How do they do that? You got it: Better processes.
 

CONTEXT: How should business adapt to deal with current economic difficulties?

MICHAEL HAMMER: Businesses will need to follow several tenets if they’re going to make it in this environment.

First, they must become very serious about customers and be really easy to do business with. Businesses say things like, “Put the customer first” and “The customer is always right,” but these are empty slogans at almost all companies. Most companies design their operations for their own convenience. If invoices are written in Bulgarian, if customer service reps don’t know anything, and sales reps are unreachable, the customer pays with inconvenience and cost. For example, a major telecommunications company had a big potential customer tell it: “Even if you gave us your product free, we couldn’t afford to do business with you.”

Businesses will have to add more value for customers, too, by solving their problems. This idea of providing solutions rather than products is an ancient idea, but it largely has been forgotten by business in the last decade. General Electric Co. [www.ge.com] stands out as a counterexample. GE Transportation Systems, for example, doesn’t just turn its trains over to a railroad and say, good luck. GE offers maintenance and route planning and helps railroads keep track of where their trains are. Other companies need to learn from GE’s example.

CONTEXT: What else should executives be thinking about?

HAMMER: Process management is critical. Processes are the Clark Kent of business ideas. They’re mild and unassuming but extraordinarily powerful. End-to-end processes—not products, not departments, not divisions—should be the primary axis around which a business is organized. Processes must be managed, improved, and occasionally re-engineered. This applies not just to transactional work like filling orders, but also to sales and product development, which traditionally have been chaotic and improvisational. At too many companies, when sales and product development do succeed, it’s largely through unsustainable, heroic efforts from individuals.

A new set of process-based measurement systems must be developed so we can understand what’s happening in real time with our businesses and focus on making improvements. The financial measures that companies use now only tell us what happened a quarter ago and don’t indicate anything about why things happened or what to do about it.

Duke Power [www.dukepower.com] is an example of a company that changed its measures to great effect. Rather than just measure how customer satisfaction was last quarter, Duke figured out what very specific factors determine customer satisfaction and translated those into performance targets for processes that it could measure and control, moment by moment. One factor was on-time delivery—in other words, turning the power on when Duke said it would. When I ask clients, “What percentage of the time do you deliver orders on the date promised?” most of them shrug and say, “I don’t know. Probably not a lot.” Duke learned it was delivering on time about 45% of the time. So it set a target of 75% on-time delivery for the first year of its program. Regional managers said, “It can’t be done,” but within three years Duke was consistently delivering service on time more than 98% of the time.

It turns out that good process management requires that executives share power in ways that make many uncomfortable. Even though teamwork has been an important idea in companies for about a decade, it often stops at the executive floor. People sometimes ask me how they can tell if their kid has executive potential. I say, “If your eight-year-old brings home a report card with ‘unsatisfactory’ under ‘plays well with others,’ you have a future executive on your hands.”

That has to stop. Customers are not interested in companies’ internal organizational structure. They are interested in the performance delivered to them, and that requires cooperation—at all levels.

CONTEXT: What can people do to become more efficient and control costs?

HAMMER: Despite a decade of improving process performance and cost-cutting, we’ve barely scratched the surface on costs. We’ve only been after the costs inside the enterprise. But a great fraction of our costs are at the edges; they relate to the way we do business with customers, suppliers, or distributors.

The high walls that separate companies invariably engender high transaction costs. The same work is done on either side. When I give you a purchase order, you turn it into a sales order. Then you give a purchase order to your supplier, who generates another sales order. And so on down the line. These transactions are mostly duplicative and high-cost for everyone.

Because nobody knows what’s happening on the other side of these corporate walls, there is also huge inventory duplication. Without shared forecasts, suppliers carry lots of inventory in case a customer decides to order unexpectedly. Similarly, the customer has to have lots of inventory in case the supplier can’t meet its demand. There’s a lot of waste. To combat it, companies have to work together with as little paperwork and as much information-sharing as if they were one organization.

