Risk is increasingly an important concern for businesses.  This can be seen in the May 2013 issue of Quality Progress, the premier magazine of the American Society of Quality (ASQ).  This issue contains four articles related to risk.  None of these articles has a consistent definition of risk.  Nor do any clearly indicate the linkage between risk and quality improvement.  Part of the problem is the current dynamics of the quality movement.

Greg Hutchins in a recent article touches on the linkage, when discussing VUCA (Volatility, Uncertainty, Complexity and Ambiguity).  He states: “Quality does not specifically address VUCA.  But it is much easier to manage VUCA when quality is in place: in other words, when processes are stable and capability is assured; i.e. there are continuously managed risk-controls in place.” (CERM Risk Insight #11)

In a follow-up article in CERM Risk Insights edition #12, Greg indicates the need for the quality profession to redefine their definition of quality around risk. Greg also advocates that the quality profession develop a risk management body of knowledge.

QUALITY AND RISK VIEWS
To a quality professional this seems both presumptuous and absurd.  Quality after all is “job #1” in a globally competitive environment.   Companies must not only meet international standards and have in place consistent processes like those delineated ISO, but it is internationally recognized that broad based organizational approaches to quality, like the Baldrige Program, provide a competitive advantage.

In a sense the quality and risk professions are juxtaposed, only viewing the world through different lenses.  The quality profession seeks to obtain and sustain system stability.  The risk profession looks at a dynamic and fluid environment.  This static versus dynamic quandary also exists in economics with regards to innovation and technological change.

The Neoclassical School stresses steady state equilibrium.  It assumes that decision makers are rational and will maximize benefits.  Perfect knowledge is also assumed.  The Evolutionary School sees the economy and business sectors as constantly in flux.  While decision makers are also assumed to be rationale, the dynamics of the economy increases complexity and makes perfect knowledge problematic.  Thus, in a dynamic environment, volatility, uncertainty, complexity and ambiguity are ever present.  This uncertainty and lack of perfect knowledge increases risk.

STRATEGIC INFLECTION POINT
For an organization, dynamic changes can force management to a strategic inflection point.  This is a point where a strategic decision can make or break a company’s future.  With an increasingly complex and dynamic environment, such as the global economy, the risk of a bad decision increases.  Risk after all is the probability an unacceptable event will occur.  Risk management is the collective actions taken to reduce that probability.

Thus, both quality and risk are based on probability.  Control of production systems and the statistical analysis of product quality are the bread and butter of the quality profession.  But, dynamic environments by their nature are disruptive.  The assessment of disruption and the determination of the probability of an unacceptable event are the bread and butter of risk managers.

Until recently risk management was the purview of financial analysts.  With the advent of a global economy things changed.  Stanford Liebesman, in his article in the May 2013 issue of Quality Progress, identifies four types of risk: 1. Strategic; 2. Operational; 3. Compliance; and 4. Organizational.  Quality professionals are eminently familiar with operational and compliance risk.  These encompass product quality standards and international and government standard compliance.  Strategic and organizational risks are not generally in their purview.  In fact, even in an organization such as Toyota, with its vaunted lean production system and its emphasis on quality, breakdowns occur, because of strategic decisions and organizational capabilities.

Several years ago, Toyota had the first major recall in its history.  To all appearances its quality process had failed.  This failure hurt its brand and cost sales.  The problem, while related to quality, was rooted in two factors.  The first was a strategic decision to quickly become the number one automobile manufacturer in the world.  This created tension between production and quality. The second was the inability of their Human Resources system to provide newly constructed production plants with managers and engineers sufficiently skilled and seasoned in lean production method.  At the plant level, production took precedence over the company’s vaunted quality ethos. Quality oriented managers certainly realized defects were occurring, but were powerless given the strategic policy.  Risk managers, with solid quality backgrounds, could have provided warning of the risks of such a strategic decision, identified the human resource limitation and pointed out the negative impact associated with a recall to the brand and bottom line.

NEW DEFINITION OF QUALITY
Greg Hutchins advocates that ASQ redefine its definition of quality around risk.  Another way of looking at the issue is one of symbiosis, two distinct but mutually reinforcing professions.  Quality emphasizes team building, statistical analysis and continual operational improvement.  Risk managers must be conversant with statistical analysis and continual improvement processes in order to correctly assess operational and compliance risk.  But, financial, logistical, legal and human resource planning skills are also needed to assess strategic and organizational risk.

Given the skill sets, the two are not likely to merge.  However, the difficulty for both the quality profession and ASQ is the trend to marginalize quality, as can be seen by the Congress’s decision to defund the Baldrige Program, and seeming lack of public and political interest in quality.  NOT GOOD!

RISK MANAGEMENT BODY OF KNOWLEDGE
While health care is a growing area for quality, this sector could easily adopt a risk management approach.  Depending on how the risk body of knowledge is structured, quality could be marginalized.  Greg’s advocacy that the quality profession develops a Risk Management Body of Knowledge is prescient.  In fact, ASQ may be at a Strategic Inflection Point with respect to risk management.

Bio:

James Kline is completing his Ph.D. The emphasis is the impact of innovation and disruptive technology on local economies and organizations.  He has written numerous articles on quality in government, and conducted economic, policy and risk analysis studies for local and state government. He is an ASQ certified Six Sigma Green Belt and Manager of Quality/Organizational Excellence.