(FORTUNE Magazine) – RECESSION and intensifying competition have put a ring akin to a hangman's noose around the white collar, menacing the fastest-growing segment of the work force with layoffs and hiring freezes. Belatedly and often reluctantly, companies are trying to accomplish in the office what they have been forced to do in the factory -- make their workers more productive. Using techniques honed on the factory floor, corporations are changing the way they motivate, measure, and reward white-collar workers. They are stressing a pair of concepts relatively new to the world of desks and chairs: quality and customer service. In practice this means minimizing errors and rework, eliminating excessive inspections and approvals, and delegating authority. It also means focusing only on those activities that, in the popular phrase, add value for the customer -- even when the ''customer'' is a person in the department down the hall. While not all managers have caught on yet (see the following article), the imperative to improve white-collar productivity is becoming screamingly clear. Service companies -- where some 85% of all white-collar workers labor -- have begun to suffer from the sort of caustic competition that seared manufacturers during the Eighties. Banks and thrifts are failing, insurance companies and accounting firms are pink-slipping professionals, and airlines and department stores are going bankrupt. Foreign conglomerates, meanwhile, are muscling their way into finance, advertising, publishing, and entertainment. Evidence from the Bureau of Labor Statistics shows how poorly service companies have been doing in productivity. Since 1979 it has jumped an average 4.1% a year in manufacturing. But in nonmanufacturing, which includes services, mining, and construction, it has registered an average annual increase of just 0.2% over the same period, and for the past two years has declined. By analyzing BLS data, Morgan Stanley senior economist Stephen Roach calculates that white-collar productivity, as distinguished from productivity in the non-manufacturing sector, shows a negligible average annual increase of 0.28% over the past decade. Even in manufacturing companies, improving white-collar productivity is emerging as a key competitive challenge for the Nineties. A senior manager at IBM's minicomputer plant in Rochester, Minnesota, recently spent a year studying the operations of Fujitsu, Hitachi, Toyota, and other leading Japanese companies. He concluded that Big Blue's Rochester installation had approximately 20% too many ''indirect'' laborers -- engineers, accountants, administrators, and managers who don't actually assemble tangible products. At the plant, a winner of last year's Malcolm Baldrige quality award, boosting the productivity of these indirects has become a top priority. Says quality director Roy Bauer: ''Our emphasis has swung away from how we manufacture to how we design, develop, support, and integrate'' -- all white-collar functions. Dramatically increasing white-collar productivity often requires a total overhaul of the way work is done in the office. The initiative strikes at the very guts of how managers do their jobs, raising uncomfortable questions about power, prestige, and control. Managers who have zealously streamlined their factories often balk at administering the same medicine to themselves and their staffs. Executives who embrace empowerment and teamwork on the assembly line demur at delegating authority in their own bailiwicks. Instead, their knee-jerk reaction is to try to lift productivity by winnowing the ranks of low-paid clerks, typists, and telephone operators. That can backfire: The work simply flows up to the next level. Georgia Tech economist Peter Sassone, who has surveyed the work habits of middle managers and professionals for six years, concludes that they are spending progressively more of their time -- as much as one-fifth of it -- doing clerical tasks. In his new book, The Business Value of Computers, former Xerox executive Paul Strassmann analyzes the financial performance, staffing levels, and spending patterns at 292 companies. One telling conclusion: Companies with the highest profits tend to have the most clerks per knowledge worker -- manager, professional, or administrator. Automation isn't the answer, at least not all of the answer. Sure, computers can work wonders in the back office, speeding up high-volume, assembly line- type activities like check clearing, bill paying, and claims processing. But when information technology is deployed to bolster the productivity of knowledge workers it can be a colossal disappointment. Think of all the PCs, multifunction phones, and electronic mail systems that seem to have generated only more drafts, more memos, more messages, and more spreadsheets. Quips Roach of Morgan Stanley: ''The computer, if left to its own devices, is dangerously productive.'' Not to mention seductive. Observes Shoshana Zuboff, a Harvard business school professor and author of In the Age of the Smart Machine: ''There is still this childlike belief that technology will make things perfect.'' The very opposite often proves to be the case. Strassmann, who has studied the use of computers in business for 20 years, has found that the most productive companies tend to spend less per employee on management information systems than companies with average productivity. Says Strassmann: ''Managers and administrators consume information technology at a prodigious rate, ((their companies)) spending as much as 30% to 40% of their base salary on it per year.''

