Business Process Reengineering


Business process reengineering (BPR) involves radically changing a process in order to increase efficiency. The term was first coined by Michael Hammer and James Champy in their book Reengineering the Corporation: A Manifesto for Business Revolution. The radical difference between business process reengineering and the traditional view of running a business is the focus on the process of how a company operates as opposed to focusing on specific functions such as production, marketing, engineering, finance, and human resources. Companies are generally organized around functional lines. This functional alignment creates silos that tend to slow the work flow and create inefficiencies. The BPR perspective is that companies are divided into core processes, such as strategy creation, product innovation, sales, manufacturing, and customer service. These processes tend to cut across numerous functions. BPR specialists contend that the optimal mode of operation is to run a company based on processes and not on function. This improves the efficiency and the competitive position of the firm through higher profits, faster time to market, and ability to respond to customers.

Managers make changes to the way business is done on a day-to-day basis. If these efforts occur regularly, why would we consider BPR a strategic alternative as opposed to ongoing operations? BPR tends to have major implications on a company's competitive ability as well as on its financial performance. Since BPR affects both strategy and finance, it is critical to evaluate BPR by linking these implications together and validating that the strategic use of BPR results in improvements in intrinsic value. In this book, our discussion will address large-scale efforts that would likely produce swings in value.

BPR initiatives usually have the following characteristics that would portend large strategic implications and intrinsic value:

  • Top-down-driven initiative

  • Dramatic shifts in day-to-day operations

  • Enterprise use of technology to create efficiencies.

Since IT and BPR initiatives are interrelated, how can you make the distinction between the two Strategic Alternatives? The difference lies in what is driving the benefits of the SA. If the objective is solely to change an existing business process, then the initiative is a reengineering. Many technology initiatives do not involve large-scale changes in work processes and there are reengineering initiatives that do not have major technology components.

Top-Down-Driven Initiative

BPR efforts that originate from the higher levels of a business will tend to have greater repercussions than those that begin in the middle management ranks. These efforts are not simple modifications to business processes occurring in the normal course of business and tend to change the entire business model of a company. Hence, a BPR initiative that is considered a SA is a stand-alone project involving the sponsorship of senior management. Let's look at a sports example to illustrate this distinction. If the coaching staff of a football team changes the play book, this would be a strategic reengineering. A quarterback making a change to a running play based on the pursuit of the defense is a modification to the business process in the normal course of a game. The coaches can be compared to executives in a top-down BPR.

Dramatic Operational Shifts

When a process is redesigned there is a radical difference in how things get done. The following diagram illustrates the magnitude of the change between the current and target (reengineered) process in a loan-granting function. The current process includes three reviews of a loan application by different employees: the salesperson, the manager, and the analyst before an approval can be made (Exhibit 3-2).

Exhibit 3-2: Current process.

start example

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end example

The target process dramatically changes the work flow by eliminating the initial review by the salesperson and the manager. A loan application can potentially be approved without human intervention. The benefits of the new process are tremendous (the financial benefits of this example will be discussed later). The target process frees up time of the analyst, manager, and salesperson creating organizational efficiency. The organization has a much greater capacity to process loan applications because the number of reviews is reduced, meaning applicants experience a faster decision time. Exhibit 3-3 shows the makeup of this change.

Exhibit 3-3: Target process.

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end example

Enterprise Use of Technology to Create Efficiencies

One of the key drivers in reengineering efforts is the use of technology to create efficiencies in the improved process. This is also the "Achilles heel" of reengineering projects. The success of the entire effort hinges on whether the technological solution is fully utilized. The important thing to remember is that the technology will be used across your entire business. The technology will do one of two things:

  1. It will perform a particular function, as shown in our loan-granting example, where the initial screening of a loan is performed by the system as opposed to a salesperson.

  2. The technology will probably become the glue that binds work functions together. Going back to our loan example, the system is routing loans back to sales after they are approved.

Work flows are designed, metrics established, and staffing levels achieved with the assumption that workers will be capitalizing on the use of a system. In many of these efforts technology is the linchpin in the BPR initiative.

Rationale for BPR

The justification for BPR is normally found in two areas: efficiency and competitive repositioning. Since these efforts involve a large amount of change, it seems that many BPRs tend to have their value proposition change along with the effort. This is a slippery slope, which may result in not accomplishing anything. The executive team should have an extremely high degree of clarity around the objective for this effort, especially when the goal is competitive repositioning.

