As every good engineer knows, there is only so much efficiency that you can squeeze out of any mechanical design. At some point the cost of fine-tuning will simply outweigh the rewards. It is then time to return to the drawing board and rethink the basics. The lesson is equally true for corporate structures. Corporations, and airlines among them, have spent much of the past decade engaged in aggressive efficiency programmes, aimed at raising productivity and stripping out cost. But without a fundamental look at basic design, such programmes have their limitations.
A typical cost-cutting programme may help to reduce operating costs and improve margins, but, almost by definition, it does little to expand revenues or create a climate of innovation and marketing agility. And it can only go so far in making best use of available corporate resources: within the constraints of the existing organisational structures. Eventually such programmes will run up against the law of diminishing returns. Thus the need for corporate re-engineering.
The target is not simply to make the organisation work slicker. Rather, it aims at a radical revision of how a company functions. Naturally, that must start with a clear set of high-level strategic objectives. But the skill is to ensure that these transmit through to the core operations within the organisation so that each part of the business is pulling in the same direction. If successful, this should ease the way towards better operational decision making and help steer the business culture towards a focus on performance and entrepreneurial behaviour. For the airline industry, with its complex organisational structures, benefits are clear - for example, allowing smooth integration between fleet and route planning, marketing and product design.
Aeromexico change programme
The experience of Aeromexico is a case in point. The company has come a long way since the turmoil of a decade ago. It sailed close to collapse in the late 1980s following a punishing fares war with local rival Mexicana. Both carriers were absorbed into the Cintra holding group and set about restoring their fortunes. Initially Aeromexico focused on the traditional virtues of reducing costs and improving operational reliability. Non-core activities were jettisoned or pared down along the way. The carrier also decided to concentrate on the top-end of the market with significant improvements on products and delivery, with a revised pricing strategy. Its re-emergence also included joining with Air France and Delta Air Lines in founding what is now the SkyTeam global alliance. A heavy investment in an IT infrastructure followed.
At this stage the airline began to run up against a block. Aeromexico had gone as far as it could within the constraints of the structure and it could only go so much further without a more fundamental change in the way that the company worked. High on the agenda was the need to ensure that departments co-operated towards common goals. In short, Aeromexico saw the need to engage in a corporate change programme. This was organised under five main headings: setting strategic priorities; establishing new business processes; organisational change; aligning initiatives; and last, but not least, Implementation
Although Sabre took the lead in development of processes and programme co-ordination, the project teams included a combination of different consulting companies each contributing parts of the picture and working closely alongside Aeromexico executives. McKinsey has developed a framework of measuring performance, while Hay Management worked on the culture change and detailed human resource processes. BDO Consulting also contributed economic expertise on a framework for value-added, with Speedwing helping to implement a change in engineering.
Sabre and the Aeromexico leadership team began by setting out the most pressing priorities and deciding where to concentrate the resources to achieve results. First they asked senior managers where they would invest for maximum return if there were no constraints on resources. An executive score-card was created to balance the importance of individual initiatives against the core strategic aims of the business. These core aims included achieving sustainable profitability, improving market position, raising customer service and develop human resources.
The next step was to ensure that this strategy was feeding through into action. Here it was clear that the project would have to address at least three key management challenges, all of which will be hauntingly familiar to any major international corporation. The first was to get different parts of the business to work and talk together across departmental divides. Departments within the airline were often working in isolation, without an overall clear company-wide objective. More importantly, there was a lack of interaction between the departments, though interaction was essential if the airline was to make fundamental improvements in the way it operates.
The problem was not that individual executives failed to understand the overall corporate objectives: they were indeed hard at work attempting to ensure that these were achieved. The problem lay in the fact that their efforts were not fully co-ordinated and they lacked the performance measurements against which to test the impact of their actions on the company overall. As a result their contributions were fragmented and isolated, reducing the impact of individual efforts.
It would have been relatively straightforward to implement improvement programmes within individual departments or to address specific shortfalls. But a mass of individual solutions is more likely to add up to a tangled mess rather than deliver against the underlying challenges which faced the organisation as a whole. As the initial discussions with the airline's leadership had revealed, the most pressing areas for improvement cut across functions within the business and required participation from many departments.
For example, aircraft procurement was largely seen as a financial exercise, yet fleet decisions have a clear long-term impact on other parts of the business such as maintenance, scheduling and marketing. The process for taking fleet decisions, including commissioning dates, therefore, needs to be designed so that it takes into account these potentially important future influences. Similarly, if operational plans for schedules, crews and maintenance are all drawn up in isolation, then last minute efforts to tie them together are unlikely to produce optimum efficiency or management flexibility.
Efforts were being made within Aeromexico to work across departments, but the processes for doing so needed consolidation into a coherent plan, with a strong corporate focus and real support.
A second potential block to raising performance came in the form of another familiar issue: spanning the gap between long-term strategic planning and hard operational decision-making. The project at Aeromexico had identified that the linkages were not in place that would allow high-level strategy to flow through into medium-term tactics and more immediate operational planning. In practice, decision-making tended to be driven by the need to address short-term pressures rather than by longer-range corporate strategy.
The need to resolve this was seen as critical in achieving improvements across the business. Stabilisation of long-term fleet planning was a particular focus, allowing for regular updates and fine-tuning of the plan as delivery dates neared. Another focus area was on developing longer-term integrated production plans, looking up to four years ahead, giving the company an ability to predict future crew requirements, adjust maintenance plans and respond to schedule changes. A further example was the need to forge greater continuity in the process of delivering good customer service, with market research and the evaluation of customer needs flowing smoothly through to product development, service design and ultimately service delivery.
Finally, the interviews also revealed a consensus among Aeromexico leadership that changing the business culture would be an essential management lever to making this change happen. There was a general lack of communications within the business, and no proper feedback channels to capture and apply lessons learned in one part of the business throughout the organisation as a whole. The change would include creating a process for human resource planning and development.
A new model
Armed with a clear set of strategic objectives and the feedback from each department, the project team set about creating a new business model for the Mexican carrier, undertaking a fundamental redesign of the company's processes. This new framework is set up on a multi-layered computer model. It provides a roadmap following processes through from long-range forecasts virtually up to the point of delivery.
At the top level, comes long-term planning, looking out five to seven years ahead. Feeding into this level are forecasts over future shifts in the economic and political landscape, as well as the more distant milestones set out for the company. On a rolling annual basis this corporate strategic plan is reviewed, to keep it in tune with approaching events.
As the future approaches, the model funnels through to more detailed medium- and short-term planning, perhaps moving from five year forecasting, down to a couple of years then a couple of months. This is now available throughout Aeromexico. A final fourth level has been created which will take the model right down to operating procedures at the time of service delivery. That is in now place for a couple of key divisions.
Effectively a mouse click on the computer model allows a manager to drill down through the layers, from the broad strategic outline, right down to the detailed process charts (see diagram). At each stage, the model outlines the necessary inputs and impacts on different departments throughout the business. So each part of the company can see and understand the strategic scenarios as they unfold. Before the day of delivery arrives, and the barriers to further change rise exponentially, managers will already have had the chance to provide for potential contingencies and agreed change management procedures.
This structured planning process not only helps to speed decision-making but also ensures that there is less wasted effort, either through pointless duplications or misunderstandings. The whole model is designed to raise the level of team-working across the old departmental divides, allowing all managers and employees that are working on a particular process to understand the needs and challenges faced by their "process customers". For example, maintenance and crew departments are both customers of the fleet planning process.
Aeromexico's management has already adopted the model as part of an educational package aimed at enhancing organisational learning among staff. It has helped to spread an understanding of the contribution that an individual department makes to the process as a whole and the impact of its actions on other part of the business.
The model has also enabled the leadership team itself to take a clearer top-down view of different business processes and appreciate the links between them. It has subsequently proved a useful tool in guiding cross-company improvement initiatives and organisational change.
In order to align better with the new process model - and the philosophies behind it - Aeromexico has also restructured the organisation itself, starting at the top with the positions of chairman and chief executive (CEO). Alfonso Pasquel previously held both roles. However, this left a conflict between responsibility for setting the company's long-term strategic direction and handling the demands of running day-to-day operations. So a new role of CEO has been created, taken by Arturo Barahona, leaving the president free to focus on strategic development of the airline.
The planning functions previously carried out within operations and engineering departments have also been separated out into a new logistics unit. The unit will focus on planning for maintenance, fleet and crew co-ordination. Its role is to formulate plans and conduct research backed by a high degree of analytical competence.
A new unit has been created to house market research, product design and service delivery functions that previously sat alongside sales. Again the aim was to give breathing space for long-term thinking away from the more immediate short-term pressure of sales. Significantly, the new director who was brought in to head this marketing and product design unit, was recruited from outside the industry, with a background in the hospitality sector.
Where relevant the new business model has borrowed heavily from best practice outside the airline industry. The leveraging of experience from retail marketing techniques is a clear example, lending experience in market research and new product design. The model has also taken advantage of e-commerce and customer relationship management technologies, providing significant business opportunities to increase market reach, customer behaviour forecasting and targeted marketing. In the engineering sector too, best practice on integrated supply chain management has been borrowed from fast moving consumer products and engineering industries.
A final, though crucial, strand of the organisational change centres on human resources. Traditionally these functions had been wrapped within an administrative department focussed on general procurement rather than personnel management as such. Those transactional tasks have been moved to finance, allowing the creation of a human resources unit focussed on people, motivation and organisational development. Training and competence development initiatives are now part of its remit following the change programme.
The new unit, in part, comes as part of a wider management goal to create a more pro-active performance-focused business culture within the company and, along the way, break down the old departmental divides.
A culture survey was carried out as part of the project to define behaviour profiles globally within Aeromexico as well as the various subcultures present in different business units. Workshops and coaching sessions were also instituted to support adoption of the new processes among the leadership team, management and employees. So were targeted mobilisation and communication events. Early and visible success from the change programme was seen as a key to helping its acceptance and winning management attention. For example, the development of a new five-year production plan helped to generate focus and momentum for the implementation effort.
Recruitment, promotion and reward processes have also been revised as part of the change programme to help foster a more entrepreneurial culture within the company. The real trick is in navigating the fine line between encouraging innovation but without trading off the virtues of the structure imposed by an orderly process plan. The aim at Aeromexico has been to achieve the optimum mix of each. Culture is, perhaps, one problem that mechanical engineering does not face.About the authors Emre Serpen, is a Vice President within the consulting arm of Sabre, the information technology group specialising in travel industry solutions. Serpen is focused on strategy development and change management activities within Sabre Consulting. He led the project at Aeromexico and is involved in a number of other such change projects within the airline industry. Jorge Wheatley is the Chief Information Officer at Aeromexico. A former consultant, he worked closely with the consultancy teams in guiding the project at Aeromexico and is the main board director currently responsible for the change management programme. He also held the role of strategic planning director.
Source: Airline Business