Chapter 4 Look From the Bottom Up Simplicity Outplace work Speed Starting points Reengineering Balance Cholesterol and overhead Good and bad overhead
Look From the Bottom Up
Excerpt from Rethinking the Corporation
By Robert M. Tomasko
Looking at a company from the top down is a lot like the builder's site selection process. Choices are made about the most promising strategic turf on which to compete. The most favorable ground being one on which capabilities can be marshaled, customers pleased, and competitors kept at bay.
Choosing a place to build is the key decision that must be made before an architect can start planning for a new structure. Frequently the site has been preselected, and the architect must work with or around its characteristics. Seldom can they be ignored. At times, though, the architect is involved in the location choice. This increases the possibility that the building's design optimally fits its surroundings, as happened at Frank Lloyd Wright's prizewinning house, Fallingwater, or Louis Kahn's Salk Institute on the Pacific coast.
Likewise, organization architects have a vital role to play in helping define a corporation's functionality, helping identify its "strategic turf." Bringing their design talents to bear on the identification and focusing of competitive capabilities ensures they have a deep understanding of what the organization must make happen.
The design process, though, does not jump from site selection to building construction. A necessary interim step is the preparation of the site. When a building is to be put up, earth must be moved, waste removed, land contours altered, and a foundation laid. This preparatory activity, not as exciting as site selection or the actual construction, is just vital. Otherwise, the building might tilt, flood or otherwise be unusable. Similarly, organization design requires some preparatory effort to bridge the gap between grand strategy and creative structure.
Eventually, as Peter Drucker is fond of observing, strategy and the big picture must degenerate into work. Resizing this work has preoccupied managers throughout the world during most of the last quarter of this century. Getting more done with less, getting more of the right things done, or both, have been the targets of countless productivity and quality improvement campaigns.
Many of these efforts have been stand-alone activities of limited impact. But those that have received senior executive championship and a multi-year commitment usually more than pay back the time and resources they consume. And those improvement campaigns well integrated into a company-wide reexamination of strategies and structures have a real chance to make a lasting change in the ways business is conducted. In our analogy to the work of the building architect, they are the equivalent of site preparation.
What is a "well prepared" site, one most ready to support the organization structure? What must happen to the activities of a company before the organization can be built around them? They need, as do the businesses' array of capabilities, to go through a resizing exercise.
Work has to be resized in a way that allows it to contribute three qualities to the company:
- speed, and
These attributes of the way work is done can provide focus from the bottom-up, just as careful selection of capabilities and competences provides a sharp sense of top-down direction. When the tasks a company does are excessively complex, excruciatingly slow, and out-of-touch with the business' real needs, no amount of creative reorganizing will have much of an impact in improving the firm's performance.
Hill took this lesson to heart. When he returned to Georgia he dismantled the complicated, problem-prone factory automation system he had installed only two years before. This led to significant productivity increases - in four years Monroe-wide productivity increased more by 25% - and high quality ratings from his Japanese customers. The lesson here is not that all automation is bad, but that automating the wrong ways of doings things will most likely make things worse, not better.
Businesses worldwide are realizing that there is a significant cost to complexity. Some companies, like those in Germany's Mittelstand, avoid it by staying small. Others by staying focused, like Japan's Kao. But for many, the advice of Donald Povejsil, who headed Westinghouse's corporate planning function, is closest to the mark: "One way to get significant productivity improvements is to stop unprofitable activities. When managers stop spending all their time on insoluble problems, it's amazing how many opportunities they can find in their existing businesses."
Monroe's and Westinghouse's experiences are typical of many companies. They find that taking a hard look at what they do, and how they do it, is frequently more useful than many technological-based solutions. Simplicity in the workplace is an easily transferable virtue. It does not require a corporate culture rooted in Zen. It does, though, require a conscious effort at eliminating unnecessary work.
John Welch, GE's former chief executive, was no stranger to criticism. Labeled "Neutron Jack" in the business press for his far reaching organization streamlining and job cuts in the mid-1980s, he also had to face internal concerns about how work was to be done in GE's newly flattened pyramid. While many middle managers accepted intellectually the need for Welch's changes to ensure the corporation's global competitiveness, they also felt mounting difficulties doing their own jobs well.
