The Process Edge: 

Process improvement isn't the same as process investment. The Process Edge shows how to prioritize investments by examining processes as financial capital. They are literally assets and liabilities to be managed as such. That means the base for investment is economic value added: the foundation of shareholder value. Much of the process paradox comes from firms putting their investment into "background" liability processes, the many workflows that are dominated by paper and steps and well-suited to streamlining, particularly through the combination of reengineering and computers. They neglect what The Process Edge terms more "salient" identity asset processes and priority processes.

This extract from the book introduces the "Salience/Worth" matrix that is at the core of the process investment framework and illustrates it through the example of Dell Computer and Compaq. Worth is the economic nature of a process as economic asset or liability and Salience is its contribution to the firm's competitive positioning: identity, priority, background and mandated.

The salience/worth matrix is the basic analytical tool for determining which processes most deserve attention and investment. The matrix (see Figure 1) clearly shows a given process's importance to a firm and whether it adds or drains value. The process's position in the matrix allows managers to decide (if anything) should be done to change it.

Figure 1: The Salience/Worth Matrix:

The worth axis is essentially self explanatory. Although determining a process's worth is not always simple, the basic principle is: any process that returns more money to the firm than it costs is an asset. A process that cost more than it returns is a liability. The four categories on the salience axis are a bit more complicated. The following descriptions are in order of importance.

An Identity process is one that defines the company for itself, its customers, and its investors. It differentiates a firm from its competitors and is at the heart of the firm's success. For instance, Federal Express's reliability defines the company and is the source of its success: think of Federal Express and you think of guaranteed on-time delivery.

Priority processes are the engine of the corporate effectiveness. They strongly influence how well identity processes are carried out and how a firm stands relative to its competition. For Federal Express, processes related to airplane operations are priority. These are not identity processes, as customers don't think of Federal Express as an airline and don't care about the specifics of flight schedules and airplane maintenance. Priority processes tend to be invisible to the customer. (Federal Express picks up your package today and delivers it tomorrow), but when they fail the problems are visible and immediate (the package did not arrive on time because the plane couldn't take off).

Background processes are a necessary support to daily operations. Many administrative and overhead functions are background processes. For Federal Express, and many other companies, payroll processing is background. They are often the core of daily operations, but it is a mistake to allow their visibility to make them the main target for management attention and capital investment, because improving them rarely generates much EVA. Such information technology tools as groupware are naturally suited to streamlining processes with well-defined flows, numerous forms, and photocopying and other procedures, so it's not at all surprising that, in my experience, around 75 percent of firms' reengineering targets are these background liability processes.

Mandated processes are those a company carries out only because it is legally required to do so. For Federal Express and most other companies, regulatory reporting and filing tax returns are obvious examples. Mandated processes are almost always liability processes; they rarely create economic value. Regulatory reporting consumes the full-time effort of whole departments in many companies; the capital tied up regulation-generated bureaucracy drains EVA.

A salience category that does not appear in the matrix is folklore processes that are carried out only because they have been in the past. As they serve no purpose and create no economic value, they are not part of the matrix; they are always liabilities and should be abandoned when discovered.

I can generally attest to the staying power of folklore processes. As a schoolboy in England in the late 1950s, I took part in the British equivalent of ROTC training in American colleges. During my training, I spent one year as part of a six-member team, learning the procedures, timing, and teamwork needed to fire anti-aircraft guns. Part of the sequence required two members of the team to move ten yards behind the forty-foot gun and kneel. I later learned that, in the 1970s, the British army finally asked what essential purpose the retreat-and-kneel move served. A veteran of the Boer Wars provided the answer: to hold the horses that moved the guns so that they would not panic and flee.

Putting the Matrix to Work: Dell and Compaq

In the early 1990s, Dell Computer transformed personal computer retailing by creating a process, rather than a product, advantage. The computers it sold were not notably different from those of its competitors, but Dell invented a new way of selling them. Using phone ordering, customized assembly, and package delivery services like UPS for distribution, it offered customers superior pricing and convenience. For several years its ads showed the virtually identical technical specifications of a Dell and Compaq machine with price tags showing the lower cost of the Dell model. Dell's ability to beat Compaq's prices was based on its then very unusual business processes. Traditional processes related to retail stores, warehouses, and finished-goods inventory became liabilities. Faced with Dell's new system of retailing processes, some store-centered companies - Computerland, for example - went out of business.

