11.2 SYSTEMS DEVELOPMENT AND ORGANIZATIONAL CHANGE
New information systems can be powerful instruments for organizational change,
enabling organizations to redesign their structure, scope, power relationships, work
flows, products, and services. Table'11.3 describes some of the ways that information
technology is being used to transform organizations.
The Spectrum of Organizational Change
Information technology can promote various degrees of organizational change.
Figure 11.3 shows the four kinds of structural organizational change Which are
enabled by information technology: automation, rationalization, reengineering, and
paradigm shifts. Each carries different rewards and risks.
The most common form of IT, enabled organizational change is automation. The
first applications of information technology involved assisting employees perform
their tasks more efficiently and effectively. Calculating paychecks and payroll
registers, giving bank tellers instant access t~ customer deposit records, and
developing a nationwide network of airline reservation terminals for airline
reservation agents are all examples of early automation. Automation is akin to putting
a larger motor in an existing automobile.
A deeper form of organizational change--one that follows quickly from early
automation--is rationalization of procedures. Automation frequently reveals new
bottlenecks in production, and makes the existing arrangement of procedures and structures painfully cumbersome. Rationalization of procedures is the streamlining of
standard operating procedures, eliminating obvious bottlenecks so that automation
can make operating procedures more efficient. For example, Toshiba's new global
infrastructure is effective not only because it utilizes state-of-the-art computer
Information Technology
Organizational Change
Global networks
Enterprise networks
Distributed computing
Portable computing
International division of labor: the operations of a firm are
no longer determined by location; the global reach of firms
is extended; costs of global Coordination decline.
Transaction costs decline.
Collaborative work and teamwork: the organization of
work can now be coordinated across divisional boundaries;
a customer and product orientation emerges; widely
dispersed task forces become the dominant work group.
The costs of management (agency costs) decline Business
processes are changed.
Empowerment: individuals and work groups now have the
information and knowledge to act. Business processes are
redesigned, streamlined. Management costs decline.
Hierarchy and centralization decline.
Virtual organizations: work is no longer tied to geographic
location. Knowledge and information can be delivered
anywhere they are needed, anytime. Work becomes
1
portable. Organizational Costs decline as real estate is
less
Graphical user interfaces
essential for business.
Accessibility: everyone in the organization--even senior
Executives can access information and knowledge; work
flows can automated, contributed to by all from remote
locations. Qrganizational costs decline as work flows move
from paper to digital image, documents, and voice.
FIGURE 11.3:
Organizational change carries risks end rewards The most common forms of organizational
change are automation and rationalization. These relatively slow-moving and slow- changing
strategies present modest returns but little risk. Faster and more comprehensive
change-such as reengineering and paradigm shifts--carry high rewards but offer a
substantial chance of failure
technology but also because its design allows Toshiba operating units, no matter
where they are located, to operate more efficiently. To achieve this result, Toshiba
had to first rationalize its business procedures down to the level of installation manuals and software instruction before it could reap the benefits of the technology. The
company had to create standard names and formats for the data items in its global
data warehouse. The procedures of Toshiba or of any organization must be rationally structured to achieve this result. Without a large amount of business process
rationalization at Toshiba, its computer technology would have been useless.
A more powerful type of organizational, change is business reengineering in
which business processes are analyzed, simplified, and redesigned. Reengineering
involves radically rethinking the flow of work and the business processes used to
produce products and services with a mind to radically reduce the costs of business.
Table 11.4 describes various ways that information technology can impact business
processes. Using information technology, organizations can rethink and streamline
their business processes to improve speed, service, and quality. Business reengineering
2
reorganizes Work flows, combining steps to cut waste and eliminating repetitive,
paper-intensive tasks (sometimes the new design eliminates jobs as well). It is much
more ambitious than rationalization of procedures, requiring a new vision of how
the process is to be organized.
A widely cited example of business reengineering is Ford Motor Company's
invoiceless processing. Ford, with over five hundred people in its North American
accounts payable organization alone, discovered that the Mazda Motor Corporation's
accounts payable organization employed only five people. When Ford management
analyzed the company's existing system, it discovered that the accounts payable
clerks spent most of their time matching purchase orders against receiving documents
and invoices and then issuing payments. Mismatches where the purchase order,
receiving document, or invoice disagreed were common, forcing the accounts payable
clerks to investigate the discrepancies and delay payments. Ford found that reengineering its entire accounts payable process Could prevent mismatches
in the first place. The company instituted invoiceless processing in
which the purchasing
department enters a purchase order into an on-line database that can be
checked by receiving department when the ordered items arrive. If the
received goods match the purchase order, the System automatically
generates a check for accounts payable m send to the vendor. There is
no need for vendors to send invoices. After reengineering the accounts
payable process, Ford was able to reduce headcount by 75 percent and
produce more accurate financial information (Hammer and Champy, 1993).
