The theory of the "horizontal organization"—an organization focused on meeting customer needs and built around natural work flows instead of conventional functions like marketing, sales, or manufacturing—is no longer new (see the boxed insert, "Horizontal organization principles"). Yet the reality of actually transforming a business consisting of 1,000 or even 10,000 individuals into such an organization is still largely uncharted territory.

This piece is an effort to start drawing those charts. We hope to do so by recounting some early lessons from two companies that have successfully experimented with this new organizational model: Kraft Foods and Ford Motor Company. Other companies such as General Electric, British Airways, AT&T, Motorola, Saab, Tesco, and American Express Financial Advisors have also made an effort to become horizontal. While the total effort can take 18 to 36 months, some companies are beginning to see dramatic performance results:

• By reorganizing all its supply management activities around a single process for each commodity group, Motorola’s Government Electronics Group was able to reduce cycle time by 80 percent, reduce late deliveries by 30 percent, and improve supplier quality performance by a factor of 10.
• General Electric’s Salisbury Plant improved productivity by 50 percent, reduced manufacturing cycle from three weeks to three days, and reduced customer complaints from 2 percent to 0.2 percent of orders when it reorganized all its functional manufacturing activities around a single build-to-order process.
• As part of its broad-scale reorganization around four core processes, Ford’s Customer Service Division has increased productivity by 20 percent and improved customer satisfaction performance by 20 to 60 percent in their Customer Assistance Center.
• Saab Aircraft division reduced lead times by 50 percent, value-added costs by 20 percent, customer complaints by 70 percent, and change orders by 50 percent through its process-based reorganization and reengineering efforts.

From these successful examples and many other less successful efforts some truths about horizontal design are beginning to emerge.¹

Strong medicine

Clearly, it is not a turnaround program for under-performing companies. The stress and challenges of making the transition can only be handled by companies with already strong foundations. The horizontal organization is a way to build on strengths, not make up for weaknesses.

It is also probably not suitable for businesses whose value stems from economies of scale or excellence in specific functional skills. Heavy manufacturers and others who make huge, one-time investments in plant and equipment and earn their keep by running huge volumes out of their factories, are still best served by organizing primarily around functions because it allows them to focus on wringing every drop of economic value out of their costly assets. The same would hold true for organizational areas where mastering a single skill is source of value; the R&D intensive aspects of businesses like biotech, aerospace, or computer hardware would be examples. However, even for these types of businesses, targeted application of horizontal concepts and principles can help boost total business performance.

Keep it subtle

In cases where a horizontal organization is clearly appropriate, the trick lies in determining just how horizontal that organization should be (see the boxed insert, "Should I go horizontal?"). Success appears to lie in the tailored application of horizontal ideas to each individual company and its situation. The appropriate breadth of change (how much of the organization is transformed) and depth of change (how completely the old functional hierarchies are realigned) depends on the nature of the company’s customer base, competitive environment, value proposition, and value delivery system. Essentially, a "design continuum" exists—ranging from the traditional, highly compartmentalized functional hierarchy, all the way to an organization that is fully process-based, and has no functional groupings whatsoever. However, most companies that are implementing horizontal principles emerge with a hybrid organization that lies somewhere in the middle of the design continuum—balancing functional and process elements to meet their unique situations (Exhibits 1, 2, and 3).

In the real world

What does a horizontal organization really look like and how do you get there? Two case examples of leading-edge companies that have recently implemented horizontal designs with significant success will help to answer the question. These two companies—Ford Customer Service Division and Kraft Foods—have approached the transformation in different ways and fall in different places along the design continuum. Ford has replaced many of its old functions with a new structure based on a few core processes, while Kraft has added new processes to its existing functional structure.

Ford Customer Service Division

In the early 1990s, the Ford Customer Service Division was facing escalating customer expectations for both service and support, partly driven by the influx of two new competitors, Lexus and Saturn. These new competitors had the opportunity to establish "greenfield" sales and service operations and were using this opportunity to redefine the standard for automotive service and effectively raise the bar for what is required to satisfy the customer. Ford understood that the stakes were high and that its traditional approach was causing it to lose ground. In the past, Ford had launched many initiatives to improve the service satisfaction performance within its own organization and across the dealer body. Although everyone was working very hard, results were not coming quickly enough.

