Why X-engineering? Why Now?

When Michael Hammer and I conceived our 1993 bestseller, Reengineering the Corporation, we recognized that the economy confronted a period of enormous change and that businesses urgently needed ways to respond. On all sides, companies were beset by globalization, by the sudden invasions of once-safe markets, by the growing demands of ever more sophisticated customers. All too many were strangling in departmentalization, mired in their single-minded focus on individual tasks. Our message: Work would have to be redesigned-reengineered, we called it-in terms of processes rather than tasks or departments.

The book touched a nerve, setting off a great wave of reengineering in company after company around the world. True to our vision, reengineering achieved enormous efficiencies. For example, a recent Massachusetts Institute of Technology (MIT) study, found that reengineering in the aerospace industry has led to a 30 percent boost in productivity since 1993. Similar productivity gains were reported in industries ranging from insurance to computer component manufacturing.

The impact of reengineering, however, was internal; by and large, the reforms ended at the company gate. That is no longer enough. The technology revolution and the global economic realignment of the past five years demand that businesses prepare for the next stage of transformation. The advances of reengineering must be extended to include all stakeholders-not just a company's shareholders, but its managers, employees, customers, suppliers, and partners as well.

I have heard much criticism that the efficiencies created by the first round of reengineering mainly benefited shareholders at the expense of customers and employees. As banks merged, for example, staffs were consolidated and downsized in the name of reengineering. Fewer people were asked to do more work, while others were laid off and customer service deteriorated. That imbalance cannot be sustained. Indeed, shareholders can expect to go on profiting from business changes only if-a crucial if-customers and employees begin to benefit as well.

What the world's harsh new economic conditions teach us, above all, is that every part of business is now connected at some level to every other part. All are interdependent. No part can thrive in isolation. Like the human body, the whole is healthy only if the parts are healthy.

This book was written to help managers confront the new challenge of connectedness and interdependency. Where reengineering showed managers how to organize work around processes inside a company, X-engineering argues that the company must now extend its processes outside-hence the X, which stands for crossing boundaries between organizations. When an organization's processes are integrated with those of other companies, all the partners can pool their efforts and effectively become a new multi-company enterprise, far stronger than its individual members could ever be on their own.

X-engineering is the art and science of using technology-enabled processes to connect businesses with other businesses and companies with their customers to achieve dramatic improvements in efficiency and create value for everyone involved.

What is driving this sweeping change is a combination of global competitive pressure and the frustrating inefficiency and redundancy that still persists in work relationships between organizations and with customers. The change is enabled, of course, by that all-purpose information medium, the ubiquitous Internet, and its associated technologies. When I call my approach X-engineering, I mean to invoke boundary-crossing on a scale approaching the Internet's ability to connect the world in a seamless web of transactions. This is hardly far-fetched. Many large organizations have already adopted forms of X-engineering, in practice if not yet in name.

Most businesspeople, I suspect, think of the reengineering movement as a thing of the past. I think it has just begun. X-engineering is reengineering squared: a vastly expanded new version, redesigned and refitted for timely service in the world's tough new business climate. With all due immodesty, I predict that the corporate transformations spurred by X-engineering in this decade will dwarf those wrought by reengineering in the last one.

Reengineering and X-engineering are alike in that they both make it possible to greatly improve business performance. They both require radical rethinking and fundamental change, and they both have a process focus. Then they part company. Reengineering is applied within the organization largely to cut costs, raise quality, and increase speed and productivity. X-engineering also improves internal efficiency, but that is just the beginning. It promises vast improvement in operations and processes across organizations-that is, among companies and their suppliers, partners, and customers. The result will be breakthrough innovations in the ways companies operate and new value propositions for customers. Ultimately, the X-engineered corporation mobilizes not only its own improved processes but also those of its X-engineered allies.

The potential impact of X-engineering can be glimpsed in this simple fact: Business spends about $2 trillion a year on logistics, 40 percent of which goes for paperwork and administration. X-engineering those processes could achieve mammoth savings. Right now, for example, the routine process of shipping something across the Atlantic is a logistical nightmare, thanks to red tape that requires shippers to execute 26 separate documents. If X-engineering could slash these administrative costs by half-a relatively modest ambition-companies and presumably consumers would be richer by $400 billion a year.

In the chapters ahead, I set forth in detail the theory and practice of X-engineering. I also offer case histories of some of the businesses that have made great strides by applying X-engineering concepts. In this chapter, my goal is more modest. I show how reengineering and X-engineering were born. I explain why the business world has been so slow to adapt to the Internet despite its huge potential, and I detail how this new technology is changing the very definition of the corporation.

