REENGINEERING THE HOT NEW MANAGING TOOL The radical redesign of business processes is powerful -- and all the fad. But it's not for everyone, and sometimes it fails to deliver. Here's how to make it succeed.
(FORTUNE Magazine) – EVERYBODY'S DOIN' IT, doin' it, doin' it. Business process reengineering is the hottest trend in management. The mint should coin money as fast as the consulting firms that peddle reengineering, several of which publish glossy magazines about their work and charge up to $2,500 for admission to conferences that double as sales pitches, with fervent testimonials by client companies. ''Reengineering is new, and it has to be done,'' asserts Peter F. Drucker, the most eminent of management experts. The telltales of faddishness are fluttering. Says a telephone company executive: ''If you want to get something funded around here -- anything, even a new chair for your office -- call it reengineering on your request for expenditure.'' Get ready for the backlash, right? Wrong. Reengineering is for real. Done well, it delivers extraordinary gains in speed, productivity, and profitability. Union Carbide has used reengineering to scrape $400 million out of fixed costs in just three years. GTE expects reengineering to deliver huge benefits to its telephone operations -- in some cases doubling revenues or halving costs. But process redesign is strong medicine, not always needed or successful, and almost always accompanied by pain -- or at least unpleasant side effects, such as causing executives' hair to fall out. By one estimate, between 50% and 70% of reengineering efforts fail to achieve the goals set for them. After a half decade of pioneering experience with reengineering, businesses have learned key lessons about what works and what doesn't, about the most common mistakes companies make, and about what executives can do to put their efforts in the win column. Reengineering, a.k.a. process innovation and core process redesign, is the search for, and implementation of, radical change in business processes to achieve breakthrough results. Its chief tool is a clean sheet of paper. Most change efforts start with what exists and fix it up. Reengineering, adherents emphasize, is not tweaking old procedures and certainly not plain-vanilla downsizing. Nor is it a program for bottom-up continuous improvement. Reengineers start from the future and work backward, as if unconstrained by existing methods, people, or departments. In effect they ask, ''If we were a new company, how would we run this place?'' Then, with a meat ax and sandpaper, they conform the company to their vision. That's how GTE looks at its telephone operations, which account for four- fifths of the company's $20 billion in annual revenues. Facing new competitive threats, GTE figured it had to offer dramatically better customer service. Rather than eke out steady gains in its repair, billing, and marketing departments, the company examined its operations from the outside in. Customers, it concluded, want one-stop shopping -- one number to fix an erratic dial tone, question a bill, sign up for call waiting, or all three, at any time of day. GTE set up its first pilot ''customer care center'' in Garland, Texas, late last year and began to turn vision into fact. The company started with repair clerks, whose job had been to take down information from a customer, fill out a trouble ticket, and send it on to others who tested lines and switches until they found and fixed the problem. GTE wanted that done while the customer was still on the phone -- something that happened just once in 200 calls. The first step was to move testing and switching equipment to the desks of the repair clerks -- now called ''front-end technicians'' -- and train them to use it. GTE stopped measuring how fast they handled calls and instead tracked how often they cleared up a problem without passing it on. Three times out of ten now, and GTE is shooting for upward of seven. The next step was to link sales and billing with repair, which GTE is doing with a push-button phone menu that allows callers to connect directly to any service. It has given operators new software so their computers can get into databases that let the operators handle virtually any customer request. In the process, says GTE vice president Mark Feighner, ''we eliminated a tremendous amount of work -- in the pilots, we've seen a 20% or 30% increase in productivity so far.'' GTE's rewired customer-contact process -- one of eight similar efforts at the company -- displays most of the salient traits of reengineering: It is occurring in a dramatically altered competitive landscape; it is a major