaxation of collateral requirements because the leased asset itself stands as main security. A second advantage relates to the in-kind disbursement mode which avoids the risk of diversion of funds. However, rural lessors face high transaction costs for supervision of lessees, a lack of secondary markets for repossessed equipment, of appropriate insurance products and awareness amongst all stakeholders about the legal and operational features of leasing.

Loans are borrowed funds with specified terms for repayment. When there are insufficient accumulated savings to finance an activity and when the return on borrowed capital exceeds the interest rate charged on the loan, it makes sense to borrow rather than postpone the investment until sufficient savings can be accumulated. Loans are also an important means of solving imbalances between household income and expenditure, provided income flows in the future are sufficient to meet the repayments. Credit is used widely as a poverty alleviation tool as it can enable people to start or improve enterprises but usually it is not a sufficient solution on its own. There is a wide variety of loan products for a financial institution to consider.

In traditional banks payment services include cheque cashing and cheque writing privileges for customers who maintain deposits. Payment services also include the transfer and remittance of funds from one area to another. There has been a great increase in people migrating to find work in recent years and it is becoming clear that a significant portion of the subsequent remittance flows go to poor and low income families in rural areas. Thus microfinance institutions, rural based banks and credit unions are all looking at money transfer services as a potential part of their business.

The scale, growth and importance of remittances to developing countries cannot be understated. The Inter-American Development Bank (IDB) estimates that $32 billion in remittances was sent to the LAC region in 2002, and it represents "the single most valuable source of new capital for Latin America and the Caribbean.... more important for the region's economic and social development than foreign direct investment, portfolio investment, foreign aid or government and private borrowing" (Inter-American Dialogue, 2004).

This World Council of Credit Unions (WOCCU) Technical Guide provides a useful introduction to the methods of how money crosses international borders, such as cash-based electronic transfers, card-based transfers, informal mechanisms and account-to-account wire transfers. It discusses the current operating environment for remittances, provides an overview of WOCCU's International Remittance Network (IRnet) and details how WOCCU has facilitated mass remittance distribution through credit unions by partnering with money transfer operators (MTOs). This system enjoys the advantages of both the credit unions' proximity to clients in the receiving countries and the MTO's transferring experience and dense network in the sending countries.

The entrance of credit unions and commercial banks into the remittance market has put pressure on MTOs to lower prices and become more competitive. Receiving institutions are seeing the potential of attracting unbanked clients as credit union members and future savers, borrowers and insurance policyholders. For example, some initiatives are underway in both Mexico and Nicaragua to develop remittance-related savings and credit products that will provide receivers with additional financial service options.

The Guide stresses a number of critical factors that affect the success of the remittance service operations and provides a number of illustrative case studies. The success factors include:

• the number and location of points of service in both the sending and receiving countries
• the quality and security of service and
• the need to comply with government legislation on control of illicit money transfers and money laundering.

Finally, the Guide looks at the future of remittance transfers and the task ahead, in particular, the need to extend the outreach and improve the shared branching network of credit unions in order to continue the provision of low-cost remittance services.