Cal. Guide
Six Sigma



A quality manager's guide to budgeting

by Vanessa R. Franco


Whether you see money as the root of the world's woes or the irresistible force that keeps the planet spinning, there's no denying that the quality field wouldn't be what it is--and in fact, all idealism aside, probably wouldn't exist at all--without it. You, the quality manager, must be able to not only manage your department's cash flow and alot funds but also justify the expenditures to the corner-office dweller with the tailored suits. In a larger sense, doing so provides justification for the very existence of quality as a business practice. If you can translate concepts such as customer satisfaction into a dollar value, you'll be doing your quality mission one of the biggest favors possible--achieving crucial management buy-in.


Budgeting basics

 Quality, unfortunately, is often seen more as an insular department than a strategy, and if this is indeed one of the obstacles you're facing, you may need to do a little extra work to prove the worthiness of your endeavor.

 "One of the primary problems with establishing a quality budget is that management thinks there's no value added by the quality organization," says H. James Harrington, COO of Systemcorp, an Internet-software development company. "The No. 1 mistake quality professionals make when planning budgets is basing them on the need to have good quality in order to satisfy the customer. Management doesn't consider the problems the organization would have if the quality budget were eliminated. If the quality budget is directed at increasing customer satisfaction, then the quality budget should be based upon how much additional revenue will be generated as a result of a projected improvement in customer satisfaction. I often see the quality budget cut by, say, 30 percent with no impact on the organization's profit picture. Whatever the aim of the quality budget, it should be based upon its projected impact on the organization's bottom line.

 "Ask yourself whether the quality budget adds value: What's the impact of investing in certain areas, and how can you use your expertise to get a significant return on investment? Having an inspection budget is a waste of money. Instead, base your budget on an impact analysis. Examine last year's poor-quality costs to determine what you should do this year, where improvements have been made and where they haven't."

 Stephen A. Arnett, COO of technology and software company DataNet Quality Systems, agrees that buy-in is essential, and that it's best achieved by speaking the language that upper-level managers understand. "For years, our highest-revenue products catered to the process correction and customer-compliance value propositions," he says. "These were easy sales because they provided obvious benefits that were easy to quantify. But our Baldrige Award-winning customers and 'Jack Welch' companies aren't buying on that basis. These companies know that most of the savings are found further up the chain and that if you want all of your customer's available dollars, you can't get there by simply producing more documentation and reducing internal scrap.

 "This is really a tough mission for the quality manager, because if your management doesn't already 'get' this concept, you aren't going to change the corporate culture with a simple budget proposal. You need to know whether your management is living in this decade or not and then map your proposal to the actual culture and its priorities. I don't want to say that you're going to educate them or that you're going to mislead them. What you're doing is first seeking to understand what they perceive your priorities and your value to the business to be and then mapping what you know you need to do to that perception. Only in that way are you going to get them to understand how your priorities and plans support their goals for you. Apply this process to what you know about your management culture."


Getting started

 It's easy enough to see why it's crucial to be able to present a quality program as a viable money-generating strategy, but figuring out how to do this can be more of a challenge. "Hire a consultant, if necessary, to estimate direct and indirect poor quality costs," Harrington suggests. "Consider costs to your company's reputation and resale, and justify your expenditures. In the assessment, it's vital that you quantify the impact of poor quality on the customer in dollars and cents. Very few organizations do this, but it allows you to justify three-sigma and higher quality levels."

 Harrington is adamant on the value knowing direct and indirect costs and using this information to promote quality. "A very common mistake is ignoring the indirect costs--not simply the costs of appraisal, prevention and internal/external failure, which are direct costs, but also customer-incurred quality costs," he explains, pointing out that the ratio of direct to indirect costs is something close to 1:100. "To illustrate indirect costs, let's say you have a new car whose door has an annoying rattle, so you drop it off at the dealership for repair. Now, in addition to the cost of repair, this defect costs you time, and costs the time of whoever has to pick you up from the dealership and drop you off the next day to pick up the car. The cost to the garage is maybe $12 for the part, but the cost to you as a customer could be hundreds of dollars of lost time, which means lost wages. The old poor-quality cost system would have put the cost to the garage at $12, but the new system would take into account the cost to the customer, as well.