While everyone was busy trying to make improvements, it wasn’t clear whether what they were busy trying to fix really mattered to the customer

Senior management recognized that there were many interdependent functions affecting the division’s ability to deliver the training, tools, and services required to improve aftermarket service, and that these functions were not working together effectively. The headquarters was designing and introducing programs to improve dealer service performance, with little input from the dealer body or the field. Conversely, the field and the dealers were providing limited formal or informal feedback to upstream functions on the effectiveness of these programs and the quality of vehicle design. Furthermore, while everyone was busy trying to make improvements, it wasn’t clear whether what they were busy trying to fix really mattered to the customer.

As a result, the Ford Customer Service Division embarked upon a comprehensive effort to transform its organization from a fully functional design to one that is largely structured around three core business processes that drive customer value (Exhibit 4):

Dealer service support develops and delivers tools and programs to help the dealer base improve its ability to repair cars and handle customers.

Upstream engineering influences the product development community within Ford to optimize vehicle serviceability, reliability, and durability.

Parts availability ensures the right service part is available at the dealership when needed.

Many of the existing functional activities were transferred to the new processes. Some functions that had limited impact on customer value were eliminated and entirely new roles were created to support the needs of the new processes.

For example, a brand new activity—service improvement operations—was created to increase the field’s analytical capability in order to drive program development at headquarters and improvement within the dealers. Many of the roles within the processes were in turn organized into a variety of cross-functional teams. For example, supply management teams—composed of buyers and merchandisers—were used in the parts availability process to ensure greater ownership and control over supplier performance. Field teams—composed of dealer operations managers, field engineers, and customer handling representatives—were used in the dealer service support process to improve the dealers’ service processes and increase ownership for the results. And vehicle center teams—composed of program managers, service engineers, and voice-of-the-customer/dealer analysts—were deployed in the upstream engineering process to jointly develop business cases to impact the design of new vehicles.

Some functions remained, such as the customer call centers, where economies of scale were important. However, even the remaining functions were realigned to better support the processes. For example, the underlying reporting structure for the customer call centers was realigned around the customer concern and inquiry processes to improve productivity and customer satisfaction performance. In some cases, employees within functions were actually co-located with process activities. In the end, hundreds of divisional employees were restaffed, new training programs were deployed, and new performance measures were created to reflect the new performance focus and process requirements.

Although change is ongoing, the transformation has produced a more streamlined organization with a much greater focus on enhancing the customer’s total ownership experience. Yet, significant changes in reporting structure are not always required to achieve the benefits of the horizontal organization, as the next case example will demonstrate.

Kraft Foods

Kraft Foods achieved horizontal organization results without dramatic changes to its reporting structure.² For a number of years, Kraft had experienced increasing challenges to profitable growth in the marketplace. New management was committed to accelerating real growth despite these challenges.

Integration

To accomplish this, Kraft senior management was determined to increase the response time and effectiveness of the current organization to meet changing consumer needs. The sources of customer value were no longer just marketing-based. The entire organization, from R&D to marketing, to packaging, to manufacturing and distribution, to the field sales representatives working the customers, was essential to identifying and delivering value to consumers. But internal challenges had to be addressed. As one executive pointed out, "literally no one below the CEO possessed an integrated consumer perspective. No one provides cross-functional leadership and no one is fully accountable for anticipating consumer needs and responding quickly and effectively." If the organization was to succeed it would have to integrate key activities in its value delivery processes, push decision making down to frontline employees, and get ahead of changing consumer needs.

While the breadth of change required was extensive, the need for Kraft to dramatically reorganize around key processes was less important than it had been for the Ford Customer Service Division. The company already had a heritage of working cross-functionally, with brand managers essentially acting as "process integrators" for each brand/product line. Furthermore, significant economies of scale and skill existed within the existing functions. The challenge was expanding and formalizing cross-functional teamwork to speed and improve decision making without compromising the effectiveness of the functions.

