BusinessWeek

WANTED: Bureaucracy basher, willing to challenge convention,
assume big risks, and rewrite the accepted rules of industrial
order.


It's a job description that says nothing about your skills in
manufacturing, finance, or any other business discipline. And
as seismic changes continue to rumble across the corporate landscape,
it's the kind of want ad the 21st century corporation might write.


Skeptical? No matter where you work, it's likely that your company
has been, in today's vernacular, "downsized" and "delayered."
It has chopped out layers of management and supposedly empowered
employees with greater responsibility. But you're still bumping
up against the same entrenched bureaucracy that has held you
back before. The engineers still battle manufacturing. Marketing
continues to slug it out with sales. And the financial naysayers
fight everyone.


That's because, despite the cutbacks, you probably still work
in the typical vertical organization, a company in which staffers
look up to bosses instead of out to customers. You and your colleagues
feel loyalty and commitment to the functional fiefdoms in which
you work, not to the overall corporation and its goals. And even
after all the cutting, too many layers of management still slow
decision-making and lead to high coordination costs.


Mere downsizing, in other words, does little to change the fundamental
way that work gets done in a corporation. To do that takes a
different organizational model, the horizontal corporation. Already,
some of Corporate America's biggest names, from American Telephone
& Telegraph and DuPont to General Electric and Motorola, are
moving toward the idea. In the quest for greater efficiency and
productivity, they're beginning to redraw the hierarchical organization
charts that have defined corporate life since the Industrial
Revolution (page 80).


"WAVE OF THE FUTURE." Some of these changes have been under way
for several years under the guise of "total quality management"
efforts, reengineering, or business-process redesign. But no
matter which buzzword or phrase you choose, the trend is toward
flatter organizations in which managing across has become more
critical than managing up and down in a top-heavy hierarchy.


The horizontal corporation, though, goes much further than these
previous efforts: It largely eliminates both hierarchy and functional
or departmental boundaries. In its purest state, the horizontal
corporation might boast a skeleton group of senior executives
at the top in such traditional support functions as finance and
human resources. But virtually everyone else in the organization
would work together in multidisciplinary teams that perform core
processes, such as product development or sales generation. The
upshot: The organization might have only three or four layers
of management between the chairman and the staffers in a given
process.


If the concept takes hold, almost every aspect of corporate life
will be profoundly altered. Companies would organize around process--developing
new products, for example--instead of around narrow tasks, such
as forecasting market demand for a given new product. Self-managing
teams would become the building blocks of the new organization.
Performance objectives would be linked to customer satisfaction
rather than profitability or shareholder value. And staffers
would be rewarded not just for individual performance but for
the development of their skills and for team performance.


For most companies, the idea amounts to a major cultural transformation--but
one whose time may be at hand. "It's a wave of the future," declares
M. Anthony Burns, chairman of Ryder System Inc., the truck-leasing
concern. "You just can't summarily lay off people. You've got
to change the processes and drive out the unnecessary work, or
it will be back tomorrow." Such radical changes hold the promise
for dramatic gains in productivity, according to Lawrence A.
Bossidy, chairman of AlliedSignal Inc. "There's an awful lot
more productivity you're going to see in the next few years as
we move to horizontally organized structures with a focus on
the customer," says Bossidy.


How so? Just as a light bulb wastes electricity to produce unwanted
heat, a traditional corporation expends a tremendous amount of
energy running its own internal machinery--managing relations
among departments or providing information up and down the hierarchy,
for example.


A horizontal structure eliminates most of those tasks and focuses
almost all of a company's resources on its customers. That's
why proponents of the idea say it can deliver dramatic improvements
in efficiency and speed. "It can get you from 100 horsepower
to 500 horsepower," says Frank Ostroff, a McKinsey & Co. consultant.
With colleague Douglas Smith, he coined the term "the horizontal
organization" and developed a series of principles to define
the new corporate model (page 76).


The idea is drawing attention in corporate and academic circles.
In the past year, Ostroff has given talks on the horizontal organization
before sizable gatherings of corporate strategic planners, quality
experts, and entrepreneurs. He has also carried the message to
MBAs and faculty at the University of Pennsylvania and Yale University,
and he boasts invitations from Harvard University and several
leading European business schools.