Dell used its process edge to go from start-up to an established firm with $3 billion in sales in a decade. Its ordering, assembly, and delivery processes became and remain its chief assets and identifying characteristics. In 1992, Dell's stock rose to $25 per share, matching the price to which Compaq had fallen.

By 1994, however, Compaq's stock had risen to $100 per share and Dell's was just $27 per share. Dell had neglected forecasting and product development and had concentrated on its successful distribution processes. Forecasting was seen as a way of keeping up with short-term demand, and product development was limited to adopting Intel's new chips so that Dell could offer products that matched mainstream IBM and clone machines. Dell's forecasting weakness and lack of innovative products became clear liabilities. In addition, competitors had entered Dell's stronghold of mail-order selling.

Dell's problems were compounded by investors' perception of its financial management processes. Dell's investor-relations processes were not just negligent, they were destructive. In 1993, when investment firm analysts complained about Dell's issuing inaccurate and incomplete financial information and failing to keep them informed about earning trends, founder Michael Dell told them in and acrimonious meeting that he didn't care about what they thought: he still ran the most successful computer company in the world. Because of inaccurate financial information-and perhaps also the acrimony-Dell's stock prices dropped substantially.

In the meantime, Compaq had faced up to its own crises (precipitated in part by Dell). When it became clear that the firm had been drifting toward mediocrity, its founder was fired, and the new leadership invested heavily in processes related to capital, commitment, and organization. The company overhauled the product development processes that had always been the basis of its identity and success (Compaq had been the first company to manufacture a portable computer with all the capabilities of a desktop IBM machine) and retooled its distribution processes, moving from reliance on resellers who sold to large corporations in bulk to mass merchandising and to contracting directly with companies for large-volume sales and technical support. It raised the priority of processes, such as procurement and pricing, that it had considered relatively unimportant. It invested heavily in new production processes. By mid-1995, Compaq was a different company from the one that it had been in 1992. It offered a stream of innovative products and became a price leader.

Compaq and Dell had reversed their relative positions in just three years. It was Dell's turn to revamp its processes in response to Compaq's process improvements. Both firms had become successful through process but relied too long on their most successful processes, neglecting others that became important as conditions changed. They regained their leadership positions only when they renewed their attention to process improvement. By mid-1995, Dell was the seventh largest computer company in the world. Its sales had grown to more than $3 billion per year, and its stock prices was $45 per share after having fallen to $13 per share in 1993. It had drastically improved its product development, cost control, and financial management. In 1994 it provided the largest investor return of any Fortune 500 company. In a competitive industry in which so many companies have gone under, both Dell and Compaq look like survivors. The process crisis was over.

The seesaw history of Dell and Compaq shows how important processes are to a firm's success and also suggests how readily the salience or worth can change. There is no ultimate answer to the question of which processes matter most and whether a given process adds value to a company or drains it. The salience of distribution and pricing went from background to priority for Compaq because Dell changed the terms of competition. The salience of product development went from background to priority for Dell because of the speed of technological improvement. Some of Compaq's asset priorities threatened to become liabilities because of neglect. Both the environment within a company and the larger environment in which it competes are dynamic, not static, and process value requires continuing attention.

Some changes in the location of processes on a company's salience/worth matrix are unintended and others deliberate. The decline of a process from an asset to a liability is clearly unintended, whether the cause is neglect within the company, a change in the business environment, or both. The shift in Dell's product development process from background liability to priority liability was also clearly unintended, the result of industry changes. In this example, obviously, Dell had no intention of making their processes less valuable. In fact, they were generally unaware of what was happening until their businesses began to decline.

Deliberate changes in process salience and worth are made either reactively, in response to business environment changes, or proactively, to gain an advantage over the competition. Compaq's determination to turn its liability pricing and distribution processes into assets was reactive, a response to Dell, just as Dell's working to make its product development process a priority asset was a response to the competitive pressure created by Compaq and other personal computer manufacturers. Dell's initial decision to focus on efficient mail ordering and common-carrier delivery was proactive, the development of new identity processes that changed the rules of competition and forced the rest of the industry to react.