Indian Pharmaceutical Industry Evolution,

Trends & Opportunities

 Presentation Structure

• Indian Pharmaceutical Evolution

• India Advantage

• Emerging Trends & Opportunities

• Key Partnership Considerations

 Indian Pharmaceutical Evolution

Phase V
Phase IV
Innovation and Research
Growth Phase •New IP law
Phase III
Development Phase •Rapid expansion of •Discovery Research
domestic market
•Process •Convergence
Phase II development •International market
Government Control development
•Production
Phase I •Indian Patent Act – infrastructure •Research orientation
Early Years 1970 creation
•Market share •Drug prices capped •Export initiatives
domination by •Local companies begin
foreign companies to make an impact
•Relative absence
of organized
Indian companies

1970 1980 1990 2000 2010

 Moving up the Value Chain
VALUE

Innovative
Products

Specialty
Generic
Generic exports Products
exports to
to under- developed
developed & countries
developing
API
countries
Exports

TIME
 India Advantage

• Large skill base

– Experts in process chemistry
– Long history of reverse engineering

• Vast talent pool

– Sheer number of scientists
– Motivated & English speaking
– Large number of trained Indians returning home from North
America and Europe

• Unmatched cost competitiveness

– Lower cost of infrastructure and skilled manpower
– Vertical integration
 India Advantage – cont.

• Strong local industry

– Growing expertise with international regulatory compliance
– High quality manufacturing with abundant capacities

• Speed
– Very strong entrepreneurial spirit
– Hungry for growth and recognition
– Quick learners and fast movers

• Availability of capital
– Stock market has seen unprecedented growth in the last decade
– Continues to be bullish on the pharma industry
 Emerging Trends & Opportunities

• Geographic Convergence
– Established and growing destination for Generic product
development and manufacturing
– Leading Indian companies seeking overseas markets and
global scale

• Generic – Innovator Convergence

– Leading Indian companies trying to climb the value chain
into innovative research
– India developing into a Drug Discovery services outsourcing
destination
 Generic Product Development &
Manufacturing Destination
• Leader in API DMF filings in the US
– Jan-Jun 2006 – 175 of the 601 DMF’s filed were by Indian companies
– 2005 - 313 of the 946 DMF’s filed were by Indian companies
• Leader in capital investments - largest number of US FDA approved
manufacturing facilities (outside the US)
• Almost 20% of ANDA filings in the US

• No place like India for generics R&D and manufacturing of API’s &
formulations
• India’s biggest assets – cost, speed & scientists – churning out
generics faster than you can say ‘copy’
• In 5 years, 30-35% of the global demand for generic products is
expected to be met by India
 Generic Product Development &
Manufacturing Destination – cont.

• Leading global/regional generic players establishing a

presence:
– Teva – acquired an Indian co in 2003, setting up new
development centre & another manufacturing facility
– Sandoz – development centre, 3 manufacturing facilities,
more than 1000 employees
– Actavis - development centre, acquired CRO (Lotus)
– Mylan – acquired controlling stake in Matrix last month for
US$ 736 mn
– Ratiopharm – development centre, manufacturing facilities
Indian companies seeking overseas markets
and global scale

• Aggressive Growth Strategies

– For building a global scale – Ranbaxy aims to be one of the Top 5
– For market entry – acquiring local co or setting up subsidiaries

• Recent M&A activity – size of deals growing

– Ranbaxy going after acquisitions in US & Europe
• Acquired 3 companies in Europe in March/April 2006
– Terapia (Romania) for US$ 324 million
• Raising 1.5 billion to fund further acquisitions
– Dr. Reddy’s
• Acquired Betapharm (Germany) for US$ 570 million in March 2006
– Matrix (now part of Mylan)
• Acquired Docpharma (Belgium) for US$ 263 million in 2005.
 Indian companies seeking
overseas markets – cont.

• Partnership opportunities
– Large number of large and mid-sized Indian companies with world-
class generic product development and manufacturing capabilities
and facilities
– Lot of under-utilized manufacturing capacities
– These companies prefer focusing attention & resources on some key
markets (US/EU) and look for partners in other markets
– Opportunities for supplementing pipelines, filling pipeline gaps and
reducing/optimizing cost of development and cost of goods:
• In-licensing products
• Dossier and API development
• Contract Manufacturing
• Contract Research – pilot & pivotal bio-equivalence studies
– Opportunities for out-licensing and supplying products to leading
Indian companies for other markets
 Generic – Innovator convergence
• Increasing number of Indian companies moving up the value chain from
generic to NDDS/NCE research
• Low cost development/manufacturing to Low cost innovation
• Some examples:
– Ranbaxy
• 1 project in Phase II
• 1 project in Phase I
• 7 projects in Pre-Clinical – 2 with GSK
– Dr. Reddy’s
• 3 projects in Phase II
• 2 projects in Phase I
• 4 projects in Pre-Clinical
– Glenmark
• 2 projects in Phase II – deals with US$ 190 million signed
• 4 projects in Pre-Clinical

• Opportunities for in-licensing & out-licensing

 Drug Discovery Services Outsourcing

• Global outsourcing market:

– US$ 15-20 billion – Manufacturing
– US$ 3-4 billion – Research (informatics, chemistry services & chemical
custom synthesis)
• Big pharma is entering into deals with Indian companies to
lower their cost of R&D
– Collaborative R&D – GSK - Ranbaxy
– Service outsourcing - Wyeth – GVK, Jubilant, Lilly – Suven
• Global discovery services companies are looking at India to
retain their cost advantages
– Albany Molecular & Nektar have already established a presence
• Indian industry hoping to see 3-4 global discovery services
companies emerging out of India
 Drug Discovery Services Outsourcing

• Leading Indian Service Providers:

– Contract Manufacturing – Jubilant, Shasun, Divi’s
– Clinical Research – Syngene (Biocon), Aurigene
(Reddy’s), Synchron
– Bio-informatics & other IT services – TCS, Satyam,
Infosys, GVK Bio, Jubilant
– Drug Discovery/Medicinal Chemistry – Aurigene, Divi’s,
Syngene, Suven, GVK Bio
– Pre-clinicals – Vimta, Lambda
– Central laboratory services – SRL Ranbaxy, Vimta
 Key Partnership Considerations
• Supplier/Partner mapping/selection
– Capability / Keenness / Reliability / Competitiveness
– Key team members – development, regulatory & commercial
• Optimal Number of Partners
– Strategic – markets/product lines
– Opportunistic – product specific
• Relationship management
– Relationship oriented culture
• Contract negotiation
– Clear distribution of responsibilities and timelines
– Demand performance - penalties for not meeting deliverables
• Project management
– Regular visits and video/teleconferences a must
 Closing Comment

India is an acquired taste

Give it some time & it will grow on you

Basics of Accounting and Finance
 What is Accounting?
• Identifying a business transaction
• Preparation of Business Documents.
• Recording of the transaction in the book of first entry
(Journal)
– Sales or Purchase Module
– Relevance with the banking operations
• Posting in the ledger (Automatic in Software)
• Preparation of Trial Balance (System Generated)
• Preparation of Profit and Loss Account and Balance
Sheet
 Important terms in accounting
• Debtors
• Creditors
• Assets
• Liabilities
• Income
• Expenses
• Account
 Important accounting concepts
• Dual Entity
• Money Measurement Concept
• Accounting Period Concept
• Going Concern Concept
• Conservatism Concept (Provisioning for NPA in
Banks)
• Accrual Concept ( Accrual of interest income and
expenses in Banks)
• Consistency Concept
• Matching Concept
 Process of Accounting
• Types of business transactions
– Cash and credit
• Double Entry Principle in Accountancy
– Debit and credit effect
• Implications
• Basic Categories of Accounts
– Personal, Real and Nominal
 Golden Rules in Accounting
• To identify the effect of a transaction on a account
there are rules:
–For Personal Account:
•Debit: the receiver
•Credit: the giver

-For Real Account:

•Debit: what comes in
•Credit: what goes out

-For Nominal Account:

•Debit: all expenses and losse
•Credit: all incomes and gains
 Recording of business transactions
• Syntel Technologies Issued 1000 shares of Rs.10 each at a premium of
Rs.110 each. The amount was deposited in our bank account (SBI)
• Raised a loan from Bank of India Rs.25,000.
• Purchased materials costing Rs.20000 cash down.
• Purchased materials costing Rs.10000 on credit.
• Manufacturing expenses incurred Rs.25000
• Administration and selling expenses incurred Rs.15,000.
• Sold goods for cash Rs.120000.
• Sold goods on credit Rs.20000
• Collection from customers Rs.10000.
• Payment to suppliers Rs.5000.
• Outstanding wages of workers Rs.5000.
• Interest payable to the bank Rs.2500.
 Finalization of accounts
• Refers to the preparation of Profit and Loss
Account and the Balance sheet as per the
legislative famework.
• Adjusting entries are to be passed.
• The revised trial balance is generated.
• Financial statements are prepared.
• Relevance of Accrual Concept, Matching
Concept, Accounting Period Concept,
Conservatism Concept at the time of
finalization.
 BALANCE SHEET
• Sources of Funds

1) Capital
2) Reserves & Surplus
3) Term Liabilities
4) Current Liabilities
 BALANCE SHEET ANALYSIS

Uses of Funds
• 1) Fixed Assets
• 2) Intangible Asets
• 3) Non Current Assets
• 4) Current Assets
 BALANCE SHEET ANALYSIS

Capital
• 1) Authorised Capital
• 2) Issued Capital
• 3) Subscribed Capital
• 4) Paid-up Capital
 BALANCE SHEET ANALYSIS
Reserves
• 1) Subsidy Received From The Govt
• 2) Development Rebate reserve
• 3) Revaluation of fixed assets
• 4) Issue of Shares at Premium
• 5) General Reserves
• Surplus
• The credit balance in profit and loss account
 BALANCE SHEET ANALYSIS
• Term Liabilities
• Redeemable preference shares
• Debentures
• Deferred payment gaurantees
• Public Deposits(Repayable after 12 months)
• Term loans and unsecured loans from friens,
relatives,directors repayable over a period of time
• Remark : The company can raise public deposits to
the extent of 25% of paid up capital plus free
reserves and 10% from share holders for the
maturity period ranging from 6 months to 3 yrs
 BALANCE SHEET ANALYSIS
• Current Liabilities
• Working capital bank borrowings
• T.loans deferred credit inst falling due in 12 mths
• public deposits maturing within 12 months
• unsecured loans, unless the repayment is on
deferred terms
• sundry creditors
• advances from dealers and customers
• interest accrued but not paid
• tax provisions
• Dividend declared and payable
 BALANCE SHEET ANALYSIS

