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com/print/content/21992210

OPERATIONS QUALITY

Quantifying the Financial Benefits of

Quality
Part One—How You Use Quality Matters
Holly Lyke-Ho-Gland

Tracking the financial impact of any support function is necessary in order to

illustrate its value and garner continued support and resources from senior
management. This struggle is vitally important for quality management
departments that continue to struggle with competing for resources. Once
organizations get clarity on the financial impact of quality, the next step is to
understand what practices and applications help improve the financial value. 

In 2016, ASQ and APQC partnered to conduct a survey that would provide a
comprehensive look at intercontinental quality and continuous improvement
methodologies and to explore organizational practices used for quality
governance, management, and measurement.

This four-part series will look at what helps drive financial benefits from
quality, including looking at the relationship between financial benefits and: 

1. the role and uses of quality,

2. governance and standardization of quality,
3. quality training for suppliers, and
4. quality incentives and training for staff.

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This first article looks at the role and uses of quality and its relationship to
driving financial benefits from quality. 

Quantifying the Benefits

As noted in the full report, “approximately 60 percent of organizations say they

don’t know or don’t measure the financial impact of quality. This lack of
measurement may be attributed to not having a common method for capturing
the financial impact.”  However, that leaves 40 percent of organizations that
have clearly linked their quality efforts to profitability (Figure 1).

Figure 1: Financial Benefits of

Quality

Of the organizations that track the

financial impact of quality, the
majority report benefits less than
$500,000 from using quality to drive profitability. However, that raises the
question, what are these organizations doing and how does the role of quality,
and its applications, really help drive improved financial value?

Role of quality and its relationship to financial value

Quality’s Role in the Organization

Respondents were asked to identify what role quality has within their
organization.  For a third of the respondents, quality is used as a tool for
proactive continuous improvement efforts or for compliance. However, the
role of quality has changed over the last few years and a growing percent of
organizations (36 percent) consider quality a strategic asset and competitive
differentiator.

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Research has shown that as organizations (especially large, globally diverse

ones) move away from quality’s being merely ”checking the compliance boxes”
to really using quality practices to impact the daily decisions of staff, there is
opportunity for a greater return on investment. To quantify this relationship,
we ran correlation analysis between the role of quality and financial benefits.
Our assumptions that the role, in fact, matters were validated. Organizations
that leverage quality as a strategic asset were more likely to report higher levels
of financial gains from their quality programs (Figure 2).

Figure 2: Quality's Role and

Impact on Financial Value

However, that does not mean the

foundational purposes of quality no
longer have a role. Developing a solid
foundation of quality assurance for continuous improvement, risk mitigation,
and compliance provide immeasurable value. However, once that solid
foundation is established, organizations can then leverage quality for the
benefit of the customer and enhance brand image, thus serving as a
competitive differentiator.

Applications of Quality for Profitability

To understand the relationship between quality and profitability, respondents

were also asked to identify what applications of quality they used to drive
profitability.  The majority of organizations tend to use quality to focus on the
customer experience, enhance their brand, and reduce waste. To pinpoint
which uses actually drive financial benefits, we conducted correlation analysis
between the ranges of financial benefit and the potential uses.  Unsurprisingly,
all of the quality uses significantly impact the financial benefits. To create
clarity and guidance on where organizations should focus their efforts, we also

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conducted a gap analysis on the median financial benefit between respondents

that did or did not use a specific application (Figure 3).

Figure 3: Gap Analysis - Use and

Impact on Financial Benefits

The first thing of note is a confirmation

that organizations that do not
specifically use quality for profitability
tend to have much smaller financial
benefits from quality. However, the second largest gap—or in this case benefit
—supports the findings from the previous section.  Organizations that use
quality as a differentiator see improved profitability—in this case, their ability
to leverage quality for price premiums.  On the flip side, organizations
continue to see bottom-line improvements and can grow their financial
benefits by applying quality for waste reduction. It was, however, surprising
that the some of the common uses of quality for profitability—innovation and
the customer experience—had a smaller impact.

Conclusion

Mature organizations’ quality systems tend to focus on proactively creating

value rather than simply being relegated to compliance or improvement
activities. By doing so, the quality function becomes a strategic partner and can
quantify the financial value of its efforts. Driving profitability through price
premiums or waste reduction creates a direct ROI on the value of quality. In
the next article, we will cover the relationship between governance and quality
standardization and the financial benefits of quality. 

Holly Lyke-Ho-Gland is process and performance principal research lead

with APQC, a member-based nonprofit and one of the leading proponents of
benchmarking and best practice business research.

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