(FORTUNE Magazine) – In the manic rush to devise principles by which to manage and motivate companies, it is increasingly difficult to tell the big idea from the fashionable quick fix. An idea, reengineering, say, is hailed as the new cure-all. A herd of companies tears around chanting the new mantra, often without clear strategic objectives. Then the rush to judgment begins: "The best thing we ever did!" "No, an utter flop!" And so it goes.

Take heart: That rare thing, a consensus, is beginning to evolve around a model corporation for perhaps the next 50 years--the horizontal corporation. After more than half a century during which the functional hierarchy was the dominant--really the only --model for organizational design, we are on the cusp of a fundamental transition, suggests David Robinson, president of CSC Index: "Changes in operating models are the tectonic shifts of the business world. They don't happen often, but when they do, they flatten the unprepared." In Robinson's opinion, just such a change is under way: "It's a shift from [competing on] what we make to how we make it." American Express Financial Advisors, which is moving toward a more horizontal organization, sells financial products--insurance and mutual funds, for example. But its organizational redesign focuses on how its financial planners sell these products, emphasizing building relationships with customers.

The horizontal corporation includes these potent elements: Teams will provide the foundation of organizational design. They will not be set up inside departments, like marketing, but around core processes, such as new-product development. Process owners, not department heads, will be the top managers, and they may sport wonderfully weird titles; GE Medical Systems has a "vice president of global sourcing and order to remittance."

Rather than focusing single-mindedly on financial objectives or functional goals, the horizontal organization emphasizes customer satisfaction. Work is simplified and hierarchy flattened by combining related tasks--for example, an account-management process that subsumes the sales, billing, and service functions--and eliminating work that does not add value. Information zips along an internal superhighway: The knowledge worker analyzes it, and technology moves it quickly across the corporation instead of up and down, speeding up and improving decision-making.

Okay, so some of this is derivative; the obsession with process, for example, dates back to Total Quality Management. Part of the beauty of the horizontal corporation is that it distills much of what we know about what works in managing today. Its advocates call it an "actionable model"--jargon for a plan you can work with--that allows companies to use ideas like teams, supplier-customer integration, and empowerment in ways that reinforce each other. A key virtue, says Pat Hoye, dealer-service support manager at Ford Motor, is that the horizontal corporation is the kind of company a customer would design. The customer, after all, doesn't care about the service department's goals or the dealer's sales targets; he just wants his car fixed right and on time--so the organization makes those objectives paramount. In most cases, a horizontal organization requires some employees to be organized functionally where their expertise is considered critical, as in human resources or finance. But those departments are often pared down and judiciously melded into a design where the real authority runs along process lines. Done right, says Frank Ostroff, a McKinsey consultant who with former colleague Douglas Smith devised a clear, coherent architecture for the new model in 1992, "the horizontal corporation can take you from 100 horsepower to 500 horsepower.''

As never before, management will make all the difference. Getting from here (the vertical, functional organization) to there (the horizontal, process-based one) is quite possibly the greatest management challenge of our time. Unraveling lines of authority and laying out new ones can entangle a company as quickly as a kitten will get tied up with a ball of wool. It is critical, experts say, that processes be defined with adequate breadth, which ensures that they span the company and include customers and suppliers. The challenge, almost by definition, is an epic one; you can't timidly test it in one corner of the organization. Says Mercer Management Consulting's David Miron: "That's like building a house one room at a time without a master plan. You never engage management in thinking about all the customer accountabilities and all of the suppliers in the process flow." Yet ever larger legions of companies are taking up the challenge. Four organizations that have started down this road show how long and hazardous it can be. They're well on their way--but not there yet.


When a company is basking in the glow of 21% annual earnings growth over the past five years, it takes a special nerve to turn it inside out. American Express Financial Advisors, based in Minneapolis, contributed a hefty $428 million to its parent company's profit of $1.4 billion in 1994. But these rosy earnings disguised a thorny problem: heavy attrition of its 8,000 planners--independent contractors who exclusively sell middle-class Americans an array of AEFA financial products like mutual funds, insurance, and investment certificates for a commission. Only 30% of the planners stayed for four years. Another problem: Selling on commission may be the norm in the industry, but people at AEFA believe it leaves them vulnerable to tomorrow's competitors.

