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Business reengineering: the ultimate productivity gain.

"The single greatest challenge facing managers in the developed countries of the world is to raise the productivity of knowledge and service workers. This challenge, which will dominate the management agenda for the next several decades, will ultimately determine the competitive performance of companies. Even more important, it will determine the very fabric of society and the quality of life in every industrialized nation" (Drucker 1991, p. 69).

The service industry is the largest and fastest growing business sector in the United States. It accounts for about 70 percent of employment. In recent years, much attention has been focused on productivity and quality of some service industries including health care, banking, and airline. In addition to rising costs and inconsistent service quality, foreign competition is also becoming a threat to the competitiveness of American service companies. The reinvention of our service industries is essential for their survival.

The productivity problems in many service industries can be illustrated by the following instances:

1. Currently, the health care costs account for 12 percent of the gross national product. A recent poll (Time, May 10, 1993 issue) showed that 71% of Americans believe it is important for the federal government (our last hope?) to reform the health care system this year. Hospitals attribute rising costs to a shortage of professional staff, such as nurses. Paradoxically, the number of graduates entering the nursing profession has steadily gone up and the number of patients' beds and length of stay has dropped sharply for years. The fact is that nurses are now preoccupied for up to half of their time in activities, such as paperwork for Medicare, insurers and the prevention of malpractice suits, which have nothing to do with patient care (or what they are trained for). Another study shows that 84 percent of hospital employees' time is spent on non-patient care activities such as keeping records, scheduling, and attending meetings (Lathrop 1991).

2. Recently, the author (a bank veteran) had a surprise experience in obtaining a conventional mortgage loan even with a 20 percent down payment and an excellent credit history. The loan was applied for almost two months before the closing date and was being slowly processed due to the occurrences of many errors and the constant exchange of information among many people. Although persistent and frequent inquiries were made during the last two weeks before the closing date, the loan process was still not completed on time. Rather than pointing a finger to one another, we have to admit that someone, somehow, somewhere, is not doing something right. As everyone's life is being affected by the quality of services more than ever, the next productivity revolution must come from the service industries.

A service is an intangible performance which is often difficult to control and measure. In many instances, service quality is perceived by customers as speed, accuracy, courtesy, consistency, and competence. To improve service quality, management needs a better understanding of the service process. The underlying cause of failure in service companies is a lack of systematic methods for design and control of their performance. With rapidly changing market conditions and technologies, all successful, competitive companies are realizing that the old ways of doing business simply do not work anymore.

Reengineering Principles

Reengineering is a strategy to radically redesign business processes by abandoning the outdated rules and fundamental assumptions that underlie existing business operations. In contrast to the traditional approach of task orientation and fragmentation of work, Dr. Michael Hammer, a pioneer in the concept of reengineering, introduced the notion of process orientation which concentrates on and rethinks end-to-end activities that create value for customers. Hammer (1990) listed the following guiding principles of reengineering:

1. Organize around outcomes, not single tasks;

2. Have those who use the output of the process perform the process;

3. Subsume information-processing work into the real work that produces the information;

4. Treat geographically dispersed resources as though they were centralized through shared databases or telecommunication networks;

5. Link parallel activities instead of sequentially integrating their results;

6. Put the decision point where the work is performed, and build control into the process;

7. Capture information once and at the source.

Reengineering Methodology

For those companies that attempt to reengineer their existing processes, Wilkinson (1991) identified the reengineering methodology as comprised of three stages, redesign, retool, and reorchestrate.

Processes are the object of reengineering, Hammer and Champy (1993) suggest three criteria to identify the candidates for process redesign: 1) Which processes have the most trouble? 2) Which processes have the greatest impact on the customers? 3) Which processes are most susceptible to successful redesign? Managers need to look behind the symptoms of process dysfunction to discover the root cause. For example, symptoms like extensive information exchange and data redundancy may suggest that excessive fragmentation of a natural process is the root problem. Process redesign not only investigates how to get the job done the best way, but also questions the reason to do it at all. The real productivity gain for knowledge and service work comes from defining precisely the outcomes and eliminating all unnecessary work.

Next comes retool: To explore the potential of new technology, such as hardware and information systems, and to develop new skills to support the redesigned process. Many companies have tried to use heavy investment in information technology to mechanize old ways of doing business and found disappointing results. The problem? These companies left the existing processes intact and used computers simply to speed them up. Merely speeding up the old processes cannot address their fundamental performance deficiencies.

Lastly, orchestrating changes should be the responsibility of senior managers who ensure that the transformation of beliefs and understandings take place throughout the reengineering process. Wilkinson (1991) recommended the process of reorchestration to begin from the onset of the engineering effort and continue through the redesign and retool processes. The following cases will exemplify the concept of reengineering. More examples are available in Hammer and Champy (1993), a classic book on business reengineering.

