Hallmark Cards was doing just fine in 1989 when the head of its core business looked over the horizon and saw trouble. The once-homogeneous greeting card market had fragmented into numerous markets serving a bewildering variety of niche customer segments. Unless it could rationalize its production to respond more rapidly to changing customer tastes, Hallmark—still controlled by the Hall family and the dominant company in the greeting card industry—might see its markets picked off one by one by smaller competitors.
This looming competitive threat convinced Robert L. Stark, president of Hallmark's Personal Communications Group (PCG), to launch a program to totally reengineer Hallmark processes. What was unusual about Hallmark's campaign, as described in the best-selling Reengineering the Corporation by Michael Hammer and James Champy, was that it was “not a response to any life-threatening problem but a farsighted effort to keep such problems out of the company's future.” For Hallmark, according to authors Hammer and Champy, “reengineering was a preemptive competitive strike.”
My firm works with underperforming and financially distressed businesses, many of them family owned. Typically, these companies become our clients because they were unable or unwilling to change processes or to adapt to new and changing markets and customer demands. Change, however, is best undertaken in anticipation of trouble, while a company is still relatively healthy—as in the Hallmark case—rather than after a crisis occurs.
The kind of transformation that may result from business process reengineering is sometimes scary for managers and employees and not easy to accomplish. Hammer and Champy themselves estimate that 50 to 70 percent of companies that undertake it fail for various reasons, most of which spring from a lack of understanding of what reengineering involves and of the organizational commitment required to make the radical innovations that are often necessary.
Change—even carefully planned change—involves risks, and some family business owners are no longer willing to take big risks unless it is a question of business survival. Ironically, family firms that were founded on principles of innovation and entrepreneurship reach a stage when security is more important to the owners than building wealth. Their companies are underperforming, or competitors are nibbling away their markets, but at this stage in their careers, they are not willing to contemplate major organizational changes.
Yet family firms, by their very nature, may be better able to succeed at business process reengineering than most nonfamily companies. Because of the concentration of ownership in these businesses, their leaders, once committed to the idea, are able to move decisively to do the thorough assessment of the company's processes and implement the long-term changes that are needed. When business survival is threatened, the desire to preserve the business for future generations and to maintain the family's status in the community become powerful motivators. The fact that many owners have given personal guarantees to lenders and suppliers, which puts their own wealth on the line, is another strong incentive to ensure the long-term profitability of the enterprise. Moreover, younger leaders of the company, who have not yet built their wealth, may be more willing than their seniors to take drastic steps to ensure the long-range viability of the company.
What exactly is business process engineering, and what is it not? To begin with, it has little to do with the old-fashioned industrial engineering that is familiar to companies that have been around for some time. In the old days, industrial engineers came into plants, closely scrutinized how people worked, and then recommended ways in which bottlenecks could be eliminated and the work organized more efficiently. These kinds of efficiency studies can lead to improvements. However, their greatest value lies in the enthusiasm that they generate in management for more extensive changes that will benefit the bottom line dramatically.
Modern-day reengineering is based on the perception that in some companies mere tinkering will not be sufficient to maintain their competitiveness. It examines a company's processes—production, the handling of orders, inventory management—in the context of organizational structure, costs, and overall market considerations. Often these functions are managed by separate departments with lines of responsibility from the top to the bottom of the organization—like silos—and with very little communication between them.
The extensive analysis that is the first step in reengineering may trigger changes not only in specific processes but in organizational structure, job design, and management systems. The perception in the ranks of many companies that “reengineering” is simply a code word for massive job cuts is mistaken. Although work force reductions are occasionally a byproduct of reengineering, they are made only after a sophisticated analysis of comparative costs. Too many companies lay off workers first and ask questions later.