Team structure

Kraft responded to this challenge by developing a network of "interlocking," discrete teams, overlaid on the existing functional structure, each focused on a critical element of a company’s value delivery process, and linked through cross-team membership, integrated performance objectives and incentive compensation linked to business results (Exhibit 5). While the concept is simple, making it work is very challenging. In Kraft’s new organization there are three primary types of teams:

Supply chain teams (or process teams, as they are called at Kraft) responsible for the production and delivery performance for major product categories; contain representatives from manufacturing, procurement, distribution, quality, and engineering.

Category business teams responsible for managing the market performance of critical business categories; composed of functional representatives from marketing, finance, promotions, R&D, sales, marketing information, and operations. This is the core business team responsible for integrating all business system functional resources necessary to accomplish business objectives.

Customer business teams charged with maximizing Kraft’s total performance with major customers; include representatives from marketing, promotions, field sales, sales information, and headquarters and field sales planning.

Each team is responsible for establishing targets, developing operating plans, and prioritizing improvement initiatives

Each of the individual teams is responsible for establishing performance targets, developing short- to medium-term operating plans, and prioritizing improvement initiatives for each of their respective product or customer areas. The functions are responsible for the day-to-day execution of these plans and targets, but the teams also play a coordinating role in the execution. Decision-making authority has been pushed down into the teams, and decision flows have been mapped out to clearly establish the limits of team empowerment. As additional resources are required, team leaders make requests to the functional groups that house and train specialized resources.

The supply chain, category business, and customer business teams are "interlocked," formally coordinating activities and decision making across the entire business system for common product/brand/customer issues. Kraft management supports this coordination across teams in two ways. First, performance objectives are aligned for each team to ensure a focus on optimizing customer and shareholder performance across the entire business system. Second, the teams have "joint members" and clear responsibilities for coordinating across teams—at least one person from the supply chain team participates on the category team and other liaison roles have been created to streamline decision making across teams.

The business support functions of consumer promotions, marketing information, R&D, and finance report into the business team structure, while the formal reporting structure has remained functional for operations and sales in order to leverage scale across Kraft’s businesses. The company has pursued innovative approaches to make the functions "partners in process performance" with the teams. Kraft has placed senior functional managers in formal team support roles to assist with internal team dynamics and to act as a liaison between the teams and the functional departments. Additionally, the company has made significant changes to its performance management systems to promote functional support for the teams, including implementing joint accountability between line and functional managers to evaluate how well the functions are supporting the process and aligning the functions’ compensation to process and team performance.

In total there are approximately 35 category business teams, 30 supply chain teams, and 175 customer business teams. While the early results are encouraging, the company realizes that continued efforts to support the teams will be required. However, it does appear that Kraft’s ongoing business and organizational situation will enable it to reap many of the benefits of the horizontal organization without dramatic changes in structure.

Getting horizontal

These cases show that horizontal ideas can be applied to varying degrees and produce different organizational structures. While much of the challenge lies in designing the new organization and figuring out just how horizontal a company should be, success also lies in the day-to-day task of making change happen and making change stick. A closer look at the steps taken in transforming Ford’s Customer Service Division illustrates this critical process in detail.

1. Align senior management commitment and mindset

Senior management must fully come to grips with the need for a new organizing philosophy. They must believe that a new level of performance is needed and that serving the customer better is a key part of getting there. They must also believe that the new performance level cannot be attained by merely squeezing more out of existing functional activities. Finally, management must also fully embrace the implications of a more horizontal design—such as the increased importance of teams and teamwork, fewer management levels, increased spans of leadership, new career paths, and broader job roles.

In 1992, when the 7,000-person Ford Parts and Service organization which supported over 5,000 dealers embarked on its change program, Tom J. Wagner, Vice President of the division, realized that the effort would require changing the way the division had traditionally conducted business. He appointed Dr Ron Goldsberry to head up the effort. Goldsberry, a former consultant and entrepreneur, was new to the division and was not hampered by traditional ways of doing business.

Prior to this point, the division had spent millions of dollars to improve customer satisfaction, but had seen limited improvements. The first move Goldsberry made was to establish cross-functional teams, called strategic focus units, to design the new strategies that would lead the division to improved customer satisfaction results. By January of 1993, the organization had launched the next phase of the strategic change process. Multiple cross-functional teams were established to take the new strategies and define the organizational processes and infrastructure to put them into action. A few months later, the division was renamed the Ford Customer Service Division to underscore the importance of the effort.

