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WCBF 3rd Annual Conference: Six Sigma in Financial Services
R.J. Donofrio
May 11, 2006
2
InvestmentServicing
Core CapabilitiesState Street Corporation> Founded in 1792> Over 20,000 employees worldwide> Office locations in 26 countries> Over 3,000 clients in over 50 countries> AA- Senior debt rating> 23% ten-year total annualized return to shareholders> 16% ten-year growth rate in dividends per shareInvestment Servicing> $10.1 trillion assets under custody> Custody, accounting and administration> Consulting, outsourcing and implementation> Transfer agency and recordkeeping> Performance, risk and compliance> Capital, lending and liquidityInvestment Management > $1.4 trillion managed> Largest institutional investment manager worldwide> Expertise across all asset classes, risk strategies
and investment approachesInvestment Research and Trading> Research, analytics and trading> Provides benchmarks for performance, optimizes
investment strategies and facilitates the investment process
> Focus on attracting liquidity and increasing efficiency
Facts as of 12/31/05
InvestmentResearch
and Trading
State Street Corporation
InvestmentSolutions
InvestmentManagement
3
Services> Benefit payments> Brokerage> Cash management> Commission recapture> Compliance monitoring> Custody> Financial reporting> Foreign Exchange> Fundamental Data> Fund administration> Hedge fund services> Insurance accounting> Investment management> Market Data
> Master recordkeeping> Multinational servicing> Mutual fund accounting> Offshore funds> Pension fund accounting> Performance and analytics> Securities lending> Shareholder services> Short term cash investing> Specialized trust services> Trade cost analysis> Transition management> Wealth management services
Investment SolutionsWe Offer a Complete Range of Solutions
Post-tradeTradePre-trade
4
Unparalleled Focus
ASSET SERVICINGINSTITUTIONAL ASSET
MANAGEMENTRETAIL ASSET MANAGEMENT
INVESTMENT BANKING; COMMERCIAL LENDING;
OTHER
State Street* 84% 16% — —
Mellon Group* 17% 18% 25% 40%
Northern 34% 14% 39% 13%
BoNY 76% 10% — 14%
JP Morgan 11% 2% 7% 80%
Citigroup 4% 6% 8% 82%
Source – 2003 annual reports; % of total revenue*2004 annual report
5
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
StateStreet
PFPC BISYS IBT BoNY Chase Fidelity U.S.Bancorp
Dreyfus SEI
Nu
mb
er
of
Da
ily P
ric
ed
Fu
nd
s
Industry Leader
6515
1359
1813
1213940 710 626 551 479600
Source: NASDAQ 12/31/2005
Money Funds
Mutual Funds
6
Global Presence
AUSTRALIAMelbourneSydney
AUSTRIAVienna
BELGIUMBrussels
CANADAMontreal Ottawa TorontoVancouver
CAYMAN ISLANDSGeorge Town
UNITED STATES
Missouri Kansas City
New Hampshire Nashua
New Jersey Princeton
New York New York
North Carolina Winston-Salem
NETHERLANDSAmsterdam
PEOPLE’S REPUBLICOF CHINABeijingHong Kong
SINGAPORESingapore
SOUTH AFRICACape Town
JAPANTokyo
LUXEMBOURGLuxembourg
CHILESantiago
FRANCEParis
GERMANYCologneEschbornFrankfurtMunich
IRELANDDublinKilkenny
ITALYMilan
TAIWANTaipei
UNITEDARAB EMIRATESDubai
SWITZERLANDZurich
UNITED KINGDOMEdinburghLondonSaint HelierSaint Peter PortWindsor
SOUTH KOREASeoul
California Alameda Los Angeles Irvine San Diego San Francisco
Georgia Atlanta
Illinois Chicago
Massachusetts Boston Cambridge Grafton Milton Quincy Westborough Westwood
7
Operating Revenue*
$792$909
$1,052$1,212
$1,423$1,575
$1,882
$2,342
$2,786 $2,785
$3,445
$3,747 $3,786
$5,515
$4,996
$4,393
0
1,000
2,000
3,000