• Contingent Liabilities
• Tax disputes
• Legal litigations
• Bills and cheques discounted with banks
• Claims against the company not acknowledged
 BALANCE SHEET ANALYSIS
• Fixed Assets
• Infrastructure like land & building
• plant & machinery
• Vehicles
• Furniture & fixtures
• Depreciation
• Straight line method
• Written down Value Method
• Remark : Dep added to profit to arrive
repayment obligation especially in term loans
 BALANCE SHEET ANALYSIS
• Investments
• 1) Shares And Securities
• 2) Associate Companies
• 3) Fixed deposits with banks/finance companies
• Remark : While analysing bal sheet we can
analyse necessity of such investments
• Remark : While fixed deposits with banks are
considered as fixed assets, the investmetns in
associate concerns are treated as non current
assets.
 BALANCE SHEET ANALYSIS

• Non Current Assets

• Deferred recievables/Overdue recievables(like
disputed amounts and Over Due > 6 mths)
• Non moving stocks/inventory/un usable spares
• Investment/Lending to associate concern
• Borrowing of the directors from the company
• Telephone deposits/ ST deposits etc
 BALANCE SHEET ANALYSIS
• Intangible Assets
• Preliminary & Preoperative expenses
• Deferred Revenue Expenditure
• Goodwill
• Trade mark
• Patents
• Rem : The o/s balance to be written off every
year by charging P&L account
 BALANCE SHEET ANALYSIS
• Current Assets
• Raw materials, work-in-progress,finished
goods,spares and consumables
• Sundry debtors and recievables < 6 mths
• Advances paid to suppliers of raw materials
• Cash and bank balances
• Interest recievables
• Other current assets such as Government
securities, Bank deposits ..etc
 BALANCE SHEET ANALYSIS
Notes
• The valuation of the stock is done as per the
opinion of the management
• Depreciation method may be changed to boost
profit
• It may be silent on key personnel and staff
turnover
• Marginal changes in the classification of certain
items would lead to different results.
 BALANCE SHEET ANALYSIS
• Notes
• Management competence
• Investment decision
• Resorting to window dressing
• experience of the promoters
• Board comprises of only family members
• The key personnel of the company
• The structure of the organisation
• The authority and decision making are
decentralised
 BALANCE SHEET ANALYSIS
• Notes
• The state of industrial relations
• Financial systems and procedures
• management control
• planning, budgeting, forecasting
• capacity utilisation
• status of the technology
• awareness of the market, competitions ..etc
• for listed co: share prices, EPS, book value,
dividend record, public response ..etc
 Profit & Loss Account
• It is a summary of revenue earned and expenses
incurred which ultimately results in profit or
loss of to the company
• No defined format in law
• Operating revenue = Sales revenue
• Non_operating revenue = Other income ( out of
sale of investments, interest, commission and
discount etc)
• Hence operating profit is a yard stick for
operating profit of the company
• Operating profit = Sales Revenue- Operating Cost
 Profit & Loss Account
Gross Sales
• Gross sales includes excise duty to be charged to the customer, central sales tax applicable,
state sales tax applicable, the discount o be allowed to distributors/dealers/customers. The
gross sales appears in the P&L account comprises of all the above part from the basic unit
price.

Net Sales
• The sales figure excluding all the factors explained above are the net sales.

Cost of production
• This is the cost incurred right from the procurement of raw material to the finished good.
• For ex in a garment firm following cost is incurred while production
• 1) cost of raw material cloth, buttons, canvas, hooks, zips etc
• 2) Maintenace of sewing machines
• 3) payment of wages to workers
• 4) power
• 5) washing, ironing,packing etc.

Selling And General Administarative Expenses

• Maintaining office staff for admn & acctg
• marketing effort
• payment of salaries/Tr All to marktg personnel
• All the expenses which are not directly connected to manufacturing are classifed as selling
and/or general expenses
 Profit & Loss Account
Cost of goods sold
• Cost of goods sold includes all manufacturing expenses and the adjustments for
opening and closing stock
• Cost of Goods sold = Opening stock + Purchases + Manufacturing expenses -
Closing stock
Gross Profit is arrived deducting figure of cost of goods sold from the sales figure ie
Gross profit = Sales - Cost of goods sold.

