TABLE OF CONTENTS
SECTIONQUALITY – WHO CARES? BUILDING A QUALITY MANAGEMENT SYSTEM BEYOND ISO 9000-TOWARDS TOTAL QUALITY CASE STUDIES CLIENT BASE
The short answer is “everybody”, if you define delivering quality as meeting the customer’s requirements. The problem has been defining what quality means to each customer. Quality in this sense is not necessarily sophistication, hi-tech or Rolls-Royce; quality is appropriateness for the requirements, or fitness for purpose. Quality management, i.e. managing for quality, must therefore cover the whole spectrum of management activity designed to ensure that customers’ requirements arte identified and met.
From these requirements, a supplier can build a system of policies and procedures (a Quality Management System, or QMA), so that people know what is expected of them. There has to be commitment to quality from the highest level in the organisation, in the form of resources and overt support, providing motivation at all levels. The system needs to include controls in order to make sure that things actually happen. And, to make sure that the process is effective, and to make improvements, measurements must be made. Once the QMS has settled into the business way of life of an organisation, motivation should be self-reinforcing, so that people using the system can identify improvements and see them implemented. And so the cycle continues. A QMS, if properly implemented, can go a long way towards setting in place a framework for achieving quality throughout the organisation.
External assessment or not?
A Quality Management System may or may nor be assessed against ISO 9000, but a growing number of organisations want to put themselves through the rigours of external assessment, both to prove to their customers that they have been independently assessed, and as a discipline to ensure that the system continues to be effective.
Pressures for a formalised Quality Management System
There are three main pressures to implement a formalised Quality Management System:
Benefits of ISO900
We recently conducted a survey of service sector organisations who had gained ISO 9000 registration. The results show that nearly three-quarters (74%) feel that ISO 9000 is beneficial, both to them and their customers. Some key figures:
The conclusion seems to be that implementing a Quality Management System and obtaining ISO 9000 registration is an important step towards improving quality throughout the service sector.
Elements of a Quality Management System (QMS)
The QMS documents how an organisation meets the requirements of ISO 9000. Typically the QMS elements will cover:
Policy (the commitment to quality) – the scope of the QMS, management responsibilities for quality, and the QMS structure put in place to deliver quality;
Infrastructure (having the right resources) – all the things you need to have in place before even talking to a customer: recruitment, training and appraisal of staff; design of products or services; equipment and facilities; control of suppliers and subcontractors;
Service Delivery (doing it right, consistently) – this is the core of an organisation’s QMS, and should be based on the way that a service is typically delivered. For example, in a software organisation it could be a system development lifecycle; for a professional firm, it might cover the method of obtaining and agreeing instructions, planning and monitoring the actual work, and the delivery of the report or advice; for an internal support department, it might cover the process for developing and agreeing service levels with client departments, and methods of monitoring and reporting performance against levels. Service delivery procedures should also make reference to the relevant standards and guidelines, whether legal requirements, industry codes of practice, or in-house standards.
Internal Quality Audit (Checking you did it right) – how you know that you are doing it right, including what will be audited, who will do the auditing, and what action will be taken if problems are found. This covers both fixing the problem (corrective action) and trying to ensure it cannot happened again (preventive action).
The ISO 9000 QMS implementation process
Planning - Before making the decision to go ahead you should be fully aware of the implications. You should:
At this point you cab decide how best to proceed.
QMS Development – The first step is to develop the detailed documentation required for the QMS, in the form of manuals or handbooks. This will involve a drafting and review process which should involve staff at several levels in the organisation. It is also important at this stage to identify a certification body appropriate to the needs of the organisation. Once approved by senior management, the QMS should be submitted to the selected certification body for approval. Once finalised and approved, your QMS should satisfy ISO 9000.
QMS Implementation, Live Running and Assessment – The QMS is launched. Every member of staff must be trained and issued with the relevant QMS documentation. During a live running period for several months, they will have to use the QMS. Internal quality audits should also be carried out. All stages of service delivery should be covered during live months. External assessors will then carry out an extensive audit of your QMS and your compliance with it. Most assessments result in a number of minor non-conformities and, subject to these being corrected, you will be recommended for registration to ISO 9000.
Continuous Improvement – Once your certificate has arrived, your organisation will be listed in the DTI’s QA Register. Once registered, you will have to maintain the QMS, update it as required, train new staff, continue internal quality audits and undergo periodical surveillance visits by certification body to ensure that your QMS is still effective and that you are still adhering to it. Registration is, in effect, the start of a continuous improvement cycle.
