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Value-added auditing – our future. By Allan Sayle Keynote address, March 12, 1999 ASQ Quality Audit Division 8th Annual Quality Audit Conference,
Houston, Texas, USA. -------- As auditors we exist to serve business. To act professionally, we
must regularly consider whether our products and services, offered and
delivered, serve well our customers' needs. Careful deliberation of two
questions is long overdue - what "service" are we delivering, what
should we be delivering? In its last two editions, "Management Audits"1 defined
"service" as "work performed for someone else that tends to
the welfare or advantage of that person".
To do this, means providing value as measured by our employers and
audit clients. Failing to do so, auditors become supernumerary staff, ripe
for downsizing. Such a prospect is not only closer to the quality movement
and its auditors than most of them realize, it is happening. The demand for value Management is
paying closer attention than ever before to measurable results - it is paid
to - and managers' personal futures are determined from them. "Economic
Value-Added" techniques (EVA) are increasingly popular with executives and boards
of directors. They make management determine the effect, on shareholder value,
that will be achieved from internal projects, initiatives and actions when
deciding whether or not to embark upon them. Just as their internal
colleagues are expected to continuously improve their processes and business
contribution, and have their projects and activities assessed by EVA
techniques, so too should auditors. So, management is right to ask of
auditors and their service: ·
What measurable and tangible pay back has been
delivered? ·
Has the benefit outweighed their total cost? ·
Why should they be indulged? ·
What value for money do they offer? Shareholder democracy The purpose of business is to make money for the owners and
shareholders. Its performance is under a spotlight as never before: the
spotlight is becoming laser-like as share ownership spreads. Failure to
deliver levels of shareholder value demanded by the share owning democracy,
as Margaret Thatcher once dubbed it, brings swift punishment. Recent stock market events
demonstrate this. Boards and management know they have no choice but to satisfy
the shareholder demand for value and that it must be placed at the top of
their list of priorities, above customer value. Management auditors' service can provide a
central role in increasing it, but must distinguish it from customer value. Customer value and shareholder value The quality movement concentrates on improving customer value
through product quality improvement. This service is insufficient. Just
because the customer receives "value", it is wrong, misleading and dangerous
to assume the shareholder will be fairly rewarded for its investment risk.
Shareholder value is of greater importance than customer value: it must be primus
inter pares. If the
shareholder does not prosper, nor will the company, nor will any of the other
so-called "stakeholders". With thanks to globalization, and other forces, pricing power
is vanishing: the era of "cost plus" is gone. Customer value is
driven by price as well as by quality, and the market now dictates price. By
reducing price, the customer receives better value for money, but the
shareholder may not, for the company might be trading unprofitably. When the
dissatisfied shareholder (investor) leaves, when revenue cannot service cost
and profit, everything falls apart - the company fails and the customer loses
a source of supply. Accordingly, the shareholder must come first, must
receive an economic return on its equity (EROE). Do "quality" auditors offer a value-added service
today? So long as they adhere to delivering compliance audits, I
believe not. The manner in which compliance audits are now conducted, the
matters upon which they focus, their guiding principles combine together to add
avoidable cost rather
than reduce it. To discover why, one must look at a combination of the
following reasons, Doing so ought to produce consternation about where they
are heading, what they are asked to do and how they are doing it: Quality standards Even though business management and commercial life have
progressed, quality auditors and the entire quality movement adhere to a
formula and format whose value is debated. If the worth of present-day
quality standards were so self evident, such debate would not occur. The
constant grinding on, about the meaning of various words in ISO 9000, has
been a pathetic, regular feature in our professional magazines and
conferences for years. Management does not want to hear it. What level of
confidence does it inspire when we argue about what we are trying to say? In
the meantime, management still has to ensure the company makes the money that
funds the quality movement and its auditors! Who is serving who then? Who is
closest to being "downsized"? Regardless of what its proponents claim, and their verbal
gymnastics to “prove its applicability” to all processes within the firm, ISO
9000 is not a standard devoted to shareholder value and the avoidance of
avoidable costs throughout the business. In today’s world its utility,
relevance and efficacy are questionable – irrespective of whatever
tinkering and word-smithing is used to produce “new editions” that regularly
appear. Guaranteeing neither product quality, nor control of avoidable
costs, nor business design will be satisfactory when its prescriptions are
followed, none of the so-called “stakeholders” benefits from its
implementation. If its implementation will produce such guarantees, why do
the registrars, such strong proponents of the benefits of registration and
the standard itself, not dump the habitual disclaimers from their
certificates? If the assessed system will not guarantee the product quality,
what will, why bother? Auditor training and qualification schemes The curricula of typical audit training courses fail to direct
auditors towards value-adding service: registration of training courses is
weak. Course instructors and those populating the governing bodies, while
being well-intentioned people, do not focus on the right matters.
