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Continuous Improvement: The New Quality Management Philosophy Many industrial and service organizations have recognized that a sys- tem based on prevention of errors rather than inspection is necessary to improve quality and operate efficiently. This approach focuses on quality improvement rather than inspection. Corporations in the U.S. (e.g., Motorola, Xerox, and Ritz Carlton) and abroad, notably in Japan, have shown that when a management system correctly implements a quality improvement approach, the results are noteworthy. In some cases, Motorola, for ex- ample, the businesses were saved. The value of this approach is exempli- fied in industry by the Baldridge National Quality Award, given for out- standing achievements in quality improvement. The federal government recognizes the applicability of the approach with the Federal Quality Institute's Quality Improvement Prototype Award and with the Presidential Award for Quality. Whether the operational term is total quality management, total quality, or continuous improvement, a new philosophy of striving for continuous quality improvement in all aspects of the enterprise pervades the thinking of theorists and practitioners of quality management. Although approaches to implementation vary in the literature, the basic "philosophy" is the same a set of commonsense actions that should be part of good management. The need to elevate these guidelines to a philosophy has arisen because, al- though they are rooted in common sense and management theory, they are not fully practiced in most organizations. Key elements include the follow- ~ng: 26

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CONTINUOUS IMPROVEMENT 27 Focus on improving quality rather than only measuring it. Identify and focus on the customers' needs for a product or service now and in the future. Emphasize thinking about the entire system rather than individual operations in the system. Make decisions based on data. Anticipate and accept change. Emphasize nonhierarchical teamwork for decision making and imple- mentation. Understand variation in measurements of the process and make a commitment to reduce it. Identify and clearly communicate the aims and purpose of the enter- prise. Foster the above activities through commitment and leadership of top management. The last of these key elements is crucial. A total quality approach requires a commitment by the highest levels of management to lead quality improvement efforts rather than just assigning responsibility for quality as- surance to an organizational unit. Each of the elements of continuous im- provement relates to the others. Above all, the philosophy stresses an un- derstanding of the organization and its product as a system of people and components working together toward common purposes. It requires having suppliers and customers work together to define and solve problems. It requires process simplification to reduce waste, remove redundant efforts, and eliminate time-consuming and non-value-adding steps. Further, the philosophy stresses a systematic approach to management, requiring data collection and analysis that are designed for fact-based decision making and problem solving. These principles are as valid in the Department of Education and other governmental agencies as they are in private industry. The student financial aid delivery system, for example, constitutes a process with suppliers and customers at each step. Early in the process the student is the supplier of information to the department. Later, the department is the supplier of funds to the student. A total quality approach to administering student financial aid seeks continuous improvement in important outcomes of the process, such as the accuracy of the award, customer satisfaction, and ac- cessibility of aid for eligible students. Additionally, a total quality approach seeks improvements that may eliminate mistakes before they are made and strives to lower costs, provide faster processing, and reduce red tape. Such an approach brings greater value to all the customers and stakeholders the Department of Education, Congress, postsecondary institutions, students, parents, and taxpayers.

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28 QUALITY IN STUDENT FINANCIAL AID PROGRAMS This chapter briefly reviews key elements of the quality improvement process. The discussion is not intended as a tutorial on quality management in the student financial aid system, but rather as an introduction to the concepts that the panel found useful in its review of the system. IMPROVING QUALITY Leading experts in the movement toward total quality management practices, such as W. Edwards Deming (1986), stress that if an organization focuses on improving quality, costs should ultimately go down and productivity should increase. As quality improves, the negative activities associated with controlling poor quality, such as inspections of work or verification of documents, are less necessary, and that in turn results in less work. As quality improves further, individuals in the organization have time to work on further changes in activities and processes, which results in further im- provements, and so on as the cycle of improvement continues. A continuous improvement approach must be distinguished from a stan- dard of zero defects, according to which any type of defect is unacceptable and every defect must be investigated to the bitter end. Indeed, organiza- tions held to such unattainable levels must spend more of their time on detecting and correcting faulty outputs than on improving systems and pro- cesses that cause the failures in the first place. Although zero defects is an admirable goal, it may set standards that are impossible to meet, particu- larly in the service sector, where the product is often more fluid, complex, and variable. Thus, the process of quality improvement begins with identi- fying the truly important quality issues and then learning how to find and remove factors that cause poor performance. IDENTIFYING CUSTOMER NEEDS To identify appropriate quality issues, it is essential to create a greater focus on the customers the consumers or users of the product or service- and to seek input from them on issues relating to quality. One task is to identify those many interests. A second is to characterize quality as it is perceived by each of those interests. There are many different ways to assess the different perceptions of quality and the program's effect on cus- tomers, from analysis of the overall program to discussions with small groups of consumers. All should be a part of efforts to improve quality. In the case of student financial aid programs, the focus on customers must include the constituent interests of the Congress, the Department of Education, state and local authorities, the educational institutions, and the students and families that are potential recipients of aid. Those constituents determine who is to be served by the educational institutions and how the

