WCBF 3rd Annual Conference: Six Sigma in Financial Services

R.J. Donofrio

May 11, 2006

2

InvestmentServicing

Core CapabilitiesState Street Corporation> Founded in 1792> Over 20,000 employees worldwide> Office locations in 26 countries> Over 3,000 clients in over 50 countries> AA- Senior debt rating> 23% ten-year total annualized return to shareholders> 16% ten-year growth rate in dividends per shareInvestment Servicing> $10.1 trillion assets under custody> Custody, accounting and administration> Consulting, outsourcing and implementation> Transfer agency and recordkeeping> Performance, risk and compliance> Capital, lending and liquidityInvestment Management > $1.4 trillion managed> Largest institutional investment manager worldwide> Expertise across all asset classes, risk strategies

and investment approachesInvestment Research and Trading> Research, analytics and trading> Provides benchmarks for performance, optimizes

investment strategies and facilitates the investment process

> Focus on attracting liquidity and increasing efficiency

Facts as of 12/31/05

InvestmentResearch

and Trading

State Street Corporation

InvestmentSolutions

InvestmentManagement

3

Services> Benefit payments> Brokerage> Cash management> Commission recapture> Compliance monitoring> Custody> Financial reporting> Foreign Exchange> Fundamental Data> Fund administration> Hedge fund services> Insurance accounting> Investment management> Market Data

> Master recordkeeping> Multinational servicing> Mutual fund accounting> Offshore funds> Pension fund accounting> Performance and analytics> Securities lending> Shareholder services> Short term cash investing> Specialized trust services> Trade cost analysis> Transition management> Wealth management services

Investment SolutionsWe Offer a Complete Range of Solutions

Post-tradeTradePre-trade

4

Unparalleled Focus

ASSET SERVICINGINSTITUTIONAL ASSET

MANAGEMENTRETAIL ASSET MANAGEMENT

INVESTMENT BANKING; COMMERCIAL LENDING;

OTHER

State Street* 84% 16% — —

Mellon Group* 17% 18% 25% 40%

Northern 34% 14% 39% 13%

BoNY 76% 10% — 14%

JP Morgan 11% 2% 7% 80%

Citigroup 4% 6% 8% 82%

Source – 2003 annual reports; % of total revenue*2004 annual report

5

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

StateStreet

PFPC BISYS IBT BoNY Chase Fidelity U.S.Bancorp

Dreyfus SEI

Nu

mb

er

of

Da

ily P

ric

ed

Fu

nd

s

Industry Leader

6515

1359

1813

1213940 710 626 551 479600

Source: NASDAQ 12/31/2005

Money Funds

Mutual Funds

6

Global Presence

AUSTRALIAMelbourneSydney

AUSTRIAVienna

BELGIUMBrussels

CANADAMontreal Ottawa TorontoVancouver

CAYMAN ISLANDSGeorge Town

UNITED STATES

Missouri Kansas City

New Hampshire Nashua

New Jersey Princeton

New York New York

North Carolina Winston-Salem

NETHERLANDSAmsterdam

PEOPLE’S REPUBLICOF CHINABeijingHong Kong

SINGAPORESingapore

SOUTH AFRICACape Town

JAPANTokyo

LUXEMBOURGLuxembourg

CHILESantiago

FRANCEParis

GERMANYCologneEschbornFrankfurtMunich

IRELANDDublinKilkenny

ITALYMilan

TAIWANTaipei

UNITEDARAB EMIRATESDubai

SWITZERLANDZurich

UNITED KINGDOMEdinburghLondonSaint HelierSaint Peter PortWindsor

SOUTH KOREASeoul

California Alameda Los Angeles Irvine San Diego San Francisco

Georgia Atlanta

Illinois Chicago

Massachusetts Boston Cambridge Grafton Milton Quincy Westborough Westwood

7

Operating Revenue*

$792$909

$1,052$1,212

$1,423$1,575

$1,882

$2,342

$2,786 $2,785

$3,445

$3,747 $3,786

$5,515

$4,996

$4,393

0

1,000

2,000

3,000

4,000

5,000

6,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Op

erat

ing

Rev

enu

e* (

US

$ m

illio

ns)

