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Oct 1994

Business process re-engineering.

by Romney, Marshall

    Abstract- Business process re-engineering (BPR) has become one of the hottest management buzzwords around. Basically, BPR involves the radical redesign of business procedures so that dramatic performance improvements can be obtained relative to cost, speed, quality and service. BPR does not aim for gradual change, rather it stresses the need to totally rethink and rework organizational structures so that essential procedures are practically reinvented. This way, by focusing on procedural impediments to higher productivity, BPR ensures that any redesign of work processes results in inefficiency being weeded out, while effectiveness is built back in. The benefits of BPR can be numerous if carried out properly. One way to ensure this would be to follow the seven basic principles of re-engineering identified by BPR advocate Michael Hammer.

One of the current buzzwords in business today is re-engineering. What is it? What are its principles? Challenges? The author explains all with real life examples.

Between 1983 and 1993, when over a trillion dollars was spent on information technology, productivity increased by a mere 1%. Businesses merely use computers to speed up their paper flow and manual procedures and continue to use methods that fail to make use of the powerful processing capabilities of today's computers. Host information systems are not able to handle the flood of new information now available or to take advantage of the steady stream of new technological advancements. With the advent of networks of powerful desktop computers, we have the technical capability to do things much differently than previous generations.

To achieve large gains in productivity, technological improvements must be combined with significant changes in management and organizational structure and the reorganization and redefining of work practices. This radical change is referred to as business process re-engineering (BPR). A business process is one or more tasks or activities that add value to an organization or to a customer. Re-engineering is the thorough analysis, fundamental rethinking, and complete redesign of essential business processes to achieve dramatic performance improvements in service, quality, speed and cost.

BPR is not a process of trying to make marginal improvements. Rather, it ignores how work is now done and starts over, from scratch. It is a revolutionary process that challenges all the old organizational structures, work flows, job descriptions, management procedures, controls, and organizational values and culture. It discards those that make businesses underperform and replaces them with more effective and efficient processes. In other words, BPR is a re-invention of business processes rather than an improvement or enhancement.

There are tremendous benefits to BPR. CSC Index, an information systems consulting group, found that BPR produces an average improvement of 48% in cost, 80% in time, and a 60% decrease in defects. After Citibank re- engineered a credit-analysis system, its employees were able to spend 43%, instead of 9% of their time recruiting new business. Profits increased by 750% over a two-year period. When Datacard Corporation re- engineered its customer-service operations, its sales increased sevenfold. Bell Atlantic reduced both the time (15 days to a few hours) and the costs ($88 million a year to $6 million) required to connect customers to long-distance carriers.

Principles for Re-engineering Business Processes

So what are the secrets to BPR? How can a company minimize the costs of BPR and maximize the benefits received? Michael Hammer, the father of BPR, has set forth the following seven principles of re-engineering.

Organize Around Processes and Outcomes, Not Tasks and Departments. Many organizations divide up work among different people. This approach, with numerous handoffs, results in errors and delays as documents wait for hours or days at each desktop to be processed. In a re-engineered system, one person is given the responsibility for an entire process. Each person's job is designed around an outcome, such as a finished component or a completed process, rather than one of the tasks necessary to produce the finished component or complete the process. Often this results in a company replacing functional departments, such as manufacturing and marketing, with interdisciplinary teams that concentrate on completing a particular business process.

IBM Credit Corp. used to have five distinct steps in its credit-approval process. Forwarding the request to someone to check the customer's credit, then to someone to determine the interest rate, and so forth until all five steps were completed took from six days to two weeks. Sales representatives who called about an approval were never able to get an answer, since the request was tucked away on someone's desk. IBM Credit re-engineered the process and now has one individual, called a deal structurer, process an application from beginning to end. The deal structurer uses a computer system that contains all the information needed for a normal application and calls on a small group of specialists when complexities arise. IBM Credit was able to reduce its head count while increasing the applications it processes by 100-fold.

Have Output Users Perform the Process. The owners and managers of companies often split their companies into separate departments and have them specialize in specific tasks. Each department does its work and passes its product off to someone else. As a result, each department is a customer of another department. For example, accounting does only accounting, designers do only designing, and salespersons do only selling.

