Last year we brought together a stellar panel of CIOs and business executives to toss Michael Hammer's theories against the wall to see if they'd stick. Along with CIO Executive Editor of Investigations Christopher Koch, the participants included John Glaser of Partners HealthCare System, David Lingren from CheMatch.com, Bud Mathaisel of Solectron, and Visa USA's Carl Pascarella and Scott Thompson.
For the last decade, Hammer, equal parts Borscht Belt comic and austere academic, author of Reengineering the Corporation (1991), has been thundering at Fortune 500 managers in his $1,000-a-head reengineering revival meetings, exhorting them to eliminate all work that does not add value to the customer. Sounds great, but keeping the faith in the real world remains a challenge.
The Process Pilgrims
Bud Mathaisel, corporate vice president and CIO, Solectron, an electronics manufacturing services company in California.
Process challenge: As a maker of the components, such as printed circuit boards, that are at the heart of cell phones, PCs and other electronic products, Solectron must constantly improve the speed and costs of its manufacturing processes to keep its name-brand electronics clientele from bolting to one of its competitors.
David Lingren, managing director of information technology, CheMatch.com, an online trading system for buying and selling bulk commodity chemicals based in Houston.
Process challenge: To continue to build its online trading community, CheMatch.com must develop value-added processes-such as personalized customer service-that set it apart from a standard commodities exchange.
Carl Pascarella, president and CEO, and Scott Thompson, executive vice president of systems development, Visa USA, a payment card company based in California.
Process challenge: Using Visa's expertise in credit card operations to create new payment processes on the web.
John Glaser, vice president and CIO, Partners HealthCare System, a corporation of affiliated hospitals in the Boston area.
Process challenge: Trying to extend its processes outside the hospital walls to support patients who have long-term diseases.
Hammer: Let's discuss where the concept of process stands in your companies today.
Mathaisel: It isn't as though we were asleep and didn't understand process before reengineering came along. It's that we didn't have the systems interoperability and the universal standards like the Internet, nor did we have the customer drivers that warranted us doing this sooner.
Solectron has what we call our value-chain model, which includes five processes: build to order, configure to order, customer relationship, materials management and new product design. So process is very much alive at our company. It's being driven by the e-business initiatives today as much as it was driven by internal efficiencies within an enterprise in the past.
Hammer: Bud makes an important point. The focus on process is something that perhaps at some deep level we'd always wanted to do but didn't have the wherewithal. It's only as the interoperability of systems allows us to break down the barriers between functions that it becomes something that we can even hope to do.
The next barrier is the intercorporate barrier. That's being broken by Internet-related technologies, and that's allowing us to extend our processes even further.
Lingren: I think you really hit one of the key things, which is processes among or between organisations. We are a very small company. Our internal processes are embryonic where they exist at all. Connecting with our trading partners and their internal processes is one of our main focuses.
Pascarella: Visa is at the apex of a number of fairly substantial changes. Five years ago, 15 or so banks contributed about 50 per cent of our business revenue. Today that business is in about five or six banks. Whenever you have that kind of consolidation, you have to manage your business differently.
We have also moved from traditional credit cards, which didn't require that we have a direct relationship with banks, to total relationship-based products such as checking cards that access a bank's accounts directly. So now we are working much more closely with our banking partners.
Electronic commerce has also had a phenomenal impact on us. It is moving so quickly that we decided to take all the e-commerce functions out of the various lines of business and put them in an entirely new organisation, called E-Visa. Then we set up a different governance system for it. Instead of having our board of directors or a subcommittee govern this very important side of the business, we went to Silicon Valley-to companies like Sun Microsystems, Yahoo, Intel and some of the online merchants-to be part of an advisory board with some of my member bank directors to really start positioning this business unit in an entirely different way.
Glaser: We have financial processes to make sure that a claim has all the data that it needs to be paid. We also have administrative processes associated with the procurement and use of medical supplies. But the core of what we spend our time on, of course, are the processes used to treat diseases.
Many of the diseases we deal with are long term-perhaps affecting the rest of a person's life. Managing a disease over the long term can involve dozens of providers that may have a common interest in that patient, with no other legal or contractual binding between them. We're examining ways to keep the person with congestive heart failure out of the hospital and enable him to maintain a life that is as good as we can make it.
CIO: What's in it for Partners to manage health-care processes outside hospital walls? Is it cost reduction? Is it customer satisfaction? What are the motivators?
Glaser: It varies by the type of patient. In pediatrics, by and large it is customer satisfaction-knowing that Moms and Dads like the comprehensiveness of care and are likely to return.
In other cases, it really is a cost question and a reimbursement question. An insurance company may say, "I'm going to give you 100,000 people. Take care of everything that goes on with them, and I'll give you a certain amount per month to do so." Then we have great incentive to look at the processes across this set of patients, across long periods of time, in a range of diseases and find ways to keep them healthy and out of the hospital.
On the other hand, if the insurance company decides to pay us for each visit, we have much less incentive to worry about the optimization of a series of visits. So it's a mixed set of motives and one of the challenges hospitals have is that all of these motives are at play at the same time.
