BEATING THE RISKS OF REENGINEERING CONSULTANT MICHAEL HAMMER CONFRONTS REENGINEERING'S PROBLEMS AND TELLS HOW COMPANIES SOLVE THEM.
By MICHAEL HAMMER PHOTOGRAPH BY BRIAN SMITH

(FORTUNE Magazine) – Shortly after a reengineering program was announced at a financial services company, rumors started running rampant: Reengineering was merely a euphemism for downsizing and massive layoffs; the company was on the brink of bankruptcy; workloads would be dramatically increased. These rumors seemed to spring from nowhere but were nonetheless omnipresent.

The union leadership of a major manufacturer felt that a proposed reengineering effort would undermine the job categories and work rules they had won over the years. They also feared that the spirit of management-worker cooperation that might ensue would erode their own position. The leadership persuaded the members to vote for a strike.

One of the senior managers of a manufacturing company undergoing reengineering was uncomfortable with power sharing and pushing decision-making down into the ranks. He resigned to start a competing firm.

When done right, reengineering can work wonders for companies. But as these and countless other stories suggest, reengineering has not been an unqualified success. Many companies have undertaken reengineering efforts only to abandon them with little or no positive result. Even the concept of reengineering is widely misunderstood. Many have come to read it as a code word for layoffs and plant closings. Others dismiss it as merely the latest consultant's buzzword designed to confuse gullible management.

These failures are significant. They reflect a fundamental fact of reengineering: It is very, very difficult to do. Ronald Compton, the CEO of Aetna Life & Casualty, describes reengineering as "agonizingly, heartbreakingly tough." Virtually everyone who has lived through the experience would describe it in similar terms. But why? What is so difficult and painful about reengineering?

The answer is that many managers who attempt reengineering fail to consider the impact it can have on people. Reengineering changes all aspects of a business. When a process changes, perforce so do the jobs of those who work in that process. But more than jobs and skill requirements change. People's styles--the ways in which they think and behave--and their attitudes--what they believe is important about their work-must also be realigned to fit the new process.

In effect, a new process requires new people. They may have the same Social Security numbers and inhabit the same bodies, but make no mistake about it: These are new people. Those who think the purpose of their work is to please the boss, or to perform the same task over and over again, have little in common with those whose first concern is creating value for the customer and taking responsibility for the performance of an entire process.

New people in new jobs also need to be managed and measured in new ways. If you measure and reward people in the same old way, your behavior fits a remark by the writer Rita Mae Brown: "A good definition of insanity is doing the same old stuff in the same old way and expecting different results." New people working in new ways also need to be organized differently. The traditional emphasis on hierarchical, functional departments is replaced by an emphasis on process teams. These changes create a ripple effect as career paths, management roles, interpersonal relationships, and value systems all undergo profound transformations to support a very different way of working.

In our experience with companies struggling to implement reengineering, the No. 1 source of their difficulties has been in this area of coping with the reactions of the people to the enormousness of the change. Resistance to change is natural and inevitable. In fact, resistance to reengineering change is a sign that something significant is happening. We become very nervous if we observe no resistance, because that suggests that the change being undertaken is incremental at most. Economist John Kenneth Galbraith has a trenchant observation on the subject: "Faced with the alternative between changing one's mind and proving it is unnecessary, just about everybody gets busy on the proof."

Resistance wears many masks and takes many forms. But a standard repertoire of techniques can be used in addressing resistance. One key: Get people involved in the reengineering effort so they are criticizing from the inside rather than resisting from the outside. To bowdlerize a saying of Lyndon Johnson's, it is better to have people in the tent looking out than to have them outside the tent looking in. Making people feel they own the reengineering effort can provide a catharsis for negative feelings. People can put their energy toward improving the design rather than carping about it. Participation also creates a feeling of control; instead of "them" doing it to "you," we are all doing it together.

Getting people to buy into reengineering isn't easy. What you're trying to do is sell something to a group of people who don't want to buy. The commodity you are selling is change, and the reluctant buyers are the people in the company. In most organizations, people put little stock in anything senior management says, and for good reason. Time and again top management has announced with fanfare a reengineering process only to implement plain-vanilla cost cutting. Consequently, management communications are usually taken with a large grain of salt, if at all. The blame lies squarely with senior managers who treat their employees as slow children who can't be trusted with bad news, confusing news, or adult news. And so information is diluted, filtered, and distorted until its meaning and value are lost.