change, with big results; it cuts across departmental lines; it requires hefty investment in training and information technology; and layoffs result. Says Michael Hammer, a former professor at MIT who runs a Cambridge, Massachusetts, business education firm that bears his name: ''To succeed at reengineering, you have to be a visionary, a motivator, and a leg breaker.'' Hammer is reengineering's John the Baptist, a tub-thumping preacher who doesn't perform miracles himself but, through speeches and writings, prepares the way for consultants and companies that do. Reengineering the Corporation, the book he wrote with James Champy, CEO of the CSC Index consulting firm, has 250,000 copies in print and has spent eight weeks on the New York Times bestseller list. Most major consulting firms have added reengineering to their repertory, including such stalwarts as the Boston Consulting Group, Ernst & Young, Gemini Consulting, and McKinsey; firms with strong information technology backgrounds such as Andersen Consulting, CSC Index, and Symmetrix; and the new consulting arms of IBM and Digital Equipment. Business is booming: Index says its revenues have quintupled in five years. The boldness of reengineering creates its perils and possibilities. Here is a partial list of what AT&T Global Business Communication Systems -- which makes PBXs, private branch exchanges installed on the customer's premises, an operation with annual sales of $3.4 billion -- had to do in two years as part of its reengineering effort: Rewrite job descriptions for hundreds of people, invent new recognition and reward systems, revamp the computer system, retrain massively, and make extensive changes in financial reporting, writing proposals and contracts, dealing with suppliers, manufacturing, shipping, installation, and billing. It ain't cheap, and it ain't easy. At Blue Cross of Washington and Alaska, where redesigning claims processing raised labor productivity 20% in 15 months, CEO Betty Woods says the resource she drew on most was courage: ''It was more difficult than we ever imagined, but it was worth it.'' Therein lies the most important lesson from business's experience with reengineering: Don't do it if you don't have to. Says Thomas H. Davenport, head of research for Ernst & Young: ''This hammer is incredibly powerful, but you can't use it on everything.'' Don't reengineer your buggy whip business; shut it. If you're in decent shape but struggling with cost or quality problems or weak brand recognition, by all means juice up your quality program and fire your ad agency, but don't waste money and energy on reengineering. Save reengineering for big processes that really matter, like new-product development or customer service, rather than test the technique someplace safe and insignificant. THE BEST corporate candidates for reengineering are companies facing big shifts in the nature of competition. It has spread as fast as gossip through financial services, for example, where deregulated banks, brokerage houses, and insurance companies now compete for the same investment dollar. Another hot spot is the vast, tumultuous field of telecommunications -- local and long-distance phone companies, cable television providers, computer makers -- where regulatory and technological barriers to entry have fallen precipitously. In 1988, says Raymond W. Smith, CEO of Bell Atlantic, one of the seven regional Bell operating companies, ''we looked at what happened to the airlines and the three blind mice ((the broadcast networks)) when new capacity came in. We had to reengineer.'' Five years later -- and with 20,000 fewer employees in its traditional telephone business -- Bell Atlantic seems decidedly more competitive. For example, the company cut the time needed to hook up customers to long-distance carriers from as much as 16 days to just hours -- and began winning back market share from ''alternate-access carriers,'' which had been moving in on its big corporate accounts. There are two principal reasons to reengineer: fear and greed. If you can imagine -- or worse, see -- that an upstart rival, unburdened by your overhead, your loss leaders, or your history, could chew up your business, or if you can see how you could do unto him, reengineering may be the ticket. ''It isn't fair,'' one insurance executive moaned to George B. Bennett, , head of the Symmetrix consulting firm. ''I've got mainframes to run and agents to pay, and I'm competing with little guys who just have PCs and telephones.'' Precisely. All change is a struggle. Dramatic, across-the-company change is war. How can you increase the odds for success? Here are a few more lessons from the front.
