Malcolm Baldrige National Quality Improvement Act of 1987

Statement of
Harry S. Hertz
Director
National Quality Program
National Institute of Standards and Technology
Technology Administration
U.S. Department of Commerce

Before the

Subcommittee on Social Security
And the
Subcommittee on Human Resources
Committee on Ways and Means
U.S. House of Representatives

February 10, 2000

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Thank you Mr. Chairman and Members of the Subcommittees for the invitation to testify.

On August 20, 1987, President Ronald Reagan signed Public Law 100-107, the Malcolm Baldrige National Quality Improvement Act of 1987. The purpose of the act was to provide a national program to recognize U.S. companies and other organizations that "practice effective quality management and as a result make significant improvements in the quality of their goods and services" and to disseminate information about their successful strategies. The program has been managed by the National Institute of Standards and Technology, an agency of the Commerce Department's Technology Administration, in close cooperation with the private sector.

From the start, our definition of quality and performance excellence has focused both on the customer and on operational performance. We view performance excellence as delivering ever-improving value to customers resulting in marketplace success, while at the same time improving overall organizational effectiveness and capabilities.

"The Baldrige public/private partnership has accomplished more than any other program in revitalizing the American economy," said Barry Rogstad, president of the American Business Conference and past chairman of the Baldrige Award's board of overseers.

Since 1998, when the first Baldrige Awards were presented to three companies, the Baldrige National Quality Program has grown in stature and impact. Today, the Baldrige program, the Award's criteria for performance excellence, and the Baldrige award-winning organizations are imitated and admired worldwide. Following are some of the program's 10-year highlights:

• Called the "single most influential document in the modern history of American business," almost 2 million copies of the Baldrige Criteria for Performance Excellence have been distributed. This number does not include the copies available in books and from state and local award programs or downloaded from the Award's World Wide Web site.
• For the past five years, a hypothetical stock index, made up of publicly-traded U.S. companies that have received the Baldrige Award, has outperformed the Standard & Poor's 500 by more than 2.5 to 1.
• State and local quality programs – many modeled after the Baldrige program – have grown from fewer than 10 in 1991 to over 40 in 1999.
• Internationally, 45 quality programs are in operation. Most are modeled after the Baldrige Award, including one established in Japan in 1996.

Today, I would like to share with you some of the lessons we have learned from the first decade of the Baldrige Program, particularly as they relate to service quality. Those lessons are realized in the evolving set of core values and concepts that form the foundation for our year 2000 Criteria for Performance Excellence. I will briefly discuss these core values and some of the resulting criteria. Finally, I will present some of the key performance challenges I believe we face. I will give some specific business examples to emphasize key points.

Service Quality

Service quality is inherently more challenging than product quality. In service delivery, production and consumption are frequently combined. While we have had manufacturing winners of the Baldrige Award every year since its beginning, it wasn't until the third year that we had a service winner, Federal Express Corporation. They learned that a process orientation could be applied to service delivery, that a 12-component performance index developed by FEDEX could track quality performance and serve as a predictor of customer satisfaction, and that empowered customer contact employees with data to make decisions can improve their own and company performance.

Service quality is greatly dependent on human factors: the behavior and personality of the customer contact person, and the customer's perception of their interaction. As opposed to manufactured goods, the "product" cannot be inventoried, and it cannot be tested fully in advance of delivery. Every customer interaction is a "moment of truth" and suffers from all the complexities associated with such interactions. The environment in which the service is delivered (e.g., surroundings, wait time, demeanor of the deliverer) and the competence of the deliverer are extremely important. That is why we see the great emphasis placed by all Baldrige winners on employee training. The service category winners as a group average over 80 hours of training per year for each employee.

Finally, and maybe most significantly in a service business, conformance to specifications often does not suffice. It is the personal concern or added touch that supplements accurate service that defines quality. For example, at Ritz Carlton hotels (a 1992 and 1999 service category winner), employee empowerment is the key to customer satisfaction. All employees are empowered "to move heaven and earth to satisfy a guest." Each employee can spend up to $2000 without approval to obtain that satisfaction.

If an error is made, not only is recovery important, but speed of recovery and how the customer is compensated for the error are equally important. At Granite Rock, a 1992 small business winner that quarries and delivers stones and concrete, their "short pay" system encourages customers not to pay for any service that doesn't meet the customer's expectations. This policy is stated in writing on every delivery form.

