Business Change

Not surprisingly, the CIOs we interviewed said their firms were experiencing an increasingly volatile business environment, driven by greatly intensified global competition, which has major implications for firms. There is less slack time, both in developing new products and in delivering customer orders. Customer satisfaction no longer means just prompt, courteous service; it also means designing products and services to meet individual customer needs. Equally important, costs must continuously go down, not up. Finally, firms increasingly must give multinational customers a consistent product and simplified order and payment processes across their dispersed divisions.

The global competitive environment has, in turn, led to four major changes in how organizations operate and are managed. All involve major process change. All heavily involve IT. And all are necessary to compete in the new environment.

Re-engineering Operational Processes

The combined demands of decreased cycle times, increased customer service, and decreased costs have led to the phenomenon currently called "business process redesign". The aim is to improve business performance by taking a process view of the functions and activities in the firm's operational value chain. In essence, firms are redesigning each process by creating cross-functional linkages, eliminating steps that do not add value from the customer's perspective, and focusing on the horizontal information flows needed to support the process. Although many process redesign experiments have failed, companies like Xerox, J. C. Penney, and Texas Instruments, among others, have demonstrated that redesigning across the value chain can reduce inventories, lower head counts, shorten lead times, increase customer satisfaction, and increase profits.

Re-engineering Support Processes

Similarly, firms are re-engineering administrative and support processes that have often been inefficient in both cost and service. Some early exemplars of business process redesign were in the "back office". For example, Ford and Baxter Healthcare applied automation to remove redundant steps from administrative activities and applied rationalization to create shared service organizations. This drive to improve support processes continues and has evolved to include, for example, the outsourcing of accounting functions at British Petroleum and the creation of service units for internal and external businesses as in the mortgage processing at Guardian Royal Exchange.

Rethinking Managerial Information Flows

Companies are reorganizing to obtain the advantages of both centralization and decentralization. Formerly decentralized companies (e.g., Johnson & Johnson and Citibank) are centralizing some functions, such as purchasing and logistics management, to take advantage of their size and access to worldwide information and to respond to customer demands for one-stop shopping. Formerly centralized companies (e.g., Frito-Lay and Miller Brewing) are putting more decision-making power lower in the organization to better use both sales information and existing local knowledge about customers and to provide more effective customer service. These companies are moving toward a "federal" organization model that combines elements of both centralized and decentralized structures and processes.^[2]

This increasingly understood need to have both the advantages of global resource management and responsiveness to local market conditions has led organizations to rethink more than just the horizontal (across the value chain) systems. It has also encouraged them to rethink their vertical processes—that is, their key managerial processes such as the planning process, the quality process, the sales managerial process, and so on.^[3] Managerial processes, which, with the exception of financial management, were rarely designed at all in the past, can now, with IT, be designed to deliver appropriate operational, customer, and competitive information. Companies like Frito-Lay, Miller Brewing, and Xerox have redesigned many managerial processes specifically to deliver information lower in the hierarchy to teams closer to the customers, where decisions can be made with the latest detailed information. We call this "managerial process redesign" (see figure 14.1).

Figure 14.1: Four Types of Process Redesign

Redesigning Network Processes

A fourth type of process redesign under way involves a firm's external customers and suppliers (see figure 14.1). With the advent of more cost-effective communications technology, there is also a need to emphasize the design of improved approaches to what Forrester Research terms "the customer connection".^[4] This also often extends in the reverse direction to supply chain integration, as illustrated by the Efficient Consumer Response initiative in the U.S. food industry.

Redesigning processes to serve customers is not new; it has been more than a decade since Federal Express added information to its service. In the 1980s, many organizations provided increased customer contact by giving customers access to their order-entry systems, and some, like Baxter Healthcare, went further by taking over related services for their clients.^[5] But the magnitude of such opportunities offered by cheaper, broadband communications is now more apparent. United Airlines is moving to a ticketless approach for serving customers. State Street Bank has placed information formerly held in its mainframe files at customer premises in client/server form to facilitate improved, simpler analysis by customer personnel. The tide of customer-oriented process change is just beginning to swell. The opportunities and perils presented by the Internet and various private networks for companies with established brand names (banks, insurance companies, pharmaceuticals, and so on) are increasingly evident. In the last half of this decade, we will see major attention to such customer-oriented redesign initiatives.

Equally, the movements of quick response and efficient consumer response have seized on the technologies of electronic data interchange (EDI), shared databases, and collaborative systems to take time, inventory, and quality slack out of the supply chain. Wal-Mart's integration with Procter & Gamble in the United States, 7-Eleven's fast replenishment system in Japan, and Marks & Spencer's contract management system in the United Kingdom are examples. We call this integration of processes with customers and suppliers (plus allies) "network process redesign".

These four major efforts at process redesign are having a major impact on IT organizations. Although pressure for the business changes started in the manufacturing sector, the needs to reduce costs and increase services have spread to all sectors (including service, health, and education), and all IT organizations are affected. On the one hand, information technology enables most effective process change, so the load on IT organizations is becoming much heavier. On the other hand, IT units must reduce costs, raise quality, reduce lead times, and improve customer service. The challenge for IT units is thus to do more with fewer resources.As a result, some top IT executives are heavily engaged in thinking through the reengineering of IT.

^[2]Handy 1990.

^[3]Applegate and Wishart 1989, Simons 1991.

^[4]Deutsch and McCarthy 1994.

^[5]Short and Venkatraman 1988.