After Cost of Quality … Cost of Culture?

The “cost of quality” concept advanced management science, but what’s next? As the science of business management has progressed, cost measurement has long been a key endeavor, as it provides a lot of the information needed to know how the business is doing and to make decisions, solve problems, and make improvements. In the past few decades, areas of cost measurement such as cost of sales and cost of quality have provided helpful insights for management teams, and improved the competitiveness of companies that understood them. Famous business gurus have weighed in on cost measurement with great positive effect. W. Edwards Deming once said “The greatest costs in business are unknown and unknowable.” Finding ways to measure those unknown costs has produced significant gains in the understanding and effectiveness of business processes, and significant progress has been made in assessing increasingly tougher areas of business, but one area has always escaped effective measurement, though it has perhaps the biggest impact on business performance of any: the culture of the organization.

Measuring cost of quality was initially a conceptual challenge. At first, as I remember it, a lot of companies saw measuring cost of quality as difficult and costly, and it took years for the practice to be adopted. Many companies still do not embrace a holistic approach to product and service quality, and have only a rudimentary understanding of how their quality affects their costs. With time and effort, however, many companies came to understand that not only can cost of quality be measured in production processes, but customer perceptions of quality can be measured using surveys, warranty and customer complaint databases, and appropriate statistical techniques. In the 1980’s W. Edwards Deming taught us that giving the average worker the training and tools to measure defects and waste, and then involving them in the improvement process, can yield major benefits to a company. While many companies used concepts such as cost of quality and total quality management in the 1970’s and 1980’s with marked success, many dropped them later due mostly to top management turnover (my perception). Since then measuring and using the cost of quality has held on in some U.S. companies, though most made it the province of accountants and analysts, and not many kept the employee involvement part of the philosophy (to their detriment).

Among types of systemic issues, the cultural issues are most difficult to address, and possibly the most damaging in the long run. In the multiple industries in which I have spent my career I and my colleagues have often commiserated over our daily problems, and spent considerable time discussing the causes of less than optimal performance around us. When I look at the scale and scope of the things that went wrong, the worst were caused, not by an engineer’s mistake or even a marketing or senior manager’s mistake, but by what I frequently call SNAFUs. SNAFUs, in my mind, are those things that go wrong not through the fault of an individual, but because systems, standards, and expectations conflict or drive suboptimal decisions and actions. SNAFUs are often extremely hard to correct, and deserve considerable analysis on their own. The worst of the SNAFUs, however, are due to cultural factors such as shared beliefs, for example, that are outdated, incorrect, or based on values that drive dysfunctional behavior and decision making on the part of senior managers and executives. Culture exists in every organization, and it is driven as much by the attitudes at the top as by any other factor including the prevalent social culture in which it operates.

Defining cultural factors and determining how they influence company success and potential is tough but possible. Measuring culture is a big challenge as it needs first to be defined by experts who are not typically employed by most companies. Culture covers an enormous variety of aspects of the company and the environment in which it does business. Defining a company’s culture will require a detailed understanding of company history, even down to the personalities involved, a similarly exhaustive history of the industry, and of the social, political, and economic environment in which the company operates, to yield meaningful results. While such knowledge is not often assembled by companies in my experience, some excellent basic knowledge is available in a collection of papers by Abraham Maslow (the “Heirarchy of Needs” originator), a seminal work titled “Maslow on Management”. This book had great impact on me, and I consider it essential reading for anyone wishing to be an effective business manager.

The study of cost of culture begins with a clear definition of organizational culture. Culture is pervasive, and expresses itself in many ways. The appropriate place to start in the study of cost of culture may be to identify the individual aspects of culture, and then see how they exist within the subject organization. Comprehensive definitions are difficult, and I will continue searching for a truly definitive one, but Debra Thorsen’s is as good as I’ve come across (link).

Aspects of culture must be linked to both internal decisions, external factors, and business outcomes. The next and even more difficult task is to tie the various aspects of culture to specific positive and negative outcomes, and to identify patterns that show some amount of consistency in the way the organization’s culture plays out in business results. This may require a lot of root cause analysis, and the fact that this may bring to light mistakes by or under the authority of individuals may make this a highly politicized undertaking that may prove nearly impossible depending on the circumstances. One place that might be good to start is in the tracking of major decisions, the analysis of their results, using post mortem reviews to assess the results downstream, and deep-dive root cause analysis of poor timing (lateness) or mistakes in the process. This must be undertaken with the understanding, originally taught to us by people like Professor Deming, that people act according to the expectations they perceive in the system, as well as based on their experience, training, and personalities. Systemic factors that relate directly to culture, such as perceived expectations and prevailing management style, contribute a great deal to decision quality, and are responsible for organization performance in ways that range from easy to extremely difficult to quantify.

Organizational behaviors must be analyzed carefully, and academic research may present the best opportunity for acquiring knowledge. For example, a business culture which “deifies” one function over another will probably display dysfunctional decision making, as I documented in a previous entry, “Dysfunctional Organizations Are Like Dysfunctional Families“. A business culture that involves fear and intimidation will suffer from poor internal communications and sub-optimization at a department level as middle managers attempt to protect their jobs. A business culture in which the incentives for managers encourage competition instead of collaboration will suffer from poor communication and coordination of efforts, among other sub-optimizing behaviors.  An organization where second-level management is not given incentives and direction to work together as a team could suffer from frequent late decisions and reversal of decisions, generating needless waste and frustration throughout the organization. Many more examples come to mind, but, essentially, each situation needs to be dissected and analyzed carefully with a focus on identifying the overarching cultural variables so they can be measured and analyzed in an “apples-to-apples” comparison. An individual who undertakes such an analysis from within an organization could be placing his or her job in jeopardy. This suggests that an external academic study may have better potential for success. Any such study will still need detailed internal information, however.

A study of corporate culture has political implications that make it a difficult “sell”. In the end, only a progressively managed company may agree to such a study and, while that could benefit the company significantly, the results of the study will be skewed by including information from only similar companies. To obtain real knowledge about cost of culture, data on multiple organizations must be obtained, and coordinated studies done to compare them and find the common points where measurements can be applied and used to create and test theories.

Cost of culture would be valuable to understand, but difficult to study. There is much ground to be broken and a great deal to be learned in the development of a good understanding of the impact of organizational culture. I expect that deep involvement of behavioral psychologists and sociologists will be needed, but the work needs to be done and may represent the next great leap forward in the science of business management.

interesting reading and resources:
The History of Quality – Overview, The American Society for Quality
Using the Cost of Quality Approach for Software, November 1998, Herb Krasner, Crosstalk – The Journal of Defense Software Engineering (includes many pertinent and informative references – TFP)
The Cost Of Quality … Is Less Than You Think, September 1996, Guelph Food Technology Centre
Ten Parameters of Good Corporate Culture, Martin Hahn, Ph. D., http://www.ezinearticles.com

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