Costs and benefits of ISO 9000 registration

By Bob Tvrdik, CIRAS

ISO 9000, at least to industry, seems well understood. But questions arise for which there are not good answers. These are, "Does it pay?" and "What does it cost?" To answer these questions some qualification is needed because the answers are not absolute. ISO can pay off in two ways, by providing marketing benefits and by reducing costs. Look at marketing first. If a small to medium size firm is a supplier to a major firm such as John Deere or Case, it may soon have to be ISO certified to do business with them at all. The added requirements seem more a threat than an opportunity, but what if the buyer won't do business with someone not registered? If you face elimination because you're not certified, you know the time for ISO is now!

If a company is not selling to a large firm like Deere, the advantage is less clear. Most companies consider ISO because they are asked by an important customer or through tracking competitors. The advantages: keeping existing clients and the ability to bid for new business.

The cost reduction justification for ISO 9000 is reasonable, though little is written about it. This is because (1) firms do not usually know what costs can be attributed to a lack of process control quality, and (2) firms usually focus on improving performance through increased sales/marketing instead of reducing costs.

Calculating a standard benefit/cost analysis is difficult because each firm is different. We must look at the experience of others and apply it with a grain of salt to ourselves. The best data reported is by Imberman and DeForest, published in ASQ's "Quality Progress" in 1995. This study tracked Cost of Poor Quality or CPQ (e.g., rework, scrap), and compared these costs to industry profits. Nearly all firms have such costs, but they seldom collect them for an overall view. Study results are surprising. For the firms surveyed, net profits were about half the CPQ! The implication: cutting quality cost in half can increase profit more than a 10 percent increase in sales!

A typical company with sales of 10 million dollars per year that reduces quality costs by half could increase its profit by $200,000-$400,000 per year! The ranges of CPQ to sales ratios for selected industries are displayed in the table.

Eliminating cost is not easy. For any cost reduction to occur, the company must first gain control of processes. ISO 9000 is the most promising method to gain process control.

Now that we have an incentive for ISO, what does it cost?

Just as it is hard to get an exact dollar figure for cost reduction, it is hard to get an exact dollar figure for the cost of ISO. Becoming ISO certified involves similar categories of costs in all companies. You must invest time and effort to upgrade documentation, train employees, provide for gauge control, practice the system, and finally hire an independent auditor or registrar. Each category has both internal and external costs. How quickly these changes can be made affects cost as well.

The cost also depends on the process controls already in place. If you now have process control methods from ASME, FDA, or other regulatory bodies, the ISO cost may be low. But for firms with few formal methods in place the price can be much higher.

Some costs, such as hiring and retaining a registrar, may be high in a small firm and, while higher, will be less burdensome for larger companies.

For common comparison, many people use ISO cost per employee. Recently, an ISO discussion line opened on the Internet, iso9000@listserv.nodak.edu, offering data from companies and consultants. A good picture of the range of costs emerges. Costs per employee vary from a high of $4,500 to a low of $1,000. Enough detail is provided to show that smaller companies are not always at a cost disadvantage. Averages were not stated, but comments indicate that costs range, or should range, from $1,500 to $2,500 per employee for initial ISO registration. This matches the experience of the Iowa firms going through the process who have published their results.

For any company, lSO 9000 is a major undertaking in time, commitment, and money. The only way to be sure you are proceeding in a prudent manner is to arm yourself with knowledge about the process.

Industry CPQ percentage of sales
Aluminum die castings 4.3% - 7.1%
Candy & confections 6.6% - 7.1%
Commercial printing 5.6% - 7.3%
Electronic components 6.3% - 8.2%
Household appliances 6.6% - 7.1%
Industry machinery 7.0% - 8.2%
Lawn & garden equipment 6.4% - 7.1%
Plastic products 6.9% - 7.8%
Sport & athletic goods 6.3% - 7.5%

CIRAS News, Vol. 32, No. 1, Fall 1997