A manager in GE's Medical Systems Group, and typical of many cutback survivors, complained of excessive pressure after a layer of management was eliminated and his number of direct reports doubled from ten to twenty. "Quite honestly, I feel overworked," he lamented to a journalist. "I work hard, and sometimes I don't enjoy it anymore.... I don't remember a time being as busy as I am today. And it just seems like it gets busier and busier and busier." He reported instances of subordinates walking up and introducing themselves with a "Hi! Remember me? I work for you" greeting. He constantly felt he was not as available to these people as he needed to be, and kept promising to himself: "Somehow I'm going to have to off-load some of my work."
This was a promise, Welch realized, that most middle managers were having a difficult time keeping.
There were limits to the kinds of change that can be mandated from the top of the hierarchy. Businesses could be bought and sold, as GE did, and management layers removed, but the net result might well be the conversion of the company into a corporate pressure cooker. And this pressure is something that cannot easily be released from on high, at least not without undoing many of the beneficial aspects of the restructuring. It is caused by the multitude of ways, that over time became dysfunctional, that work is done where the "rubber meets the road." Mending these ways has to start from the bottom-up. But it will not necessarily start by itself.
Getting this process moving, Welch realized, was his responsibility. Welch structured his time so he had regular opportunities to hear his middle managers "sound off," especially during his frequent appearances at GE's Crotonville, New York, management training center. He used these as opportunities to engage in sharp give-and-take debates with the managers attending classes. He encouraged them to confront and challenge the way things were commonly done. And they, in turn, tended to be open and frank about problems they were having and improvements that were needed. Welch was far enough away, hierarchically, for them to feel a degree of safety about their candor. While sessions like these stimulated a great deal of thought, their impact had a short half life. They basically were attempts to circumnavigate the hierarchy, and Welch soon realized that he needed to find a way to plug this kind of reexamination and debate into the hierarchy.
With the help of James Baughman, GE's head of executive development, a pilot program was quickly developed and launched. Welch wanted a way to, regularly, put all of GE's business leaders in front of 50-100 of their people at a time for a no-holds-barred debate about how work was getting done. He wanted something with more staying-power than the meet-the-boss, grand finale session of a typical training program.
Welch, originally from Massachusetts, patterned the sessions after the rampant democracy of New England Town meeting. Like these gatherings, they are forums for spirited debate and serious decision making. They are attended by a cross-section of a business unit's workforce: executives and hourly workers, middle managers and union leaders, clerks and computer professionals. And they are mandatory, not optional.
Called "work-out" they are Welch's way to get rid of the "thousands of bad habits accumulated since the creation of General Electric." The name has multiple meanings. It was originally borrowed from a program underway to put physical fitness centers in many GE facilities, though the sessions provide more of a mental than a physical work-out. It is a mechanism to work-out-of-the-organization unnecessary tasks, and is done in the same tough-minded manner that bank work-out specialists use when dealing with non-performing loans.
Major investment in simplicity
Each unit of GE holds several work-out sessions each year. The early ones tackle bothersome, but relatively easy-to-solve issues such as excess paperwork. Subsequent sessions deal with problems that cross organizational and turf boundaries. Teams may be made up of employees from several departments or divisions, all having a role to play on a process that cuts-across organization units, like product development or order processing. After skill and comfort with the mechanics of the work-out process are acquired, issues that span the company's boundaries might be considered. Suppliers, and possibly, customers may be invited to participate as equal members of work-out teams. One session brought 40 Sears buyers and 40 GE sales-service employees together to reexamine how GE was serving Sears, and jointly plan ways to serve them better.
The successful creation of work-out was due in no small measure to the strong partnership formed at GE between the chief executive and the senior human resource staff. It is a program whose success depends on an blend of group dynamics with power dynamics. Senior operating executives tend to be skilled at one of these, HR-types at the other. In most companies seldom do the twain meet, which explains why so many well meaning improvement programs actually lead to very little real change.
