A Model Management Approach To Business Process Reengineering

Journal of Management Information Systems
ISSN: 0742-1222 (Print) 1557-928X (Online) Journal homepage: http://www.tandfonline.com/loi/mmis20
A Model Management Approach to Business

Process Reengineering
Levent V. Orman
To cite this article: Levent V. Orman (1998) A Model Management Approach to Business
Process Reengineering, Journal of Management Information Systems, 15:1, 187-212, DOI:
10.1080/07421222.1998.11518202
To link to this article: http://dx.doi.org/10.1080/07421222.1998.11518202
Published online: 07 Dec 2015.
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A Model Management Approach to
Business Process Reengineering
LEVENT V. ORMAN
LEVENT V. ORMAN is Associate Professor ofInfonnation Systems at Cornell Univer-

sity, Graduate School of Management. He received a Ph.D. in infonnation systems
from Northwestern University. He has published in a variety of journals, including
recent articles in MIS Quarterly, Information Systems, Decision Support Systems,
IEEE Transactions on Data and Knowledge Engineering, Journal of Intelligent
Downloaded by [Monash University Library] at 23:00 18 March 2016
Information Systems, and Acta Informatica. His current research interests are data
quality and integrity, business process reengineering, and electronic commerce.
ABSTRACT: A prescriptive and analytical approach is taken to business process

reengineering (BPR). The objectives are to provide precise guidelines for process
redesign to take full advantage of the efficiencies created by infonnation technologies,
and to develop techniques to evaluate alternative structures. A decision-making
paradigm of organizations is adopted, and organizational processes are viewed as
collections of decision models. Such a simplified analytical model provides an
effective methodology to describe and quantify the impact ofinfonnation technology
on organizational structures and processes. The model explains and quantifies a
variety of organizational issues such as: the significance of hierarchical structures in
organizations, the need for business process reengineering after the introduction of
infonnation technology, and the exact conditions under which infonnation technology
may (and should) lead to more or less centralized structures. Reoptimization of
business processes after the introduction of infonnation technology is fonnulated as
a dynamic programming problem.
KEY WORDS AND PHRASES: business process reengineering, decision models, hierar-
chies, model complexity, model management, organization design.
BUSINESS PROCESS REENGINEERING IS THE POPULAR TERM for comprehensive

reoptimization of organizational processes and structures, often following the intro-
duction of new infonnation technologies into an organization. There is considerable
anecdotal evidence that even small changes in the use ofinfonnation technology (IT)
in an organization may require major restructuring of the organization to take full
advantage ofthe efficiencies created by the technology [3, II, 12, 13]. Conversely,
there is also considerable evidence that, without major restructuring, the introduction
of IT may not produce the savings needed even to justify the investment [33, 36].
Although the evidence for organizational restructuring to accompany technological
change is strong, there is much less agreement on exactly what organizational changes
Journal ofManagement I"formation Systems / Summer 1998, Vol. 15, No. I, pp. 187-212.
© 1998 M. E. Sharpe, Inc.
0742-1222 / 1998 $9.50 + 0.00.
188 LEVENT V. ORMAN
are needed to take full advantage of the technology. The controversy includes both
macro- and micro-level changes. At the macro level, the most salient issue is the
change in the degree of centralization of decision making, with related questions about
the depth and shape of organizational hierarchies. At the micro level, the most salient
issue is job definition and content, with related questions about communication
patterns, employees' job satisfaction, and skill requirements.
There is a remarkable degree of disagreement on the impact of IT on organizations
in all of these areas. IT may be expected to increase centralization because it increases
the information-processing capacity of managers, allowing them to centralize more
decisions [35,42,43]. IT may also be expected to decrease centralization because it
reduces the cost of communication and coordination and allows decisions to be
delegated [6, 19,31,42]. IT may be expected to decrease the depth of organizational
hierarchies since it automates some of the middle-management functions, facilitating

