This isn't the board of directors talking about ways to institute the latest total quality management (TQM) program. Nor is it a committee devoted to streamlining existing operations. The group, which includes senior management, line employees and the vice president of human resources, is tearing the company's operations apart systematically and putting them back together again, piece by piece and nut by nut. Because the company resembles an automobile engine that has become too unwieldy and complex after years of modifications and additions, the group is designing an entirely new corporate motor. This motor will either power the firm to greater profit and productivity or stall out on the road to market dominance.
The firm? CTB Macmillan/McGraw-Hill, a company that provides standardized achievement tests for school children in grades kindergarten through 12. The problem? Operations so bureaucratic and cumbersome that customer service is slow and unresponsive. The solution? The complete reengineering of CTB's test-scoring division. This is a process that will radically change the way people work, how projects are handled and the way employees think about their jobs.
When all the changes are finally made by next spring's test season, the turnaround time for scoring tests will go from 21 days to as few as five. CTB expects to cut its peak work force by more than 20%, and it will save $2.4 million during the next two years. "There's no turning back," says Mary Layman, CTB's vice president of human resources, and one of the key members of the committee planning the change. "We are totally committed to a vision."
Reengineering involves radically changing and reinventing the way work is done
Over the years, U.S. corporations have embraced one concept after another in an endless quest to eke out greater efficiency and profitability. Streamlining, rightsizing and TQM all have developed loyal followings. However, all of these concepts have dealt mostly with existing structures and processes rather than taking a step back and completely reinventing the way work is done. Business process reengineering is far more revolutionary. It requires sweeping changes in management and organizational structures. It redefines the way companies use technology and human resources. "It is throwing out the old and inventing entirely new ways to do the work. It's starting with a blank sheet of paper," says Deanna Cinelli, a research analyst in the Total Quality Management Center at The Conference Board in New York City.
It certainly isn't difficult to understand why many managers now think such radical surgery is needed. Over decades, most companies have built up layer upon layer of bureaucracy. Business processes—whether they involve manufacturing, sales or customer service—have become complicated and unwieldy. The result? Ongoing downsizings and restructurings, without any improvement in the bottom line. "There's a tendency to reduce costs by reducing the number of people working at a company," says Martin Medford, director of human resources at Danbury, Connecticut-based Union Carbide. "So the costs go away, but only temporarily. The work doesn't disappear. It simply overburdens the people who stay." As a result, the company winds up having to hire people back as consultants, often for more money than it was paying them originally.
Business process reengineering attempts to solve that problem. Reengineering, however, requires an entire change in mindset and corporate culture, and it isn't without risk. "A company must challenge all its assumptions about how each task is handled. It must not be afraid to peel back the layers and examine itself in a way it has never had to in the past," says William A. Wheeler, a partner at the New York City-based consulting firm of Coopers & Lybrand and co-author of Business Process Reengineering: Breakpoint Strategies for Market Dominance.
In many instances, it means breaking down the traditional vertical structure and replacing it with a horizontal approach that minimizes autocracy. It's a system that sometimes uses interdisciplinary teams and almost always allows employees close to the action to make key decisions. "It is the radicalization of the corporation," says Wheeler.
Although the concept is so new that few companies have fully implemented it, those that have successfully reengineered a core process, a factory, a warehouse, even the total enterprise, are realizing more efficient operations and greater profits than they ever thought possible. Like CTB, reengineering can mean getting products to market faster, filling orders more efficiently and producing goods at a far lower unit cost, all of which are crucial factors at a time of increasing global competition.
But reengineering isn't for everyone. A survey conducted by Gateway Management Consulting, a New York City firm that specializes in reengineering, found that large companies (those that have annual revenues exceeding $1 billion) are the most likely candidates for reengineering. According to consultants, industries such as insurance, banking, brokerage and telecommunications—heavy users of technology—often benefit the most. The reason? Changes in technology are driving many reengineering efforts. "There are plenty of times when simple streamlining isn't enough," says Wheeler. Liz Davila, vice president of quality and reengineering at Palo Alto, California-based Syntex Inc., a $2 billion pharmaceutical company, agrees. "This isn't a task undertaken by the faint of heart. Only with major changes can you realize major gains. If you take processes that aren't efficient and automate them with new technology and new systems, all you wind up with is automated inefficiency. Most companies have plenty of experience with that over the years," says Davila.
