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Change begins at 'square zero.' (corporate governance)

At Square One, executives think about how to get the most out of what they do; at Square Zero, they think about what they ought to do.

I confess that I have very mixed feelings when discussing the Unisys turnaround. For one, I see too many reports to the effect that I "saved" our company. I can't emphasize enough how vital total employee involvement is. Our 54,000 people didn't just sit back and watch while a handful of executives executed a plan. Their contribution was essential -- they were the turnaround.

A second problem related to our successful restructuring and turnaround is that everybody focuses so much -- and with the best of intentions, I realize -- on what you just did that nobody notices what you're doing. So, let me give you a sense of where we've been at Unisys, how that relates to where we're heading, and what I think are the lessons of our experience.

Unisys is one of the world's 10 largest suppliers of information technology systems and services. While we're thought of as a mainframe company, mainframes (or, more generally, enterprise servers) account for only a quarter of our revenue. In fact, software and the range of services we offer are approximately 40% of our annual revenue.

It was a combination of accelerating technological change and shrinking hardware margins, together with a slowing hardware revenue growth rate, that forced us to begin our turnaround process. We knew that we had to restructure ourselves to accommodate these developments, and saw that we needed to do more than simply cutting back, or downsizing, our business.

Downsizing is the art of making yourself smaller. But a company that isn't correctly positioned to compete cannot be fixed for the long-term by becoming 5%, 10%, or 50% smaller. It can only heal itself by identifying where it is strong, where it is weak, how it fits in the marketplace, and then acting on that understanding.

Downsizing reflects a view that nothing is fundamentally different about your environment -- that your poor performance reflects a run of bad luck rather than the product of structural change around you. But how many bad years in a row can you blame on the economy -- even an economy as inhospitable as the one we've had for the past several years?

We had to confront the fact that what had changed was not the economy, or our luck, so much as our industry's environment. That's when we went about right-sizing our company -- finding the size and structure that supported our strengths and strategic directions.

One reporter who interviewed me recently about what was happening at Unisys asked: "In your restructuring, did you go back to Square One?" My answer was: "If only it had been that easy!" Actually, we had to go back further than that. There is a place where any company has to go before they can move forward to Square One. I call it Square Zero.

You see, at Square One, executives think about how to get the most out of what they do. At Square Zero, they think about what they ought to do. After all, as Peter Drucker once said, "There is little point in trying to do cheaply what should not be done at all."

The Right Question

At Square One, executives ask themselves: How should I organize this company? At Square Zero, they ask themselves: How do we create value for our customers?

Change really begins at Square Zero, because the answers to the questions that you get when you reach Square Zero are the ones that change your thinking and give direction to any restructuring effort. Square Zero is where outmoded paradigms go to die.

It is unfortunate that companies only seem to question how they create value for their customers when they're in crisis, because the answer continually changes as technology changes, or as your customer's objectives change, or because the competition they face changes.

Now, we had always thought that Unisys created value for our customers through our hardware products. That is, we saw ourselves as technology providers. But when we examined how our customers' information technology requirements were changing, our own thinking changed. We came to realize that product quality alone was no longer going to keep us afloat. We came to understand that the average organization that uses information technology has ample technology at its disposal. Their challenge is to harness it to solve their daily problems. What they want is someone to provide a bridge between their computing power and the problems they face.

This simple but vital realization -- that the value of computers had shifted from their manufacture to their use -- led us in a new direction. Our hardware must, and does, make an important contribution to our revenue and profit. But it was the networking, the systems integration, and the expertise in our customer's problems that were the key to creating customer value. We had to become a technology-based, service provider.

We saw that, in order to sell our traditional hardware and software products, we would have to add such value-creating services as business process consulting, systems integration and software application development. These services would lever our technology base. We would have to change our focus from providing technology to implementing information-based solutions to our customers' problems. If we couldn't create a bottom-line return for them, then it wasn't worth providing.

It was that focus -- on creating customer value -- that drove our restructuring. We determined that we would re-examine every aspect of our company to determine whether it supported this new strategic direction. If it did, then we would streamline it and keep it. If it didn't, we would farm it out or cut it off, because all tasks aside from those that create customer value-differentiators are distractions.

Redefined 'Boundaries'

That's why I say that we didn't downsize our company so much as we right-sized it -- we found the size and structure that were appropriate to our new strategy. That meant, in practice, that we had to redefine our company's "boundaries": Given this conception of how we created value for our customers, what did we have to do internally, and what could we obtain from the outside world, through alliances or other relationships?

This new lens for self-examination proved to be a powerful weapon. We asked ourselves, "Does this activity add value?" instead of, "Can we do this better?" The answers changed dramatically. As a result, we:

-- Outsourced our semiconductor fabrication;

-- Outsourced our memory disk manufacturing;

-- Outsourced all but the most sophisticated PCs;

-- Eliminated two product lines;

-- Took over 20,000 items out of our catalogue;

-- Outsourced our payroll;

-- Sold several non-strategic businesses and, well, the list goes on and on.