From Reengineering to X-engineering

One of our key insights into the need for reengineering came from an insurance executive who sought our help in the late 1980s. He told us that it took his company 24 days to issue a new policy-nearly a month just to write up a simple life policy and send out a bill. The delays were both annoying and expensive, but that wasn't the worst of it. "Here's my real problem," he said. "I don't want to give reluctant customers that much time to change their minds."

It turned out that the actual time necessary to create and print a policy and send a bill was 10 minutes: After all, policies are usually composed of standard boilerplate clauses, and every department was fully automated. So how could the process conceivably take 24 days?

We traced the order's paper trail through the organization. We visited the 14 different departments on its route. We saw all the computers-and we concluded that the company's problem was caused by its extreme fragmentation and specialization. No amount of increased efficiency inside those 14 separate stovepipes was going to help. The only way to make any dramatic gain in our client's performance was to tear down the system, dismantle those stovepipes, and create a clear, clean line from the beginning to the end of every process.

And that became reengineering.

A decade later, in the summer of 2000, I had a similar epiphany about X-engineering. It came while I was sitting in the conference room of Harvard Pilgrim Health Care, Inc., a health maintenance organization (HMO) in Boston, Massachusetts. Founded by a group of doctors from Harvard Medical School and previously known as Harvard Community Health Plan, it has always been committed to providing the best possible health care.

Harvard Pilgrim had a new chief executive officer, Charles D. Baker, who had arrived to find impending disaster. At least $100 million of previously unreported red ink was on the books, and there wasn't much of a cushion to lean on. Even more disturbing, the organization, like many HMOs, was having trouble tracking its expenses and its members.

Baker's questions were initially about survival. How does a business get into a condition where it learns about its real income and costs a full year after it closes its books? How could it fix its operations and get its financials under control while continuing to provide the quality health care that had made its reputation?

Baker and his new management team could have cut costs in the disturbing fashion of many HMOs-by simply dumping whole categories of patients who required more care than the norm. But these doctors and managers had a great sense of purpose: Not only did they want to use the best of their ability to continue to serve all their members, but they were going to solve all the conundrums that plague the health care industry.

Baker and his colleagues had other questions in need of answers: How can we improve our services, for example by tracking the outcomes of our treatments, without increasing the costs of health care? Why does it sometimes take over a year to settle up our financial arrangements with our doctors and hospitals? Why do our members have to fill out new forms and register again every time they see a new care provider? Why can't we have universal health care records, accessible to all providers-with the members' permission, of course? Why are all of us in health care spending as much as 35 percent of every expense dollar on administrative processes that often involve multiple health care providers and other insurers? What if we could spend most of that money directly on the delivery of care?

What struck me at our meeting was that a solution for Harvard Pilgrim would require more than reengineering the processes inside the organization. Harvard Pilgrim was not a finite business that could ever thrive alone, no matter how superb its internal processes might become. Like so many other businesses today, this HMO was essentially an intermediary, trading in information with its partners. It was, in fact, a complex network of mutual processes and relationships with other organizations.

Solving Harvard Pilgrim's problems would thus require crossing the boundaries of multiple organizations. The HMO would have to redesign its working relationships with members, employers, doctors, hospitals, and other insurers. Each player in the health care industry would have to change the way it added value to the patient's experience. And none of them could do it alone. The solution would require cross-organizational process change, shifts in strategy, and the generous application of the Internet and related information technologies. In the end, the health care industry would have to be reinvented. And the key to that kind of reinvention is what became X-engineering.

As I realized that day in Boston, there must be a broader approach to doing business that expands the application of technological advances across whole industries without respect to organizational or geographic boundaries. What had been vacuous concepts-"the networked economy" or the "virtual corporation," for example-could now be made a reality. But it would not happen simply through the application of technology. It would happen only if managers radically changed their business processes-this time not just within their companies or even just where customers and companies meet. The opportunity was now to create a new generation of processes that would cross the boundaries of organizations and be shared first between companies and eventually throughout a whole industry.

These new processes would both dramatically improve the performance of companies and the value they deliver to customers. I also realized that understanding the real effects of the Internet and the role of information technology would be critical to successful X-engineering. For example, I needed to decide whether these tools were disruptive or indispensable or perhaps both. After all, many company processes can and have been reengineered without the use of information technology. But in X-engineering the Internet is the central nervous system, the medium for sharing vital information and integrating disparate companies and their processes. It is indispensable to X-engineering. Not surprisingly, the Internet also brings all the challenges of disruption.