Operating Profit is arrived deducting selling, administrative and general expenses ,

provision for bad debts, interest and miscellaneous expenses from the gross
profit. ie Op Profit = Gr Prof - (Sel & adm exp + Prov bad debt + mis exp )

Profit Before Tax When other income is added and other expenses are deducted
from the operating profit we get profit before Tax ie PBT = Op Profit + oth Inc -
oth exp
Net Profit When provision for taxes is deducted from the Profit Before Tax we get
Net profit ie Net Profit = PBT - taxes
 Profit & Loss Account
Non Operating Income/Expenses
• The income earned by the unit from other than manufacturing and seling
operations is classified under this head . i.e
a) Interest earned on fixed deposits
b) Dividends and profit earned by sale of assets and share.
• All those expenses which are not directly connected with operations of the unit are
classified under this head. i.e
a) Preliminary expenses written off
b) Loss suffered due to sale of assets & share
 Cash flow Statement
• What is cash flow statement?
• Why cash flow statement?
• AS3: Cash Flow Statements
• How to prepare cash flow statement?
– Cash from operating activities
– Cash from financing activities
– Cash from investing activities
– Change in cash and cash equivalents
 Ratio Analysis
• Accounting ratios is an expression showing the relationship
between two figures of financial statement. Accounting ratios
may be expressed in terms of fractions like 1/2 ,1/3 or rates
like two times, three times or percentage like 10%, 20%, etc.
Many times absolute figures do not help to understand the
position of the concern & the final account & financial
statements prepared there from may not reveal enough
information which will help in decision making. Therefore
ratio analysis is employed as a tool to analyse financial
position & make logical inferences out of the same.
• There are three types of ratio:-
• 1)                 Balance Sheet ratios.
• 2)                 Revenue Statement ratios.
• 3)                 Combined ratios.
 Important Ratios
Balance Sheet Revenue Combined Ratios
Ratios Statement Ratios
i) Current ratio i) Gross profit ratio i) Return on Investment
ii) Quick ratio ii) Operating ratio ii) Return on Proprietor’s
iii) Proprietary ratio iii) Stock- turnover
iv) Debt Equity ratio Fund
ratio iv) Net profit ratio iii) Return of Equity
Capital
iv) Earning per share
v) Price earning ratio
vi) Dividend Payout ratio
vii) Debt Service ratio
viii) Debtor’s turnover
ratio
ix) Creditors Turnover
ratio
 Current Ratio
• Current ratio = Current Asset/Current
Liabilities
•  It Indicates short term solvency or short term financial
strength of company.
•  It shows whether the company is capable of paying off
its short term commitments easily out of its current
assets
•  Too high & too low ratios not desirable. A high current
ratio indicates presence of idle funds whereas low ratio
indicates inadequacy of funds.
 Quick Ratio
• Quick ratio = Quick Asset/Quick
liabilities
•  It Indicates immediate solvency / financial
strength of company.
•  It shows whether the organization is in a
position to pay its liabilities within a very short
period of time out of assets which can realize
money quickly.
 Proprietory Ratio
• Proprietary Ratio = Share holders
Funds / Total Assets
• Total Assets = Fixed Assets + Investments + Current
Assets.
•  It Indicates long term solvency or long term financial
strength of
• company.
•  Proprietors funds should be equal to atleast fixed assets
but it
• may not be possible in all industries.
 Debt Equity Ratio
• Debt Equity Ratio = Debt Funds / Equity Funds
•  It Indicates borrowing capacity of organization
& emphasizes that more the borrowing, the more
is the rate of return for owners.
•  However there should be a suitable
compromise as far as this ratio is concerned.
•  In earlier years business should have more
owned funds whereas after establishment i.e. in
subsequent years business should resort to more
external funds.
 Gross Profit Ratio
• Gross Profit ratio = GPX100/ Sales

•  It shows the trading efficiency of management.

•  It should be sufficient enough to cover operating and
non- operating expenses to assure final profits.
 Stock Turnover Ratio
• Stock – Turnover Ratio = Cost of goods sold /
Average Stock

•  It shows amount blocked in stock & how fast it

can be converted into sales & finally cash.
•  It indicates efficiency of company in inventory
management.
•  Sometimes too high ratio also indicates a
possibility of stock out.
 Return on Investment or capital employed
• ROI = NP before tax & Interest/ Capital Employed

•  It Indicates management efficiency in utilizing

shareholder’s & borrowed funds. & is a clear
index of earning capacity.

•  Higher ratio indicates higher returns & hence

can attract additional funds from lenders.

•  Higher earning power indicate more punctual

repayment of interest & principal amount.
 Return on Proprietors Funds
• Return on net worth = NP after tax and interest / Net Worth

•  It indicates profitability on proprietor’s funds and

efficiency of company in utilizing shareholder’s fund.

•  It is used by share holders before investing additional

funds into business.

•  Higher profitability attracts higher funds from

shareholders & can also increase market price of shares in
anticipation of higher dividends & bonus shares.
 Return on Equity Capital
• Ret on Eq,Capital = Pafter tax – Pref Dividend /
Equity Capital

•  It indicates earning for equity holders and

management’s efficiency in utilizing equity
capital.

•  Dividend percentage is also determined on the

basis of above ratio after taking decisions of
retention of some portion of profit for expansion
of diversification schemes.
 Earnings per share
• EPS = (NP after tax - Pref Div) / No. of eq. Shares

•  It indicates absolute earning per share which

affect a market prices of shares.

•  High EPS encourages prospective investors.