Of course, reengineering also has a profound effect on human resources. HR must communicate policies, handle interviews for new positions, write job descriptions, deal with compensation issues and handle those displaced by the new corporate order. Along with all the responsibility, however, comes tremendous opportunity. "It's a chance for HR to redefine itself and take a strategic lead in linking business culture issues," says Janet Caldow, a senior consultant at IBM Consulting Group in White Plains, New York, which has helped reengineer such companies as CIGNA and GTE. "It's an opportunity to step beyond the conventional boundaries and become part of the visionary process."
Only half of HR executives can explain what the term reengineering means
W. Matthew Juechter, CEO of the Englewood, Colorado, consulting firm, ARC International, believes that business process reengineering is here to stay, despite the fact that it has become the latest corporate fad. "The technologies that we have developed—computers, overnight transportation systems, and cellular and wireless communication—allow us to move information and goods very quickly, without the use of hands and feet. Over time, corporations have developed elaborate ways to process work. Nobody has ever stepped back and taken a look at the entire system. Today, if most companies were starting from scratch, they would invent themselves in totally different ways."
That's the heart of reengineering. Yet making it work is a difficult proposition. Experts say that only 30% of all reengineering efforts are successful. "Everything needs to be tied to a central strategy. A company needs to look at what it's trying to accomplish and what type of business culture will make that happen," says IBM's Caldow. As senior vice president of human resources at Stamford, Connecticut-based GTE Corp., Bruce Carswell is presently involved in his company's efforts to reengineer customer service and dozens of other operations. He offers this advice: "The work force has to understand that, above all else, reengineering is about the quality of goods and services delivered to the customer, which ultimately affects the health of the company and job security. People must realize that it isn't just another cost-cutting tool."
Reengineering often is misunderstood. "Everybody is calling everything reengineering," says Wheeler, who points out that many companies deceive themselves into thinking they're involved in reengineering when they're simply streamlining or tweaking operations. Another big mistake involves focusing on reengineering non-core processes. That usually leads to disappointing results. Yet even those companies that do identify key operations sometimes get derailed. "It's a tremendous commitment. It requires that some of the best and brightest people in the company devote a tremendous amount of time and energy to the task. Often, senior management has no idea how long it can take," says Wheeler. Then there's the human component. Companies implementing reengineering often encounter tremendous resistance and a lack of understanding about the new concepts. "People are scared they're going to lose their jobs. The folks who create the blueprint for reengineering have tremendous technological expertise, but they don't examine the human issues. That's an area where companies traditionally fall down," says ARC International's Juechter.
A recent study conducted by Gateway Management Consulting in New York City backs him up. Fifty-four percent of senior executives indicated that they have used outside consultants to assist with their firms' reengineering efforts. Only 20% indicated an interest in using reengineering training for their employees. Ray Manganelli, Gateway's president, describes the attitude as "short-sighted." Yet HR may have only itself to blame. Half of all human resources professionals couldn't explain what the term reengineering means.
When CTB began its reengineering effort in June 1993, Mary Layman was determined not to let HR get pushed out of the picture. Senior management knew that it had to make operations more efficient and responsive. During the previous two years, the firm had embarked on a variety of streamlining and restructuring efforts, but it had realized only minimal results. To maintain its marketshare (CTB is the nation's largest publisher of standardized achievement tests) it was clear that something more drastic had to be done.
CTB decided to initiate a pilot reengineering program to see how it could save money and make its core operations more responsive. Its initial goal? Decrease the turnaround time on the tests from 21 days to 10 days, and slash $1 million in operational costs per year. When CTB pulled together a steering committee to guide the effort, HR wasn't part of the picture. The project team, assembled with the help of an outside consultant, had personnel from customer service, finance, information systems, computer operations and marketing all making decisions about the firm's future.
When Layman asked immediately if she could participate in the meetings, her boss quickly gave her the nod. "I went out of my way to get involved because I knew it was going to incorporate human resources issues. In the beginning, they didn't see that, or they didn't want to address it. They were looking at the reengineering effort in a more technical way. They hadn't begun to look at the organizational changes that were going to be needed. Unfortunately, you can't have one without the other," Layman explains.
