Bank Interview: Jon Theuerkauf, HSBC

Published: Oct 2005

Jon talks to Treasury Today about how HSBC uses Six Sigma and suggests the tools and techniques that can be of use to the treasury function.

Jon Theuerkauf

Head of Best Practice, Global Transaction Banking

Does Six Sigma have any relevance to the treasury function?

Sure it does. I have been talking to major corporates about what is keeping them up at night. What issues are causing the nightmares. One recurring theme right now is SOX – Sarbanes- Oxley. This is a good example of where the tools of Six Sigma can help.

All the SOX auditors are really asking about is good process management. They are asking, do you understand the processes in your business? Do you have the key process indicators and key risk indicators (KRIs) identified? Do you measure and monitor them? Do you have reaction plans if an indicator gets outside acceptable tolerance? In other words do you have risk mitigation plans? For Six Sigma guys this is what we call business process and risk management. It is all about being in control and being able to demonstrate that you are.

Those companies that have a Six Sigma initiative in place have been able to say we do that already. GE is an example. Being great users of Six Sigma, they were able to say we already do that. Others have their own process improvement programs and are also not struggling with SOX. But many companies are. For these companies Six Sigma techniques can help.

Maybe it would help if I give you some practical suggestions – a process you can use for meeting SOX requirements (see box below).

One of the other issues facing treasury is the impact of new accounting regulations. Can Six Sigma help here?

Six Sigma helps whenever there is process. It may not help very much with the interpretation of accounting rules but, as soon as the rules are applied and there is a process in the equation, Six Sigma can help in analysing the impact and the risks so that the key risk areas are recognised. A tool called failure modes effect analysis can be used to determine what happens if a process blows up. This helps us to get a predictable outcome and once again have effective control.

Can a department in a company that does not have an extensive Six Sigma program use just some of the techniques? Can they ‘cherry-pick’ Six Sigma?

There are some basic tools in the Six Sigma tool kit you can use without taking the whole process.

The first is a good mapping tool for the activities that you perform. The characteristics of good mapping, particularly for a SOX environment, is as you map it try to improve it.

You follow a simple methodology, identify:

  • Value.
  • Non-value.
  • Business enabling (or regulatory) activities.

Mapping is done at the level of the activity or the process that does something, that turns one thing into another or changes something. We use colour codes when we are mapping. Green for value added work that changes an input to something else. Non-value add is red. This is usually re-work, waste, queuing time, any activity that does not add value and should be eliminated. The third part, the tricky part, is business enabling activity. If I do not do this activity, I can be fined or put out of business. An example in our business is all the documentation surrounding trading. It has no value add but it enables us to keep control. KYC (Know Your Customer) documentation is another good example. These boxes are yellow.

So the first step is to map out all the processes and code them. Then the second thing you want to do is simulations. If you are looking at optimisation work it is important to be able to simulate.

  • What will happen if I take all these red boxes out, all that rework.
  • How many people would I need then?

This is really useful when you are doing Sarbanes-Oxley work because you can simulate and understand the effects of changes without being forced to experiment with an actual change in the processes. So you can simulate and thus understand what is the effect on the rest of the process if this or that goes wrong.

Six Sigma is like a Formula1 tool box with 500 tools inside it but this is one of the good basic tools.

HSBC Business Process & Risk Management
Diagram 1: HSBC Business Process & Risk Management



  • VOC = Voice of Customer
  • VOB = Voice of Business
  • BOS = Voice of Stakeholder

Bringing Transparency & Execution

So how would you analyse what could go wrong?

There are lots of ways to do this but one of the most pragmatic is what is called the failure mode effect analysis tool. This is a very good way to take subject matter experts and force them down a methodical, rigorous path using a map of the processes. The experts tell us what happens if that pops or if that process fails.

Then we can weigh the probability of the event – how likely is it that there will be a problem. So we get what does it cost and how likely is a blow up? Then you take the appropriate action. A £500,000 per event, once every five years risk would get a low risk rating in our business.

In a SOX situation this process enables you to identify, rank and rate the risks and establish the key indicators that you want to put in place. Then you feel comfortable you have not missed things.

How does activity based costing fit in this process?

If you take the view that you want to improve the processes as you map them then activity based costing is very helpful. For example, how much cost is in all those red boxes? Nothing motivates management more than the cost of non-value add steps in a processes. How much of the actual processing cost is lost in non value-add processes?

An example in our business is a standard account opening form. Do we have exactly what is required or are we over-burdening the process? We turned an eight page form into a four page form. This was a golden nugget we found and every company has them. When you find them you can get enormous savings.

