The Impact of ISO 9000 Certification on the Financial Performance of Organizations

Emeka S. Dunu, Alabama A&M University Michael F. Ayokanmbi, Alabama A&M University ABSTRACT ISO 9000 has emerged as a universally accepted quality management system. This study examined whether ISO 9000 certification results in significant financial improvement for organizations. Our results indicate that there is evidence that revenues and operating income improve following ISO 9000 certification. However, when viewed from the perspectives of the ratios of revenue to assets or operating income to assets, these financial improvements seem to evaporate. Also, we found that ISO 9000 firms performed better than non-ISO 9000 firms, but the differences were not statistically significant. Introduction ISO 9000 quality management system is used worldwide by both large and small organizations. It has been adopted in 170 countries, with more than 897,866 certifications (ISO, 2007). It was first published by the International Organization for Standardization in 1987, but was revised in 1994 and 2000. It is designed to provide a basis for establishing, documenting and maintaining a consistent and demonstrable quality assurance system (Albuquerque et al. 2007; Singels et al. 2001; Beattie & Sohal, 1999). ISO 9000 quality system is not designed to prescribe specific product quality standard. Instead it seeks to detail essential generic elements of a formal quality management system which can be applicable to any organization (Corbet et al., 2005; Adanur & Allen, 1995; Marquardt, 1992). The 1994 version had three standards ISO 9001, 9002 and 9003 which have now been combined into one standard, ISO 9001 in the 2000 version. The 1994 standards have been criticized as placing more focus on documentation of processes than in the improvement of product quality (Seddon, 1997; Mallak et al., 1997). The current version has been described as promoting a process-based approach and designed to ensure that an organizations quality management system has procedures, policies and requirements which ensure that customer satisfaction is consistently achieved (Bhuiyan & Alam, 2005; Vouzas & Gotzmani, 2005). There is a certification process associated with ISO 9000, which is conducted by authorized third party firms. Certified organizations must be periodically reaudited in order to keep their certifications current. Numerous organizations in the United States (U.S.) with a total of about 44,883 locations have achieved ISO 9000 certification (ISO, 2007). As many U.S. organizations become ISO 9000 certified, they are increasingly making it a requirement for their suppliers and subcontractors (Bodison & Warning, 1991; Barnes, 1998). For example, organizations such as NASA, AT&T, Department of Defense, Food and Drug Administration, the chemical and nuclear industries have adopted ISO 9000 and expect their suppliers to be ISO certified. Also, several industries have developed industry-specific quality management systems using ISO 9000 as a foundation. They include the automotive industry (QS-9000), the aerospace industry (AS9000), and the telecommunications industry (TL9000) (Gupta and Pongetti, 1998; Zuckerman, 1998). Furthermore, ISO 9000 certification has become a requirement in European Union (EU) countries with a purchasing power of more than $14 trillion (IMF, 2008; Eckstein & Balakrishnan, 1993). Several benefits have been attributed to ISO 9000 certification. They included increased operational efficiency, customer satisfaction, increased market share, cost savings, competitive advantage, perceived higher quality, etc.(Aksoy et al., 1997; Castledine & Bannister, 1996; DeAngelis, 1991; Elmuti, 1996; Ebrahimpour et al., 1997; Hambrick & Mann, 1995; Corbett et al., 2005; Casadess & Gimnez, 2000; Oneil, 1998; Zuckerman, 1998; Bhuiyan & Alam, 2005; Douglas et al., 2003).

