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by H. James Harrington and Frank Voehl


If we define “normal” as ordinary, typical, average or common, then truly great CEOs are extraordinary, atypical, unusual and rare. Great leaders don’t set out each morning to provide leadership. Outstanding leadership that nets results calls for a profound sense of responsibility for the role, its impact on the organization’s success, a sense of value and an understanding of what leaders should know about quality to create an environment of responsibility.

Creating that environment is a requirement for all great leaders. It starts with a clear understanding, acceptance and commitment to the organization’s vision, culture and goals. Jack Welch, GE’s former CEO, loved to spot leaders early, follow their careers and stretch them in jobs of increasing complexity. “We spend all our time on people,” he said. “The day we screw up the people thing, this company is over.” He received volumes of information--good and bad, from multiple sources--and he and his senior team tracked executives’ progress in detail through a system of regular reviews. His written feedback to subordinates is legendary: specific, constructive, to the point.

Of course, some came up short. When Welch committed the company to achieving Six Sigma quality a few years ago, he evaluated how high-level executives’ beliefs aligned with the Six Sigma values of critical thinking. He confronted those who weren’t on board and told them GE wasn’t the place for them.

 

Quality and the CEO

According to a survey conducted by Louis Harris & Associates for the Foundation for the Malcolm Baldrige National Quality Award, corporate America’s CEOs see a large number of important trends1 emerging in the business environment. Six trends affecting major U.S. companies are considered critical by more than 70 percent of the CEOs surveyed. They are:

Globalization (94%)

Improving knowledge management (88%)

Cost and cycle time reduction (79%)

Improving supply chains globally (78%)

Manufacturing at multiple locations in many countries (76%)

Managing more part-time, temporary and contract workers (71%)

 

Eight other trends were considered major by between 50 percent and 70 percent of the surveyed CEOs:

Developing new employee relationships based on performance (69%)

Improving human resources management (68%)

Improving the execution of strategic plans (68%)

Developing more appropriate strategic plans (64%)

Ongoing measurement and analysis of organizational processes (60%)

Developing a consistent global corporate culture (56%)

Outsourcing manufacturing (55%)

Creating a learning organization (52%)

 

Inaccurate quotes, outdated information, missing shipments, unfilled orders and irate customers all reflect how poor quality can negatively affect a CEO’s ability to cope with and succeed in the new business environment. The impact of poor quality is felt at every level of the organization; therefore, it’s vital for senior leaders to address the need to improve.

More than half of the CEOs surveyed believe they and their peers must improve the following skills “a great deal”:

Ability to think globally (72%)

Ability to execute strategies successfully (66%)

Improving flexibility in a changing world (63%)

Ability to develop appropriate strategies (60%)

Ability to redefine their business rapidly (54%)

Understanding new technologies (52%)

 

Between 40 percent and 50 percent of CEOs also believe they and their peers must improve the following skills “a great deal”:

Ability to work well with different stakeholders (50%)

Ability to create a learning organization (49%)

Ability to make the right bets about the future (43%)

Ability to be a visible, articulate and charismatic leader (41%)

Being a strong enough leader to overcome opposition (40%)

 

The different talents listed above indicate just how difficult it is to be a CEO of a major company today. New and different skills are needed, of which the critical thinking skills of quality improvement are paramount. Poor quality and poor critical thinking cost the average organization at least 25 percent of its revenue. Imagine what a company could do with that additional revenue without having to increase capital equipment expenditures.

The effect of losses due to poor quality and critical thinking are too great for any CEO to ignore. They include the effects on investors, the bottom line, the corporate image, shareholders and employees. Fortunately, high quality can also earn enormous returns.

 

Poor quality’s effect on investors

A corporation’s shareholders hold its CEO responsible for personally investigating every idea, suggestion, inclination or notion that might lead to shareholder value. Attention to quality principles can increase value by:

A sustained increase in revenues

Ongoing reduction of operational expenses

Consistent increases in efficiencies and effectiveness

Any other combination of positive effects on the bottom line

 

In other words, CEOs should always be on the lookout for measurable, memorable and sustainable results. However, although shareholders expect results, they also expect integrity. The public has learned to mistrust corporate America. The hundreds of restated financial reports each year could be ignored, but real-life accounting scandals can’t. First Enron, then Tyco and now WorldCom; investors are running scared, and they’re looking for someone to blame. Does the fault lie with the CEO, senior management, underlings, auditors, analysts or lax government oversight?