Above all, reengineering should be totally focused on serving the customer, on determining the best way to deliver the goods and services that the customer wants, when he or she wants them. Usually, the best way becomes obvious when the company reexamines its processes in the context of how it goes to market. That has been Champy and Hammer's experience, and that has been my firm's experience as well. When business owners say, “I am willing to change our processes totally if that is what it takes to serve our customers better,” they are ready for business process reengineering. The structural changes undertaken at Hallmark were all organized around point-of-sale computerized systems installed at Hallmark-owned stores to record sales for different lines of greeting cards. With this new system, production of cards and deliveries to retailers were more closely tailored to shifts in customer demand. The system was the key to a team approach to management that quickened the development and delivery of new products.
Many of our clients make the mistake of relying on their sales force to keep them informed about what customers want and how the company's performance is perceived. In our experience, the customers know a lot more about the company's operation and its ability to deliver than the sales people ever find out. The customers usually do their homework on suppliers. They know not just that their deliveries are sometimes late or that the supplier's product is not always consistent in quality. They usually have insights into whether the company is functionally organized, what management weaknesses it has, what problems it has in its markets, whether it has bottlenecks in production scheduling, and what kinds of inventory management problems it faces.
Business owners who are not in touch with these perceptions may wake up one day and find that their customers have drifted away. The experience of a family owned textile manufacturer with $35 million in sales was typical. The company, a producer of high-volume, low-margin commodity yarns, was losing business to competitors. The family managers felt compelled to compete on price, even though the business had been built on its reputation for product quality and service. With lower prices, the company's gross margins fell. The family's habitual response to low margins was to increase volume. Traditionally, the family managers were happiest when the plant was humming at full capacity. So they began to produce more, and more, and more. They cranked up the plant to operate 24 hours a day, seven days a week, turning out more of the same commodity yarns.
To increase production, however, the company had to buy new machinery, and management did not pay enough attention to these front-end costs. The increased internal costs eventually wiped out the company's slim profit margins. The more the company produced, the more money it was losing. Cash became tight and suppliers and lenders brought pressure on the company for payment, further accelerating the decline. The competitors, meanwhile, seemed to be thriving while operating on normal production schedules.
The family clung to the status quo until it became fully clear that without dramatic changes, the company might disappear off the face of the earth. The first step was to consult the company's customers. When the family leaders did that, they discovered that customers felt they could get commodity yarns from many suppliers and that what they really needed was high-quality colored cotton, for which they were willing to pay a premium.
After much soul-searching, the family decided to change its strategy to produce these specialty yarns. It revamped its production facility, introducing customized systems to react swiftly to smaller-volume orders for different colors of cotton. The specialty yarns were not only produced by shorter runs, but required greater attention to scheduling, setup, timely delivery, and quality. Now that the company was going to market with a new product, the sales force had to be reorganized and staffed differently. The sales people had to focus on solving customer problems and not just selling high volume.
The change in strategy not only increased gross margins but served as a catalyst for a dramatic cost-cutting program under which management was reorganized, staff was reduced, and an underutilized plant was idled. After two years in which the company was losing $2 million annually, it is now operating at break-even and has survived as a going concern.
This family clung to the status quo until it was almost too late. Although it has succeeded in reversing the company's decline, management could have moved much sooner to address the company's problems. In a turnaround situation, the company must first be stabilized and its balance sheet fixed. To contemplate changes in such turbulent circumstances is both disruptive and scary—although at this point reengineering may be the only remedy.
Family business owners often resist considering such remedies for a number of reasons. For one thing, they tend to be closer to their employees than leaders of large publicly owned corporations and reluctant to take any action that might require a work force reduction or management reorganization. For another, the fact that the leaders wear two hats—they are both owners and managers—tends to paralyze the will when embarrassing decisions must be made. The effective manager might see the need to overhaul operations and lay off people in order to save the company and the rest of its loyal employees. But owners often have an image of themselves—many are put on a pedestal in the community—that prevents them from taking steps that would amount to an admission of failure and a loss of face. Thus, the leader of the textile manufacturing firm dreaded the prospect of idling the underutilized plant, even though, as a good manager, he saw the need for it quite clearly.
