''I still remember that day in May, 1994, vividly. Richard Andrews, my friend, and the CEO of the Delaware-based KG Bearings, who later became our partner, presented me with a book that was to change my understanding of management: Reengineering The Corporation. I read and re-read the book. Reengineering seemed to be the ideal route for improving our performance since it was structured to resolve operational issues, where our problems lay. But I could apply the management technique only in 1997. Burdened by operational inefficiencies, we were drifting away from the customer. To come closer to him, I had to eliminate unproductive work. Or, reengineer. But even one year after the process was set in motion, the impact has been marginal. Did I plunge headlong into reengineering without a proper diagnosis? Was reengineering the right technique to employ ?'' Ramesh Nadkarni, the CEO of Sigma Bearings, was confused as he began a letter outlining his company's experience with reengineering to Michael Pinto, a management consultant. Aptech's Ganesh Natarajan, Rajnish Karki & Associates' Rajnish Karki, and Amtrex's Arvind Nair diagnose Nadkarni's problems. A BT Case Study.

From: Ramesh Nadkarni, CEO, Sigma Bearings
To: Michael Pinto, Executive Director, Jonathan Consulting

Dear Mr Pinto,

I was impressed by your presentation on reengineering at the All India Management Convention in Mumbai yesterday. Ever since I learnt of the concept from the CEO of our American collaborator, Richard Andrews, three years ago, I have been bowled over by reengineering. As I mentioned to you at lunch, we tried it out at Sigma Bearings (Sigma) over a year ago, but without success. Your observations on why -- and where -- companies go astray when they try to reengineer were of particular interest to me.

Let me share with you Sigma's bitter experiences. We have been making industrial bearings at our Pune (Maharashtra) plant for over two decades. We have been boosting our turnover and profits consistently every year; today, we rank second in the domestic industry with a 14 per cent share of the market. Bearings -- which increase the fuel-efficiency of an engine by reducing friction -- are used by industries as diverse as consumer durables, railways, and aircraft although the automotive sector alone consumes a third of our output. In fact, more than 70 per cent of Sigma's annual production goes to about a dozen auto-majors in the country, with whom we have entered into long-term contracts. That has helped us acquire a fairly strong customer focus.

However, it has also forced us to undertake joint costing exercises with our major customers, who insist on reducing end-prices by about 4 per cent every year, and want to pay correspondingly less for their components. Besides, the bearings industry is dominated by the unorganised sector, consisting of traders -- who import bearings which are 20 per cent cheaper than local products -- and small firms, which enjoy a price advantage of around 25 per cent. Sigma, therefore, is under continuous pressure to manage the cost of its operations. Our experience showed that while variations in our manufacturing costs have been marginal, it is the administrative overheads -- which account for between 10 and 12 per cent of sales -- that tend to go haywire. And when the latter shot up to 18 per cent for two successive years, 1995-96 and 1996-97, we decided to take the bull by the horns.

With a little over 2,000 employees, Sigma was, obviously, bloated. As the company had grown in terms of sales, it had accumulated flab at every layer of the organisation. A lot of unproductive work was going on at various levels, adding not only little value to our products and services, but also increasing the hidden costs of our operations. We tried to de-bureaucratise our manufacturing operations by disbanding our quality control department, and making workers on the shopfloor responsible for product quality. We discussed the issue at our Management Committee Meeting, and decided to take a fresh look at our administrative systems and procedures, examining their impact on value-addition.

We designed two simple tests for employees to distinguish work that adds value from work that does not. First, we said, before you start a particular piece of work, ask yourself: am I fulfilling a customer need? If the answer is yes, go ahead and do it. But if the answer is no, don't do it. Second, step into the customer's shoes, and ask: does this procedure matter to me? If the answer is no, don't do it. A customer does not benefit from most of the documentation and paperwork that goes on in an organisation. For, it does not contribute to the value of the product.

Our logic was irrefutable: if we could flush out the wastages of time and effort built into each of Sigma's numerous transactions and processes, we would discover one more way of getting closer to the customer. So, I said, let us eliminate unproductive work -- let us reengineer. It seemed as though this management technique was tailored to resolve operational problems like ours. We put one of our senior vice-presidents, a Sigma veteran who had been with the company since its inception in 1968, in charge of the exercise. We set up a three-member team with a clear target: administrative overheads should account for no more than 8 per cent of sales in 1997-98. But we were clear that while cost-reduction was important, it would be a secondary objective. The more important thing was to put the customer on top of the change agenda.

That was in January, 1997. Over a year has passed, and we are nowhere near our targets. The team combed the entire organisation for hidden costs. We reorganised our reporting and information systems, but the volume of paperwork has remained almost constant. Most of it exists, I am told, to serve our internal customers. This is quite baffling. All our senior managers are sure that a lot of costs are buried in our bureaucratic maze, but we are unable to slash them. The impact of the reengineering exercise has been marginal -- not dramatic. Sigma's financial results for 1997-98 show that our administrative overheads have come down only marginally to 16 per cent of sales. Did we go about reengineering the wrong way? Or is reengineering a tool that has failed us? I continue to be haunted by those questions.

