Reengineering the rapidly growing entrepreneurial company.
What is an RGEC?
We can define rapid growth as sales volume that increases at greater than 40 percent annually. An entrepreneur is one who takes risks to initiate business activity. So, RGECs are companies that are achieving rapid growth because of their success at taking risks. This success is usually measured in terms of growth in sales volume. The risks involve implementing new products or entering new markets at a rapid pace. The resulting organizational culture is biased toward growing sales volume, finding new customers, and finding products that these customers will buy.
The emphasis on sales usually corresponds to a de-emphasis on the process of product fulfillment. This is not to say that the fulfillment of sales to customers is de-emphasized; it means only that the process of fulfilling customer orders is not a priority of the RGEC. Product fulfillment proceeds with the same entrepreneurial approach that the sales were initially made. The result is usually a build-as-you-go product and a service delivery process that is inefficient.
Effects of rapid growth
Rapid growth, and focus on maintaining that growth, can hide the inefficiency of the product and service delivery process. First, the rapid growth in volume dilutes the operating expenses of the organization. In a business where the timing of expenses lag the timing of sales, any business success ratio that relies on gross sales as a denominator will necessarily paint a better picture than is truly the case. Second, the bias toward sales that the RGEC has will tend to motivate the organization to assess the success of the business using ratios with gross sales as a denominator. Third, the organization sends a message that operations expenses take a lower priority to sales growth, so process evaluation and feedback systems are not fully developed. As sales volume grows, so do expenses. Often, the expenses grow at a faster rate than sales.
Another effect of the rapid growth strategy is that the actual products and services being sold are often loosely defined and rely on customization to meet individual customers' needs. This is because in the entrepreneurial spirit the RGEC has not taken the time to analyze the market, define the product, and develop a product and service delivery process. If it had taken time to develop these processes it might have missed the market opportunity! Or, maybe the flexibility of a vague product allows for a market to be created where none existed before. Whatever the case, from an operations point of view the processes that are created during this growth strategy are full of special handling, customized applications, and unique one-time transactions. The operations are like those of a craft shop.
At first it may not be important that the product and service delivery infrastructure is not efficient. However, as the volume of transactions grows beyond the capabilities of a craft shop, a need to develop standard processes arises. As the market matures, there will be a demand to deliver a standard quality of product or service in order to maintain customers that have been acquired through the rapid growth strategy. There will also be a need to deliver products and services at a controllable cost. When an RGEC reaches this point, there are two directions it can go: turn to reengineering to bring order to the business process, or remain on the same path of "business as usual" and risk the business blowing itself up.
The tools of reengineering are usually underutilized in an RGEC. Often, they are foreign to the organization's culture. The reason for this is that reengineering is a structured process that requires a disciplined, methodical approach. This type of approach to business design goes against the entrepreneurial organizational culture discussed above. A reengineering project must overcome some significant obstacles prior to implementing significant change. Some of these obstacles are as follows:
* Denial of the need to reengineer - Every reengineering project faces resistance to change and denial. The RGEC is different in that it has good reason to deny the need to change. It is successful at its business and, unless the business has already blown up, has few compelling reasons to change anything.
* Lack of attention - The company is biased toward sales growth, product implementation, and market penetration. It is hard to swim upstream against this organizational culture. Reengineering requires a substantial commitment of time and energy to make it effective. It is difficult to get senior managers to apply sufficient time and attention to address operational issues.
* "Not invented here" syndrome - Individuals have difficulty accepting ideas from sources outside their domain. This obstacle is harder to surmount in an RGEC because the success of the organization is the result of the entrepreneurs in the organization implementing their ideas. The thought of an outsider telling them how to improve their operations results in comments such as, "You don't understand our business," or, "That won't work at this company."
* Need for customized products and services - The entrepreneurs in the RGEC believe that there is a market-driven need to customize their products for each customer. This belief is driven by past practices and experience. It is difficult to envision a transition to products and services that are well defined and thought out to an extent that a standard product set is robust enough to satisfy a large market segment.
