Linkedin Post - Reference List to 31 Jan 2012

I regularly post interesting articles I read/find on Linkedin. recenlty I found that Linkedin keeps a very limited history of posts so I thought I create a list here of all my past Linkedin posts as a reference point.

My Linkedin profile: au.linkedin.com/in/davidxbarton/

28/1 - Australia ranks as second best place to be born in 2013 http://www.economist.com/news/21566430-where-be-born-2013-lottery-life?fsrc=scn/ln_ec/the_lottery_of_life

20/1 - She notes that while double-entry bookkeeping has long been a recorder of business growth, it has been oblivious to many of the intangibles people value most, such as good human relationships and a clean environment. http://knowledge.asb.unsw.edu.au/article.cfm?articleId=1687

18/1 - Becoming more strategic: Three tips for any executive   https://www.mckinseyquarterly.com/Strategy/Strategy_in_Practice/Becoming_more_strategic_Three_tips_for_any_executive_2992

14/1 - Will insurance make the difference in MySuper?  http://investmentmagazine.com.au/2012/10/will-insurance-make-the-difference-in-mysuper/ 

11/1 – LGS tops climate risk survey - http://www.top1000funds.com/news/2013/01/09/fund-heads-in-sand-on-climate-risk/

10/1 - A great initiative but still a long way from implementation Integrated reporting seeks to add the five other types of capital to the current financial reporting of a business:

1. Manufactured capital accounts
2. Natural capital
3. Human capital
4. Intellectual capital.
5. And, social capital

  http://knowledge.asb.unsw.edu.au/article.cfm?articleId=1661 

11/11 – Fiscal cliff definition http://on.wsj.com/QooOQA

6/11 - Inhouse management isn’t for everyone - Attracting the right talent and budgetary constraints are cited as reasons for maintaining external investment management strategy http://www.top1000funds.com/conversation/2012/09/14/in-house-not-for-every-house-wsib/

2/11 - The payoff and penalties of holding meetings  http://www.strategy-business.com/article/re00190?gko=97c84

26/10 – Buzzwords - http://www.smh.com.au/executive-style/management/is-it-time-to-buck-the-buzzword-trend-20121017-27qc1.html

25/10 - The offline executive  http://www.strategy-business.com/article/00121?gko=c4c55&cid=20120717enews  The more often someone feels compelled to check their e-mail or phone, the harder it is to focus on the task at hand.

28/9 - 8 secrets of success http://www.stumbleupon.com/su/3mlXyJ/:vf8xy9eN:KFd8DFnO/www.ted.com/talks/richard_st_john_s_8_secrets_of_success.html/  - work-a-frolics

25/9 - How to Memorize Verbatim Text  http://www.stumbleupon.com/su/2FwO7Q/:12AJgeNN6:KGWsZO26/www.productivity501.com/how-to-memorize-verbatim-text/294/

12/9 - http://www.top1000funds.com/conversation/2012/08/24/merton-the-individual-plan-man/  the argument for SMA’s  “Merton, who among other things was a co-founder of Long Term Capital Management, says these solutions have to be customised for every individual – to be individually managed accounts.”

7/9 - http://www.economist.com/blogs/graphicdetail/2012/07/daily-chart?fsrc=scn/fb/wl/dc/abrokenrecord

6/9 - Understanding the lunch break Lunchtime Legends: The Ins and Outs of Workday Breaks -...knowledge.asb.unsw.edu.au  Published: September 04, 2012 in Knowledge@Australian School of Business "I usually eat in front of my monitor because everyone else does and I would feel like a slacker going out to eat for a half an hour or an hour to recharge.