Like whom, precisely? Like Bill Gates, replies Douglas Lennick, an executive vice president, referring to Microsoft's yet-to-be-approved acquisition of Intuit, maker of Quicken software, which allows users to pay bills, manage finances, and track investments online from their PCs. Says Lennick: "The marketplace does not want cold calling and adversarial tactics. Unless the industry responds better to clients, they'll turn to the equivalent of the automatic teller machine. Quicken is an emerging torpedo boat.'' By year-end AEFA intends to put an end to cold calling and to award planners--and managers--bonuses for scoring well on client-satisfaction surveys. The goals of the redesign are explicit: a 95% client-retention rate, 80% planner retention after four years, and annual revenue growth of 18%.

To reach these goals, AEFA knew it could not content itself with installing teams at the front line and giving extra training and software support to planners, though it is doing both of those. More important, AEFA brought elements of the horizontal corporation into its gracious 29th-floor executive offices in 1994. The position of general sales manager was dropped; those responsibilities are now shared by seven executives. Each has a vertical responsibility, usually regional, and "owns" a process that horizontally spans the organization--a process like client satisfaction or account management. Below the senior managers, 180 divisions have been reconfigured into 45 clusters led by group vice presidents, who own processes like new planner integration.

Organizing by process calls for a difficult and time-consuming hand-over of power, something you don't hear much about amid all the hosannas when companies reorganize. Says Lennick: "This creates a lot of trauma. People are saying, 'How can you take my district away from me?' " Simply defining what job belongs in which process can be confusing. "One of the beauties of the vertical, functional organization is that who you report to and who's the boss is very, very clear. The new system creates ambiguity for everybody,'' says Barry Murphy, AEFA's animated vice president of client service. For example, the executive team initially made client acquisition part of the marketing process. Later the team decided it was more appropriately Murphy's job, since satisfying the client begins at the very beginning.

Because AEFA is a successful company with strong leadership, the strategic vision of the redesign seems to be shared across the company, which improves its chances of success. Marilyn Pierson, a senior financial adviser in the Cleveland office, has taken to the new client-satisfaction surveys, which she recently received back from her clients: "It's very valuable. If we want long-term clients, this is how we go about it.''

Is going horizontal a euphemism for being spread too thin? Worries Brij Singh, a region director based in Cleveland: "There is a lot going on. My concern is that something could fall through the cracks." AEFA's single-minded focus on its horizontal design may also have hobbled its ability to take advantage of opportunities. While CEO Harvey Golub is pushing American Express to think more globally, AEFA has made few moves to capitalize on the growth of a large middle class in Asia and Latin America. This is a characteristic weakness of the horizontal corporation, argues Boston Consulting Group's Philippe Amouyal, who attacked the concept in a provocative article he co-authored. An organization obsessed with satisfying today's customer is prone to miss tomorrow's. The focus on process, he says, is not enough. A corporation must continually be replenished by its core, functional disciplines--"the professional excellence that elevates a company's processes from best practices to competitive breakthroughs."


If proof were needed that the horizontal, process-based corporation has widespread appeal, here it is: Even Detroit is among the disciples. Ford's 6,200-employee customer service division is ripping up its organization chart to focus on increasing customer satisfaction, a yardstick by which it trails not only the Japanese but even General Motors. Says Ronald Goldsberry, the mildly theatrical division general manager: "We looked to see if anywhere in the division we had a quantifiable goal of 'fix it right the first time.' We couldn't find one. It shocked us."

After a 2 1/2-year study, Ford announced last fall that it was organizing around four key processes that create customer satisfaction on the service side of the business: Fixing it right the first time on time, supporting dealers and handling customers, engineering cars with ease of service in mind, and developing service fixes quicker. Like most companies going horizontal, Ford elected to keep some employees organized in functions like employee relations or the controller's office, where specialized expertise was deemed critical. The division has stopped selling parts to independent repair shops directly, even though this was profitable, because it didn't contribute to customer satisfaction and customer retention, the new touchstones.

That's the right way to think about something as fundamental as the transition from a functional organization to a horizontal one, says McKinsey's Ostroff: "This is not just about efficiency. It starts from 'Where do we want to be in ten years? What business do we want to be in? What are the processes that drive that?' " Ford made building easy-to-repair cars one of its core processes, and so rather than pinching pennies, it has doubled staffing in upstream engineering.

Dealer support is a second core process. Dealers are independent businessmen, but obviously Ford's effort to improve service would be a nonstarter without their cooperation. To enlist it, Ford is simplifying the way it works with dealers by reducing the battery of functional experts--parts specialists, marketing incentive specialists, and many, many more--dealers routinely dealt with.