It’s your system
The ISO 9000 registration process, if properly planned and implemented, should result in a QMS which serves you, rather than vice versa. It is your system and, as such, will evolve. A good QMS should be seen as a means of continuously improving the way you operate, to the benefit of your organisation, your customers and your staff.
Benefits and Limitations of ISO 9000
Achieving ISO 9000 represents a major step forward for most organisations. Typically the benefits to be gained are:
ISO 900 can be achieved with some or all of the benefits described above although there are also limitations. If not enough effort has gone into making the QMS usable and practical, or no effort is made to build on ISO 9000 registration, an organisation can be faced with:
ISO 9000 registration can be summed up as “Assured Quality”, i.e. a customer can be more confident that an organisation with ISO 9000will deliver (to timescales, budget, specification and cost) than one without ISO 9000. However, in a competitive marketplace, ISO 9000 becomes the minimum that any credible supplier has to have. A well designed QMS is a good starting point, but to keep on improving requires moving up a gear to drive towards the goal of total quality.
Moving Beyond ISO 9000
TQM means different things to different people, and even TQM gurus disagree. However, it is clear that TQM is a continuing process, and you cannot ‘be’ or ‘get’ Total Quality. It is more like a never-ending game of snooker or chess, where you do not just play the current shot or move, but continually position yourself for the next one, and the one after that. Two key features of TQM are Cost of Quality and External Focus, both entailing the involvement of people throughout the organisation.
Cost of Quality
Cost of Quality has two main elements: Price of Conformance (POC) is the cost of trying to make sure that nothing can go wrong; Price of Non- Conformance (PONC) is the cost when things do go wrong. POC is further split into Prevention, to avoid problems happening and Appraisal, to trap problems before they get out. PONC is split into Internal and External costs. The table above gives examples of each category.
The steps in the Cost of Quality cycle are:
Then start all over again! Most costs of quality can be easily measured or a good guesstimate made. Later, accuracy can be improved, but only if it actually helps. Getting Cost of Quality right can be described as “Efficient Quality” – building on Assured Quality to deliver consistency efficiently, then continuously improving.
Building an External Focus means a shift from your own internal viewpoint towards that of your customers and potential customers – after all, they are the reason you are in business. This can be directly, eg by project planning and review, or indirectly by customer satisfaction surveys, perception surveys (non- or potential customers), success/failure analysis (why you did or did not get the contract). Additional input, such as R&D and best practice benchmarking, can help you deliver not only what is explicitly specified, but what is subconsciously expected, or even not expected. Total Quality is a journey, not a destination. Getting the External Focus right, and continuously striving to refine it, means that you are well on the Continuous Improvement route to Total Quality.
The figure above shows this Continuous Improvement process. In the period before a QMS is implemented, an organisation is in a state of uncertain quality, i.e. there is limited assurance of standards being met. As the organisation implements a QMS it reaches a level of assured quality. The QMS is shown as a wedge, keeping quality from slipping to a lower level and used to drive quality upwards. Moving beyond ISO 9000, the organisation looks at measuring and improving its systems, processes and procedures to achieve efficient quality, documented in the QMS. Developing an external focus used the QMS as a starting point for other initiatives, looking outside the organisation and moving towards Total Quality.
Futures and options brokers – back office
Software implementation consultancy
This client is the largest firm if brokers in London. They wanted to achieve ISO 9002 for the Operations Department (back office) which, once a trade is struck, is the area that most affects their clients’ perception of quality of service. We were commissioned to help plan, develop and implement an appropriate Quality Management System (QMS). The key was that the QMS had to be designed to fit working practices, with the minimum number of additional procedures to satisfy ISO 9002.
The manager of the Operations Department was heavily involved in the project from the start. The only major change to operational working practices was the introduction of a simple checklist for each section to ensure that the key actions were being carried out each day. We helped draft non- operational procedures, and also assisted with the evaluation and selection of a suitable certification body.
Implementation started with a series of launch meetings cum training sessions so that everyone in the department was clear in their responsibilities and the requirements of the QMS. In fact, most people had been involved in the department process, so there were no surprises.
We supported the client during several months of live running and helped set up the internal quality audit programme. Our client became the first organisation in the sector to gain ISO 9000 registration for any of its services, and is using the QMS as a firm basis for continuous improvement into the future.