Hammer: To Carl's point about consolidation and the need to partner more with customers, one of the universal phenomena I've seen in companies recently is that you all probably have fewer customers. Consequently, they have greater power, whether that is because they are going through mergers and acquisitions or because they are banding together in groups. Stronger customers create a greater emphasis on operating performance because they demand it. That's one of the drivers behind process.
Lingren: We really face this partnership issue in at least two different ways. We are sort of a third party, and a lot of what we do is organise around facilitating and supporting partnerships or processes among our customers. In other words, we don't buy or sell chemicals but we support a place where buyers and sellers can come together. We are independent of them, and we have to infer a lot of their processes by indirect observation and by trying to encourage them to make changes in the way they work today.
On a second dimension, the activities that we support are very complicated and involve a lot of different facets. There is the buying and selling of product. There is the logistics and the transporting of the product. There is a lot of testing and inspection. There are financial aspects. As a very small company, we can take part in only very selected parts of those processes. To create more value-added services for our customers, we are trying to form partnerships with companies that specialize in those other things.
Mathiasel: Toward this end, one of the real advantages that our industry has is "RosettaNet. [RosettaNet (www.rosettanet.org) is a nonprofit consortium of electronics manufacturers and suppliers that is developing a set of standard supply chain processes to let members hook into each other's supply chains. The first set of standard processes was due to roll out this spring.] The e-commerce drive that we're all feeling requires that we have standard ways of exchanging information and standard processes. I think each industry needs its own version of XML standards for this to work. The RosettaNet standards will let us do such things as sharing product designs across the web; sharing manufacturing requirement planning across the web and conducting externally focused ERP that reaches out to the component suppliers and any distributors that may be in the loop.
CIO: Carl, what pressures is Visa feeling regarding connecting with its customers online?
Pascarella: We're facing almost having to reinvent and reposition the way our brand is perceived in electronic commerce. To do that we have to be very bold, if you will, and that's why we set up this new discipline of the E-Visa group. You have to deal with this new channel almost as a different business where you take the core competencies that you had in your physical world and transfer those skills to the new channel. You have to have superior process design so that you can move to a new channel and motivate, attract and retain the right people.
CIO: Michael, define the extended enterprise for us and explain how companies can make sense of it.
Hammer: Instead of looking at customers at arm's length, or suppliers at arm's length, you recognize that you are all really part of what is starting to be called an extended enterprise or virtual enterprise; that it's you, your company, your suppliers, your customers, all working together as though you were one company. The whole Internet phenomena is something that's underlying and driving that very intensively.
This is in some sense the final nail in Henry Ford's coffin. Fortune recently named Henry Ford Businessman of the 20th Century. Well, he had two big ideas. One, of course, was that he did a lot of work on the assembly line. The other big idea that he had was vertical integration. At his famous River Rouge plant, rubber and iron came in one end of the plant and cars came out the other. He did everything.
Now, we're going in the opposite direction. Companies are doing less and less but doing it better and better. That's being driven very strongly by the Internet. One of the great ironies is that Ford, among other auto companies, is turning to a very small number of suppliers and saying, "We don't want to buy parts from you. You're going to deliver a whole subsystem." So one supplier delivers the entire car interior, another delivers the chassis, another supplies the drive train and another builds the body. Ford tells each supplier: "You will deal with the hundreds of vendors that go into making up those components. In fact, we're not going to do detailed technical design. We're going to give you the specs. You work it out." Then when it comes to actual assembly, the plants are organised around the subcomponents, and for final assembly, there are barely any Ford folks there. It's almost all these principal suppliers that have to work together to assemble the car under the vague guidance of somebody from Ford, Chrysler or General Motors.
The same deconstruction holds true in other industries. You can say that Visa is really the payments process for a lot of companies that don't want to have to bill individual customers. If you look at somebody like CheMatch.com, it really gives companies the opportunity to not worry about their procurement process. Let CheMatch.com do it. If you look at somebody like Partners-if they are like a lot of health-care institutions I know, they're having suppliers do more and more of the inventory management for them. Not just managing inventory but getting out inventory and delivering directly to the wards and to the floors.
So that's the phenomenon of an extended enterprise. It's being driven by, on the one hand, the need to deliver world-class value to end customers and it's driven by companies finally having the ability, because of the Internet and XML, to work together as though they were one, linking together their disparate systems with a common vocabulary over the net.
Lingren: One of the things that makes the CheMatch.com problem interesting is that unlike possibly Solectron, or a lot of traditional supply chains, we don't have an industry that thinks that if we all just work together and make things more efficient, we'll be one big happy extended enterprise. We have a number of people in the industry who make their living on contention and competition and outguessing other links in the supply chain. We have producers and we have consumers, but we also have traders who take financial positions in a chemical and bet on price movements or volatility. We have brokers. We have distributors. Balancing those different roles and attracting all of those different kinds of people to our platform is a much messier problem than just figuring out how to optimize a lot of links in a linear chain.
CIO: So how are you doing it?