22/8 - Why work does not have to be fulfilling  http://www.forbes.com/sites/actiontrumpseverything/2012/06/19/why-work-does-not-have-to-be-fulfilling/

6/8 - Tools to make great Infographics  http://www.stumbleupon.com/su/1xSQF9/www.socialable.co.uk/16-tools-to-make-awesome-infographics/

27/7 - Warren Buffett Book   http://www.fourhourworkweek.com/blog/2012/06/11/exclusive-warren-buffett-a-few-lessons-for-investors-and-managers/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+timferriss+%28The+Blog+of+Author+Tim+Ferriss%29

25/7 http://blogs.wsj.com/economics/2012/07/20/u-s-cities-with-bigger-economies-than-entire-countries/tab/interactive/  - Crazy that Bob Carr can say the American economy is in decline when Australia's GDP is only slightly higher that that of NYC

20/7 Competing through data: Three experts offer their game plans  - https://www.mckinseyquarterly.com/Marketing/Digital_Marketing/Competing_through_data_Three_experts_offer_their_game_plans_2868

25/6 Top Teams Span of Control http://www.strategy-business.com/article/00107?gko=ce37c&cid=20120410enews

20/6 Equities Obsession: Too Much of a Good Thing? http://knowledge.asb.unsw.edu.au/article.cfm?articleId=1558

27/4 -The Art of Influence http://www.stumbleupon.com/su/2Zwp9S/:1Fd-.5r!d:KCoXNWsV/www.psychologytoday.com/print/73451?page=3/

17/4 - ESG linked to exec renumeration http://www.top1000funds.com/news/2012/03/23/esg-almost-an-afterthought/

10/4 Why External Hires Get Paid More, and Perform Worse, than Internal Staff - http://knowledge.asb.unsw.edu.au/article.cfm?articleId=1566   or is it that the expectations are higher?

3/4 - Strategy, an executives definition http://www.strategy-business.com/article/cs00002?gko=d59c2&cid=20120306enews

30/3 - Will be interesting to see the results of this survey on on asset owners are managing climate change risk exposure across their respective portfolios. http://www.top1000funds.com/news/2012/02/08/climate-risk-disclosure-project-goes-global/

29/3 - Meetings: http://www.smh.com.au/small-business/blogs/work-in-progress/group-work-helpful-or-just-monkey-business-20120202-1qvxj.html

12/3 - 9 oddest interview questions - http://mashable.com/2011/12/27/glassdoor-interview-questions-2011/

14/2 - Finding the courage to shrink - https://www.mckinseyquarterly.com/Corporate_Finance/Performance/Finding_the_courage_to_shrink_2854

6/2 - CIOS do you get what you pay for, interesting although this doesn’t take into account differences in investment style  - http://www.top1000funds.com/news/2012/01/27/do-you-get-what-you-pay-for/

31/1 - How social technologies are extending the organization  https://www.mckinseyquarterly.com/High_Tech/Strategy_Analysis/How_social_technologies_are_extending_the_organization_2888

20/1 - How the role of equities may shrink - https://www.mckinseyquarterly.com/Economic_Studies/Country_Reports/How_the_role_of_equities_may_shrink_2898

12/1 - Worthwhile if you’re looking to increase your productivity in 2012 - http://mashable.com/2011/12/28/email-infographic-toutapp/

9/1 - Resetting the cost structure - http://www.strategy-business.com/article/11402?gko=bf63b&cid=20111213enews

4/1 - The efficiency conundrum - http://www.economist.com/node/21538771?fsrc=scn/fb/wl/ar/theefficiencyconundrum

28/12/11 - Have you tested your strategy lately? - https://www.mckinseyquarterly.com/Strategy/Strategic_Thinking/Have_you_tested_your_strategy_lately_2711

21/12/11 - Mapping Migration - http://www.economist.com/blogs/dailychart/2011/11/diasporas?fsrc=scn/fb/wl/mt/mappingmigration

18/12/11 - Global cities of the future: An interactive map  - https://www.mckinseyquarterly.com/Economic_Studies/Productivity_Performance/Cities_the_next_frontier_for_global_growth_2758

14/12/11 - Revealed the worst passwords of 2011 - http://www.smh.com.au/technology/security/revealed-the-worst-passwords-of-2011-20111121-1npr1.html

