How to communicate the type of impact your improvement project generated
As the champion of Lean Six Sigma in your organization you’re excited to celebrate the successes of your improvement projects. Maybe you’ve already identified what needs to be improved and you know which processes are involved in creating your problem. Perhaps you’ve even determined the current level of performance. Now you are determining which type of savings the project will create.
What are hard savings vs soft savings, you ask yourself?
As a general rule, you want all of your projects to produce a financial benefit—either directly or indirectly—through cost reductions, revenue growth, balance sheet improvements, or accomplishing strategic goals.
In addition, cost improvements come from reductions in labor, inventory, material, cost of money, scrap, excess equipment, space, and so on.
Click to discover how to quantify the impact of your continuous improvement program: see how best-in-class companies justify the return on investment of their Lean Six Sigma programs.
Soft Savings vs Hard Savings
Traditionally, savings fall into two categories: hard savings and soft savings.
Lean is all about what can be quantified and measured. It’s not surprising that most organizations prefer to measure success in terms of hard savings—dollars to the bottom line now. And are less impressed with soft savings—the possibility of dollars to the bottom line in the future.
A good way to estimate the potential value of a project is to calculate savings if the problem was completely eliminated.
Types of Hard savings
Hard savings reduce expenses and result in a financial improvement. They are directly attributed to an actual expense. There should be no confusion about how much was actually saved, as there is an invoice, payroll stub, bill, receipt, or the like associated with the expense.
Examples of hard savings are: reduction in unit cost of operation, such as, cost of sale and unit cost of production; reduction in transaction cost; lower overhead costs; lower head count; and increased throughput, resulting in increased sales or revenue.
Potential savings are a form of hard savings but require some type of action or decision before they occur. One example is a project that upgrades the design of an existing product. Until the redesign is implemented, the savings can’t be counted.
Types of Soft savings
Soft savings are real benefits from a project, but don’t impact a company’s financial statements like hard savings. They are calculated by using an assessment of the expected benefits and a probability analysis.
Soft savings tend to fall into two basic categories.
The first is the intangibles– lower frustration, improved job satisfaction, shorter lead times, greater trust, are all extremely difficult to directly apply dollar values to. All of them impact the bottom line. The problem is that it’s difficult to quantify how much the savings will impact the profit and loss statement.
The second category of soft savings are those that result in savings, but rely upon projections and estimates so a hard value can’t be assigned.
Consider the addition of a piece of safety equipment to machine. Intangible savings come from the increased job satisfaction that employees will experience from feeling that their employer cares about them. But there is also a potential hard savings in medical or legal costs if an employee was injured. The problem is that even though this would ultimately be a quantifiable expense, there is simply too much speculation to apply an actual dollar value to it.
Soft savings are, in fact, real savings. Companies save money when employees are more satisfied. For example, acquisition costs go down because satisfied employees are more likely to land new business than disgruntled ones. Consequently, they are also more likely to appease upset customers. Both of these impact the bottom line.
Process Metrics vs. Financial Impact (Hard & Soft Savings)
In making the determination about Hard vs. Soft Savings it may be helpful to think about the process metric which was changed and how directly that change will translate into direct business financial impact. If the impact is direct, it is more likely to be a Hard Savings Impact. If the impact is less direct, or depends on multiple other assumptions, or may take a longer time to translate into dollars, then the project may be generating Soft Savings.
Hard savings vs soft savings guidelines
Creating a continuous improvement culture drives cost savings over time. Having a team of empowered employees that attacks problems can have a tremendous impact on profit.
- Don’t confuse hard and soft savings with cost avoidance. They’re two different categories. You can have an actual hard savings—as in when you save enough space that you can stop renting a production facility—or you can avoid the hard cost of having to rent a new facility to handle expansion. Both situations involve hard savings.
- Be accurate when tallying hard savings. There’s a tendency to inflate savings when reporting on a project. Resist the urge to be overly aggressive in assigning credit. This is particularly important with Hard Savings. Your creditability and the programs creditability will be negatively affected if you claim Hard Savings that can’t be audited or verified.
- Don’t double count the same savings. This is common when two continuous improvement teams both report that they saved the same money. This is very important for maintaining credibility of a Lean program.
- Reported savings must make it to the bottom line to keep naysayers from having ammunition in resisting change.
- Don’t neglect soft savings at the expense of hard savings. Some soft savings, especially those linked to job satisfaction, can pay off much more than a hard savings. Be careful, though. Soft savings are extremely difficult to calculate.
Click here to find out about a third savings category and the 6 steps to calculating and communicating project value.