Sitting in on the meetings, Layman offered her HR expertise. As the process progressed, she began to establish criteria for new work teams, interview for positions on the teams, provide training and help communicate new policies to the scoring division's 250 employees. After documenting and studying every step in the scoring process and using focus groups to determine major deficiencies, the project team began designing how cross-functional teams in the new organization would operate and what work could be eliminated altogether.
When the dust cleared three months later, CTB had reduced the number of steps in its scoring process from 154 to 68. It had also reduced the number of temporary workers it needs during the peak scoring season from 450 to 360, and eliminated several permanent positions. The company now expects profits from the scoring operation to increase by 120%. The reengineering program is slated to ripple through the entire company in the coming months.
CTB's program incorporates most of the key elements of a successful reengineering effort. It's:
- Taking place in a highly competitive arena
- Fundamentally changing the way people work
- Cutting across traditional departmental lines
- Requiring new technology and training.
"It's a broad commitment," says Juechter. "But without a clear vision and the total commitment of the CEO and executive team, it can't achieve dramatic results."
HR can provide valuable insight when companies reexamine their work processes
Syntex is another company that has used reengineering to alter drastically its landscape and mindscape. Nearly three years ago, the firm recognized that the pharmaceutical industry was entering a period of significant change. It realized that it would have to become more innovative and efficient to get products to market quicker than ever before. Today, developing a new drug can cost upwards of $250 million and take 10 years to complete. It also requires leading-edge technology to track and verify the accuracy of clinical trials and the hundreds of thousands of pages of data that results.
The organization's initial response was to purchase state-of-the-art computers and information systems to track and verify the mountains of data. But then, according to Davila, Syntex bumped into the concept of reengineering. "We realized that the systems must be designed around the business processes. It became clear that we needed to make fundamental changes in the way we work. We needed to take a step back and reexamine every process associated with drug development before we could install the technology," says Davila.
When the company examined its structure and the way in which work gets processed, it discovered quickly that scientists, clinical specialists, legal experts, regulatory affairs personnel and marketing experts didn't integrate well across departmental lines. Many worked in an isolated fashion, and a lot of time was lost in the shuffle between desks. Moreover, many had to keep track of several projects at a time, a task that sometimes created confusion and errors.
The solution became clear. Create cross-functional teams of eight to 12 individuals, each assigned to a particular project. Although team members would retain expertise in their particular fields, they also would assume enough general knowledge that they could handle inquiries from inside and outside the organization. That would reduce response time, partially by eliminating the delay caused by voicemail and E-mail messages that previously had to wait for a particular person to respond.
Today, the company has 12 teams in its drug development division. "As we got more involved we became even bolder," says Davila. "We realized there are far more opportunities to reduce work and eliminate hand-offs than we ever imagined." In fact, Syntex now expects to cut development time and costs by 20%. A new computerized information system that's designed around the reengineered operations will soon go on line.
Successful reengineering sometimes means redefining roles within a traditional work structure. At IDS Financial Services, a Minneapolis-based provider of mutual funds, insurance and other financial products, a major reengineering effort currently is identifying ways to offer a higher level of customer service. One of the company's innovative solutions has been to radically change the way district managers work with their financial planners.
Under the current system, district managers have no incentive to pass promising leads on to planners in another district because they won't get anything in return. Under a new program that the organization will introduce in early 1994, all districts will be abolished. Compensation and commissions will be based on the success of the entire division.
Likewise, IDS is creating incentives for its independent financial planners to create their own group practices. This will allow financial planners the opportunity to provide expertise on a wide range of financial topics and provide referrals without losing income.
Still, much of the reengineering revolution remains driven by technology. Today, 30 years after IBM introduced the mainframe computer to the marketplace, information technology finally is beginning to pay huge dividends. It's invading every corner of corporate America, and thanks to plummeting PC prices, sophisticated software, wireless hand-held terminals and an array of other gadgetry, digital data is coursing through giant corporations at the speed of light. It's providing new and innovative ways to process work. It also is allowing departments and work teams to make decisions instantly and effectively.