29/11/11 - Do Newspaper Articles Predict Aggregate Stock Returns? http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1959916

22/11/11 - The effect of ageing on asset prices may make the rich world’s problems worse - http:///www.economist.com/node/21530077?fsrc=scn/fb/wl/ar/bringingdownthehouse

17/11/11 - Scrum Master in Under 10 Minutes -  http://www.youtube.com/watch?v=Q5k7a9YEoUI

15/11/11 - 99 interview tips that will actually help you get a job - http://www.stumbleupon.com/su/2ekOgq/passivepanda.com/interview-tips

14/11/11 - Measuring the value of search - https://www.mckinseyquarterly.com/Marketing/Digital_Marketing/Measuring_the_value_of_search_2848

4/11/11 - Angst for the educated - http://www.economist.com/node/21528226

3/11/11 - 10 Killer Apps for the Coworking Professional - http://mashable.com/2011/09/06/coworking-apps/#236051-Cobot

15/10/11 - 5 Social Media Tips for Scoring Your Next Job - http://mashable.com/2011/09/01/social-media-job-search/

6/10/11 - LinkedIn Explores What It Takes To Be an Entrepreneur [INFOGRAPHIC] - http://mashable.com/2011/09/01/startup-founder-linkedin/

30/9/11 - Daniel Goleman’s Emotional Intelligence: valuable to review this again from time to time - http://www.stumbleupon.com/su/9QxCls/www.mindtools.com/pages/article/newCDV_59.htm

25/9/11 - Eat Your Peas: A Recipe for Culture Change - The methods used by celebrity chef Jamie Oliver to promote health in a West Virginia city can also be used to raise organizational performance. - http://www.strategy-business.com/article/11205?pg=0

12/9/11 - How Much Data Will Humans Create & Store This Year? [INFOGRAPHIC] - http://mashable.com/2011/06/28/data-infographic/

9/9/11 - Effectively managing service operations - Effectively managing service operations is crucial to controlling labour costs and improving customer satisfaction. - http://www.strategy-business.com/article/00072?gko=ce4b4

2/9/11 - Distortions and deceptions in strategic decisions -Companies are vulnerable to misconceptions, biases, and plain old lies. But not hopelessly vulnerable.https://www.mckinseyquarterly.com/Strategy/Strategic_Thinking/Distortions_and_deceptions_in_strategic_decisions_1716

26/8/11 - How to Win Friends and Influence People: This is Dale Carnegie's summary of his book, from 1936 - http://www.stumbleupon.com/su/2ClSXT/www.westegg.com/unmaintained/carnegie/win-friends.html

22/8/11 - 14 ways to create a memorable business card- http://mashable.com/2011/07/23/business-card-designs/

12/8/11 Seven steps to better brainstorming  - Most attempts at brainstorming are doomed. To generate better ideas—and boost the odds that your organization will act on them—start by asking better questions. - https://www.mckinseyquarterly.com/Strategy/Strategy_in_Practice/Seven_steps_to_better_brainstorming_2767

10/8/11 Total Shareholder Returns - http://www.strategy-business.com/article/00068?pg=0

28/7/11        The Rise of Generation C - http://www.strategy-business.com/article/11110?gko=64e54&cid=20110222enews

19/6/11        The "Nonplussed" Problem - How long should we cling to a word's original meaning? - http://www.slate.com/id/2290536/

10/4/11 “That’s the Way We (Used to) Do Things Around Here” - http://www.strategy-business.com/article/11109?gko=8928a&cid=20110301enews

Career Paths

Having been involved in Investment Accounting for over 20 years I have had the opportunity to mentor a number of people in developing and progress their careers.

This is a concise resource I came across that outlines a potential career path in investment accounting; unfortunately there doesn’t seem to be an Australian equivalent. The starting position would be a role as an Investment Accountant, Fund Accountant or Fund Accounting Analyst (all role would be similar). The point I try and make clear when interviewing graduates is that Investment Accounting is not a career path to become a portfolio manager!