Phoenix Designs Inc. used to sell furniture by having independent dealers send salespersons to talk to customers. The salespeople would gather customer ideas and submit them to a design team. One or more drafts later the salesperson would take a draft to the customer. The customer would request changes, which the salesperson would take to the designer. This back-and-forth process could go on for up to six weeks before the customer was satisfied with the design. Phoenix re-engineered the process. Salespersons, using a PC and special software, design the furniture in the customer's office. The system increased dealer sales by up to 1,000% and boosted after-tax income by 27%.

Have Those Who Produce Information Process It. Ford used to have its purchasing department prepare a three-part purchase order, one each for themselves, the vendor, and accounts payable. When goods were received, the receiving department prepared a multicopy receiving report and sent one copy to accounts payable and kept the other. The vendor prepared a multicopy invoice and sent a copy to accounts payable. More than 500 people worked in accounts payable matching 14 different data items on the three documents and trying to reconcile all the mismatches. Payments were delayed, vendors were unhappy, and the process was time consuming and frustrating.

In Ford's re-engineered system, purchasing agents enter their purchase orders into an online database and forward an electronic copy to the vendor. Vendors ship the goods but send no invoice. When goods arrive, the receiving clerk enters three items of data into the system: part number, unit of measure, and supplier code. The computer matches the receiving information with the outstanding purchase order data. If they do not match, the goods are returned. If they match, the goods are accepted and the computer sends an electronic funds transfer payment to the vendor. The re-engineered system saves a significant amount of money, much of it by reducing head count in accounts payable by 75%.

Centralize and Disperse Data. To achieve economies of scale and eliminate redundant resources, companies centralize operations. To provide better service to their customers, companies decentralize operations. With current technology, corporate-wide databases can centralize data and telecommunications technology can disburse the data. In effect, companies can have the advantages of both approaches.

Hewlett-Packard (HP) had a decentralized purchasing system that served 50 different manufacturing units very well. However, HP could not take advantage of its extensive buying power to negotiate quantity discounts. HP re-engineered its system and introduced a corporate purchasing department. This department developed and maintained a shared database of approved vendors. Each plant continued to meet its unique needs by making its own purchases from the approved vendors. However, the corporate office tracked the purchases of all 50 plants and used that data to negotiate quantity discounts and resolve problems with vendors. The result was a significantly lower cost of goods purchased, a 50% reduction in lead times, a 75% reduction in failure rates, and a 150% improvement in on-time deliveries.

Integrate Parallel Activities. Certain processes, such as product development, are performed In parallel and then integrated at the end. For example, Chrysler had many different teams, each working on the design of different parts for a new car. One team worked on the engine, another on the frame, etc. Unfortunately, the teams did not communicate well. At the integration and testing phase they found the components did not fit together properly and had to be redesigned at considerable expense. Chrysler re-engineered its product development and put people from each area on the team in charge of a particular automobile. Chrysler was able to reduce its product development time significantly and reduce costly redesigns.

Empower Workers and Use Built-in Controls. Most organizations have a layer of personnel who do the work and several layers who manage, audit, or control the others. According to this BPR principle, those who do the work should be empowered with decision-making responsibilities. This results in faster responses to problems and increases the quality of the task performed. Information technology, such as expert systems, can help workers make correct decisions and avoid mistakes. Controls should be built into the process itself. For example, the system could be programmed not to proceed until all relevant data have been entered and edited by the system for validity, correctness, and reasonableness.

At Mutual Benefit Life (MBL), approving an insurance application required 30 different steps performed by 19 people in five different departments, and took up to 25 days. The re-engineered system eliminated several layers of managers. MBL now assigns all applications to a case manager who has the power to approve the application. Case managers are supported by an expert system and specialists they can call on for help. There is no handing off of files, there are fewer errors, costs decreased substantially, and turnaround time improved dramatically. Case managers now handle more than twice the volume of new applications, allowing the company to eliminate 100 field positions. The average turnaround for new applications is now two to five days.