By June of 1993, the initial work of the teams was coming to a close and several problems emerged. The effort was not focused. The selection of the new strategies were largely based on management experience and "gut feel." Although directionally correct, what resulted was a multitude of initiatives. They would have to pare the list back based on what drove value for customers.

2. Understand the drivers of customer value for the business

Once the need for change is recognized and the new performance philosophy is established, senior management must define the underlying drivers of customer value that support the new philosophy. They must explicitly understand the customer value drivers for the business, how these drivers differ by customer segment, what performance levels ("breakpoints") are required to succeed, and how well they are performing today.

At Ford, this was accomplished by building a factbase about what really drove customer satisfaction. This factbase consisted of detailed information on 200,000 customers over a five-year period (five years is roughly the ownership cycle). Interestingly enough, this data was abundant and had long been used to develop the features and pricing strategies for new vehicles. However, the data had never been used for making basic organizing decisions. The result of this analysis was a detailed breakdown of the drivers of customer satisfaction related to vehicle quality, reliability, and features, as well as the drivers related to the sales and service experience (Exhibit 6).

Goldsberry’s team showed that the customer service division had direct influence over all aspects of the service experience through its dealer support processes and field operations, and played a major role in vehicle satisfaction through its ability to feedback customer and dealer concerns to product development. The latter role, while thought to be important, had not been a focus of the division. The division also evaluated how well it was performing on each of the satisfaction drivers in order to define the critical performance gaps and focus the change ahead.

3. Define the organizational processes that support the customer value drivers

After the customer value drivers are determined, management must then begin to define the business and management processes that provide, or should provide, value. We say "should provide" because in many organizations some of these important processes may not even exist. There is no exact "science" to defining these processes. They are simply the major activity or decision flows (typically three to five business processes) that cut across functions and deliver end products and services that drive customer value and the business’s overall strategy.

At Ford, defining and agreeing on the processes that deliver customer value had proven to be a very difficult task. Most people within the functional organizations lacked an "end-to-end" understanding of the processes essential to improving customer service. Additionally, many of the processes cut across traditional boundaries into both dealers and other company divisions, resulting in a general skepticism toward the ability of Ford Customer Service Division to change or improve things.

To overcome these challenges, the division spent time mapping critical decision flows that directly supported the important drivers of customer satisfaction. These process decision maps were the basis for interactive working sessions with senior management to develop a consensus on the definition of the key business processes for the division. In addition to the decision maps, two criteria were used to arrive at a common definition of the processes—each process defined needed to have similar skill requirements and a similar customer focus. The result were the three processes sketched earlier in the case: dealer service support, upstream engineering, and parts availability (Exhibit 7).

4. Understand how the current organization supports the processes

Once the processes are defined, senior management then has to understand how the current way the business is managed supports or bottlenecks the process performance. For those processes that are constraining performance, management must understand what elements of the current organization—reporting structure, performance measurement, skills, information technology, resource allocation—stand in the way of change.

To do this, Ford conducted multiple customer and dealer interviews to establish the expectations for process performance. Teams then worked backwards through the process and decision flows, irrespective of organizational boundaries, to diagnose how well the current organization supported the processes. The diagnostic highlighted several fundamental issues with the current organization. Decision flows and processes were far too complex, traveling up and down in functional departments, cutting across many activities and departments, and resulting in slow decision making and lost accountability (Exhibit 8). In addition, organizational performance objectives, resources, and skills were misaligned (Exhibit 9). For example, the dealer service support process had a total of 146 objectives within the relevant activities; only 16 of these were related to the end-of-process objectives and only one was quantifiable and controllable.

5. Develop the redesign vision and blueprint

Defining the critical processes and how well the current organization supports the processes will help management in the next step: determining how much change is needed and where the change should be focused. The options range from simply realigning performance measures, to creating part-time cross-functional teams overlaid on a functional structure, to fully restructuring around processes. Regardless of what the right option is, it is essential for management to agree on the nature of the current problem within the organization and accept what needs to change, before designing the details of the new design.