As a Investment Accountant you would usually be responsible for ensuring the Net Asset Value (NAV) of funds is calculated correctly. The implications of an incorrect NAV can be catastrophic and as a result these position have a large amount of responsibility attached.

In terms of education post graduate course such as Kaplan’s Graduate Diploma in Applied Finance would be recommended. The course covers such topics as financial markets, ethics, operational risk management, applied valuation, etc. Coupled with good on the job training this will develop a strong skills base. 

I came across this quote “If individuals are risk-neutral decision-makers who bear the full cost of investment in their own human capital, marginal costs of investment in formal education should be approximately equal to expected present value of marginal returns.”

This unfortunately doesn’t take into account the full picture. Don’t look at additional training in terms of the short term gain (promotion. Pay rise, etc). Those things will come in time, however you will gain networking contacts and your exposure across the industry.

Valuation Process – How valid is the value?

The recent volatility in markets, across days and intra-day, got me thinking about how accurate is a fund unit price in this market. The calculation of a unit price is an estimate at a point in time however it is imperative to be as accurate as possible given the circumstances.

Fundamental to the calculation of a unit price is pricing the investments within a portfolio. Whilst this may seem like a simple exercise it requires a number of decisions and like much of the unit price process the result of these individual decisions can result in significant differences in the final outcome.

Listed equities would seem to be a very straightforward investment to value; just take the price at the end of each day. Which price? Do you use Bid, Offer or Last price, and what time should the price be taken? Market convention is to use Bid for long positions and Offer for short positions. Typically procedures would be in place for situations where:

• No Bid price exists
• No Offer price exists
• Tolerance checks for price movements from the prior day (typically 3%)
• Zero price checks
• Stale price checks where the price has not moved for a number of days (usually 3 days).

Additionally at least two pricing vendors should be used and comparisons made.

My experience is that all reputable organisations would have these controls in place as a minimum however there are a number of other controls that should be considered to maintain accuracy.

Thinly traded stocks. These may not be identified as part of the stale price check. Typically these stocks our outside the ASX200 and price movements can be sporadic. As there is a limited market for the stock what is the accurate price? Where there is a significant holding it is very unlikely that all the holding could be sold at the current bid.

Significant gap between Bid and Offer. If the Bid is significantly lower than the Offer using the Bid may be under-valuing the holding. If the gap continues there may be a case for applying a higher price than the Bid.

Penny stocks. If a share has a price of 1c then a move to 2c would be a 100% increase. Would the price movement exception identify if there was an actual error?

Delisted stocks. No market exists and it is common to apply a zero price until there is some certainly on any value that can be obtained.

Unlisted stocks. These should be independently valued or priced at cost. Is the valuer actually independent or do they have a vested interest in an inflated value? Should more than one valuer be used when there could be significant differences in value?

Significant holdings. Where holdings in a particular company exceed 5% is there a case for using a price lower than the end of day Bid given that any significant on market sale is likely to be at a lower price.

Periods of high volatility. Where there are wide gyrations across the market consideration needs to be given on whether pricing should be suspended. The assumptions that unit trusts work on is that unit issued based on the end of day price allow the cash to be invested next day at a similar price. In recent weeks we have seen situations where the market has opened 2-3% up or down from the previous day’s close (following the lead of US markets). This volatility is inequitable as existing investors are impacted as new investors cash cannot be invested close to the prices they were given. A solution raised in the past has been to calculate prices intra-day however this has proven to be impracticable. The remaining solution is to consider suspending pricing where holdings volatility exceeds certain parameters.

What triggers are in place to suspend the fund given large inflows or outflows? In volatile markets it is very unlikely that significant portions of a fund could be liquidated equivalent to the prices used for unit pricing purposes. For large funds or where there are significant holding in a particular stock consideration should be given to what the realisable value would be.

It is important that the pricing sources, timings and methodologies be reviewed on a regular basis to confirm that the controls are adequate. If the price movement tolerance is set at 3% and the market is fluctuating more than that each day then all stocks would be out of tolerance; is this causing real issues to be hidden?