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However, ISO 9000 certification has been described as expensive and could cost as much as hundreds of thousands of dollars, with annual maintenance cost of more than $7000 (Barnes, 1998; Joubert, 1998; Mallack et al, 1997). In addition, ISO 9000 certification has been faulted by some managers as bureaucratic and time consuming, and can reduce flexibility. Given the attendant cost of ISO 9000 certification, there have been concerns about whether it actually results in improvement in the financial performance of the organization (Skrabac et al., 1997; Stevenson & Barnes, 2001; Han et al., 2007). So this study examined the impact of ISO 9000 certification on the financial performance of organizations. Literature Review Many studies have examined the impact of ISO 9000 certification on the operational performance of certified organizations. However, Heras et al. (2002), Wayhan et al. (2002) and Corbett et al. (2005) have criticized much of them as largely anecdotal in nature, either based on case studies or self-reported surveys. In addition, several criteria have been used by these studies to assess the impact of certification on organizational performance. Some of these criteria or measures are unclear, imprecise and subjective in nature. There are some empirical studies on the financial impact of ISO 9000 certification on organizations that avoid the potential bias of self-reporting through the use of objective financial indicators obtained from audited annual reports (Puderbach and Brown, 1998; Lloyds Register of Quality Assurance Ltd., 1996); Heras et al., 2000; Aarts, 2001; Wayhan et al., 2002; Dimara et al., 2004; Corbett et al., 2005; Martnez-Costa & MartnezLorente, 2007). However, contradictory findings have been reported. Mann and Kehoe (1994) and Buttle (1996) in their studies of ISO 9000-certified firms in United Kingdom (UK), noted that certification was associated with improved business performance at the operational level. Lloyds Register of Quality Assurance Ltds (1996) survey also found that the average post-certification profit margins and returns on capital of certified companies were more than double the industry average. Simmons and White (1999) found that ISO 9000

certification is associated with superior financial performance in the United States within the electronic and electrical equipments industry sector. Financial benefits were also found in a Danish study where the ISO certified companies had a significantly higher rate of return than before they were certified (Hversj, 2000). Similar findings were reported by Casadess et al.s (2000) study of Spanish firms. Similarly, using audited financial data of manufacturing firms in the United States, Corbett et al. (2005) reported that ISO 9000 certification contributed significantly to superior financial performance. In contrast, Batchelors (1992) study of 647 certified UK firms found that only 15 percent of firms achieved gains such as reduction in error rates and procedural efficiency from quality certification. In a survey by Deloitte and Touche, half of the respondents did not associate ISO 9000 certification with realizable, significant savings (Endrijonas, 1994). This is supported by a study of 1,000 firms in Australia and New Zealand by Terziovski et al. (1997), which found that quality certification ad no significant, positive relationship with business performance. In a review of 14 survey studies done from 1991 to 2000, Heras' et al. (2002) observed that only a minority of them found that costs or waste were reduced. Studies by Lima et al. (2000) in Brazil, Martnez-Costa & Martnez-Lorente (2002) in Spain, and Singels et al. (2001) among Dutch firms found no link between ISO 9000 and improvement in organizational performance. Wayhan et al. (2002) utilized archival financial data, to study the implications of ISO 9000 certification on U.S. companies. They concluded that there was a link between ISO 9000 certification and return on assets (ROA) but that the effect was extremely small and that the effect dissipated quickly. Douglas et al. (2003) reported that 49 per cent of the 100 quality professionals in UK firms who responded to their survey on ISO 9000, felt that their organizations did not achieve any benefits with regard to reducing costs or waste. Also, Dimara et al., (2004) reported that there was no significant difference in financial performance indicators after a period of six years following the adoption of ISO 9000. Han et al. (2007) studied ISO 9001- registered manufacturing companies of electronic and other electrical equipment and components, chemicals and allied products in the United

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States. They concluded that "obtaining ISO 9000 certification will not by itself guarantee customer satisfaction and/or improve the firms business performance. In a survey of mangers of small and medium-sized enterprises (SME) in Tehran, Bayati and Taghavi (2007) obtained inconclusive results in terms of the cost reduction potential of ISO 9000 certification at those firms. Research Objectives and Hypotheses Increase in sales and reduction in cost are among the often cited benefits of ISO 9000 certification. All things being equal, a reduction in cost would lead to an improvement in operating income. So the financial performance measures we consider in this study are revenues and operating income. Revenue in this study is equivalent to net sales and other operating revenues. Operating income here is equivalent to net sales and operating revenues less cost of goods sold and operating expenses, without deducting depreciation and amortization. Thus; Hypothesis 1: ISO 9000 certification will increase revenues. Since changes in revenues did not control for acquisitions and divestitures, we also examined the changes in the ratio of revenues to the firm's total assets. Hypothesis 2: ISO 9000 certification will increase the ratio of revenues to firm's total assets. Hypothesis 3: ISO 9000 certification will increase the operating income of the firm. Hypothesis 4: ISO 9000 certification will increase the ratio of operating income to firms total assets. The fourth hypothesis is an important consideration since increases in productivity and efficiency are among the perceived benefits attributed to ISO 9000 certification. We tested these hypotheses using; (1) only ISO 9000 certified firms and (2) using matched-pair samples of ISO 9000 certified firms (test sample) and nonISO 9000 certified firms (control sample).

