Beyond Business Process Redesign: Redefining Baxter’s Business Network

In the rush to dramatically compress product development cycle times, improve market responsiveness, and redefine customer-focused operations and service quality, many companies have turned increasingly to redesigning — “reengineering” — operational business processes. Yet the majority of these efforts focus almost exclusively on redesigning internal operations in areas such as invoicing (Ford), insurance application processing (Mutual Benefit Life), and marketing and distribution (Rank Xerox U.K.).1 Although many business process redesign initiatives start out amid great fanfare and bold projections of state-of-the-art performance improvements, lurking beneath the glare are often quite modest attempts to reduce operational costs in a single functional area, to improve product quality in a single product line, or to downsize the business to reduce the firm’s cost structure. A few initiatives involve total quality programs, cycle time compression, or outsourcing. Yet many, if not most, business process redesign initiatives invariably turn inward. From the perspective of customers, the external supplier network, and key trading partners, the danger is simply that business process redesign may have little or no measurable impact on the firm’s external market performance. Worse, in some cases, internally focused redesigns may actually allocate scarce resources away from company initiatives that could directly affect external customers.

Information technology (IT) has not dramatically affected this picture. In and of itself: IT has been shown to have little or no impact on overall firm performance.2 Indeed, the usual methods for boosting internal performance — process simplification (usually through process rationalization but now increasingly through outsourcing of selected functions) and process automation — have not produced the required impact on performance. To the extent that many companies still tend to use IT to automate existing processes rather than to redesign them, investments in IT have yielded disappointing results. Of course, most of our job designs, work flows, control mechanisms, and organizational structures came about before the advent of the computer. It is not surprising, therefore, that using information technology to redesign internal business processes has been difficult.3

Ultimately, what distinguishes improvements in the efficiency and effectiveness of internal operations from a broader rethinking of the firm’s external relationships with different markets, trading partners, customers, and suppliers is what Hamel and Prahalad have succinctly labeled “strategic intent.&

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References

1. T. Davenport and J. Short, “The New Industrial Engineering: Information Technology and Business Process Redesign,” Sloan Management Review, Summer 1990, pp. 11–28.

2. G.W. Loveman, “An Assessment of the Productivity Impact of Information Technologies” (Cambridge, Massachusetts: MIT Sloan School of Management, Management in the 1990s Program, Working Paper No. 88-054, July 1988). See also:

D.D. Wilson, “Assessing IT Performance: What the Experts Say” (Cambridge, Massachusetts: MIT Sloan School of Management, Management in the 1990s Program, Working Paper No. 88-050, June 1988).

3. M. Hammer, “Reengineering Work: Don’t Automate, Obliterate,” Harvard Business Review, July–August 1990, pp. 104–112.

4. G. Hamel and C.K Prahalad, “Strategic Intent,” Harvard Business Review, May–June 1989, pp. 63–76.

5. Ibid.

6. R.I. Benjamin, D. De Long, and M.S. Scott Morton, “The Realities of Electronic Data Interchange: How Much Competitive Advantage?” (Cambridge, Massachusetts: MIT Sloan School of Management, Management in the 1990s Program, Working Paper No. 88-042, February 1988);

M.D. Hopper, “Rattling Sabre: New Ways to Compete on Information,” Harvard Business Review, May–June 1990, pp. 118–125;

N. Venkatraman, “IT-Induced Business Reconfiguration: The New Strategic Management Challenge” in The Corporation of the 1990s, ed. M.S. Scott Morton (New York Oxford University Press, 1991);

E.K. Clemons and M. Row, “McKesson Drug Company: A Case Study of Economost — A Strategic Information System,” Journal of Management Information Systems5 (1988): 36–50;

D.G. Copeland and J.L. McKenney, “Airline Reservation Systems: Lessons from History,” MIS Quarterly 12 (1988): 353–370; and

J.I. Cash and B. Konsynski, “IS Redraws Competitive Boundaries,” Harvard Business Review, March–April 1985, pp. 134–142.

7. See, for instance, N. Venkatraman and A. Zaheer, “Electronic Integration and Strategic Advantage: A Quasi-Experimental Study in the Insurance Industry, “Information Systems Research 1 (1980).

8. Although the IBM system 1001 was central to the Tel-American initiatives, in the mid-1970s, IBM elected to discontinue the system 1001. Since AHSC’s business strategy was intricately linked to this technology, the company acquired a small communications and systems-oriented company, TekPro, as part of its corporate portfolio. The TekPro division developed an information system that could acknowledge the receipt of each line of data from the hospitals, thus ushering in the era of two-way, computer-based communications between AHSC and hospitals.