Baldrige Core Values and Criteria

Service quality is only one component of overall organizational performance quality. The Baldrige Criteria for Performance Excellence provide a framework for guiding and assessing overall organizational performance. The Baldrige Criteria are based on eleven core values and concepts. These core values and concepts typify the characteristics of high performing organizations of all types. These core values, like the Baldrige Criteria, evolve to continue to define leading edge high performance practices. The core values and concepts are:

• Visionary Leadership
• Customer Driven
• Organizational and Personal Learning
• Valuing Employees and Partners
• Agility
• Focus on the Future
• Managing for Innovation
• Management by Fact
• Public Responsibility and Citizenship
• Focus on Results and Creating Value
• Systems Perspective

All these core values and concepts are relevant to the subject of today's hearing, but let me comment on four:

Organizational and Personal Learning

Achieving the highest levels of performance requires a well-executed approach to organizational and personal learning. Organizational and personal learning is a goal of visionary leaders. The term organizational learning refers to continuous improvement of existing approaches and processes and adaptation to change, leading to new goals and/or approaches. Learning needs to be embedded in the way an organization operates. By embedded I mean that learning: (1) is a regular part of daily work; (2) is practiced at personal, work unit, and organizational levels; (3) results in solving problems at their source; (4) is focused on sharing knowledge throughout the organization; and (5) is driven by opportunities to affect significant change and do better. Sources for learning include employee ideas, research and development, customer input, best practice sharing, and benchmarking.

Employee success depends increasingly on having opportunities for personal learning and practicing new skills. Organizations invest in employee personal learning through education, training, and opportunities for continuing growth. Opportunities might include job rotation and increased pay for demonstrated knowledge and skills. On-the-job training offers a cost-effective way to train and to better link training to organizational needs. Education and training programs may benefit from advanced technologies, such as computer-based learning and satellite broadcasts.

Personal learning can result in: (1) more satisfied and versatile employees; (2) greater opportunity for organizational cross-functional learning; and (3) an improved environment for innovation.

Dana Commercial Credit, a 1996 service category winner, uses "people finding a better way" as their motto. Their organization's three-part focus is on customer satisfaction, quality, and knowledgeable people. All education is followed by a course evaluation, a personal improvement plan, 90-day follow up, and correlation analysis to measure effectiveness in improved customer focus. Suggestions and innovation, part of Dana Style, led to a more than tripling of profit after tax per person from 1992 to 1996.

Valuing Employees and Partners

An organization's success depends increasingly on the knowledge, skills, innovative creativity, and motivation of its employees and partners.

Valuing employees means committing to their satisfaction, development, and well-being. Increasingly, this involves more flexible, high performance work practices tailored to employees with diverse workplace and home life needs. Major challenges in the area of valuing employees include: (1) demonstrating leaders' commitment to employees; (2) providing recognition opportunities that go beyond the normal compensation system; (3) providing opportunities for development and growth within an organization; (4) sharing the organization's knowledge so employees can better serve customers and contribute to achieving strategic objectives; and (5) creating an environment that encourages risk taking.

Organizations need to build internal and external partnerships to better accomplish overall goals.

Internal partnerships might include labor-management cooperation, such as agreements with unions. Partnerships with employees might entail employee development, cross-training, or new work organizations, such as high performance work teams. Internal partnerships also might involve creating network relationships among work units to improve flexibility, responsiveness, and knowledge sharing.

External partnerships might be with customers, suppliers, and education organizations. Strategic partnerships or alliances are increasingly important kinds of external partnerships. Also, partnerships might permit the blending of an organization's core competencies or leadership capabilities with the complementary strengths and capabilities of partners, thereby enhancing overall capability, including speed and flexibility.

Successful internal and external partnerships develop longer-term objectives, thereby creating a basis for mutual investments and respect. Partners should address the key requirements for success, means of regular communication, approaches to evaluating progress, and means for adapting to changing conditions. In some cases, joint education and training could offer a cost-effective method of developing employees.

Boeing Airlift and Tanker (A&T) Programs, a 1998 Baldrige Award recipient, designs, develops, and produces the C-17 Globemaster III airlifter for the U.S. Air Force. In the early 1990's, the Department of Defense threatened to cancel all
C-17 orders due to quality problems. Based on a unique partnership with its union, A&T's exemplary quality performance by 1996 led to A&T receiving the government's largest ever multi-year contract for additional C-17's. The union partnership involves employee gainsharing and ownership of work teams.

Managing for Innovation

Innovation is making meaningful change to improve an organization's products, services, and processes and create new value for the organization's stakeholders. Innovation should focus on leading the organization to new dimensions of performance. Innovation is no longer strictly the purview of research and development departments. Innovation is important for key product and service processes and for support processes. Organizations should be structured in such a way that innovation becomes part of the culture and daily work.

3M Dental Products Division, a 1997 manufacturing category recipient, starts its innovation process with insights into changing customer requirements. Introduced in 1979, the innovation process itself has been refined 37 times since then. Now customer feedback is received at least three times during each development cycle. In 1996 more than 40% of 3M Dental's total sales stemmed from new products.

Systems Perspective

The Baldrige Criteria provide a systems perspective for managing an organization and achieving performance excellence. The core values and the seven Baldrige Criteria categories form the building blocks of the system. However, successful management of the overall enterprise requires synthesis and alignment. Synthesis means looking at the organization as a whole and focusing on what is important to the whole enterprise. Alignment means concentrating on key organizational linkages among the requirements for organizational success.

Alignment means that the senior leaders are focused on strategic directions and on customers. It means that senior leaders monitor, respond to, and build on the organization's business results. Alignment means linking the organization's key strategies with its key processes and aligning its resources to improve overall performance and satisfy customers.

Thus, a systems perspective means managing the whole enterprise, as well as its components, to achieve performance improvement.