Based on the organization diagnostic, senior management at Ford Customer Service concluded that the division would need to be formally restructured around the critical processes. To accomplish this, the current organization had to be recast along process flows. Detailed analysis of current activities was used to realign those activities critical to process performance. If the benefits of serving a process outweighed the benefits of functional specialization, the activity was moved under control of the process.

In one case, a key element to improving the dealer’s ability to repair cars was ensuring they used the most current technical documentation. The technical publications department had always been a part of customer service’s engineering organization. Yet analysis showed a greater benefit to be derived by tightly coupling this activity with the field and the dealers. As a result, the technical publications department was moved from the engineering organization to the dealer service support process.

In addition to realigning activities within process flows, resources needed to be reallocated across processes to focus the division’s resources on places that created the most value for customers. Throughout this process, political opposition was encountered as senior managers viewed the loss of people and resources as a loss of power. By using the factbase developed in the initial phases of the effort, Goldsberry and his team were able to get senior management to agree to the redesign and all that it entailed.

6. Drive horizontal skills and behavior down to the front line

Achieving changes in frontline skills and behavior is the final, critical step in realizing the true performance potential of the horizontal organization. Doing so requires senior management to set clear direction and expectations for the new skills and behavior required to succeed, build ownership throughout the organization, build commitment for the new performance and organizing philosophy, and mobilize employees to begin working and interacting in new ways to achieve early impact.

This was a particular challenge at Ford Customer Service. Essentially the change process had to move from involving about 20 senior managers to involving over 100 middle managers and eventually all 3,500 salaried people throughout the organization.

The design teams focused on streamlining decision flows, delayering the organization, and increasing the ability of frontline people to make decisions

Translating the design to the front line required first selecting the "right" people to lead the detailed design of the new process-based organizations. Process team leaders were selected based on their business experience and their willingness to challenge conventional ways of doing business. Team leaders were selected and nine organization design teams (ODTs) were launched in April 1994 to conduct the detailed design of the new process organizations and functions. Formal kick-off meetings were held to explain the rationale and specifics of the new top-level design, and the ODTs were given specific criteria for the new design. In particular, the ODTs focused explicitly on streamlining decision flows, delayering the organization, and increasing the ability of frontline people to make decisions.

The ODT process included people from all the activities in customer service. The detailed design included: developing sub-process designs, working out the hand-offs between functions and teams, defining roles and responsibilities, defining team composition, assessing skills, and identifying the specific infrastructure requirements to support the new organization. In many cases resources were reallocated within processes to support key activity or skill gaps. Throughout the 10 to 12 week ODT process there were frequent team leader meetings to flesh out the details of critical cross-process interfaces and maintain coordination across the efforts. Goldsberry and the management team stayed closely involved, participating in multiple report-outs to preview the detailed design and to solve specific problems. By June of 1994, the ODTs had completed their work and detailed implementation plans had been established.

While the new organization was being implemented, three frontline skill-building efforts were launched to build the institutional capabilities required to reinforce the new organization design and meet the new process and division goals. These skill-building efforts included:

• increasing the fields’ ability to help the dealers improve their service processes
• increasing upstream engineering’s capability to influence the product development community on reliability, durability, and serviceability problems
• improving the customer handling capabilities across the division and the dealers.

All three of these efforts emphasized a "learn by doing" approach and focused on achieving real, short-term impact. In addition to these skill-building efforts, team building programs were launched across the organization to support the implementation of cross-functional teams within each process and build increased "horizontal" skills and behavior.

At the Ford Customer Service Division, the change process is ongoing. Since the original redesign effort, additional processes have been defined to meet new performance challenges, and the original process organization has been expanded from North America to the rest of the world to support the corporation’s global strategy.

Without question the horizontal organization does legitimately expand the "solution space" for senior managers trying to redesign their organizations. While it is not appropriate for all companies and all situations and can take well over a year to put into action, if customer requirements are changing rapidly, customer sophistication is increasing, speed and responsiveness are critical, and multiple, interdependent functions are needed to deliver customer value, it holds great promise.