The lack of quality corporate governance surely contributes to faulty financial reporting. But is it possible to correct this problem by holding the corporate governance structure accountable when so much of the problem is an ethics issue? The shadow of guilt quickly spreads to all: outright liars, those who’ve made honest mistakes and even the squeaky clean. Lacking solid evidence to the contrary, shareholders suspect all financial reports. Trust must be earned. Once lost, it’s almost impossible to regain.

Although government and private-sector groups have roles to play in establishing trust, the lion’s share of the job falls squarely on each company. Investors know “you can’t legislate morality.” They’ll not be fooled again by misleading claims such as: “Trust us. Our auditors approved it.” Regaining trust requires better reporting as well as solid evidence that the numbers are accurate.

Companies must realize that investors and others who use financial reports are customers. To a customer, a high-quality financial report isn’t one that merely meets generally accepted accounting principles (even assuming those are brought up to date). A high-quality financial report is one that helps them make better decisions more efficiently. It must be:

Current (a 90-day-old insider trade is ancient history)

Comprehensive (no off-the-book liabilities allowed)

Easy to understand (few people can understand an annual report)

Accurate

 

Companies must adopt a spirit of continuous improvement in financial reporting. The first step toward that end is measurement. Investors expect a more precise statement than “these numbers are the best they can possibly be.” Are the stated receivables within 1 percent, 3 percent, 5 percent or “we really don’t know?” Financial statements must clearly state the accuracy of each bit of key financial data.

No one expects a financial report to be perfect. Indeed, people are surprisingly forgiving of flaws and errors once they understand them. But investors do expect improvements. Nothing builds trust more than continuous improvement. If last year’s receivables were within 5 percent, then companies must make improvements to get this year’s within 2 percent and next year’s within 1 percent. Companies must also report faster. If insider trades were reported within 60 days last month, this month they should be reported in 45 days, next month in 30 days and so forth.

Some might argue that faster reporting and more accurate reporting are incompatible. This simply isn’t the case. Today’s financial processes are error-prone. They produce poor results and are slow and costly because finding and fixing errors is difficult, time-consuming and expensive. Eliminating errors at their source yields better, faster and less costly results. To do this, companies must get everyone involved, from the dock worker off-loading supplies, to the middle manager filing an expense report, to the finance executive setting up a special-purpose entity. Companies must name names. Chief executives and heads of audit committees must bear personal accountability for errors in financial statements that exceed stated accuracy limits.

Each of these steps is challenging by itself. Taken together, they require a sea change in attitude, belief and action. CEOs shouldn’t underestimate the enormity of the task. But the quality costs of not implementing these steps are even greater. In the final analysis, the best and most cost-effective way to appear trustworthy is to actually be trustworthy.

 

Effect on the bottom line

How many CEOs take the time to consider how much their organization spends to fix incorrect information? Or the cost of delayed decisions because data on which important decisions were based were late or incomplete? Chances are many haven’t. After all, they’re spending all their time correcting or tracking down bad or missing data. Who has time to speculate on the cost to correct a situation that’s so far out of hand?

A significant majority of CEOs believe the critical thinking and quality criteria found in the Baldrige Award are “extremely” or “very” valuable in stimulating both quality improvements in U.S. companies (79%) and improvements in the competitiveness of U.S. business (67%). Relatively few believe they’re “not very valuable” or “not valuable” in improving quality (11%) or competitiveness (23%). But in this time of decreased budgets and belt-tightening, the cost of poor quality can rob organizations of valuable resources they need to get the job done. It’s well worth the time and effort to investigate a bit further. Here’s one way to look at it:

Cost of Poor Data Quality = Cost to Prevent Errors + Cost to Correct Errors + Cost to “Make Good” for Customer

Now look a little deeper. How much time does your organization spend:

Making good on customer complaints caused by errors?

Checking data that should be correct when they come to your department?

Fixing issues and incorrect data?

Finding missing information?

Clarifying data that don’t make sense?

 

Multiply the time by the loaded cost to your company for staff hours devoted to those tasks. One example of the cost of poor quality is order entry staff who must supply missing address information for new customers:

They spend nearly 25 percent of their time performing this task.

There are 10 people on staff (0.25 r 10 = 2.5 staff effort-years annually).

Cost accounting tells you the approximate loaded cost for a staff member is $50,000 per year.

That means the approximate annualized cost of poor quality for this one item is $125,000 per year (2.5 r $50,000 = $125,000).

 

That’s just one simple example. Add costs incurred for lost or misdirected shipments, reshipping, restocking and the like. Furthermore, can you ever put a dollar value on the cost to your organization for customer dissatisfaction? Your COPQ can be staggering.