PROCESS AND PAIN. But this is much more than just another abstract
theory making the B-school lecture rounds. Examples of horizontal
management abound, though much of the movement is occurring at
lower levels in organizations. Some AT&T units are now doing
annual budgets based not on functions or departments but on processes
such as the maintenance mf a worldwide telecommunications network.
They're even dishing out bonuses to employees based on customer
evaluations of the teams performing those processes. DuPont Co.
has set up a centralized group this year to nudge the chemical
giant's business units into organizing along horizontal lines.
Chrysler Corp. used a process approach to turn out its new Neon
subcompact quickly for a fraction of the typical development
costs. Xerox Corp. is employing what it calls "microenterprise
units" of employees that have beginning-to-end responsibility
for the company's products.


In early December, nearly two dozen companies--including such
international giants as Boeing, British Telecommunications, Stockholm-based
L.M. Ericsson, and Volvo Europe--convened in Boston under the
auspices of Mercer Management Consulting, another consulting
shop peddling the idea, to swap stories on their efforts to adopt
horizontal management techniques. Indeed, nearly all


of the most prominent consulting firms are now raking in tens
of millions of dollars in revenues by advising companies to organize
their operations


horizontally.


What those consultants' clients are quickly discovering, however,
is that eliminating the neatly arranged boxes on an organization
chart in favor of a more horizontal structure can often be a
complex and painful ordeal. Indeed, simply defining the processes
of a given corporation may prove to be a mind-boggling and time-consuming
exercise. Consider AT&T. Initially, the company's Network Services
Div., which has 16,000 employees, tallied up some 130 processes
before it narrowed them down to 13 core ones.


After that comes the challenge of persuading people to cast off
their old marketing, finance, or manufacturing hats and think
more broadly. "This is the hardest damn thing to do," says Terry
M. Ennis, who heads up a group to help DuPont's businesses organize
along horizontal lines. "It's very unsettling and threatening
for people. You find line and function managers who have been
honored and rewarded for what they've done for decades. You're
in a white-water zone when you change."


Some management gurus, noting the fervor with which corporate
chieftains embrace fads, express caution. "The idea draws together
a number of fashionable trends and packages them in an interesting
way," says Henry Mintzberg, a management professor at McGill
University. "But the danger is that an idea like this can generate
too much enthusiasm. It's not for everyone." Mintzberg notes
that there is no one solution to every organization's problems.
Indeed, streamlined vertical structures may suit some mass-production
industries better than horizontal ones.


Already, consultants say, some companies are rushing to organize
around processes without linking them to the corporation's key
goals. Before tinkering with its organization chart, Ostroff
says, a company must understand the markets and the customers
it wants to reach and complete an analysis of what it will take
to win them. Only then should the company begin to identify the
most critical core processes to achieve its objectives--whether
they're lowering costs by 30% or developing new products in half
the time it normally required.


DIFFERENT CLIMATE. In the days when business was more predictable
and stable, companies organized themselves in vertical structures
to take advantage of specialized experts. The benefits are obvious:
Everyone has a place, and everyone understands his or her task.
The critical decision-making power resides at the top. But while
gaining clarity and stability, such organizations make it difficult
for anyone to understand the task of the company as a whole and
how to relate his or her work to it. The result: Collaboration
among different departments was often a triumph over formal organization
charts.


To solve such problems, some companies turned to so-called matrix
organizations in the 1960s and 1970s. The model was built around
specific projects that cut across departmental lines. But it
still kept the hierarchy intact and left most of the power and
responsibility in the upper reaches of the organization.


Heightened global competition and the ever increasing speed of
technological change have since altered the rules of the game
and have forced corporate planners to seek new solutions. "We
were reluctant to leave the command-and-control structure because
it had worked so well," says Philip Engel, president of CNA Corp.,
the Chicago-based insurance company that is refashioning its
organization. "But it no longer fit the realities."