Exemplifying deteriorating standards, recent changes to QSLA qualifications
removed the need for Lead Auditor validation of applicant experience: we need
to raise standards, not lower them. A few (typical) examples occurring recently demonstrate the
inadequate service results: ·
Auditors
of a major international company wanted to prepare for their CQA. All were
"qualified" auditors, trained on "recognized courses".
None could produce a flow chart, none could map or analyze a process. ·
Dissatisfied
with the reliability of their suppliers' internal audits and registrar certificates,
members of the Big 3 automotive companies are gradually reverting to
performing their own audits of suppliers. ·
Chrysler
still insists on witnessing and approving the production processes at tier
one suppliers holding QS-9000 certificates. Reason? They know such a
certificate does not mean the registrant has a reliable system. Registrar performance. The performance of the registration industry is little short of
scandalous. Recent examples, out of many, illustrate the inadequacy of their
service: ·
The
vice-president of production for a high profile manufacturer of industrial
equipment alleged to me the certificates for its North American factories had
been "bought". ·
For its
assessment, apparently a major registrar regularly ignores the mandated
on-site time and scope requirements. When the registrar is threatened with
loss of contract, major deficiencies are downgraded to
"observations": the audit scope, actual departments and personnel
to be audited, are selected by the auditee. This shambolic disgrace occurs
despite product recalls involving safety systems produced by the auditee. ·
A
prominent QS-9000 registrar requested assistance to train its assessors in
how to create clear and effective CAR's and reports. The per trainee budget
authorized by its management was less than the cost of hiring a teenage baby
sitter, which shows what value that registrar places on training its staff to
deliver a quality service. But the request is an appalling reflection on the
value of so-called registered courses, attendance at which is compulsory for
each and every assessor, their curricula and instructors. Observing the current QS-9000 situation, it is frustrating and
sad to note my Baltimore speech which warned of the risks of repeating known mistakes,
went unheeded.2 Quality programs No sane person can doubt the excellence of the products the
Boeing Corporation delivers. Its product quality program is far superior to
anything found in most companies: thousand of peoples’ lives safely entrusted
to Boeing when traveling by air, attest to that. But, one can strongly argue,
even Boeing’s quality program, quality audit program and quality audits are
inadequate these days. Consider these figures:
And no one can regard the Airbus Industrie aircraft as inferior
to those of Boeing – each receives its air worthiness (safety)
certificate from the FAA or CAA. One might suggest Boeing is failing to deliver customer value
since that productivity gap has to be paid for by someone: it represents
avoidable cost. If the customer is not bearing the cost, because of price
discounting, then it must be the shareholder. Accordingly, one could conclude
Boeing does not deliver the shareholder value performance that Airbus
Industrie appears to. The results are reflected in the stock price,
substantially lower over the last few years, and the fact that Boeing is no
longer the world dominant supplier of commercial aircraft it was. With
profits depressed, a massive lay-off was announced in 1998. Time to rethink When a product quality program as exemplary as Boeing’s still
fails to deliver the business benefits essential in an increasingly
competitive world, it is time for a fundamental rethink. In doing so, one
concludes: ·
Present
day product quality programs cannot be relied upon to protect shareholder
wealth and do not necessarily enhance shareholder value. Any expectation,
that such programs serve well shareholders, employees, the community or
suppliers – “stakeholders” all – is disingenuous. ·
Quality
programs should be business management programs. ·
Management
audits should be of a value-added nature, not just compliance based. ·
All
elements within the business management program should be required, inter
alia, to be based on
economic value-added principles (EVA). ·
If a “quality standard” is deemed
desirable, inter alia, ·
It must
mandate implementation of EVA. ·
It must
require a business management program, executed company wide and company
high. ·
It must require
value-added audits conducted internally and throughout the supply chain. Moving from compliance to value-added audits To repeat my message of 1992 to your first QAD conference, 3“Raise
your sights, raise your standards, raise your product and you will raise your
own, your company's and your nation's economies.” Doing that will raise value. Value-added audits are our future: compliance audits are our
past, although they will continue to have their uses. But, who should do
them? There is plenty of material available for process operators to learn
how to conduct compliance audits – and it is they who should perform
them. Just as end-of-line inspection gave way to SPC, internal independent
compliance audit must give way to self-audit. (Those who attended the Toronto
Annual Quality Congress, in 1989, will recall seeing during the Quality Audit
Technical Committee meeting the self-audit videos I produced.) What are value-added audits? An audit's value is obtained by comparing
the total amount of avoidable costs identified and quantified during the
audit with the total costs of conducting it. These latter costs are the
aggregate of the audit
team costs, the auditee’s costs and the
overhead costs associated with each. If the audit is to add value, the
total costs must be exceeded by the deliverable avoidable costs. The latter
will be determined from a cost-benefit analysis of the opportunities
discovered by the auditors. Expressed as a formula: Audit added value =
(Avoidable
costs identified minus cost of
realizing them) minus Total cost of audit performance To satisfy EVA
concerns, though, the resulting number must exceed the return on equity (ROE)
required by top management for the company: it should be at least that of the
company's sector average. How can management auditors add value? The differences
between compliance and value-added audits are many, principal ones dwelling
within the following categories: Time focus Loss prevention is the foundation on which profit is built.
