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Reengineering Case Study

Carlos Alatorre, Stefano Core, Michael Dergis, Russ Klein, Brian Laughlin and Vivek Tannen (MBA Degree Candidates at the University of Michigan Business School) prepared this case under the supervision of Professor Allan Afuah as the basis for class discussion.

It was an overcast late December day in 1994 as James Champy, President of Computer Sciences Corporation’s (CSC) Commercial Consulting Group, sat in his office on Kendall Square. It had been a wild and profitable ride for Champy and CSC over the last four years, but there was potential trouble around the corner. CSC’s growth rate had slowed as competition had intensified. It was time to make some strategic decisions concerning the future of the company.

James Champy had served as Chairman of CSC Index, a management consulting division of Computer Sciences Corporation, until his recent promotion. Since CSC Index had "invented" reengineering in the late 1980’s, the concept had become one of the biggest management fads of the century, eclipsing the popularity of even Total Quality Management. The firm more than quadrupled in size since 1988. Champy’s 1993 book on reengineering, co-authored with Michael Hammer, reached number one on the New York Times bestseller list. Despite this phenomenal success, Champy privately wondered if his firm would have been even better off had he kept reengineering proprietary to CSC. Champy felt that identifying the factors that had led to the successful commercialization of reengineering and CSC’s subsequent growth could help him decide on a course of action that would enable CSC to meet its lofty future growth objectives. As he contemplated these challenges, his thoughts drifted back to the situation in the late 1980’s.

In the late 1980’s and early 90’s, demand for business consulting services grew rapidly. The senior management teams of many Fortune 500 corporations hired consulting firms to recommend and often implement solutions to the complex problems facing their companies. Traditionally, most of the top-tier consulting firms had been known for their "strategy consulting" services, but that distinction was gradually disappearing as many firms broadened their practices to include areas such as organizational studies and information technology. Although most large consulting firms offered a broad array of services by the early 1990’s, there were still two distinct consulting categories: strategy and information technology. Strategy consulting was dominated by "elite" firms such as McKinsey & Co., Boston Consulting Group (BCG) and Bain & Co., while the information technology system integration category was led by Andersen Consulting and Electronic Data Services (EDS). Many smaller "boutique" firms also advised corporations on strategy and IT issues.

The cost structures of most large consulting firms were quite similar. The largest expense was professional staff. Consulting professionals, who commanded high levels of compensation, were drawn from a common pool of graduates from top universities and graduate schools. Recruiting and marketing costs for consulting firms averaged approximately 7% of sales.

Although many consulting firms had devised proprietary concepts and methodologies, the quality of consulting services usually depended more on individual consultants than on firm-specific characteristics. This made it difficult for clients to predict the value of proposed projects in advance. As a result, competition among consulting firms was seldom driven by price. Firms generally priced their services at levels ranging from two and three times staff salaries. The main driver of profitability was capacity utilization. Therefore, the scope, length and number of simultaneous ongoing projects largely determined a consulting firm’s profitability.

It often takes at least a decade for a new entrant to the consulting industry to establish a strong reputation and brand recognition. The results a firm produces for its clients, the new strategies and concepts it develops, and the experiences of its staff are among the factors which senior executives use to decide whether or not to hire the firm for a new consulting engagement. As a result, a firm must constantly innovate in order to generate new business and to meet the changing requirements of its customers. To further differentiate themselves, many firms publish their own "scholarly" journals, such as the McKinsey Quarterly and the Booz•Allen Strategy & Business journal.

Although consulting firms had shown that they could add value to companies in good times as well as tougher times, economic conditions prevalent in the late 80’s and early 90’s led to unprecedented growth in the industry.

For most of the 20^th Century, an American company could prosper by being competitive in one of three areas: cost and productivity, quality and service, or speed and flexibility.