Rationalizing procedures and redesigning business processes are
limited to specific parts of business, New information systems can
ultimately affect the design of described in Chapter 10, used new
information systems to create a competitive on~ demand shipping service
and to develop a new sideline business managing the logistics of other
Companies. Baxter International's stockless inventory system, described
in Chapter 2, transformed Baxter int6 a w6rking partner with hospitals
and into a manager of its customers' supplies. The new system redrew
organizational boundaries, allowing Baxter to take over its customers'
warehousing functions.
This still more radical form of business change is called a paradigm
shift. A paradigm shift involves rethinking the nature of the business
and the nature of the organization itself. Banks, for instance, may decide
not to automate, rationalize, or reengineer the jobs of tellers. Instead
they may decide to eliminate branch banking altogether and seek less
expensive sources of funds, such as international borrowing. Retail
cust0merl may be forced to use the internet to conduct all their business,
or a proprietary network. A paradigm shift is akin to rethinking not only
the automobile, but transportation itself.
How much change is good? Should change be incremental Or global?
There is some reason to believe that reengineering produces the
3
largest :value when it is part of a global' change program affecting
organizational structure, decision authority, business process, and
incentive systems (Barua, Lee, and Whinston, 1996). Nothing is free and
'simply creating radical change in some parts of the business is not the
key to overall business success. Reengineering projects may not choose
the right business process to improve, simply the most obvious targets.
Deciding which business process to get right is half the challenge (Keen,
1997}. Paradigm shifts and reengineering often fail because extensive
organizational change is so difficult to orchestrate and manage (see
Chapter 14). Some experts believe that 70 percent of the time programmatic
reengineering efforts fail. Why then do so many corporations entertain
such radical change? Because the rewards are equally high (see Figure
'11.3). In many instances firms seeking paradigm shifts and pursuing
reengineering strategies achieve stunning; order-of-magnitude increases
in their returns 0a investment (or productivity). Some of these success
stories and some failure stories are included throughout this book and
in the Window on Organizations.
Redesigning Business Processes
Many companies today are focusing on building new information systems
in which they can redesign business processes. To a large extent, business
process redesign t0- day has become the generic label for all sorts of
change programs from simple automation to rationalization, reengineering,
and paradigm shift. The idea is to choose an "important" business
process--one that consumes a considerable amount of organizational time
and costs--and then greatly improve the process through judicious
application of information technology.
The home mortgage industry is a leading example in the United States
of how major corporations have applied business process redesign. The
cost of obtaining a mortgage is one of the leading factors that has led
to a decline in home ownership in the United States from 66 percent to
64 percent. of households in 1997. The application process for a mortgage
is about six to Sight weeks currently, and costs about$3000. The goal
of many mortgage banks is to lower that cost to $1000 and the time to
obtain a mortgage to about one week. Led by fast-growing mortgage banks
such as BancOne Corporation, BancB0st0n, and' Countrywide Funding
Corporation, other banks are radically simplifying the mortgage
application process.
Figure 11.4 illustrates how the mortgage application pi0cess is being
redesigned by leading banks. The mortgage application process is divided
into three stages: orgination, servicing, and secondary marketing.
Business process redesign is being used at each of these stages.
In the past, a mortgage applicant filled out a paper loan application.
The bank entered the application transaction into its computer system.
4
Specialists such as credit analysts and underwriters from eight different
department accessed and evaluated the application individually. If the
loan application was approved, the closing was scheduled. After the
closing, bank specialists dealing with insurance or funds in escrow
serviced the loan. This desk-to-desk assembly-line approach might take
up to17 days.
Leading banks have replaced the sequential desk-to-desk approach
with a speedier work-cell or team approach. Now, loan originators in the
field enter the mortgage application directly into laptop computers.
Software checks the application transaction to make sure the information
is correct and complete. The loan originators transmit the loan
applications using a dial-up network to regional production centers.
Instead of working on the application individually, the credit analysts,
loan under- writers, and other specialists convene electronically,
working as a team to approve the mortgage. Some banks provide customers
with a nearly instant credit lock-in of a guaranteed mortgage SO they
can find a house that meets their budget immediately. Such preapproval
of a credit line is truly a radical reengineering of the traditional
business process.