 Price Earning Ratio

• Price Earning ratio = MPS / EPS

•  It indicates market price as compared to earning

per share.

•  Lower ratio generally attracts investors for

purchase of share.
 Dividend Payout Ratio
• Dividend – payout ratio = (DPSX100) / EPS

•  It indicates extent of dividend declared out of

earnings.

•  Lower ratio indicates greater portion kept for

self financing.

•  Short terminvestors are always interested in

higher ratio & vice versa for long terms investors.
 Debt service coverage ratio
• DSCR = (NP bef int tax and dep) / Interest +
Instalment due in next year

•  It indicates ability to meet current interest &

instalment due.

•  it is an index of long term solvency.

•  Higher ratio indicates more safety for lenders.

Debtor Turnover ratio and collection period

• Drs turnover ratio = Sales / Average receivables

•  It indicates efficiency of company in

management of account receivables.

•  Higher the index, better is the ratio & result.

 Creditors turnover ratio and average payment
period

• Crs Turnover ratio = Purchase / Average Payables

• It helps to know creditor’s velocity i.e. average

period offered by suppliers for making payment.

•  Lower the turnover, better is the result as it

indicates more period offered by suppliers to
make payment.
 Importance of Ratios in financial statement
analysis
• Liquidity Position and working capital
financing

• Minimum permissible bank finance

• Profitability ratio

• ROCE, dividend payout ratio, pe ratio and

the investors preferences.
 Cost-Benefit Analysis

Cost-benefit analysis (CBA) is the implicit or

explicit assessment of the benefits and costs
(i.e., pros and cons, advantages and
disadvantages) associated with a particular
choice.

Benefits and costs may be monetary

(pecuniary) or non-monetary (non-pecuniary,
“psychic”).
martial arts classes or going to a movie
on Saturday night, we are often not
aware of any internal process of
consideration of costs and benefits, but
behave as though we do.

An individual will choose an action if:

Benefits (B) > Costs (C)

or
Net Benefits (NB) = B - C > 0.
 What is a Benefit and a Cost?

• The benefits of a change are those goods or services

that result from the change for which someone would
be willing to make sacrifices to obtain
• We measure benefits in terms of Willingness to Pay
(WTP)
• Cost is the value of opportunities forgone! (it could
be a Euro value, but could include much more
e.g. the value of your time).
• Opportunity Cost: An activity's opportunity
cost is equal to the most net benefits that
you could have obtained from doing
something else.
 Important Concepts

1) Benefit minus 2) Cost

- marginal benefit - marginal cost
- total benefit - total cost

=
3) Net benefits
- marginal net benefit
- total net benefit

!!! An efficient allocation maximizes !!!

Total Net Benefit
 Cost-Benefit Analysis (CBA)
In any CBA, several stages must be conducted
1) Definition of the Project
2) Identification of the Project Impacts
3) Which Impacts are Economically Relevant?
4) Physical Quantification of Relevant Impacts
5) Monetary Valuation of Relevant Effects
6) Discounting of Cost and Benefit Flows
7) Applying the Net Present Value Test
8) Sensitivity Analysis
Quality Management
 The Importance Quality Management

• Many people joke about the poor quality

• But quality is very important in any projects.

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 What Is Quality?
• The International Organization for Standardization
(ISO) defines quality as “the degree to which a set
of inherent characteristics fulfils requirements”
(ISO9000:2000).
• Other experts define quality based on:
– Conformance to requirements: The project’s processes
and products meet written specifications.
– Fitness for use: A product can be used as it was
intended.

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 What Is Quality Management?
• quality management ensures that the project will
satisfy the needs for which it was undertaken.
• Processes include:
– Quality planning: Identifying which quality standards are
relevant to the project and how to satisfy them.
– Quality assurance: Periodically evaluating overall project
performance to ensure the project will satisfy the relevant
quality standards.
– Quality control: Monitoring specific project results to
ensure that they comply with the relevant quality
standards.
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 Quality Planning
• Implies the ability to anticipate situations and
prepare actions to bring about the desired
outcome.

• Important to prevent defects by:

– Selecting proper materials.

– Training and indoctrinating people in quality.

– Planning a process that ensures the appropriate

outcome.
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 Design of Experiments
• Design of experiments is a quality planning
technique that helps identify which variables
have the most influence on the overall outcome
of a process.

• Also applies to project management issues, such

as cost and schedule trade-offs.

• Involves documenting important factors that

directly contribute to meeting customer
requirements.
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 Scope Aspects of Projects
• Functionality is the degree to which a system performs its
intended function.
• Features are the system’s special characteristics that appeal to
users.
• System outputs are the screens and reports the system
generates.
• Performance addresses how well a product or service performs
the customer’s intended use.
• Reliability is the ability of a product or service to perform as
expected under normal conditions.
• Maintainability addresses the ease of performing maintenance
on a product.
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 Who’s Responsible for the Quality
of Projects?
• Project managers are ultimately responsible for
quality management on their projects.

• Several organizations and references can help

project managers and their teams understand
quality.

