KNOWLEDGE BASED PROCESS REENGINEERING

 

Jiří Voříšek

 

Department Information Technologies

Prague University of Economics

W. Churchilla 4

130 67  Praha 3

e_mail: vorisek@vse.cz,

http://nb.vse.cz/~vorisek/


Published: March 2000

 

 

Key words: individual and organisational knowledge, business processes, strategic management, management of IS/IT

 

1.      INTRODUCTON

In the late 1990s changes in economic and social environment have accelerated. The main accelerators are new communication and information technologies and their applications - e.g. E-commerce, E-learning, virtual teams and virtual organisations, customer relationship management, and supply chain management. Many authors (e.g. Drucker, 1999, Hesselbein, 1999, Thurow, 1997) are documenting these in their papers very thoroughly. Examples of changes typical for our global information society are as follows:

·    Increase in the importance of knowledge for the achievements of individual, enterprise, even a nation (together with poor visions for little qualified),

·    Increase in the importance of alliances and logistics chains,

·    Mergers of formerly separated branches,

·    Increase in the stressing of process organisation of business and its high flexibility,

·    Increasing influence of value system (enterprise or national culture) on managing processes,

·    Extremely fast development of information and communication technologies that influences all areas of human activities.

All these changes are also reflected in new requirements on business management and business information system. Therefore the concepts and principles of strategic management and systems integration are to change, too. The imperative of the moment is interdisciplinary and multidimensional approach towards the majority of problems that are being solved.

This article points out the necessity and possibility of integration of business processes with three types of knowledge: a) individual knowledge of individual employee, b) together with knowledge accumulated in the business over time and c) together with knowledge and competencies of business partners.

2.      HYPOTETHICAL EXAMPLE - CHANGE OF A SMALL FLORIST STORE

We are going to introduce a hypothetical example in order to make the explanation of general principles easier. The majority of the principles are going to be demonstrated on the example. The example is to demonstrate following:

·      Changes in style of thinking that are required by the new economic environment

·      Changes in strategic management of processes and knowledge

·      The important role of alliances and outsourcing when ensuring fast respond to market changes


Ø   Small garden-tillage with a store

Ø   So far none IS that would be used by the company, IS for accounting and wages are outsourced

Ø   SWOT:

·    (-) limited number of customers

·    (-) seasonality of sales (green-houses are not used since last year - expensive heating)

·    (-) domestic flowers only

·    (+) skilled arrangers of bouquets

·    (+) creative management (owner)

·    (+) new business opportunities arising from new information and communication technologies

¨   Main points of the new global strategy

Ø   The primary target of the company is to multiply its turnover and its market share within one year, the increase in profit is just a secondary target (the target is more the value of the company than its immediate profit)

Ø   Taking the advantage of maximum existing opportunities  - co-operation, incorporation into chains, modern methods of payment, information and communication technologies, ...

Ø   New business model:

·    Orders via the Internet

·    Involvement of a customer in creating the bouquet (types of flowers, design of bouquet, packing, selection of card going with the bouquet, place and time of delivery)

·    Prepared bouquets for less creative customers

·    Purchase of flowers from other countries (especially from Dutch wholesalers)

·    Narrowing the core business during the year, liquidation of the garden-tillage and concentrating on arranging and deliveries of single flowers or complex flower decorations to end customers

·    Outsourcing of the shipping (Post, FedEx,...)


¨   Key decisions in the framework of information strategy

Ø   The company concentrates on its core business, still outsources IS for accounting and wages. New functions of IS are also going to be solved by outsourcing (forming alliances with prominent providers of information services) in 4 consecutive projects (knowledge and competencies of business partners will be utilised):

1)   web orders - completely outsourced through web services provider

§   provider interface: (a) output - catalogue and flowers price list, (b) input - customer's order (by fax in the first phase, then by  electronic means - email)

§   service provider price: 5% of the value of the order (motivation for web provider)

§   new costs: approximately 1 000 USD (PC with internet access) and telephone charges

§   realisation period: 4-6 weeks

§   garden-tillage is going to be run for the duration of one more season

§   deliveries to remote customers  - cash on delivery

2)   system for communication with bank - acceptance of credit card payments and usage of SET

3)   system for communication with  flower wholesaler

4)   system for communication with FedEx - deliveries  to foreign countries

3.         LEVELS AND DIMENSIONS OF BUSINESS PROCESSES

As we have already mentioned in (Voříšek, 1999)  there is a possibility of describing the interdisciplinary and multidimensional concept of systems integration by four basic concepts. The elementary concept is called "Processes, areas and sources of business management". This concept places IS/IT among other enterprise sources and processes and it shows their mutual links  - see Fig. 3.


