What can investment managers learn from Amazon?

by Tim Dier

Investment managers learn from Amazon

Investment managers are adept at learning and evolving, so what can they learn from Amazon to help achieve better returns for investors?

One of the ways Amazon achieved operational excellence was through implementing six-sigma process improvement into its strategy. Pioneered in 1986 by Bill Smith while working at Motorola, the concept of six-sigma was developed as a way to cut costs in business processes.

Six Sigma uses a 5-step method, known as DMAIC, to improve processes and solve problems:

  1. Define
  2. Measure, including building tools to measure
  3. Analyse
  4. Improve
  5. Control

Within the Analyse step, Amazon uses the Five Whys method developed by Toyota in the 1930s: if you see an anomaly, ask why, then keep asking why until you have got to the root cause. The outcome of implementing these six-sigma techniques is that Amazon continuously reduces waste by cutting spending, eliminating non-value-adding process stages, and cultivating a Kaizen-based company culture. The results at Amazon. speak for themselves.

How can six-sigma DMAIC help investment managers cut transaction costs?

There has been a great deal of regulation over the past decade, but markets have mostly not become more efficient because of it. Managers need to take measures into their own hands. Applying six-sigma techniques to the execution process for financial instruments can deliver material improvements. In broad terms, managers need to:

  • Develop a repeatable execution process and keep refining through experimentation
  • Analyse the execution performance data
  • Try new things and look again at the statistics
  • Continue to make improvements

For some investment strategies, shaving a single basis point off transaction costs can amount to multiple $millions in savings per annum. As investment alpha is always reported net of trading costs, following this process can help enable managers to trade more efficiently and capture more alpha for their funds.

This is where OptimX can support your business. We help you navigate this technique, identifying and reducing transaction costs, all without you having to add new resources. Trusted by investors, managers, and boards, OptimX’s independence puts it in a unique position to help boost your bottom line. We are motivated by creating value for you and your investors.