The Six Sigma Way to Profit Maximization
In today’s market climate, investment bankers and venture capitalists are facing a volatile operating environment that is fierce, resource-constrained, and highly regulated. Owing to this, many financial institutions (and corporations) are rethinking their strategic and operational priorities in the interest of increasing their value proposition.
For an investment banker or venture capitalist to dominate a particular market segment, they must not only be rigorous about using the more classical forms of economic risk assessment and abatement, but they must also be more innovative about how it’s done. Herein lays the competitive advantage – being able to innovate new processes for securing high economic yields, as well as the ways and means by which those monies are allocated, distributed, managed, and reported.
Consequently, investment bankers and venture capitalists must think beyond their client returns and internal profits. In today’s business environment, they must concurrently think about how to improve the system of roots that reaches out into the fertile soil of transactional quality, speed and cost. Only by improving the root system will the tree of business yield sweeter fruit in greater quantities. It also means doing these things in a simple and highly repeatable way – a tall order, indeed.
Euphemistically speaking, today’s investment environment is not for amateurs. Creating opportunities for added value and sustaining that focus over time is a task best left to seasoned, battle-hardened professionals. This is not to say that newcomers to the investment game should stay home and sit on the front porch; however, it is to say they need to reach out and embody new ways of business thinking. Doing so can get them off the porch and into the game.
To illustrate the pragmatic nature of the latter points, most would concede that, for virtually anything in life, the following deterministic relation would hold true: Y = f (X), where Y is the result, X represents the inputs and f is the way in which X is transformed into Y.
In terms of investment banking and venture funding, we may choose to declare Y as the economic yield of a particular financial instrument or transaction. We’ll also declare the X’s to be things like quality, quantity, cycle-time and cost (collectively referred to as operational variables). Thus, economic yield (Y) is a function ( f ) of the operational variables.
Now, if we want to improve Y, we must naturally seek to improve or otherwise optimize f and X. So, why do so many investment bankers and venture capitalists spend 80% of their time focusing on Y when 80% of the result is attributable to f and X? Perhaps if this modus operandi was reversed, the client and investor could enjoy higher economic yields; thereby, promoting a win-win situation.
To better understand the practicality of deterministic reasoning, let’s consider the following heuristic equation: V1 = (C1 * C2) / C3. In this case, V1 is the present value of a transactional base (like some type of financial instrument), C1 is the transactional process capability, C2 is the maximum process capacity and C3 is the total transactional cost (fixed and variable).
Now, let’s say that V2 is the desired future value. Thus, Δ = V1 – V2. Given these considerations, we can now say that the Velocity of Value (VOV) can be expressed as VOV = Δ / T. In simple language, VOV is the “bang per buck,” so to speak. As one might surmise, the VOV concept can be applied to just about anything in the world of investment banking and venture capital.
Consequently, we can easily reason that if any of the causative factors (C1, C2, and/or C3) are favorably altered, individually or collectively, the VOV is increased. Of course, the converse of this is also true. So, the central question becomes: “What are the vital few determinants of value, and what combination of settings will optimize internal profits and client returns.”
To better facilitate an answer to such questions, tools like experimental design, quadratic programming, regression, and constrained optimization can be applied to uncover the most viable and robust solution for a given set of transactional circumstances and constraints. In this way, the transactional risks can be explored and abated without such a high reliance on experience. The idea is to augment the experience, not replace it.
While this is a seemingly over-simplified lesson in the creation of value, it certainly underscores the timeless fact that we must always be focused on the right-hand side of the equation and not the left — if we are to expect higher profits (and client returns) that are both concurrently robust and sustainable.
Thus, value can be created, seemingly where there is none to reap. When properly managed, the rate at which such improvements can be realized (over a baseline condition) can be greatly enhanced. Hence, by increasing the VOV, an investment firm can achieve higher internal profits; and at the same time, greater returns for its clients. Leaving substantial amounts of money on the table is no longer an accepted cost of inefficient business, which we often mask through the use of computational constants and conventional practices.
Path to Success
As previously implied, the primary opportunity in the world of business is to increase Velocity of Value. To achieve this super-ordinate goal means creating and sustaining vertically connected levels of progressive economic value that are robust to changing market conditions and operational constraints. In this way, an enterprise can be focused on business growth and asset preservation with an elevated aim and stronger constancy of purpose.
The ways and means to accomplish this higher-order mission were developed by Dr. Mikel J. Harry over a 30 year period of working with the senior executive teams of nearly half of the
Fortune 100. Exalted corporations like General Electric, DuPont, and Ford Motor Company have underscored Dr. Harry and his methods of business improvement.
After many corporate successes, Dr. Harry was able to empirically distill the key cause-and-effect relationships that exist between the operations of a business enterprise and its financial performance. In short, Dr. Harry was able to make the “control function” of an enterprisebothvisibleandaccessibletotheCEOandseniorexecutiveteam. In this way, the leadership team of an enterprise can set the critical knobs of their business machine to their most optimal settings and then sustain those conditions over time, but do so in a robust and consistent way.
Although several of the methods used by Dr. Harry have been around for many years, he was able to successfully integrate these traditional techniques with several innovative concepts and proprietary methods. The result was a system that takes profit maximization to the next level, yet done so in a more simple and direct manner. Essentially, the net effect of Dr. Harry’s heuristics, empirical studies, and supporting equations revealed that several of the classical assumptions that underpin the formulation of business strategy and operations management practices were either flawed, misleading, or in error. In this context, Dr. Harry was able to extend the power of Six Sigma into the inner core of profit maximization.
Dr. Harry’s innovative thinking; lessons-learned and best-in-class practices were woven into a strategic fabric (system) for business improvement, now referred to as his Business Yield Optimization System, or BYOS for short.
Essentially, BYOS is designed for large-scale to mid-sized companies and is aimed at strategically optimizing top-end growth while tactically minimizing the bottom-end cost structure. Of course, the latter is accomplished by attenuating natural and unnatural variations in the total variable cost structure, as well as upwardly tuning the rate of top-end growth.
From this perspective, it’s easy to see that the overriding purpose of BYOS is to install a measurable and verifiable methodology by which an organization can close the gap between its baseline of deliverable value and the prescribed goal, but done so in a very rapid, robust, effective and efficient way; hence, the focus on maximizing an organization’s Velocity of Value.
As we all know, to get the right thing, you must do the right thing; and to do the right thing, you must know the right things. To enable BYOS, Dr. Harry has immediate access to many of the world’s top subject-matter-experts in a wide array of business competencies and Six Sigma. This means he can quickly assemble the right people at the right time at the right place with the right knowledge with the right mission.
Following a proprietary diagnostic process, a specialized BYOS team can be quickly assembled and brought to task for each client. In this way, a wide range of client-centric needs can be fully satisfied across a wide range of economic needs. For the average
company, the aggregation of BYOS benefits can quickly amass to a 5-10 point improvement in a company’s overall value proposition, usually accomplished within 180-240 days of engagement.