Enterprise Risk at Wachovia Six Sigma Quality Management

1. Enterprise Risk at WachoviaSix Sigma Quality Management September 2008 Institutional Risk Management Group

2. Table of Contents Page Enterprise Risk .……..……………………..…………………………………….... 3 Our Approach……..……..…………………………………………………........... 4 Continuous Improvement…………………………………………………………. 5 Quantitative Analytics.…………………….………………………………………. 6 Six Sigma – The DMAIC Structure……………..………...……………………… 8 Statistical Origins…………………………….……………………………………. 10 Early Adopters…………………………………………………………………….. 11 Example – Wachovia ATM Transactions………………………………………. 12 Appendix…………………………………………………………………………… 13 Where to Learn More Risk Management Careers

3. Enterprise Risk At Wachovia, the business of risk management permeates daily operations. The company utilizes multiple groups and resources to address banking’s inherent exposure to Operational, Reputational, Credit, and / or Market risks. Risk considerations may include the following: Operational Risk – Concerns related to fraud, legal / regulatory / compliance, and / or Business-as-usual operations Reputational Risk – Negative perceptions created by failed mergers, system integrations, and / or customer interactions Credit Risk – Defaults, distressed securities, spreads, and / or hedges Market Risk – Includes equity, interest rate, currency, and/ or commodity considerations Risk

4. Our Approach To improve risk management capabilities, Wachovia abandoned a siloed approach to problem solving and created a centralized Risk Management Group (RMG). This group uses an enterprise approach to problem solving that cuts across organizational silos and product biases to deliver integrated solutions.

5. Continuous Improvement RMG’s structure and methodology starts with the tactical requirements of Project Management. But as projects advance down the maturity curve, the group applies Process Re-Design and Performance Management strategies to drive continuous improvement. Continuous Improvement: RMG encourages continuous improvement on all projects. Through creation of a Performance Management framework, processes can be routinely optimized long after project conclusion.

6. Quantitative Analytics Quantitative analytics is a primary tools used in evaluating projects. The metrics-driven approach uses Six Sigma tools and techniques to determine cost / benefit ratios and prioritize projects within the portfolio. $XX,XXX,XXX

7. Quantitative Approach (continued) Quantitative analytics is a primary tools used in evaluating projects. The metrics-driven approach uses Six Sigma tools and techniques to determine cost / benefit ratios and prioritize projects within the portfolio.

8. Six Sigma – The DMAIC Structure Six Sigma methodology follows 5 distinct project phases – Define, Measure, Analyze, Improve, and Control (DMAIC). This DMAIC framework utilizes standardized tools and templates to facilitate fact-based analysis and common documentation baselines. Analyze Define Measure

9. Six Sigma – The DMAIC Structure (continued) Six Sigma methodology follows 5 distinct project phases – Define, Measure, Analyze, Improve, and Control (DMAIC). This framework utilizes standardized tools and templates to facilitate fact-based analysis and common documentation baselines. Improve Control Controls vs. Control Phase In Six Sigma, the Control Phase measures process improvements for deviations. Measurement tools are called Key Performance Indicators, which provide statistics on % of system downtime, # of rejected transactions, or # of defects. In Audit, controls typically fall into Automated, Manual, Preventive, and / or Detective. Their goals is to provide reasonable assurance about financial statement accuracy and deter fraud. The premise for both is the same – checks and balances to determine adequacy of control.

10. Statistical Origins Six Sigma is rooted in statistics. The methodology measures process performance against normal distributions to predict stability. • Statistics 101 • Sigma (or s) represents 1 Standard Deviation from the Mean: • Mean – The average (20) • Standard Deviation (s) – The range in which 34.1% of occurrences / random samples would fall. In the Normal Distribution example at right, 1s would equal 5 (the difference between the Mean (20) and the s (15 or 25) on either side). • 6s – Six Standard Deviations (three to either side of the Mean). For a Normal Distribution, 6s represents 99.99966% of the expected population. That means for every 1 million observations, you would expect 3.4 to fall outside 6s.

11. Early Adopters Motorola, Allied Signal, and General Electric were some of the pioneers in adopting Six Sigma techniques for business. • How Does That Apply to Business? • In the mid 1980’s, Motorola had a problem. Production costs were high, customer satisfaction scores low, and profits dwindling. They continued to lose market share to foreign competitors. • In studying the problem, they focused on their factory floors, where products were coming off the line with defects and anomalies. They realized they had too many Defects Per Million Opportunities (DPMO), embarked on what became the first corporate Six Sigma campaign: • By 1991, Motorola had reduced cycle times and overall costs by 90% • By 2006, they reported over $17 billion in savings • Six Sigma became a registered trademark for Motorola • In the mid 1990’s, Jack Welch (CEO) introduced Six Sigma at GE. Through his aggressive application of it’s cost savings methodology, GE became a recognized Six Sigma champion. Welch’s flamboyant personality helped popularize the methodology through the manufacturing industry. • By the late 1990’s two-thirds of Fortune 500 companies had Six Sigma programs.

12. Example – Wachovia ATM Transactions The power of Six Sigma is most obvious in high-volume processes. Incremental adjustments to efficiency rates can yield large improvements – and with significant benefits. For 2008, Wachovia is projected to handle 288,418,323 transactions through it’s ATM network. At that volume, efficiency ratios and number of defects per Sigma level are as follows: – 99.9997 accurate (865 errors) – 99.977% accurate (663,362 errors) – 99.379% accurate (1,791,078 errors) – 93.32% accurate (19,266,344 errors) – 69.2% accurate (88,832,844 errors) – 31% accurate (199,008,643 errors)

13. Appendix Where to Learn More Careers in Risk Management

14. Where to Learn More There are many great sources of information on Six Sigma, Risk Management, and Quality Project Management knowledge. Websites • Wikipedia - http://en.wikipedia.org/wiki/Six_Sigma • Project Management Institute – http://www.pmi.org • American Society for Quality – http://www.asq.org • Risk Management Association - http://www.rmahq.org/RMA/ Books • The Six Sigma Way Team Fieldbook, by Peter S. Pande, Robert P. Neuman, and Roland R. Cavanagh. McGraw-Hill, 2002. • Six Sigma DeMystified, by Paul Keller. McGraw Hill, 2005. • Demystifying Six Sigma – A Company-Wide Approach to Continuous Improvement, by Alan Larson. Amacom Publishing, 2003.

15. Careers in Risk Management There are multiple ways to build a career in Risk Management. By learning aspects of Audit, Project Management, Legal, and Information Technology, Risk Managers build the breadth and depth of skills needed throughout their career. Entry Level Roles • Audit Staff • Information Technology (especially IT Audit) • Records Management • Project Management Mid Level Roles • Audit Managers • IT Governance • Legal and Compliance • Program Management • Merger Integration Risk Specific Roles • IT Risk Manager • Credit Risk Manager • Operational Risk Manager • Market Risk Manager • Risk Director • Chief Risk Officer