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CONTINUOUS IMPROVEMENT 29 mechanics of student financial aid affect who is served, as well as how public monies are to be safeguarded in the distribution of financial aid. Some constituents are most concerned with the breadth of outreach of finan- cial aid, others with liability and financial exposure, others with maldistribution of scarce resources, and others with the immediate mechanics of loan appli- cation that affect timeliness and ease of compliance. It would seem most appropriate, however, to focus on students as the primary customers of a student financial aid system. Appendix B provides an example of how another federal agency, the Internal Revenue Service, takes a customer focus. EMPHASIZING SYSTEMS THINKING Learning to focus the attention of all activities within an organization on the improvement of services is a significant element of the new philoso- phy of quality management. Systems are composed of many interconnected processes. Each process has materials, equipment, methods, environment, and people blended in some manner to accomplish some task. Organiza- tions often discover that their systems have complex structures and pro- cesses. Flowcharts, a useful tool in developing systems thinking, often reveal that many subprocesses occur before the output of any one process goes on to the next. The interaction between the "supplier" and the "cus- tomer" at each subprocess cannot be analyzed in isolation from the larger system. Making changes, even to solve a problem, in one area or subpro- cess without taking account of how it will affect another may result in unexpected quality reduction in another part of the system and overall poor service. Only by working on changes in relation to the entire system can an organization make fundamental improvements. Many quality experts believe that at least 85 percent of the problems that exist in systems are attributable to sources other than people-for ex- ample, methods, environment, equipment, and materials. Nonetheless, when things go wrong within a process, even if caused by something other than the individuals involved, a person is frequently blamed. Frontline workers should be encouraged to work on quality improvement in their activities, but they cannot be expected to resolve quality problems that are the result of the system. In the case of a system as complex as student financial aid, the Department of Education must take the lead to accomplish many of the system changes that could improve overall quality. Another fundamental concept in systems thinking is optimization. That is, standards, goals, and processes must be established that optimize the capabilities and product of the system as a whole. Organizations often require one department or component to make improvements, cut costs, or otherwise satisfy some goal of another department. Such compliance by one component may come at the expense of fulfilling another of the organization's

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30 QUALITY IN STUDENT FINANCIAL AID PROGRAMS missions, or at least at the expense of improvements to service for the ultimate customers. In the context of student financial aid, educational institutions may be forced to allocate additional staff to the financial aid office to comply with the Department of Education's quality control re- quirements or face penalties for poor performance in financial aid manage- ment. This may force reductions in other functions or force other depart- ments at the school to offer lesser degrees of service. Poor communication among parts of the system is also a principal cause of poor service. The student financial aid system poses special problems because of the relationships among federal, state, and private institutions that must be addressed in considering efforts to reform current practices. Problems in communication are to be expected unless all parties make great efforts to solicit inputs and listen to suggestions offered. The panel heard repeatedly of problems in communication between the Department of Edu- cation and the educational institutions. As in other organizational contexts, those institutions themselves are likely to have communication problems internally. Efforts to improve communication should be at the top of the list of problems to address in any management improvement effort. MAKING DATA-BASED DECISIONS Often decisions in organizations are made on the basis of the strongest voice rather than the most reasoned deliberation. That is, the person with the most persuasive argument or the highest rank wins the right to impose decisions on others. Moreover, quality experts have often found that when data are gathered that might be used in decision making, they are often gathered without a plan concerning how they will be used. The basic pur- pose of gathering data is to enable people to make better decisions. Further, data should be gathered as part of an ongoing effort to improve manage ment processes. Fortunately, many organizations are learning that genuine improvements can occur when individuals work together and make decisions using sound empirical information. This approach requires more sophisticated methods of data collection, measurement, and interpretation than are typically found in long-standing management structures. Generating and using information effectively require a rigorous system of planning, testing, assessing, and replanning based on the knowledge gained. For example, Deming (1986) called these "plan," "do," "study," and "act" cycles. Such a cyclical process imposes discipline and systematic self-examination by teams in the work- place, and it bolsters confidence in those who must ultimately implement decisions generated by the process. Another effect of this cyclical process is that the data are produced and analyzed to address problems as they are perceived by a team that includes all levels directly involved in the opera

