Reengineering Reengineering for the Flat World—with James Champy

Jim Champy, author of many management bestsellers, including Reengineering the Corporation, led a fascinating discussion 18 April 2006 at Chicago’s Standard Club, sponsored by Perot Systems. Beginning with the presentation, “Doing Business in a Flat World: An Exploration of the Next Era in Globalization,” Jim gave attendees an invaluable perspective on how executives needed to reengineer reengineering for the knowledge economy. He highlighted past transformational efforts in the industrial economy (the original reengineering) and focused on how to achieve change in the knowledge economy. As usual, I will summarize key points of the discussion first and follow up with my insights.

Reengineering: 20th Century

In the 80s and 90s, reengineering helped businesses improve their business processes. For example, an insurance company regularly required 24 days to issue a policy because 13 departments were involved, each of which had optimized processes for itself, not the enterprise (or the customer). In fact, to issue the policy took ten minutes of actual work; the rest was administrative time. Today, business models of the industrial era are becoming obsolete, but most companies haven’t yet changed how they manage their businesses. A default method of drastic organization change, often employed by IBM and many others, is to implement large-scale layoffs and let the remaining people figure out how to streamline processes.

Reengineering: 21st Century

Today, innovation is vital to managing a business because continuous change (process refinement) isn’t enough. Innovation usually entails breaking the mold in some way. Consumers are far more demanding today because they have increasing information at their disposal. For example, Jim shared his personal experience with buying an unnamed “German sports car” by looking up the list price online, sharing it with the dealer and executing the sale in a few minutes. He illustrated the problem of the out of synch company by referring to GM and Ford, which are notorious for many levels of management. Japanese carmakers have flattened their structures and consequently innovate far more quickly. Competition is relentless. Consumers are getting accustomed to the “More-with-Less Economy” in which they get higher quality products and services for less money. Former Federal Reserve Chairman Alan Greenspan has stated repeatedly that economists don’t yet understand the impact of the productivity increases we are experiencing.

The More-with-Less Economy

The More-with-Less Economy poses challenges for 20th Century producers. For example, having low costs is table stakes, and restored pricing power will be the exception to the rule. Innovation (he cited Doblin extensively—for more, see Innovation and Interaction) will be required to thrive because it is a way to achieve widespread change. Returning to the insurance policy above, many corporations labor under business processes that are bloated with administrative cost (health care, anyone?): ten minutes of work that requires 24 days (say, that’s 34,550 minutes for administration and 10 minutes for the actual work!). Therefore, new entrants have a lot of room to deliver for much less. It’s an understatement that executives need to manage differently now: we are at an inflection point. They must focus on cross-boundary reengineering, across departments and outside the enterprise.

Another group of drivers for imminent discontinuous change will spring from the 3 billion people that comprise the emerging consumer markets in Asia. Already, Asia has burgeoning pockets of consumerism, and these will accelerate over time. Work crosses boundaries with less friction all the time, and new capabilities are emerging every day. These capabilities will give astute companies the opportunity to reorganize themselves.

Innovation at the Business Model Level

Will executives have the appetite for radical operating change? Jim gave us an example of SwissAir, which couldn’t see its unique assets and opportunity to innovate at the business model level by focusing on passenger and crew experiences. They went bankrupt and ended up re-launching as Swiss, which is now largely owned by Lufthansa. Business model innovation must focus on strong value propositions for customers who leverage information transparency in the “More-with-Less Economy.” Although ideas are important in a value proposition, Jim strongly feels that execution is what gives a business sustainability. He presented a “differentiation value curve” (from least to most differentiation): price > speed > quality > service > customization > variety > innovation.

Here are some examples of innovative business models:

• Lean—The Minute Clinic‘s operating principle is leanness. Employing mostly R.N.s at locations within (mostly) pharmacies, they diagnose common illnesses right away, and prescriptions are filled immediately. Their tag line gets to the point: “You’re sick. We’re quick.”
• Value beyond the product—Bass Pro Shops pampers their customers to an amazing degree.. and customers reward them by paying top dollar.
• Leverage processes and technology—Zip Car‘s value proposition is offering automobiles as a service. They enable, in effect, shared car ownership in a seamless fashion. Members reserve cars via the Internet, and everything is in the package at a reasonable price. It’s another example of “appealing to a higher value” (below) as Zipcar talks about “liberating” city dwellers from the costly car ownership model. Check out their comparison calculator.
• Appealing to higher value—some propositions appeal to a sense of mission beyond profits. For example, Tata Motors is making a “car for everyone” (which reminds me of the $100 laptop) that will cost a $2,200 and is projected to go into production around 2008 (see Sidebar).