 

Effect on corporate image

Everyone at one time or another feels the impact of quality errors. Most times poor quality results in lost time, lost money, lost consumer confidence, embarrassment and the like. However, sometimes quality errors cost lives.

The items listed below were newsworthy for the same reasons: poor quality and critical thinking. Although few, if any, of the news reports specifically point a finger at erroneous data, poor critical thinking is often at the heart of the problem. Simply stated, the right--and correct--thinking wasn’t in the right place at the right time to do what needed to be done.2

“Fixing Hospital Billing Errors” CBS MarketWatch.com Jan. 16, 2004, by Kristen Gerencher. As many as nine out of 10 hospital bills are in some way inaccurate, and many patients miss mistakes in not knowing how to decode charges and ask the right questions.

In Consumer Reports’ January 2004 issue, 5 percent of 11,000 readers said they found major errors upon reviewing their itemized hospital bills. Those with at least $2,000 in out-of-pocket expenses were twice as likely to have found inaccuracies.

“ New Jersey Shows Failures of Child Welfare System” The New York Times, April 15, 2003, by Richard Lezin Jones and Leslie Kaufman. New Jersey child welfare system’s confidential files were made public on April 14, providing a detailed account of the deaths and abuse of more than a dozen children. Although some blame rests with individual failures of caseworkers and supervisors, poor data quality is also at fault.

“Hyundai Reports Errors in Horsepower” USA Today, Sept. 10, 2002, by James R. Healey. Hyundai Motor America admitted it reported incorrect horsepower ratings for 1.3 million vehicles sold in the United States since 1992. The error, which ranged from an overstatement of 4.3 percent to 9.6 percent, occurred when engines were retuned to meet U.S. pollution requirements. South Korean engineers neglected to notify its U.S. marketing department of resulting power losses.

 

Effect on employees

In a keynote address titled “The New Productivity: A Growth Strategy for America,” Paul A. Allaire, former chairman and chief executive officer of Xerox Corp., focused on the relationship of quality to new productivity and the implications both have for growth in the U.S. economy. Quality management was the business practice of the 1990s, Allaire says, but quality alone isn’t enough. Quality is based on specific values, including discipline, teamwork and consistency--all hallmarks of Japanese society.

“We cannot expect to do better than our Japanese competition using only quality management,” Allaire said. “They have an inherent structural advantage. On the other hand, America has some sources of potential advantage in its environment, including diversity, creativity and the entrepreneurial energy in its workforce.

“If America is to remain strong and competitive in global economies, we have to use quality as a foundation, but we have to focus quality on this new productivity that really unleashes the creativity, critical thinking and common sense of our people to create value for customers.”

Allaire also discussed the need for business schools to participate in this change by preparing students and future employees in quality management and critical thinking. In addition, he recommended that “…business students should work on issues over the horizon, the ones CEOs in the business community don’t see yet. If they grasp this new productivity, the power of our people to create value and unleash critical thinking will be celebrated.”

 

Summary

Everyone knows quality systems and associated data warehouses are among an organization’s most important assets. And everyone knows the current level of critical thinking simply isn’t good enough for 21st-century organizations. Too many decisions are simply wrong, irrelevant, too hard to understand or otherwise unfit for use. Poor quality costs millions, angers customers and interferes with sound decision making.

To meet the strategic challenges outlined in this article and take advantage of the opportunities they create, CEOs must embrace creative problem solving and critical thinking as never before. To achieve effective levels of critical thinking and quality improvement, an organization must improve the creativity of its work groups and individuals, and CEOs must create the right kind of work culture that will foster critical thinking and turn it into a competitive advantage.

Sources

1. NIST Study No. 818407 July 1998, updated 2003.
A survey conducted for the Foundation for the Malcolm Baldrige National Quality Award Data Collection. The results were tabulated and analyzed by Louis Harris & Associates Inc.; 111 Fifth Avenue, New York, NY 10003; (212) 539-9600.

2. Quality Data Solutions report on CEOs and Quality Improvement.
Navesink, New Jersey; 34 Sycamore Ave, Little Silver, NJ 07737; (732) 933-4669.

 

About the authors

H. James Harrington is CEO of the Harrington Institute Inc. and chairman of the board of the Harrington Software Group. He has more than 45 years of experience as a quality professional and is the author of 22 books. Visit his Web site at www.harrington-institute.com.

Frank Voehl is COO of the Harrington Software group. He has more than 30 years of experience as a systems engineer and quality professional and is the author/co-author of 16 books and hundreds of articles and papers on quality management, continuous improvement and teamwork. Visit his Web site at www.harringtonsoftware.com.