There is hope. Smart outfits such as Motorola, Corning, IBM, Amoco, Security Pacific, and USAA have made great strides in improving white-collar productivity, not by blindly computerizing office work but by re-engineering it. Observes Carla Paonessa, a partner at Andersen Consulting in Chicago: ''Just automating something that shouldn't have been done manually won't get you to be more productive.'' What will work is eliminating bottlenecks, reducing mistakes, focusing on customer service, and then, and only then, introducing new technology. The first step to increasing white-collar productivity may be figuring out how to measure it -- a problem that has long dogged managers, academics, and bureaucrats. Traditional indexes of labor efficiency, developed in the Model-T age, track output (units or dollars) per input (typically, man-hours). But assessing knowledge work in that manner can produce absurd, even pernicious, results. Motorola used to chart the productivity of its communications-sector employee recruiting department by the amount of money the recruiters spent to sign up each new hire. The goal was to spend less per hire each year. Yes, productivity went up steadily, but without regard to the quality of the people who were joining the company. Notes Bill Smith, a Motorola quality manager and VP: ''If you hired an idiot for 39 cents you would meet your goal.'' Motorola, also a Baldrige award winner, has completely revamped the way it calculates the effectiveness of its employees. In the office, as in the factory, the company emphasizes quality. The recruiting department, for instance, is now measured by how well its recruits subsequently do at Motorola. Did they turn out to be well qualified for the job or did they need a lot of remedial training? Were they hired at the right salary or did they leave six months later for a higher-paying job at another company? Judged by such standards, the department decided to increase its spending per new hire. Motorola now defines everything it does, from making cellular telephones to releasing quarterly earnings reports, in terms of ''opportunities to make mistakes.'' Managers then set out to determine who is making the errors and why. Most mistakes are due not to sloppy or indolent employees but to the way they have been told to do their work, procedures that are antiquated, complicated, and redundant. Says Smith: ''Your error rate is not a function of your intellect. It's a function of the process you work in.'' Identifying and rooting out potential mistakes can have a pronounced effect on productivity. When Motorola's corporate finance department balances the books at the end of every month, it has no fewer than 1.3 million chances to screw up. An ''opportunity,'' in this case, is defined as a credit or debit entry into the general ledger. Having streamlined their operations by eliminating snags, the number crunchers now get things right 99.92% of the time, 16 times as good as just 2 1/2 years ago. That means the company can close the monthly books in four days instead of eight, which translates into an annual saving of 576,000 man-hours, worth $20 million. The essence of Motorola's approach is a concept known as process management. Explains Kenneth Johnson, corporate vice president and controller: ''You look at a department as if it were a factory, with raw materials, labor, a product, a customer, and cycle time.'' Take corporate auditing, an arcane activity performed by highly trained professionals who produce a very limited number of ''products'' each year -- 150 audits of Motorola plants around the world. Three years ago it took an average of seven weeks from the time a field auditor first penned a report to the time the final version was delivered to top management. The auditor would visit a plant to vet its books, return to headquarters in Schaumburg, Illinois, write his report in longhand, give it to a typist, revise it, send it to his supervisor, revise it again, have it retyped, send it to an audit manager, have it revised again, send it to the auditee for comment, incorporate changes, and then type up a final version. Each twist and turn of the process afforded new opportunities for delay and error. To speed things up, the company sequestered four auditors and two managers in a conference room for two weeks. Their charge: to identify and eliminate those tasks that were not essential to producing quality products for the ''customers,'' Motorola's top management and the members of the corporate board's audit committee. The task force recommended radical changes in procedures and a judiciously expanded use of information technology. AS A RESULT, an auditor now writes his report