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The Cost-Quality Tradeoff

Some companies are concerned about cutting costs, worried that their cost reduction may come at the expense of quality service to the customer. Yes, there is a relationship between cost and quality, but it's a surprising one. Companies that are cost-effective also tend to produce high-quality products and services. It's a proven fact in at least one industry, nuclear power.

Nuclear plants in the United States are assessed periodically by a group called the Institute of Nuclear Power Operations, or INPO. INPO rates each nuclear plant in the United States on a 1 through 5 scale, with 1 meaning that the plant runs at state-of-the-art efficiency, and a 5 meaning that the plant is very poorly run. (Plants at the "4" or "5" level are generally shut down for a major overhaul.) Cost effectiveness is not a consideration in INPO's evaluations; all INPO cares about is how well the plant is running, regardless of cost. But when you compare the costs and staffing of nuclear plants with their INPO ratings, then -- adjusted to make the figures comparable -- costs and staffing are actually lower at the highest-rated plants. The higher the rating earned by a plant, the lower the costs and staffing for that plant.

This study confirms the experience of many highly-regarded cost and quality experts around the country: High quality organizations are cost-effective organizations.

Q. We are about to close several field offices in our company, in the interest of reducing costs. The customers in those areas are used to having convenient access to our company, and may not be happy with this move. What should we do? Isn't this a poor cost-quality tradeoff?

A. First, check with your customers. Very often, they are less concerned with your office closings and staff reductions than your employees are.

We recently encouraged one midwestern electric utility to end its 100-year-old program of giving away free light bulbs to customers. Company employees argued that ending the program would greatly anger the customers, but an examination of survey data indicated that relatively few customers took advantage of the free light bulb program. (Light bulbs were given away only in the downtown office, while most customers lived in the suburbs.) Moreover, our interviews with customers indicated that they would prefer to end the light bulb program if it would help lower electricity costs.

Second, communicate to your customers. If your customers understand that you are taking away a marginal service in return for lower and more competitive costs, they may be more supportive of your cost reduction activities than you realize.

Q. Everyone in our company participates in a Total Quality Management program. We've found that, in order to improve quality, we've invariably had to spend money. How does this square with cost effectiveness?

A. It's very true that sometimes you have to spend money to save money. Companies often spend millions of dollars on system enhancements (for example), but then save millions in reduced labor costs and add millions in revenue because of enhanced customer responsiveness. Such investments are money very well spent.

But if your total quality program requires greater overall long-term spending by your company, my guess is that something is wrong with your total quality program. Most experts in quality management agree that your costs should go down as a result of improved quality. As one quality expert has said, "Doing it right the first time is cheaper than doing it over." In addition, if your total quality program is driving your overall costs and prices up, you'll find yourself in a troubling paradoxical situation: As your quality improves, your customers will desert you -- for lower cost suppliers. In short, cost is an important component of any successful quality program.