Methodology Sample Selection We obtained a list of the sites of organizations in the United States that are ISO 9000 certified through the former Globus Registry and Quality Digest. Since the financial records of many of these organizations are not readily available, we decided to limit our investigation to only those ISO 9000 certified firms that are publicly traded. The annual financial records of these firms are readily available. ISO 9000 certification is awarded to specific locations of an organization after they have met the requirements of the standard they are certified to. Many of the firms in our listing have multiple locations. So it is possible to have organizations with some sites certified while others are not. Since the financial records of the different locations of these firms are not listed separately, we decided to include among our test sample, only those who generate at least 50 percent of their total revenues from ISO 9000 certified locations. In order to determine the financial impact of ISO 9000 certification, we adopted the procedure used by Hendricks and Singhal (1997) in their study of firms that implemented TQM programs. We examined the financial performance of our sample three years before and three years after certification. Creating Matched-Pair Sample In order to control for potential industry and economy-wide influences, we created a matched-pair sample of firms that are not ISO 9000 certified. In creating this control sample, we assumed that firms in the same industry and of similar size experience similar economic and industry-wide factors. For each firm in our test sample we selected a firm that, (1) is not ISO9000 certified, (2) has at least the same twodigit SIC code (3) is similar in total assets (less than a factor of three) in the year when its matching ISO 9000 firm obtained its certification, and (4) has financial records for the same years being examined for the test firm.

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Transforming Fiscal Year to Event Year Since the year in which each firm achieved ISO 9000 certification varies, we transformed the fiscal years to event years. The fiscal year when the firm achieves ISO 9000 certification is denoted as year 0 in event year. The fiscal year following certification is denoted as year +1 in event year, while the second fiscal year is denoted as +2 and the third as +3 in event years. The fiscal year before the one in which the firm achieved ISO 9000 certification is denoted as year -1, while the year before that is year -2 and the third year before certification is year -3 in event years. Data Analysis Strategy The differences in both the revenues and operating income of the certified firms and their matching control firms were determined. Also, the differences in the ratio of both the revenues and operating income to total assets of the certified firms and their matching control firms were obtained. These differences were computed for

annual intervals as well as for extended intervals -3 to 0, 0 to +2 and 0 to +3. Using t and Wilcoxon signed-rank tests, we tested whether the mean and median differences are statistically significant. Results Change in Revenues for the ISO 9000 Certified Firms Table 1 shows the mean and median values of the annual changes in revenues for the ISO 9000 certified firms. The Table also shows that the mean and median revenues consistently increase each year following certification, but the mean change is statistically significant at 5 percent level, from +1 to +2 year and for the cumulative three years 0 to +3. In the two years prior to certification, mean revenues decrease but these are not statistically significant. However, the median change is statistically significant at 5 percent level or better, for all the years except for -3 to -2 and +2 to +3 years.

Table 1: Change in Revenue for the ISO 9000 Certified Firms

Year -3 to 2 -2 to 1 -1 to 0 0 to +1 +1 to +2 +2 to +3 -3 to 0 0 to +2 0 to +3 Sample Size 44 46 46 46 46 44 44 46 44 Mean -31.1 -1.9 91.0 40.7 175.5 103.5 29.0 221.0 455.0 p-value (t-test) 0.69 0.51 0.05 0.25 0.03 0.11 0.41 0.05 0.01 Median 7.0 9.4 50.0 23.1 64.0 14.9 44.0 70.0 191.0 p-value (Wilcoxon) 0.05 0.02 0.00 0.02 0.00 0.08 0.02 0.00 0.00

Change in Revenue to Asset Ratio for the ISO 9000 Certified Firms The mean and median changes in the revenue to asset ratios are presented in Table 2. All the values are negative for the years following certification except in the +1 to +2 and 0 to +2 years for the mean, and in the 0 to +1 year for

the median. Although none of these is statistically significant, it seems to suggest that the increase in revenues observed earlier in the previous section, may not be attributable to ISO 9000 certification. It may be due to increase in revenue-generating assets.