Our client is the European professional services arm of a US-based banking software company. They provide implementation consultancy, configuration and support to their clients, who have purchased the company software.
They decided to obtain ISO 9000 registration as a first step in a longer term quality programme, mainly to improve the efficiency and effectiveness of the services they provided. We assisted then with a detailed plan for the development and implementation of a ISO 9000 Quality Management System (WMS), identifying the costs, resources and timescales involved in the programme.
Working closely with the full-time client project manager we helped develop the necessary QMS procedures, based ion the TickIT guide and the client’s existing lifecycle mythology. We also helped them to select a suitable certification body to review and approve the QMS in principle.
Once the QMS was approved in principle, we developed training material, assisted with the launch, and supported the project manager during live running, self audit and the assessment. With a small number of nonconformities cleared, our client was registered to ISO 9001 under the TickIT scheme at the first attempt.
Following the success of the initial project, our client retained us to help develop the necessary additional procedures to widen the scope of registration to include development of one if the company’s key software products.
We provide quality consultancy advice to clients in service-oriented organisations. The following list shows clients we have worked with in this area, designing, developing and implementing Quality Management Systems to ISO 98000 standard.
Professor Michael Mainelli, Executive Chairman, The Z/Yen Group
[An edited version of this article first appeared as “Gilding Government Debt: Government Innovation And Risk Management”, Journal of Risk Finance, Volume 10, Number 5, Emerald Group Publishing (November 2009).]
Government innovation, despite its rarity, isn’t an oxymoron. Governments, when forced, can be as innovative as other large organisations. However, what force might be strong enough to force governments to innovate? James Carville, an advisor to President Clinton, quipped – the bond markets - “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a 0.400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.” [Wall Street Journal, 25 February 1993] And there are big changes afoot in government bond markets.
Government debt is about to rise sharply due to a perfect storm of financial crises, recession, fiscal stimulus costs, falling tax receipts due to recession and falling tax receipts due to stimuli, under a looming overhang of demographic change leading to rising healthcare and pension costs. Throw in the facts that private finance initiatives may be coming back to haunt government balance sheets and vastly larger off-balance sheet pension obligations are moving into current expenditure.
The Economist summarised a recent IMF report (“Fiscal Implications of the Global Economic and Financial Crisis”, 9 June 2009) “by next year  the gross public debt of the ten richest countries attending the summits of the G20 club of big economies will reach 106% of GDP, up from 78% in 2007. That translates into more than $9 trillion of extra debt in three years … The IMF economists’ baseline is that the government debt of the rich ten will hit 114% of GDP by 2014. Under a darker scenario in which economies languish for longer while fears about governments’ solvency push interest rates up, the debt ratio could be 150%.” [“Government Debt: The Big Sweat”, 11 June 2009] Against global GDP of some $55 trillion, that’s a lot of new debt. The UK government estimates that it will be issuing £260 billion of gilts (UK government bonds) in 2010 alone on UK GDP of £1.2 trillion.
Whew, governments’ finances are a right mess. So what’s new? Well, the scale and simultaneity are new. On the IMF’s optimistic estimates, government debt will grow by 36% in three years; on its pessimistic estimates, by 50%. The skies will darken with so much debt. So much debt is likely to create serious market trouble as it crowds out private sector debt. The ratio of global public sector debt to private sector debt is about 2 to 1, so there’s going to be a lot of crowding. So much debt will increase governments’ temptations to escape through inflation and default. Yet, the silver lining is that so much debt will encourage innovation. In any market where supply is about to grow massively, producers (governments) need to lower their costs (increase the yield) and tailor their products to customers (investors). Governments are going to compete heavily to issue this debt and thus need to find ways to distinguish themselves. And this leads to innovation.
It’s questionable how much true innovation exists in finance. Everyone talks about innovation and it’s certainly appeared over the decades in retail technology such as credit cards or cash machines. A lot of so-called innovation is tediously obvious, e.g. online banking; it stares you in the face that if you can buy everything online why not bank online. A lot of capital markets innovation has ancient roots (futures and options simply updated), and who wouldn’t use computers for calculations. Still, bond markets have been innovative themselves over the decades at a technical level, e.g. clawback provisions (options to redeem a specified fraction of the bond issue within a specified period at a predetermined price with funds that come from a subsequent equity offer) and at a structural level, e.g. inflation-linked bonds. Inflation-linked bonds emerged during similar periods when governments were in tough spots issuing debt, the UK in 1981, followed by Australia in 1985, then Canada in 1992, Sweden in 1994. The premise behind this article is that we can expect an explosion of new ways of structuring and selling government debt because governments are competing heavily; all at once.