Information system and information technologies (IS/IT) together with knowledge belong among the four basic enterprise sources and basic areas of management. These sources and areas of management are closely linked. Any area without the existence of the three remaining ones would be pointless.

Any area can be divided into five levels (these levels are modifications of organisational processes levels proposed by Scheer, 1999) according to the processes that exist in the areas of management.

 

First Level - strategic management - sets strategic characteristics of every area and their links. The main outcomes of this level are answers to these questions:

Ø   What are the company's goals and priorities,

Ø   What products/services is the company going to provide and who are its customers,

Ø   What alliances and co-operative relationships is the company going to form, what competencies is the company going to apply in co-operation and which one does it expect its partners to perform  (Voříšek, 1998),

Ø   How are the material and information flows going to run among partners in chain - rough framework,

Ø   What human, knowledge/information and financial sources are going to be necessary for the company and how are they going to be obtained (how are the excessive sources going to be released),

Ø   What metrics are going to be used to measure the degree of fulfilling the goals.

The above mentioned example is describing this level. Management of the company took the advantage of new IS/IT possibilities (communication with customers, suppliers and banks via Internet) together with the knowledge and competencies of other firms (web provider, bank FedEx) in order to redefine its core business and to create completely new range of products and services and to find new target audience.

 

The second level is Process Design. This level defines or modifies business processes that lead to production of products and services defined in level one. The target of this level is to propose the business processes in such a way that they would lead to production of products/services with defined quality, in minimum time with the consumption of the least possible enterprise sources. Main outcomes of this level are:

Ø   Design of main processes (processes leading to customer),

Ø   Design of supporting processes,

Ø   Description of each process (initiating event, individual activities and their flow, job positions responsible for individual activities etc.),

Ø   Time calculation of duration of typical process instance and calculation dealing with typical consumption of sources (material, finance, human capital, etc.),

Ø   Setting of metrics that are going to be observed during the process, their dimensions and frequencies of their observing. The aim is to initiate a feedback (the arrow in the Fig. 3) that would allow continuous improvement of the process.

One of the key trends in this area is maximum self-service of customers and employees through IS/IT. An example could be the wholesale communication with its suppliers. It does no longer order the goods with its suppliers, but the suppliers themselves have to access wholesaler's IS and have to control the deliveries in such a manner that there is always optimal stock of given goods available.

Getting back to our example, the main processes could be defined as follows:

1)   Creation of the catalogue and the price list of flowers and other services

2)    Acceptance and execution of order for one bouquet,

3)   Acceptance and execution of complex order (flower decoration) - in this and the above mentioned process the self-service type of ordering is used ,

and these supporting processes:

1)   Purchase of flowers from Dutch wholesaler,

2)   Growing own stock of flowers etc.

Following metrics can be assigned for these processes (data in brackets quote the dimensions in which the metrics are observed):

·    Orders taken by web provider (number, price, day, month, type of order, type of customer, residence of customer),

·    Total costs of orders (day, week, month, type of order, type of customer),

·    Profitability of individual products (type of  product, territory),

·    Time needed to respond to the order (week, month, type of order),

·    Number of claims (day, month, type of order, type of customer) etc.

 

The third level is the Process Control. Level two was dealing with processes on a general level, it created a process model. All instances of processes are going to be run on the base of this model. As this model states estimated duration of individual instance of process and estimated consumption of business sources during a typical process, it sets basic data for detailed planning and control of processes and business capacities.

The design of processes on level two is an occasional activity (created model of process can remain unchanged over several years). On the other hand, control of processes is a continuous activity and its outcomes are:

Ø   Detailed operative plan of processes and consumption of business sources. This plan may show what business sources are going to be activated, the order of execution of accepted orders, place of execution of an individual order of an individual customer etc. Its aim is to satisfy requirements of all customers, if possible at all, without running into bottleneck, respectively having idle business sources,

Ø   Regulatory intervention into running of processes.

 

The importance of the operational level of management in the era of E-commerce has substantially grown. The reason for this is the fact that due to this business form it is even harder to estimate the volumes of orders and the capacities needed for executing these. The operational level is therefore responsible for the optimal sizing and optimal allocation of business capacities (human capital, technology, finance) according to changes in the volume of orders.

In our example of a florist store planning of processes and capacities could include: planning of shifts, recruitment of part-time employees during high season, price adjustments of products and services according to changing number of orders etc.

