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Reengineering Tries a Comeback - The Return of Reengineering for Recessionary Times

Michael Hammer and James Champy's 1993 manifesto Reengineering the Corporation was all the rage when published in 1993—but companies took away the wrong message: Downsizing is a good thing. In fact, reengineering was much more than a call for layoffs. Now the term is being revisited, seen by some as the perfect strategy for steering businesses through recessionary times.

The Return of Reengineering For Recessionary Times

When reengineering first appeared during the economic slowdown of the early 1990s, many firms hadn't tackled the problems of redundancy in their organizations. A company's units and functions often operated almost as though they were independent silos, with little attempt to coordinate efforts among them. Each unit might have its own process for purchasing, accounts payable, or expense analysis. And rarely did a single employee monitor an entire process so that he could, for example, pinpoint exact delivery dates for customers.

Against such a backdrop, process reengineering seemed bold and exhilarating. The basic idea, as Michael Hammer and James Champy expressed it in their 1993 manifesto Reengineering the Corporation, was "the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical contemporary measures of performance, such as cost, quality, service, and speed." Whether you were focusing on the production line, the sales organization, or performance-review systems, went the reengineering mantra, you were not constrained by the existing process design or by market forces—indeed, by altering, even obliterating, designs and slashing costs, you could revolutionize your organization.

For all those lofty ambitions, in practice reengineering too often became a rationalization for downsizing staff, demoralizing employees, and ignoring corporate culture. The goal became "achieving Wall-Street-sexy cost reductions" instead of the overhaul of basic processes, says Ed Constantine, chairman of Simpler, a consulting firm in Ottumwa, Iowa.

Companies must find new markets, new sources of revenue. Can the new version of reengineering offer any help here?
— Kirsten D. Sandberg

And after the rapid loss of human capital and employee loyalty, many companies found themselves without a growth strategy. Indeed, in Reengineering Revisited, authors S. Ramu Thiagarajan of Mellon Capital Management and Bala V. Balachandran of Northwestern University conclude from their recent survey of 150 firms that this turmoil occurred without "any compensatory long-term benefit."

Despite this track record, reengineering is making its way back into managerial conversations, as Hammer's The Agenda and the re-release of Hammer and Champy's Reengineering the Corporation (HarperBusiness, 2001) attest. The primary reason for the renewed interest is that the current downturn may turn out to be "much steeper than people think," says Thiagarajan, director of investment research at Mellon in San Francisco. But this time around, "cost-cutting alone may not be enough. Wall Street has set growth targets, implicitly or explicitly, that companies must hit to sustain their current stock price." To do that, companies must also find new markets, new sources of revenue. Can the new version of reengineering offer any help here?

Today's reengineering—let's call it collaborative reengineering to distinguish it from the early 1990s version—combines the austere method of process reengineering with the pliable, collaborative medium of the Internet in ways that weren't technologically possible a decade ago. It emphasizes out-of-the-box thinking and cross-functional doing—not just inside a company, but across the companies linked together in a supply chain. It also seeks to provide the discipline that corporate Internet operations sorely need.

A tall order
But will the benefits extend beyond cost savings? Can collaborative reengineering use the Internet to create new products, services, and markets from scratch, and so generate long-term growth? In the current recessionary climate, cost reduction is the only performance measure on many of his client companies' radar screens, says Thomas H. Davenport, director of Accenture's Institute for Strategic Change (Cambridge, Mass.) and author of Process Innovation: Reengineering Work Through Information Technology (Harvard Business School Press, 1992), one of the first books about reengineering. "That makes achieving growth through innovation a tall order."

If collaborative reengineering is to have a chance of succeeding, managers must pay as much attention to external processes—those that extend beyond the walls of the company—as to internal ones. They must look at the people who perform the processes—employees, customers, and even competitors—in a new light. And instead of trying to overhaul a company from top to bottom, they must develop an appreciation for the power of incremental change.

"Streamlining cross-company processes is the next great frontier for reducing costs, enhancing quality, and speeding operations," writes Hammer in "The Superefficient Company" (Harvard Business Review, September 2001). And in The Agenda, he writes: "The last vestiges of overhead lurk, not deep in your company, but at its edges. Exploit the real power of the Internet to streamline the processes that connect you with customers and suppliers." Below, several suggestions that can help you get this extramural reengineering under way.