IBM Credit Corporation

The business of IBM Credit, a wholly owned subsidiary of IBM, is to finance the computers, software, and services that IBM sells. Although IBM itself is in trouble, the financing business has been very profitable. In the early 1980s, an IBM salesperson needed to call in with a request for financing from one of the fourteen loan underwriters. The entire loan approval process normally took six days to two weeks and the request bounced from office to office. The turnaround time was so long that the salesperson could easily lose the business. When the salesperson tried to find out the progress, no one had a clue since the request was lost somewhere in the chain.

To redesign the process, two senior managers at IBM Credit performed an operational analysis and found that the actual work could be completed in only 90 minutes. Using the principle of reengineering, IBM Credit replaced most of its specialists, such as credit checkers and pricers, with generalists (called deal structurers). Instead of sending an application from office to office, the deal structurer processes the entire application from the beginning to the end. As a result, IBM Credit reduced the turnaround time from at least six days to four hours. Since then, it even managed to achieve a small work force reduction when the number of loan applications has increased 100 times after reengineering!

What lesson do we learn from this example? The old process was designed to handle the most difficult loan applications one can imagine, thereby requiring the intervention of highly trained specialists. In fact, most loan requests were simple and straightforward. An individual should be able to handle the entire set of tasks when he or she is supported by a computer system that provides access to all the data and tools a specialist uses. In really complicated situations, the generalists can always get help from a small pool of specialists who are experts in credit checking or pricing.

Ford Motor Company

In the early 1980s, Ford was considering an alternative to reduce the workforce in its accounts payable department. Under the old system, Ford's purchasing department would send a purchase order to a supplier with a copy going to accounts payable. When the supplier shipped the products, a receiving clerk at the Ford's warehouse would complete a form describing the items and then send it to the accounts payable. The supplier also sent accounts payable an invoice. Many of the 500 accounts payable clerks spent a great deal of time trying to match documents such as purchase orders, receiving documents, and invoices. Most of their time was devoted to tracing and clarifying discrepancies. By installing a new computer system to help the matching process, management at Ford was able to reduce the accounts payable clerks from 500 to 400 (20%).

Ford managers were excited about the improvement until they found out Mazda had only five accounts payable clerks. The principle of reengineering followed. As a result, the Ford's new accounts payable process was redesigned and radically different. What Ford managers found was preventing the mismatches in the first place is far better than investigating a way to help accounts payable clerk work more efficiently. Under the new system, a buyer in the purchasing department issues a purchase order to a vendor and simultaneously enters the order into an on-line database. When suppliers send the requested items to the receiving dock, the receiving clerk will check instantaneously if the shipment corresponds to an outstanding purchase order in the database. If it does, the receiving clerk accepts the items and issues a confirmation in the database which will automatically send a check to the supplier. (If not, the shipment will be sent back to the supplier.) Payment authorization, which was performed by accounts payable, was now accomplished at the receiving dock. This "invoiceless" process almost eliminated the need for an accounts payable department.

Mutual Benefit Life

Mutual Benefit Life (MBL) used to handle customer applications with a long, multi-step process involving credit checking, quoting, rating, underwriting, and so on. The entire sequential process would take 30 steps, 5 departments, and 19 employees to complete. While the actual work took only 17 minutes, the turnaround time would range from five to twenty five days, with most of the time spent passing information from one to another.

The president of MBL decided that a radical change was necessary to stop this nonsense. In the end, MBL abandoned existing job definitions and departmental boundaries. Case managers were assigned the responsibility for an application from receipt to issuance. Databases and computer networks allowed a variety of information to be available to each case manager. Expert systems were also developed to support the decision-making by the case manager. Empowering individuals to process an entire application has improved the operations performance and quality. An application can now be completed in as little as four hours. As a result, MBL could eliminate 100 field office positions when the volume of new applications had doubled.


Reengineering does not seek incremental improvements of the existing processes. The purpose of reengineering is to challenge those existing processes which are fundamentally inappropriate to current business realities. Reengineering is to develop strategies and tactics to fulfill the company's goals and to incorporate the maximum potential of technology. Properly applied, reengineering enables a company to do more with far less resources -- the ultimate productivity gain.


The author would like to thank Dr. Bruce May for his insightful comments that led to the improvement of this article.


Drucker, Peter F. "The new productivity challenge." Harvard Business Review, Nov/Dec 1991, pp. 69-79.

Hammer, Michael. "Reengineering work: Don't automate, obliterate." Harvard Business Review, July/Aug 1990, pp. 104-112.

Hammer, Michael and James Champy. Reengineering the corporation: A manifesto for business revolution. New York: Harper Business, 1993.

Lathrop, P. "The patient focused hospital." Healthcare Forum Journal, vol. 34, no. 4, 1991, pp. 17-21.

Wilkinson, Richard. "Reengineering: Industrial engineering in action." Industrial Engineering, August 1991, pp. 47-49.

About the author: Ronald Lau, Ph.D., is Assistant Professor of Production/Operations Management and Statistics at the School of Business, University of South Dakota.
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Author:Lau, R.S.M.
Publication:South Dakota Business Review
Date:Sep 1, 1993
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