CAGR15–year 14%10–year 13% 5–year 10%

* Operating revenue as defined in the Corporation’s SEC filings

8

Operating Earnings Per Share*

$0.39$0.46 $0.51 $0.57

$0.66$0.74

$0.90

$1.18

$1.35 $1.37

$1.66

$1.89$2.04

$2.82

$2.47

$2.29

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Op

erat

ing

Ear

nin

gs

Per

Sh

are*

— D

ilute

d

* Operating earnings per share as defined in the Corporation’s SEC filings

9

Assets Under Management

$1,400

$227$292

$390

$485

$667$711

$775 $763

$1,100

$1,400

0

200

400

600

800

1,000

1,200

1,400

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

U.S

. $ B

illio

ns

10

Strategic Alliance

Six Sigma is Embedded in the Business Unit

Direct Resource to the Business Units> Part of the business unit> Business unit owns resources> Business unit controls resources> Easily accessible> Works on projects to directly

support business unit needs

Grassroots

> Growing slowly over time

> Word of mouth

Institutional Investor Services

Commingled Funds

InvestmentManagers

Six Sigma

11

Critical Factors for Successful Grassroots

> Partner with the Right Customer– GE Asset Management

> Customer Driven– Projects need to customer focused

– Customer facing

– Customers need to feel and experience Six Sigma

> Need a Senior Leader– Senior Leader who believes in Six Sigma

– Senior Leader who is from a Six Sigma organization

Delight

Neutral

Dissatisfaction

Cu

sto

mer

Sa

tisf

acti

on

Degree ofAchievement

FulfilledAbsent

Delig

hter

s

More Is

Bette

r

Must Be

PleasedResigned to Reality

Taken forGranted

Not Pleased

Delight

Neutral

Dissatisfaction

Cu

sto

mer

Sa

tisf

acti

on

Degree ofAchievement

FulfilledAbsent

Delig

hter

s

More Is

Bette

r

Must Be

PleasedResigned to Reality

Taken forGranted

Not Pleased

GE Asset Managementand

State Street

GE Asset Managementand

State Street

12

Culture Change: Decision Making Process

1. Intuition, gut feel, I think

2. Data exists and is used

3. Graphs & charts of data

4. Advanced statistical tools to evaluate data

Simple

Complex

Decision Making Path Types of Problems

Six Sigma is about data based decision making

13

Engagement Detail (#MBB/BB/GB)

3

7

1112

11

20

4 42 2

3 3 3

7

22

1 2 2 2 2 2 2 23

1998

1999

2000

2001

2002

2003

2004

2005

2006

Plan

ned

Green Belts

Black Belts

Master Black Belts

History in the Business Unit

n

1997 2007

1998 1999 2000 2001 2002 2003 2004 2005 2006

1997 - 1998Servicing GE Asset Management

Six Sigma Team Formed

2003Senior Executive

from Xerox

2003 - 2004Further Expansion

2001 - 2002Initial Expansion Strategic Alliance

1998 - 2001Servicing GEAM

2005Executive

Vice President from Citistreet

2004 - 2006Continued Expansion

2006 - 2007Today

Note: Does not include Belts in other areas: Securities Operations

or Investment Manager Services

14

Six Sigma Project OpportunitiesWhere do the project opportunities come from?

Business Plans/Operating Plans

“Where’s the Pain?”

GoalsProcess Owners

Errors &Problems

Customer: VOC

Six SigmaProjects

15

Six Sigma Project SelectionLimited Time, Limited Resources

Will the project impact performance, satisfaction, or buying behaviors?

Customer Satisfaction

Will the project impact operational or regulatory risk?Compliance

What are the costs and the savings?Economic Benefit

Will the project impact core or enabling services?Strategic Fit

Ease of Implementation How quickly can we complete the project? Is data available?