4,000
5,000
6,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Op
erat
ing
Rev
enu
e* (
US
$ m
illio
ns)
CAGR15–year 14%10–year 13% 5–year 10%
* Operating revenue as defined in the Corporation’s SEC filings
8
Operating Earnings Per Share*
$0.39$0.46 $0.51 $0.57
$0.66$0.74
$0.90
$1.18
$1.35 $1.37
$1.66
$1.89$2.04
$2.82
$2.47
$2.29
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Op
erat
ing
Ear
nin
gs
Per
Sh
are*
— D
ilute
d
* Operating earnings per share as defined in the Corporation’s SEC filings
9
Assets Under Management
$1,400
$227$292
$390
$485
$667$711
$775 $763
$1,100
$1,400
0
200
400
600
800
1,000
1,200
1,400
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
U.S
. $ B
illio
ns
10
Strategic Alliance
Six Sigma is Embedded in the Business Unit
Direct Resource to the Business Units> Part of the business unit> Business unit owns resources> Business unit controls resources> Easily accessible> Works on projects to directly
support business unit needs
Grassroots
> Growing slowly over time
> Word of mouth
Institutional Investor Services
Commingled Funds
InvestmentManagers
Six Sigma
11
Critical Factors for Successful Grassroots
> Partner with the Right Customer– GE Asset Management
> Customer Driven– Projects need to customer focused
– Customer facing
– Customers need to feel and experience Six Sigma
> Need a Senior Leader– Senior Leader who believes in Six Sigma
– Senior Leader who is from a Six Sigma organization
Delight
Neutral
Dissatisfaction
Cu
sto
mer
Sa
tisf
acti
on
Degree ofAchievement
FulfilledAbsent
Delig
hter
s
More Is
Bette
r
Must Be
PleasedResigned to Reality
Taken forGranted
Not Pleased
Delight
Neutral
Dissatisfaction
Cu
sto
mer
Sa
tisf
acti
on
Degree ofAchievement
FulfilledAbsent
Delig
hter
s
More Is
Bette
r
Must Be
PleasedResigned to Reality
Taken forGranted
Not Pleased
GE Asset Managementand
State Street
GE Asset Managementand
State Street
12
Culture Change: Decision Making Process
1. Intuition, gut feel, I think
2. Data exists and is used
3. Graphs & charts of data
4. Advanced statistical tools to evaluate data
Simple
Complex
Decision Making Path Types of Problems
Six Sigma is about data based decision making
13
Engagement Detail (#MBB/BB/GB)
3
7
1112
11
20
4 42 2
3 3 3
7
22
1 2 2 2 2 2 2 23
1998
1999
2000
2001
2002
2003
2004
2005
2006
Plan
ned
Green Belts
Black Belts
Master Black Belts
History in the Business Unit
n
1997 2007
1998 1999 2000 2001 2002 2003 2004 2005 2006
1997 - 1998Servicing GE Asset Management
Six Sigma Team Formed
2003Senior Executive
from Xerox
2003 - 2004Further Expansion
2001 - 2002Initial Expansion Strategic Alliance
1998 - 2001Servicing GEAM
2005Executive
Vice President from Citistreet
2004 - 2006Continued Expansion
2006 - 2007Today
Note: Does not include Belts in other areas: Securities Operations
or Investment Manager Services
14
Six Sigma Project OpportunitiesWhere do the project opportunities come from?
Business Plans/Operating Plans
“Where’s the Pain?”
GoalsProcess Owners
Errors &Problems
Customer: VOC
Six SigmaProjects
15
Six Sigma Project SelectionLimited Time, Limited Resources
Will the project impact performance, satisfaction, or buying behaviors?
Customer Satisfaction
Will the project impact operational or regulatory risk?Compliance
What are the costs and the savings?Economic Benefit
Will the project impact core or enabling services?Strategic Fit
Ease of Implementation How quickly can we complete the project? Is data available?