Best practice is to institute a Pricing Committee whose responsibility is to own the Security Pricing and Asset Valuation methodology. Membership should consist of Risk & Compliance, Finance and Investment Management staff. The intention is to create a group that challenges and tests the existing process looking for potential weaknesses. 

The Risks of Insourcing Investment Management

Recently there has been an increasing trend for large asset owners (pension funds, sovereign funds, etc) to insource the investment management functions. Whilst this has obvious cost benefits and can increase the perceived control of the functions there are a number of factors that Boards need to consider.

CalPERS (responsible for the California Public Employees' Retirement Scheme and the largest public pension fund in the US) recently set an external fee reduction target for the financial year, in light of the fact it spent more than $1 billion on external asset management fees in 2009-2010 and only a relatively modest $29.5 million on investment office personnel services including salaries.


About 62 per cent of CalPERS’ assets are managed inhouse, compared to about 33 per cent for its global peers according to a database put together by CEM. External asset management fees at CalPERS accounted for 90 per cent of the $1.2 billion in total investment office costs in 2009-2010. The other costs were personnel (3 per cent), portfolio management tools (2 per cent), consultants (2 per cent), legal and audit fees (1 per cent), appraisal fees (1 per cent), enterprise overhead (1 per cent)

Although the reduction in investment management fees in a laudable goal trustees need to consider the additional costs that will be incurred as a result of support these functions inhouse.

Potential for Underperformance
It would be uneconomical for Trustee to employ a full range of fund managers to cover all asset classes (including research team). Then a decision needs to be made on which sectors will be managed in-house and which will be outsourced.

Employing a team of fund managers also has its pitfalls. Leaving aside the problem of recruiting the managers with the right level of skills and experience, the pension fund is committed to using the skills of those managers it has recruited. Should market conditions dictate a change of strategy, a small investment team may not have the breadth of skills necessary to adapt to the new requirements. The fund then runs the danger of allowing the asset allocation to be dictated by the skill set of the fund managers it has hired.

Operational Costs
Operationally from insourcing, the pension fund becomes legally liable to meet an expanded range of increasingly complex reporting requirements, which adds to the overall management cost burden. The pension schemes that want to take control of the fund management process may also have to take on responsibility for middle and back-office functions.

Previously, these functions would have been managed by the fund manager, who to some degree acted as gatekeeper. In the wake of the financial crisis and the Madoff scandal, pension funds have wanted much closer control of these functions. Valuation, performance data, risk analysis and other services give the trustees a much more detailed picture of the state of their scheme's liabilities, but they come at a price.

Data Requirements
Many of the investment activities in which Pension fund trustee's are involved, such as the implementation of tactical asset allocations or the equitisation of cash balances, require visibility of the entire fund’s assets, often down to a security level. Typically service providers to investment managers have typically delivered portfolio data at an individual portfolio or product level with limited requirement to ‘roll up’ this data into consolidated structures to enable an overall view of portfolio positions. Trustee's insourcing investment management may need to consider the ability of their service providers to provide consolidated data or an investment in a data warehouse that can provide similar capabilities.
Risk reporting
A key incentive for insourcing investment management has been to provide improved risk controls. As part of the review of insourcing an analysis needs to be completed on the existing risk management systems and the reliance that is put on reporting from current investment managers. Risk management systems are typically expensive and complex to implement. Service provider offerings in this space have typically not provided the total fund perspective such as value-at-risk (VAR) and simulation testing.

Front Office Systems and Processes
Most investment managers have existing technology to support investment processes such as portfolio management and dealing. Where pension funds have made the decision to insource investment management they will often not have front office systems in place, and will need to select and implement these platforms. The expertise required to select and implement this system may not reside inhouse and could result in a protracted transition period.

The decision to insouce investment management needs careful consideration including an analysis of the operational and support costs.

