The path from compliance to performance

The role of management systems in underpinning organisational strategies is changing as the ideas of the quality pioneers are reinterpreted and applied by today's quality managers, writes Mike James, managing director of Lloyd's Register Quality Assurance (LRQA)

Issue number: August 2012
Date: 06 August 2012
Author: Mike James

Prior to the 2000 update, ISO 9001's focus was on conformity. ISO 9001:2000 changed that, revolutionising the way in which standards are used to underpin organisational strategies and performance.

With tougher stakeholder demands, rapidly changing business conditions and increased competition, organisations are seeking more effective control of operations, improved performance and better management of risk throughout their businesses. In these times of austerity, organisations are increasingly looking inwards to see how they can lever their existing systems and processes to drive outward performance and growth. This approach – the 'quality management vision' – is simply taking the best from management systems of today and translating them into strategies for success.

The last few years have seen a proliferation of management system and sector-specific standards covering a growing number of areas. From an initial base of quality, this has expanded to cover environment, health and safety, energy management, business continuity and beyond. A growing number of organisations are seeing clear benefits in integrating their management systems into one corporate system. This approach allows the organisation a more holistic view of their operations, enabling them to clearly see the commonalities between areas such as quality and health and safety. These areas – as others – have a clear link which could otherwise be overlooked were they treated as two separate management systems.

Changing mindsets

With the foundations for management systems performance set, the opportunity for strategic organisational improvement is clear. The primary role of the quality management system is to ensure that the quality of goods and services meets the needs and expectations of the customers. However, as quality and customers are central to any organisation's competitive strategy, being able to extend the use of management systems – originally conceived in an operational setting – into the area of strategic management is becoming increasingly important. This challenge has been particularly sharpened by innovations in management thinking and new techniques brought about by the global economic changes and technical
innovations that have been emerging in recent years.

From strategic analysis to strategy execution

There has been a lot of work done to improve an organisation's ability to conduct strategic analysis. Probably because this left an incomplete picture, it was then followed by more work on how best to execute strategy. In turn, this has led to a great deal of attention being focused on the measurement of strategy, and a range of different models and scorecards have been created to do this.

Much of the data needed to populate these models is generated by the organisation's management systems and consequently the management systems professional is called upon to provide advice and systems of measurement.

However, the nature of the processes and measures routinely used to control and manage operations are very different from those required to determine whether a strategy is on course. Operational processes follow clearly defined rules and have easily quantifiable outputs, whereas strategic processes by their nature have to adapt to changing circumstances and experience. Therefore, strategic measures need to be flexible and far fewer in number than those needed to control operational processes. In effect, placing too many rigid detailed measures and/or key performance indicators (KPIs) on strategic processes can be the equivalent of pouring concrete into a company's strategic decision-making processes.

From re-organisation to re-adjustment

Many business executives will be familiar with the thinking on company strategy and structure: strategy should determine organisational structure over the long run but in reality, in the short term anyway, structure very often informs or at least constrains a company's strategy. This notion was created when there were far fewer structural alternatives than there are today, when companies either organised around products or geography. Organisational design has been revolutionised by the internet, the outsourcing of non-core activities and global supply chains. This has led to far more frequent re-adjustments to structure as chief executives attempt to create alignment between strategy and structure as opposed to the major one-off re-organisations that were seen in the past.

The evolving quality professional

Management systems professionals are extremely relevant to this process. In the first instance, their role is key in maintaining control of the key value- creating processes during frequent organisational design changes. Also, modern organisational design with its blurring of traditional boundaries through the use of global supply chains – or demand networks as they should be more accurately called – together with increased electronic communication has led to there being far less clarity of responsibility and authority so that risk has become far less visible. In this instance there is a need to manage risks associated with organisational design change through the management system. The issue here is political access.

Organisational design change is the prerogative of the chief executive or managing director and is a highly political process. Sometimes the need for the appropriate governance, review and clarification of changing responsibilities and authority can get lost in the ensuing changes. Working with organisational politics is not in the comfort zone of many management systems professionals. However, given the connection between management systems data and how this can be used to communicate strategic insight and influence the corporate decision- making process, the value of the management systems professional has never been stronger.

Michael Toffel is associate professor of business administration at Harvard Business School and has been researching which voluntary programmes and management system standards actually distinguish participating companies as having superior performance. He conducts research into companies' environmental, safety and quality programmes, and has found that the main driver for the implementation of management systems standards such as ISO 9001 is meeting the requirements of current and potential customers. However, he says: "In other domains such as environmental management and labour practices, many companies are implementing independently certified management systems standards in an attempt to
distinguish themselves."