9. An American Hospital Association Study showed that a typical 250-bed hospital in 1981 had an operating budget of $90,000 per bed per year and an average supply expenditure of $18,862 per bed per year. Assuming a dollar-for-dollar relationship between cost of supplies and logistical support for those supplies, materials management had responsibility for 40 percent of a hospital’s operating budget.

10. Interviews with former AHSC personnel. These services were initially provided free to the hospital. As demand for the service grew, it was later provided to customers as part of volume purchasing agreements between AHSC and the hospital.

11. Standard and Poor’s, 24 June 1971.

12. Interviews with Baxter and former AHSC personnel. The actual number of systems installed in hospitals is difficult to ascertain, but they probably never exceeded twenty to thirty at any one time. The difficulty in precisely counting the number of systems is that hospitals were experimenting with different supplier services. It was not unusual for a hospital to try one or another of the systems for a short period of time before settling on the preferred vendor.

13. Standard and Poor’s, 22 June 1972.

14. Former AHSC executives have commented that had Whittaker General introduced ADAMM in the mid-1970s rather than at the end of the 1970s, it might have constituted a serious threat. If we compare the AHSC case to the McKesson Economost case, the key difference appears to be that McKesson had a large national-level competitor, Bergen-Brunswig, that realized that a delayed, weak response to Economost would result in the erosion of its competitive position. Although Bergen-Brunswig is not typically included in the set of leading examples of strategic information systems, it is important to note that it responded quickly to neutralize the benefits accrued to McKesson due to Economost. See:

Clemons and Row (1988).

15. White & White, Inc., et al. v. American Hospital Supply Corporation, U.S. Court of Appeals for the Sixth District, 16 December 1983.

16. Karl Bays and Vernon Loucks, interviewed by D. Cassak, “The New Baxter Travenol — Life with American Hospital Supply Corporation,” Health Industry Today, February 1986, pp. 16–26.

17. See T.G. Cody, Strategy of a Megamerger: An Insider’s Account of the Baxter Travenol-AHSC Combination (Westport, Connecticut: Quorum Books, 1990).

18. Interview with D. Cassak, editor of Health Industry Today, February 1986, p. 17.

19. T.J. Main and J.E. Short, “Managing the Merger: Building Partnership Through IT Planning at the New Baxter,” MIS Quarterly 13 (1989): 469–484.

20. S. Scott, “ASAP Express: Toward All-vendor Systems,” Computers in Healthcare, October 1988, pp. 38–40.

21. O. Williamson, The Economic Institutions of Capitalism (New York: Free Press, 1985); and

T.W. Malone. J. Yates, and R.I. Benjamin, “Electronic Markets and Electronic Hierarchies,” Communications of the ACM 30 (1987): 484–497.

22. Baxter internal documents.

23. Hospital Purchasing News, July 1990, pp. 4, 6.

24. In an earlier article by one of the authors, the concept of shift in business roles enabled by information technology was discussed. See: N. Venkatraman and A. Kambil, “The Check’s Not in the Mail: Strategies for Electronic Integration in Tax-Return Filing,” Sloan Management Review, Winter 1991, pp. 33–43.

25. M. Wagner, “Vanderbilt’s Stockless System Relies on Distributors as Its Materials Managers, Modem Healthcare, 5 February 1990, p. 44.

26. K Eisenhardt, “Building Theories from Case Study Research,” Academy of Management Review 14 (1989): 532–550.

27. O. Williamson, “Transaction Cost Economics: The Governance of Contractual Relations,” Journal of Law and Economics 22 (1979): 233–261; and

O. Williamson, “The Economics of Organization: The Transaction Cost Approach,” American Journal of Sociology 87 (1981): 548–575.

Acknowledgments

This research was funded by the Center for Information Systems Research and the Management in the 1990s Research Program, MIT. Special appreciation is extended to AHSC-Baxter executives Robert Andersen, James Bryant, Michael Heschel, Thomas Main, Carl Steiner, Thomas Streff, and Ergin Uskup for their valuable insights and comments. We would also like to thank Jack Rockart, Judith Quillard, and Michael S. Scott Morton of MIT, Ajit Kambil of New York University, Benn Konsynski of Emory Business School and several anonymous reviewers for their valuable comments. Portions of this article have appeared previously in the Proceedings of the Hawaii International Conference on System Sciences, Volume IV: January 1992, pp. 666–677.