However, several important structural changes in the U.S. economy during the 1970’s and 1980’s changed this model. Declining trade barriers increased global competition for American businesses both at home and abroad. Easing of restrictions on foreign direct investment allowed foreign firms to acquire numerous American companies. At the same time, the rapid diffusion of new technologies also lowered the barriers to entry in many industries. In order to achieve success in this more competitive environment, firms now had to excel in at least two of the three areas. The success of Japanese automobile manufacturers during the 1980’s provided evidence of this structural change. By building high quality automobiles at a relatively low cost, Japanese manufacturers were able to take significant market share away from Ford, General Motors and Chrysler.

A major study on U.S industrial productivity in 1986 detailed the weaknesses prevalent in many domestic industries. This study concluded that many American companies lagged behind their leading foreign competitors in customer satisfaction, product quality, manufacturing techniques, and time-to-market for new products. The study also found that rigid antitrust laws and an emphasis on products as opposed to processes limited growth opportunities for American companies. In addition, while domestic corporations typically retained top-down organizational structures created during the 1950’s, many Japanese companies now used quality teams and flatter hierarchies to lower their costs. The study predicted that the failure of U.S. industries to modernize their organizational structures and manufacturing techniques would lead to an even further decline in American competitiveness.

Throughout the 1980’s, the trade deficit soared as the U.S. lost leadership in key manufacturing industries such as steel, automobiles and consumer electronics. These economic losses were exacerbated by the recession that began during the summer of 1990. GDP fell by 1.2% in 1991, and the Commerce Department’s index of coincident economic indicators reached its lowest point in decades during the fall of 1992. Many of America’s largest corporations incurred record losses. Ford and GM each reported multi-billion dollar losses from global operations. Consumer confidence continued to fall as the unemployment rate climbed above 8% in November of 1992. Spurred by a surging national debt, a burgeoning trade deficit and declining corporate earnings, the Federal Reserve cut the discount rate to 3% in an attempt to stimulate growth. Nevertheless, according to Fed Chairman Alan Greenspan, the pace of the economic revival was "little more than glacial."

It was in the context of sinking profitability and increasing global competition that Michael Hammer, a former MIT Computer Science Professor, and James Champy, the Chairman of CSC Index, noticed an interesting trend.

As a result of initiatives they had begun during the late 1980’s, several major American companies seemed to have fared slightly better than average during the recession. Companies such as Xerox and IBM Credit had responded to structural changes in the global environment by developing new technologies, manufacturing techniques and product development strategies. The firms that were most successful often went far beyond implementing programs such as Just-In-Time (JIT) manufacturing and Total Quality Management (TQM). These companies began to rethink their entire business models as they searched for innovative ways to become more responsive to customer needs. Consulting firms like CSC Index, which had assisted in the design and implementation of many of these initiatives, sensed that the recession gave their firms a unique opportunity to gain new business by applying similar change management programs to other troubled companies.

The Index Group, which became CSC Index when it was acquired by Computer Sciences Corporation in 1988, was a boutique technology consulting company. Its location in Cambridge, Massachusetts enabled the firm to carry out research in conjunction with MIT academics. Michael Hammer, a former IBM software engineer who taught computer science at MIT, was one of the professors who maintained an affiliation with CSC. Hammer had begun to formulate ideas about restructuring companies in the mid-1970s while working with the Index Group on information system consulting projects for Citibank and Xerox. At that time, he says, "most organizations were using computers to automate antiquated paper practices." They were merely paving cow-paths." Hammer believed that applying technology solutions to current business practices had built-in limitations in what it could accomplish. To achieve more dramatic results, companies needed to rethink the business processes themselves and then determine how to apply technology to the redesigned organization.

Prior to the Industrial Revolution, companies were mainly small job shops where a single person performed most of the work. For instance, the blacksmith paid the bills, took orders, and made the goods. The concept of the division of labor emerged out of the Industrial Revolution. As work became more complicated, it had to be broken up into smaller tasks. These tasks were then divided and assigned to different people, who became specialists at their piece of the work. This model allowed for the growth of large industrial companies where work was divided into areas that specialized in specific functions.