 

Process Workflow is occurring on the last fifth level. The processes are running according to the process model defined by level two and by detailed plan set by  level tree. Outcomes of this level are already individual products and services.

Creation and deliveries of ordered flowers and complex flower decorations will be happening on this level in our example.

 

Above this operative level, there is the fourth level called Process Monitoring. The results of metrics value analysis are then in relevant aggregation passed to upper levels:

Ø   To level 3 - for better process control

Ø   To level 2 - for optimisation of processes models

Ø   To level 1 - for evaluation and changes of business strategy.

 

Note: Activities run on levels 1-4 are managerial processes that can be described and analysed by the same methods and tools as operational processes of level 5.

There are very tight links among individual areas of management. For instance, the main process "execution of an order" from the area business logistics must be bound to company's organisation (specific job positions are responsible for individual activities of the process). This process must be financially secured and supported by IS/IT. Processes from the three remaining areas (human resources, finance, IS/IT) can be either supporting processes to the main processes, or can exist directly as a part of main processes (such as subprocess - order of bouquets through web).

Systems integration must secure not only the integration of processes of every individual area of management, but also integration of processes from all areas.

A good example could be the integration of new business processes with business organisational structure in transition from the commodity or geographically oriented organisational structure to organisational structure depending on language and national culture.

Let us have a look now what questions must be solved while integrating IS/IT with individual levels of managerial and operational processes. We are going to use and further develop the proposal of Scheer (Scheer, 1999). The difference between our and Scheer's approach is based on Scheer's usage of another specific level so-called Process Application. This level includes software support of individual operational processes. On the other hand, our concept assigns relevant data and software sources to every of the five above-mentioned levels - further explanation is given in the following table.

 

 

Application (software sources)

Information Sources

Strategic Manage-ment

·       EIS (Executive Information System), BI (Business Intelligence)

·       Datawarehouse

 

·       Information about market development

·       Long-term statistics of company results according to several dimensions

·       Benchmarking

·       Information about products and services of potential co-operators

·       Information about national and company culture

Processes Design

·       Modelling tools (process diagrams, stage diagrams,...)

·       Simulation tools

·       Tools for quality management

·       Reference models of products

·       Reference models of processes

·       Statistics from running the processes in the past

Process and Capacity Control

·       Control systems for time and capacity management

·       Tools for project management

·       Status and plans of processes

·       Status and plans of business sources

Monitoring

·       Monitoring systems

·       Systems for data analysis

·       It is often included in applications for operational processes support

·       Sensors measuring operational processes and organisational sources

·       Data of individual metrics

Process Workflow

·       Workflow tools

·       Modules of standard ERP systems (often include also applications of higher levels)

·       Detailed data describing current status of individual instances of processes and individual enterprise sources

 

4.         KNOWLEDGE BASED PROCESS REENGINEERING (KBPR)

One of the key problems of the above-described concept is the process design and optimisation. BPR has become one of the most frequently discussed topics of professional conferences and discussions of business managers in the 1990s. However, its results (as well as the results of systems integration projects) are not always satisfactory.

The following approach used for process design and optimisation was developed by the team of the Information Technologies Department. It was also verified in an outsourcing project of a large utility company. The base of the concept is the criticism of the mechanical approaches to design and reengineering of processes which are too technically oriented, do not respect the knowledge of people participating in the processes and do not allow human creativity in the process.

¨   Classical Process Design and Process Reengineering

The result of the classical process design and process reengineering (especially if ARIS Toolset type of tools is used) is detailed design of process that contains exactly defined network of activities. For every partial activity in the process following data are described: its inputs and outputs (sometimes also algorithm of an activity), responsible job position for given activity, maximum duration of an activity, maximum costs per activity, conditions necessary for running the activity, etc.

This detailed design of process offers many advantages (e.g. when describing processes of car production):

Ø   Every running of the process and its outcome are identical with the ideal values that were counted with in the design of the process,

Ø   Running of the process has well predictable duration and costs,

Ø   The activities of a process can be carried out by relatively unqualified (but well trained) labour force,

Ø   Specialists designing the model are very creative; on the other hand, creativity during running the process could lead to very negative results such as disturbing the optimal flow of activities, low quality output etc.

Above-described approach may, however, bring number of disadvantages to other situations:

Ø   As soon as the running of the process depends on many conditions, external factors and their combinations, then the model of the process gets very complicated. Imperfect description that may not be solvable due to some combinations of conditions can lead to abnormal termination of the process,

Ø   There are certain situations were the optimal model might not even be agreed upon. For instance, when describing the process of development of information strategy we may be able to describe the optimal structure of document of information strategy. However, very likely we are not going to be able to describe the whole process of development of the information strategy in the detail that was mentioned above. We could try to do so, but this detailed proposal would be probably rejected by the specialists developing the strategy as they would soon reveal the shortages of the design for the given situation,

Ø   The strict definition of the process does not allow to take advantage of new ideas and proposals that could be brought up by the employees taking part in the running of the process.