IT Complexity Is there a large IT component to the project?

16

State Street’s Six Sigma Focus

Define

.5 – 1 Month

Does a Process Exist?

Measure

1 Month

Analyze

1 -2 Months

Improve

1 Month

Measure

1 Month

Stop

Verify

1 Month

Design/Optimize

1 Month

Analyze

1 Month

Control

1 Month

Stop

Measure

1 Day

Analyze

1 Day

Improve

1 Day

Control

1 Month

Stop

Process Goal Defect

Reduction? Or Process

Standardization?

DMADV4-6 Months

DMAIC4-6 Months

LEAN1-2 Months

YESNO

Defect Reduction

Process Standardization

------Kaitzen Event------

Our Focus

17

Six Sigma Project Types

Quality Improvement Projects, Data Driven, Disciplined Approach

DMAIC

Operational Risk, Bottom up Risk Identification Operational

Risk Assessment

Can’t manage what you don’t measure. Allows for data based discussions with the customer

Dashboards

Organizations Who Have Deployed Six Sigma. Utilized Where Six Sigma May Add Value or Could be a Differentiator

Sales Support

Large Asset Conversions

No longer a conversion of assets…a conversion of processes. Six Sigma Disciplined approach

Client Consulting Clients who use our Six Sigma services. Onsite Client Projects.

18

Projects by Project Type

New Business Conversions5%

Quality Improvement Projects (DMAIC)

36%

Operational Risk Assessments (IBRA)

21%

Project Support11%

Dashboards11%

Client Consulting11%

Sales Support5%

19

Projects by Segment

Mutual Funds4%

Internal Operations7%

Performance & Analytics4%

Not For Profit7%

Commingled Funds19%

GE Asset Mgt44%

Investment Manager15%

20

Sampling of ProjectsDMAIC> Corporate Actions > Position Breaks > Account Opening Process> ERISA Reporting> Time Deposit Automation> Limited Partnership Processing> Hold Cash (on non SSC Fed holidays)> Billing > Performance & Analytics Process Review> India Cap Gains Tax> Income Separation> First Pass Yield Accuracy of New Bond Buys> Asset Transfer> Non Custody Cash & Share Exception Reporting > Overdrafts> TBA Processing> WIMCS Inquiry Tracking> Month End First Pass Yield> Month End Close> NAV Timeliness & Accuracy> Fund/Trust Accounting> Fund/Trust Reporting> Fund/Trust Expenses

Dashboards> GEAM> Strategic Alliance Customers> Commingled Funds CustomersOperational Risk Assessments> GEAM> Commingled Funds Customers> Strategic Alliance CustomersSales Support> Not For Profit Customers> Public Funds Customers> Commingled Funds CustomersLarge New Business Conversions> Not For Profit Customers> Commingled Funds CustomersClient Consulting> Strategic Alliance Customers> Commingled Funds Customers

21

Results in Controlled Infrastructure, Process, and Organization to Support Strategic Business Objectives

>Essential to Risk Management . . .

– Identify and Quantify the Risks That Represent the Greatest Potential for Financial and Reputation Damage to a Customer and Its Customers

– Assess the Mitigation or Elimination of Those High Risks

– Prioritize Risks to Ensure that “Vital Few” Risks are Mitigated

– Take Action to Reduce Those Risks

– Establish Strong Control/Monitoring Process

High-Level ApproachOperational Risk Assessments

PrioritizeFunctions

(Define)

IdentifyRisks

(Measure)

AnalyzeRisks

(Analyze)

ReduceRisks

(Improve)

MonitorRisks

(Control)

22

PrioritizeFunctions(Define)