“Prevention” means looking to the future, not the past. The past is what
matters to compliance auditors (i.e. inspectors), but does not guarantee
future success. A distinction I have repeatedly made, over the last three
decades, between audits and inspections: audits are future focused,
inspections look at the past. Management does not need a history lesson
– which is what most audit reports provide: rather, it needs a road map
to the future. Auditors should be the best placed to provide one. Anticipating
change, noting trends and projecting their impact on the future is essential.
VA audits challenge current and past decisions in relation to present and
future business needs. A most valuable question is "Given the facts
and business situation facing us, would we make again the same decision for
today and for tomorrow?"
(In practice, seldom is the answer “yes”.) Those facts
are many and diverse, and in a constant state of flux. Business performance focus Value-added
audits uncover avoidable costs and eliminate them, unlocking hidden value
within the firm. Their auditors believe where there is waste, there is
unacceptable quality and avoidable cost and want improvement. Compliance
auditors fail to consider such vital matters as the following, while
value-added auditors do not: ·
What does it cost to run the system, how much waste
does the system incur when in operation? ·
Is the business model responsive to the auditee’s real
business needs and future, is it designed to prevent avoidable costs? ·
Where are the opportunities for improving business
performance, for reducing avoidable costs? ·
What is their cost-benefit? Avoidable costs can be of staggering amounts. A recent
assignment subjected the entire key supplier base of a company, in the
Standard & Poor's 500, to basic elements of a Value Assessment, and
produced the following results: ·
Nearly
all suppliers were registered under ISO 9000, QS-9000 or both. ·
Even so,
few of the suppliers had forward business plans for cost reduction in the
next 1, 3 and 5 years? (So much for proactivity and planning.) ·
Amazingly,
only 2 ½ % know where their avoidable costs are! ·
A
conservative estimate of cost savings attainable for the customer (the
client) within a couple of years showed, as its equal share, in a cash
give-back from the suppliers, $20m in an annual purchase of about $350m. (The
suppliers would do equally as well.) Racing to the bottom line, immediately
they accrue, they are ongoing, year after year. In a distribution, the
client's shareholders could receive a 25% rise in e.p.s! Cost beneficial solutions as results Customers want solutions and additional knowledge in making
their choices. Bland compliance audit reports, containing little if anything
by way of a solution to product or management system inadequacies discovered,
do not suffice. A failure to offer solutions is a failure to offer added
value. One of my long standing, well documented, 12 Golden Rules of auditing
is: Always help the auditee – translation: always offer solutions. Auditee management
wants to know? ·
What measurable performance improvement can we achieve
in our systems, organization, products, people, policies and procedures? ·
How? ·
What will it cost? ·
When will we see payback? Any decision by management to proceed further
with the solutions made by the auditor rests on the cost-benefit analysis
performed by the auditor. It wants tangible, measurable, quantifiable
opportunities reported, not vague, uncosted ideas. Nor does it want banal
corrective action requests dealing with isolated errors and trivia that
should have been resolved at lower levels, or solutions that increase operational complexity,
bureaucracy and avoidable costs. Faced with such material, it is small wonder
diminishing numbers of executives bother to attend compliance auditors' exit
meetings. They know their time is better spent in attending to other business
matters, perceiving compliance audits deliver little, if anything, by way of
added-value. Those perceptions should raise a downsizing danger signal for
auditors. Audit
performance VA audits break
with the conventions of the typical compliance audit. As examples, ·
They may take weeks or months to complete, although
the activity is not necessarily continuous throughout that period of time. ·
A greater range of tools is employed. ·
Corrective action requests (CARs) are not issued. ·
VA auditors cost the action plans (solutions) they
suggest. Auditor
knowledge, ability and training Businesses and
all their constituent processes prosper or fail from the knowledge (or lack
of it) they possess and apply. The auditor is charged with assessing the
existence, depth, breadth, currency and application of that knowledge. To do this, the