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CONTINUOUS IMPROVEMENT 31 lion under scrutiny. This also allows for small-scale studies and incremen- tal reassessment of the data in order to determine when sufficient informa- tion has been gathered to justify action. Finally, to gather and use the data and information so generated, statis- tical expertise must be available. Management at all levels needs good information on which to base decisions; thus it needs help in properly de- veloping studies and in interpreting the data in order to make decisions. Such expertise is often not readily available in an organization, a situation that if uncorrected may limit the success of management improvement ef- forts. ACCEPTING CHANGE Improvement of quality requires acceptance of change. People are naturally resistant to change. In many organizations, individuals may be reasonably comfortable with the way things are, certainly when compared with the unknown future. If changes are to occur within an organization, substantial planning must take place and policies must be developed that encourage innovation and support change. For innovation to occur within the planning process, a culture of risk taking must be encouraged and supported by man- agement and line workers, and the culture must include personnel policies that support and even reward risk takers. As alluded to above, the individuals who must implement the desired changes must be directly involved in the planning and decision-making process. Small, ongoing changes are easier to effect than large, break- through changes. Often incremental changes can be made over many months such that the impact on the individual is reduced. Innovative projects should be tested on a pilot basis and in the spirit of partnership rather than hierar- chical dictate whether within the organization or across organizations within the total system. Changes that are effected in a "no surprises" environment in which all parties feel they have contributed and learned from the plan- ning process become a win-win undertaking and best ensure a lasting, posi- tive impact. WORKING TOGETHER In most organizations, whether in the private or public sector, no single activity, individual, or group provides the entire service to the customer. Seeing one's responsibilities as part of a larger system and generating a commitment to working in teams require training and education because team structures are not characteristic of most management designs. Creat- ing, training, and supporting cross-functional teams with a mission to im- prove a particular process generally require many organizational adjust

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32 QUALITY IN STUDENT FINANCIAL AID PROGRAMS meets. Yet, this approach has been successful in many organizations. In- deed, over the past several years, the winners of the Baldrige National Quality Award, the preeminent national award for meritorious quality im- provement efforts, have been organizations that undertook just such restruc- turing and changes in managerial styles. UNDERSTANDING VARIATION Measurement of any attribute in a system is subject to variation. An organization may have an ideal value to which it wants all similar units processed to "measure up," but a key to quality improvement is an under- standing that individual units will vary from the ideal. Two types of varia- tion are possible: that due to assignable causes and that due to random causes (Shewhart, 1980~. Deming (1986) has suggested that these be called special causes and common causes of variation, respectively. Special causes of variation occur now and then, and are not part of the process at all times or at all places, but arise because of specific circumstances. Examples include a broken part in one of many machines producing the same item and one person misinterpreting training on how to comply with an administra- tive requirement. Common causes of variation are inherently part of the process, are present at all times in the process, and affect all outcomes of the process, although the degree of their contribution may vary. Common-cause varia- tion is the unit-to-unit deviation that occurs when the system is operating according to its specifications. The type of equipment, the quality of mate- rial, and the need to interpret regulations are examples of system specifica- tions that result in common-cause variations. Measurement of a unit from the system is expected to be within some limits, which are the result of the system's requirements. Thus, there is no way to predict whether the next measurement will be higher or lower than the previous one or to draw any conclusions about why the variation occurs, especially about who or what is at fault. Problems that many students are experiencing in filling out finan- cial aid applications are likely examples of common causes of variation. Too often organizations, reacting to an incidence of unacceptable or unexplained variation in some units, attempt to solve the problem by setting new goals or increasing regulations or inspections for all units. Such inap- propriate actions are often referred to as common-cause solutions to spe- cial-cause problems. When determining what problems to fix, it is first essential to be able to distinguish between special causes and common causes of variation (or error in the process). Special-cause solutions are applied to those few units having trouble performing to a level that other units meet. Common-cause solutions, on the other hand, are actions taken to address a system limitation that is affecting all units doing some task. The appropri