The first computer systems to enter Corporate America were designed to replace labor-intensive manual processes with automated, programmable functions. Accounting and payroll units were among the first areas of many companies to install large mainframe computers. Over time, a growing number of businesses used computers for assistance in tasks such as producing memos and calculating financial statements. Most companies used computers to speed up existing work, without changing the nature of the work itself.

Through his work with his clients, Hammer realized that companies that derived the greatest benefits from computers did not use them simply to automate specialized business functions. Rather, they employed technology to restructure business processes that spanned functional areas. Hammer became more interested in this subject, and he quit his job at MIT job 1982 to launch his own Cambridge (Mass.) consulting firm. He also founded a strategic research firm, called PRISM (Partnership for Research in Information Systems Management) that he ran in coordination with Thomas Davenport of CSC Index. In 1989, Davenport and Hammer co-authored an article for the Harvard Business Review entitled, "How Executives Can Shape Their Company's Information Systems."

Hammer maintained a loose affiliation with CSC Index even after he left MIT. CSC gave Hammer valuable consulting projects and access to potential clients. In return, Hammer continued to provide CSC with information regarding his research on the potential applications of new technologies.

Hammer never claimed to have invented the idea of applying technology to restructuring business processes. In fact, Hammer and Champy borrowed the term "business processes" from the quality movement of the 1980's. Through their research and work with clients, they simply recognized that technology could be used to do much more than to improve upon existing tasks. Hammer and Champy believed that the power of information technology rested in its ability to reorganize work methodologies that had been in place since the beginning of the Industrial Revolution.

Other consulting firms also recognized the revolutionary potential of computers. In the late 1980’s, Boston Consulting Group pioneered the concept of "time-based competition", which combined systems analysis with process mapping to improve a company's overall performance. TQM also relied on technology to monitor production processes.

Hammer coined the term "reengineering" in 1987. However, according to Thomas Davenport, who worked with Hammer and Champy to develop the principles of reengineering,

"Reengineering," historically applied to the process of taking apart an electronic product and using it to design a better product. Hammer and Champy realized that the same process could be applied to businesses.

The basic ideas behind reengineering were not new. However, CSC Index was the first consulting firm to recognize that several "old" concepts could be combined in a new way that could yield powerful results for clients. The three key principles of reengineering were:

1. Leveraging computer technology to improve the way in which work is performed.
2. Looking at work as business processes, rather than functional assignments.
3. Starting a change management program with a clean slate to encourage creative ways of thinking about work.

Reengineering was the first management theory to use computers as a starting point rather than an addition to the process of restructuring an organization. Thomas Gerrity, now Dean of the Wharton School of Business, worked with both MIT and CSC Index at the time that reengineering was developed. He recalled "dismissing the term as too ‘techie’ to catch on. " Forces in the economy and in the information technology and management consulting industries combined to prove him wrong.

The goal of reengineering was to move businesses away from task or functional orientations, and towards process orientations. Hammer and Champy argued that companies could increase productivity and profitability by creating work process teams that controlled the entire production process, from start to finish. This was a radical idea because it meant that teams would, in many cases, replace the traditional assembly line manufacturing process. CSC Index also believed that reengineering could be applied successfully to service industries like banking and retailing.

Hammer and Champy defined three main objectives for all reengineering projects. First, companies must empower employees at all levels of the organization. Workers should hold both the responsibility and the authority to complete their assignments. Customer satisfaction must be every employee’s primary goal at all times. Second, organizations must be re-structured to eliminate functional chimneys and unnecessary handoffs. Finally, information technology systems should be installed in order to allow the free flow of information within a company. Hammer says, "middle managers…spend a lot of time as communications conduits, but now, employees can get access through their PCs to all the information they need. Overall, there will be a greatly reduced need for middle management work."

Hammer and Champy used reengineering "success stories" such as IBM Credit and Xerox to demonstrate that restructuring business processes and freeing workers from needless bureaucracy would yield many benefits. They asserted that reengineering increased productivity and customer satisfaction, reduced processing times and slashed non-value added management overhead costs. In its entirety, reengineering was about growing the business by increasing productivity, not about cutting costs through labor reductions.