Prioritize Functions

> Prioritize Core & Enabling Functions Based On

– High Perceived Risk

– Known Past Failures

– Commitment of Leaders

TradeSupport

Accounting PerformanceSharedServices

Overall Client Relationship Management

Quality Program

Service Components

TradeProcessing

Cash &Secty Settl

Trade SupportTrade Support

Reporting & CRM

TradeProcessing

Cash &Secty Settl

Trade SupportTrade Support

Reporting & CRM

Level OneProcesses

PricingCorp

ActionsCustody Recons

F.I Controls

ClassActions

Data Integrity ServicesData Integrity Services

Reporting & CRM

PricingCorp

ActionsCustody Recons

F.I Controls

ClassActions

Data Integrity ServicesData Integrity Services

Reporting & CRM

Daily CashNonCustody

Recons &Processing

Daily Acctg

& Controls

AccountingAccounting

Reporting& CRM

MonthlyAcctg

& Controls

Daily CashNonCustody

Recons &Processing

Daily Acctg

& Controls

AccountingAccounting

Reporting& CRM

MonthlyAcctg

& Controls

DailyReturns

MonthlyReturns

PerformancePerformance

MTDReturns

CRM & Administrative

DailyReturns

MonthlyReturns

PerformancePerformance

MTDReturns

CRM & Administrative

AccountingLevel Two & Three Processes

Daily Acctg & Controls Non Custody Recon Daily Cash

Daily Audits

Asset Transfers

Benchmark Trading

Research Russell S&P 500

Settle Transactions

Reconcile Cash

Reconcile Positions

FX Processing

Client Directed Activity

Cash Forecast

Cash Reconciliations

USDCash

ForeignCash

Cash Sweep

Overdraft Monitoring

InterestBought/Sold

Tip Adjustments

ProcessSecty Txfr Audit

Trades Income

Obtain Custod.Stmnt

Recon All Cash

ResearchExceptions

PostAdjust.

Obtain Custod.Stmnt

Recon Positions

ResearchExceptions

PostAdjust.

ObtainTxns

Post to MCH

Settle

AccrualBasis

CashBasis

OMACReview

OMACCoding

PensionSTIF

NHTrust

SSgA

Pension Fund Avail

PensionRoll Up

NH TrustForecast

Non NHTrust 4Cast.

Weekly Audits

IncomeVerification

Past Due Income

Failed Trades/FX

Custody Recon

D M CA I

23

Identify Risks

• Validate Process Maps to Determine Scope

• Leverage List of Past Issues/Failures

• Use Customized FMEA Scales

>Validate Process Maps

Expenses

Example: Expenses

120Incorrect expense budgeting

Paid out of incorrect account

Pay out 12b-1 expenses

Expense Accruals

100Understated / overstated NAV or Income

Balance sheet incorrect.

Review accounts for validity

Balance Sheet Review

Process Step

Failure Effect RPNFailure ModeProcess

120Incorrect expense budgeting

Paid out of incorrect account

Pay out 12b-1 expenses

Expense Accruals

100Understated / overstated NAV or Income

Balance sheet incorrect.

Review accounts for validity

Balance Sheet Review

Process Step

Failure Effect RPNFailure ModeProcess

Create FMEA Tied to Process Maps

IdentifyRisks

(Measure)

D M CA I

Start

Receive signed authorization for

fixed and variable expenses

Input expense parameters to

MCH

Update off-line spreadsheet with

any expenses calculated manually

Post daily expenses to MCH

Review daily expense for

validity

Pay out 12b-1 expenses

Expense Control

Pay out Authorized expenses

Expense proofs/ Control

End

NO

Yes Yes

NO

24

Sample FMEA Scale

Severity Worst-case consequence of failure if and when it actually occurs

Rating Description Long Description

10 Regulator Involvement Results in Investment Manager or Trust receiving regulator sanctions

9 Investment Manager loses investors Results in catastrophic failure (ie. renders product or service unfit for use).

8 Wide-spread Investor dissatisfaction Causes "extreme" or "wide based" customer dissatisfaction.

7 Large perf loss or >$100K checkResults in bad press or severely degraded product/service. Fixes are visible to the customer. Have to write a big (>$100k) check.

