Evaluating the Financial Benefits of Six Sigma Project

There has been considerable debate in the industry in the past as to whether Six Sigma projects are worth all the hoopla that has been surrounding it. For decades before this debate, Six Sigma was followed in a cult-like manner and organizations would never question the financial viability of the projects undertaken. However given the fact that many conmen type consultants have surfaced in the recent past promising unbelievable benefits from Six Sigma projects, checks are now imposed to ensure that the projects are financially viable. Here is a list of some prominent issues in Six Sigma financial evaluation as well as how these issues have been solved.

Contemporary Issues in Financial Evaluation

Projected Numbers Never Materialize: At the end of the Six Sigma project, the Finance Certifier gives the PNV of the project. This is the Projected Net Value of the project and markedly different from the Net Present Value (NPV). The difference stems from the fact that all the calculations mentioned are hypothetical in nature. This means that it is assumed that the process will continue behaving in a certain way and financial benefits will be realised over a period of time. However an analysis of the past projects has shown that the reality was very different. In many cases, the projected numbers were not realised.

Calculations are Off-base: A deeper evaluation of past Six Sigma projects shows that the reason gains were never realised was the fact there were no gains in the first place! The numbers used to show the financial viability of the project were off base. Many times it was assumed that market shares would increase because of efficient processes, however it did not materialise because competitors improved their processes too. It was clear that the consultants were accounting for gains that were beyond the control of the organization.

Bonuses are Paid on Projections: What intensified the debate further was the fact that bonuses were paid to executives on the basis of these fudged numbers. Executives therefore had an interest to inflate the financial viability of the project and show it off as a bigger success than it actually was misleading the strategic initiative of the organization involved.

Solutions to Contemporary Issues

As a result of this debate, many organizations have become vigilant on what they spend towards Six Sigma initiatives and what is the Return On Investment (ROI). Here are some of the initiatives that have been started:

Follow Up Review: A project is not considered an immediate success on completion. Reviews are set up every six months or so where the senior member of the project team meet with the senior management to check whether the project is on track and delivering what was promised to the organization, if not, why? And what can be done to ensure that the gains are in fact realised?

Standardized Calculation Policy: Many corporations have come up with explicit policies regarding how calculations pertaining to Six Sigma projects can be done. This has eliminated the problem of fudged numbers to a large extent.

Personal Accountability: A large part of the bonus of the executives is linked to the realization of gains. Bonus is announced at one go, but paid over a period of time if reviews show the project is one track.