Not a GE exclusive
Oryx is the world's largest independent gas and oil producer. Based in Dallas, it was spun-off from Sun Oil as part of Sun's top down refocusing in the late 1980s. Faced with a need to keep cost reductions ongoing as the price of crude oil dropped, it refocused, from the bottom-up, all its activities with the objective of eliminating rules, reviews, reports, approvals and other procedures that were not contributing in some way to finding hydrocarbons. Teams with representatives from all departments were organized to identify the work that did not need doing. The results were impressive. An amount equivalent to half the annual earnings was eliminated from Oryx's operating costs. An observer of the team's efforts found that "the company junked 25% of all internal reports, reduced from 20 to 4 the number of signatures required on requests for capital expenditures, and compressed from seven months to six weeks the time it took to produce the annual budget."
Outplacing work through work-out is a way to rebuild simplicity into a company's workings. "For a large organization to be effective," believes John Welch, "it must be simple. For a large organization to be simple, its people must have self-confidence and intellectual self-assurance. Insecure managers create complexity. Frightened, nervous managers use thick, convoluted planning books and busy slides filled with everything they've known since childhood. People must have self-confidence to be clear, precise, to be sure that every person in their organization ... understands what the business is trying to achieve." There is a psychological aspect to simplicity as well as an analytical one. Successful resizing requires mastery of both.
Programs such as work-out can be good tools to improve productivity, but frequently the best way to resize is by adding speed.
This means reviewing the processes used to convert raw materials to products. A process is a group of interrelated work activities that accomplish this sort of transformation. Processes have cycles, sequences of activities necessary to take something from the process' beginning to end. The phrase "cycle time" is used to denote how long one of these sequences takes.
In the late 1980s several management consultants "discovered" (i.e., observed a practice already in place, but relatively unnoticed) how important cycle time, and its minimization, is to competitive success. Two of these, George Stalk and Thomas Hout, found significant financial advantages accruing to companies practicing what they called time compression. These companies organized their processes in ways that minimized the amount of time they required, and in doing so sharply reduced operating expenses, improved quality and responded fast to changes in customer needs. They were able to command prices that were from ten to one hundred percent higher than slower competitors, while their manufacturing and service costs were ten to 20 percent less. They also turned over inventory several times more often than did their competition, and were able to develop new products at only half the cost of their competitor's R&D efforts
Many of the companies they studied to learn about the importance of time were Japanese, but American companies such as Sun Microsystems, Wal-Mart and the maker of Coleman camping equipment realized similar benefits. Coleman once had to stockpile two months of factory production just to be certain it could respond to orders from its retailer customers. After an application of time reduction techniques it was able to make an ship an order within a week, and save $10 million from the inventory reductions this fast cycle time allowed. Similarly in Japan, Honda found ways to cut the time required to build motorcycles by 80% and Matsushita, even more dramatically, found ways to manufacture washing machines in two hours. The process used to take 360 hours to produce each machine.
Some European businesses have also achieved significant competitive successes through speed, especially the German Mittelstand companies. Geers, the Dortmund firm that makes the miniature hearing aid favored by former President Ronald Reagan, is able to go from idea to store displayed product in nine months. One of its key competitors, electrical giant Siemens, required three years to move through a similar product creation and introduction cycle. Geers' time advantage is so strong its owner claims "We don't need patents": time compression provides an even stronger market defense.
Like quality improvement, time-based competition has become popular in businesses through out the world. In some cultures it has even changed executive's thought processes. Whereas business strategists used to think about competitors providing their rivals with a price or cost umbrella under which they could thrive, now the more worrisome umbrella is the cycle time of the slowest competitor. For others to gain an edge, they just have to do the right things quicker. For example, both General Motors and Honda announced the establishment of new car divisions at about the same time. But by the time GM's Saturn cars were arriving in dealers showrooms, Honda's Acura has been out in the marketplace and had completed three major model changes. GM's relative slowness, or Honda's ability to operate comfortably within GM's product development cycle, is a key factor behind the market share declines of Detroit-based auto companies.
Regarding Asian managers, one of Hout's colleagues observes: "They think about time the way we do about cost." It is a scarce resource, it is something whose consumption needs to be planned and monitored. Another consultant, James Swallow, feels the most certain way to improve quality is through speed. He maintains: "Quality and cycle time are like the yin and yang. If you go after cycle time, you lower the water level in your lake, and suddenly all the rocks stick out."