Get the strategy straight first. ''Don't fix stuff you shouldn't be doing in the first place,'' says Robert M. Tomasko, author of a new book, Rethinking the Corporation. Take a long look at what business you want to be in and how you intend to make money at it. Union Carbide made a fundamental decision to emphasize commodity chemicals rather than specialty products. That decision dictated the company's aim in reengineering: to seek its competitive advantage in the lowest possible manufacturing costs and provide added value in delivery and service. Reengineering is about operations; only strategy can tell you what operations matter. An early hero of the reengineering movement was Mutual Benefit Life. The New Jersey insurer brilliantly redesigned the way it issued and underwrote policies -- but that didn't keep disastrous real estate and mortgage investments from forcing it to seek shelter under the protection of the New Jersey State Department of Insurance in 1991. Says John Hagel III, a reengineering specialist at McKinsey: ''We did an audit of client experiences with process reengineering. We found lots of examples where there were truly dramatic impacts on processes -- 60% to 80% reductions in cost and cycle time -- but only very modest effects at the business-unit level, because the changes didn't matter in terms of the customer.'' A computer company, convinced that customers needed more expertise from its sales force, poured tens of millions of dollars into reengineering its selling operations, training people in consultative sales techniques and outfitting them with costly electronic gear. It turned out that most customers didn't care. What mattered to them was price. At Agway, the giant farm supply cooperative in the Northeast, two years of losses had convinced executives that the business was in trouble. Says Bruce Ruppert, senior vice president for planning and operations: ''At the beginning, when we asked where Agway should go, all the top executives said different things.'' Agway's 600 stores sold everything from cattle feed to garden trowels -- basically a retail chain backed by 18 warehouses and feed mills. That setup was out of sync with the times. One out of eight farms in the Northeast disappeared in the 1980s. The survivors -- often big, sophisticated outfits -- wanted more expertise than store personnel could offer. Agway shipped directly from its mills and warehouses to many farmers, but they placed their orders at the stores, resulting in a costly tangle of bills and records. MEANWHILE, discount retailers like Wal-Mart had begun to siphon off general- merchandise sales from the stores, whose ability to respond was hampered by their need to serve commercial farmers. After a strategy review, Agway decided to split up its retailing and commercial farming businesses. Only then could reengineering begin. Reengineering without strategy leads almost inexorably to market-blind cost cutting. It can maim the company. Says Thomas M. Hout of Boston Consulting Group: ''If your only objective is cost reduction, not raising value, you will not engage the organization. People transfer out and seek shelter in a healthier division. It's like white flight.''
Lead from the top. Reengineering is cross-functional. An insurance claim might pass through customer service, adjusting, and accounting before a check is cut. All three departments must be brought into any effort to reengineer the process -- they all might end up being combined. Says William G. Stoddard, director of Andersen Consulting's reengineering practice: ''Departments are stovepipes. We work in sewer pipes.'' That means reengineering must be led by people with the authority to oversee a process from end to end or top to bottom. Says Hammer: ''The guy at the top must have a lot of clout, because a lot of people are going to need to be clouted.'' The ideal reengineering czar, therefore, is not a department head, staff officer, or information officer but the CEO, COO, or her equivalent at the business-unit level. The leader should create a core team of first-rate people from all relevant departments -- the very people their bosses are most loath to spare -- as well as senior executives from human resources and information systems.
Create a sense of urgency. Reengineering will break apart under political pressure or peter out after a few easy gains unless the case for doing it is compelling, urgent, and constantly refreshed. That is not hard for a major buyer of red ink. When the need is less clear, there is no better salesman than a customer. Hallmark Cards shattered whatever complacency resulted from its cosseting culture and seemingly unassailable market position by making a series of videotapes to show to its top 40 executives. Chiefly at issue was the company's pokey process for bringing new products to market. First, small retailers talked about slowly falling store traffic. Then a senior vice president of Wal-Mart, a not-insignificant customer, delivered the not-subtle message that he hoped their companies could continue to do business. Says Steve Stanton, the CSC Index consultant who had the videos made: ''By the time the lights went up, the temperature in the room had fallen 20 degrees.'' Fear, resistance, and cynicism are inevitable as the reengineering team begins to unearth problems and toss around radical ideas for solutions. If not team members themselves, almost certainly their bosses and peers will defend their turf or be quick to show why a new idea can't possibly work. To keep peace among the dukes and baronets, nothing is more critical than for the core team constantly to fill in the case for reengineering by talking to customers about their needs and learning where competitors are ahead. Says Joseph Ambrozy, Bell Atlantic's vice president for strategic planning: ''Benchmarking is essential. You must know where you stand, function by function, process by process.''