The Right Selection Process Improves Performance

Working with a organisation recently it was oserved that over the past two years staff turnover rates were well above the industry average. This was leading to increased recruiting, selection and training costs. In addition the high turnover rate was disrupting the efficient running of the organisation with knowledgeable and experienced staff leaving and replacements being sought.

In exit interviews the main reasons stated for leaving was an inability to “fit in” with the company culture and that the compensation did not compare to market rates. The selection process was being reviewed to determine if it is contributing to the turnover.

Analysis
In determining the cause of the high turnover all aspects of the human resources management (HRM) were reviewed uncovering that the root cause was the selection processes. The ineffective selection process resulted in staff being hired that did not fit culturally with the organisation. In addition to the high turnover the lack of cultural fit was potentially causing absenteeism and low productivity although these had yet to be researched. Pfeffer (1998) has suggested that recruiting people that have a cultural fit with the organisation leads to increased profits.

Issues with the selection process were a narrow search for candidates, no screening for cultural fit, no clarity on critical behaviours and attitudes, conducting only one interview and not assessing the results of the selection process. Analysing each of these issues in turn provided support for the premise that hiring for cultural fit is key to reducing high turnover.

Figure 1: Issues with the selection process

Sourcing candidates from a wider search would increase the chances finding the candidate with the best fit. Organisation such as Southwest Airlines and Subaru source large numbers of applications and interview a significant proportion in order to have the highest probability of sourcing the right candidate (Pfeffer 1998).
The reason for leaving of “not fitting in” highlighted that the values and assumptions of the candidates did not align with those of the organisation. To ensure better fit it was recommended that compatible values should be identified in the selection process. Personality and cultural traits should be screened for as these cannot be taught however skills can be taught. Candidates who are sociable and cooperative would support the high level of teamwork required. It was proposed that when people work in organisations that have a culture that fits with their values, they are more likely to be satisfied and productive.

Due to the tight labour market there is a tendency to settle for the first applicant with the right skills however this approach is unlikely to identify the values and behaviours that will provide a suitable fit with the corporate values. Conducting only one interview will not identify the teamwork and presentation skills required in all roles. Companies that value their staff require candidates to proceed through several interviews and a rigorous selection procedure. Not gathering feedback on the selection process leads to a repetition of the problem. A number of months after the selection it should be possible to assess the quality of the selection process by reviewing each component.

Although the organisation had a policy of paying market rates this does not appears to be attracting the right candidates. We argued that if organisational want to attract the highest performers it needs to have compensation that is substantially above market rates.

Improvement Planning
Selecting candidates based on cultural fit rather than the first applicant with the right skills will ensure lower turnover, lower absenteeism and improved productivity. The exit interviews support this with staff leaving because they don’t fit in. For the model to be effective all aspects of the model must be integrated simultaneously in order to derive business value. Although these could potentially improve the selection process they are outside the scope of this improvement plan and were analysed at a later date.
In recommending improvements we recommended a model for hiring the right people that included having a large number of applicants, screening for cultural fit and attitude, being clear about the most critical skills and behaviours, using several rounds of screening and assessing the process. A more structured process would be supported by the level of formalisation in the organisation.

The number of sources for candidates can be increased by utilising sources such as internal searches, advertisements, employee referrals, employment agencies, and web-based advertising. Although web-based advertising has a wide reach it generates many unqualified candidates.

As a example companies like Southwest Airlines prefer to hire without previous industry experience and select based on attitude alone to achieve cultural fit. This approach did not fit with the organisation as many of the roles are highly technical requiring five to ten years industry experience. A more appropriate approach would be to select for a combination of experience and attitude.

A more lengthy selection process would ensure that those who are hired have been carefully scrutinised and are committed to the role. The selection process should involve at least three interviews with the candidate’s supervisor, manager and HR. Other selection devices could include application forms, written tests, performance-simulation tests and background investigations. This will increase the resources expended on selection however given the costs of replacement this is justified.

In order to improve the selection process all components would be validated against the subsequent performance of the people selected. The HR department would manage this feedback process with the process being refined and developed based on these reviews.

