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ROI and Six Sigma - Improve Your Bottom Line!

Aug 17, 2007
Very easily, Six Sigma is your best bet for maximizing return on investment, more so in troubled economic times. However, the success of implementation depends much on its achieved degree of alignment with the problems. Ifs and buts not withstanding, there are stories to support both sides of the issue. First let's consider the negative side of the story.

Why Do We Hear Failures To Achieve Projected ROIs On Six Sigma Investments?

We hear failure stories not just because they are reported but because they occur. Now, why do they occur so much as to be heard in the open? The first reason any practitioner can give is the lack of support from the top management. Considering long implementation periods, commitment levels sometimes wither away and consequently the effects percolate down the line of the organization. And project implementation turns into a ritual exercise. The claims of $1 million per Black Belt in ROI can appear more and more unrealistic.

It is not enough to blame top management alone. Champions and Master Black Belts on their parts could scale down the projects that result in slashed expenses. High returns can be realized in this scenario by driving projects initially through the internal market to gain much-needed support. Things are subjective to multiple aspects but a complete turnaround is not impossible.

What Critical Factors Help Bring About Satisfactory ROI?

There are three more critical factors barring project selection that play a role in ROI. Obviously, these are:

1. Lowering the investment
2. Maximizing the returns
3. Reducing the time to return

But things are more complex than meets the eye! Interrelated variables such as quality of personnel and training, support of management and magnitude of the opportunity, function in unison. Apart from these, aligning the management (and stakeholders') initiatives to the Six Sigma initiatives must be given due importance. All good programs will launch from a project on revenue maximization that potentially becomes an instant hit.

How to Measure ROI in A Six Sigma Initiative?

Return on investment simplistically means the cost of implementation over time compared to return for the corresponding period after discounting inflation and risk adjusted rates. For reasons of practicality, return on investment is measured in terms of hard and soft returns. Hard returns are those which are tangible and can be measured; for example, the savings achieved on reduced personnel and wastage. Whereas soft returns are mostly intangible like the advantage derived from the reduced cycle time.

Soft returns vary hugely from company to company and from project to project, unlike hard returns, which are measured almost by the same yardstick universally. So clearly, the soft returns are relative in nature, depending on accepted interpretations at that time, thus making quantification a difficult exercise. Errors in calculation of reduced capital employed or cost of financing leaves tremendous room for debate.

As a rule, most successful companies don't differentiate between hard and soft returns. What is more interesting is the recurring returns in terms of all around savings. Add to it the value creation by increases in the growth rates and defeating competition, which all result in higher shareholder value.

More sophisticated tools such as Economic Value Analysis may help quantify intangible value created.
About the Author
Tony Jacowski is a quality analyst for The MBA Journal. Aveta Solution's Six Sigma Online offers online six sigma training and certification classes for lean six sigma, black belts, green belts, and yellow belts.
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