Some guiding principles for innovation are:

• Beware of long adoption curves. Although many of these ideas seem obvious, experience tells all people who listen that the adoption of new ideas is always longer than one expects. To whit, many of the Internet companies that were born in the Internet Boom had solid value propositions, but they discounted the length of time required for adoption.
• Don’t confuse individual behavior with corporate behavior. In general, it is far easier for individuals to change their behavior than for corporations.
• Be sure the idea is scalable. When you’re dealing with a global market that is far more diverse than previous markets, you need scalability and adaptiveness.
• Drive some level of standardization. You can manage complexity and achieve adaptiveness by standardizing where possible. Dell’s mass customization is an excellent example of this.
• Digitize as much of your process as you can. Paper is static and invisible from a global standpoint; however, digital documents are searchable (and able to be found) anywhere in the world (even out of the world).

X-Engineering

X-Engineering is defined as “..the art and science of using technology-enabled processes to connect businesses with other businesses and companies with their customers to achieve dramatic improvements in efficiency and create new value for everyone involved.” Some of its key principles are transparency, standardization and harmonization. Trust underlies everything (because it’s crucial in collaboration). Choosing partners with whom to collaborate is difficult, but recognize that most partnerships don’t work. To succeed, you need compatible beliefs, complementary products/services, the ability to create new propositions and the power to eliminate redundancy. Jim shared with us some business model concepts, “flat world opportunities”:

• The delivery of discreet, repeatable business processes on an on-demand, transactional basis most likely enabled by or delivered over the Internet.
• An IT and business process outsourcing company, with a real global delivery model: the ability to deliver with scale on-site, on-shore, offshore, and nearshore services.
• A business software provider that supports simple, elegant operations processes, at low costs.
• A real offshore, IT infrastructure utility (scale).
• Almost anything that has to do with healthcare administrative and clinical services and that changes how services are managed and delivered (e.g., build a global healthcare information utility using search engine capabilities).
• A manufacturing company that begins with quality products but that also runs with a superb set of processes, deeply linked to the processes of its customers and suppliers, running on the principles of transparency and collaboration.
• Any of the above business models, but selling back into the countries where the playing field has been “leveled” and that represents new markets and new wealth of 3 billion people.

Analysis and Conclusions

• The knowledge economy (“flattened world”) challenges all the assumptions of the industrial economy, which does not mean that everything changes. Rather, smart leaders will reexamine long-held assumptions and principles to see whether they still apply in the same way they did before. Some things just no longer apply, while others are relevant in a different way. Of course, this includes management tools and approaches, and Jim’s talk reflected this. Reengineering itself must be adapted to the knowledge economy. For example, the old reengineering focused mostly on process improvement, while the new focuses on innovation.
• In the 80s and 90s, reengineering helped to change the corporation within the context of itself, which made sense because the industrial enterprise was the locus of attention. The industrial enterprise developed and thrived in an era of scarcity (products, food, health), and therefore producers had the most influence in the market. Today, people in the world increasingly live in an era of plenty, and therefore the influence in the market has shifted to the consumer. Imagine how many business decisions embed the assumption that the producer has the upper hand. I’ll wager most of them.
• My favorite of Jim’s Principles was: “go for businesses that take work out of companies rather than businesses that try to change how companies do their work.” Reading between the lines here, discontinuous change is required because the amount of change is too great for continuous change. Therefore, don’t try to do the reengineering of the 80s and 90s, even though that may be more comfortable, because it won’t be enough. In addition, expand your vision outside the enterprise because innovation thrives on the dynamism that results from diverse points of view and practices coming together. Of course, that means extensive collaboration with partners (some would even say “pervasive outsourcing” ;-).
• Tata Motors’ “peoples car” represents a price point that is orders of magnitude less than other carmakers’ current offerings. In addition, it will be “the first car” for many people in emerging markets, giving Tata the opportunity to imprint customer experiences with millions of emerging market customers. This is a textbook example of why multinationals cannot stay out of emerging markets: they represent a precious R&D opportunity to learn how to engage tomorrow’s customers.
• The productivity increases behind the “More-with-Less Economy” are driven by the shift to the knowledge economy. In the industrial economy, companies differentiated by changing product features, which often meant changing the alloy, design or manufacturing process. These things are difficult changes because they involve “bits,” real physical materials that impose constraints on what can be done and how. In the knowledge economy, companies create differentiation with information, which knowledge workers organize and apply as knowledge. In most cases, it is far easier to change information about a product (“bytes”) than it is to deal with the “bits.” Information is far more scalable and change is more rapid. From a macroeconomic perspective, knowledge workers create more change more quickly, hence more differentiation and value.
• X-Engineering is sorely needed due to its focus on cross-enterprise boundaries. In my opinion, decreasing e-collaboration costs will increasingly pressure enterprises to forgo their tightly coupled business processes in favor of loosely coupled processes. Outsourcing is a paradigm in which to transition to loosely coupled processes. This is a very difficult proposition that will require much innovation and—you guessed it—unparalleled collaboration, to the point that the very definition of the “enterprise” will morph from a centralized command/control structure to a decentralized networked, collaborative one.