Ford has abandoned its functional organization in pilot projects in Minneapolis and the Washington, D.C., area. There, field teams to serve dealers are making a promising debut. Teams are staffed by a divisional operations manager, a field engineer, and a customer service representative-three people, vs. 25 in the old, hierarchical field office. Says Dick Strauss, a Ford dealer in Richmond: "It removes several layers of hierarchy we had to go through for official recognition of a customer problem. Now we make decisions on the spot in out-of-warranty situations, and the customer service rep backs us up." Despite widespread support from dealers, the pilots, which started in the summer of 1993, will not be evaluated till the summer of this year, when Ford will decide whether they will be rolled out across the country.

This raises a nagging question: Is Ford moving fast enough? The company is just beginning to experiment with systems that complement the horizontal organizational design, like 360-degree performance reviews. Budgets are still drawn up on departmental lines. Says Marshall Roe, who heads the division's business strategy and communications: "There are things we have to solve before we pull the trigger. In the past if we got close enough, we'd pull the trigger and pick up the pieces later."

Still, managers who once competed for resources now work in teams alongside finance folk and are actually putting money they think they won't need back on the table. Dealers seem excited. The division has its new structure in place. It has defined comprehensive core processes. It has set the bold stretch target of increasing customer retention--the percentage of Ford owners whose next car is also a Ford--from 60% to 80%. Each additional percentage point is worth a staggering $100 million in profits, Ford estimates.

Trouble is, consumer perception is a stubborn beast to ride. As it tools down the horizontal highway, Ford will have its work cut out for it staying abreast of competitors, who are also focusing on after-sales service as never before. Says Ford's Donald Sparkman: "If you take too long, you could miss the market." Which may explain why some industry veterans aren't impressed. "They've set themselves a pretty big challenge. It's a noble goal," says Jake Kelderman, executive director for industry affairs for the National Auto Dealers Association, making a game effort to stifle his skepticism: "In this industry we hear a lot of talk about doing things differently. The minute the objectives are not achieved, people are off to something else."


Imagine a manufacturing operation where the manager in charge confesses he can't evaluate his three direct reports because he sees too little of them. Go down two layers to a production associate, a union steward to boot, who says he won't talk to his manager unless there is a problem because his manager has plenty on his plate. (He does check for E-mail messages daily, though.) Chaotic, you wonder? Far from it. This is a plant that has cut the time it takes for its order-to-remittance process--the period from when an order is received through shipment to payment--by 40% over the past three years.

GE Medical Systems is a tale of delayering run riot. In the Eighties, Frank Waltz took over the Milwaukee plant that makes magnetic resonance imaging machines. The managers of the nearby X-ray and CT scanner facilities moved to other positions in the past four years, so Waltz has assumed those jobs as well. Over the past six years two layers beneath him have been torn out altogether. In the X-ray facility, for instance, only a production manager stands between him and 170 people on the factory floor. Says Waltz: "Every year the organization changes. I would expect it to change next year."

Bet on it: His boss, Serge Huot, a direct French Canadian who is vice president of global sourcing and order to remittance, wonders in all seriousness if the organization is delayering fast enough: "In a big organization each layer slows down the process. By delayering you are giving people the power to change. Too many companies spend too much time thinking about this. By the time they do it, the train's passed them."

When you're as flat as GE Medical is in Milwaukee, a lot of what some companies see as the niceties of the horizontal corporation are revealed to be necessities. Waltz is perfectly matter-of-fact about why production associates routinely visit GE facilities in Europe: "They see things the managers don't see." Elsewhere, people use 360-degree appraisals to shift employee focus--for example, to get employees to pay attention to more than pleasing the boss. Waltz has a more basic reason: "When it comes to evaluating managers who report to me, I can't do it alone. I see them for a few minutes a week sometimes. I don't know how they are doing their jobs."

Quite nicely, it turns out. At the X-ray facility, a team of engineers, production associates, and sourcing staff reduced the time needed to install complex X-ray machines at customer sites from 350 hours a couple of years ago to a third of that today. They did this in part by letting production associates perform calibration and radiation tests that used to be done by field engineers. The CT scanner facility hasn't missed a delivery since the first quarter of 1994.

