The cost of poor quality in a small business

Key takeaways

The cost of poor quality is everything a business spends because work was not right first time: redoing it, checking it, refunding it and losing the customer. In small businesses that do everything in-house, most of it comes from routine tasks done by non-specialists in a hurry.

• 4 parts: prevention, checking, internal failure and external failure.
• 3 hours a week of rework at £19.81 an hour is about £2,700 a year.
• External failures cost most: refunds, complaints and lost customers.
• Measure errors per 100 tasks before trying to reduce them.

What is the cost of poor quality?

The cost of poor quality is the total cost a business incurs because a product, service or internal task did not meet the required standard first time. Quality management divides it into internal failure, found before the customer sees it, and external failure, found afterwards. Prevention and checking are the costs of avoiding both.

• The hidden costs of doing everything in-house
• Admin errors costing money? When accuracy says outsource

How do you calculate it?

Calculate it by adding four things for a typical month: hours spent redoing work, hours spent checking, the value of refunds and credits, and an estimate of business lost through complaints. Price the hours at the loaded cost of the person. An employee on £30,000 costs about £19.81 per worked hour, so 3 hours a week of rework is about £2,700 a year.

• Rework hours x loaded hourly cost.
• Checking hours x loaded hourly cost.
• Refunds, credits and replacement costs.
• Estimated margin from customers lost to errors.

• The true cost of an employee in the UK
• Work out your cost per task before you outsource

Where does in-house work leak quality?

In-house work leaks quality where tasks are occasional, unowned or unchecked. The same few places appear in most small businesses.

• Invoices with wrong amounts, addresses or purchase order numbers.
• Orders and bookings keyed into more than one system.
• Customer replies written fresh each time, with different answers.
• Website and marketing content published without review.
• Reports built by hand from several sources.

• The cost of manual processes, and what to fix first
• The four eyes principle for small businesses

Why do errors cost more the later they are found?

An error caught by the person who made it costs minutes. Caught by a colleague, it costs both their time. Caught by a customer, it costs a correction, an apology and some trust. The Institute of Customer Service's UK Customer Satisfaction Index tracks how often customers experience problems and how well they are resolved, and resolution quality affects whether they stay.

When is good enough actually good enough?

Good enough is right for low-stakes internal work, where a small error costs little and perfection would cost more. Spend on quality where failure reaches the customer, touches money or carries legal weight. Everywhere else, a sensible standard beats a perfect one.

• When not to outsource

What does a single error really cost?

A single error costs far more than the minutes to fix it. Take a wrongly addressed order. Someone spends 10 minutes finding out what happened, 10 minutes apologising to the customer and 10 minutes arranging a replacement. The goods and postage are paid for twice. At a loaded £19.81 an hour, the labour is about £10, and the second shipment may be another £10 to £20. A £30 error on a £40 order has removed the margin on several others.

• Running an e-commerce business alone: hidden costs

How do you find the cause instead of the culprit?

Look at the last twenty errors in one process and group them by type. Most processes have two or three causes behind the majority of mistakes: a field that is easy to mistype, a step done from memory, information arriving in an inconsistent format. Fixing those causes, with a required field, a checklist or a template, removes most errors without anyone needing to try harder.

Blaming individuals has the opposite effect. People hide mistakes, and the count you rely on becomes unreliable.

How much should you spend on prevention?

Spend on prevention up to the point where it costs less than the failures it removes. If rework and refunds in a process cost £5,000 a year, a £500 fix that halves them is an easy decision. A £6,000 system to remove the last few errors is not. Measure first, so the spending is proportionate.

• How to benchmark in-house team performance

What does this look like in practice?

A pattern we see in e-commerce operations: order details are copied by hand from the shop system into the courier portal. Around one order in fifty goes to the wrong address. Each one costs a second shipment and a support conversation, and the total is larger than the cost of fixing the process.

Across our client work, back-office cost per task has fallen by 42% once the process was written down and run by a managed team.

• See client work
• BPO Solutions for UK businesses

Cost of poor quality checklist

Measure for one month.

• Pick the three processes with the most corrections.
• Count errors per 100 tasks.
• Log rework and checking hours.
• Total refunds and credits.
• Find the commonest cause and fix that first.
• Re-measure after 30 days.

• The hidden cost audit: score your business in an hour

Next step

Tell us which process generates the most corrections. We will help you price it and find the cause in a 30-minute call.