Numerous business frameworks had gained widespread acceptance in the past. The BCG Growth Share Matrix, the McKinsey/GE Industry Attractiveness Model and Total Quality Management (TQM) were among the many concepts that preoccupied both consultants and boards of directors at various times during the past thirty years. However, very few business "fads" ever enjoyed the degree of support that reengineering received in the early 1990’s.

Thomas Davenport, one of the architects of reengineering at CSC Index, stated, "just as the concept of reengineering wove together three previously unrelated strands, its application brought together an iron triangle of powerful interest groups: top managers at big companies, big-time management consultants, and big-league information technology vendors."

By 1992, many senior executives at Fortune 500 corporations were desperate to find solutions to mounting problems. The recession, combined with increased competition at home and abroad, had eroded profit margins. Despite recent large-scale business purchases of personal computers, network servers and other new technologies, productivity had not increased as much as expected. The traditional fixes such as financial restructuring had been tried, usually without success. As "reengineering" success stories began to receive attention from the business press, many senior managers started to believe that it could offer a solution to their problems.

William Buehler, senior vice president at Xerox, explained that fear of failure often prevented top-level management from implementing broad strategic changes. According to Buehler, "You can see a high-performance factory or office, but it just doesn't spread." Management consulting firms proposed that they could solve this dilemma by offering impartial advice and by dismantling internal organizational barriers. Managers realized that if consultants were able to deliver on their promises, the benefits from reengineering would far outweigh the costs of hiring consulting firms.

Consulting firms recognized the potential of reengineering to generate explosive growth. Reeningeering projects were more lucrative for consulting firms than other consulting assignments due to the high number of people and the extensive length of time needed to complete the initiatives. Consulting firms also found that reengineering projects created opportunities to sell additional projects such as outsourcing and systems development to their clients.

The technology industry also played an important role in promoting reengineering. During the 1980’s, American business purchased more than $1 trillion of hardware, software, and communications products. However, as of the early ‘90’s many businesses had not seen substantial cost savings or productivity gains resulting from these acquisitions. According to Thomas Davenport, reengineering "justified all that spending - and promised to increase it. In addition, many of these [technology] vendors had gone through reengineering themselves; they could offer consulting services on top of their technology. A nifty double dip." Given that reengineering projects were intended to redesign business processes to take advantage of advances in computing power, it is no surprise that American high-tech companies strongly advocated the concept.

Michael Hammer introduced the business world to reengineering with the 1990 article "Reengineering Work: Don't Automate, Obliterate," in the July/August edition of the Harvard Business Review. The article presented a description of reengineering and a case study of several companies that, in Hammer’s view, had successfully reengineered. In explaining the essence of reengineering, Hammer said,

The ideas put forth in the article, were not new, but they hit a nerve with the business community. The number of articles written on the subject of "reengineering" grew from 8 in 1990 (only 1 related to business reengineering), to 147 in 1992 (121 about business reengineering) and mushroomed to 489 in 1994.

The market was ripe for reengineering, and Hammer and CSC Index exploited it. While developing a strategy department based on reengineering, Champy and Hammer began collaborating on the book that would eventually make reengineering a household word.

Reengineering the Corporation: A Manifesto for Business Revolution, was published in 1993 and spent 6 months on the New York Times best-seller list. By June 1995, it had become the number two management bestseller of all time behind In Search of Excellence by former McKinsey & Co. consultants Tom Peters and Robert Waterman. By 1997 it had sold over two million copies, was published in seventeen languages and had achieved five digit sales figures in Europe. The Japanese version sold 250,000 copies in the first three months. As the book’s popularity grew, so did the prestige of CSC Index and Michael Hammer.

Riding the wave of reengineering, CSC Index’s revenues grew from $28 million in 1988, to $70 million in 1992. Having "invented" the concept, CSC retained control of the market for reengineering consulting services at first. A 1991 article on the subject stated:

By 1994, CSC Index’s revenues had topped $160 million.

