Reengineering is the hot new management buzzword. The basic message of process reengineering is that many work flows, job designs, control mechanisms, and organizational structures are either superfluous or obsolete, and should be completely redesigned. As its leading guru, Michael Hammer, explains in a recent article in the Harvard Business Review: "It is time to stop paving the cow paths. Instead of embedding outdated processes in silicon and software, we should obliterate them and start over. We should reengineer our [organizations]; use the power of modern information processing technology to radically redesign our ... processes in order achieve dramatic improvements in their performance.... We cannot achieve breakthroughs in performance merely by cutting fat or automating existing processes. Rather we must challenge the old assumptions and shed old rules."
Hammer illustrates reengineering with the revolution that took place in Fords system of accounts payable. In the early 1980s, Fords auditors carefully studied accounts payable activities and concluded that, by consolidating, by rationalizing processes, and by installing new computer systems, staff could be cut twenty percent -- from 500 employees to 400. Ford was pleased with its plan to slim the accounts-payable payroll -- until it looked at Mazda, whose entire accounts-payable organization consisted of five clerks. Consequently, Ford did not "settle for the modest changes it first envisioned. It opted for radical change -- and achieved dramatic improvement." Through reengineering, Ford cut the required number of manual accounting transactions and reconciliations associated with processing and paying for the goods it used from nine to three, thereby producing "a 75 percent reduction in head count, not the twenty percent it would have gotten with a conventional program." Hammer also notes that the changes Ford made in its accounts-payable operation also resulted in improved materials management and more accurate financial information.
The principles of reengineering are fairly simple. First, wherever possible, design jobs around an objective or outcome instead of a single function -- functional specialization and sequential execution are inherently inimical to expeditious processing. Second, whenever possible, have those who use the output of activity perform the activity and have the people who produce information process it, since they have the greatest need for information and the greatest interest in its accuracy. The use of modern data bases, expert systems, and telecommunications networks provides many, if not all, of the benefits that once made administrative centralization and specialization of administrative functions such as reporting, accounting, purchasing, or quality assurance (economies of scale, high levels of coordination, and standardization) attractive, without sacrificing any of the benefits of decentralization. Third, capture information once and at the source. Fourth, coordinate parallel activities during their performance, not after they are completed. And last, give the people who do the work responsibility for making decisions and build control into job design (Hammer, 1990, pp. 108-112).
All kinds of governments are experimenting with reengineering. Here in Oregon, the purchasing division of the states general services department recently won one of the Ford Foundations prestigious awards for Innovation in State and Local Government for its computerized vendor information system. Before last year, invitations to bidders were handled in Oregon the way they are in most places. Vendors registered with the state and the purchasing division periodically sent them fat packets containing ITBs or RFPs through the mail. Processing all of this paperwork required scores of clerks. The postage alone cost the state $144,000 a year. Now the whole process is handled via electronic mail. Any vendor with access to a computer and a modem can log onto the states vendor information system and download any file they want. The system includes historical information on previous contracts -- who won, who lost, what the winning and losing bids were -- as well as all ITBs and RFPs.
As expected, savings in the purchasing department have more than paid for the vendor information system -- including the substantial public relations effort that was needed to sell it to potential users. What was not expected when the system was approved was the effect that it would have on the competition for the states business. Instant access to ITBs and RFPs has increased the number of bidding vendors by one third; better information has also increased the average quality of those bids. As a consequence, Oregon has already saved more than $17 million on the products it once purchased under the old system.
The hearings division of Oregon Public utilities commission has also used the principles of process reengineering and activity-based costing to make staff reductions of twenty percent and anticipates substantial further reductions. Previously it was believed that, because the hearings division had no control of its case load and because case load was its main cost driver, it couldnt control its costs. Tom Barkin, its head, observed that labor hours per case varied directly with case cycle time -- the time from opening of the case docket to its final closure following appeals to the courts if any. Consequently he concluded that, if the division could control its cycle time, it could control costs.
The divisions administrative-law judges quickly found that they could exercise greater control of their hearings calendars by granting fewer requests for delays, reschedulings for convenience, and continuances. One of the ALJs developed computer templates that could be used to produce orders for routine cases, which cut the time spent drafting orders in half. As a result of these efforts, average case cycle time dropped dramatically and, despite substantial staff losses to attrition, the divisions case backlog had practically disappeared by the end of this summer.
It turns out that the best way to reduce cycle time is to negotiate a settlement prior to hearing, since settlement eliminates the need for a hearing and most of the drafting burden that goes with it and automatically closes the case docket. Consequently, the ALJs are now aggressively trying to negotiate settlements. If present trends continue, this will permit staff levels to fall twenty percent more, without increases in case backlogs.
These are pretty exciting examples of administrative reform. Nevertheless, as I become familiar with the principles of process reengineering, I am often struck by the gap between those principles and standard operating procedures in government. Consider, for example, the contrast between how Ford now handles its accounts payable and how the U.S. Navy pays its bills. It takes the Navy twenty-six manual accounting transactions and nine reconciliations -- thirty-five steps in all -- to process and pay for the things it buys. This system is not only cumbersome, it often leads to bad service and excessive investment in inventories. According to the recent Gore Report, on reinventing government, the Navys purchasing system causes delays in obtaining repair parts. And, these delays keep a large proportion of its cars and trucks out of commission, which forces the taxpayer to buy ten percent more vehicles than the Navy really needs.
Computerization could eliminate over half of the steps in the Navys accounts payable process. But why are fourteen, let alone thirty-five, accounting records needed where Ford gets by with three? One answer is that Navy fails to capture information once and at the source. Instead each step in the supply process -- requisition, receipt, certification of invoice, reconciliation, and revision -- is repeated on up the chain of command. Moreover, the people who produce information do not process it. Processing is handled by financial-management specialists at every level from the cost center to the Financial Information Processing Center of the Defense Accounting Office. But the most important reason is that the Navy does not build financial control into job designs. Captains of naval vessels, for example, are not held responsible for controlling costs and they have little discretion as to the mix or quantity of resources used by their commands. Even in peacetime their effectiveness in managing resources has no bearing on the evaluation of their performance. Indeed, their budget is determined at a higher level.
The principles of process reengineering imply that the Navys 400 ship commanders should instead be responsible for their purchases and that they should be supported by a standardized information system. Under this approach the Defense Accounting Office would be responsible only for maintaining a database on vendors, which it would share with ship commanders, and for using the database to negotiate contracts with vendors on behalf the Department of Defense as a whole and to monitor purchases made by responsibility center commanders. Instead of rules preventing them from incurring excess obligations, ship commanders could be evaluated during peacetime at least in part on the basis of their success in managing costs. The adoption of this approach or something like it would permit the number of manual accounting entries needed to make a purchase to be reduced from thirty-five to three: order, receipt, and payment. At Hewlett-Packard, its adoption resulted in substantial cost savings and a better than 100 percent improvement in service.
The system of ordering and processing supplies is primarily intended to insure that neither they nor higher level authorities exceed their obligational authority, which is divided into fifty separate accounts, 557 management codes, and 1,769 accounting lines.
Larry Herring, manager of the purchasing division, hopes to make the system a two way street. Vendors can download information from the state, but they cant upload their bids back to the state. While the vendor information system is capable of receiving bids electronically, state law requires them to be sent by mail and signed in ink. Fixing that problem will require an act of the state legislature.