Solectron, a 1991 and 1997 manufacturing category recipient, realized that to grow its business it had to surpass the quality of original equipment manufacturers' internal production. A key goal became quality and process capability. Key performance indicators and regular review of those indicators were established (daily on the floor, weekly by division, monthly by the CEO), improvement strategies were implemented, and training programs were developed. All employees benefit from success through Solectron's variable compensation plan.

Criteria for Performance Excellence

The Baldrige Criteria for Performance Excellence translate the core values and concepts into an assessment vehicle for determining organizational strengths and opportunities for improvement. The seven Baldrige Criteria categories for this assessment are: Leadership, Strategic Planning, Customer and Market Focus, Information and Analysis, Human Resource Focus, Process Management, and Business Results.

As with the core values and concepts, all of the Criteria are relevant to the subject of today's hearing, but let me summarize very briefly the first two Criteria categories because they are critical to organizational communication and future success. These two areas challenge all large organizations (and many small ones).

The Leadership Category examines how an organization's senior leaders set, communicate, and deploy values and performance expectations, as well as a focus on creating and balancing value for customers and other stakeholders. Also examined is how senior leaders focus on empowerment, innovation, learning, organizational directions, and responsibilities to the public and key communities.

Xerox Business Services, a 1997 Baldrige recipient in the service category, has 14,000 employees, with more than 80% at 4300 client sites worldwide. Through a focus on learning and empowerment, XBS trains and then empowers its employees to make decisions as if they were running their own small business. XBS learning programs focus on individual learning styles for people learners, information learners, and action learners.

The Strategic Planning Category examines an organization's strategy development process, including how the organization develops strategic objectives and action plans, and key human resource plans based on its strategic objectives and action plans. Also examined are how plans are communicated and deployed to achieve organizational alignment and how performance to plans is tracked.

AT&T Consumer Communications Services, a 1994 service category Award recipient, uses a HR planning council to achieve alignment of its business plans and HR plans. Council members include management and occupational associates. Council members are responsible for communicating HR plans to their organizations, who then develop organizational work plans and individual competency plans.

The Importance of Results

Performance tracking is extremely important. A shortcoming of many early total quality management (TQM) efforts was a total focus on process without an equal focus on whether process improvements were yielding results or whether the improvement focus was even on organizational (senior leader's) priorities. Furthermore, when results were measured, organizations generally measured what was available and easy, and not what was important.

Based on lessons learned by the Baldrige program over the last decade, we have developed a set of "results imperatives" – what to measure and how to use the measurements.

• Results should be tied to key business and customer requirements.
• Results should be tied to key product/service and support processes.
• Results should gauge progress on key strategic objectives and their associated action plans.
• Results need to track "levels and trends."
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  - Tracking the level of performance means knowing where one stands relative to goals and to examples of high performance (obtained through benchmarking).
  - Tracking trends ensures that the progress made and the rate of progress are acceptable.
• Results must be linked to and produce the measures senior leaders use for their organizational analysis and decision-making.
• Results must be actionable and action generating!

In other words, the results an organization should and must measure are those that lead to action on the part of that organization. This action occurs at all levels – individual, work unit, division, and senior leader – and the key results and actions are linked.

At Merrill Lynch Credit Corporation, a 1997 service category winner, client satisfaction is a long-term focus. Hence, client satisfaction survey measures are tracked at all levels of the organization. In addition, key indicators of client satisfaction are tracked down to the individual partner (employee) level where customers have told MLCC that timeliness of loan approval and in-process status information are key.

What CEO's Say

Obviously CEO's must focus on overall organizational results. As part of the tenth anniversary of the Baldrige program, the private sector Foundation for the Malcolm Baldrige National Quality Award conducted a survey of U.S. private and public sector chief executives to understand the other key challenges they face entering the 21st century. At a July 1998 CEO forum two subjects that received considerable discussion bear comment here:

• By a three-to-one (72% vs 26%) margin, CEO's believed timely strategy deployment was more challenging then strategy development.
• The CEO's strongly believed that the internet and electronic commerce will be the most important and challenging new vehicle for conducting business at all levels. While they were unwilling to speculate on the specifics of these challenges, they felt they had to be leaders in this new business technology.

Seven Challenges

As the Baldrige program looks to the future, I see seven key challenges for all organizations. Organizations must:

• Go beyond today's performance management and quality systems. They will not deliver future results.
• Measure, analyze, and execute for alignment.
• Evaluate and improve with a purpose. Focus on the important.
• Focus on their value chain and changing value equation. Balance the needs of all stakeholders -- all those who create value for the organization and for whom the organization hopes to create value.
• Build flexible strategies: only change is a given.
• Anticipate the needs and desires of a diverse workforce and a diverse customer base.
• Manage knowledge, stimulate innovation, support people, learn and grow as an organization.

To meet these challenges we will need high performing organizations – organizations characterized by flexibility, innovation, knowledge and skill sharing, alignment with organizational objectives, customer focus, and rapid response to changing business needs and requirements of the marketplace.

Thank you, Mr. Chairman, and I would be pleased to answer any questions that you may have.