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CONTINUOUS IMPROVEMENT 33 ate time to make the type of fundamental changes needed to fix common problems affecting all units is when measured variation exceeds desirable limits. Failure to distinguish between common and special causes of variation may result in inappropriate actions taken to correct sources of error or variation. For example, if the Department of Education imposed new regu- lations on everyone in response to problems only a few were experiencing, the regulations would create systemic change and potentially add an unnec- essary burden for everyone. This approach is referred to as tampering- imposing inappropriate actions on everyone when something special, not common to the system, has been observed. Similarly, punishing organiza- tions when measured errors rise and rewarding them when the measurement drops irrespective of any distinction between common and special causes of the errors often does no good and indeed may make matters worse. Chasing the numbers, as it is sometimes referred to, usually results in time- wasting activities and leaves little energy for anything more productive. Congress also must be careful not to create legislation in reaction to special causes. Defining standards is an important part of quality management, as is the method used to ensure that the standards are met. Many organizations have found that compliance inspection systems are apt to create adversarial rela- tionships and a far more effective approach is to teach the organizations how to recognize special causes of variation and how to analyze common causes of variation. Then, individuals and groups within the organization can monitor their own processes, thereby engaging the organization in an overall effort of continuous improvement. Data gathered on an operating process should be studied to determine the distribution of possible out- comes. Understanding what is normal variation and what is not will enable the investigators to distinguish when the process is operating effectively as currently designed and when systemic redesign is required. Only with that knowledge will individuals be able to tell the difference between improve- ment and tampering. Finally, when systemic changes are determined to be necessary and a new goal or target is set, it is equally essential that the organizational mem- bers assigned the responsibility to implement the change have available to it the resources and methodology needed to bring about change and that the system to be changed be under their authority. UNDERSTANDING THE ORGANIZATION'S AIMS AND PURPOSES An organization must identify its mission, values, and guiding prin- ciples in ways that are clear and easy to communicate to everyone in the

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34 QUALITY IN STUDENT FINANCIAL AID PROGRAMS organization. Each division within an organization should prepare its own mission statement so that everyone can clearly see the role of each organi- zational entity. A clear statement of aims and purposes of the organization is essential to continuous improvement efforts. A vision statement should also be developed that expressly states where the organization is headed and makes clear the relevance and appropriate- ness of individual projects in the context of the overall purpose of the organization. The vision statement sets the goals for the future and enables those in the organization to "see" the picture of the desired future, at least in the best of all possible worlds. Adjustments may be needed, but the general vision and the roadmap to the goal must be understood. The mission statement and the vision statement should be revised from time to time. However, constancy of purpose requires that the changes not merely reflect changes in administration and leadership. FOSTERING TOP MANAGEMENT LEADERSHIP Organizations that have been successful in implementing strategies for continuous improvement have done so with leadership from the top man- agement in the organization. Successful leaders provide clear direction in an environment or culture that nurtures individuals and nurtures change. Leaders work with people to create the vision and direction for change, develop the plans, strategies, and methods, and then guide the organization through the process of change. Further, leaders help by coaching, empow- ering, and counseling their subordinates, not by directing them. And lead- ers understand that there are frequently no easy solutions or quick fixes. Leadership requires the perspective that fundamental change must be achieved over the long term. In the context of federal student aid programs, top management leadership in the Department of Education will be more diffi- cult to achieve, perhaps because of the history of frequent changes of senior appointees. Nevertheless, leadership is essential and must be ongoing, even if changes are made. Otherwise, the continuous improvement efforts will wither away.