X-Engineering Principles

As the O&M example illustrates, there are three principles that underlie X-engineering: harmonization, transparency, and standardization. Let's take each of them separately.

Harmonization

It should come as no surprise that transactions between companies are inherently inefficient. After all, they usually involve processes that were developed at different times by different players. One company's selling process tries to engage another company's procurement process. Another company's ordering process tries to engage another company's order-fulfillment process. As these processes engage, there is usually more friction than harmony—lost time, lost quality, and lost money. To deal with these problems, companies often build redundancy into their work, adding even more complexity and costs.

Early approaches to dealing with these problems—such as electronic data interchange and customer relationship management—were intended to work at the interfaces of differing processes, moving data and information across corporate boundaries. They did not aim to go very deep in the redesign of processes within companies.

X-engineering goes further. It requires that the processes companies share be jointly redesigned, or harmonized, as I call it. A company, for example, should not see its suppliers as independent entities throwing products or services over its wall, but rather as a set of processes that must be integrated into its own, and vice versa.

Transparency

For companies to harmonize their processes with others, they must become increasingly open. That is, they must show others how they operate, and even what their costs look like. That means letting go of false beliefs that most of what companies do is proprietary, and not to be shared. The hard truth is that most companies in an industry do the same thing. Very little of what they do is distinctive.

For customers and suppliers to connect in harmony with your processes, they must be open and visible. The next step will be to share your knowledge and your good ideas. Just as you propagate goods ideas within your company, you will now discuss them with your customers and suppliers.

Recently, I was explaining this concept of openness to a group of executives at a conference on corporate change. One executive challenged the idea. “You're advocating the death of capitalism as we know it,” he argued. “How can we compete if we give all our secrets away?” Of course, if you have real secrets—like a truly proprietary manufacturing process—you don't give that away. But I believe that I am advocating the next phase of capitalism, a time when information flows freely between companies and when the basis of competition increasingly becomes a company's ability to execute.

And remember one other condition as you contemplate opening up and letting the world see how you operate. You can compete on the basis of having superb processes. Your competitors may not be able to copy your processes easily, because of their own behavioral legacies. High-performing companies often share how they do things. For example, take GE's processes for business improvement known as Six Sigma. For years, GE has been telling other companies how to accomplish major process change using Six Sigma techniques. The result has hardly been new competitive threats to GE in its markets, but rather an increasing admiration for how well GE operates.

Standardization

Once you have accepted that most of what you do is not unique, it should be an easy step to accept the benefits of standardization. Why not share nondifferentiating processes and the infrastructure to execute those processes with other members of your industry? This model was accepted many years ago in the financial services industry, when clearinghouses were established for processing multiple kinds of standard transactions. But even the financial services industry has not gone as far as it could. Most banks and brokerage houses maintain large “back room” operations that perform the very same, nondistinctive operations. Billions of dollars a year are spent on these duplicative infrastructures. The duplication benefits neither banks nor their customers.

But standardization cannot just be restricted to processes. Information technology infrastructures must also be standardized. Information, products, and money cannot move from one company to another in an X-engineered environment without systems that can easily work together. Even within single companies, multiple versions of systems, software, and hardware proliferate, making it difficult to communicate and do business internally. Before a company moves to X-engineering, it must reengineer itself—getting itself in order so that it can better collaborate with others.

The O&M story also illustrates several principles to keep in mind as you look for opportunities to X-engineer your own business.

Follow the Money

Knowing the real costs of operating can provide you with great insight as to where process improvement opportunities might lie. But don't stop at your own costs. Look at your customers' total landed costs for your product and services. And find out what it costs your suppliers to deliver materials in the manner you have requested. Also look for opportunities to reduce capital expenditures by managing inventory differently or sharing ownership of fixed assets with your customers, suppliers, and partners.

Go Broad

Excess costs in operations and performance problems generally are not attributable to a single activity or even a single process. The broader your net, the more you will find. Look across your processes and the processes of your customers and suppliers. The further you go, the greater the opportunity and the greater the challenge.

Know What Your Customers are Going Through

The French philosopher, Simone Weil, used to tell her students that when meeting a person they should not ask, “How are you today?” but rather, “What are you going through today?” Weil argued that it was the more authentic question.

Similarly, it is better to ask about the authentic realities and challenges facing your customers than to ask about their immediate needs. You need to have an intimate knowledge of your customers' concerns, not just their buying history, to find business propositions that will work for them and for you.

Chart Breakdowns

Analyzing failure will give you some direct clues as to where you might improve your processes and business propositions. Talk to your customers directly and openly about problems as they occur. It will give you great insight as to customers' expectations and what they really value.

Fish Upstream

The cost of a product, service, or process is substantially determined in its design phase. That is true for you, your customers, and your suppliers. Look upstream with your customers and suppliers into their design processes and see where you can do early harmonization. The farther back you go in the processes of your customers and suppliers, the more efficiency improvements and customer value you are likely to create.

Finally, in your search for X-engineering opportunities, let me suggest that you use a mix of optimism and realism. Pessimists need not apply for this work. They worry too much that if something is broken, their company or their customers may never change.

Optimism is important to see X-engineering's opportunity, and realism grounds you in the scope of the task ahead, dispenses with the hubris around technology, and forces you to confront the capabilities that you will need to develop or acquire.