These and other actions changed our structure as a company, but we also needed to change our character and culture. We needed to be not only more focused but more responsive -- faster-cycle. We needed to create a "culture of action."

One way we went about doing this was our "7x7" program. That is, we insisted that every manager have a span of control of no less than seven. We also set an objective for no more than seven organization layers within the company. We're not 100% there yet, but we've made substantial progress and have succeeded in ripping entire layers out of the organization. This improves communication as well as cycle-times.

Faster and Flatter

I've learned that a faster and flatter organization structure is capable of unlocking the talent and experience of your people. For example, when we realized the magnitude of the tasks before us at Unisys, we assembled "turnaround teams" of our people from around the world who had dealt with the same corporate functions, such as managing inventories, procurement, human resources programs, accounts payable and receivable, real estate and facilities, or our internal information and telecommunications networks. We told them to identify among themselves the best practice that we had in any one region or division and to implement it on a company-wide scale.

I see each of our divisions as a laboratory in solving business problems, such as the best way to organize the sales force to deliver benefits to the customer, or the best way to deliver services to the field, or the best way to manage 1ogistics and the order-shipment-billing cycle. An executive has to use the products of these laboratories for business process innovations just as he uses other laboratories for product or technology innovations.

The results were that they found ways to generate a billion dollars in cash by improving our asset management and our cost structure. They re-engineered our internal processes to make them flatter, faster, and more focused. For example, they combined 10 different internal telecommunications networks into a single one and eliminated duplicate support. They cut back the number of suppliers with whom we did business, saving money and improving quality as a result. They reduced the number of steps in our telemarketing order-entry system from 47 to seven. In short, they fixed what they knew from their own experience was broken.

We're trying to build this idea of a quick response, action-oriented culture into our organization through new programs that stress becoming a faster-cycle company. One program that will help us reach this goal of improving cycle-time is the Unisys Total Quality Process. This quality program seeks to involve every employee in the process of producing customer satisfaction by improving the way we perform every function within the company.

When you do that, two things happen. One is that you get everybody focused on the right objectives -- you unify everybody's agenda. And the second is that, once everybody has the right agenda, they notice what needs fixing. And that is the key to ongoing restructuring. If you can get everybody focused on the right problem, they will find the right solutions.

Ongoing Restructuring

These changes in both process and culture give me hope that we're going to be able to have an ongoing restructuring that will preclude the need for future cataclysmic ones. (All restructurings ought to be ongoing. If they're not, then they're no more than a process for catching up, and catching up means paying a price. In the past several years, my own industry has taken cumulative restructuring charges of more than $22 billion. That gives you a sense of what it costs to fix the problem.)

So far, I've discussed our restructuring in somewhat conceptual terms, driven as it was by a new conception of how we created value and how we had to organize ourselves to do so successfully. But there was also the need to cut costs within our organization. Sometimes cutting costs doesn't involve concept as much as it does stepping up to difficult decisions and making them. And there was an element of that as well in our restructuring -- the need to "cut the fat."

That's not to say that we simply took a meat axe to the company. In fact, our cost-cutting efforts melded perfectly with our new directions. That's what drove the "where" and "why." For example, we were able to use our R&D budget as a lever for promoting cost-cutting changes. We used our R&D to provide a migration path for users of some of our lower-volume systems to other Unisys product families. We used R&D to create greater commonality among our componentry. And we created our Unisys Architecture, an industry-leading road map for interoperability of all of our product families which will carry this process of leveraging R&D into the future. And we used our R&D program to consolidate product families and create greater commonality among them. This will save both development and manufacturing costs down the road.

Ownership of Costs

But there were some parts of our organization in which cost reduction was simply a matter of discipline and building a sense of "ownership" of costs. The size of our staffs, for example, was far too large, at the corporate level, within the divisions, and within individual business units. We encouraged these groups to undertake a program of "process re-engineering" -- that is, to examine their work's contribution to our product or marketing divisions.

But it was also necessary to give these groups targets for their total budgets, and for sales, general, and administrative expenditures as a percentage of total revenue, because we understood that we had to implement a new economic model for our business driven by the realities of our marketplace. We had to take the same approach to our payroll and benefits program. This was as difficult a set of decisions as we've made.

It would also be misleading to discuss our turnaround and restructuring solely in terms of what we cut back, what we outsourced, or what we did away with. It is equally important to focus on what we kept and what the driving priorities of the turnaround process were.

The first of those priorities -- without equal -- was customer satisfaction. We determined early in the process that those aspects of our operation that were directly related to producing customer satisfaction were to remain within the company and, even if "reengineered," were to continue to function. So, we pressed ahead with those programs that improved our provision of a broad range of customer services, from business consulting to systems integration, after-sale service, and outsourcing.