Figure 2: New selection process

Selecting candidates based on their cultural fit to the organisation improves their ability to work within the team and improves performance. With such critical functions it is important to have the "right" team in place and time spent recruiting will improve performance in the long term.

Applying a Process Methodology to the Production of Unit Prices

Applying a process mindset to the the production and delivery of unit prices can provide a insights into potential improvements. Accuracy and timely delivery are critical to the process with substantial penalties for non-conformance thereby requiring strong process controls.

Fig 1: The Unit Pricing Process in an outsourced environment
Customers define quality as quality of design and conformance quality. In regard to the unit price delivery quality of design relates first to the calculation of the unit price. There are many inputs into the calculation of the unit price and its calculation is governed by standards issued by Financial Services Council (FSC) and subject to review by ASIC. Achieving quality of design is the ability to meet all these standards. The second aspect of quality of design relates to timely delivery as defined by the customer. Conformance quality is associated with being able to deliver to these parameters each day.

The Joiner triangle (Joiner, 1994) provides a model to review how quality is delivered to customers and emphasises that for quality to be delivered it must be measured and that quality is achieved through an empowered workforce. The delivery of quality is essential in regard to the calculation and delivery of unit prices due to the high level of regulation and the high costs incurred for errors. There have been many examples of large compensation payouts for unit pricing errors with the largest being in 2003 when National Australia Bank recompensing customers $67 million for errors that had continued for the past ten years (SMH, 2003).

Figure 2: The Joiner triangle (Joiner, 1994)

In delivering quality the external failure costs are the most visual and the most difficult to estimate. An error may exist for an extensive period before being discovered. Many other costs of quality are less obvious but substantial and include prevention, monitoring and internal failure costs. Although many product issuers outsource the unit pricing process reviews and reconciliations are still required due to the high level of risk in the process. Designing the process, employing and training staff assists in preventing errors however there is a large costs incurred.

Although errors in the process are the most visible aspect they are relatively rare. The area that requires more attention is the other aspect of quality that customers value; the actual delivery of the unit prices to customers each day. The review process must be accurate and meet the requirement for zero errors but it must also meet customer’s requirements for on time delivery.

Measures
Achieving high quality in the unit pricing process requires objective facts about processes and outcomes. The two types of measurement that can be used are outcomes and process measures. Outcome measures are obtained direct from customers regarding their satisfaction. Process measures look at the internal processes their impact on customer satisfaction. Data should be collected on the level of customer expectations, the relative importance of those expectations and the customers’ perceptions of comparisons with competitors.

Table 1 outlines for the unit price process the approach that should be taken to collect the data, the relevant measures.

Table 1: Unit price process measures (Adapted from Berry & Parasuraman, 1997)

1(c) Common & Special Cause Variation
Common causes are those factors and variables that give rise to normal variation, whereas special causes lead to un-normal or unusual variation. Common causes often encompass many small random variations that individually are difficult to isolate and control, but together result in an expected and often predictable range of variation. Although there are many measures that can be chosen for the unit price process delivery time is the most visible and has a high impact on customers if the specification is not met.

Common cause variation is intrinsic to the process and applying this to the delivery time for unit prices this would cover items such as staff training, staff sick leave, staff annual leave, reconciliation differences and delivery delays. As part of the normal process staff resources must be managed. This applies to both the outsource provider and to Schroders. In the normal course of business staff will be on sick or annual leave which can result in the process taking longer. Additionally new staff may need to be trained on the process which again will result in a later delivery. In managing staff resources most of these circumstances are pre-planned and additional resources can be obtained to reduce the variance. Over a certain period there will be a reasonable number of reconciliation differences as a result of the large number of calculations required. Investigation and resolution of these reconciliation differences have the potential to delay the delivery.