IT Complexity Is there a large IT component to the project?
16
State Street’s Six Sigma Focus
Define
.5 – 1 Month
Does a Process Exist?
Measure
1 Month
Analyze
1 -2 Months
Improve
1 Month
Measure
1 Month
Stop
Verify
1 Month
Design/Optimize
1 Month
Analyze
1 Month
Control
1 Month
Stop
Measure
1 Day
Analyze
1 Day
Improve
1 Day
Control
1 Month
Stop
Process Goal Defect
Reduction? Or Process
Standardization?
DMADV4-6 Months
DMAIC4-6 Months
LEAN1-2 Months
YESNO
Defect Reduction
Process Standardization
------Kaitzen Event------
Our Focus
17
Six Sigma Project Types
Quality Improvement Projects, Data Driven, Disciplined Approach
DMAIC
Operational Risk, Bottom up Risk Identification Operational
Risk Assessment
Can’t manage what you don’t measure. Allows for data based discussions with the customer
Dashboards
Organizations Who Have Deployed Six Sigma. Utilized Where Six Sigma May Add Value or Could be a Differentiator
Sales Support
Large Asset Conversions
No longer a conversion of assets…a conversion of processes. Six Sigma Disciplined approach
Client Consulting Clients who use our Six Sigma services. Onsite Client Projects.
18
Projects by Project Type
New Business Conversions5%
Quality Improvement Projects (DMAIC)
36%
Operational Risk Assessments (IBRA)
21%
Project Support11%
Dashboards11%
Client Consulting11%
Sales Support5%
19
Projects by Segment
Mutual Funds4%
Internal Operations7%
Performance & Analytics4%
Not For Profit7%
Commingled Funds19%
GE Asset Mgt44%
Investment Manager15%
20
Sampling of ProjectsDMAIC> Corporate Actions > Position Breaks > Account Opening Process> ERISA Reporting> Time Deposit Automation> Limited Partnership Processing> Hold Cash (on non SSC Fed holidays)> Billing > Performance & Analytics Process Review> India Cap Gains Tax> Income Separation> First Pass Yield Accuracy of New Bond Buys> Asset Transfer> Non Custody Cash & Share Exception Reporting > Overdrafts> TBA Processing> WIMCS Inquiry Tracking> Month End First Pass Yield> Month End Close> NAV Timeliness & Accuracy> Fund/Trust Accounting> Fund/Trust Reporting> Fund/Trust Expenses
Dashboards> GEAM> Strategic Alliance Customers> Commingled Funds CustomersOperational Risk Assessments> GEAM> Commingled Funds Customers> Strategic Alliance CustomersSales Support> Not For Profit Customers> Public Funds Customers> Commingled Funds CustomersLarge New Business Conversions> Not For Profit Customers> Commingled Funds CustomersClient Consulting> Strategic Alliance Customers> Commingled Funds Customers
21
Results in Controlled Infrastructure, Process, and Organization to Support Strategic Business Objectives
>Essential to Risk Management . . .
