Financial Impact of Completed Projects: Update 2018 – Part 1
Author: Alberto Yáñez-Moreno, Ph.D.
Posted: March 2018
From its origins manufacturing in the 1990s, more and more companies have embraced Lean Six Sigma including service oriented businesses, health care organizations, cities and municipalities. To be successful these companies need to be aware of the investment required, most notably in terms of developing the skills and knowledge of their people. As in any other business proposition, companies expect a return on their investment. From a Voice of the Business perspective, the expected return is financial: Reduced Costs, Increased Sales, Improved Profitability, etc. Obviously other types of benefits are also a goal whether the focus is on Voice of the Customer (Better Quality, Improved On-Time Delivery), or the Voice of the Employee (Increased Safety, Higher Employee Retention, Improved Morale).
Now to the question of expected financial return: TMAC has been reviewing completed project files submitted for Green Belt and Black Belt certification for ~14 years. As part of our detailed review of the submitted documentation we check to see the level of improvement in key metrics, including financial measures. Back in April of 2016 we shared the results of our analysis of 219 different LSS projects. You can read that original blog here: “What Payback Can You Expect From Your Lean Six Sigma Project?”
We felt it was appropriate to give an update on what our customers are reporting. As of March of 2018 TMAC staff have reviewed a total of 415 projects submitted for certification. In considering the reported financial results per project please keep in mind the following:
- It is calculated on an annual basis
- It includes a combination of soft and hard savings
- Results are from a wide variety of industries including health care, insurance, city government, banking, information systems and manufacturing
- It includes a mix of both kaizen events and full DMAIC projects
Finally, it should be noted that TMAC does not have the means to validate the financial impact in each project submitted. Our staff do ask questions of GB or BB candidates – by phone or email – so that we understand how reported figures were generated. In addition, the following items provide some assurance that the results are reasonable estimates of the true impact:
- Green and Black belt students must submit a letter of recommendation from the project sponsor who typically mentions any measured results, including financial outcomes
- Some firms use a Master Black Belt to verify results
- Other firms use an accountant or finance manager to verify results
Here then are financial results reported over the past ~14 years:
Table 1: LSS Project Financial Impact Results – 2003-2018
|| Sample Size
Table 1 includes both the mean and median financial impact. Because outliers tend to skew results for the mean we feel the median is a better measure of central tendency. In other words, you should consider the median results as a more likely outcome for a typical LSS project.
The Median for all projects combined is $121,000 with a mean of $630,574. As a rule of thumb, Black Belt projects have a larger scope and can be more challenging than Green Belt projects. This is in part reflected in the median financial impact of a completed project that is $149,000 and $100,000 for Black and Green Belt projects respectively. Such projects are typically completed in four to eight months. This is a significant financial payback for a single project.
But that is just the start. For most projects the financial impact is ongoing. As an example, consider a Black Belt project with a median savings of $150k per year. Over two years that sums to $300k, and after the third year the total accrued savings is $450k. All this from a single project.
Below is a chart to show how savings will accrue for a LSS Black Belt who completes two projects per year. Each project is assumed to achieve an annual savings of $150k, spread evenly over the course of a year. It is also assumed that there is no savings for the first five months of the project. Finally, the cost of training and travel is included for months 1-4, which is why the results are negative for that period.
Finally, I will note that the mean reported financial payback is quite an astonishing figure at $630,000. Clearly some LSS projects do result in a huge payback. We hope that by sharing this information it will be easier for you to convince upper management that LSS can have a tremendous financial impact on your company’s bottom line.
What sort of results can be achieved when examined by type of improvement – kaizen vs. full DMAIC? How about by industry? We will share these results and more in Part 2 of this blog in April 2018.