– International Organization for Standardization

(www.iso.org)

– IEEE (www.ieee.org)
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 Quality Assurance
• Quality assurance includes all the activities related to
satisfying the relevant quality standards for a project.
• Another goal of quality assurance is continuous quality
improvement.
• Benchmarking generates ideas for quality improvements by
comparing specific project practices or product
characteristics to those of other projects or products within
or outside the performing organization.
• A quality audit is a structured review of specific quality
management activities that help identify lessons learned
that could improve performance on current or future
projects.
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 Table 8-1. Table of Contents for a
Quality Assurance Plan*
1.0 Draft Quality Assurance Plan 4.0 Quality Assurance Procedures
1.1 Introduction 4.1 Walkthrough Procedure
1.2 Purpose 4.2 Review Process
1.3 Policy Statement 4.2.1 Review Procedures
1.4 Scope 4.3 Audit Process
2.0 Management 4.3.1 Audit Procedures
2.1 Organizational Structure 4.4 Evaluation Process
2.2 Roles and Responsibilities 4.5 Process Improvement
2.2.1 Technical Monitor/Senior 5.0 Problem Reporting Procedures
Management 5.1 Noncompliance Reporting Procedures
2.2.2 Task Leader 6.0 Quality Assurance Metrics
2.2.3 Quality Assurance Team Appendix
2.2.4 Technical Staff Quality Assurance Checklist Forms
3.0 Required Documentation

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 Quality Control
• The main outputs of quality control are:
– Acceptance decisions
– Rework
– Process adjustments
• Some tools and techniques include:
– Pareto analysis
– Statistical sampling
– Six Sigma
– Quality control charts
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 Pareto Analysis
• Pareto analysis involves identifying the vital few
contributors that account for the most quality
problems in a system.

• Also called the 80-20 rule, meaning that 80 percent of

problems are often due to 20 percent of the causes.

• Pareto diagrams are histograms, or column charts

representing a frequency distribution, that help
identify and prioritize problem areas.
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Figure 8-1. Sample Pareto Diagram

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 Statistical Sampling and Standard
Deviation
• Statistical sampling involves choosing part of a
population of interest for inspection.
• The size of a sample depends on how
representative you want the sample to be.
• Sample size formula:
Sample size = .25 X (certainty factor/acceptable error)2

• Be sure to consult with an expert when using

statistical analysis. Information Technology Project
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 Six Sigma
• Six Sigma is “a comprehensive and flexible system
for achieving, sustaining, and maximizing business
success. Six Sigma is uniquely driven by close
understanding of customer needs, disciplined use
of facts, data, and statistical analysis, and diligent
attention to managing, improving, and reinventing
business processes.”*

*Pande, Peter S., Robert P. Neuman, and Roland R. Cavanagh, The

Six Sigma Way, New York: McGraw-Hill, 2000, p. xi.
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 Basic Information on Six Sigma
• The target for perfection is the achievement
of no more than 3.4 defects per million
opportunities.

• The principles can apply to a wide variety of

processes.

• Six Sigma projects normally follow a five-

phase improvement process called DMAIC.
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 DMAIC
• DMAIC is a systematic, closed-loop process for continued
improvement that is scientific and fact based.
• DMAIC stands for:
– Define: Define the problem/opportunity, process, and customer
requirements.
– Measure: Define measures, then collect, compile, and display
data.
– Analyze: Scrutinize process details to find improvement
opportunities.
– Improve: Generate solutions and ideas for improving the
problem.
– Control: Track and verify the stability of the improvements and
the predictability of the solution.

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 How is Six Sigma Quality
Control Unique?
• It requires an organization-wide commitment.
• Training follows the “Belt” system.
• Six Sigma organizations have the ability and
willingness to adopt contrary objectives, such as
reducing errors and getting things done faster.
• It is an operating philosophy that is customer
focused and strives to drive out waste, raise levels
of quality, and improve financial performance at
breakthrough levels.
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 Examples of Six Sigma
Organizations
• Motorola, Inc. pioneered the adoption of Six
Sigma in the 1980s and saved about $14
billion.*
• Allied Signal/Honeywell saved more than $600
million a year by reducing the costs of reworking
defects and improving aircraft engine design
processes.**
• General
*Pande, Electric
Peter S., Robert P. Neuman, uses Six
and Roland SigmaThetoSixfocus
R. Cavanagh, Sigma Way.on
New York:
McGraw-Hill, 2000, p. 7.
achieving
**Ibid. p. 9. customer satisfaction.
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 Six Sigma and Project Management
• Joseph M. Juran stated, “All improvement takes place project by
project, and in no other way.”*
• It’s important to select projects carefully and apply higher quality
where it makes sense; companies that use Six Sigma do not always
boost their stock values.
• As Mikel Harry puts it, “I could genetically engineer a Six Sigma goat,
but if a rodeo is the marketplace, people are still going to buy a Four
Sigma horse.”**
• Six Sigma projects must focus on a quality problem or gap between
the current and desired performance and not have a clearly
understood problem or a predetermined solution.

*“What You Need to Know About Six Sigma,” Productivity Digest (December 2001), p. 38.
**Clifford, Lee, “Why You Can Safely Ignore Six Sigma,” Fortune (January 22, 2001), p. 140.