– Identify and Quantify the Risks That Represent the Greatest Potential for Financial and Reputation Damage to a Customer and Its Customers
– Assess the Mitigation or Elimination of Those High Risks
– Prioritize Risks to Ensure that “Vital Few” Risks are Mitigated
– Take Action to Reduce Those Risks
– Establish Strong Control/Monitoring Process
High-Level ApproachOperational Risk Assessments
PrioritizeFunctions
(Define)
IdentifyRisks
(Measure)
AnalyzeRisks
(Analyze)
ReduceRisks
(Improve)
MonitorRisks
(Control)
22
PrioritizeFunctions(Define)
Prioritize Functions
> Prioritize Core & Enabling Functions Based On
– High Perceived Risk
– Known Past Failures
– Commitment of Leaders
TradeSupport
Accounting PerformanceSharedServices
Overall Client Relationship Management
Quality Program
Service Components
TradeProcessing
Cash &Secty Settl
Trade SupportTrade Support
Reporting & CRM
TradeProcessing
Cash &Secty Settl
Trade SupportTrade Support
Reporting & CRM
Level OneProcesses
PricingCorp
ActionsCustody Recons
F.I Controls
ClassActions
Data Integrity ServicesData Integrity Services
Reporting & CRM
PricingCorp
ActionsCustody Recons
F.I Controls
ClassActions
Data Integrity ServicesData Integrity Services
Reporting & CRM
Daily CashNonCustody
Recons &Processing
Daily Acctg
& Controls
AccountingAccounting
Reporting& CRM
MonthlyAcctg
& Controls
Daily CashNonCustody
Recons &Processing
Daily Acctg
& Controls
AccountingAccounting
Reporting& CRM
MonthlyAcctg
& Controls
DailyReturns
MonthlyReturns
PerformancePerformance
MTDReturns
CRM & Administrative
DailyReturns
MonthlyReturns
PerformancePerformance
MTDReturns
CRM & Administrative
AccountingLevel Two & Three Processes
Daily Acctg & Controls Non Custody Recon Daily Cash
Daily Audits
Asset Transfers
Benchmark Trading
Research Russell S&P 500
Settle Transactions
Reconcile Cash
Reconcile Positions
FX Processing
Client Directed Activity
Cash Forecast
Cash Reconciliations
USDCash
ForeignCash
Cash Sweep
Overdraft Monitoring
InterestBought/Sold
Tip Adjustments
ProcessSecty Txfr Audit
Trades Income
Obtain Custod.Stmnt
Recon All Cash
ResearchExceptions
PostAdjust.
Obtain Custod.Stmnt
Recon Positions
ResearchExceptions
PostAdjust.
ObtainTxns
Post to MCH
Settle
AccrualBasis
CashBasis
OMACReview
OMACCoding
PensionSTIF
NHTrust
SSgA
Pension Fund Avail
PensionRoll Up
NH TrustForecast
Non NHTrust 4Cast.
Weekly Audits
IncomeVerification
Past Due Income
Failed Trades/FX
Custody Recon
D M CA I
23
Identify Risks
• Validate Process Maps to Determine Scope
• Leverage List of Past Issues/Failures
• Use Customized FMEA Scales
>Validate Process Maps
Expenses
Example: Expenses
120Incorrect expense budgeting
Paid out of incorrect account
Pay out 12b-1 expenses
Expense Accruals
100Understated / overstated NAV or Income
Balance sheet incorrect.
Review accounts for validity
Balance Sheet Review
Process Step
Failure Effect RPNFailure ModeProcess
120Incorrect expense budgeting
Paid out of incorrect account
Pay out 12b-1 expenses
Expense Accruals
100Understated / overstated NAV or Income
Balance sheet incorrect.
Review accounts for validity
Balance Sheet Review
Process Step
Failure Effect RPNFailure ModeProcess
Create FMEA Tied to Process Maps
IdentifyRisks
(Measure)
D M CA I
Start
Receive signed authorization for
fixed and variable expenses
Input expense parameters to
MCH
Update off-line spreadsheet with
any expenses calculated manually
Post daily expenses to MCH
Review daily expense for
validity
Pay out 12b-1 expenses
Expense Control
Pay out Authorized expenses
Expense proofs/ Control
End
NO
Yes Yes
NO
24
Sample FMEA Scale
Severity Worst-case consequence of failure if and when it actually occurs
Rating Description Long Description
10 Regulator Involvement Results in Investment Manager or Trust receiving regulator sanctions
9 Investment Manager loses investors Results in catastrophic failure (ie. renders product or service unfit for use).
8 Wide-spread Investor dissatisfaction Causes "extreme" or "wide based" customer dissatisfaction.
7 Large perf loss or >$100K checkResults in bad press or severely degraded product/service. Fixes are visible to the customer. Have to write a big (>$100k) check.