What might these new products look like? One idea, Index-Linked Carbon Bonds, was highlighted in a London Accord team paper and presented to the World Bank Government Borrowers’ Forum at Ljubljana in May 2009. At their simplest, index-linked carbon bonds would set interest rates on government debt by linking to governments’ carbon emission targets, tariff feed-in prices, in-country fossil fuel prices or carbon prices. Governments would pay more interest when they missed targets or when relevant green prices were lower than governments had promised. This kind of index-linked bond could easily be issued by any government (national, state, province) or multi-lateral agency without any need for a global initiative. Governments claim they are serious about meeting carbon emission targets and moving to a low carbon economy. Given that failure to perform would cost, governments would have real incentives to meet their own emission targets.
These bonds would change the risk management of large energy projects. Clean tech projects, for example, face virtually the same risks as traditional energy projects, except for one thing – their competitiveness depends on government policy being enacted. Investors cannot hedge emission target failure or low feed-in tariffs, nor hedge low fossil fuel prices or low carbon price risks over a significant part of the project life. But that is where index-linked carbon bonds would come in – by issuing debt whose interest rate is linked to these risks over the life of the project. This government debt provides investors with a risk profile that mirrors their clean tech investment risk, allowing them to hedge against governments failing to deliver. An investor would invest in a low-carbon project (either equity or debt), and simultaneously buy a proportion of index-linked government carbon bonds. With close to no faith in government, the hedging might be one to one, i.e. each $1 of government debt issued would result in $1 invested in clean tech. If even a small proportion of the $9 trillion of forthcoming government debt, say a little over 10% or $1 trillion, was in index-linked carbon bonds at one-for-one confidence levels, governments would come close to meeting the clean tech investment targets of reviews such as the Stern Report. As confidence rose in governments, the multiplier effect would increase. Further, the debt price would provide a constant speedometer about confidence in governments meeting green targets.
Index-linked carbon bonds are but one idea. Imagine governments issuing debt linked to other areas they control, branching out from inflation and carbon targets to education, healthcare or crime. We’ll borrow the money, but guarantee we meet our targets. If these markets grew, they would transform corporate risk management and give a new twist to public-private partnership. We’ll locate our corporate facilities in deprived areas (poor education rates, high murder or crime rates) and hedge the risks with government debt (education quality bonds, crime-linked bonds). Of course, risk managers can stimulate innovation by looking at how corporate risks are intertwined with government policies and targets, and then making suggestions.
There are certainly complexities, such as auditing and authentication of government figures, liquidity, leverage opportunities, stripping, etc. As with any new government-private products there will grafters and fraudsters. But faced with bringing far too much product to market at once, governments will have to innovate. As they innovate, governments will join everyone else in needing to prove that “my word is my bond”, and index-linked bonds are likely to proliferate. Naturally, the ultimate innovation will be the government bond whose interest rate goes down as government debt goes down. Fat chance.
International Monetary Fund, Fiscal Implications of the Global Economic and Financial Crisis, Staff Position Note 2009/13, Fiscal Affairs Department (9 June 2009) - http://www.imf.org/external/pubs/cat/longres.cfm?sk=22987.0
Michael Mainelli, Jan-Peter Onstwedder, Kevin Parker, William Fischer, "Index-linked Carbon Bonds – Gilty Green Government", Z/Yen Group Limited (April 2009) - http://www.zyen.com/index.php?option=com_content&view=article&id=231
Michael Mainelli, "PFI And PPP: Could They Result In Enron UK?", Balance Sheet, The Michael Mainelli Column, Volume 11, Number 2, pages 39-43, MCB University Press (July 2003).
Nicholas Stern, The Economics of Climate Change: The Stern Review, Cabinet Office - HM Treasury, Cambridge University Press (2006).
Z/Yen operates as a commercial think-tank that asks, solves and acts on strategy, finance, systems, marketing and intelligence projects in a wide variety of fields (www.zyen.com), such as developing an award-winning risk/reward prediction engine, helping a global charity win a good governance award or benchmarking transaction costs across global investment banks. Z/Yen’s humorous risk/reward management novel, Clean Business Cuisine: Now and Z/Yen, was published in 2000; it was a Sunday Times Book of the Week; Accountancy Age described it as “surprisingly funny considering it is written by a couple of accountants”.
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