Lingren: Well, it's a funny combination of trying to figure out which of those kinds of people we can attract first. Producers for example, feel that price transparency and a high degree of information about transactions works against them because they don't want their competitors to know what they are doing. We almost have to take it one trade at a time and try to figure out what's in it for each of the players and try to figure out whether to go after buyers first and then attract sellers or vice versa. It's a very tactical and ad-hoc activity.
And this brings up a question. To me, process denotes repetition and at least some measure of stability. But our business changes constantly and we don't have many repeatable processes-most are tailored to individual customers. How important is it to carefully define a process that you're only going to execute once? And at what point does process turn into a kind of portfolio of individual products or projects? Where do we need project management as opposed to process definition? What's the balance?
Hammer: That's a question that a lot of people are asking now. I don't think process means bureaucracy, but it does mean definition. If you're only going to do things once, then why bother to define the process so carefully? What I think we're going to see is a framework, a fairly loose process for doing a whole set of different projects under that framework. What do the rest of you perceive? Are your organisations stepping up to all of this stuff?
Thompson: The promise that we make to 250 million consumers here in the United States is that they're going to be able to use their Visa card whenever and wherever they want. By default, the promise that we're making is a processing promise. Our systems are going to be there to successfully process 2,500 transactions a second around the world.
We have metrics to measure the performance of our systems and the processing we do. The conflict comes about, however, when you are forced by the nature of competition to introduce new functions into this enormous processing engine. There isn't enough time to model these new functions to predict and ensure that the new functions won't negatively influence the processing of these other transactions. So you have this natural, built-in conflict to changing processes. We have it all the way down to the consumers because what we know from our studies and research is that they want that piece of plastic to be able to do more than it does today-paying for goods and services is not enough. In order to keep pace with their needs, wants and desires, we need to do things that might have been unacceptable years ago because we didn't want to negatively influence processing. We need to take more risks on a daily basis to allow our organisation to move that much faster than it would otherwise.
CIO: So do you see a great tension between what's being demanded of you on the outside and what you can accomplish internally?
Thompson: It's more a question of do you have the will to do it at the pace that the marketplace demands. So let me give you another example. Some of our merchants came to us and said, "Look, we find it ridiculous that we would have to invest in your infrastructure as well as all the other competing brand's infrastructure. Please allow us to send MasterCard transactions over your network."
You can imagine the tension in the organisation, particularly an organisation that's grown up with the brand promise that we have, when a value proposition as I've just described is presented to us. In some sense, it's unnatural. It's an unnatural business decision to say to yourself, "OK. I'm going to allow my railroad in this case to be used by my main competitor."
We eventually concluded that we absolutely need to do this because if we don't, somebody else will, and we will have lost out on a very important part of our brand promise in the relationship we have with merchants. It was really a question of will and willpower. You know, are we big enough as an organisation that we can allow somebody else to leverage our largest asset and yet continue to compete successfully as we have in the past.
CIO: Michael, what do you say to companies that are behind the curve on electronic commerce? Is ERP the best platform for large companies to begin developing electronic commerce processes?
Hammer: We are stuck with something like the equivalent of ERP as an entry point. It isn't the whole answer, but there are two reasons that I would give for an ERP solution. An enterprise cross-cut of information flow is important not only because it provides you with a consistent set of processes for interfacing to the outside world, but it's only through ERP that your operational people get the kind of insight that they need to do their knob tuning for their piece of the business. I mean, you have to remember that the enterprise is still comprised of individuals. Those individuals need to know how they are contributing to the whole because they're not doing the whole. ERP is the best way that I've seen for people in materials organisations, or people in finance, or people in the manufacturing organisations or people in transportation to know where they stand.
Thompson: This ERP approach is clearly not a direction that we intend to go in. In fact, where we are investing money for the future is at the very front end of our business-the network. Not to integrate the Internet into it, but to make our network that much more flexible than it has been historically. So the premise we're using for our architecture is get the transaction onto the network. The network will be intelligent enough to know what that transaction is and what to do with it. We can add functionality to the network much more quickly than if we tried to modify our core systems.
Lingren: This relates to a belief I have that the only process that matters is the process by which you manage change. The processes that endure are the processes that measure and respond to things happening in your customers or in the outside world and that prompt changes in the way you interact with those things. [Consultant] Dick Nolan has been saying for years, "We're moving from a situation of make and sell to a situation of sense and respond." That sensing and responding and that adaptation, that's permanent.
Hammer: I think that is an area of process that only a few companies have begun to think about, which is really the management of the process. This is about learning to think in a disciplined way and to measure how we do the strategic management work of an enterprise, of identifying new opportunities, setting priorities and doing resource allocation. In a lot of companies, that is still done ad hoc as a result of luck and talent and wisdom, and therefore, is high risk and nonreplicable. The idea of really turning that into a replicable process may be the most important thing we can do because the Internet is clearly the issue of the moment; but I'm willing to bet that in five years there will be some other issue of the moment. Instead of lurching from issue to issue, we need to have a structured process so that we can respond quickly and reliably to new environmental situations.