What rocks? Several years ago Toyota was dissatisfied with one of its suppliers. It was taking too long for the parts Toyota ordered to arrive. Rather than cancel the order, this being Japan, Toyota sent in some staff experts to help. They found the supplier required fifteen days to produce each component that Toyota ordered. The advisors found this could be cut to six days just by reducing the size of each order. Then they redesigned the way the supplier's factory was arranged, eliminating as many as possible of the places that inventory was building up. This took another three days off the production time. Finally all the places in the plant where partially built components were allowed to pile up were eliminated. This last improvement brought the total time from order to delivery down to one day.
General Electric has also added speed by teaming with its customers. Using the work-out mechanism one GE division devised a way to let major customers enter orders directly into GE's computer system. Time saved: one week. At another division, considerable make-work time was saved when - again in the candor induced during a work-out session to which customer representatives were invited - a customer admitted to throwing away without reading six reports that GE carefully prepared for them each month!
Key starting points
- The product development process: all the steps that occur from idea generation to market introduction. The quicker these happen the easier it will be to preempt competition and ensure that the customer need you are meeting is still current.
- The order process: the activities that must occur between a customer wanting something and getting it, including those involved in making it. Speed here results both in happier customers and lower operating costs.
- The problem resolution process: mistakes happen, things malfunction, but what can be more damaging is slowness in resolving the problems and fixing the breaks.
Some fear that concern with process speed and cycle time is a return to early twentieth century Taylorism or the 1950s era of stop-watch-equipped efficiency experts. But the orientation here is quite different. The idea is not so much working faster, just smarter, and enlisting the best thinking about improvements from everyone in the organization, not blindly following the advice of an outside consultant. Companies that make time-awareness a key pillar of their management philosophy try to change the mind-set of their managers and employees, not just their behaviors. They instill an awareness of how interconnected everyone and every job is. And they measure the length of the connections in terms of time, not distance on an organization chart or salary scale.
Perot Systems, a computer services firm headed by the founder of Electronic Data Systems, H. Ross Perot, carries this concern with the psychological aspect of time even further. They apply it to their reward and recognition system. When an employee accomplishes something especially significant - perhaps closing a major sale, or successfully completing an extremely difficult assignment - a stock option bonus is paid that very day. There is no waiting until the end-of-the-year employee recognition banquet or merit review, and no lingering period of uncertainty on the employee's part wondering if anyone noticed what was accomplished. But along with the immediate recognition comes a brief speech reminding the employee that the special accomplishment is now part of the company's history. "Put it behind you, and focus all of your attention on today's challenges" is the not-too-disguised message intended to be delivered by this practice..
Perhaps just-in-time bonuses can reduce some of the psychological slack that accumulates in many organizations, but dealing with organizational slack requires heavier artillery.
An increasingly popular way to untangle a corporation's processes, and reduce its consumption of time, has been dubbed "reengineering." As with the technique of work-out, it has political and psychological as well as technical dimensions.
From a mechanical point of view, reengineering is a way not so much to speed up the old ways of doing things, but to reinvent new ones. It challenges the conventional wisdom and accepted rules about how work can best be done. It tries, starting from scratch, to use breakthrough thinking inspired by the potential of information technologies to almost literally recreate the company. Just as work-out builds on the techniques of statistical improvement, reengineering is accomplished using tools such as flow charting and work process mapping. And just as the success of work-out requires the participation of those on the receiving end of the work that needs to go out, so reengineering is most likely to succeed politically and psychologically when done by a bottom-up team with members that cut across the business' functions, and whose efforts have top management's strong backing.
Reengineering is a frontal assault on many of the industrial practices that have shaped twentieth century enterprise. Specialization of labor, many-step workflows, and subdivision of work into minute tasks allowed for the realization of economies of scale from the English factories of the late eighteenth and early nineteenth centuries. It also allowed them to make use of the abundant, low skill labor that was available as many fled rural poverty. These practices were updated by Henry Ford and others a hundred years later as the factory was turned into a tool for mass production, and eventually imported into office settings as new work methods were needed to cope with the avalanche of paperwork that accompanied the post World War II emergence of a mass consumer market.