At Blue Cross of Washington and Alaska in Seattle, 16,000 medical claims stream through the benefit services division every day. Using a sophisticated software program that can identify claims that don't have enough information or lack the correct data, employees in the reengineered department can train new hires in two days rather than six months. That combined with software that allows customers to file electronic claims has resulted in a 12% smaller work force handling 17% more volume. The time it takes to handle a typical claim has been cut from an average of 10 days to six days. "We have removed redundancy from the system. We have eliminated a great deal of our front-end costs," notes Bill Eastwood, vice president of benefit services for Blue Cross of Washington and Alaska.
Of course, sitting back and watching while the corporation is shredded and reassembled over months or years is nothing less than tormenting for most CEOs and senior executives. "The technology is way ahead of our ability to install it in organizations. Along the way we run into people problems. Reengineering requires a tremendous investment in training, changing attitudes, and adjusting job descriptions and compensation packages to fit the new design," says ARC International's Juechter.
Driving the psychological change involved in reengineering is up to HR
Examine a Third World jungle culture or a corporate culture and certain characteristics are remarkably similar. Each has its leaders, heroes, stories, rituals, ceremonies and artifacts. Each has deeply ingrained behavioral patterns that influence the way things get done. Maybe that's why some of today's consulting firms go so far as to use anthropologists to study corporate societies and make recommendations for change. "Sometimes, it's as simple as changing the stories that are told or the awards that are handed out," says IBM's Caldow. "Sometimes, it's far more complex."
Chris Wells knows that fact well. When Syntex introduced its new order, Wells, who is the company's director of human resources, helped create an elaborate presentation that symbolized the change. On a Friday afternoon, the company held a farewell party to the old corporate culture. Employees reminisced about the past, looked at photos of the old departments, and the development research division president gave a parting speech in conjunction with a fancy lunch. At the end, he destroyed a symbolic wall that carried the terminology of the old company. Everyone went home early. When the work force reconvened on Monday, a new wall bearing the newly adopted terminology had been erected. Employees met in their new work groups, they discussed their roles in the new organization, ate a brown sack lunch and went to work.
But it takes more than symbolism to fuel the fires of change. It almost always requires major involvement from HR. Syntex achieved its transformation with Wells sitting on the senior team overseeing the reengineering effort. GTE's Carswell and CTB's Layman provided feedback and expertise on how the redesign of business processes could be carried out while weighing in the human factor. "HR's role is significant. It can make or break a reengineering effort," notes Coopers & Lybrand's Wheeler.
Experts say it all begins with keeping the work force informed. In some cases, companywide meetings are appropriate. Other times the CEO may need to visit divisions or groups of employees. Videos, teleconferencing, newsletters and E-mail may also help. "Once the rumor gets going, the headaches can be enormous," says Blue Cross' Eastwood. Adds Wheeler, "You already have a lot of people running around scared anytime you introduce major change. The lack of information only creates greater anxiety and makes the changes more difficult in the long run."
According to Juechter, the task of driving the psychological change within the organization falls squarely on the shoulders of HR. "It has to help people shift from thinking in a vertical mode to a horizontal, team-oriented approach. It's the same as getting every player on a basketball team to take responsibility for the outcome. It isn't something that just happens. After years and years of conditioning, individuals worry only about their own career. The patterns of thinking run deep," says Juechter.
Those employees who are forced to make the transition from an individual approach to a team environment can experience a severe case of culture shock. "You often wind up with people walking around in a haze. In the beginning, it's like an emotional roller coaster," says Blue Cross' Eastwood. A few people simply are unable to make the mental switch. They may seek early retirement or apply for another position that isn't affected by the reengineering project. Yet, experts agree that the majority of a work force is able to make the transition, as long as they receive ongoing support, experience and education. "One day of exposure to these ideas doesn't change the basic way a person thinks," says ARC International's Juechter.