¨   Different Levels of Process Design

Due to the reasons described above, Knowledge Based Process Reengineering distinguishes four levels of modelling and optimising a process. The difference among levels is based on different level of knowledge and experience required from the employees participating in running the process. It is up to the creators of the design to choose the optimal level for each of the processes. Individual levels of description are characterised as follows:

(1)    The first level - the least detailed design of the process - describes the process through these characteristics:

·  Target of the process (product/service and its characteristics)

·  Event activating the given process

·  Role (job position responsible for the whole process)

·  Qualitative and quantitative metrics of the process and

·  Limiting conditions of the process (financial or time limit for running the process).

 

If we used this level to define the process of "Creating the catalogue of offered flowers", then the process could be defined, for example, this way:

·      Targets of the process: to create a catalogue for individual market segments that is responsive to national cultures and to pricing policies in these territories

·      Events activating given process: change in customers values, change in pricing policies in the territories, new collection created by designers

·      Job position responsible for the process: marketing director

·      Qualitative and quantitative metrics of the process: number of offered flowers in the catalogue, number of pricing policies etc.

·      Limiting conditions: the catalogue has to be changed at least four times a year; the offer of prepared bouquets has to be at least in three pricing policies, calculated profit from 1 bouquet must exceed 10%

 

Every other level of process design always keeps the characteristics of the previous one and adds some more.

 

(2)    The second level is extended by defining the outcome of the process (required structure of the final document, model of a product, photography of a sample etc.).

If we used this level to define the process of "Creating the catalogue of offered flowers", then we would add one more binding definition of catalogue structure for individual market segments.

Note: we are not going to give examples for the two following levels due to their high amount of text requirements; Attentive readers would be surely able to fill them in by themselves anyway.

 

(3)    The third level is extended by:

·  List of activities that are parts of the process (however, the flow of the activities is not defined),

·  List  of roles, job positions taking part in the process (roles are not assigned to activities)

·  List of all external inputs into the process (inputs are not assigned to activities)

·  List of all appropriate software tools to support the process.

 

(4)    The fourth level is extended by:

·  Flow of activities,

·  Inputs and outputs of every activity,

·  Responsible roles are assigned to individual activities.

¨   Business Knowledge versus Employees' Knowledge

The process described here is called the knowledge based process reengineering as it distinguishes two types of knowledge - accumulated enterprise knowledge (saved in the company's database, in existing definition of company processes and standards etc.) and empoyees' knowledge (those employees engaged in the running the process).

The first level of describing the process is used in the case when the accumulated enterprise knowledge is not sufficient, e.g. when running of every process is very different due to changed conditions and external factors. This situation may happen especially in the processes of strategic management. This is the reason why the first level requires highly qualified and creative employees who are going to be able to plan and implement all so far not defined characteristics of the process during running  the process.

For defining the process of "Creating the catalogue of offered flowers", it would be advisable to use the first level at the beginnings of the firm's pursuing  the new business strategy. The reason for this is that the firm is lacking the experience with optimal structure of catalogue for web pages and for different territories. At this stage, it is also important to hire a prominent marketing specialist who would create the catalogue.

On the other hand, the fourth level of describing the process assumes highly qualified and experienced specialists who design the process. Therefore consultant firms are very often being hired to help in designing the process, as these people know the "best practice" of given area of interest. The fourth level at the same moment represents the highest level of standardisation of running the process.

It is important to realise that the more we are approaching the fourth level, the higher the costs of process definition are and the lower the costs of process running including the costs of managing the process are. The reason for this is that when realising a process that is defined at the fourth level, it is not necessary for the employees to figure out the best way of workflow. This task has already been fulfilled by the designer of a process. This also leads to the conclusion that the higher the number of process instances, the more appropriate a detailed process definition.

KBPR suggests that the level of definition of the process may change over time. As the knowledge of employees taking part in the process realisation increases, there is growing opportunity to further develop the design of the process. The more detailed the design gets, the easier it is to handle the work over to less qualified employees. This de facto leads to accumulation of enterprise knowledge. Gradual accumulation of knowledge makes the company less dependant on concrete people and their knowledge. We can therefore state that the accumulation of enterprise knowledge is one of very important supporting processes - as e.g. maturity model of company's development (CMM, 1995). All this rises a very interesting question - how to motivate the employees to hand over their knowledge?