Professor Toffel continues: "In comparison with the quality domain, companies more rarely require their suppliers to adopt international standards governing environmental management and labour conditions, which is one reason fewer companies have adopted them. However, this means that such standards offer greater opportunity for suppliers to differentiate themselves from their competitors. This can be achieved through improved systems and processes which lead directly to improved efficiencies as well as delivering an enhanced corporate reputation to both internal and external stakeholders."

Continuous improvement is a key feature of global management system standards. Organisations are required to set objectives and targets, to measure progress against these targets, and to periodically review progress. Importantly, the standards require management to periodically review these objectives and targets in order to ensure progression. Professor Toffel says: "The whole idea is that as you achieve these targets, you set new ones. For example, ISO 14001 contains a lot of provisions to help organisations ensure that procedures are documented and that staff are well trained. If that were all it had, then you wouldn't necessarily expect improvement; targets that require periodic review and revision ensure a drive for continuous improvement, so management systems are in effect continually adding value to an organisation."

The corporate journey from compliance to performance

While associated benefits from implementing management systems have been well documented, a key success criterion is not only adopting but embedding them into an organisation's strategic modus operandi to underpin organisational performance. Over the past 12 years, three distinct trends have emerged which clearly illustrate the corporate journey from a compliance- driven application of management systems through to one that places performance and risk management at an organisation's core.

The trends can be best illustrated by using examples from some of the world's leading organisations:

a) Corporate heartbeat

Leading environment and food testing group ALcontrol Laboratories was initially awarded ISO 14001 certification in 2003. Since that time, ALcontrol's approach to their management systems has put them at the heart of their organisation in driving competitive advantage, employee engagement and strategic performance.

Bob Cutler, general manager of the oil testing department at ALcontrol, explained the link between their management systems and strategic objectives: "Our objectives are firstly to increase business and profits but to do so our objectives also include making sure we have got quality, health and safety, and environmental controls in place.

"Without having a management system, we could not monitor what we try to do and maintain our performance, which is required by our clients, who include major oil companies who have got the same standards, and we follow suit. They want ALcontrol to prove that we can monitor our systems and show that we are meeting the standard that they require. So without having a management system, we don't win any business from any of our major clients."

Mike McCorkell, managing director of ALcontrol's Food & Waters business, adds: "People say 'what gets measured gets managed', and I think that is the case with the management systems. It embeds the 'plan, do, check, act' approach, or a setting-out of objectives. We are measuring how we are performing and we are going back again and reviewing to see how we are doing. Without management systems, we are not going to get the performance that we want."

Summarising, Iain Swinton, business director at ALcontrol Laboratories UK&I, says: "There definitely is a link between our strategic objectives and our management system. It is very important that we behave in an ethical way when it comes to the environment. And our environmental management system enables us to do that and ensures that we are able to give our customers confidence that they can rely on us."

b) The halo effect

The careful nurturing and protection of a corporate brand is often an organisation's most important activity. Companies such as the global giant Starbucks and the major UK retailer John Lewis understand that their brand name and reputation is fundamental to their corporate value. As such, the 'halo effect' is driven by brand equity and is demonstrated by the bias shown by customers towards certain products because of a favourable experience with other products made by the same manufacturer or maker.

The implementation and certification of management systems is a crucial tool that helps organisations enhance and protect brand reputation. Within this domain, examples of the halo effect are emerging.

Ballarpur Industries Limited (BILT) is one of India's leading producers of paper products, and is well aware of its responsibility to manage its business in a manner that is sustainable – both towards the environment and financial stakeholders. This was a key driver that led BILT Graphic Paper Products (Bhigwan) to commence its certification journey back in 2000. As Indraneel Guha, associate vice president at BILT (Bhigwan) explains: "With each standard we implemented, when commencing with quality back in 2000, we found that our performance increased. We found ourselves on a journey with increasing levels of performance and results, from quality, to environmental, to health and safety, which drove competitive advantage as well as employee engagement and morale at work."

BILT Graphic Paper Products, (Bhigwan) has now integrated all of its management systems to avoid the duplication of work and documentation and to drive employee engagement, all of which is resulting in increased competitive advantage.

c) Harmonisation and collaboration

Organisations across the global food supply chain recognise food safety as a non-competitive issue.

At the 2012 Global Food Safety Initiative (GFSI) Conference in Orlando, food companies demonstrated how their approach to auditing and certification, through the harmonisation of food safety requirements coupled with a risk-based approach to assessment, is paving the way for excellence and delivering real benefits to businesses.