These practices made increasingly less sense as the workforce became better educated, and more concerned with finding work that allows the autonomy necessary to make use of the schooling. They also make less sense as mechanization allows routine, repetitive tasks to be done by machines and robots, and information systems permit workers to be responsible for a bigger piece of the job - without the need for close oversight from someone with "super-vision." But just because a practice no longer makes sense, there is no guarantee it will fade away on its own.
Except possibility at the founding of a company, seldom is much deliberate attention given to designing company-wide work processes and flows. Functional competence is usually the basis for organizing most businesses (scientists in one department, accountants in another, etc.), with work needing to be passed from one functional unit to another until completed. Some reengineering practitioners like to compare this situation to the way many colonial American roads were originally laid out. The early streets followed already established cowpaths. Cows, animals that are usually in no particular hurry, tend to meander as did many of these dirt roads. When the time came to "improve" (pave) them, their routings were already well taken for granted, and just paved over. Decades later the advent of the motor car made speed more of a possibility and straight-lined roads more of a necessity. Straightening the cowpaths, though, is usually far from straightforward. In the intervening years many structures have been built along the twisting paths, and the paving tended to give an aura of permanence to the original route.
Heinz also found that sometimes it is worthwhile to slow the production line. Sales were declining of its formerly popular potato product, Tater Tots. Consumers had noticed that its once chunky taste had turned mushy. The cause: new high speed potato cutting machines. They were slowed down and the chunky taste returned as did the customers. The sales increase easily covered the cost of the process slow-down.
Citicorp once received many favorable comments in the business press for its fast home mortgage approval process. In the mid-1980s it set out to become the dominant U.S. housing lender using this speedy process to provide loans to buyers who provide little or no information about their income or assets. After several years, and a lingering recession, the strategy backfired, and many billions of dollars of its loan portfolio were significantly overdue in being repaid.
The view from the bottom up needs to be balanced with that from the top down. Mutual Benefit Life did all the "right" things in making micro-improvements to its insurance application process But these did not keep it away from the strategic difficulties that forced the New Jersey state insurance regulators to seize it and take top management control away from a creative process reengineer. Instead turnaround artist Victor Palmieri was put in charge to rehabilitate the insurer from the top down.
The resizing issue is really one of design: how should work and work processes best be configured? While it is impossible to provide one answer suitable for everything that goes on in a complex organization, the parallels between physical and organization design provides some clues.
It is very difficult to specify what makes a good design good. It is partially a matter of aesthetics, partially a matter of personal preference. But over time, design professionals and their critics have tended to favor simplicity over clutter, economy over extravagance, and a sense of proportion over exaggeration. Too much of a good thing, whether it be management practice or artistic flourish, can be dangerous.
Tools are available to help find the right degree of balance. Applying judgment and logic is usually helpful, and sometimes analogies can guide the logic. Analogies can also suggest some new ways to think about old problems. For example, here is a way to reconsider the evils of overhead expenses.
Cholesterol and overhead
Both have been severely misunderstood. Cholesterol plays a very important role in human chemistry . It forms the nucleus of the vitamin D molecule - the nutrient that builds strong bones. It is a component of several sex and regulatory hormones, and contributes to the fluidity of cell membranes. Often thought to be a fat, it isn't. Actually it helps make the bile salts which emulsify fats in the intestine.
Cholesterol is manufactured within the body. Problems arise, though, when it is ingested. Its internal production goes on regardless of the amount taken in, and its chemistry is such that it is hard to break down once a surplus occurs.
Cholesterol comes in two types, depending on how it is being transported in the blood stream. As those who have had tests for cholesterol know, one of these types (called "HDL") is sometimes dubbed "good cholesterol" because it is underway to the liver where it can do something useful for the body. "Bad cholesterol" (identified as "LDL") tends to stay put and result in deposits on artery walls. Heart attacks are often associated with high levels of the LDL variety, and decreased risk of having coronary disease with concentrations of HDL.
The relative balance between HDL and LDL is, in part, controllable. LDL increases when diets are rich in animal fats; regular aerobic exercise leads to more HDL.
Overhead, like cholesterol, is something that naturally occurs to make effective functioning possible. It plays a key role in regulating the proper balance among a firm's diverse activities. As with cholesterol, problems arise when too much is taken in or imposed on the business from the outside. It is hard to remove once in place and, like some people's dietary limitation regimes, it can be painful to cutback. Corporate aerobics, such as work-out, can keep overhead in check, but only temporarily.