Sometimes, however, the senior generation is simply satisfied with what it has accomplished and no longer driven to build more wealth. Such was the case with a chicken-processing company which had been profitable for many years and was suddenly faced with a loss. A number of family members had taken home good incomes from the company over the years, while building it from a $1 million to a $150 million enterprise. The company had lost $500,000 in the year before our firm was called upon to assess their operations. When we analyzed the financial statements for the previous five years, we found that, in fact, the company had been only breaking even. While the company did not face a turnaround situation, the performance of this business was nothing anyone could brag about.
The family business owner, though an exceptionally gifted leader, was doggedly committed to existing processes of inventory control. The company produced a wide variety of chicken products—cutlets, nuggets, thinly breaded, thickly breaded, some with five spices, others with seven spices. Because management felt that the company should have all items in stock whenever a customer called, the firm was overproducing inventory. The slow-turning inventory meant that a certain amount of product was spoiling or becoming damaged on the warehouse shelves. Yet at the same time the company was experiencing frequent stockouts of some items—that is, it was frequently out of some products at the time customers wanted them. Customer fill rates should ideally be in the 90 to 99 percent range, but this company's rate was consistently in the 80s—an unacceptable level. The result was lost sales and embarrassingly low service levels.
The company also suffered from production interruptions due to frequent shortages of chickens from suppliers. Management worried because production line employees were standing around at times and costs per unit for labor, electricity, and other plant basics were rising. The owner's initial response was to bring in cost analysts to fine-tune manufacturing methods. But this had only a marginal effect; the stockouts and losses continued.
What was clearly lacking in this inventory operation was the right mix of products. The stock of different items had to be more closely coordinated with purchases of raw materials and sales, but, in fact, these functions were, at best, only marginally connected in the company. The company had an inventory manager, a production manager, and a purchasing manager. But none actually managed—and they rarely communicated with one another.
Why were the goals of high inventory turns and optimal customer fill rates not connected in the past? Prior to the reorganization, management thought everyone was responsible, when actually no one was responsible. With our help, the client completely reengineered the inventory system to integrate previously disjointed purchasing, production, and selling functions. A new position of materials manager was given responsibility for both inventory turns and customer service.
The appointment of materials manager ensured that from then on one person would be in charge of both. That was a radical change in a company that had long kept these functions separate. At the same time, the sales function was more closely integrated with production, so that materials and output would be geared to sales forecasts based on customer needs instead of the “guesstimates” used in the past. Finally, managerial incentives were tied to return on net assets. This program motivated managers to support corporate goals of reducing dollars tied up in excess inventory while maximizing revenues and customer satisfaction.
Surprisingly, reengineering the approach to inventory was just as traumatic to the family managers as a plant closing would have been, despite the fact that no jobs were lost. The family was under a lot of stress and emotions ran high. Why? The change required a complete reversal in the way they had always thought about the business. As long as inventory was building, the family managers were satisfied that the company was strong and doing right by its customers. Now success is measured by other indicators, such as return on net assets and customer satisfaction, and the company has returned to profitability.
Clearly, in order to undertake business process reengineering, companies—family and nonfamily alike—must be powerfully motivated to change. If the program is not driven by the instinct for survival, it must be stimulated by something else. When top management approaches the program on little cat feet, when it refuses to examine real problems for fear of disrupting the operation or unsettling employees, it greatly diminishes the prospects for success. Yet we've found that the owner who is willing to acknowledge problems and admit mistakes earns the respect of employees—and can often mobilize their support for change.
Members of the second generation can play a key role, perhaps because they have a large stake in the long-term survival of the company and in building their own net worth. A case in point is a manufacturer of office equipment with $35 million in sales that was run by the founder and his daughter. The company had suffered through a long decline, but an analysis of its processes suggested several fertile areas for reengineering that might reverse its losses. We recommended changes in production and scheduling that would eliminate several million dollars worth of raw material and work-in-process inventory. We also proposed a reorganization of the marketing and order departments that would permit a 50 percent reduction in personnel and actually speed up customer service through improved forecasting. In addition to these benefits, the reengineering plan would free up plant space, allowing the company to close one facility and eliminate an in-house transportation fleet.