A second priority was our ability to maintain "leadership technology," because even if the value of information technology had shifted from the provision of that technology to its use in solving business problems, we still needed to be able to bring leading technology to the table. It's not that technology was no longer critical, it's just that it was no longer sufficient.

Winning Plaudits

Our results in these two areas over the past couple of years, our turnaround period, demonstrate that we were able to carry out our priorities. Unisys, through its Japanese joint venture, Nihon Unisys Ltd., has won the nationwide customer satisfaction survey of all mainframe computer users in Japan, the most demanding market on earth, for the past three consecutive years. In 1992, it placed first against such competition as NEC, Fujitsu, Hitachi, and, of course, IBM, in 16 out of 17 categories, ranging from price performance to reliability to professional services. We've recently won comparable recognition in the U.S., France, Brazil, Australia, and elsewhere. You can't achieve that without paying attention to quality at every step of the process. And even during our period of greatest financial stress, we were able to introduce a variety of new products and services that have left the industry analysts applauding.

Another dimension of what we retained within Unisys -- and, in this case, increased substantially -- was employee involvement. Our head count went down so dramatically throughout our restructuring that it's easy to lose sight of the fact that the work of our turnaround was really employee-based. I've already mentioned our "turnaround teams," with their mission of finding the best practice within the company for each of many functions and then re-engineering the entire company to reflect that practice.

Now I've heard it said that a good story has to have two things: a happy ending and a moral. Our restructuring story has had a happy ending, but only in a manner of speaking. Actually, a restructuring story never has an ending, since the process never ends. Our return to financial health and recent success allows us to claim a happy ending, if such a thing can exist. But what about a moral?

To say that I'm an expert on restructuring is to make a virtue out of a necessity. But, speaking from experience, I do think that I can discern three important lessons in our experience that are worth sharing.

See Through the Paradigm

The first of these is that the CEO's primary focus must be on change of the organization as an ongoing process. This demands that the CEO continually gauge both his company's and his own investment in the status quo -- one being financial, the other intellectual. The CEO's job is to see through the paradigm that dominates the thinking around him, to understand both what is and what might be, and preside over a program of ongoing restructuring that bridges the two.

That might seem like an unreasonable demand. But it was George Bernard Shaw who said that it was only unreasonable men who did not accept the prevailing wisdom of the day and, therefore, that the entire history of human progress was the product of unreasonable men. I remember this saying and take it to heart every time that one of my colleagues at Unisys tells me that I'm being unreasonable.

A second lesson I've learned is the importance of "process re-engineering" -- reconceiving/redesigning how work gets done. Information technology is creating new and powerful process re-engineering possibilities that will change the way our businesses are organized.

For example, information systems today are flattening our organizations by making the information inside a company available to all. Decisions no longer need to move through the organization trying to find the groups with the needed information. Instead, the network can bring the information to the decision. That's part of process re-engineering -- making our companies flatter.

Another important dimension of process re-engineering is time-based competition. Time is becoming the crucial dimension of a company's competitiveness. Service industries, manufacturers, financial institutions, transportation and distribution companies, even public sector organizations, know that time is the standard by which our customers and clients measure us.

Information systems are the basis of timebased competition. They determine the lag between product design and manufacturing, the time between order and shipment, or between proposals and approvals, or the time it takes for a customer to call your 800 number and get a satisfactory response.

In this century, we have thought of our work processes as "low cost" or "high reliability." In the next, we will think of them as "fast and simple" because "fast and simple" will lead to "low cost" and "high reliability." And the information system that enables you to redesign and simplify your operations will make it happen.

Lastly, I have to reiterate my earlier point about employee involvement. When you ask who's responsible for the remarkable things we've accomplished at Unisys, the answer must be: "54,000 committed employees." While it's the executives who get credit for restructurings, it's employees who make them happen, by enlisting in the cause and taking ownership of the problem.

Committed and Confident

When it's all said and done, our success in our restructuring and turnaround reflected three things: * First, we were sure of our strategic direction and were prepared to follow where it led. * Second, we were committed to change -- no change was so disconcerting or dramatic that it was ruled out without due consideration.

* Third, we were confident.

That confidence shouldn't be a surprise. An executive who is comfortable with his strategy and prepared to work for change has reason to be confident. It's the executive who isn't prepared to change and who doesn't have a firm grasp of his strategic direction who has a reason not to be confident, no matter how rosy things may appear at the moment. In that sense, we remain confident at Unisys and expect to be confident for some time to come.

James A. Unruh is Chairman and Chief Executive Officer of Unisys Corp. He was with Burroughs Corp. when it merged with Sperry Corp. in 1986 to form Unisys, at which time he was named Executive Vice President responsible for corporate staffs and planning. He was elected President and COO in 1989 and Chairman and CEO in 1990.
COPYRIGHT 1993 Directors and Boards
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Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Unruh, James A.
Publication:Directors & Boards
Date:Mar 22, 1993
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