Accumulation of enterprise knowledge by specifying the model of business processes is in a way (from the systems point of view) an analogy to evolution development of layered architecture of system (Voříšek, 1997). The development of understanding and automation of certain area of reality usually undertakes following steps:

(1)    At the beginning all the problems of area of reality are solved by intuition, without any in advance elaborated plan

(2)    Gradual understanding leads to elaboration of various methods of problem solving. The application of the methods requires creative approach in every step

(3)    Further deepening of understanding the area and experience with methods leads to elaboration of consensual approach to solving. The solution is divided into steps with exactly defined consequences, each step has exactly defined inputs and outcomes. The activities in every step are, however, defined only approximately

(4)    By further understanding is the consensual approach changing into the algorithm of solution. Algorithm is already in detail defined solution of the problem that there is no more necessity of any creative approach of people and therefore computers are in charge. Algorithm in this stages becomes a part of individual application software;

(5)    Gradual standardisation of formerly different algorithms of solving similar problems leads to transmission of algorithm to lower level  - into a standard application package, such as  ERP;

(6)    The algorithms that have been standardised the most and that are crucial to the efficiency of the system become part of hardware.

The tools that are appropriate for automation of process support depend also on the level of process design. The more we are approaching the fourth level, the more appropriate are the standard application packages such as ERP (SAP R/3, BAAN etc.). On the contrary, the more we are approaching the first level, the more appropriate are universal tools such as MS Excel, respectively different applications of EIS.

There is no necessity in praxis to stay with the four levels of description of the process as defined here. When proposing a concrete business process, it is always at first necessary to evaluate the level of employees' knowledge and the state of accumulated enterprise knowledge. Then, on the base of this analysis, it can be decided what characteristics are going to be optimal for description of the given process.

¨   KBPR and company culture

As we have already mentioned above, when thinking about optimising the company processes, it is also necessary to take into account  current national and company culture  and required changes of the company culture. The more we would like to respect current national and company culture, the looser we can define company processes. However, as soon as we desire to change the company culture then, the stronger the change, the more rigid description of processes is appropriate. This more rigid approach gives exact advice how to solve the problems. The more rigid description should be binding until new values and principles of new company culture become absolutely familiar to all employees.

We have to take into account the considerations about national and company culture also when we are choosing the right software support for our processes. The majority of standard software has already explicitly or implicitly encoded culture of country of their origin (e.g. form of communication, meaning of certain symbols, priorities of certain values, context data), as described by Kay and Little (Kaye&Little, 2000) or Moores and Gregory (Moores&Gregory, 2000). Now it is a question whether this culture is understandable or acceptable everywhere and by all users. 

5.         CONCLUSION

Managing the information system of a company and systems integration must more precisely and flexibly respond to changes in social and economic environment. This leads to an increasing number of factors (dimensions) that have to be taken into account when developing IS/IT (time, data, processes, user interface, software, hardware, organisation, legislation, finance, qualification, etc.). Other important factors that must be considered when thinking about implementing and running information system are company and national culture and knowledge. These factors strongly influence the optimal features of company processes.

In order to be able to manage IS/IT even when the number of considered dimensions grows, it is helpful to create concepts that make the basic principles of management clear. This article has tried to contribute to our understanding in this direction. It describes basic concept of systems integration. This concept points out the necessity and possibility of integration of company processes from the following three points of view:

·    Integration of processes on different levels of management  (beginning at strategic level and finishing with operational processes),

·    Integration of processes of different areas of management (business logistics, organisation, finance, IS/IT),

·    Integration of processes with business and individual knowledge and with company culture.

 

The integration of processes with business and individual knowledge can be managed through appropriately chosen level of business processes definition.  We have described 4 possible levels of process definition. The first is the briefest, the fourth, on the other hand, defines the process into very detail. The more we are approaching the fourth level, then:

·      the more accumulated business knowledge is required (higher levels of knowledge, experience and creativity of employees defining the process)

·      the lower are the requirements on qualification and creativity of employees realising the process

·      the lower the flexibility of the process to external changes

·      the higher the standardisation of the process  and standardisation of process outputs

·      the higher the cost of process definition and the lower the cost of process realisation

·      the better the estimates of time period and costs of the process

·      the more appropriate are standardised application packages such as ERP. On the other hand, the more we are approaching the first level, the more appropriate are universal tools such as table processor (application of business intelligence).

 

 

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