There is another great tool called QFD which you can use to understand the requirements of the business and translate them into operational definitions. It is the latter process that often gets missed. In a SOX environment QFD helps you develop a definition of what is really required. To define the ‘must have’ and not the ‘nice to have’, which have been put in place for a single event which is unlikely to recur.

Six Sigma is like a Formula1 tool box with 500 tools inside it but this is one of the good basic tools.”

Tell me what form these tools take. It sounds as if it is a large piece of paper and coloured pens?

No it has to be very much electronic. There are lots of software programs available.

You will use a paper based process to start and get the big boxes – 12 or 14 boxes within which we define the processes. We do this in what we call the war room. Then others review the maps the first guys have produced. Then subject matter experts review and everyone is bought in to make sure all the processes are properly defined.

Then this is put into the software which becomes the base for all the subsequent work. It becomes the engine room driving everything else we do. Value and non-value add are defined. Then activity based costing is applied to the processes. The electronic document becomes the reference point, the place we go back to. All the information, all the key risk indicators, all the failure nodes are identified. All the information is stored in the software which is generally available to everyone working on the project.

How does a company choose which program to use?

Great question! If you have a group standard great, but there are lots of software programs otherwise and some tools can be downloaded free from the web. You might also want to send someone to get trained or purchase a self tutorial.

Leading names are iGrafix, Process Flow and ABC Flow Charter but there are lots of other programs. Only a select number of these programs have process simulators. With others you take the output and put it in another program like Crystal Ball.

Failure modes effect analysis is really just a big sheet. You can get Excel spreadsheets that do this off the web. The discipline is how to take a team through the process of identifying what can go wrong. These techniques all came from the military and NASA who had to work out worst case scenarios.

QFD tools can also be freeware from the web. QFD stands for Quality Functional Deployment. It has been around for a long time. Six Sigma pulled a lot of these tried and tested approaches together in a tool box. It gives the framework to say when you see this situation go to drawer 7 and use tool 38.

A lot of this process is about risk analysis and evaluating the likelihood of an event happening. What if the event is very unlikely but it could be catastrophic?

You live with it and you may just accept it as a risk in the business and keep an eye on it. But if it is very unlikely it is not going to be one of the key risk indicators you monitor all the time.

You have to take a practical approach. You cannot reserve against every possible event. I believe statistics are a great tool for evaluating risk. If a risk is very unlikely to occur I will have a mitigation plan and will think carefully about whether to invest in reducing a one in a million risk.

This is all about getting a comfort level for the risks the business faces. You can do not enough or do too much and a lot of this is subjective. There is no one answer. It depends on the company’s appetite for risk. I may think that it is OK. You may think that my sampling is not adequate. That is where the subjectivity comes in and also where the auditors differ. That is why SOX is so difficult.

It is about comfort levels. Are the executives comfortable that they have in a very thorough, in a very practical way, using common sense, looked at the processes in the business? Have they mapped the processes, identified the risks and then fixed them or put mitigation plans in place? Are they comfortable? If so, they can sign knowing that if one of those events occur this will be what happens.

“These techniques all came from the military and NASA who had to work out worst case scenarios.”

Can I come back to ABC? Costing within banking has always been an uncertain art. Please tell me a little more about how you are using ABC in HSBC.

There is ABC and ABC Management – ABCM. This takes the P and L data and flows the costs back to the activities within the organisation.

Let me give you an example. If we take account opening we might want to look at different types of account and the processes involved in opening them. ABC is the process that enables the costs to be allocated based on the processes involved in opening different types of account. ABCM gives the manager a much better view of what it is really costing to open different types of account.

Everyone talks about marginal pricing which is fine but only when you understand break even. This is not well understood in the banking business.

Don’t you need to set prices to get transactional volume in the banking business?

Yes but you also need to know break even. You need to get the right information in front of people to get them to understand. Time Based ABC enables us to understand this, to understand break even.

We have a new mantra – good data combined with common sense and a practical view of the world and the business we operate will yield more frequent and better decisions. If you remove any of these three elements you have poorer business decisions.

Treasurers are increasingly reaching out in the organisation and trying to influence what is going on elsewhere. This is something you are doing all the time. What advice would you give to them?

This is about change management. You have to create a shared need for change, felt by everyone. You need everyone pulling the same way – toward a common vision.

Once everyone is on side you are aligned and you can use the Six Sigma. This is what we need to do, this is what it will give us. How are we going to do it? Hey, here is a methodology to help us get there. And once we have improved it stays improved.

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