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The Financial Gains of Quality Improvement

by Geof Cox and Anne Radford Published in Legal Business Magazine, June 1991

Through quality improvement, your firm can increase its profitability, reduce costs, and add clients.

What is quality improvement and why is it so powerful?

J.S.Oakland, Exxon Chemical Professor of Total Quality Management at Bradford, says that quality means "meeting the customers' requirements."

Many chief executives ensure that quality is the focus of their organisations, Jack Welch of General Electric puts it this way: "Quality is the best way of assuring customer loyalty, it is our best defence against foreign competition and the only way to secure continuing growth and profits.' While competition for legal services may not yet come from overseas, most law firms are acutely aware of increased competition from 'foreign' competitors such as accountants.

Increase profitability

The Profit Impact of Market Strategies (PIMS) database on 3,000 European and North American companies indicates that there is a positive correlation between quality and profit. The more customers perceive a company's qualitative performance to be better than its competitors, the higher the average financial performance of that company.

When the data are analysed further, less than a quarter of the companies with low quality have a 'return on investment (profits as a percentage of investment) greater than 25 per cent, while nearly 60 per cent of the companies in the high quality group do so.

According to research by Bain International, UK companies are showing profit increases of 20 to 60 per cent just by improving their customer retention rate by a few percentage points.

Your clients' opinion of your firm's quality of service is crucial to your financial success. Those law firms which carry out regular third-party surveys of clients and have individual discussions with clients twice a year know the value of these activities. If your firm is not yet doing so we would suggest that spending between £10,000 to £25,000 to retain clients is money well spent when you are safeguarding millions of pounds of fees.

Your clients may be adopting the total quality management (TQM) approach. If so, the client is reviewing its relationship with the companies supplying it with goods and services. Marks & Spencer was one of the first companies in this country to take this approach. Such companies usually select companies for a long-term business arrangement and the selection is based on quality.

Invariably, the companies which adopt TQM reduce the number of suppliers. Data from the United States show that companies reduce the number of suppliers substantially — 3M had some 3,500 suppliers before TQM and 350 after; following the introduction of TQM General Electric's number of suppliers dropped from 1,600 to 200 and Ford's dropped from 35,000 to 3,500. This is good news for the firm that meets the client's standards. For the firm that doesn't meet the client's standards the relationship comes to an end and so do the fees.

Reduce costs

Philip Crosby, one of the leading experts on TQM, says that the cost of doing things wrong in service companies is 40 per cent of operating costs. This covers three types of costs: prevention costs — training staff and setting up procedures to stop faults getting to the client, appraisal costs — inspecting and checking to make sure that what the client gets is right and the failure costs — reworking and correcting mistakes that do occur either before or after they reach the client.

According to these figures the cost of doing things wrong in a law firm with a turnover of £9 million is £2.4 milion (40 per cent of £6 million, assuming costs are two-thirds of total revenue).

Crosby states that the cost of doing things wrong can be cut in half in a couple of years by reducing the costs of failure.

Add clients

Quality companies set themselves the task of adding clients by being better than their competitors. The PIMS research quoted earlier shows that the companies which differentiate themselves from their competitors and are perceived to have higher quality than their competitors tend to be more profitable.

We have already talked about the need to collect information on your clients' perceptions. Your firm also needs to collect information about the service provided by your regular and 'foreign' competitors. You can then compare every aspect of your service against the best offered by your competitors. By offering a service which exceeds those benchmarks your firm differentiates itself from its competitors.

Different firms decide to differentiate themselves in different ways. Pannone March Pearson was the first law firm to apply for and receive BS5750. Although it may have cost them £30,000, this is a relatively small amount of money when one thinks of the national visibility and potential client attention they have received as a result, not to mention the change in approach which has taken place within the firm to focus each person on the goal of quality control.

It is therefore in a good position to differentiate itself even more by taking the next step: implementing TQM. The difference between quality control (QC) and total quality management (TQM) can be summarised as follows: for 'Inspection' read 'Prevention': for 'Compliance to fixed standard' read 'Continuous improvement'; for 'Internally set standards' read 'Externally set standards'; for 'Control by a few' read 'Responsibility by all'; for 'Stable or increasing costs' read 'Reducing costs'; and for 'Product focus' read ' Customer focus'.

In essence, quality companies increase profitability, reduce costs, and add clients by adopting the customer service rules that Stew Leonard has carved in granite outside his successful store in Norwalk, Connecticut:

• Rule 1 - The Customer is always right.

• Rule 2 - If the Customer is ever wrong, refer to Rule 1.

Geof Cox and Anne Radford are TQM specialists at management consultants Castle Consultants in Edinburgh and London offices respectively. Anne is a member of the Law Society Working Party on Quality Management.

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