It is nice of you to accept my invitation to meet Sigma's managers to gauge their reaction to the reengineering programme. I would be glad if you could meet our customers too. It would help you diagnose our failure, and to revive the reengineering experiment. I look forward to seeing you again.

Regards,
Ramesh.

From: Michael Pinto
To: Ramesh Nadkarni

Dear Mr Nadkarni,

Thank you for your letter. I am glad that you found my talk valuable. Let me try to answer your questions. I can see two problems at Sigma: time and focus. The exercise has been stretched out for too long. The period between identifying a process for reengineering and the first field-release should not exceed six months. If it goes on for a year, and beyond, it becomes a drag; people feel uncomfortable, stressed-out, and, gradually, begin to lose interest. The backlash is more difficult to handle than reengineering itself.

But the problem with your experiment is more fundamental. Your reengineering effort was not properly focused. It encompassed too wide an organisational sweep, and tried to address too many issues simultaneously. You faltered in the very primary step: process-mapping. You don't reengineer a company; you reengineer a process. A process is any business activity that has a natural flow. It has a well-defined beginning and an end. More importantly, it makes a difference to business results. There are no more than a dozen processes in any company. Some examples: prospect-to-order (sales); order-to-payment (order execution); procurement-to-shipment (manufacturing); and inquiry-to-resolution (customer service).

Each of these, of course, consists of several sub-processes. Once you map the process, you discover several areas that require improvement. For instance, you may need to increase the inventory turnover rate, reduce the order-to-payment time, minimise the time taken for a new product-launch, or improve cash-flows. Organisations accustomed to working in functional departments must first break down the activities taking place in different departments, and reorganise them around processes. This is the first step in reengineering. But you took the wrong one at Sigma.

Obviously, no company will be able to reengineer all its processes simultaneously. Reengineering requires a guided-missile approach, and enormous discipline. Unless the company has exceptional management capability, it should not take on too many processes. That is the first thing a CEO must keep in mind. So, how do you identify a process to focus on? There are three parameters you should apply:

Is it in the deepest trouble?

Does it have the greatest impact on the customer?

And is it amenable to redesign?

Your choice of areas for reengineering has not, in my view, stood the test on any of these parameters.

I would be glad to come over and talk to your people, and understand what went wrong with your experiment. It would, in fact, substantiate my argument.

Regards,
Michael.

From: Ramesh Nadkarni
To: Michael Pinto

Dear Mr Pinto,

Thank you for your quick response. I agree with some of your observations. But I am confused about process-mapping which, you say, is fundamental to the success of reengineering. The terminology, to my mind, is an exercise in semantics. Even if I concede the importance of breaking down various activities into processes, I see no reason why getting close to the customer -- the principal objective of the exercise at Sigma -- cannot be seen as a business process in its own right. It has a natural flow of its own, and it certainly impacts business results. And I was looking for dramatic, not incremental, improvements. We wanted to eliminate all unproductive steps; we were not looking for ways to manage them better. The approach was meant to be radical. We were questioning the very basis of our long-held procedures and beliefs. And the whole exercise was focused on the customer.

Perhaps you are right about looking at the need for reengineering differently. I would be glad to bank on your expertise.

Regards,
Ramesh.

From: Michael Pinto
To: Ramesh Nadkarni

Dear Mr Nadkarni,

I have had several discussions with your reengineering team for the past three days, and I would like to make the following observations.

Cost-reduction can never be the sole objective of reengineering. Nor can getting close to the customer by cutting down bureaucracy. If there is a proliferation of checks and controls in an organisation, it is a symptom. The root cause is the lack of trust among the people within. It should be addressed not by reengineering, but by HRD-interventions -- such as building a climate of transparency in the organisation. Reengineering is the wrong tool to build employee trust.

As long as you have people working together, some amount of internal control is absolutely essential. The issue is not whether non-value-adding work exists in an organisation, but whether it constitutes a large chunk of all the work that the organisation performs. In fact, there is a noticeable bias at Sigma against conflict of any kind; there is a premium on consensus.

This has worked well, but the top-down nature of reengineering will face a lot of resistance in such a setting. A high-calibre leadership, with a strong vision, is a pre-requisite here. It is important to realise that reengineering -- unlike total quality management -- never happens bottom-up. I suggest that you look at the need for reengineering differently. If you envision yourself as the market-leader in bearings by 2002, you could identify four or five key processes that are critical in order to get there. And, then, zero in on those processes for reengineering.

You had said that you need to answer two questions. Did Sigma go about reengineering the wrong way? Or is reengineering a tool that has failed Sigma? Frankly, I don't know the answers. However, I am convinced, more than ever before, that each company is unique as far as reengineering is concerned. And that everything about reengineering narrows down to the technique. It is right if it works for you. It is wrong if it doesn't.

Regards,
Michael.

Did Sigma apply reengineering methods to an inappropriate problem? Has reengineering produced any results that Sigma can build on? Has the company set too short a time-frame for pay-offs? Is Nadkarni's disillusionment with the    reengineering exercise at Sigma justified? Did the company take on a task for which it was simply not equipped in terms of management resources? What are the pitfalls in reengineering that a company should foresee? How can they be overcome? How should a company go about the exercise? Is the backlash at Sigma a critical issue? Can Sigma undo the damage now?

Solution A | Solution B | Solution C

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