* Unwillingness to turn away business - The RGEC's culture makes it difficult to turn away business. A sale is a sale, even when making the sale requires the product to be modified, enhanced, and customized to the point where it loses money for the company. "So what if it loses money, we'll make it up on volume," say the entrepreneurs.
* Attempting to satisfy all customers at all costs - This obstacle is related to the previous one, but it deals with the customer relationship once the initial product has been sold. When the customer discovers that the product he purchased has erratic quality characteristics, the RGEC tends to try to appease him with more services, for free, rather than fix the original problem. In other words, it is easier to build a new process to rework the poor quality product than it is to fix the problem at its source. This is all too easy for the RGEC, since it perceives this rework process as enhanced customer service.
* Selling before the product is developed - While the reengineering project is underway, it is likely that many new products and services will be offered to customers under the old "product development" method. This means that until the reengineering is completely implemented, it is likely that these new products and services will not have defined processes. This keeps the reengineering effort constantly playing catch-up with the product development effort. By the time a process is redesigned, the RGEC will say, "Well, we don't do it that way anymore. That product has completely changed."
* Customer desire for special attention - Customers who have had long term relationships with an RGEC will have mixed emotions regarding reengineering. Many have become used to the hand holding and special treatment they have received while the company grew from its infant stage to its current stature. On the other hand, the customers are probably anxious to see an improvement in the quality and consistency of the company's product and service delivery. The obstacle becomes getting customers to release their desire to be treated with special care, even though this special care was the result of poor product and service quality in the past.
Implementing reengineering at the RGEC
Some RGECs will realize that they need to take a step back and evaluate what they are doing, to rationalize their business processes. The reason for this realization may be financial - the company may have realized that revenue has been increasing, but income has remained flat. Or, customers may be complaining or leaving because of the erratic quality of products and services being supplied. It could even be that the company outgrew the ability to implement products and services on the fly, because it had simply become too big to react to the market without structured processes in place. In any case, the RGEC discovers it needs to go through the reengineering process, but that discovery does not alleviate the obstacles identified above. The team that is responsible for reengineering must set a strategy to mitigate those obstacles. One way to do that is to focus on the benefits of reengineering. Following are some ideas for how this can be accomplished.
1) Identify the benefits - Establishing project benefits is difficult in an RGEC. Benefits are measured improvements from a baseline. Since the RGEC has little stable history to compare to, and little process management discipline, there are probably few baseline indicators from which to measure. Other issues regarding measurable benefit goals are:
* The products and processes are moving targets and are undefined, which makes it difficult to measure cause and effect from a reengineering effort;
* When rapid growth is involved, it is difficult to achieve cost savings (versus cost avoidance), since expenses will likely rise in some proportion to volume;
* The RGEC will have developmental or strategic needs that may require adding resources to improve the long term success of the business; and
* In many cases, the benefit is continued success, versus a reduction in measurable resource utilization.
2) Establish a baseline - The first step in the reengineering process is to establish a baseline of productivity, quality, and financial status. Establishing the baseline is, by itself, a major improvement for an RGEC. It becomes the springboard from which the organization can establish a strategy, set objectives, and design an action plan.
3) Establish an organizational strategy - Small companies with strategic plans are more successful than those without strategic plans, regardless of the reengineering process. For the purposes of reengineering, it is vital that the reengineered organization support the strategic direction of the company. Therefore, it is important to develop a strategic plan. This plan can be developed within the reengineering framework, external to the reengineering effort, or in conjunction with the reengineering effort. The latter two seem most reasonable, since the baseline established as part of the reengineering project is a good beginning for developing a strategic plan. Once developed, the strategic plan is a direct feed to the next step in the reengineering process.
The baseline identifies where an organization is. The strategic plan will identify the direction in which the organization should move. The strategic plan should include discussions regarding three key success indicators: productivity, quality, and financial. This will establish expectations for the reengineering process from which to develop action plans and measure success.