Efficiency

A major benefit of reengineering is that it drives down costs. Most reengineering business cases are extremely compelling. The improvement in margins and profitability can be dramatic. To illustrate the extent of cost reduction, let us compare the cost of approving a loan in the current process and the reengineered process presented earlier. Labor costs are driven down in two ways—through time reduction and step elimination. Time reduction is a simple concept. Time is money. Assume that the analyst in the loan-granting process reduces the time he needs to review a loan from two hours to thirty minutes by using technology. If his hourly labor rate is fifteen dollars, then his labor cost per loan is thirty dollars using the current process. In the reengineered environment, the cost would be $7.50. The total labor cost in the reengineered process is 75 percent lower than in the current process. Second, the reengineered environment mitigates the number of steps required to perform a process. Looking at the financial implications of the process changes illustrated in Exhibits 3-2 and 3-3, the current environment requires eight steps to render a loan decision. At most it takes five steps to make a decision in the reengineered process. The elimination of these steps results in savings of approximately twenty-six dollars per loan. The cost per loan declines by 55 percent if an analyst reviews the loan and 90 percent if it is automatically approved (see Exhibit 3-4).

Exhibit 3-4: Cost reduction.

start example

Table cost Reduction Illustration—Loan Granting

Current

Reengineered (Analyst Review)

Reengineered (System Review

Step

Employee

Time (minutes)

Labour Cost (per hour)

Cost of Step

Step

Employee

Time (minutes)

Labour Cost (per hour)

Cost of Step

Step

Employee

Time (minutes)

1

Sales

15

20

$5.00

1

Sales

15

20

$5.00

1

Sales

15

2

Sales

10

20

$3.33

2

NA

1

$0.00

2

NA

1

3

Sales

5

20

$1.67

3

Analyst

30

15

$7.50

2

NA

0

4

Manager

10

25

$4.17

4

Analyst

10

15

$2.50

4

NA

0

5

Manager

5

25

$2.08

5

Sales

20

20

$6.67

5

Sales

20

6

Analyst

90

15

$22.50

7

Analyst

10

15

$2.50

8

Sales

20

20

$6.67

Total

165

$47.92

76

$21.67

36

end example

Market Share Enhancement Through Cycle Time Reduction

Cycle time is the time it takes to perform a certain process. We talked about how time increases efficiency. Reducing process time helps the competitive position of a business. Competitive abilities improve by reducing the time it takes to accomplish a project, process, or a reaction to customers. The definition of project completion is broad in scope—it could mean anything from product development to rolling out new technology. Process completion is critical in a fast-moving environment. Compression of the product development process is critical in high technology.

The product life cycle is so sensitive to cycle time that delays narrow the window of competitive advantage for a business. Let's take the microchip business as an example. If a chip is delayed by a month, it may result in the erosion of a company's competitive advantage. This creates a pool of cash, or market demand, waiting to be taken by a competitor. The first entrant into the market place can capture a higher share (market share) of this demand before its competitors.

The first entrant into the market place also enjoys the ability to charge a higher price. Prices of chips decline rapidly over time, making it more difficult to recover research and development investments and compress profits because unit costs remain the same.

Efficient Resource Consumption

Firms can optimize the use of resources by reengineering. Resources are anything that costs money, such as people, materials, and computer time. The loan-granting process can be improved through shifting resources in steps four and five from high-cost management time to lower-cost analytical staff (see again Exhibit 3-4). Management review time is no longer required, saving approximately six dollars per loan. In the reengineered process, the responsibility of sales is to enter the application into the digital approval system. This creates a win situation for sales staff. The elimination of steps two and three allows salespeople to sell more by focusing their efforts on calling potential applicants, which increases their income potential. They no longer need to be involved in screening loan applications. The bank benefits lower its costs per loan.