That's a fact that reengineering veterans know well. At CTB, the human resources staff and outside trainers provide a total of 40 half-day sessions for each team leader, and continuing training for team members. "It's about shifting their thinking from satisfying an internal standard to satisfying the customer," Layman explains. At GTE, ongoing training also is part of the picture. It affects both work teams in the field and senior members of the reengineering committee. "As you restructure and reengineer, the contents of jobs change. In some cases, new technology means learning new skills. There is training in virtually every aspect of reengineering," says Carswell.
When the $20 billion phone giant decided to pilot a new customer-care center in Garland, Texas, last year, training was just as important an issue as technology. Repair clerks always had taken down complaints and then passed them on to technicians equipped to fix the problem. GTE, however, wanted results while the customer was still on the phone, something that occurred only once in 200 calls. The company began by moving testing and switching equipment to the workstations of the repair clerks, and then training them how to use it. Then, instead of timing how fast the representative could field calls, it began tracking how often staff members could solve the problem without passing the call on. So far, GTE has managed a 30% success rate. It's aiming for 70%. In some cases, problems that used to require handling by 15 different representatives now require only one or two people.
Radical changes in a corporate structure create multiple HR challenges
When companies are reengineered, most human resources departments find themselves creating new compensation and benefit structures to reflect the changes. When work teams are involved, it often requires finding innovative ways to structure bonuses and cash incentives. Many departments also design new performance measures that are driven by customer assessment. CTB, for example, uses turnaround time, work quality, service level and the caliber of interpersonal skills and teamwork (both inside and outside the company) as factors. "The old paradigm was management by objectives and goals for the next year. This is an entirely different way of looking at performance. It's based on factors that are driven by the customer," says Layman.
Some companies, such as Blue Cross of Washington and Alaska, are finding innovative and unusual ways to use human resources. Eastwood's benefit services division actually has a full-time human resources professional on staff. The individual, who reports to both Eastwood and the head of human resources, supervises training and oversees all personnel-related matters in the reengineered division. "The support has helped fuel the positive results," he says.
At Syntex, Wells helped senior management work through a number of difficult and complicated issues. During one particularly troublesome session that had lasted for 14 hours, he guided members of the reengineering committee as they slotted senior-level executives into new positions. He placed a large map on the wall that listed all the jobs and all the people. Then he guided the group through the selection process, as the committee decided which name should go with which job. Later, many of the firm's executives turned to Wells for advice and to help them think through their own situations. As the reengineering project has moved forward, employees increasingly have become comfortable with approaching the human resources department with questions and suggestions.
One of the frequent by-products of a successful reengineering is layoffs. As work is eliminated, so too are positions. When Union Carbide opted to reengineer in December 1990, it focused on lowering manufacturing costs and providing added value to its customer service. The company has been so successful (in some cases eliminating dozens of unnecessary steps) that it already has slashed staffing by 20% to 50%, while realizing almost $400 million in savings. Yet it has managed the results while raising productivity.
At the very least, reengineering results in a major redeployment of a work force. IDS Financial Services, as part of its reengineering effort, found that it had to move 1,300 people in its Minneapolis headquarters into new jobs, many of them in different locations within the building. At CTB, the reengineering project affected more than one-third of the company's 750 employees, and more than 40 people lost their jobs. "Ultimately, there's no way to avoid the issue of layoffs," says GTE's Carswell. "The best you can do is keep people informed and help people understand why it's happening. Those who remain have to buy into the new corporate philosophy. They have to believe that all of this is happening for a good reason and that it will benefit them in the future."
In the end, reengineering can offer benefits beyond the lower prices, greater profits and more efficient customer service that a CEO and board of directors clamor for. Those who have survived the gut-wrenching process say that it often leads to a better-educated, better-trained and more responsive work force that isn't afraid to offer opinions and expertise to management and is more comfortable and better suited to making the lightning-quick decisions essential to business success in the '90s.
Getting to the promised land, however, is no easy task. It may take months, even years, before a company is able to clearly see the payoff. "It's an incredibly intense exercise," says Syntex's Davila. "You don't undertake reengineering unless you're committed to sticking with it for the long haul. You must commit tremendous resources and your most talented people to the process. There are times when you question reality and why you are doing this. But along with the risks can come incredible rewards. It's an opportunity to gain a dominant position in the marketplace."
Personnel Journal, December 1993, Vol. 72, No.12 pp. 48A-48O.