 "Additionally, there's lost-customer cost to consider when you're estimating poor-quality cost. You need to know the value of each customer, the projected expenditures over the course of his or her lifetime. If you don't know this, you're in bad shape, because you don't really know what each defect costs."

 Once you understand these concepts, you'll need to do two things, Harrington believes. "First, determine how much money you need to make an impact on customer satisfaction that will generate more revenue, in the forms of repeat sales and word-of-mouth new sales," he says. "Always remember when you're trying to 'sell' anything to upper management not to approach it with grand ideas such as 'Let's empower employees.' Instead, sell the results: 'Let's reduce turnover from 16 percent to 10 percent.'

 "Second, plan how you're going to spend the money. How can you use it to resolve potential problems early in the process? Develop a program, a quality strategy, by doing a root cause analysis to determine what can make the money go furthest."


Selling your project

 Arnett also stresses the importance of doing your homework first. "You need to thoroughly understand your objectives and develop an approach according to your standards rather than picking a third-party program to duplicate," he says. "Understand the nature of the expected outcomes and expected communication standards before acting. As every firm has different expressions of outcomes or accountability, I tend to look within for answers regarding how my audience will react. When pitching your projects to senior decision makers, model your presentations and cost-and-benefit analyses after investor-relations-style documents. If they're being measured by shareholder response to their actions, start with that: How are your stakeholders being measured? How do they report these items, costs and benefits? How can you show how this investment or request for increased investment is going to be reflected in their reporting systems to their stakeholders? This immediately aligns your program with stakeholders' interests and eliminates errors that are possible when you expect them to intuitively figure this out from your usual means of reporting to those who work directly with you. Don't leave these highest-level assumptions to chance. The most valuable information you need is probably right at your fingertips."


Fighting resistance

 So what do you do if you've taken all of these steps and management still isn't ready to commit as much financial support as you'd like? Don't despair; this isn't an uncommon problem. "No matter how open you think those receiving or evaluating your proposal may be, there are always some limitations and unspoken expectations," Arnett says. "At some point, you'll likely have plans of such scale that they're going to test the system by virtue of their magnitude, regardless of the proposed benefits. So do the research and seek the comfort level of your stakeholders. If you get a sense of the ballpark in which you're working, you'll have a much better sense of how much effort you need to invest documenting the benefits. If you find this implied budget constraint too restrictive for your goals, don't ignore it; use it. Map out a plan to get your program where it needs to be, as well. Detail what you can do with the restrictions in place and, when the initial goals are met, immediately seek support for a more ambitious plan. Allow your stakeholders the comfort that the additional funds won't be spent if the initial expectations aren't met. Keep the objectives measurable and visible; then deliver. Keep working on this implied buy-in for your more ambitious goals while delivering the current ones. Most important is to always keep delivering."


Learning from role models

 Another potential resource, especially for those looking to implement an initiative new to their companies, is a good case study. "Look to market leaders and map meaningful parallels," Arnett suggests. "Which companies 'get it'? Which not only understand levers of change related to product excellence, or market exploitation, or service or process redesign, but are also fundamentally committed to reducing enterprise variability in order to own their customers for life. This is about top-to-bottom execution. Everyone can name a couple of market leaders and can probably assess how applicable their quality models are to the business in which your company competes. Don't expect these high-profile market leaders to be new names to your stakeholders either. Leverage what you learn about where these companies invest to improve and how this has translated to their bottom line to defend your case. We'd all rather see a proposal backed by a real success story--especially one with clear parallels in process or industry requirements--than theory."


Budget nirvana

 Are you ever going to have a perfect budget, even with the most supportive of managers? Probably not, but don't let that discourage you. What you'll likely find is that, with the proper investment of time and energy to do the necessary research, you'll be able to stretch your quality dollar a lot further and more creatively than you might have thought.


About the author

 Vanessa R. Franco is Quality Digest's managing editor. E-mail her at .


Menu Level Above 

[Contents] [News] [WebLinks] [Columnists]

This Menu LeveL 

[BMW] [ISO 9K:2K] [Baldrige] [CBT] [Cal. Guide] [Budgeting] [QS-9000] [Six Sigma]

Menu  Level Below 


Copyright 2000 QCI International. All rights reserved.
Quality Digest can be reached by phone at (530) 893-4095. E-mail:
Click Here

Today's Specials