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Comparing Changes in Revenue Between Test and Control Samples The results of the differences in change in revenues between the ISO 9000 certified firms and the non-certified firms are shown in Tables 3 and 4. Following certification, the mean and median changes in revenues of the certified

firms are greater than those of the non-certified firms during +1 to +2, +2 to +3, and 0 to +3 years. For the revenue to asset ratio, the mean changes for the test firms are greater for the periods +1 to +2 and 0 to +2, while the median changes are greater for the periods +1 to +2 and 0 to +3. However, these are not statistically significant even at 10 percent level.

Table 2: Change in Revenue/Assets for the ISO 9000 Certified Firms

Year -3 to 2 -2 to 1 -1 to 0 0 to +1 +1 to +2 +2 to +3 -3 to 0 0 to +2 0 to +3 Sample Size 44 46 46 46 46 44 44 46 44 Mean -0.080 0.258 -0.203 -0.072 0.077 -0.136 -0.044 0.052 -0.047 p-value (t-test) 0.93 0.19 0.76 0.87 0.23 0.85 0.71 0.35 0.72 Median -0.026 -0.014 0.044 0.014 -0.012 -0.047 -0.082 -0.027 -0.087 p-value (Wilcoxon) 0.96 0.56 0.02 0.66 0.67 0.78 0.87 0.74 0.68

Table 3: Differences in Change in Revenue Between ISO 9000 Certified Firms and Non-certified Firms
Year -3 to 2 -2 to 1 -1 to 0 0 to +1 +1 to +2 +2 to +3 -3 to 0 0 to +2 0 to +3 Sample Size 44 46 46 46 46 44 44 46 44 Mean -23.3 -10.7 20.4 -140.3 33.0 93.0 62 -115.1 6.0 p-value (t-test) 0.62 0.57 0.35 0.98 0.33 0.26 0.66 0.89 0.49 Median 2.1 -2.1 8.0 -21.0 2.7 1.0 6.0 40.0 -6.0 p-value (Wilcoxon) 0.31 0.52 0.26 0.97 0.28 0.40 0.28 0.60 0.59

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Change in Operating Income for the ISO 9000 Certified Firms Table 5 shows the mean and median changes in operating income, while Table 6 shows the changes in the ratio of operating income to assets, for the ISO 9000 certified firms. The mean and median changes in operating income are all positive except for the mean in years -3 to -2 and 0 to +1. The mean change is statistically significant only for the 0 to +3 cu-

mulative period, while the median changes are all statistically significant at less than 5 percent level except for the +2 to +3 and -3 to 0 years. The means of the ratio of operating income to assets are all negative for the years following ISO 9000 certification, except for the 0 to +1 year when it is essentially zero. Conversely, the mean changes for the periods before certification are positive. This seems to be similar with the behavior of the revenue to asset ratio.

Table 4: Differences in Change in Revenue/Assets Between ISO 9000 Certified Firms and Non-certified Firms
Year -3 to 2 -2 to 1 -1 to 0 0 to +1 +1 to +2 +2 to +3 -3 to 0 0 to +2 0 to +3 Sample Size 44 46 46 46 46 44 44 46 44 Mean 0.309 -0.242 -0.581 -0.058 0.414 -0.131 -0.162 0.407 -0.048 p-value (t-test) 0.13 0.21 0.90 0.55 0.14 0.81 0.62 0.13 0.68 Median 0.010 0.000 0.082 -0.024 0.019 -0.007 0.018 -0.060 0.050 p-value (Wilcoxon) 0.21 0.58 0.16 0.40 0.49 0.55 0.49 0.63 0.66

Table 5: Change in Operating Income for the ISO 9000 Certified Firms
Year -3 to 2 -2 to 1 -1 to 0 0 to +1 +1 to +2 +2 to +3 -3 to 0 0 to +2 0 to +3 Sample Size 44 46 46 46 46 44 44 46 44 Mean -15.7 19.6 23.5 -3.1 7.0 27.1 17.9 4.0 58.0 p-value (t-test) 0.76 0.11 0.05 0.61 0.33 0.11 0.17 0.43 0.00 Median 3.2 2.3 4.9 3.6 6.0 6.0 3.7 9.3 29.4 p-value (Wilcoxon) 0.01 0.04 0.01 0.01 0.03 0.05 0.10 0.03 0.00