Make electronic commerce your first major cost-cutting project. The advent of the Internet tested an established company's ability to remake, join, or buy an entire supply chain at lightning speed. All of a sudden, incumbents had to sell products across diverse channels. They soon found themselves hastily erecting Web sites or partnering with existing sites. But in this mad dash for market share, many online businesses were guilty of exactly what Hammer accused the 1950s industrialists of—failing to thoughtfully design procedures in the first place. Chances are, your company's Internet operation could benefit from a little streamlining.

Here in the Internet era, customers do more than just demand results—they want to control their own processes, some of which overlap with the last mile of your company's processes, such as ordering and delivery. By reengineering your processes to give customers the freedom they want, you can create economies of scale. Office Depot (Delray Beach, Florida) brought customers into the order-entry and fulfillment processes by plugging its Web site into the existing service infrastructure and exploiting its call center, delivery fleet, inventory system, and product and store information. Customers can now go online, view Office Depot's available inventory, and order the items they want; previously, these steps would have required the assistance of back-office personnel. Moreover, the company's physical stores, catalog, and Web site all cross-promote each other, increasing efficiency and productivity across channels and upping the average catalog order size.

Map your processes out end to end rather than wall to wall. If you follow a product from the factory conveyor belt to the end user, or the paper trail that documents this process, you'll be surprised by what you can learn. By analyzing its payables, for example, Ford Motor discovered a way to simplify the process for its vendors while reducing its exposure to risk. Now, Ford pays suppliers only after a vehicle sells, thereby eliminating billing and inventory costs.

Once you start scrutinizing your value streams, you'll soon uncover a lot of hidden waste, says Constantine, an advocate of so-called lean production methods, which have much in common with reengineering techniques. "Look for places where there are long delays in the flow time or for steps that involve many people. And try to get the flows to move in single pieces rather than batches. Batches can often buffer problems with your process, whereas with single-piece flows, any down time or lapse in quality becomes readily apparent."

Ask your IT team to find out more about the emerging Business Process Management (BPM) technologies. BPM systems promise to enhance the applications you already have while enabling all your processes to interface with each other and with those outside your firm. Thus, your purchasing, accounts payable, delivery, and customer-relationship management processes will all be able to communicate with your vendors' and suppliers' back-office processes.

Start of a beautiful friendship
Somewhere along the way, public perception of the reengineering efforts of the 1990s crossed the line between boldness and audacity. "Teams of outsiders—either from outside the company or from outside the unit being reengineered—would come in, make calculations, and then change processes and flow paths," says H. Kent Bowen, Bruce Rauner Professor of Business Administration at Harvard Business School. "Their logic was impeccable—to everyone except the people actually doing the work."

And that was when companies were reengineering internal processes. Today, "reengineering external processes can be even harder, because many of the people involved don't work for you," says Davenport. For it to succeed, companies need a healthier appreciation of the potential for cooperation than Hammer and Champy demonstrated a decade ago. You can no longer dictate terms to, or force technologies upon, your vendors, as retail giant Wal-Mart once did; you must work with them to optimize processes end to end. Occasionally, you must learn to make partners out of competitors, as the pharmacy chain Rite Aid (Camp Hill, Pa.) had to do when it developed a co-branded Web site and integrated fulfillment system with Drugstore.com.

A collaborative mindset doesn't just happen. It takes a lot of work to create and ongoing effort to maintain. You have to meet regularly with your managerial counterparts, establish procedures that ensure everyone has the latest information—and not presume to know your partners' processes better than they do. But even then, a kind of tunnel vision can still hamper many companies' efforts to reengineer their external processes. The remedy is to move from a focus on the next handoff in the value chain to a unified view of the end user.

"Individually, companies 'know' their customers; collectively, they don't," says Lynette Ferrara of London-based CSC Research Services. Although companies may be partners in the same supply chain, each typically has a different picture of the customers' needs. Consequently, "no one has a truly good fix on consumer demand, and massive amounts of inventory still sit somewhere in the system," says Ferrara. CSC's study of the automobile industry found that moving from the raw materials stage to delivering the finished car to a consumer takes an average of 65 days, including an inexplicable 19-day trip from the factory to the dealer. By collaborating with suppliers and distributors with the customers' needs foremost in mind, carmakers could redesign the logistics process, cutting the time to market, saving as much as $5,000 per car, and still meeting customers' expectations.

