The Financial Impact of ISO 9000 Certification in the United States: An Empirical Analysis

Recently published independent research on the financial impacts of ISO 9000 certification provides the first real hard evidence on how organisations can benefit financially from ISO 9000.

This detailed academic study was designed to test whether ISO 9000 certification leads to productivity improvements, market benefits, and improved financial performance. We have taken the key points from the research and provided a summary below.

A major, independent study into the effects of ISO 9000 has found that organisations experience ‘strongly significant abnormal improvements in financial performance’ after deciding to seek certification. Conducted by scholars from Universities in California, Madrid and Maryland and published by the Institute for Operations Research and the Management Sciences (INFORMS® www.informs.org), the detailed academic study was designed to test whether ISO 9000 certification leads to productivity improvements, market benefits, and improved financial performance.

The research team believes its findings provide the first hard evidence to date on how organisations benefit financially from ISO 9000.

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Research

Since the introduction of ISO 9000 more than 560,000 facilities in 159 countries have achieved certification, and this new study is based on the premise that there has been some uncertainty about the true effects of the standard, given ‘its generic and minimally prescriptive nature’.

The research team set out to resolve this issue by tracking the performance of 7,238 certified manufacturing firms in the USA with SIC codes 2000-3999 from 1987 to 1997. The information took more than two years to collect. It was merged with the Compustat Annual Industrial File data for the same 10 year period, and was compared with previous studies into the effects of ISO 9000 certification.

Using an event-study method, the researchers matched each certified organisation to a control group of one or more non-certified organisations in the same industry with similar pre-certification size and/or Return On Assets (ROA), with the intention of comparing ROA before, during and after certification.

A range of ‘sensitivity analyses’ was performed to explore the impact of different methods of matching certified and non-certified organisations, but in every case the result was that three years after their first certification, organisations experienced significant improvements in performance when compared to the control group organisations. These improvements were achieved primarily through increased productivity – something that was maintained over all the longer tests.

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Results

The research team believes these results ‘strongly suggest’ that after deciding to seek their first ISO 9000 certification, firms made changes that led to improvements in Return on Sales (ROS) through increased productivity.

The report says that closer examination suggests in many cases that certified firms see only a minor increase in ROA compared to two years before certification, while non-certified firms see substantial declines. “This would mean that ISO 9000 is a qualifying criterion rather than an order-winning criterion. It helps firms to maintain, rather than increase, profitability.”

In their paper detailing their findings, the researchers acknowledge that the decision to seek ISO 9000 is often associated with other ‘good management’ practices, and that it is these latter practices that improve ROA rather than the ISO 9000 certification process itself. However, as its control groups consisted of organisations with the same prior performance, ‘something had changed at the certified firms in the two years before the actual certification’.

“In light of the magnitude of the effects, it seems likely that factors other than ISO 9000 certification contributed, but given the design of the study, these findings do indicate that the preparations for the first ISO 9000 certification also contributed to superior performance.”

The paper comments that one way to interpret the results is that the prescriptions contained in ISO 9000 themselves lead to superior performance. Alternatively, firms may use the certification procedure as an opportunity for process improvement. “In the latter view, it is the firm’s own efforts that lead to superior performance, not the standard in itself, but these efforts are triggered and guided by the ISO 9000 certification process.

“One firm may have the potential to be more successful than another, but this potential is turned into reality as a result of ISO 9000. One could say that some firms may have a ‘gene for good management’, but that this gene is not expressed until ISO 9000 switches it on. If a firm lacks the ‘good management gene’, ISO 9000 may not help much either. Firms that do have the potential to be successful may need an external trigger to unlock that potential: ISO 9000 appears to be one such trigger.”

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Conclusion

The report concludes that the precise timing and magnitude of the effects of introducing ISO 9000 vary across different control-group specifications, but the longer-term effects are ‘strongly significant’ in all cases.

It explains; “By using control firms with similar pre-event size and performance, and by performing extensive sensitivity analyses, we can largely rule out the alternative hypothesis that ISO 9000 has no causal effect on performance but is simply adopted by firms that are better managed.

“Of course, this does not mean that all firms will reap benefits from ISO 9000 certification: anecdotal evidence abounds that some firms implement the standard in a more rigorous and comprehensive way than others, and hence are likely to obtain more benefits.

“Overall, though, the evidence presented here does support the view that careful design and implementation of consistent and documented quality management systems can contribute significantly to superior financial performance.”

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Authors

Charles J Corbett
Anderson School of Management, University of California, Los Angeles, California, USA.

Maria J. Montes-Sancho
Universidad Carlos III de Madrid, Spain

David A. Kirsch
R.H. Smith School of Business, University of Maryland, USA.

Readers wishing to view an abstract of the article may do so by accessing:
http://www.extenza-eps.com/INF/doi/abs/10.1287/mnsc.1040.0358

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