Cathy Stannard, global head of quality and food safety management for Mars, commented: "For Mars, a quality management programme compatible with GFSI requirements offers us consistency and efficiency, which helps across the supply chain."

Jennifer Yezak, global food safety manager at Wrigley – a subsidiary of Mars – made one of the key illustrative points of the session: "We saw a 25- 50% reduction in retail audit requests once we went to FSSC 22000. So you're saving time and the cost of audits thereby enabling our people to focus on getting the product right the first time round."

The path to improvement

All three of these approaches are delivering benefits to organisations worldwide, irrespective of their size or geographic location. Taking environmental management systems (EMS) as an example, this standard helps companies to organise environmental management processes within a plant or across an organisation. It requires the creation of an environmental policy and documentation of procedures such as training and internal quality audits. Summarising, Professor Toffel says: "An EMS is a way of organising all environmental aspects of an organisation's activities which might otherwise be conducted in a more ad- hoc manner. It can also help companies harmonise their approach across their various plants, which some managers have noted is particularly helpful after acquisitions. So an EMS can provide a consistent, structured approach to the management of environmental affairs."

The creation of an effective environmental management plan reduces risk, providing assurance to stakeholders and often delivering brand benefits.

A further benefit of independent certification is compliance with customer-specified requirements; many companies now require their suppliers to demonstrate independent certification to a number of standards to lower risk and assure the resilience of their supply chains.

While independent certification delivers a number of common benefits, each individual standard provides its own specific advantages. Professor Toffel says: "In terms of processes, a few academic studies have shown that organisations that have been certified to the ISO 14001 environmental management system standard experienced faster reductions in pollution and greater improvements in compliance with environmental regulations."

In a different study co-authored by the University of California – Berkeley Professor David Levine and Professor Toffel looked at ISO 9001, comparing adopters with non-adopters over several years. The researchers examined single plant firms in California and found that the adopters of quality management systems (QMS) realised faster sales growth and employment growth compared to a similar set of non-adopters, which served as the control group. They also found some evidence that QMS adopters were subsequently more likely to report zero injuries warranting compensation. This was particularly interesting because it revealed that the adoption of a QMS appears to have some spill-over benefits in terms of improving workplace safety.

The California study also found that QMS adopters were more likely to have survived several years later, compared to the non-adopters. Professor Toffel believes that there are several possible explanations for this finding: "First, many believe that a QMS is a proxy for other good management practices and that better run companies are more likely to survive. Second, because a QMS is so often adopted to qualify for more tenders, one might expect sales to increase among adopters, which we found in our study, and such increases in sales could improve firm survival rates. But in either case, our results indicate that companies looking for long-term supplier relationships can use a QMS as a useful predictor of supplier longevity."

Who benefits most?

Professor Toffel's work has demonstrated that in terms of sales and employment growth, smaller companies experience greater benefits from adopting ISO 9001 than larger companies. This could indicate that smaller firms learn more from adopting ISO 9001 or that the standard is particularly helpful in enabling smaller firms to focus on quality.

Professor Toffel speculates that organisations in less regulated industries might gain more from adopting quality standards, compared to organisations in industries, such as pharmaceuticals, where quality is already heavily regulated by governments. "The benefits of adopting an EMS or QMS might be greater in countries with weaker regulatory enforcement because adopting standards to meet independent third- party certification could spark an investment in managerial attention that can substantially enhance operational effectiveness and efficiency," Professor Toffel notes.

Looking forward

In summary, the strategic relevance of management systems in driving organisational performance has never been clearer.

What has been fundamental to the continued growth and worldwide adoption of management systems is their applicability and relevance, underpinned with new management thinking. By relevance, I mean their proven ability to play a key role in driving the strategic decision making of an organisation. The updates and planned revisions of these standards deliver increased functionality to enable companies to build on the principles set down by the pioneers or gurus of quality.

So what we are seeing is that smart organisations recognise that by putting – or applying – management systems at the heart of their business, the results are stakeholder engagement, increased brand reputation, risk mitigation and management best practice.

The potential of management systems to directly influence corporate growth is limited only by the ability of organisations to appreciate the value of their management systems professionals to effectively communicate the relevance of management systems outputs to corporate strategy. Yes, management systems have changed to underpin organisational strategies and growth. But in these times of austerity, this can only be a change for the better.

Mike James is managing director of Lloyd's Register Quality Assurance (LRQA) and chair of the Independent International Organisation for Certification

Return to Qualityworld front cover >>

My CQI

Please log in to access CQI member services, update your details and pay subscriptions

 

Log in Register