As you comb through your processes, the relationships—between your company and its partners, and between your company and its final customers—should never take a back seat to process design. This is especially true for processes that involve knowledge work. The most successful reengineering projects to date have tended to involve highly structured back-office processes that a firm could automate—for example, order management and procurement. "But many companies today are eager to be more collaborative about product design and development," says Davenport. Such messy, nonlinear processes as innovation require human intervention of a particular kind in order to succeed.

In their book The Social Life of Information (Harvard Business School Press, 2000), John Seely Brown and Paul Duguid describe this intervention as an employee's practical insight based on experience, or what we call the person's professional practice. For example, the process of diagnosing a copy machine's problem is similar to that of a physician diagnosing a patient's disease. It can require impromptu calls to colleagues and improvisation—both of which are verboten in Hammer's Agenda, but not in IBM's. IBM leverages its various practices through knowledge management tools like Lotus Notes so that employees can collaborate on solving customer problems. IBM now wins 40% more consulting business than before, and the rich employee collaboration is at least partially responsible for it.

A checklist for growth
Some companies believe they've downsized and reduced inventory as much as they can. CSC's study, for example, found that automakers and their suppliers "have already cut the fat within their businesses," says Ferrara. Such companies are looking to collaborative reengineering as a means of spurring growth, and here are a few options:

  • Provide total customer solutions through a single customer interface. Thiagarajan points to the financial services firm that rewired its customer service so that clients can speak with a single customer representative who has the complete picture of the customer's needs. The rep can offer more products and much-improved service as a result, which has enabled the firm to capture greater market share.

  • Turn processes that you perform extremely well into services for collaborators. Some firms are growing by managing parts of their vendors' processes, says Ferrara. For example, Procter & Gamble helps Coca-Cola launch new beverages.

  • Let the efficiencies you've achieved drive your growth strategy. Here's a classic example: Jake Brake, a Bloomfield, Connecticut-based supplier of brake retarders for diesel engines, faced a crisis in 1987, when a major customer started offering a competing product—at a much lower price. As Simpler's Constantine relates, Jake Brake was able to achieve more than a four-fold productivity improvement across the organization by implementing lean production methods. Realizing that this productivity growth wouldn't fall to the bottom line unless revenues grew commensurately, Jake Brake went international, creating Japanese and European markets for its components.

"If you can make a product faster or cheaper, you're going to improve its desirability—more people are going to want to buy it," says Accenture's Davenport. But developing markets to absorb your increased capacity is an example of incremental growth, he adds. Breakthrough growth requires a commitment to innovation. Many cost-conscious companies are unwilling to make such a commitment just now, but if you are, keep in mind this cautionary observation from Brown and Duguid: By emphasizing process over practice and not examining the dynamic between the two, earlier reengineers grossly underestimated their companies' need for working knowledge.

Even as you reengineer your processes, stay mindful of the particularities of the knowledge work that accompanies innovation. Manufacturers can lay off and rehire manual labor easily, but when you lay off your Web staff, you're losing the creative talent that embeds knowledge into the business by constantly analyzing data and creating new services for specific groups of customers.

Incremental but not incidental
Redesigning knowledge processes without vitiating the all-important informal information flows, developing a unified view of the end user, collaborating with people who don't work for you to reengineer extramural processes—most of these changes occur incrementally, but they shouldn't be sneered at because of that.

Thiagarajan cites a financial firm's success in redesigning its transaction-bound private banking business. Instead of focusing on solving customers' needs regardless of the product, the firm's employees had become wedded to particular products and the transaction fees they generated. Proceeding location by location, one product at a time, the redesign effectively revolutionized the private banking unit and, indeed, the entire private banking industry—the other players had to change radically in order to compete. But the entire company wasn't transformed in the top-to-bottom, go-for-broke way that Hammer urged back in 1990. Instead, the company-wide effect was evolutionary. Other units saw what reengineering could do for them, which was a significant piece of learning in and of itself. The lesson here, says Thiagarajan, is that "everyone needs small wins."

"A theory doesn't stand on its own—you need people to apply the ideas," says Davenport. "The creators of reengineering were overly optimistic about how easy it would be to implement radical change. You can design processes in a revolutionary way, but the implementation will almost always be evolutionary." For collaborative reengineering to succeed, you've got to give it time. Therein lies the challenge, he adds: "getting people fired up for things that are going to take a long while."

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Excerpted with permission from "Reengineering Tries a Comeback—This Time for Growth, Not Just for Cost Savings", Harvard Management Update, November, 2001.

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Kirsten Sandberg is the executive editor of HBS Press. She can be reached at ksandberg@hbsp.harvard.edu

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