Special cause variation arises from specific conditions that occur singularly. Applying this to the delivery time for unit prices this would cover items such as the introduction of new funds, changes in legislation or rules, email server failure, system failure or new customers. As the delivery of the inputs from the outsource provider and the delivery of the final unit prices to customers is by email any failure or delay in email servers will result in late delivery. Changes in legislation of calculation methodology will require changes in processes and additional staff training which initially could lead to later deliveries. Apart for the legislative changes these variations are un-planned and must be dealt with at the time they occur.

To develop conformance quality it is first necessary to eliminate the special causes of variation and develop a stable process. The next step is to then reduce the common cause variation.

Control Chart
Using the delivery time for unit prices to customers an X-chart can be used to track the actual delivery times.
In setting up the control chart the following steps should be followed:

1. Estimate the mean of the data.
2. Calculate the standard deviation of the data.
3. Calculate the upper control limit
4. Calculate the lower control limit

Example of the Control Chart for release of unit price data

Analysis

Using the data above the unit price delivery appears to be a stable process with all data points within the upper and lower control limits. The variations in delivery time appears to be the result of common cause variation however this does not specify how well the process meets customer requirements. In this example customers required that the unit price email be delivered before 2pm and the data collected showed that in many instances this parameter was not being met. Customers do not define a lower specification as they are happy to receive the data earlier, if possible. The lower specification has been set at 11am as this is the earliest the input data could be delivered.

The capability ratio measures the expected number of times the delivery will be outside specifications. This is calculated as:
Cp = (Upper specification – Lower specification)/6σ

Cp = (14:00 – 11:00)/(6 * 0.8)

Cp = 0.60

This would indicate that the variation is less than customers expect however this is only the case if the mean lies close to the centre point of the specification range. For this example the unit pricing process this is not the case. The process capability index, Cpk , defines which of the upper or lower customer specification will likely be breached.

Cpk = min( Upper specification - Χ, Χ - Lower specification)/3σ, 3σ

= min ((14.00 – 13.70)/(3 * 0.8)), ((13.70 – 11.70)/(3 * 0.8))

= 0.10

As the graph shows and this calculation verifies the lower specification will be rarely breached however the upper specification has a high probability of being breached. In this sample it has been breached 18 out of 40 times.

In order to identify the reason the customer specification are not being met a cause and effect diagram can be used.

Cause and effect diagram of the unit price process (Adapted from Slack et al, 1995)

There are three steps within the unit price delivery process being the delivery of inputs from the outsource provider, checking and review by the Product Issuer and then delivery to customers of the final unit price. Further analysis of each step through the use of control charts can identify where the largest variances occur. Reducing these variances is the key to improving the final delivery to the customer. Once a variance is indtified the first step is to remove the special cause variance. The aim is to reduce the processing time in order to meet the final client specifications; therefore the first step is to set some specification for this process (eg mean time for the process should be 30 minutes with and upper limit of 40 minutes and lower limit of 20 minutes). Given these parameters the analysis then needs to concentrate on those days when these parameters were exceeded. Clearly if the process takes longer than 40 minutes there is an issue however taking less time could indicate a lack of integrity in the review process. Reviewing and investigating each observation provides insights into correction.

Working with the outsource provider on their processes presents an opportunity to reduce both special and common cause variance. Rather than treating the processes in each organisation as separate viewing it as the one process would allow efficiencies to be identified. Some of the reviews and checks that Product Issuers complete could be moved to the outsource provider so that when the inputs are delivered minimal processing is required. Although Product issuer needs to maintain responsibility it can achieve this be conducting due diligence on the Service provider processes. This would remove duplication and improve delivery times to the customer.

The process of reducing common cause variation is ongoing and iterative. Reducing variation will in turn reduce the upper and lower control limits resulting in a higher quality and reliable product to be produced.

The unit price process has critical parameters for accuracy and timeliness from the customer’s perspective. Although the requirements for accuracy are being achieved it is essential that deliveries are made within client specifications. Designing a process that delivers quality at a reasonable cost is the goal of Total Quality Management. Designing a quality process is not just contained to within the Product Issuer but requires the process to be treated as a continuous process between the Service provider and the Product Issuer.