6 Visible performance loss (some bps) Performance loss (some basis points)
5 Visible to Investor Visible to the investor, may or may not have financial implications.
4 Loss, Not visible to Investor Minor performance loss.
3 Significant rework (>40hrs)Unnoticed and only one-time minor loss on performance (<$25k) or causes significant rework (>40 hours)
2 Rework (<40hrs)Causes minor nuisance (ie <40 hours of work) but can be overcome with no performance loss.
1 Negligible Unnoticed and no loss of performance.
Detection Expected speed of detecting failure
Rating Description10 Within the Quarter or later
9 Within 2 Months
8 Within a Month
7 Within 2 Weeks
6 Within a Week
5 Within a few Days
4 Next Day
3 Within 24 hours
2 Sameday
1 Prior to associated transaction
Occurrence Expected frequency of failure
Rating Description10 1 or more failure per Hour
9 1 failure per Day
8 1 failure per Week
7 1 failure per 2 Weeks
6 1 failure per Month
5 1 failure per Quarter
4 1 failure per 6 Months
3 1 failure per Year
2 1 failure per 5 Years
1 1 or fewer failures per 10 Years
25
0 100 200 300 400 500 600
0
5
10
15
20
25
30
35
RPN 2002
Fre
quen
cy
Above CutOff of 100:
N = 13
Sum = 1681
Max = 240
Sample
AnalyzeRisks
(Analyze)
Identify High Risk Issues
Analyze Risks
> Develop Action Plan to Reduce High Risk Items.
> Launch “Just Do It’s”
> Launch Green Belt/Black Belt Projects
Supplement Quantitative Approach with Business Sense “What keeps you up at night?”
D M CA I
26
Reduce Risks
> Develop Action Plans
> Establish Target Dates
> Assign Owners
> Execute Action Plans
> Rescore High Risk Items
ReduceRisks
(Improve)
Monthly report group does expense proofs to identify any incorrect postings
70120Incorrect expense budgeting
Paid out of incorrect account
Pay out 12b-1 expenses
Expense Accruals
Centralized processing group is performing a monthly review
70100Understated / overstated NAV or Income
Balance sheet incorrect.
Review accounts for validity
Balance Sheet Review
Process Step
Failure Effect Executed Action ItemReduced RPN
Original RPN
Failure ModeProcess
Monthly report group does expense proofs to identify any incorrect postings
70120Incorrect expense budgeting
Paid out of incorrect account
Pay out 12b-1 expenses
Expense Accruals
Centralized processing group is performing a monthly review
70100Understated / overstated NAV or Income
Balance sheet incorrect.
Review accounts for validity
Balance Sheet Review
Process Step
Failure Effect Executed Action ItemReduced RPN
Original RPN
Failure ModeProcess
High Risk w/ Action Plan, Net Yet Reduced
Accepted High Risk Reduced to Low Risk
Color Indicates Status
D M CA I
27
Monitor Risks
> Establish Reassessment Frequency> Create Dashboards for Monitoring> Develop Lessons Learned> Determine any Additional Areas
MonitorRisks
(Control)
Sample Dashboard
0
10
20
30
0
20
40
60
80
100
Defect
CountPercentCum %
Per
cent
Cou
nt
Timeliness Accuracy
Timeliness Defect Root Cause Analysis Accuracy Defect Root Cause Analysis
Timeliness & Accuracy
No Defects to Report
36 36 36 36 36 36
0 0 0 0 0 00
5
10
15
20
25
30
35
40
May Jun Jul Aug Sep Oct
Month
To
tal
# o
f N
AV
's
Del
iver
ed
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
Sig
ma
Total NAV Opportunities
NAV Defects
Sigma
100% 100% 100% 100%100% 100%
36 36 36 36 36 36
0 0 0 0 0 00
5
10
15
20
25
30
35
40
May Jun Jul Aug Sep Oct
Month
To
tal
# o
f N
AV
's
Del
iver
ed
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
Sig
ma
Total NAV Opportunities
NAV Defects
Sigma
100% 100% 100% 100%100% 100%
0
10
20
30
0
20
40