Because it understood how to explain reengineering to its people, Liberty Mutual, an insurance and financial services company with more than 20,000 employees and assets over $25 billion, got through a particularly challenging period of change. Despite its overall success, the Boston-headquartered company faced persistent problems in its middle-market unit, which concentrated on selling business insurance-workers' compensation, general liability, property, commercial auto--to small and medium-sized companies. Profitability was far from satisfactory, and key performance measures were below industry norms.

The symptoms of distress were many and varied. Most tellingly, the time from initial contact with a potential customer to issuance of a contract averaged 62 days. Yet preparing a contract took only three days. The primary cause of this long cycle was the 15 to 20 interdepartmental handoffs that each application had to endure. Moreover, the sales, underwriting, and production departments used independent computer systems, with each group having to reenter data into its own system. This led to errors, of course--and to more delays.

This was the challenge facing Liberty Mutual when it began reengineering in September 1992. Only 21 months later, in mid-1994, Liberty Mutual had implemented a solution that eliminated almost all the handoffs and reduced the time it took to process a contract by more than half. The new process that delivers these benefits is based on cross-functional teams of sales, underwriting, and loss-prevention experts, who are collectively responsible for everything from sales planning through application processing, underwriting, and policy issuance. The performance consequences have been dramatic. The company is offering quotes to many more prospects than before and has doubled the number of quotes that turn into closed deals. Overall, the annual benefits of the new process exceed $50 million a year.

Another mistake companies make: When they put a group of people in charge of reengineering, they seldom take the trouble to fuse them into a team. Successful team building should be fun and should involve discovery of oneself and of other team members. But above all it must build trust. To use a term from physics, trust is the "strong force" that binds the atoms of the team. The members are going to have to rely on each other in moments of stress and confusion. Like a trapeze artist sailing off a swing, they need to know that there will be someone to grab them at the other end.

Team building is not a one-time event; it begins in the first week and must be reinforced throughout the life of a team. A sense of solidarity and camaraderie requires frequent rejuvenation. People must be constantly reminded of the nature of a team, of their role in it, and of its rules of engagement. This process of reinforcement must run parallel with the entire reengineering process.

One approach is to instill in your reengineering teams the following three characteristics: caring, daring, and sharing. Caring means having an environment that allows open and honest communication. People must feel free to support or attack an idea without threatening the person who first proposed it. Caring involves mutual support. You don't have to be enamored of everyone on your team, but you must identify and be concerned with them.

Daring means encouraging everyone on the team to be innovative and adventurous, and to ask the hard questions. But the quest for innovation cannot turn into a competition; all brilliant ideas must be marked as team property. A team should remember Newton's dictum: "If I have seen further, it is because I stood on the shoulders of giants."

Sharing means that a team has a common objective. As the saying goes, "There are no winners on a losing team." Sharing also requires a clear sense of how everyone fits into the team. If there is a team leader, he or she must be acknowledged as such. Explicit operating procedures are needed; everyone on the team must be familiar with what is expected and acceptable, and what is not.

Once you've gotten people to buy into the reengineering process, you must find ways to break down their assumptions, biases, habits, and other ways of thinking that get in the way of true change. Consider, for instance, one of the classics of reengineering, the story of accounts payable at Ford. In the old days Ford had a department called accounts payable, which would get a purchase order for, say, a steering wheel from purchasing, a receiving document from the receiving dock, and an invoice from the vendor. It would then compare them and, if they matched, issue a check.

This process was replaced by one much simpler and less labor-intensive. Now the person on the receiving dock takes possession of the goods, checks to see if they match against an order, and if so, authorizes payment; if they don't match, the shipment is not accepted. So why wasn't that done all along?

There are three answers to this question. One is that in some cases the old process was never actually designed, it just happened. People blundered about, making ad hoc decisions about specific situations. The old "design" was simply an accretion of decisions that had coalesced into policy.

Second, in some cases the old process could not have been replaced any earlier because the requisite technology had yet to be invented. Without a computer screen glowing on the receiving dock, there was no way of quickly reconciling order and delivery.

But these answers are of purely historical interest. It's the third answer that holds the key to all successful reengineering. What kept Ford from changing sooner was an old assumption about the way work got done. Perhaps that assumption was once valid. But, like everything else in creation, assumptions are rooted in time and can become as dated as last week's newspaper.

