2017

Risk Management

Is it the future of quality management?

by Greg Hutchins

All business proceeds on beliefs or judgments of probabilities, and not on certainties.

­Charles Eliot, past president
Harvard University

There's a lot of talk about the future of quality and quality management. First let me put your fears to rest. Quality is alive and well. It won't disappear. It'll just morph into something that reflects market needs.

In discussions with senior executives at major companies about these changing times, I've learned that their No. 1 heartburn issue is maintaining the stratospheric price to earnings ratios of their companies' stock. How can they do this? One strategy is to improve the top line by increasing sales. Another way is to improve the bottom line by increasing earnings.

Improving the top line is accomplished by enhancing brand value, acquiring hot growth companies, capitalizing on new ideas and innovating. Improving the bottom line is done through containing costs, managing people assets, minimizing costs and, most important, managing risks, and risk management is where I think quality is heading.

Stability and consistency

Top executives have unusual thought processes. While they talk about wanting breakthrough this and that, the reality is that most want stability and consistency. Top executives, by nature, are risk sensitive but not risk taking. Only a few really believe in bare knuckle competition. Instead, most of today's senior executives at major corporations decided to fight the corporate promotion wars instead of opting for riskier careers such as selling real estate, pitching penny stocks or managing the new dot-coms.

Risk is defined as the potential for the realization of unwanted negative consequences of an event. In Against the Gods: The Remarkable Story of Risk, Peter Bernstein says the mastery of risk is the foundation of modern life and what divides modern from ancient times.1

Murphy's law--if something can go wrong, it will--applies to markets, customers and businesses equally well. A company can try to understand and anticipate what can go wrong or be victimized by it. Risk management is the process of controlling what can go wrong. So, by consciously or unconsciously calculating probabilities, top executives make intelligent decisions based on perceived risk.

Software development risks

There are many examples of business risks. Software project development risks are huge because these projects are complex, take longer and cost more. Many projects are not completed on time or within budget. Of 175,000 information technology projects started in the last few years, 31% were canceled before they were completed and another 53% came in at nearly twice their original cost estimates.2 Whoa! You certainly can't run businesses like that.

"The bogeyman for corporations is anything that can disrupt business--hackers, rogue traders, product tamperers, regulators or Mother Nature," said the Wall Street Journal recently.3 According to PricewaterhouseCoopers, 69% of fast growing companies are concerned about risk, yet only one-third have risk management processes. This results in an opportunity for quality professionals to relabel quality processes and redeploy quality practices into risk management.

And that's the power of quality management. Quality, health, safety and environmental issues will coalesce into a risk based approach to management. Continuous improvement, prevention, systems/processes, stakeholder satisfaction, optimum quality for invested dollar, adherence to standards and checks/balances are all quality principles and practices that are immediately transferable to risk management.

Six Sigma may illustrate this. I don't get Six Sigma, which seems like a rebranding of many of Walter Shewhart's ideas. But the important thing is what Six Sigma means to top executives in today's business climate. If it's just another fad or tool, it really won't mean much. But if Six Sigma can help define an organization's core processes, ensure its stability and mitigate risks through process consistency, it then becomes a vital tool for top management. So, think of Six Sigma as the probability or risk of achieving 3.4 nonconformances per million occurrences, and it doesn't take much of a stretch to realize that your future depends on risk management.

REFERENCES

1. Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk (New York: John Wiley & Sons, 1996).

2. "When All Else Fails," CIO, April 1, 1995, pp. 14-16.

3. "Business Bulletin," Wall Street Journal, Jan. 27, 2000, p. 1.


GREG HUTCHINS is a principal with Quality Plus Engineering, a process, project and supply chain management company in Portland, OR. He can be reached at gregh@europa.com or 800-266-7383 or on ASQ's members-only career forum at www.asq.org.

If you would like to comment on this article, please post your remarks on the Quality Progress Discussion Board, or e-mail them to editor@asq.org.


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