in the field on a personal computer (equipped with a spell-checking program), shows it to the auditee on the spot, and incorporates his comments and those of an auditing department manager in the field. Back in Schaumburg, a secretary does a quick cleanup of the copy on the disk, then prints it out. Another auditor scores it for quality, using a 36-point questionnaire that takes about one hour to complete. (Later, the department uses the quality rating sheets in determining how to improve procedures.) The whole process, from the time the auditor returns to his office to the time his report reaches the customer, now takes just five days, a tenfold improvement in cycle time. The bottom line on the audit department: While Motorola's revenues have doubled in the past five years, it hasn't had to hire any more auditors. The department has reduced its supervisory and support staff by a third. Thanks to the improvement in quality and timeliness, Motorola now saves $1.8 million a year in external audit fees. Sometimes the hardest part of process management is figuring out where the process begins and ends. At Corning, which has been phasing in process management since 1987, the trail can originate in an engineer's head, meander through myriad departments, and come to a conclusion only in the cupboard of a consumer. Employees in the applications engineering group of the glass and ceramic maker's optical products department, for example, were chagrined when they learned that their seemingly minute drafting errors were causing quality and production problems that stretched far beyond their small work area. The five-person engineering group, located in Corning, New York, draws up specifications for ophthalmic pressings, finely engineered pieces of glass that Corning manufactures and sells to the makers of prescription lenses. Four years ago, when the department began looking at quality, it found that fully 35% of the drawings had mistakes in them, most of them mere pen slips, such as a single incorrect digit on a document that might carry 5,000 different numbers. Yet at each step of the process, a drafting error became increasingly expensive to correct -- $250 if it was caught before the toolmakers cut the tools, $20,000 if it was discovered before the assembly line started running, and as much as $100,000 if it was detected only after the pressings reached the customer. Admits supervisor Stanley Lewek: ''The accountability should have been in our group, but it wasn't. We let it slip.'' The group prescribed a series of corrective measures for itself, including taking the almost painfully simple step of sending one engineer to a proofreading class. The group also replaced its drafting tables with computerized workstations and began transmitting the drawings electronically to Corning's distant plants to be double-checked in advance of manufacturing. As a result, the error rate on drawings has dropped from 35% to 0.2%, just a diopter away from perfection. By the time one engineer retires later this year, the unit will be doing more work with fewer people. Says Lewek: ''Productivity is way up. And so is morale, because we no longer have to spend our time fighting fires.'' IN THEIR DRIVE to improve white-collar productivity, many companies are focusing not on the employee but on the customer. Service companies in particular have discovered that simply doing more work with fewer people can be a Pyrrhic victory if clients have to wait too long for a telephone to be answered, an order to be processed, or a billing dispute to be resolved. Says Robert McDermott, CEO of USAA, a prosperous insurance and investment management company: ''You can become more efficient in processing paper, but you may not be more effective in providing service to the customer.'' USAA has managed to do both. Under McDermott, a retired Air Force brigadier general who holds a Harvard MBA, the San Antonio company has expanded its owned and managed assets from $200 million to $19 billion in the past 22 years, a 95-fold increase. For all its growth, though, USAA has merely quintupled its work force. Has the customer suffered? Hardly. In an industry that too often provides dilatory and inattentive service, the company gets high marks from its two million members, the term USAA uses to describe its property and casualty policyholders, all of whom are active or retired military officers and their dependents. Nearly 99% of members renew their policies every year. When Consumer Reports surveyed customers of 51 automobile insurers, USAA ranked second in the prompt and satisfactory settlement of claims. The picture hasn't always been that bright. In the early Eighties, McDermott and his managers were alarmed by slippage in USAA's productivity growth. The problem, they concluded, wasn't the abilities of the workers but the way they were being measured. The company's efficiency index was crude and simplistic. It divided the total number of policies on the books by the number of employees who wrote, sold, and maintained them. Missing from the equation was the customer. Without taking him into account, recalls Gerald Gass, director of