Six Sigma for ROI is a practice for increasing ROI through Six Sigma through the application of Six Sigma best practices.
John Lopez-Ona of Six Sigma Qualtec stated ”the greatest difficulty in measuring ROI in any performance improvement initiative is assigning value to non-cash-yielding improvements, like if the initiative boosts sales growth rates or advances the company’s competitive position.”
As you know, Return on any investment compares investments over time to returns over time – discounted by a risk-adjusted rate for value of $ over time.
Six Sigma impacts the most sensitive variable in this calculation – the returns, and not the costs.
Hard and soft savings make up the returns.
Hard savings include line items like headcount reductions.
Soft savings are typically less “bankable” – and include things such as cycle time reductions.
It’s generally easier to calculate hard savings. These calculations are typically consistent from company to company, project to project and year to year.
On the other hand, many would agree that there is no standard as it relates to soft savings calculations.
Whether hard or soft, few organizations calculating returns differentiate between one-time and recurring savings.
To accurately count recurring savings, calculate the present value of the related cash flows over the time period they recur. It’s fine to be conservative here, but don’t be too conservative.
How does one assign value to non-cash-yielding improvements – such as the targeted initiative advancing the firm’s competitive position in the marketplace?
In our example, intrinsic value is positively influenced, creating shareholder value in excess of project savings.
Economic Value Analysis can assign value here – addressing shareholder value more significantly.