Capture Data Once, At its Source. Historically, each functional area has designed and built its own information system. As a result, each application had to collect some of the same information, usually on different forms, enter it into its system, and store it. This is inefficient, expensive, and creates data discrepancy errors. In today's world, EDI and source data automation devices allow data to be captured electronically at its source, entered once in an online database, and made available to all who need it. This reduces errors, eliminates data processing delays, and reduces costs.

VHF Corp. realized its product cycle of 18 to 24 months and its large and infrequent shipments to customers were not meeting their needs. The key to its BPR effort was an automatic inventory management system that linked VHF computers directly with its customers' computers. VHF used the point-of-sale data to track its products and quickly identify a change in buying patterns. VHF also shortened its product development cycle to a few weeks. These two changes allowed smaller and quicker production runs, which in turn led to VHF being able to make smaller and more frequent shipments to its customers. VHF can now quickly spot changes in consumer buying patterns and meet those needs by producing more of an existing product or by designing new products.

Underlying each of these seven principles is the use of information systems technology such as user-friendly software, expert systems, imaging technology, mobile computing, and networks of personal computers. Expert systems encapsulate the expertise of specialists in a computer-based system. Imaging technology makes it possible for users at different locations to access and work with the same information at the same time. Mobile computing allows on-the-go people to keep in constant communication with their companies and their customers. Local area networks (LANs) connect multiple users in a single location, and wide- area networks (WANs) connect users in multiple locations.

Challenges Faced by Re-engineering Efforts. Unfortunately, all BPR projects are not as successful as those described. According to CSC Index Inc, about 75% of all BPR projects will fall short of expectations. Even BPR supporters admit the likelihood of a project failing is greater than it succeeding. Companies that begin BPR projects face many of the following challenges:

* Resistance. Change, especially radical change, always meets a great deal of resistance. In many cases this is the most serious problem companies face in BPR.

* Tradition. Traditional ways of doing things do not die easily; they are often a part of the organization's culture. This means the culture and beliefs held by individuals will also have to change.

* Time Requirements. BPR is a lengthy process, almost always taking two or more years to complete.

* Cost. It is costly to examine thoroughly the way business is handled and to question the way everything is done in order to find a faster and more efficient way to accomplish it.

* Skepticism. Some people are skeptical about BPR. Some view it as traditional systems development, but in a new wrapper with a fancy name. Others don't believe it can be done. A big obstacle is outlasting those who say it cannot be done.

* Job Losses. BPR often results in employees being laid off. Some estimates range as high as 25 million jobs being eliminated before BPR runs its course.

Maximizing Your Chances for BPR Success

There are guidelines that can be followed to maximize the chances for success in a BPR effort:

* Realize that not every company needs to reinvent itself. Do not embark on a BPR project simply because it is the thing to do. Do not try to fix something you shouldn't be doing in the first place.

* Expect strenuous resistance and manage it properly. Sell the change by constantly stressing the positive aspects of the change and the benefits to be derived by employees and the company.

* Surround the project with a sense of urgency, since projects tend to die unless the need to change is urgent and is constantly reemphasized.

* Get top management to fully support the project and have them make it clear that everyone is expected to support the project.

* Keep the lines of communication to employees open to prevent damaging and inaccurate rumors and misunderstandings.

* Create an atmosphere of trust and cooperation. Allay fears and provide assurances the company is genuinely concerned about employees.

* Make sure the people who are affected by or are going to use the new system are involved in the change process.

* Change the way employees are evaluated and rewarded to motivate them to support the system.

* Staff the project with your best people and provide them with resources they need to be successful.

* Design the system from the customer's point of view, not from that of the company. Eliminate processes or steps that add no value to the customer.

* Make sure employees are adequately trained in how to use the new system.

* Be prepared to change the company's culture and its organizational structure, and to reorganize the information systems function.

* Go for small successes at first. Go for more dramatic projects once you have gained some experience in BPR.

Observing these guidelines is time-consuming and expensive. As a result, some people skip the more difficult steps to speed up the BPR process. Unfortunately, ignoring these guidelines usually results in a project failing to meet its intended objectives or in the project being unduly delayed. The old adage, "take time to save time," certainly applies when considering a BPR project.

Marshall Romney, PhD, CPA, is Professor of Accounting and Information Systems at Brigham Young University.

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