Is this, then, the perfect organization? "You haven't asked me about the stress," says Bob Claudio, a production group leader in testing. We're all ears, Bob. There's plenty, he confirms: Most days after work he goes home, lies down, and listens to music for an hour to recoup. Barb Barras, who started out at the plant 23 years ago in an entry-level position in subassembly production, says her colleagues' response to the delayering is mixed; people like the greater responsibility, but some dislike the accountability that goes with it. In her current position she uses CAD systems to plot the production process flow, a job reserved for engineers until a couple of years ago. Says Barras: "Twenty years ago you came in, you punched a clock. Nobody came and asked you whether there was a better way to do this."


Like many state-funded hospitals in Europe, prestigious Karolinska Hospital in Stockholm faced financial difficulties in 1992, in its case a reduction of funding by about 20%. Karolinska's then chief executive, Jan Lindsten, dreaded the prospect: He felt the hospital had already cut as much as it could without impairing the quality of care. When he turned to the hospital's professional advisory board, which includes the CEOs of companies like Volvo, they suggested trying Boston Consulting Group's Time Based Management methods to radically change the way work was done. BCG promptly set about reorganizing work at the hospital around patient flow. Instead of bouncing a patient from department to department, BCG advised, look at illness to recovery as a process with pit stops in admission, surgery, and a recovery ward.

What this means in practice is that patients now meet a surgeon and a doctor of internal medicine together, for instance, rather than separately, which results in better care and fewer hospital visits. Says Mikael Lovgren, a BCG consultant who worked with Karolinska: "Hospitals don't think along the patient dimension. They think only in terms of specializations"--not unlike many companies that manage only their functions and thereby obscure their line of vision to customers.

Karolinska's problems as it began to transform itself into a horizontal organization were compounded by the fact that it had recently been through a major decentralization, which had created 47 departments marching to their own drums. Tribalism is the human condition, it seems, within hospitals as well as corporations. Lindsten had brought the number down to 11, but coordination was still woefully haphazard. Patients had to scale the high walls between functions, often making multiple all-day visits to the hospital for tests. A patient with an enlarged prostate gland spent, on average, an astounding 255 days after his first contact with the hospital before it was treated; only 2% of that time involved actual treatment--the rest was passed waiting for appointments, shuttling between departments, and so on.

To manage patient flow, most departments in the hospital created a new position, that of "nurse coordinator," whose responsibilities include minimizing the number of visits a patient must make. Nurse coordinators--one might call them "process doctors''--look for situations where the baton is dropped in the handoff between or within departments. The position has also created a career track for nurses, who can aspire to become administrative heads of various departments. Departments have a medical chief as well, who is responsible for the professional expertise that is so obviously important in a hospital. Says Sonia Wallin, a nurse coordinator, who has worked at Karolinska since 1981: "I report to a nurse who is over the doctors. A few years ago that would have been impossible."

Not all the doctors are entirely comfortable reporting to nurses, even on purely administrative matters. The new structure has been sold to physicians as a way to free them from scheduling and other drudgery. They can concentrate instead on their clinical work and research. Some departments at Karolinska have taken to the concept of patient flow faster than others--orthopedic and plastic surgery share a ward, for example--yet hospital managers are sanguine. Says Einar Areklett, a senior manager: "Running a hospital is like running an opera house. You have a lot of Pavarottis. It takes a few years before you have everyone with you."

One of the clear lessons managers involved in similar transitions can take away from Karolinska is the need for what Reengineering Management author James Champy calls "honest eloquence." Lindsten, who has since left to take charge of a similar redesign of a hospital in Copenhagen, consistently framed his exhortations for change in the context of the hostile external environment the hospital faced. Staff moved quickly from disbelief to action. Waiting times for surgery have been cut from six or eight months to three weeks. Three of 15 operating theaters have been closed, yet 3,000 more operations are performed annually, a 25% increase. Says Dr. Sten Lindahl, head of the department of anesthesiology and intensive care: "We would hate to go back to the lazy days."

That's the funny thing about newly horizontal companies. People get positively proprietary about them. Take John Vanderpoel, a team leader in AEFA's back office, who took his 20-member team out to dinner to celebrate five good months. A rare but rich pleasure; he wasn't able to spend time with the entire team as often as he would like, he said.

Across the hall sits Sandy Weeks, a service associate in the new business section. She began ten years ago in a department that only performed address changes on accounts, an example of Taylorism gone crazy. She exudes a quiet pride in her work, though she confesses that she sometimes finds her increased responsibilities daunting. To help her in those times, she's tacked a quotation from Machiavelli's The Prince onto a wall in her cubicle. Because it addresses the anxieties of anyone caught in the throes of organizational change and illustrates how one woman has embraced the challenge, some of it seems worth reproducing:

It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things.