In this installment of my discussion of management buzzwords, I will turn to techniques that are being as ways to improve company performance: activity-value analysis, total quality management, and -- most notably today -- reengineering.

Activity-value analysis often goes by other titles. Among them are overhead value analysis, administrative value analysis, organizational efficiency study, and organizational analysis.

Virtually every consulting and accounting firm offers a "product" with an activity-value analysis focus and the primary objective of cost reduction.

Typically, activity-value analysis begins by working with teams of employees to develop a list of key missions and activities.

The next step is to determine the amount of time spent at each of those activities.

Valuable Information

For example, one activity could involve generating and reviewing a particular report. Once the activity survey is complete, management can determine not only the time spent to create the report, but also the number and level of people involved in its creation.

Further, by allocating salary numbers, management learns that the report generation requires x dollars in salary expense.

If built correctly, the data base of the activity-value analysis provides management with much valuable information concerning what tasks are being performed, who is performing them, and what the tasks cost.

Nonetheless, the data-base creation is only step one in the process of evaluating performance.

Team Approach

Substantial value can be realized by encouraging teams of employees to take a hard look at the tasks being performed and determine their value.

Do these activities need to be performed at all? If they do need to be performed, can a lower-cost employee do the task? Can the task or activity be outsourced?

Remarkable cost savings and increased productivity should occur as a result of this process. Companies report a reduction of 25% or more of the operating cost base when this program is implemented with commitment, care, and creativity.

In one client case, activity-value analysis determined that highly paid corporate bankers were spending more time answering customer inquiries than they were cross-selling new products or marketing to targets.

In this case, the activities being performed were important, but most of the customer servicing activities could be completed as efficiently by trained lower-cost personnel.

Threefold Payoff

After analyzing the data base to quantify the time and cost involved, management shifted maintenance activities to support staff and rewrote the bank-officer job description and management objectives to reflect an increased emphasis on sales.

The payoff to management was threefold: lower cost to maintain current customers, increased marketing activity by the bankers, and greater job enrichment for experienced bankers and their backup support.

One other key value emerges from activity-value analysis: Developing the cost data base allows managers to assess and perhaps begin to attack the overhead costs generated by support departments such as accounting, controllers, operations, and management information systems.

Often these indirect costs are overlooked by line managers, because they are usually not accountable for them, even though overhead costs can exceed 30% of the total cost base of a department.

Basis for Informed Decisions

Basically, this process should allow senior managers to make informed decisions about whether to reduce or change the activities performed by "overhead" areas.

Two notes of caution.

* Companies should beware of the "canned" cost reduction product or system. While the general process is largely the same from one company to another, the specific approach should be customized to your organization and culture.

* When using an outsider for a project of this type, make certain you are comfortable with the approach and personality of the project leader. Like reengineering, activity-value analysis needs a strong driver, whose creativity, ability to work with others, time commitment, and understanding of the company will play a major role in the project's success.

The definition of total quality management differs according to the source. The approaches of Deming, Juran, Crosby, and Shigeo Shingo, among others, all have a slightly different emphases.

Robert Flood of the University of Hull states that total quality management has 10 main principles, including:

* Focus on the prevention of problems rather than problem resolution.

* All levels and functions of the organization must be involved in quality assurance.

* Quality must be measured.

* Standards must exist for internal and external customers.

* Quality is a process of continuous improvement.

When introduced correctly, quality gives increased autonomy to employees, emphasizes the ability of the individual to do things right the first time, and relates improved quality to improved profitability.

Clearly, it is easy to agree to the principles listed above.

All too often, however, similar approaches are adopted half-heartedly by managers who do not respect or understand employees whom they expect to respect clients and offer excellent service.

Cautionary Tale

One bank trying to promote quality-management practices to its tellers failed in the attempt for several reasons.

Firstly, senior managers showed no substantial respect for low-level employees, requiring them to work in uncomfortable and unclean circumstances.

Secondly, senior managers made speeches but seldom visited the branches to speak with on-site employees.

Thirdly, the tellers, who were from poorer socioeconomic groups, had seldom experienced good-quality service in their personal lives, and received only minimal training. There was no way that they could be expected to deliver good service to customers.

Quality service is obviously important, but it must also be linked to profit. Banks should offer their highest-quality service to their most profitable customers.

While less important customers should not receive poor service, all too often today banks fail to differentiate, providing too much to customers who pay too little to justify the investment of employee time.

The bottom line: If quality is only a buzzword and not a passion of the corporate culture, employees and customers will soon realize that they are being lied to. The quality program, no matter how well packaged, will fail.

Engineering Change

No buzzword is more in the headlines than reengineering. Despite its recent popularity, Joseph Juran, the 88-year-old guru of the quality movement, has this to say about reengineering: "It's just a label for something that's been around for a while."

Mr. Juran is right. Nonetheless, reengineering is an exciting technique. Though difficult, it can lead to fundamental change in how a company is managed and in the degree of responsibility and accountability given to employees throughout the company.

Reengineering is a creative, time-consuming process that requires management and employees to shake free of truisms and think differently about their company's objectives and the activities they as individuals perform.

Case History

Mike Hammer, in his book "Reengineering the Corporation," provides an excellent example of successful reengineering in discussing IBM Credit Corp.

Originally, the business approval process at that company started with a request for financing, submitted by the field salesperson to the "call logger."

The request then moved through the credit area, the business practices area, and pricing. Then an approval letter was prepared in a clerical area.

The process involved six areas of the business and averaged six days to complete.

Mr. Hammer explains that the reengineered approach also begins with the field salesperson, but then is dramatically changed. The salesperson now contacts a "deal structurer," who then has sole responsibility for completing most deals.

That person enters the relevant data, performs the credit check, modifies loan covenants, determines the appropriate interest rate, and writes the approval letter.

Delay Slashed

The result? A big improvement in turnaround time (four hours versus six days) and in productivity. One hundred times as many deals can be reviewed, with no head-count increase.

It is important to note that in this case the process was simplified first, and then management used technology to support and complement that change.

As this example indicates, reengineering often breaks through functional organizational barriers to look at the "natural" progress of a transaction. The IBM deal structurer completes work that at one time moved through five different departments.

Given the compartmentalization and bureaucracy of many banks, reengineering opportunities merit considerable attention.

Of all the techniques reviewed in this series, it is also the most difficult to implement successfully. From a consultant's perspective, it is also a very tough assignment.

Why? The existing organization usually resists this process. Each power center will invariably fight to protect its turf, out of fear or out of concern about an untested approach. This is particularly the case if a company is generating good results.

Tough Assignment

An excellent facilitator, whether an internal employee or an outsider, has to keep the rethinking process going while avoiding missiles and time bombs from strong personalities within the company.

Most important, senior managers must be committed -- personally involved in the process -- and must understand that the intense involvement of employees required to redesign processes may take many months.

The payoff makes facing these issues worthwhile. Improved productivity, a more customer-sensitive organization, and higher quality performance can all result from this process.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.