60
80
100
Defect
CountPercentCum %
Per
cent
Cou
nt
No Defects to Report
D M CA I
28
Sample Project Timeline
6/20/2005 12/1/2005
7/1/2005 8/1/2005 9/1/2005 10/1/2005 11/1/2005
6/21/2005Project Initiation
6/24/2005 - 7/1/2005Project Planning
7/1/2005 - 7/11/2005Create Scope and Scale
7/11/2005 - 7/26/2005
Process Map· Mgt Fee Observation 7/12· Mid Month Observation 7/18 & 7/19
7/26/2005 - 8/10/2005Score
8/10/2005 - 8/22/2005Analyze Risks
8/18/2005High Risk Identification
8/26/2005 - 9/22/2005Risk Mitigation Planning
9/24/2005 - 11/15/2005Risk Mitigation Execution
9/23/2005PlanningTollgate
11/16/2005MitigationTollgate
7/11/2005Scope
Tollgate
7/7/2005
Kickoff Meeting with Janus
7/27/2005Process Map
Tollgate
8/11/2005ScoringTollgate
8/25/2005Assessment
Tollgate
Today
Ongoing Monitoring And Control
29
State Street’s Six Sigma Results
> Improved Quality of Service– Improved Timeliness & Accuracy
of Core Services
– Improved Timeliness & Accuracy of Shared and Support services
– Reduced Operational Risk
Green100%
OriginallyAssessed
Today S
um
Of
Hig
h-R
isk
Ite
ms
Today
Of the original high risk items, 100% have been MitigatedOf the original high risk items, 100% have been Mitigated
Asset Transfer ProjectMirror Reports & Mirror %’sAdditional controlsCorporate Action Reports
* Nine P&A items were reduced below RPN 100 reducing detection to within one week, but are still viewed as high risk by GE because GE sends reports out to clients sooner than the detection. This will be added to Phase II IBRA.
*
Orig
inal
Reduc
ed
0
500
1000
1500
2000
2500
3000 2833, 182833, 18
30
State Street’s Six Sigma Results
> Cost Savings– Soft Dollar savings provide
additional capacity and efficiency
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
2004 2005 2006 Projected
31
State Street’s Six Sigma Results
> Increased Customer Satisfaction– Customer was not expecting this level of
service
– Builds Customer loyalty
– Expands customer relationship
– Contributor to Revenue Retention
– Customer more likely to be a good referral
Delight
Neutral
Dissatisfaction
Cu
sto
mer
Sa
tisf
acti
on
Degree ofAchievement
FulfilledAbsent
Delig
hter
s
More Is
Bette
r
Must Be
PleasedResigned to Reality
Taken forGranted
Not Pleased
Delight
Neutral
Dissatisfaction
Cu
sto
mer
Sa
tisf
acti
on
Degree ofAchievement
FulfilledAbsent
Delig
hter
s
More Is
Bette
r
Must Be
PleasedResigned to Reality
Taken forGranted
Not Pleased
$0
$20,000,000
$40,000,000
$60,000,000
$80,000,000
$100,000,000
$120,000,000
$140,000,000
2004 2005 2006 Projected0.00
1.00
2.00
3.00
4.00
5.00
6.00
2003 2004 2005 2006 Projected
Satisfied
Loyal
32
State Street’s Six Sigma Results
> Contributor to New Revenue– Existing customers purchasing
more products and services
– New customers
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
2004 2005 2006 Projected
33
Customer Benefits
> “Enhanced communication and validated/quantified the items that represented the highest risk to our customers”
> “State Street was such a key component of our processes. This has enabled us to have a boundary free approach to process issue resolution and extend the common language/approach to key vendors.”
> Removes Subjectivity
> Visual Depiction– Demonstrate dependencies
– Identify any redundancies
> Allows for data based, informed decisions
34
What’s Ahead?
> Standardized Curricular
> Continued commitment to creating more belts
> Creating more grassroots teams across Investor Services
> More Client Consulting
> More Internal Cost Savings Projects
> Self Sustainability
35
Thank You!