Indeed, many companies are moving to this new form of corporate
organization after failing to achieve needed productivity gains
by simple streamlining and consolidation. "We didn't have another
horse to ride," says Kenneth L. Garrett, a senior vice-president
at AT&T's Network Systems Div. "We weren't performing as well
as we could, and we had already streamlined our


operations."


In all cases, the objective of the horizontal corporation is
to change the narrow mind-sets of armies of corporate specialists
who have spent their careers climbing a vertical hierarchy to
the top of a given function. As DuPont's Terry Ennis puts it:
"Our goal is to get everyone focused on the business as a system
in which the functions are seamless." DuPont executives are trying
to do away with what Ennis calls the "disconnects" and "handoffs"
that are so common between functions and departments. "Every
time you have an organizational boundary, you get the potential
for a disconnect," Ennis says. "The bigger the organization,
the bigger the functions, and the more disconnects you get."


SPEEDIER CYCLES. The early proponents of the horizontal corporation
are claiming significant gains. At General Electric Co., where
Chairman John F. Welch Jr. speaks of building a "boundaryless"
company, the concept has reduced costs, shortened cycle times,
and increased the company's responsiveness to its customers.
GE's $3 billion lighting business scrambled a more traditional
structure for its global technology organization in favor of
one in which a senior team of 9-to-12 people oversees nearly
100 processes or programs worldwide, from new-product design
to improving the yield on production machinery. In virtually
all the cases, a multidisciplinary team works together to achieve
the goals of the process.


The senior leadership group--composed of managers with "multiple
competencies" rather than narrow specialists--exists to allocate
resources and ensure coordination of the processes and programs.
"They stay away from the day-to-day activities, which are managed
by the teams themselves," explains Harold Giles, manager of human
resources in GE's lighting business.


The change forced major upheavals in GE's training, appraisal,
and compensation systems. To create greater allegiance to a process,
rather than a boss, the company has begun to put in place so-called
"360-degree appraisal routines" in which peers and others above
and below the employee evaluate the performance of an individual
in a process. In some cases, as many as 20 people are now involved
in reviewing a single employee. Employees are paid on the basis
of the skills they develop rather than merely the individual
work they perform.


Ryder System is another convert. The company had been organized
by division--each with its own functions--based on product. But
it wanted an organization that would reduce overhead while being
more responsive to customers. "We were reaching the end of the
runway looking for cost efficiencies, as most companies have,"
says J. Ernie Riddle, senior vice-president for marketing. "So
we're looking at processes from front to back."


To purchase a vehicle for leasing, for instance, required some
14 to 17 handoffs as the documents wended their way from one
functional department to another at a local, and then a national,
level. "We passed the baton so many times that the chances of
dropping it were great," says Riddle. By viewing this paperwork
flow as a single process from purchasing the vehicle to providing
it to a customer, Ryder has reduced the handoffs to two from
five. By redesigning the work, weeding out unnecessary approvals,
and pushing more authority down the organization, the company
cut its purchasing cycle by a third, to four months.


"A CLEAN SHEET." Some startups have opted to structure themselves
as horizontal companies from the get-go. One such company is
Astra/Merck Group, a new stand-alone company formed to market
antiulcer and high-blood-pressure drugs licensed from Sweden's
Astra. Instead of organizing around functional areas, Astra/Merck
is structured around a half-dozen "market-driven business processes,"
from drug development to product sourcing and distribution. "We
literally had a clean sheet of paper to build the new model company,"
says Robert C. Holmes, director of strategic planning. "A functional
organization wasn't likely to support our strategic goals to
be lean, fast, and focused on the customer."


Some fairly small companies are also finding the model appealing.
Consider Modicon Inc., a North Andover (Mass.) maker of automation-control
equipment with annual revenues of $300 million. Instead of viewing
product development as a task of the engineering function, President
Paul White defined it more broadly as a process that would involve
a team of 15 managers from engineering, manufacturing, marketing,
sales, and


finance.


By working together, Modicon's team avoided costly delays from
disagreements and misunderstandings. "In the past," says White,
"an engineering team would have worked on this alone with some
dialogue from marketing. Manufacturing wouldn't get involved
until the design was brought into the factory. Now, all the business
issues are right on the table from the beginning."