quality measurement and improvement: ''If you increased service by adding employees, your productivity would go down.'' WORKING WITH the American Productivity & Quality Center in Houston, USAA came up with a revolutionary evaluation system called the Family of Measures, or FOM. Every month the FOM charts the work of each of the company's 14,000 employees, scoring them on quantity, quality, timeliness, and customer service. Supervisors use FOM tallies in determining bonuses and promotions. In the telephone sales department, for instance, the FOM includes the number of policies each representative sells, the accuracy of his or her price quotes, the amount of time he or she spends on post-call paperwork, and the pleasantness of his or her telephone manners (as determined by periodic eavesdropping). Every salesperson is part of a team, each of which has a collective FOM chart and a competitive nom de guerre, such as Top Guns, Noble Eagles, and Success Express. Teams with the best monthly FOM scores are singled out for public commendation. Like the Family of Measures, USAA itself is a curious mix of military regimentation, gung-ho athleticism, and New Age management. At a time when other companies are flattening their organizational pyramids, USAA still has no fewer than 30 different pay grades. Its senior managers have the deadpan demeanor and technocratic vocabulary of former military officers, which most of them are. The company has rigid rules about lunch and coffee breaks and a strict dress code. At the same time, USAA has found that its productivity is enhanced by keeping its employees loyal, comfortable, fit, and smart -- beginning with a 69-year record of no layoffs. In 1971, USAA became one of the first companies to adopt a four-day, 38-hour workweek, a move that significantly reduced turnover and absenteeism among employees, two-thirds of whom are women. The four-million-square-foot San Antonio headquarters is set on a 286-acre campus filled with jogging trails, picnic grounds, tennis courts, and playing fields. Inside you'll find offices designed to suppress background noise and maximize daylight, a store for employees the size of a small supermarket, four cafeterias, a counseling service, and a subsidized health club. USAA devotes 2.7% of its annual budget to training, nearly double the industry average, and it dispenses some $1.4 million a year in college and graduate school tuition reimbursements. The company is such a desirable place to work that it received 24,000 applicants to fill 1,000 vacancies last year. Says McDermott, a trim 70-year-old who is lionized by his senior managers: ''You spend more waking hours at work than you do at anything else. Working conditions are very important.'' USAA is also an object lesson in the effective use of computers. ''McD,'' as the chairman is often called, aims to combine ''high tech'' (making work easier and more rewarding for the employee) with ''high touch'' (improving service to the customer). USAA's image-processing system, the most heavily utilized in American industry, allows a policy service representative to instantly call up on his or her computer terminal electronic pictures of a customer's entire file. Says McDermott: ''The system enriches the job by giving workers information right at their fingertips, so that they can make a decision on the first phone call.'' No more worrying whether a crucial letter is stuck in a file cabinet or buried on a supervisor's desk. In USAA's property and casualty insurance division, scanners take digitized pictures of all incoming documents -- some 25 million a year -- then store them on optical disks the size of phonograph records. The IBM-designed imaging system, using software developed by USAA's own engineers and programmers, also sorts and prioritizes documents. That means that the next piece of work in an employee's electronic queue is always the most urgent. The property and casualty division now destroys 99% of all documents it receives, a forest of paper that used to fill 39,000 square feet of filing cabinets every year. When executives look closely at what goes on in the office, they realize, often with an inner shudder, that many of the tasks assigned to knowledge workers are pretty dumb. Managers and professionals busy themselves with memos, meetings, reports, reviews, and revisions that add little value to the company's final products or services. Says Audrey Freedman, a labor economist at the Conference Board: ''Much of an employee's time is spent in activity that doesn't serve the customer but serves the company's need for control and bureaucratic Mickey Mouse.'' Managers at Amoco Production Co. came to much the same conclusion two years ago. The company, a subsidiary of the Chicago oil giant, realized that its traditional matrix organization, six tiers of management cross-laden with a multitude of functional bureaucracies, was sapping its productivity. Geologists, for example, were frittering away nearly 40% of their time in committee meetings, searching for approvals when they could have been searching for hydrocarbons. How could that be? President Patrick Early says, ''I