Design from the outside in. The point and power of reengineering is the clean sheet of paper with which it begins. Filling it in begins with customers: The right question is, How do they want to deal with us?, not How do we want to deal with them? Says Steven Patterson, Gemini Consulting's chief reengineer: ''To cross multiple boundaries in the company, you need a view of the organization that everyone agrees on but that doesn't depend on today's geography. So you start from the customer -- then figure out how to execute the work.'' That's easier said than done, particularly as reengineering moves from design to execution, and after the easy victories have been won. Glenn Hazard, the process reengineering vice president of AT&T's Global Business Communication Systems, says, ''Designing from the outside in -- all the way through -- was the most critical success factor.'' To make the company wear its customers' shoes for the whole journey, Hazard's team enlisted several customers who served as a focus group, critiqued plans, participated in trial runs, and gave regular feedback. / Reengineering experts warn against spending too much time studying existing work flows -- ''the analysis tar pit,'' Hammer calls it. But don't throw out the old process map too fast. Especially if coupled with activity-based cost accounting (FORTUNE, June 14), it can identify points of leverage where new thinking will provide the biggest benefit.
Manage your consultant. You've used consultants before. They come in, interview people, run some numbers, present their findings, and leave you with a handsome black binder. (It's on the shelf to your right.) Reengineering consultants do that too, only they expect to stay around to help with implementation. Not just legions of bright young MBAs; behind them stand cadres of techies ready to help rebuild your information systems. You need them, because implementation is the tough part. Says J. Raymond Caron, chief information officer of insurance giant Cigna, who coaches the company's extensive reengineering effort: ''When you start to implement, there will be nights when you go home and get sick.'' As reengineering is put into practice, old functional priorities (and their Praetorian guards) will reassert themselves: They'll insist that you can't eliminate the regional sales offices, for example. An outsider can help you contain such objections. Trouble is, consultants bill by the hour. ''Consultants are pushing the hell out of reengineering,'' says one of their brethren, ''because it sells well and it's very labor-intensive.'' Bills of a quarter million dollars a month are common. Moreover, a clean-slate philosophy, says Davenport of Ernst & Young, ''inevitably leads to multi-megabuck implementation projects.'' One giant office-products company lost sight of costs while designing a splendid order-management process, richly gewgawed with technology -- then discovered that the price for hardware, software, and training would be $1 billion. At Blue Cross of Washington and Alaska, Betty Woods instructed her consultant that each stage of reengineering had to generate enough savings to pay for the next. ''It was a new experience for them,'' she says, laughing. An Andersen Consulting client announced up front: ''I'll spend as much on information technology as you save me in inventory.'' Rules like these not only keep costs in line but also build enthusiasm and confidence as managers and employees nail coonskins to the wall. Most important, says Joseph Ambrozy of Bell Atlantic, ask your consultant for references, check them, and use him ! to train in-house experts who can carry the message deeper into the company.
Combine top-down and bottom-up initiatives. At first blush, reengineering, with its emphasis on strong leadership, technology, and radical change, seems to be the antithesis of employee involvement, Total Quality Management, and other participative schemes your people have been beavering away at. It's true that reengineering cannot be led from the bottom of an organization, because it will be blocked by organizational boundaries, like a wave dashing against a sea wall. But top-down and bottom-up change needn't conflict. In fact, says Andersen's Bill Stoddard, ''you can't do reengineering without an environment of continuous improvement or TQM.'' When the consultants move on and the process map comes down from the wall, the painfully won gains will leak away unless the employees who have to live with the new work design had a hand in creating it and unless the human systems of the company -- compensation, career paths, training -- reinforce the changes. Reengineering should not replace TQM or other initiatives. It should give them something to work on. In Union Carbide's industrial chemicals division, plant and equipment maintenance accounted for 30% of costs, making it an obvious target for reengineering. Top management took aim at it and made broad decisions about how the new process should look -- notably that maintenance and operating staffs would work on the same teams and against the same set of ambitious goals. But the details -- how to set up shifts, procedures for fixing a steam leak or cleaning a line -- were developed on the floor of the pilot plant in Taft, Louisiana. Employees found savings of more than $20 million -- 50% more than management expected. In a nutshell, says vice president Vincent Villani, ''top-down for targets, bottom-up for how to do it.''
For all its macho rhetoric and technological content, reengineering in the end is like any other effort to change the way people work: Culture counts big. Change won't occur merely because management wills it. Says Agway's Bruce Ruppert: ''You can survive the old way. You can survive the new way. It's the goddamn transition that'll kill you.'' When the once-clean sheet of paper is covered with boxes, lines, and arrows, the true test of leadership begins.