These are the Costs of Poor Quality

Managing project knowledge is important for ongoing project successWe all know what poor quality looks like in project execution. Typically it manifests itself as a poorly implemented system. But do we know what delivering with poor quality actually costs in terms of reputation and profitability?

The term “poor quality” can have different meanings for different audiences. For example, the client executives see a system that is not performing per their expectations, and may even be detrimental to their ongoing business. The end-users see a system that is “buggy” and frustrating to work with as they try to service their customer base and are required to use too many workarounds. The maintenance programmers see a system that disrupts their evenings and weekends whenever they are called in for emergency fixes.

So yes, we all know what poor quality looks like in delivering systems.

I ask again:

While we may know what poor quality looks like, do we know what poor quality actually costs in terms of lost reputation and decreased profitability?

I recently saw a statistic from the Center for Economic and Business Research (ASQ, 2020) which indicated that for every $1 invested in a quality management program, it returned $6 in revenue, $16 in cost reduction, and $3 in profit. Granted, the study was based on data gathered from a comprehensive review of relevant global business and economic literature, and was not specific to IT project delivery; however, one can extrapolate from these numbers and determine that there is money to be made and saved by committing to a culture of quality and process improvement.

Whenever I raise this question with IT providers as to the costs of quality to their bottom line, it is apparent that they are aware of the obvious intangible costs, but that they have not considered the tangible, real dollar costs. Typical answers include:

  • Excessive numbers of defects. They can often measure the cost of software defects if the testing process goes on longer than scheduled. For every week the project is delayed, they can measure lost opportunity costs, overtime costs, contractual penalties, or additional staffing costs if more staff are brought on to help reduce the number of defects. But can they quantify the hidden costs in customer dissatisfaction or low employee morale?
  • Rework of deliverables. Similar to the previous point, the cost of poor deliverable quality and having to redo portions of or entire deliverables can also be calculated in terms of opportunity costs. Again, seldom do they go further to evaluate the hidden costs.
  • Warranty claims. Clients with newly implemented systems, that discover deficiencies in those systems, will claim against their warranty. It can be argued that IT providers build the cost of the warranty into the price of their services. But what if quality was such that warranty claims were less frequent or not required at all? Would not the cost of the warranty flow to the bottom line
  • Lawsuits. This is an easy cost to calculate in terms of the cost of litigation, potential damages assigned, and current business lost. But what of harm to reputation? What of lost business that they aren’t even aware of?

I’ve seen studies that show that the cost of poor quality can be estimated at 4 to 5% of revenue. Thinking back to the last several projects I worked on, each of which was valued between $100 million and $400 million, the cost of poor quality could have been between $4 million and $20 million. Let’s say a more quality-minded IT provider manages its cost of poor quality to only 1%. The cost and effort to improve its quality of project delivery would still pay huge dividends.

From my personal experience, however, I believe that the cost of poor quality goes much deeper than just those items identified above:

  • What about the cost of dissatisfied clients who do not continue to do business with us?
  • What about the loss of reputation in the marketplace? Are we able to calculate the number of opportunities lost because of this?
  • What about the cost of dissatisfied employees who engage less on projects, or who leave the company taking their institutional knowledge and experience with them?

When you consider these more hidden costs in terms of both their immediate and long-term costs to the bottom line, the effects can be devastating. One such estimation suggests that these costs can be from 10% to 25% of revenues. Considering the large projects cited earlier – well, you do the math! (Fortunately, the IT provider for each of these projects subscribed to a quality management system. Though their delivery results were not perfect, they did not leave the kind of money on the table these statistics would indicate.)

Quality should be the goal of every IT provider organization; indeed, it should be a core value of the organization. Quality is about maximizing productivity, completely satisfying clients, and fully engaging project team members in the quest for superb delivery. As noted in my previous article, “5 Principles for Managing Quality”, quality management is more about the people aspects of project delivery than just process.

This takes leadership – leadership that is proactive in implementing quality systems rather than reactive when faced with an adverse event that forces them to consider a quality program. I get it; the benefits of managing quality are difficult to quantify in terms of cost savings or increased profits, the return on investment often occurs over long periods of time, and the payback is not immediate. However, study after study indicate that there is a strong case to be made for investing in a culture of quality.

It’s never too late to start.

Footnotes

American Society for Quality. The Economic Case. accessed August 14, 2020, http://asq.org/economic-case/


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