think lack of attention has a lot to do with it. There's a natural human characteristic to avoid risk, so you put in another control, another report.'' TWO YEARS AGO, Early concluded that his company's mushrooming overhead could not be sustained in an era of higher production costs and cheaper oil. The solution: Junk the old system and involve employees in completely redesigning the way they do their jobs. Says Early, a precisely mannered man not given to hyperbole: ''It's a radical departure for us.'' Aided by Booz Allen consultants, Amoco is eliminating three layers of management and dismantling its functional hierarchies. Workers are being grouped into units of 500 or so, organized around multi-disciplinary teams and invested with a great deal of authority to make decisions. The first operation to be completely overhauled was the Offshore Business Unit (OBU) in New Orleans. One of the OBU's six ''natural work teams,'' for example, is made up of geologists, geophysicists, engineers, and computer scientists charged with teasing more oil from already explored fields in the Gulf of Mexico. No longer completely reliant on the production company's mainframe computer in Houston, the team does its plotting and analyzing on powerful workstations. In the past, each professional would have been segregated into a functional ghetto and subject to a chain of command that stretched from New Orleans to Houston to corporate HQ in Chicago. How well is the new system working? Last year the offshore unit replaced more than 100% of its depleted reserves, an exceptionally good record in a mature province. Sums up unit leader Peter Jordan: ''We're finding more oil and getting better financial results with the same number of professionals and fewer managers.'' Managers at the IBM plant in Austin, Texas, have figured out another way to raise the productivity of professionals -- offload some of their responsibilities onto specially trained assembly workers. At a factory that makes circuit cards for IBM PCs, engineers no longer worry about measuring the accuracy and speed of production processes or about testing the quality of the finished products. Those jobs are done instead by ''manufacturing technical associates,'' blue-collar workers who attended courses either in-house or at a nearby community college (at IBM's expense) to qualify for their new responsibilities. Empowering assembly workers gives engineers more time to do what they were hired to do -- design better products and more efficient ways to make them. IBM Austin has also racked up white-collar productivity gains by consolidating administrative functions. Notes Peter Palazzari, manager of site operations: ''Every manager wanted to control his own support staff. Every plant used to have its own little fiefdom.'' Now, Austin's accounts payable department, for example, is in Endicott, New York, electronically linked to Texas, and capable of handling the same function for many other company factories. IBM managers, not unexpectedly, are fervent believers in the use of technology to increase productivity. In Austin, two video conference rooms enable managers to save time and money on airplane trips. Almost every administrative function at the site is on-line, from employee records (including education, sick days, promotions, and raises) to expense account reimbursements (which are directly deposited into the bank account of the person filing). Says Joe Formichelli, manager of the electronic card plant: ''I've got all the stuff I used to dream about ten years ago.'' That stuff is finally becoming more user friendly, even for knowledge workers who don't know a megabyte from a modem. Senior managers with acute keyboard phobia can now tap into computer systems using nothing more sophisticated than their own vocal chords. Software engineers at Security Pacific Corp., for example, have taken an off-the-shelf, 60-word voice recognition program and expanded it to a 600-word program custom-made for the bank holding company's 200 top executives. In the past, says John Singleton, chief executive of Security Pacific Automation Co., information systems seemed to have been designed solely by and for data-processing experts. As a result, a lot of computing power went unused. Says he: ''All this information was there in the system, but people were making decisions on typed paper.'' Now, he adds, managers can get quick access to sophisticated financial analysis, speeding up decision-making and bolstering productivity. POWERFUL and more accessible computers do not, by themselves, guarantee more effective employees, as Singleton and other executives readily acknowledge. The siren call of new and improved technology has been beckoning white-collar workers and their employers for nearly three decades. But before heeding the cry, it is worth examining, measuring, and then changing the way work is done in the office. Says Gary Neilson, a Booz Allen vice president in Chicago: ''We almost never find people not busy. The question is: 'What are they working | on?' '' It's a simple query, but getting the answer right can have powerful -- and productive -- consequences.