Businessweek Archives

How To Make It Pay


Cover Story

HOW TO MAKE IT PAY

When the "total quality" mantra swept U.S. boardrooms in the 1980s, few companies responded with the fervor and dedication of Varian Associates Inc. The scientific-equipment maker put 1,000 of its managers through a four-day course on quality. The company's Silicon Valley headquarters buzzed with quality-speak. Talk of work teams and cycle times replaced discussion of electrons and X-rays. There was even a mascot, Koala T--a manager who wore a koala costume and roamed Varian's cafeteria handing out homilies about quality.

And it wasn't just buzzwords and bear suits. Varian went about virtually reinventing the way it did business--with what seemed to be stunning results. A unit that makes vacuum systems for computer clean rooms boosted on-time delivery from 42% to 92%. The radiation-equipment-service department ranked No.1 in its industry for prompt customer visits. The semiconductor unit cut the time it took to put out new designs by 14 days. W. Edwards Deming and J.M. Juran, the famous management consultants and leading prophets of quality, would have been proud.

But while Varian thought it was playing quality by the book, the final chapter didn't feature the happy ending the company expected. Obsessed with meeting production schedules, the staff in that vacuum-equipment unit didn't return customers' phone calls, and the operation ended up losing market share. Radiation-repair people were so rushed to meet deadlines that they left before explaining their work to customers. Sure, Varian could boast about quality. But in 1990, its sales grew by a paltry 3%, to $1.3 billion. And Varian posted a $4.1 million loss after a $32 million profit in 1989. "All of the quality-based charts went up and to the right, but everything else went down," says Richard M. Levy, executive vice-president for quality.

Levy isn't the only one who's dismayed. Countless other managers have heeded the siren song of total quality management, or TQM, only to discover that quality doesn't necessarily pay. At Johnson & Johnson, quality teams for several product lines criss-crossed the country, benchmarking against other companies, but costs skyrocketed. In 1990, Wallace Co. won the Malcolm Baldrige National Quality Award. Two years later, the oil equipment company filed for Chapter 11 as the cost of its quality programs soared and oil prices collapsed.

RALLYING CRY. Of course, the quest for quality doesn't always have unhappy results. Detroit, for instance, finally caught the quality wave in the 1980s, and it's hard not to shudder at the thought of how the Big Three would be faring today if they were still turning out Chevy Citations instead of Saturns. And much of the rest of U.S. industry would be locked out of the game in today's global economy without the quality strides of the past few years.

But at too many companies, it turns out, the push for quality can be as badly misguided as it is well-intended. It can be popular with managers and their consultants, but as at Varian, it can devolve into a mechanistic exercise that proves meaningless to customers. And quality that means little to customers usually doesn't produce a payoff in improved sales, profits, or market share. It's wasted effort and expense.

That's why a growing number of companies and management thinkers are starting to refine the notion. Today's rallying cry: return on quality. Concepts such as better product designs and swifter manufacturing aren't being rejected, but advocates of the new theory are abandoning the narrow statistical benchmarks worshiped by some TQM acolytes. Instead, managers are trying to make sure that the quality they offer is the quality their customers want. And they're starting to use sophisticated financial tools to ensure that quality programs have a payoff. Roland Rust, a Vanderbilt University professor of management and one of ROQ's chief apostles, says executives have to worry about only one thing: "If we're not going to make money off of it, we're not going to do it."

The ROQ revisionism is attracting a growing number of corporate devotees across a wide spectrum of industries. Banking giant NationsBank Corp., for example, now measures every improvement in service, from adding tellers to offering new mortgage products, in terms of added revenue. Telecommunications powerhouse GTE Corp. is looking for quality at reasonable costs. Even companies that were in the vanguard of the 1980s quality push are considering the benefits of ROQ. "We're trying to isolate quality improvements that just don't add any value to the service that is delivered to the customer," says Michael E. Reed, managing director of operations at Federal Express Corp.

For FedEx, a 1990 Baldrige recipient, that has meant rethinking its original quality goals. In its sorting operation, for example, FedEx stressed speed over accuracy. Workers met schedules, but the number of misdirected packages soared as they scrambled to meet deadlines. FedEx eventually fixed most errors, but redirecting each wayward package cost it some $50. Now, the Memphis-based shipper has eased the sorting crunch by investing $100 million in new equipment that routes packages to various destinations.