auditor must be up-to-date. One cannot endorse the foolish dictum once offered
in the ASQ magazine, Quality Progress: Avoid trying to understand
the process. Your job is to determine if the interviewee understands it. Even for a
compliance audit, it produces a report amounting to I did not understand
what I was looking at but the auditee complies because he told me so! The application
of knowledge cannot be assessed by assigning ignorance to the task. Moreover, a
broader range of tools is used during value-added audits than is the case for
compliance audits, and an audit team has to be skilled in their selection and
application. Crucially,
though, the VA audit team needs up-to-date knowledge of the auditee's
industry, processes and market as well as what is going on in the world
outside if it is to focus on the future. It cannot deliver a full value
service without it. Those embracing the ideas of continuous professional
development are the quality professionals who will readily expand their
knowledge to be able to conduct VA audits. This is not easy. Maintaining
one's currency in an expanding knowledge base has always been a challenge;
today’s accelerating rate of expansion demands ever increasing effort. Risks and rewards The following of J.K. Galbraith's observations, about financial
disasters, apply equally to the quality movement in explaining how its
professional progress halted after ISO 9000 et al appeared: “The euphoric episode is protected and sustained by the will
of those who are involved, in order to justify the circumstances that are
making them rich. And it is equally protected by the will to ignore,
exorcise, or condemn those who express doubts…[there is] mass escape from reality,
that excludes any serious contemplation of the true nature of what is taking
place.”4 Management auditors need to assess whether they wish to remain
associated with the quality movement and its schemes, as they currently
exist; associated with the ISO 9000 industry. If the movement cannot return
to its original mission, focusing on the issues that built its credibility, a
parting of the ways must and will happen. If it cannot or will not address
the issues that matter most for business success, cannot or will not broaden
its perspective, cannot or will not cease its myopic view of business operational
priorities, it will pursue the path to oblivion. While a separation between
management auditors and the quality movement would be regrettable, serving
business needs is of greater importance than maintaining a low value-adding
union. If you carry on doing what you have always done, you will
continue getting what you always got! Many auditors and quality professionals
feel frustrated about the level of commitment they perceive from their top
management. Many are dissatisfied with the results of their ISO 9000 or
QS-9000 programs and their audits. Any belief that sticking slavishly to
these programs will make a substantial difference to shareholder value, will
result in disillusionment. (The figures quoted earlier for that VA assessment
illustrate the point). It is time for change. Compliance audits add little if
any value. Value added audits are more rewarding because: ·
They are
constructive. ·
They
achieve positive change. ·
They
produce quantifiable benefits that all can appreciate. ·
They earn
for auditors the respect and attention of management. Their auditors feel
wanted, valued, appreciated. And going to work becomes more pleasant. At your Baltimore conference, I said "auditors have got
the respect they have earned". It is worth repeating. We brought it on ourselves. So, let’s
change our service from ill-fated compliance audits to value-added audits.
The improvement is overdue: they are the future that is now arriving. And for
those who don’t want to participate, a little advice: quit griping, "My
management doesn't support me". If its does not, you cannot be offering a service "to
its welfare or advantage". You are an avoidable cost. © 1999, Allan Sayle Associates. All rights reserved References 1.
Sayle,
Allan J., Management Audits, 3rd edition, 1997, ISBN 0 9511739-0-1. 2.
Sayle,
Allan J., Auditing: Time for a rethink and overhaul, Luncheon address to the 4th
Annual Quality Audit Division Conference of the ASQC, 24 February 1995.
Printed in Quality World, Volume 21, Issue 4, April 1995. 3.
Sayle,
Allan J. Audits - the key to the future, Keynote address to the First Annual Quality Audit
Conference of the ASQC, February 27 1992. Printed in EOQ Quality, No. 3 September 1992 pp 21-26. 4.
Galbraith,
J. K., A short history of financial euphoria, 1993, Viking Penguin, New York. ISBN
0-670-85028-4. --------------------- |
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