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Comparing Changes in Operating Income Between Test and Control Samples Tables 7 and 8 present the results of the differences in change in operating income between the ISO 9000 certified firms and the noncertified firms. In the year immediately following certification, the non-certified firms significantly perform better than the ISO 9000 certified firms on the average. In the subsequent two years +1 to +2 and +2 to +3 the mean differences are positive but not statistically significant. The mean differences for the extended periods 0 to +2 and 0 to +3 are also negative. The negative values of the mean for these periods are likely

due to the relatively very poor performance in the 0 to +1 year, which is not adequately compensated for by the positive values of +1 to +2 and +2 to +3 years. The median values for the post certification years are all negative except for the +1 to +2 year. For the income to asset ratios, none of the post-certification means is positive and only the median for the +2 to +3 year is positive. The results seem to suggest that the certified firms outperformed the non-certified firms during pre-certification periods, while the reverse is the case following certification.

Table 6: Change in Operating Income/Assets for the ISO 9000 Certified Firms
Year -3 to 2 -2 to 1 -1 to 0 0 to +1 +1 to +2 +2 to +3 -3 to 0 0 to +2 0 to +3 Sample Size 44 46 46 46 46 44 44 46 44 Mean 0.002 0.001 0.026 0.000 -0.005 -0.008 0.004 -0.002 -0.009 p-value (t-test) 0.38 0.47 0.05 0.50 0.64 0.67 0.38 0.55 0.72 Median 0.002 0.001 0.014 0.008 -0.006 0.002 -0.007 -0.006 -0.008 p-value (Wilcoxon) 0.33 0.42 0.02 0.33 0.89 0.80 0.41 0.68 0.63

Table 7: Differences in Change in Operating Income Between ISO 9000 Certified Firms and Non-certified Firms
Year -3 to 2 -2 to 1 -1 to 0 0 to +1 +1 to +2 +2 to +3 -3 to 0 0 to +2 0 to +3 Sample Size 44 46 46 46 46 44 44 46 44 Mean -10.1 5.9 30.1 -67.1 20.3 1.3 35.1 -92.6 -98.3 p-value (t-test) 0.80 0.34 0.26 0.90 0.79 0.48 0.29 0.93 0.86 Median 2.4 0.6 -1.1 -0.9 0.5 -1.99 8.8 -0.6 -2.0 p-value (Wilcoxon) 0.30 0.30 0.55 0.86 0.56 0.37 0.25 0.76 0.63

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CONCLUSION This study examined whether ISO 9000 certification results in significant financial improvement for organizations. Our results suggest that there is evidence that revenues and operating income improved following ISO 9000 certification. However, when viewed from the perspec-

tives of the ratios of revenue to assets or operating income to assets, these financial improvements seem to evaporate. Also, we found that ISO 9000 firms performed better than non-ISO 9000 firms, but the differences were not statistically significant

Table 8: Differences in Change in Operating Income/Assets for ISO 9000 Certified Firms and Non-certified Firms
Year -3 to 2 -2 to 1 -1 to 0 0 to +1 +1 to +2 +2 to +3 -3 to 0 0 to +2 0 to +3 Sample Size 44 46 46 46 46 44 44 46 44 Mean 0.018 0.037 0.014 -0.014 -0.030 -0.002 0.058 -0.036 -0.030 p-value (t-test) 0.11 0.05 0.43 0.57 0.90 0.53 0.27 0.67 0.61 Median 0.006 0.007 0.015 0.000 -0.020 0.007 0.029 -0.040 -0.001 p-value (Wilcoxon) 0.21 0.14 0.42 0.54 0.95 0.48 0.05 0.89 0.60

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Emeka S. Dunu is an associate professor in the Department of Management and Marketing at Alabama A&M University. He holds a Ph.D. in Management Science from the University of North Texas. He also received a Master of Science in Industrial Engineering and a Master of Business Administration. He has been leading a team that conducts workshops in logistics and supply chain management, quality improvement and lean management since 2001. His research interests include quality management, lean thinking, supply chain management, and operations management.

Michael F. Ayokanmbi is an assistant professor of industrial technology and the acting chair of the Department of Industrial Technology at Alabama A&M University, Normal, Alabama. He received his B.S.E.E. from the University of South Alabama, his M.B.A. from Alabama A&M University, his M.S.I.E. and Ph.D. from the University of Alabama in Huntsville. His research interests include manufacturing process improvement, real options analysis, and quality management.

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