ROQ is more than just a new twist on an old theme. Many companies believe that applying a bottom-line discipline to quality is crucial at a time when the economy is rebounding and competition is growing. AT&T CEO Robert E. Allen, for example, receives a quarterly report from each of the company's 53 business units that spells out quality improvements and their subsequent financial impact.

RETURN THRESHOLD. Everything from the installation of new technology to methods of improving billing accuracy is held up against an array of financial yardsticks, such as potential sales gains and return on capital. Based on its experience, AT&T has found that when customers perceive improved quality, it shows up in better financial results three months later. "This is the most important thing that AT&T has ever done," Allen told a meeting of top managers the day before his June board presentation.

To win approval from AT&T's top management these days, proponents of any new quality initiative must first demonstrate that the effort will yield at least a 30% drop in defects and a 10% return on investment. Ma Bell used those criteria last year to maintain its supremacy in the toll-free 800-number market. To reduce service outages--its customers' biggest complaint--AT&T mulled a vast modernization program. But it seemed unlikely that the staggering $1 billion-plus project would net enough new customers to clear the 10% investment-return threshold. Instead, Ma Bell invested $300 million in backup power equipment to guard against failures in its 800-number system. "It isn't the old `Give me money and I'll fix it' stuff," says Phillip M. Scanlan, a corporate quality officer. "We're taking the cost out of making our system better."

CHASING PRIZES. Of course, quality was always supposed to make bottom-line sense. In the Deming and Juran doctrines, empowered employees would make quicker and more market-based decisions. Faster and better manufacturing processes would lead to improved products and broader market share. That message was popularized by Deming in the 1950s, and it soon became the cornerstone of Japanese management theory. The quality theory emigrated to the U.S. in the 1980s as American companies tried to duplicate the Japanese miracle.

For some of them, including Motorola, Intel, Hewlett-Packard, and General Electric, excellence became the norm. But others among the legions who followed Deming came to confuse process with purpose. Quality devotees grew obsessed with methodology--cost-cutting, defect reduction, quicker cycle times, continual improvement. Before too long, customer concerns seemed to fall by the wayside.

Quality became its own reward. Standards were more important than sales. And companies appeared more interested in chasing prizes than profits. Pleasing the International Standards Organization, which sets European quality standards, became a paramount concern for some companies. Meanwhile, Baldrige wannabes often tripped and fell as they tried to complete an obstacle course of requirements that emphasizes process over proceeds. "There's been an insufficient focus on the aspect of quality improvements that will make the largest contribution to overall financial performance," admits Curt W. Reimann, director of the Baldrige Quality Award.

The new focus on the relationship between quality and financial returns does have its detractors. Critics say it's just a smokescreen behind which companies are cutting back on their quality efforts. A healthier economy and rising sales may be prompting them to slack off on the costly discipline of TQM. And some companies--Hewlett-Packard among them--argue it's a mistake to take a bean-counter's view of something as fundamental as quality. Yes, HP makes its decisions about quality based on sound business considerations. But that doesn't mean it takes out a calculator every time it launches a quality program. "Saying that this is a quality move and this is what it's worth is like saying, `What's my left lung worth?"' says Richard LeVitt, director of corporate quality. "Quality is intrinsic to our whole business."

IRONING IT OUT. To its advocates, ROQ is about getting companies back to something that's equally intrinsic to everyone's business: customer focus. Instead of talking about attracting new customers with dazzling statistical displays of quality, ROQ emphasizes customer retention. After all, selling more to existing customers is a cheaper way to build market share than luring business away from competitors. "Customers are an economic asset. They're not on the balance sheet, but they should be," says Claess Fornell, a University of Michigan professor who is a leading ROQ advocate. Extensive surveying, perhaps even inviting customers into design and production processes, helps companies identify the key factors that affect customers' buying decisions.

One company that's looking closely at how and why customers choose to buy is Promus Co., the Memphis-based hotel and gaming company. When it wanted to lure more customers to its Hampton Inns chain, Promus decided to offer guaranteed refunds to any customers dissatisfied with their stays for any reason. Refunds totaled a mere $1.1 million in 1993 for Hampton Inns. But guest surveys showed that the policy was pretty persuasive. Promus reckons the program brought in an additional $11 million in revenue for the Hampton chain last year. An added bonus: higher employee morale. With everyone from maids to front-desk clerks empowered to grant refunds, employee job satisfaction climbed steadily. Turnover at the chain fell to 50% last year, from 117% three years ago.

