Tuesday, 9 May 2006
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Does ISO 9000 Certification Pay?
Implementing a quality management system and getting it certified to one of the ISO 9000 standards is not a piece of cake.
While the actual costs involved differ from company to company, the certification process inevitably requires significant effort with respect to designing, implementing and documenting appropriate processes, entailing both direct and indirect costs associated with consulting and audit fees, employee training, etc.
Is it worth it?
Specifically, how might investing in ISO 9000 certification pay off?
Some argue that it leads to improved internal processes, which in turn enable higher productivity and lower costs.
Others argue that customers increasingly require ISO 9000, so certification should help maintain or increase a firm’s market share.
Yet others dispute these benefits, claiming that the standard is too generic to lead to genuine improvements. In their view, if any positive correlation is found between ISO 9000 certification and financial performance that merely reflects the fact that firms that are better managed are also more likely to seek ISO 9000 certification.
Which camp is right?
Surprisingly, no hard answer to this question has been given yet, despite the fact that the standards have been around since 1987 and that some 670,000 certifications have been awarded worldwide. Anecdotal evidence abounds, both in favour of and contradicting the hypothesis that ISO 9000 somehow leads to improved financial performance.
We examined the effect of ISO 9000 certification on publicly traded firms in the US over a 10-year period (1988 to 1997) and found that certification does appear to lead to improved financial performance, measured by return on assets (ROA).
The study focused on the three industrial sectors with the largest number of ISO 9000 certificates: (1) chemicals, (2) industrial and commercial machinery and computer equipment, and (3) electronic and other electrical equipment and components.
We find that firms that failed to seek certification experienced substantial deteriorations in ROA, productivity, and sales, while firms that did seek certification generally managed to avoid such declines.
In the chemical industry, the effects are primarily internal: ISO 9000 leads to cost reductions through improved productivity. In the industrial and commercial machinery, computer equipment, electronic and other electrical equipment and components industries, both sales and cost effects are observed.
In other words, firms that received certification did not, on average, see their absolute performance improve, but they did see their relative performance improve substantially, compared to their uncertified peers.
The good news, clearly, is that, in all analyses we conducted, we found significant relative improvements in ROA. From that perspective, we can answer the original question of, “Does it pay to seek ISO 9000 certification?” with a resounding “YES!”
This article contained selected extracts from a Special Report presented in the July-August 2002 issue of the ISO Management Systems magazine that assessed the financial performance of ISO 9000-certified companies in three US business sectors.
The report was prepared by a group of business school academics from the US and Spain.
The selected extracts are reproduced with the kind permission of ISO Central Secretariat http://www.iso.org/