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The Horizontal Corporation


Cover Story

THE HORIZONTAL CORPORATION

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.

John A. Byrne in New York, with bureau reports


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