The refund program also helped Promus identify guests' chief annoyances. One of the biggest complaints at its Embassy Suites Inc. chain was a lack of irons and ironing boards. Promus had always staffed its hotels with service people who spent their entire time ferrying irons from room to room. But no amount of coaching or planning could move the irons

fast enough to satisfy demand.

Then, Promus ran some numbers. At a cost of roughly $80, the chain could put a board and iron in every Embassy Suites room. By depreciating the expense over four years, the cost would average some $20 a room--a mere $475,000 per year on the expense side of the ledger. "We have literally no problems now from an area that was one of the largest complaint generators," says Mark C. Wells, Promus' senior vice-president for marketing.

Listening to customers is the easy part. Doing what they want without spending into oblivion can be difficult. After its dispiriting experiences with TQM, Varian has focused on finding less expensive ways to please customers and boost quality. When customers complained about the long time that was needed to set up its radiology equipment at hospitals, the company didn't just send out an army of installers, as it would have in the old days. Varian took its time identifying several hundred possible solutions, ranging from the way it shipped products to how they were installed.

BONDING. In the end, Varian changed many of its procedures. For example, it decided to ship cables in plastic bags rather than the "popcorn" filler it had been using. That saved 30 minutes of cleanup time. The company also redesigned key parts to make them fit together more easily. Varian's customers were delighted. The changes saved 95 hours in setup time, worth as much as $50,000 per order to hospitals. Varian also saved $1.8 million a year. "Everything we do, we do because it makes good business sense," says Levy.

ROQ also means that companies have to learn when not to listen to customers. GTE spent $2 million in 1989 to launch a "customer bonding" program designed to respond to customers who called with complaints or questions about cellular-phone service. But the bonding program raised unrealistic expectations among customers, who suggested that GTE offer everything from on-line yellow pages to psychic hot lines. And a survey found that customers were still likely to cancel after calling to complain. After studying its cellular system, GTE decided that what it really needed to do was improve its switching to stop complaints in the first place.

Proponents argue that ROQ tenets can be applied across a company's operations, from personnel policies to product development. Consider tiny Zebra Technologies Corp., a Vernon Hills (Ill.) maker of bar-code printers. Zebra had developed a reputation among customers as a manufacturer of high-quality, top-of-the-line printers. But the company also saw a lot of sales potential in the low-end portion of the marketplace. A low-priced, low-frills printer was a cinch to make. But such a model would pose two risks: It might tarnish Zebra's image of quality with its customers. Worse, it might cannibalize the existing product line.

CHERISHED BELIEFS. The solution? Zebra came up with a no-frills version with a plastic housing that pleased its clients. But it didn't give away the store: It made sure that the stripped-down $1,495 printer couldn't be upgraded, to ensure that it wouldn't compete with its high-end $1,995 model, which is faster and can print on different kinds of materials. The result: The new Stripes printer helped Zebra's sales climb 47% last year, and margins on the new printer match those from Zebra's original line.

Rethinking quality can force some companies to abandon cherished beliefs. United Parcel Service Inc., for example, had always assumed that on-time delivery was the paramount concern of its customers. Everything else came second. Before long, UPS's definition of quality centered almost exclusively on the results of time-and-motion studies. Knowing the average time it took elevator doors to open on a certain city block and figuring how long it took people to answer their doorbells were critical parts of the quality equation. So was pushing drivers to meet exacting schedules. UPS even shaved the corners off delivery-van seats so drivers could slip out of their trucks more easily. All next-day packages had to be delivered the next day by 10:30 in the morning.

The problem was, UPS wasn't asking its customers the right questions. Its surveys barraged clients with queries about whether they were pleased with UPS's delivery time and whether they thought the company could be speedier. When UPS recently began asking broader questions about how it could improve service, it discovered that clients weren't as obsessed with on-time delivery as previously thought.

The biggest surprise to UPS management: Customers wanted more interaction with drivers--the only face-to-face contact any of them had with the company. If drivers were less harried and more willing to chat, customers could get some practical advice on shipping. "We've discovered that the highest-rated element we have is our drivers," says Lawrence E. Farrel, UPS's service-quality manager. "Now, we're viewing drivers as more of an asset than a cost."

In a sharp departure, the company is encouraging its 62,000 delivery drivers to get out of their trucks and visit customers along with salespeople. It also allows drivers an additional 30 minutes a day to spend at their discretion to strengthen ties with customers and perhaps bring in new sales. Delivery quotas are important, but now, UPS is willing to add extra drivers so that others can be freed to spend time with customers. As an added incentive, UPS is paying drivers a small commission for any sales leads they generate. The program has cost UPS $4.2 million in drivers' time so far this year but has generated "tens of millions of dollars" in revenue, says Farrel.