The secondary marketing of mortgages to other institutions such as Fannie
Mae and Freddie Mac (two corporations originated by the federal
government to securitize mortgages' and develop a secondary market) is
also being radically changed. Both Fannie Mae and Freddie Mac have
developed expert systems to automate the credit authorization process,
and reduce processing time from twenty to thirty days down to two days
to obtain approval
By redesigning their entire approach to mortgage processing,
mortgage banks have achieved remarkable efficiencies. They have not
focused on redesigning simply a single business process but instead they
have reexamined the entire set of logically connected processes required
to obtain a mortgage. Instead of automating the previous method of
mortgage processing, they have completely rethought the entire mort- gage
application process. To streamline the paperwork in the mortgage
application process, many banks have turned to workflow and document
management software, described in the Window on Technology.
Steps in Business Reengineering
Business reengineering entails developing a business process model of
how activities function, analyzing .relationships among business units,
and implementing changes that would eliminate redundant processes and
make business units more effective. Reengineering experts have outlined
five major steps for reengineering business processes (Davenport and
Short, 1990):
1. Develop the business vision and process objectives. Senior management
5
needs to
develop a broad strategic vision, which calls for redesigned business processes. For
example, Proctor & Gamble's management looked for breakthroughs to lower
costs and accelerate service that would enable the firm to regain its competitive
stature in the consumer products industry (see Chanters 2 and 3).
.
2. Identify the processes to be redesigned. Companies should identify a few core
business processes to be redesigned, focusing on those with the greatest potential
payback.. Symptoms of inefficient processes include excessive data redundancy
and reentering information, too much time spent handling exceptions and special
cases, or too much time spent on corrections and rework. The analysis should'
identify what organizational group owns the process, what organizational functions or departments are involved, in the process, and what changes are required.
The methods for identifying organizational information requirements described
earlier in this chapter may be useful here.
3. Understand and measure the performance of existing processes. If, for example,
the objective of process redesign is to reduce time and cost in developing a new
product 6i filling an order, the organization needs to measure the time and cost
consumed by the unchanged process. Table 11.5 provides examples of metrics, that
have been-used for the reengineering analysis.
4..Identify the. opportunities for applying information technology. The conventional
method of designing systems establishes the reformation requirements of a business function or process and then determines how they can be supported by information technology. However, information technology can create new design
options for various processes because it can be used to challenge longstanding assumptions about work arrangements that used to inhibit organizations. Table 11.6
provides examples of innovations that have overturned these assumptions using
companies discussed in the text. Information-technology should be allowed to influence process design from the start.
5. Build a prototype of the new process. The organization should design the new
process on an experimental basis (see Chapter 12}, anticipating a series of revisions and impio4ements until the redesigned process wins approval. For instance~
Mutual Benefit Life implemented a 15ilot project to redesign its individual life
insurance underwriting process, The pr6cess involved 40 steps with over 100 people in 12 functional areas. Hoping to raise productivity by 40 percent, MBL centralized all underwriting tasks under a case. manager using a workstation application that could draw together data from all over the company. After a brief
start-up period, the firm realized that it needed to add specialists such as lawyers
or physicians on some underwriting cases ("The Role of IT," 1993).
.
Following these steps does not automatically guarantee that reengineering will
always be successful. The term reengineering itself is somewhat misleading, suggesting that there are some recognized principles that if followed will always produce
predicted outcomes. In fact, the majority of reengineering projects do not achieve
breakthrough gains in business performance. Michael Hammer, a leading proponent
of reengineering, states that 70 percent of reengineering efforts he has observed have
6
failed (Hammer and Stanton, 1995). Other estimates of unsuccessful engineering
projects are equally high (King, 1994; Moad, 1993). Problems with reengineering are
part of the larger problem of orchestrating organizational change, a problem that attends the introduction of all innovations, including information systems. Managing
change is neither simple nor intuitive. A reengineered business process or a new information system inevitably affects jobs, skill requirements, work flows, and: reporting relationships. Fear of these changes breeds resistance, confusion, and even Conscious efforts to undermine the change effort. In addition, what happens after
reengineering? How will the "change" program be sustained over time to remain
competitive (Harkness, Kettinger, and Segars, 1996)? The organizational change requirements for new information systems are so important that we devote 'an entire
chapter (Chapter 14) to this topic
7