Michael Hammer had also profited from the explosive growth of reengineering. By 1994, he routinely filled training seminars with hundreds of executives eager to pay the $2,000 fee to hear him speak.

Hammer functioned as the radical evangelist and cheerleader for the reengineering cause, peppering interviews and lectures with quotes like "folks, we’re going on a journey. On this journey we’ll carry our wounded and shoot the dissenters." He compared reengineering to a neutron bomb: "The walls remain standing, but everything else is nuked."

Hammer was also keenly interested in promoting himself. In reference to the book he co-authored with Champy, he noted, "[It] is by Hammer and Champy rather than Champy and Hammer." Champy accepted Hammers self-promotion as long as CSC Index got its share of the credit. "I’m okay with Mike establishing a guru position. It isn’t as personally important to me to have my name here, although it is very important to me to have my firm’s work represented."

Champy was primarily interested in using reengineering to generate growth for his firm. He made the following comment:

For companies to reengineer in the timeframe Champy suggested, they would almost certainly need to hire a consulting firm like CSC Index.

Champy advocated a "kinder, gentler" reengineering than his co-author, explaining that while change was required for survival, it did not have to be as threatening as the change advocated by Hammer. "You don’t need to toss out middle management, just restructure its roles."

The concept’s rapid rise in popularity can be attributed, at least in part, to its name. Hammer said of reengineering:

CSC Index and Michael Hammer had tapped into the hottest management fad in decades. With the breadth and scope of change that reengineering required, it seemed that reengineering projects would last for many years, far eclipsing TQM’s effect on business. The success seemed to feed itself. Managers would repackage their initiatives as reengineering and sell it to bosses, shareholders and employees. Consultants could bill up to $1 million per month on long-term reengineering projects. The only people not happy about the process were rank-and-file employees and middle managers. As senior executives experienced pressure from shareholders to show returns from expensive reengineering projects, they found that one of the fastest ways to recoup their investments was to reduce head count.

By the end of 1994, the board of directors at CSC had some concerns about the future of reengineering. The topic was still popular, but interest in the business press had peaked. In addition, the successes of CSC Index had not been overlooked by their competitors. Big Six accounting firms such as Arthur Andersen and Deloitte & Touche recruited industry experts, MBAs and even recent college graduates at record rates in order to expand their consulting units. Ernst & Young established a Center for Information Technology in Boston, with a former CSC consultant on staff, gaining 10% of the market. Though leading the charge into reengineering, CSC Index fell to fourth place with an estimated 6% share of the market; reengineering projects accounted for nearly 100% of its revenues. (Exhibit B) In addition, many large corporations were beginning to allocate more money to enterprise systems software, such as SAP, Baan and PeopleSoft.

Some of the polish seemed to be wearing off the reengineering concept. Although originally intended to produce broad restructuring of companies from the ground up, reengineering had instead come to mean layoffs. In fact, a June, 1994 poll of 621 companies conducted by CSC Index found that many confused the term reengineering with downsizing. Champy himself estimated that 60-70% of all reengineering projects ended in failure.

There were also troubles on the home front. In July, 1994, Hammer and Champy announced that they were going their separate ways. Essentially, the split boiled down to a disagreement over "how violent" reengineering should be. Said Hammer,

Champy replied, "It’s just that I’ve moved some in what I believe you need to do when you reengineer. I’ve just gone in a different direction."

Sitting in his office, James Champy reflected on what his next moves should be to insure the continued growth and success of CSC.

Appendix A

(6) Combine managerial and non-managerial activities as often as possible. Let workers' teams take on hiring, evaluating, and scheduling.

Appendix B

Appendix C

Appendix D

Appendix E

Major Sector Multifactor Productivity Index

Series Catalog:

Series ID : MPU300001 (1992 = 100)
Sector : Manufacturing
Measure : Output Per Hour All Persons

Clearly, there is still a need for consulting firms that perform reengineering services. As of late 1998, Ford Motor Company had 5 or 6 major reengineering projects still under way.