4) Design the new organization - With the data from the baseline analysis and the strategic plan available, the reengineering team is ready to design the new organization. Now the project becomes more like a typical reengineering effort. The team designs a new organization, new macro business processes, new detail processes, and new management processes. The design is performed with the specific goals outlined in the strategic plan. The benefits of the changes recommended must relate to these goals.
For example, if one goal from the strategic plan is to increase market penetration through mergers or acquisitions, and this strategy is new to the organization, then any functions and processes to support this effort will need to be designed. The benefit of this design may be the creation of the organization and processes, not an improvement to productivity or quality. This is one of the gray areas of reengineering an RGEC. A strategic addition to an organization will probably affect productivity and/or quality. The problem is that thinking of benefits from strategic additions in terms of productivity or quality may be too restrictive in the context of the RGEC. The development of the strategic plan should have already encompassed an analysis of financial, productivity, and quality criteria. Therefore, to the reengineering effort, the implementation of the strategy may be the benefit.
Each recommended change must be identified and documented as either a strategic addition to the organization or a productivity, quality, or financial benefit relating to the existing organization. Through the documentation of anticipated benefits from design recommendations, the success of the reengineering implementation can be measured.
5) Measure successes of the reengineering effort - Some of the typical reengineering benefits may prove elusive to the RGEC. The total expenses of the organization will probably be higher at the end of the project than they were at the beginning (in absolute terms). Quality and productivity improvements will be measurable only for processes that existed at the beginning of the project. So, in order to capture the true overall benefit of the project, the following recommendations should be considered:
* Utilize the benefits identified in the design process to categorize expected benefits. The categorization should minimally include a separation between strategic additions and reengineered processes;
* Establish a project plan and timeline that identifies actions to be taken to implement the recommendations and the expected date of implementation;
* Track actions completed versus the plan to establish a project management methodology. Utilize the timing of actions completed to maintain an updated overall timeline;
* Track and report all planned benefits received as the recommendations are implemented; and
* At the end of the project, measure all benefits received versus expected benefits. Present the benefits by category, as previously established.
Following the project management process identified above may be difficult in an RGEC. The entrepreneurial nature of these companies does not usually foster many highly structured and disciplined managers. One might even find that recommendations for strategic additions are implemented much faster than changes to existing processes because they are more exciting and risky.
In many ways, the reengineering project at an RGEC is like any other reengineering effort. Yet, there are significant differences that will interfere with the direction of the project if they are not taken into account. These considerations include:
* The organizational culture can be predicted - The bias toward revenue growth, sales, and risk taking must be considered when initiating a disciplined process such as reengineering.
* A baseline must be established for productivity, quality, and financial criteria - This will create definition where little definition existed. Definitions of the market, the product, the processes, the results, and success factors will need to be established.
* A strategic plan must be created - This plan should document the direction that the organization intends to take. Otherwise, the reengineering effort may lead in a direction different to the desired strategy.
* The reengineering design must consider the organizational culture - This is done to accommodate people within the organization and outside the organization (customers, partners, and vendors).
* The reengineering design must consider the baseline - This is done to consider the total "distance" that the organization must travel. Accommodate phasing of changes to facilitate implementation.
* The reengineering design must consider the strategic plan - This is done to ensure that the direction built into the reengineering process is consistent with the strategic direction desired by the organization.
* A project planning and management process must be implemented prior to implementing changes - The project management process will be vital in supporting a disciplined approach to the implementation of project recommendations. It will also allow for accurate benefit tracking and reporting. In a rapidly changing environment, it is important to maintain control of the direction of the changes being made.
* All changes and the benefits they achieved must be reported - Not only does this validate the change, but it presents a carrot to the rest of the organization to continue with future changes.
Embarking on a reengineering project for a rapidly growing entrepreneurial company can be very successful. In fact, the positive aspects of growth can take away some of the bitter perceptions many people have of reengineering. It is an exciting environment that is full of rapid change and many challenges. Properly implemented, the reengineering of a rapidly growing company will establish a path toward a successful future.
Michael Scott is a senior associate with LoBue Associates Inc., a financial consulting firm based in Fair Lawn, New Jersey.
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|Date:||May 1, 1997|
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