The father preferred to stay the course, unwilling to risk such far-reaching changes. But the daughter sprang to the defense of the plan, pointing out the logic of the recommendations and underscoring their potentially positive impact on the bottom line. While the owner saw little risk to his already funded retirement plan from maintaining the status quo, the daughter tended to view reengineering as the only way to meet her expectations for a future livelihood and to increase the value of her estate.
With the daughter's support, some of the changes have been implemented and the firm has been able to stabilize its financial position and satisfy lenders.
Many companies fail at reengineering because of a lack of follow-through on the analysis of their processes. Companies spend huge sums on studies, then fail to implement the changes that are necessary, usually because of the same resistance that prevented the company from addressing the problems in the first place—bureaucratic inertia, fear of radical change, old habits of thinking. In my experience, three major elements are essential to effective follow-through: 1) the continued presence of outside “change agents,” 2) a business plan that sets out specific goals, assigns tasks, and establishes a timetable for their completion, and 3) a management reorganization to ensure effective monitoring and implementation of the plan.
The outside expert's role in the early stages of the engagement is to analyze the factors that have led to the company's decline and, in turnaround situations, ensure that enough cash is generated to stabilize the firm. The outsider then has a continued role to play in professionalizing management and making certain the staff is equipped to direct the new operations. Unless new, interim management is brought in, the existing management must be trained to operate in a vastly different, reengineered environment.
The business plan provides financial projections and a narrative of the future with numbers attached to it. For example, it may provide that a certain plant will be shut down by November 30; or the company's overall head count will be reduced from 150 to 100 by that date, while the sales force is increased from 15 to 20. Unlike budgets, formal plans include written assumptions that allow management to both monitor and implement the required steps. At the same time, it allows other stakeholders such as inactive family shareholders and lenders to monitor the company's progress.
A final key factor for success in reengineering is the presence of a champion. One of the problems of reengineering in large public companies is that division managers sometimes see the process as just another in a series of top management fads which will eventually be forgotten. They don't sense that top management has an enduring commitment to it unless the chairman declares, “Division presidents, I am serious about seeing that this plan is carried out. Your jobs are on the line.”
Although some owners of family businesses see their employees as extended family, they nevertheless have difficulty communicating the message that change is necessary. Because a family owner has singular power and stature, however, he or she is in a far better position to get the company moving than the leader of a public company who must answer to many more stakeholders.
When Hallmark employees began to worry that the company's traditional values and beliefs would be threatened by the vast reengineering changes in the company, they were reassured by Donald J. Hall, the company's chairman and the son of the founder. As Robert Stark, head of the Personal Communications Group, recalled: “Don wrote five beliefs and four guiding values that were communicated to all 22,000 Hallmark employees over several months through private and group meetings; articles in the company's internal magazine; and videos featuring Hall, CEO Irvine Hockaday Jr., and other senior executives. Once we had effectively communicated this message, everyone understood that while we would change our ability to get to market, we wouldn't change our beliefs and values. That for us was a critical first step to create a change process focused on results.”
The chairman of a smaller family company that we worked with, a manufacturer of lanterns with several plants, personally visited each of his plants with members of our team and announced at each site, “People, this is something we are going to do.” His presence left a powerful impression and no doubt contributed to the successful implementation of the reengineering process.
The owner of a retail hardware chain with $10 million in sales confessed his own concerns to employees while explaining the difficulties of reengineering the company's inventory and merchandising strategies. “I feel like I'm standing on a rock in the middle of a rushing stream,” he said. “If I stay here or go back, I'm going to get wet and, in fact, I may drown. Well, darn it, if I'm going to get wet, I might as well do it going forward. I will get to the other side.” The employees appreciated his candor, and wholeheartedly supported the reengineering plan. There was a true champion.
Baker A. Smith is managing partner of the Atlanta office of Morris•Anderson & Associates Ltd., a consulting firm that provides experienced management and counsel to underperforming and financially troubled family owned and middle-market companies. The firm's services include business process reengineering along with guidance in restructuring, refinance, and productivity and profit improvement.