TEAM HATS. The change allowed Modicon to bring six software products
to market in one-third the time it would normally take. The company,
a subsidiary of Germany's Daimler Benz, still has a management
structure organized by function. But many of the company's 900
employees are involved in up to 30 teams that span several functions
and departments. Predicts White: "In five years, we'll still
have some formal functional structure, but people will probably
feel free enough to spend the majority of their time outside
their functions."


So far, the vast majority of horizontal experimentation has been
at the lower levels of organizations. Increasingly, however,
corporations are overhauling their entire structures to bear
a closer resemblance to the horizontal model defined by consultants
Ostroff and others. Eastman Chemical Co., the $3.5 billion unit
of Eastman Kodak Co. to be spun off as a stand-alone company
on Jan. 1, replaced several of its senior vice-presidents in
charge of the key functions with "self-directed work teams."
Instead of having a head of manufacturing, for example, the company
uses a team consisting of all its plant managers. "It was the
most dramatic change in the company's 70-year history," maintains
Ernest W. Deavenport Jr., president of Eastman Chemical. "It
makes people take off their organizational hats and put on their
team hats. It gives people a much broader perspective and forces
decision-making down at least another level."


In creating the new organization, the 500 senior managers agreed
that the primary role of the functions was to support Eastman's
business in chemicals, plastics, fibers, and polymers. "A function
does not and should not have a mission of its own," insists Deavenport.
Common sense? Of course. But over the years, the functional departments
had grown strong and powerful, as they have in many organizations,
often at the expense of the overall company as they fought to
protect and build turf. Now, virtually all of the company's managers
work on at least one cross-functional team, and most work on
two or more on a daily basis. For example, Tom O. Nethery, a
group vice-president, runs an industrial-business group. But
he also serves on three other teams that deal with such diverse
issues as human resources, cellulose technology, and product-support
services.


These changes in the workplace are certain to dramatically alter
titles, career paths, and the eoals of individuals, too. At AT&T's
Network Systems Div., each of 13 core processes boasts an "owner"
and a "champion." While the owners focus on the day-to-day operations
of a process, the champions ensure that the process remains linked
with overall business strategies and goals. Through it all, collaboration
is key. "An overriding challenge is how you get marketing people
to talk to finance people when they've thrown rocks at each other
for decades," says Gerald Ross, co-founder of ChangeLab International,
a consulting firm that specializes in cultural transformation.
"Your career will be dependent on your ability to work across
boundaries with others very different from you."


Don't rush to write the obituary for functional management, however.
No companies have completely eliminated functional specialization.
And even advocates of the new model don't envision the end of
managers who are experts in manufacturing, finance, and the like.
"It's only the rarest of organizations that would choose to be
purely vertical or horizontal," says consultant Douglas Smith.
"Most organizations will be hybrids."


Still, the horizontal corporation is an idea that's gaining currency
and one that will increasingly demand people who think more broadly
and thrive on change, who manage process instead of people, and
who cherish teamwork as never before.


COMPANIES MOVING TOWARD 


AT&T Network Systems Div. reorganized its entire business around processes; now 
sets budgets by process and awards bonuses to employees based on customer 
evaluations 
EASTMAN CHEMICAL Kodak unit has over 1,000 teams; ditched senior v-ps for 
administration, manufacturing, and R&D in favor of self-directed teams
GENERAL ELECTRIC Lighting business scrapped vertical structure, adopting 
horizontal design with more than 100 processes and programs


THE HORIZONTAL MODEL
LEXMARK INTERNATIONAL Former IBM division axed 60% of managers in manufacturing 
and support in favor of cross-functional teams worldwide 
MOTOROLA Government Electronics group redesigned its supply management 
organization as a process with external customers at the end; team members are 
now evaluating peers
XEROX Develops new products through multi-disciplinary teams that work in a 
single process, instead of vertical functions or departments 
DATA: BUSINESS WEEK, McKINSEY & CO.






Copyright 1993 McGraw-Hill, Inc. All rights reserved.