This is where the Internet comes into its own. About a year ago, Dan Bricklin, the inventor of the spreadsheet, made an interesting observation to me. He said: “It’s not the Web, it’s the ’Net.” What he means is that, while the Web is a great way for consumers to view and share information, the broader Internet is what’s really powerful for businesses because it’s a low-cost, real-time, ubiquitous way to connect computer systems to each other. That means processes can be connected seamlessly, overhead goes down, and data get shared.

Kimberly Clark Corp. [www.kimberly-clark.com] and Kmart Corp. [www.bluelight.com] have made this kind of connection work. They integrated their forecasting and planning processes. They started treating each other like they were part of the same company. It used to be that for Kimberly-Clark’s Huggies diapers, for instance, each side did a different demand estimate and didn’t share it with the other. With opposing forecasts, somebody is either going to get caught short or else stuck with excess inventory. So the two companies decided to pool data, which reduced inventory and simultaneously increased in-store availability.

International Business Machines Corp.’s resellers [www.ibm.com] used to have a 50% error rate. They would order the wrong item or configure a system incorrectly. You can imagine the cost created for both the resellers and IBM. Now resellers no longer input data into their own systems to generate purchase orders. They can input data directly into an IBM system, which checks orders for completeness and accuracy and knocks the error rate down to practically nothing.

The cutting edge of efficiency lies in sharing information and integrating transactions with what I call “co-customers” or “co-suppliers.”

General Mills Inc. [www.generalmills.com] and Land O’Lakes Inc. [www.landolakesinc.com] are examples of co-suppliers. General Mills sells Colombo yogurt. Land O’Lakes sells butter. They don’t compete, but they both sell to the same supermarkets.

The trouble with dairy goods is that the category is very fragmented. No one tends to have enough market share to fill up their delivery trucks. General Mills might fill a truck half full of yogurt and send it to six supermarkets to make the trip worthwhile. But the last stop would often not get its shipment, because some stops would take longer than planned, and the manager at the last supermarket would get mad.

So General Mills and Land O’Lakes started stocking trucks together, sending out both yogurt and butter. Now the trucks might make just three stops, reducing the chance for delays. Supermarkets like the arrangement because they handle one delivery instead of two. A supermarket might even get one invoice instead of two or submit just one order for both products.

CONTEXT: How far should we extend that General Mills/Land O’Lakes model? Should they now bring in another supplier of a noncompetitive dairy product?

HAMMER: General Mills has formed a consortium of about 15 companies to make similar collaborations. It makes sense. About 20% of the U.S. trucking capacity runs empty at any point in time. If I’m sending a shipment from A to B, I may or may not be able to find somebody who is shipping back from B to A, and if I can’t find somebody the truck is going to go back empty. What a waste.

The General Mills consortium shares a database filled with each company’s shipping schedules so they can find complementary shipping routes.

But to borrow a phrase from newspapers, this is a breaking story. We’ll have to see how far the cooperation goes.

CONTEXT: Will direct competitors collaborate this way?

HAMMER: We’re already seeing cooperation with suppliers. Different companies that buy from the same source can combine their purchasing power. This is what I mean by “co-customers.”

That’s part of what Covisint Inc. [www.covisint.com], the car industry’s purchasing exchange, is about. Can the same thinking be applied at the front end, in dealing with distributors? I don’t know of direct competitors that are doing that yet, but I wouldn’t be surprised if it emerges.

CONTEXT: People can certainly argue it ought to happen because General Mills and Dannon Co. [www.dannon.com], for example, compete primarily on their brands or the quality of their yogurt.

HAMMER: Right. They don’t compete on efficiency or shipping, and neither has enough scale to be efficient in shipping. If they collaborate in that realm, everybody will win because waste is driven out of the system.

CONTEXT: In these cooperative arrangements, should partners look for quick wins or focus more on generating a long-term strategy?

HAMMER: I have learned that long, all-encompassing development efforts never work. The idea that we’re going to get all our ducks in a row before we do anything doesn’t work. Organizations are reluctant to make that kind of long-term investment, and momentum gets lost.

You have to move quickly and put something in place.