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 Six Sigma Projects Use
Project Management
• The training for Six Sigma includes many project
management concepts, tools, and techniques.

• For example, Six Sigma projects often use business

cases, project charters, schedules, budgets, and so
on.

• Six Sigma projects are done in teams; the project

manager is often called the team leader, and the
sponsor is called the champion.
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 Six Sigma and Statistics
• The term sigma means standard deviation.
• Standard deviation measures how much variation exists
in a distribution of data.
• Standard deviation is a key factor in determining the
acceptable number of defective units found in a
population.
• Six Sigma projects strive for no more than 3.4 defects
per million opportunities, yet this number is confusing
to many statisticians.
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 Six Sigma Uses a Conversion Table
• Using a normal curve, if a process is at six sigma, there would
be no more than two defective units per billion produced.
• Six Sigma uses a scoring system that accounts for time, an
important factor in determining process variations.
• Yield represents the number of units handled correctly
through the process steps.
• A defect is any instance where the product or service fails to
meet customer requirements.
• There can be several opportunities to have a defect.

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Figure 8-2. Normal Distribution and
Standard Deviation

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 Table 8-3. Sigma and Defective Units

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 Table 8-4: Six Sigma Conversion
Table

The Six Sigma convention for determining defects is based on the above
conversion table. It accounts for a 1.5 sigma shift to measure the number of
defects per million opportunities instead of the number of defects

per93unit . Information Technology Project

Management, Fourth Edition
 Quality Control Charts and the
Seven Run Rule
• A control chart is a graphic display of data that
illustrates the results of a process over time. It
helps prevent defects and allows you to determine
whether a process is in control or out of control.

• The seven run rule states that if seven data points

in a row are all below the mean, above the mean,
or are all increasing or decreasing, then the process
needs to be examined for non-random problems.
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 Six 9s of Quality
• Six 9s of quality is a measure of quality control equal
to 1 fault in 1 million opportunities.

• In the telecommunications industry, it means 99.9999

percent service availability or 30 seconds of down
time a year.

• This level of quality has also been stated as the target

goal for the number of errors in a communications
circuit, system failures, or errors in lines of code.
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 Quality Control Charts
• A control chart is a graphic display of data that illustrates the results
of a process over time.
• The main use of control charts is to prevent defects, rather than to
detect or reject them.
• Quality control charts allow you to determine whether a process is in
control or out of control.
– When a process is in control, any variations in the results of the process
are created by random events; processes that are in control do not need
to be adjusted.
– When a process is out of control, variations in the results of the process
are caused by non-random events; you need to identify the causes of
those non-random events and adjust the process to correct or eliminate
them.

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 The Seven Run Rule
• You can use quality control charts and the
seven run rule to look for patterns in data.

• The seven run rule states that if seven data

points in a row are all below the mean, above
the mean, or are all increasing or decreasing,
then the process needs to be examined for
non-random problems.

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 Figure 8-3. Sample Quality
Control Chart

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 Testing
• Many IT professionals think of testing as a
stage that comes near the end of IT product
development.

• Testing should be done during almost every

phase of the IT product development life
cycle.

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 Figure 8-4. Testing Tasks in the
Software Development Life Cycle

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 Types of Tests
• Unit testing tests each individual component (often
a program) to ensure it is as defect-free as possible.

• Integration testing occurs between unit and system

testing to test functionally grouped components.

• System testing tests the entire system as one entity.

• User acceptance testing is an independent test

performed by end users prior to accepting the
delivered system.

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 Figure 8-5. Gantt Chart for Building Testing into
a Systems Development Project Plan

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 Testing Alone Is Not Enough
• Watts S. Humphrey, a renowned expert on software quality,
defines a software defect as anything that must be changed
before delivery of the program.

• Testing does not sufficiently prevent software defects because:

– The number of ways to test a complex system is huge.

– Users will continue to invent new ways to use a system that its
developers never considered.

• Humphrey suggests that people rethink the software

development process to provide no potential defects when you
enter system testing; developers must be responsible for
providing error-free code at each stage of testing.
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 Modern Quality Management
• Modern quality management:

– Requires customer satisfaction.

– Prefers prevention to inspection.

– Recognizes management responsibility for quality.

• Noteworthy quality experts include Deming, Juran,

Crosby, Ishikawa, Taguchi, and Feigenbaum.

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 Quality Experts
• Deming was famous for his work in rebuilding Japan and
his 14 Points for Management.
• Juran wrote the Quality Control Handbook and ten steps
to quality improvement.
• Crosby wrote Quality is Free and suggested that
organizations strive for zero defects.
• Ishikawa developed the concepts of quality circles and
fishbone diagrams.
• Taguchi developed methods for optimizing the process
of engineering experimentation.
• Feigenbaum developed the concept of total quality
control.
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 Figure 8-6. Sample Fishbone or
Ishikawa Diagram

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 Malcolm Baldrige Award
• The Malcolm Baldrige National Quality Award originated
in 1987 to recognize companies that have achieved a level
of world-class competition through quality management.
• Given by the President of the United States to U.S.
businesses.
• Three awards each year in different categories:
– Manufacturing
– Service
– Small business
– Education and health care

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 ISO Standards
• ISO 9000 is a quality system standard that:

– Is a three-part, continuous cycle of planning, controlling, and

documenting quality in an organization.