Risks of Reengineering

We mentioned earlier that the business cases for reengineering are extremely compelling. Any bank CEO would want to dramatically reduce her cost per loan. Yet, why do BPR efforts fail? There are four major risk points in a reengineering engagement:

  1. Unreasonable expectations

  2. Lack of sustained executive commitment

  3. Resistance to change

  4. Technology performance failures

Unreasonable Expectations

We mentioned that a distinctive feature of BPR is that it involves large-scale change. Politically speaking, big changes require large incremental benefits to be accepted. Many of these efforts are justified by astronomical cost savings. This creates a vicious cycle of exaggeration and overcommitment to unattainable goals. The proponents of these types of initiatives will tend to hype the benefits of BPR just to get approval to move forward. The decision makers will demand more, and the proponents of the effort will overpromise just to get the initiative approved. This puts the SA at risk by overlaying unreasonable expectations on an effort that would deliver strong benefits. This feeds the next risk.

Lack of Sustained Executive Commitment

BPR efforts are difficult to execute and often encounter delays in progress. This tends to test the resolve of the executives who have sponsored the SA. As delays occur resulting from resistance to change, short-term operational disruption, and technology, senior management will look to terminate the effort, since the operation has gotten worse as opposed to better. The loan origination capability of the bank described above could have gone from two days for an approval to three days because the staff is getting used to the new process. This would cause customer complaints, declines in customer satisfaction, and loss of revenue to the bank. Since executives have been sold on improvements in customer service and cycle times, they would begin to question the effort. If things do not improve, then they may want to scrap the effort entirely. These types of disruptions also exert political pressure on the executive sponsors. Being associated with a large-scale failure could be a career-ending occurrence. Executives do not want to be associated with a failure and will tend to distance themselves from the initiative. The bar of success may have been set unrealistically high to push the initiative forward. The frustration caused by delays and political exposure may be enough to scuttle the effort, leaving angry employees, customers, and a great deal of money spent with no benefit stream.

Resistance to Change

All humans are creatures of habit, and change is not welcome unless it is absolutely necessary. Doing things differently is uncomfortable and inconvenient for most employees. Just because a new process makes logical sense does not mean that people will embrace change. For example, there was going to be a change in the renewals process for commercial lines of credit for a regional bank. The existing process was causing customer service problems for the bank's existing customers. Customers had been complaining that the process took too long, required too much information, and rehashed details that the bank already covered. The bank was losing accounts to competitor banks in the region that touted hassle-free renewals. The effort to change the renewals process was sponsored by both the president and the CEO of the bank. This was considered a reengineering effort because it affected the largest customers of the bank and cut across two major functions of the operation. The team that was created to spearhead this effort worked with the bank officers and staff to construct a process that would eliminate unnecessary work steps and diminish the functional barriers. The team was careful not to expose the bank to inordinate risk by changing its processes. In a series of meetings, all those involved agreed to the new processes and procedures, and no one voiced a dissenting opinion about the new way of doing things. The president of the bank made sure that the procedures were put in place quickly.

After one month everyone was still doing things the old way. It was discovered that the chief risk officer (although he had verbally endorsed the process) was resisting the change. He stated that he would not approve any renewals using the new process. This is one example of how resistance to change can come at any level of the organization and can foil any BPR.

Technology Performance Failures

Many reengineering efforts do not increase value because the technology that was expected to be the linchpin in the effort does not work. This can happen for many of the reasons stated above. Since employees are depending on technology to help them perform daily functions, weak performance of technology will render the new processes dysfunctional. This risk can also cause resistance to change, as well as loss of executive sponsorship. For instance, ERP systems were supposed to deliver seamless integration of functions. These implementations were notorious for dismantling a perfectly good process and replacing it with laborious, time-consuming processes that required more work than the original way of doing things.

Summary: Reengineering as a Strategic Alternative

By now you should have a clear picture of reengineering. This Strategic Alternative has many compelling positive and negative features. There are various instances where reengineering is a viable solution to creating shareholder value. This SA should be considered when you feel that the way your business is operating can be improved by breaking down functional barriers and removing needless tasks in business processes. The benefits of reengineered processes are increased efficiency, market share enhancement, and better resource consumption. The risks are unreasonable expectations, lack of sustained executive commitment, resistance to change, and technology performance failure.




Translating Strategy into Shareholder Value. A Company-Wide Approach to Value Creation
Translating Strategy into Shareholder Value: A Company-Wide Approach to Value Creation
ISBN: 0814405649
EAN: 2147483647
Year: 2003
Pages: 117

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