6 Visible performance loss (some bps) Performance loss (some basis points)

5 Visible to Investor Visible to the investor, may or may not have financial implications.

4 Loss, Not visible to Investor Minor performance loss.

3 Significant rework (>40hrs)Unnoticed and only one-time minor loss on performance (<$25k) or causes significant rework (>40 hours)

2 Rework (<40hrs)Causes minor nuisance (ie <40 hours of work) but can be overcome with no performance loss.

1 Negligible Unnoticed and no loss of performance.

Detection Expected speed of detecting failure

Rating Description10 Within the Quarter or later

9 Within 2 Months

8 Within a Month

7 Within 2 Weeks

6 Within a Week

5 Within a few Days

4 Next Day

3 Within 24 hours

2 Sameday

1 Prior to associated transaction

Occurrence Expected frequency of failure

Rating Description10 1 or more failure per Hour

9 1 failure per Day

8 1 failure per Week

7 1 failure per 2 Weeks

6 1 failure per Month

5 1 failure per Quarter

4 1 failure per 6 Months

3 1 failure per Year

2 1 failure per 5 Years

1 1 or fewer failures per 10 Years

25

0 100 200 300 400 500 600

0

5

10

15

20

25

30

35

RPN 2002

Fre

quen

cy

Above CutOff of 100:

N = 13

Sum = 1681

Max = 240

Sample

AnalyzeRisks

(Analyze)

Identify High Risk Issues

Analyze Risks

> Develop Action Plan to Reduce High Risk Items.

> Launch “Just Do It’s”

> Launch Green Belt/Black Belt Projects

Supplement Quantitative Approach with Business Sense “What keeps you up at night?”

D M CA I

26

Reduce Risks

> Develop Action Plans

> Establish Target Dates

> Assign Owners

> Execute Action Plans

> Rescore High Risk Items

ReduceRisks

(Improve)

Monthly report group does expense proofs to identify any incorrect postings

70120Incorrect expense budgeting

Paid out of incorrect account

Pay out 12b-1 expenses

Expense Accruals

Centralized processing group is performing a monthly review

70100Understated / overstated NAV or Income

Balance sheet incorrect.

Review accounts for validity

Balance Sheet Review

Process Step

Failure Effect Executed Action ItemReduced RPN

Original RPN

Failure ModeProcess

Monthly report group does expense proofs to identify any incorrect postings

70120Incorrect expense budgeting

Paid out of incorrect account

Pay out 12b-1 expenses

Expense Accruals

Centralized processing group is performing a monthly review

70100Understated / overstated NAV or Income

Balance sheet incorrect.

Review accounts for validity

Balance Sheet Review

Process Step

Failure Effect Executed Action ItemReduced RPN

Original RPN

Failure ModeProcess

High Risk w/ Action Plan, Net Yet Reduced

Accepted High Risk Reduced to Low Risk

Color Indicates Status

D M CA I

27

Monitor Risks

> Establish Reassessment Frequency> Create Dashboards for Monitoring> Develop Lessons Learned> Determine any Additional Areas

MonitorRisks

(Control)

