There is an interesting dilemma stemming from two independent objectives being unintentionally fused together over the years.
First, the drive for buyers to reduce the costs of the products and services they are procuring in order to deliver efficiencies and costs savings — a perfectly sound objective.
Second, organizations’ need to purchase increasingly comprehensive products and services that add value to their ongoing business strategy. Again, a perfectly reasonable objective.
While these two objectives were never meant to be mutually exclusive, that’s exactly what they have become. If suppliers focus exclusively on reducing the costs of their operation, it is highly likely that buyers of these services will experience reduced quality. That in turn means a higher likelihood of defects, which will have a cost associated with them. It also means the suppliers will be less able to differentiate themselves in the market, at least on a macro scale. On the other hand, an exclusive focus on quality on behalf of the suppliers will more likely result in a clear differentiation of their service in the macro market, even if that service is a niche one.
Some of the costs associated with poor quality are clearly visible, but others may be hidden and you need to find and measure them.
Think of the costs of poor quality as an iceberg. The clearly visible ones might be such things as the impact of early terminations and no-shows or higher margins/rates as a result of rogue hiring. But then there are the less-obvious costs (and there are many), such as the many costs associated with defect prevention, quality monitoring and defect resolution.
For organizations buying staffing services, there are four key quality-related activities that incur costs: prevention, appraisal, internal failure costs and external failure costs.
Prevention costs. Prevention costs are incurred as a result of activities undertaken to prevent or avoid problems related to poor quality, such as program design, implementation, and any ongoing activity aimed at preventing issues such as implementing legislative changes and setting up of sourcing channels to ensure fulfillment. Prevention costs are generally planned, but often ignored. They could include such things as:
- RFx process
- Supplier evaluation and selection
- Implementation and communication
- Process/guidance development and adoption
- Quality improvement sessions and projects
- Education and training
Appraisal costs. Appraisal costs are associated with the ongoing measuring and monitoring activities related to quality. In other words, they are the costs associated with a buyer’s evaluation of the staffing or program provider to ensure that they meet the contractual obligations. They could include:
- Any reviews for monitoring the staffing service being provided.
- Supplier audits.
- Measuring and monitoring of service level agreements and key performance indicators.
- Review and implementation of any new product/service associated with improved quality.
Appraisal costs occur because of the buyers need to maintain a high quality level across all stages of the hiring process, conformance to quality standards and compliance to legislative requirements.
Internal failure costs. Internal failure costs occur when the service fails to reach design-quality standards due to end-user (buyer) defects, such as:
- Poorly structured job specifications resulting in delayed submission of suitable candidates.
- Hiring managers not meeting cycle times such as reviewing submissions, arranging interviews or providing feedback which results in loss of candidate interest.
- Lack of governance resulting in the service provider not being aware of correcting actions necessary to deliver the most optimum service levels, resulting in, rework, redesign, delays and protracted failure analysis.
External failure costs. External failure costs are incurred to remedy defects resulting from supplier error or inefficiency. These costs generally occur when the service fails to reach the original design quality standards. They could include:
- Time spent in service correction (such as invoicing errors).
- Dealing with complaints and the cost of effort associated with handling and servicing customer dissatisfaction.
- Costs associated with early terminations or no-shows.
The costs of receiving a quality service, conducting quality improvements, and achieving your goals must be carefully managed so that the long-term effect of quality on the buying organization is a positive one.
These “costs of quality” should be a true measure of the quality effort, and they are best determined from an analysis of the costs of quality. Such an analysis provides a method of assessing the effectiveness of the management of quality and a means of determining problem areas, opportunities, savings and action priorities.
The mechanism for measuring the cost of quality, once established within a staffing program, should be ongoing and have a positive impact on the achievement of the organization’s goals and objectives.