NO PROOF. It may be a while before companies get it right. ROQ measurements can be maddeningly inexact. Among the uncertainties: How much of a return is enough? How fast can a company expect a payoff? "You build evidence, but you can't claim proof," says Eugene Nelson, director of quality-education measurement at Dartmouth-Hitchcock Medical Center in Lebanon, N.H. And the new quality revolution depends heavily on customer surveys, which, as UPS learned, can be misleading if they're not carefully designed and executed.

And there isn't a lot of help out there. Major consulting firms, such as Andersen Consulting, Booz Allen & Hamilton, and Ernst & Young, still deep into their efforts to "reengineer" Corporate America, are just now turning some attention to ROQ. Many management experts believe companies have to rethink their basic operations before addressing return on quality. "If you initiate a quality program with people who are obsolete, you make them very good obsolete people," says Andersen associate partner Leonid Lipchin.

Still, some management thinkers are building thriving businesses as they spread the ROQ gospel. Michigan professor Fornell runs an Ann Arbor consulting firm, Anjoy QSC, that boasts 60 full-time consultants, offices in four countries, and 25 multinational clients that include UPS, Oldsmobile, and IBM Europe. In October, Fornell, the University of Michigan, and the American Society for Quality Control, an association of corporate quality managers, will start publishing a Customer Satisfaction Index that will measure quality improvements in 40 different industries against returns on investment. Fornell has designed a similar system for the government of Sweden, which uses it as an economic indicator. Meanwhile, Vanderbilt's Rust has formed his own consulting firm, Strategic Profit Systems, and is marketing ROQ software that forecasts long-term economic returns from quality improvements.

That eye on financial results keeps quality programs from running amok, ROQ proponents argue. And for the first time since Deming launched the quality imperative, companies can start developing precise tools to measure results. With a well-implemented return-on-quality program, they can get more than a sense of a job well done and the opportunity to spout lofty rhetoric about valuing their customers. They can get the kind of results that they can take to the bank.

QUALITY

START with an effective quality program. Companies that don't have the basics, such as process and inventory controls and other building blocks, will find a healthy return on quality elusive.

CALCULATE the cost of current quality initiatives. Cost of warranties, problem prevention, and monitoring activities all count. Measure these against the returns for delivering a product or service to the customer.

DETERMINE what key factors retain customers-- and what drives them away. Conduct detailed surveys. Forecast market changes, especially quality and

new-product initiatives of competitors.

FOCUS on quality efforts most likely to improve customer satisfaction at a reasonable cost. Figure the link between each dollar spent on quality and its effect on customer retention and market share.

ROLL OUT successful programs after pilot-testing the most promising efforts and cutting the ones that don't have a big impact. Closely monitor results. Build word of mouth by publicizing success stories.

IMPROVE programs continually. Measure results against anticipated gains. Beware of the competition's initiative and don't hesitate to revamp programs accordingly. Quality never rests.

HOW COMPANIES ARE RETHINKING QUALITY

A growing number of companies are focusing their efforts to improve quality on measures that produce tangible customer benefits while lowering costs or increasing sales. Among them:

AT&T Telecommunications giant measures all quality programs in terms of financial returns. Demands at least 10% return on quality investments.

UPS Instead of stressing prompt delivery at any cost, the company is giving drivers free time to talk with customers. The hand-holding improves customer relations and helps develop sales leads. UPS figures the drivers could produce millions in additional sales.

FEDERAL EXPRESS Rather than just pushing workers to meet strict package-sorting goals, FedEx is investing in sorting equipment. The company hopes to cut down on misdirected packages, which can cost it $50 a piece.

GTE After setting up program to encourage questions and suggestions, GTE found customers who called and complained were also more likely to drop cellular service. GTE upgraded system to stop complaints in the first place.

VARIAN ASSOCIATES The company studied hundreds of different methods to reduce the time it takes to set up its radiology equipment in hospitals. One solution: a different way to package cable equipment that both saved Varian money and speeded up unpacking.

ZEBRA TECHNOLOGIES Introduced a new low-end printer to keep customers happy. But company designed the $1,495 equipment so that it couldn't be upgraded and compete with its high-end product, which sells for $1,995.

DATA: BUSINESS WEEKDavid Greising in Atlanta, with bureau reports


Video Game Avenger
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus