James Champy and Michael Hammer wrote the groundbreaking book “Reengineering the Corporation” in 1992, ushering in a new era of management change. Last year, Champy updated those earlier concepts with “X-engineering the Corporation.” Champy, Chairman of Consulting for Perot Systems Corp., sat down last week in Champys Boston office to discuss X-engineering—also known as “cross” engineering—its relationship to technology, its successes and failures and its future with eWEEK News Editor Scot Petersen.
eWEEK: Explain briefly the difference between “reengineering” and “X-engineering.”
Champy: Its the application of the same process ideas of reengineering but applying that process thinking across organizations. Having said that, I think the work is much more challenging. Its the same, its about process. Whats different though is that the work is more enabled by the Internet, frankly, than reengineering. When we wrote the reengineering book the Internet wasnt a presence. But today the Internet allows companies to operate as an extended enterprise. And so whats different is enabled by the Internet. The other characteristic is the degree of collaboration. Its much more collaborative and much more demanding than reengineering.
eWEEK: Is it possible to have an X-engineering process that doesnt involve the Internet?
Champy: It is possible, but its the Internet that will really enable the substantial reduction in costs across an organization. For instance, in health care, you go into an HMO today or any insurer. Youll find that 40 cents on every dollar is spent on some kind of administrative costs, often redundant. You can reduce 40 to 50 percent of that, but its not going to happen with simply paper transactions. Its the electronic transactions that will allow for substantial improvement.
eWEEK: What industries are prime candidates for X engineering?
Champy: Health care, certainly logistics. Manufacturing, particularly big contract manufacturers that are manufacturing someone elses design. Retail. If you look at the way Wal-Mart is operating right now, its the quintessential X engineered company.
X engineering takes three things: It takes first a willingness for transparency, for companies to be more open with each other than theyve ever been before. It takes a great transparency and openness. Second, it will force forms of standardization in terms of processes and technology. Thirdly, it takes a degree of collaboration—I call it harmonization—that companies typically have not done. So its transparency, standardization and harmonization thats required in order to do [X-engineering].
eWEEK: Are companies ready for X-engineering? If they havent yet reengineered, how are they going to do X?
Champy: I think companies are ready and needing it but Im not convinced that managers have the appetite today to do this kind of work. Having said that, go into Wal-Mart, theyre not only ready but they demand it. Go into Dell. Michael dell is a quintessential X engineer. He wouldnt think of operating with suppliers that arent highly integrated into his operations. Theres a great deal of variability in the marketplace. Some companies are ready and doing it. Other companies havent done the basic reengineering work that they need to do. I think right now managers dont have the appetite to do this work. Its too hard.
eWEEK: Dell said one of his biggest challenges is finding managers who can keep up with the rate of change.
Champy: I think this is a particularly difficult and challenging time. I dont want to underestimate the difficulty of the X-engineering work, or the reengineering work. I also believe that managers right now are very challenged around fundamentals like being a low-cost producer in their industry. Thats basic reengineering stuff. And a lot of managers, I think theyre just stuck. I think part of it is just the general business malaise. But also think that theyre tired. They dont have the ambition.
eWEEK: Are you talking middle managers, upper management?
Champy: I think its middle to upper. I think there are upper level managers too that are cynical about ideas, who over the last five years have been told a lot things have havent come true—about the “e” stuff—and they are cynical right now. Theyre uncertain to some degree about what to do with their business. Theyve got to become a low-cost producer, and the question of being a low-cost producer and maintaining a competitive position is becoming increasingly difficult. Thats the market data dark side of the Internet. The Internet has commoditized just about all products and services. Everything becomes transparent. Look at how you buy an automobile today. Sixty percent of the people go into a showroom knowing what the car costs. So whats the basis of competition? It had better be service. But not every bodys on that yet. Not everybody has figured out what the basis of competition is. So the problems are tough, and I think the managers really lack the ambition and the appetite.
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eWEEK: Do you think the cynicism and uncertainty has something to do with the culture of the consultant business over the last 10 years. They may be saying, we tried it once, were not going to do it again.
Champy: The consulting industry has not done business as great a service as it could. In fact, you could argue that if it hyped ideas and solutions as being too simple, it did business a disservice. And I believe the industry as a whole has yet to perceive the depth of change, the operating change, that companies will have to go through. Im a strong believer in the idea that companies will have no choice but to reengineer and cross engineer at some point. But that means changing a huge set of operating procedures, and I think consulting firms failed to really develop clients in ways that the clients have the strength to take that on. Its hard work, very hard.
eWEEK: Has consulting gone beyond X engineering yet? What are you hanging your hat on these days?
Champy: Im not going beyond the cross engineering concept, because theres so much to do. And the world doesnt need a new idea at this point. I think consulting firms have used those labels frankly to stimulate business. But the world doesnt need a new idea. We introduced the reengineering concept in 1992 and I think only about 10 percent of real process change that companies have to go through has been done. Im not hanging my hat on anything new. In fact, Im a little uneasy of having the cross engineering term, because of the cynicism with which managers encounter new ideas.
eWEEK: When you go into a company, you dont say, were going to X-engineer you. You start with something smaller, like lets fine tune your customer relationship management or define your business processes.
Champy: We tell about the benefits of harmonizing operations between you and your suppliers and your customers. That benefit is going to require some operating changes that are larger that what you have experienced in the past. The companies with which we are doing this work have to really again begin with the principles of transparency and standardization. Get those ideas. It they dont get those ideas, the changes will be incremental at most. I try to get them to see the degree of change they are going to have to go through to do this work. I dont think there are many companies that understand it or see it yet.
eWEEK: How do you get that 10 percent up to 20 percent?
Champy: There is some combination of vision and fear. Right now theres a lot more fear operating than there is vision. But it grows to 20 percent or more when some management team starts to shift dramatically the way they think of their business performance. The way you get it going is to get people thinking more radically. Some set of business metrics, some set of performance metrics. Once they start thinking that way they see that they cant operate and just make incremental changes. They cant operate the way they used to and just make incremental changes. Its in appreciating the value of the radical ness of a business improvement.
eWEEK: What industries do you like right now, in terms of those rethinking their businesses?
Champy: Wal-Mart is doing the right thing. Their suppliers see an opportunity to do better. Thats what you have to do, you have to get to the point in a relationship with suppliers that they arent just there to beat you down in price. Its about making more margin while selling at a lower cost. Wal-mart is a leader in that kind of thinking. Dell also is a leader in thinking about the degree of integration. Ive also been watching the mortgage business, and the way that industry has consolidated. You can only be in that business if you are a big player, but its actually done a very good job of engaging its customers electronically and process wise. Its very efficient.
eWEEK: So in effect, X-engineering success requires buy-in from suppliers and customers on each end of the business.
Champy: Absolutely. Dell is an example of that. The supplier has to be totally open for costs, processes, and the buyers have to be open, so you can look at each others operations and say, this isnt just about CRM or throwing a product over a wall, its about designing what these processes are going to look like, eliminating redundancies and back orders and substantially improving performance while both are lowering their costs.
eWEEK: How important is outsourcing to X-engineering?
Champy: I believe outsourcing is—or a willingness to outsource—is important, the willingness to share a process with someone else or give a way a process that someone can do better than you can. I think X-engineering requires knowing what your distinctiveness really is, and what youre good at. And then an openness and willingness to get rid of the rest. You have to focus on what you are good at. Were going to see increased outsourcing of processes way beyond the IT operations of a company.
eWEEK: Can todays IT departments keep up with the pace of change necessary?
Champy: Theres a systemic problem that IT departments have. Just outsourcing doesnt solve this problem. The problem is the old one of legacy. Most companies, whether they are spending inside or outside, are spending most of their IT budget on old systems and old processes. And they need to find ways to shift what they are spending to the new process and new systems. And thats a dilemma they have not solved yet. Many of them look to outsourcing to solve that but what they do is they outsource their processes and systems as they are. And they lock themselves in a 10-year deal that continues the status quo. Outsourcing per se is not he answer. The answer to keeping up is finding a way to stop doing the old stuff. And to be able to promise the development of the new.
eWEEK: The old stuff being mainframes, client/server….
Champy: Its not always defined by the technology, its defined by the application. Take financial services, which wants to be able to go to its customers an integrated set of offerings. But its IT infrastructure reflects a highly fragmented set of offerings. Every system was built to support a given product. Big banks have tremendous difficulty integrating new products and services and developing new products and services. The next round of changes in IT will be the need for companies to integrate their offerings, products and services.