There are also two kinds of overhead: good and bad. Good carries its own weight, and then some; bad only contributes bulk. The processes considered earlier, work-out and process re-engineering, are good tools to help make these distinctions. But in some cases a deeper, more thoughtful, examination is necessary than can be provided in the gung-ho, take-no-prisoners atmosphere of these outplacement mechanisms for work and time. The analogy with cholesterol can help guide the review.
Good and bad overhead
Developed by a large consulting firms (Booz, Allen & Hamilton), and ingested into LTV, this system in the mid-1970s required each division to prepare and send to Dallas a two-inch-thick planning study each year. The head of LTV's steel unit, at that time, was Thomas Graham, an irreverent, combative enemy of corporate bureaucracy. He was convinced the planning documents were having little impact on how the company was operating, other than the consumption of the resources required to generate them. He even suspected the LTV headquarters staff was not bothering to read them, so he tried an experiment.
One year, at plan submission time, he put a new cover sheet on the previous year's study, and sent it on. Not receiving any comment on this "updated" plan, be became bolder. The next year's submission also was that of two year's ago - with an updated cover - and several sections in the report's middle whited-out. Again, no sign his mischief was detected: "No one ever said a word," Graham maintains.
Strategic planning at Royal Dutch Shell has engaged the talents of senior executives in a less delinquent fashion. Shell is a world-leader in the development and use of scenario-based planning. "Scenario" is a theatrical term that has entered both the military and business vocabularies. It refers to the script and directions actors in a play or film are expected to follow. When used in corporate planning, scenarios tend to be stories, part fact and part conjecture, intended to stimulate thinking about the future. They are not forecasts per se, but possibilities - illustrations of how things might turn out.
Shell was one of the few companies to have anticipated - and thought out contingency plans to cope with - both the unexpected sharp OPEC price increases of the 1970s and the surprise free-fall in oil prices a decade later. This occurred, not because Shell has a clearer crystal ball than other companies, but as a result of its ongoing use of scenarios that dealt with a wide range of possible oil prices. The scenarios were researched and written by a talented team of in-house futurists. This team would then travel throughout the Shell network of offices, and present these alternative futures to executives in ways that would engage their imaginations and stimulate their thinking, and encourage them to consider and prepare for far-out possibilities. These discussions, in turn, helped identify the decisions Shell executives would need to make, depending on which ways oil prices actually moved.
LTV and Shell represent two ways to go about long range planning. One involves filling out forms, the other rehearsing the future. In one the information produced by the planning process enters a black hole in headquarters; in the other the central staff leave their offices and creatively stimulate the thinking of the rest of the company. One is a worthy candidate for work outplacement; the other an important contributor to balance between the future and the present. One plays the role of LDL in its corporation's metabolism; the more acts more like HDL. Both processes are costly in terms of staff salaries and management time. Across the board cutbacks in both companies would be counterproductive. In one, needed muscle would be harmed, in the other, the cuts would probably not go deeply enough.
When resizing, overhead quality can be more important than quantity. Time-compression guru Thomas Hout observed a Michigan auto part maker's overhead twice as large as its Japanese affiliate's. But the real difference was not so much the size as the type of overhead. Even though the Japanese manufacturer had only half the administrative headcount, twice as many of these people held jobs whose purpose was to make things better in the company by improving processes. In jobs such as R&D engineers, materials managers, purchasing coordinators and process development specialists. They were "good overhead" (process improvers) and focused on the company's future. The more "today" oriented overhead jobs - such as expediters, extra material handlers, inspectors and miscellaneous troubleshooters - outnumbered the Japanese improvers by four-to-one.
The resizing techniques described in this and the previous chapter may seem to be like taking the long way around to building the new corporation. But tools like capability analysis, outplacement of unnecessary work, reengineering, advanced information technologies, activity costing and benchmarking are essential to prepare its foundation. Too many reorganizations impatiently start with lines and boxes, centralization and decentralization, jobs and headcount.
And many of these also fail.
© Robert M. Tomasko 2002