The power of the Internet as a technological development ranks with the advent of electricity, the internal-combustion engine, nuclear power, and the computer itself. It is the ubiquitous network that can link all organizations, and it is driving a fundamental shift in the way organizations operate. Over time, it will not only improve the performance of managers and employees-it will alter the very nature of their work. Moreover, it will allow organizations to become not just tools of change but creators of change.

Information has always been powerful; the Internet makes it very nearly omnipotent. We can now gather, analyze, and share information with a speed and sophistication that dramatically raises organizational intelligence. In our new digital democracy, what used to be "secrets" that managers believed provided competitive advantage become common knowledge almost instantly- information that farsighted companies disseminate to all hands. Transparency of information and processes becomes the norm.

This openness and ease of information dispersal is the key to mobilizing a company and its customers, suppliers, and partners for a common purpose. And that will enable almost miraculous efficiency. Every day, process-savvy companies use the Internet to routinely exceed performance levels unimagined 10 years ago. Just as the four-minute mile seemed impossible until Roger Bannister ran it one day in 1954-whereupon runner after runner matched his breakthrough until that milestone became routine-the performance standards of a decade ago are now easily surpassed.

There is a popular misconception that the breaking of the dotcom bubble on Wall Street signaled a disenchantment with the Internet as a way of doing business and even with high technology in general. Not so. What has changed is how technology and the Web are being used. At the retailer Staples, Inc., for instance, even as management slammed the brakes on launching new e-businesses and folded its Staples.com subsidiary back into the parent company, new technology was being put in place to increase efficiency. An investment of $2.5 million in a new data-storage system was expected to return $10 million in savings, and an online help desk for store managers and clerks should bring a 60 percent return on investment over four years-well over four times the average Staples return.

That is typical of the bottom-line savings we are seeing through process change and the application of technology. Here are some other examples:

• Item: FedEx Corporation is encouraging its customers to keep tabs on packages via its Web site. Why? It costs FedEx $2.14 to track a package if a customer calls its phone center, 4 cents if a customer does it via the Web. And FedEx receives more than 600,000 such queries a day.

• Item: By using online auctions, the pharmaceutical and consumer-products giant Bristol-Myers Squibb Company has trimmed 6 to 8 percent of its cost on everything from chemicals to medicine dispensers and reduced time in its purchasing process.

• Item: The health care provider Humana, Inc., used to spend $128 to handle a single job application and résumé. Putting that process online has collapsed the cost to a nearly invisible 6 cents, boosting productivity some 2,133 times.

• Item: Banks enjoy a savings bonanza when their customers use the Web. At one financial institution I know, the cost of handling a transaction over the Internet costs the bank just 2 cents, compared with 24 cents via a cash machine, 54 cents by telephone, and $1.25 by teller.

• Item: The General Electric Company is saving some $600 million a year. How? By making just a third of its procurement purchases online.

• Item: International Business Machines Corporation (IBM) has seen its purchasing costs drop by $6.5 billion in two years simply by putting its procurement process online. Another benefit of its e-procurement process: Its contract cycle time has declined from one year to 30 days.

In truth, the real potential of the Internet was never in auctions of gewgaws or the spamming of e-mail advertising. Cutting costs is the name of the Internet game. To be sure, investment in technology is turning down as companies digest the huge investments they have made in recent years. In a survey in May 2001, 260 chief information officers said their planned growth in technology budgets was down to 4 percent from 19 percent six months previously. But the plan was still to grow, and 70 percent of the respondents to a survey of 150 senior executives by the Wharton School of the University of Pennsylvania said Internet technology was crucial-both for customer service and for making purchasing more efficient.

Beyond all this, the Internet is transforming competition itself. Traditionally, companies have used various methods to capture and retain customers, improve operational efficiency, and achieve competitive advantage. In my consulting work I identified many of those options long ago. For example, companies have always sought to gain new efficiencies by trimming manufacturing costs, cutting inventories, and slashing distribution expenses. All that is still possible, but the use of the Internet will lift all boats. Competitors' costs will become similar-and their prices will drift closer together.

This leveling of the playing field is being accelerated by a wave of new alliances and partnerships. Ronald Coase, the Nobel Prize-winning economist, pointed out years ago that the high transaction costs involved in finding and working with new partners led companies to try to do everything themselves. Today the Internet has made partnering easier and far less expensive. This has encouraged many businesses to look outside their borders, seeking alliances with companies that can perform particular processes better than they can. Paradoxically, the nature of competition today leads companies to cooperate. In other words, the right conditions are in place for X-engineering

It is abundantly clear that information technology has become the 600-pound gorilla in thousands of businesses the world over. The task for managers is to master the new technology instead of becoming its victim.