The risk is that you may end up limiting what you can do in the future as a result. But you can find a happy compromise if you not only make an arrangement quickly, but are prepared to write it off quickly, too. Be ready to replace the initiatives once you’ve figured out the way they ought to be.

CONTEXT: How expensive is it to develop the systems needed to support an arrangement like General Mills’ with Land O’Lakes?

HAMMER: Shockingly, it’s neither terribly expensive nor very time-consuming. For example, a multibillion-dollar chemical manufacturer named Geon [now PolyOne Corp.] connected some of its systems with a key supplier in 90 days. That’s part of the loveliness of the ’Net. You don’t have to build the underlying infrastructure. It’s there. When a Geon representative told a conference of mine what the system cost, people were shocked at the low price.

CONTEXT: The changes you describe require that people change what they do and how they do it. At Geon, for instance, purchasing agents became responsible not just for getting the best price—their traditional focus—but also on making sure that the right amount of supply would always be available. How hard is it to get people to modify their behavior?

HAMMER: That’s the name of the game, and it’s very hard.

About 100 years ago, when I was still an engineering professor at MIT, I was working on a project with a business-school colleague. He said something to me that, at first, I could not comprehend. I thought about it and decided he was wrong. I thought some more and realized he had insulted me. Then I thought a little more and decided he was right. What he had said was: “The technical problems are the easy problems.”

It’s so true. The technical problems—dealing with Internet architecture, data sharing, synchronization, and so on—are easy. The hard problems are getting people to change their behavior. That’s true of any major initiative.

CONTEXT: Does anything work?

HAMMER: The success stories I am familiar with have involved treating behavioral change as a marketing campaign. They shook the dust off their consumer marketing textbooks and used the classic techniques of brand management and communication and incentives to promote the hell out of the change to the people inside the organization. They were remarkably effective.

CONTEXT: What are the risks of getting yourself so tightly coupled with partners, which have agendas that won’t always match with yours?

HAMMER: There are a lot of potential risks, but it’s too early to be clear about what all of them are.

One thing is already clear. It reminds me of a great quote from Wall Street: “Bulls make money. Bears make money. Pigs get slaughtered.” The sentiment applies very strongly in this environment. If you try to be a pig and take advantage of your partners, in the long run you’re going to hurt yourself.

That’s one reason for the demise of many of the electronic marketplaces that seemed like such a good idea a couple of years ago. There was nothing in it for the suppliers. As one supplier told me: “This is great. I pay a transaction fee for every order I get from my existing customers, and to get them I have to compete against guys I have never seen before. Why should I want to do this?”

So if you try to make something a win/lose situation, you’re in trouble. Success in this environment requires an enlightened self-interest. In the long term, everyone has to be a winner or nobody is going to be a winner.

CONTEXT: How might these collaborations be extended out to customers?

HAMMER: Collaborative product development is the next wave of integration. In the past, product development was a closed-door phenomenon. I would develop a product, specify the parts, and then ask you, the supplier, to make it for me. I would give you the completed design and a cost target, treating you like a factory. That’s dumb because I may design something that is hard for you to make, and I’m also not taking advantage of your expertise.

The auto industry is working very hard on this issue. Traditionally, the auto world has five tiers of suppliers. The first tier produces a whole component, such as car seats, and the other tiers supply pieces for it. Now the idea is to create what they call .5 tier suppliers. These would make even greater pieces of the finished product—the interior, for example. These suppliers wouldn’t just manufacture the pieces; they’d work together with the car maker to develop products.

CONTEXT: We’ve covered quite a bit of territory. Where should people start if they want to implement your ideas?

HAMMER: Probably the place to begin pulling on the string is with the idea of process, but what I’ve learned over the past several years is that Curly was wrong. Now Curly in this case is not the Curly of Larry, Moe, and Curly fame, but the Curly of City Slickers, who says to Billy Crystal’s character in that movie, “It’s just one thing.” And that’s wrong. It’s not just one thing. It’s a lot of things. I don’t think you can get by doing just a few of the things I’m talking about. You pretty much have to do all of them. The reality is that companies need a holistic redesign of their operating strategies.