Sample Dashboard

0

10

20

30

0

20

40

60

80

100

Defect

CountPercentCum %

Per

cent

Cou

nt

Timeliness Accuracy

Timeliness Defect Root Cause Analysis Accuracy Defect Root Cause Analysis

Timeliness & Accuracy

No Defects to Report

36 36 36 36 36 36

0 0 0 0 0 00

5

10

15

20

25

30

35

40

May Jun Jul Aug Sep Oct

Month

To

tal

# o

f N

AV

's

Del

iver

ed

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Sig

ma

Total NAV Opportunities

NAV Defects

Sigma

100% 100% 100% 100%100% 100%

36 36 36 36 36 36

0 0 0 0 0 00

5

10

15

20

25

30

35

40

May Jun Jul Aug Sep Oct

Month

To

tal

# o

f N

AV

's

Del

iver

ed

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Sig

ma

Total NAV Opportunities

NAV Defects

Sigma

100% 100% 100% 100%100% 100%

0

10

20

30

0

20

40

60

80

100

Defect

CountPercentCum %

Per

cent

Cou

nt

No Defects to Report

D M CA I

28

Sample Project Timeline

6/20/2005 12/1/2005

7/1/2005 8/1/2005 9/1/2005 10/1/2005 11/1/2005

6/21/2005Project Initiation

6/24/2005 - 7/1/2005Project Planning

7/1/2005 - 7/11/2005Create Scope and Scale

7/11/2005 - 7/26/2005

Process Map· Mgt Fee Observation 7/12· Mid Month Observation 7/18 & 7/19

7/26/2005 - 8/10/2005Score

8/10/2005 - 8/22/2005Analyze Risks

8/18/2005High Risk Identification

8/26/2005 - 9/22/2005Risk Mitigation Planning

9/24/2005 - 11/15/2005Risk Mitigation Execution

9/23/2005PlanningTollgate

11/16/2005MitigationTollgate

7/11/2005Scope

Tollgate

7/7/2005

Kickoff Meeting with Janus

7/27/2005Process Map

Tollgate

8/11/2005ScoringTollgate

8/25/2005Assessment

Tollgate

Today

Ongoing Monitoring And Control

29

State Street’s Six Sigma Results

> Improved Quality of Service– Improved Timeliness & Accuracy

of Core Services

– Improved Timeliness & Accuracy of Shared and Support services

– Reduced Operational Risk

Green100%

OriginallyAssessed

Today S

um

Of

Hig

h-R

isk

Ite

ms

Today

Of the original high risk items, 100% have been MitigatedOf the original high risk items, 100% have been Mitigated

Asset Transfer ProjectMirror Reports & Mirror %’sAdditional controlsCorporate Action Reports

* Nine P&A items were reduced below RPN 100 reducing detection to within one week, but are still viewed as high risk by GE because GE sends reports out to clients sooner than the detection. This will be added to Phase II IBRA.

*

Orig

inal

Reduc

ed

0

500

1000

1500

2000

2500

3000 2833, 182833, 18

30

State Street’s Six Sigma Results

> Cost Savings– Soft Dollar savings provide

additional capacity and efficiency

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

2004 2005 2006 Projected

31

State Street’s Six Sigma Results

> Increased Customer Satisfaction– Customer was not expecting this level of

service

– Builds Customer loyalty

– Expands customer relationship

– Contributor to Revenue Retention

– Customer more likely to be a good referral

Delight

Neutral

Dissatisfaction

Cu

sto

mer

Sa

tisf

acti

on

Degree ofAchievement

FulfilledAbsent

Delig

hter

s

More Is

Bette

r

Must Be

PleasedResigned to Reality

Taken forGranted

Not Pleased

Delight

Neutral

Dissatisfaction

Cu

sto

mer

Sa

tisf

acti

on

Degree ofAchievement

FulfilledAbsent

Delig

hter

s

More Is

Bette

r

Must Be

PleasedResigned to Reality

Taken forGranted

Not Pleased

$0

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000

$140,000,000

2004 2005 2006 Projected0.00

1.00

2.00

3.00

4.00

5.00

6.00

2003 2004 2005 2006 Projected

Satisfied

Loyal

32

State Street’s Six Sigma Results

> Contributor to New Revenue– Existing customers purchasing

more products and services

– New customers

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

2004 2005 2006 Projected

33

Customer Benefits

> “Enhanced communication and validated/quantified the items that represented the highest risk to our customers”

> “State Street was such a key component of our processes. This has enabled us to have a boundary free approach to process issue resolution and extend the common language/approach to key vendors.”

> Removes Subjectivity

> Visual Depiction– Demonstrate dependencies

– Identify any redundancies

> Allows for data based, informed decisions

34

What’s Ahead?

> Standardized Curricular

> Continued commitment to creating more belts

> Creating more grassroots teams across Investor Services

> More Client Consulting

> More Internal Cost Savings Projects

> Self Sustainability

35

Thank You!