– Provides minimum requirements needed for an organization

to meet its quality certification standards.

– Helps organizations around the world reduce costs and

improve customer satisfaction.

• ISO 15504, sometimes known as SPICE (Software Process

Improvement and Capability dEtermination), is a
framework for the assessment of software processes.
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 Improving Information Technology
Project Quality
• Several suggestions for improving quality for IT
projects include:

– Establish leadership that promotes quality.

– Understand the cost of quality.

– Focus on organizational influences and workplace factors

that affect quality.

– Follow maturity models.

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 Leadership
• As Joseph M. Juran said in 1945, “It is most
important that top management be quality-minded.
In the absence of sincere manifestation of interest
at the top, little will happen below.”*
• A large percentage of quality problems are
associated with management, not technical issues.

*American Society for Quality (ASQ), (www.asqc.org/about/history/juran.html).

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 The Cost of Quality
• The cost of quality is the cost of conformance
plus the cost of nonconformance.
– Conformance means delivering products that meet
requirements and fitness for use.
– Cost of nonconformance means taking responsibility
for failures or not meeting quality expectations.
• A 2002 study reported that software bugs cost
the U.S. economy $59.6 billion each year and
that one third of the bugs could be eliminated
by an improved testing infrastructure.*
*RTI International, “Software Bugs Cost U.S. Economy $59.6 Billion Annually, RTI Study
Finds,” July 1, 2002.
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 Table 8-5. Costs Per Hour of Downtime
Caused by Software Defects
Business Cost per Hour Downtime
Automated teller machines (medium-sized bank) $14,500
Package shipping service $28,250
Telephone ticket sales $69,000
Catalog sales center $90,000
Airline reservation center (small airline) $89,500

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 Five Cost Categories Related to Quality
• Prevention cost: Cost of planning and executing a project so
it is error-free or within an acceptable error range.
• Appraisal cost: Cost of evaluating processes and their
outputs to ensure quality.
• Internal failure cost: Cost incurred to correct an identified
defect before the customer receives the product.
• External failure cost: Cost that relates to all errors not
detected and corrected before delivery to the customer.
• Measurement and test equipment costs: Capital cost of
equipment used to perform prevention and appraisal
activities.
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 Media Snapshot*
• A 2004 study by Nucleus Research Inc. estimates that spam
will cost large companies nearly $2,000 per employee in lost
productivity in 2004 alone, despite investments in software to
block spam. Spam currently accounts for more than 70
percent of total e-mail volume worldwide.
• In just one month (August 2003), at least 50 new Internet
viruses surfaced, and losses related to computer viruses cost
North American companies about $3.5 billion. Businesses
have suffered at least $65 billion in lost productivity because
of computer viruses since 1997.

*McGuire, David, “Report: Spam Costs Are Rising at Work,” Washington Post (June 7, 2004).
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 Organizational Influences,
Workplace Factors, and Quality
• Study by DeMarco and Lister showed that organizational issues
had a much greater influence on programmer productivity than
the technical environment or programming languages.
• Programmer productivity varied by a factor of one to ten across
organizations, but only by 21 percent within the same
organization.
• Study found no correlation between productivity and
programming language, years of experience, or salary.
• A dedicated workspace and a quiet work environment were key
factors to improving programmer productivity.

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 Expectations and Cultural
Differences in Quality
• Project managers must understand and manage
stakeholder expectations.

• Expectations also vary by:

– Organization’s culture

– Geographic regions

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 Maturity Models
• Maturity models are frameworks for helping
organizations improve their processes and systems.

– The Software Quality Function Deployment Model

focuses on defining user requirements and planning
software projects.

– The Software Engineering Institute’s Capability Maturity

Model is a five-level model laying out a generic path to
process improvement for software development in
organizations.
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 CMM Levels and CMMI
• CMM levels, from lowest to highest, are:
– Initial
– Repeatable
– Defined
– Managed
– Optimizing
• The Capability Maturity Model Integration (CMMI) is
replacing the older CMM ratings and addresses software
engineering, system engineering, and program management.
• Companies may not get to bid on government projects unless
they have a CMMI Level 3.
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 PMI’s Maturity Model
• PMI released the Organizational Project Management
Maturity Model (OPM3) in December 2003.

• Model is based on market research surveys sent to more

than 30,000 project management professionals and
incorporates 180 best practices and more than 2,400
capabilities, outcomes, and key performance indicators.

• Addresses standards for excellence in project, program,

and portfolio management best practices and explains
the capabilities necessary to achieve those best practices.
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 Using Software to Assist in Project
Quality Management
• Spreadsheet and charting software helps create Pareto
diagrams, fishbone diagrams, and so on.
• Statistical software packages help perform statistical
analysis.
• Specialized software products help manage Six Sigma
projects or create quality control charts.
• Project management software helps create Gantt charts
and other tools to help plan and track work related to
quality management.
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 Chapter Summary
• Project quality management ensures that the project
will satisfy the needs for which it was undertaken.

• Main processes include:

– Quality planning

– Quality assurance

– Quality control

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