The assumption at Ford was that accounts payable had to be a complicated, slow, bureaucratic process because the people at the receiving dock were not in a position to match invoice and order. But the advent of online computer systems made that assumption obsolete.

As at other companies, the mere fact that the assumption was no longer valid didn't mean that it ceased influencing the way work was done. Quite the contrary: At Ford and elsewhere, assumptions remain firmly fixed in people's minds precisely because they remain as invisible as the air we breathe. The first step in the brand of creativity we call assumption busting is making those assumptions visible. This means bringing everyone into an open discussion about the work and all the old habits and assumptions that are keeping people from doing their work more efficiently. Once the people at Ford recognized that this assumption about the loading dock was preventing change, they were able to take the first step toward operating in a different way.

Another obstacle companies commonly run up against in reengineering: The senior management team is incapable of undertaking change because it can't convince its people of the need for change. One company, Engelhard, a New Jersey specialty chemical and engineered materials company with sales of $2.2 billion, got around this problem by setting near-outrageous reengineering goals. These ambitious targets not only signaled that top management was serious about change but also forced employees to stretch their abilities and efforts.

Engelhard's reengineering story has its roots in the late 1980s, when the company undertook several rounds of restructuring, culminating in a 1990 effort that eliminated more than 500 jobs from the salaried work force. This restructuring aimed to reduce costs and increase speed and flexibility by eliminating bureaucracy in corporate staff and operations management. But as L. Donald LaTorre, president and COO, admits: "We learned that we really didn't change the work, we just eliminated people. This made us realize that we had to change the work as well."

The company brought all its senior managers to an off-site meeting to explore what would be needed to make Engelhard the world's leading petroleum catalyst company. At that meeting, management concluded that the improvements of the past would not be enough to fuel the future growth of the company. It was time to reengineer.

Since manufacturing was the dominant driver of the company's costs, LaTorre announced that reengineering would begin with an immediate goal of reducing manufacturing costs 20% to 33%-or 10% below best in class, whichever is greater-within 12 months. This goal was quite a stretch, since the company's restructuring and quality programs had long been hacking away at costs. No one, moreover, had the slightest idea how to achieve the goal. LaTorre also mandated that the effort pay for itself.

Challenged by these lofty targets, an Engelhard reengineering team in its petroleum catalyst business was able to reduce costs as mandated--and at the same time increase the plant's manufacturing capacity by 34%, obviating the need for a previously authorized multimillion-dollar plant expansion. Understandably, the reengineering team wanted to claim those millions as project benefits. But management ruled that additional capacity in itself is not a bankable benefit; only its output, when sold, could be considered part of the reengineering outcome. Management was not being greedy or arbitrary: Its decision gave the team a powerful incentive to find customers for the enhanced capacity.

To do that, Engelhard created cross-functional sales teams that would target major accounts. By pulling together people from different parts of the company like sales, distribution, and manufacturing, the company found it could better respond to the needs of its customers. For instance, an Engelhard distribution specialist could now understand exactly how customers wanted their products packaged, delivered, and so on. This new approach worked so well that the new capacity was sold out in six months. Thanks to reengineering, the petroleum catalyst unit increased its worldwide market share by 35% and achieved an important improvement in profits.

Not everyone was happy or remained with the program. "We've had to move some of our resisters out," LaTorre says. "But we got such good early results that there's been a lot of peer pressure to go along with the change." Not surprisingly, the greatest problems were encountered in middle management, where people felt very threatened by the changes. Little wonder. Management hierarchy in the plants was being flattened, with the worker-to-foreman ratio increasing from 8 to 1 to as much as 18 to 1.

One lesson here is that all change is loss. Even when change is for the better, there is still loss. The old life always had some redeeming aspects; no matter how bad it was, isolated aspects of it were good. Moreover, whenever people change, they leave a piece of themselves behind. Managers must do all they can to help people cope with this loss.

The reengineering revolution profoundly rearranges the way people conceive of themselves, their work, their place in society. It creates a world in which people have careers rather than jobs, in which they grow rather than get promoted, in which income is based on results rather than position. It is a world of fulfilling, exciting work, but of work that can be stressful and all-consuming. Above all it is a world of individual responsibility and autonomy, in which both you and your people have the opportunity to exhibit and profit from your individual talents. It's scary, but in the end, you won't be able to believe you ever worked in any other way.