the movement of information through the organizational hierarchy [7, 42]. IT may
also increase the depth of hierarchies by reducing the delays and distortions introduced
by the movement of information through the hierarchy [5, 35]. IT may be expected to
reduce job satisfaction and diminish skill requirements by routinizing work, by
subdividing work into small, highly specialized and repetitive tasks, and by subjecting
humans to machine control [6, 42, 43]. IT may also be expected to increase job
satisfaction, enrich jobs, and replace low-level clerical jobs with high-skill profes-
sional jobs by automating the most mundane tasks [2, 22, 43].
One explanation for the inconsistency of the empirical evidence is that the impact
ofiT on organizations is nondeterministic. IT creates options for the organization, and
the organizational choice among those options creates the variation in observed
outcomes [10,28,43]. This explanation is valuable in establishing the complexity of
the interactions but not very useful in prediction or prescription, and it gives no
guidance to the implementor of IT or business process reengineering. A second
explanation for the inconsistency of the empirical evidence is in the treatment of IT
as one specific factor. In fact, IT contains many diverse technologies that can be used
to support a variety of organizational processes. What gets supported determines what
would be the optimum structure for the remaining processes! Clearly, automating
clerical tasks would have a different impact on the organization than building execu-
tive support systems for top management [24, 37]. This explanation is valuable in
narrowing the research question and providing a general framework for prediction and
prescription. However, general macro-level prescriptions about organizational struc-
tures are not always easy to translate into specific micro-level changes in organiza-
tional processes even when those prescriptions are available [21], and further
refinement of the prescriptions is often necessary.
This article takes a prescriptive and analytical approach to business process reen-
gineering. It attempts to determine what changes need to take place to take full
advantage of the efficiencies created by IT through a simplified analytical model of
organization as an information-processing system. The two major questions are the
identification of general structural changes necessary to take full advantage of IT and
the efficient implementation of those general changes through a redesign of specific
A MODEL MANAGEMENT APPROACH TO BPR 189
organizational processes. The objectives are to provide insight into the structure of
business processes and to provide guidance and analytical tools for the reengineering
efforts. In the process, a number of organizational issues are explained and quantified,
including the significance of hierarchies, how they concentrate power on top, and how
they may create employee alienation at the bottom, the need for business process
reengineering after the introduction of IT, the exact conditions under which IT may
and should lead to more or less centralized structures, and the exact location and nature
of those structural changes. An information processing-decision making paradigm of
organizations is adopted [15, 17, 38, 40]. Organizational processes are viewed as
collections of decision models within the general framework of organizational infor-
mation processing. Each decision model is identified by a type of decision which is
its output, and contains a sequence of information-processing tasks [26]. The infor-
mation-processing tasks are the smallest identifiable units of analysis, and their
optimum arrangement is the critical design variable determining the efficiency of the
resulting structures. The structures will be evaluated in terms ofthe cost of information
processing and the cost of communication among tasks [21]. Both criteria are heavily
influenced by the arrangement oftasks, since those arrangements determine what tasks
need to communicate with each other, the direction and the content of communication,
and the possible sharing of tasks among models.
Business Processes as Decision Models

A DECISION-MAKING PARADIGM OF ORGANIZATIONS IS ADOPTED where organizational
processes are viewed as collections of decision models. Each decision model is
associated with a specific type of organizational decision, and it is characterized by a
collection of constraints that the decision is required to satisfy. A decision model is a
construct that transforms input data into a specific decision that satisfies the constraints
of the model. Such decisions are called "satisficing" decisions. Optimizing decisions
are special cases of satisficing decisions since optimality conditions can be viewed
also as constraints. This view of a decision model is similar to the production rules of
expert systems where a set of constraints and a specific action completely characterize
each rule, and the satisfaction of the constraints leads to the execution of the action.
A constraint is a predicate that transforms a set of input variables to a binary variable
(TRUE/F ALSE), and it is implemented by a decision task that is the smallest unit of
analysis for structural purposes. Decision tasks receive input, search through the input
using some decision algorithm to identify the input values that satisfy the constraint
involved, and pass on the reduced (and possibly transformed) search space to the next
task. After executing all tasks of a model, the set of input values (called the search
space) is reduced to a specific decision. In decision theoretic terms, each task reduces
the uncertainty associated with the decision and passes on the remaining uncertainty
to the next task until all (or sufficient) uncertainty is removed to reach the decision
[26]. In decision theory, a utility function is employed to determine the benefits
derived from uncertainty reduction, and the costs are assumed to be determined by the
market prices. There is a close correspondence between the utility-based analysis of
190 LEVENT V. ORMAN
decision theory where costs are assumed to be given by a market place, and the
cost-based analysis of model management we employ. To some extent they are
substitutes since there is a considerable overlap in analysis, but they are also comple-
mentary since neither costs nor utility can be ignored in a complete analysis. Costs are
especially critical in a structural analysis since there is a more intuitive and direct
relationship between costs and structure, and the costs cannot be assumed given by
the market place since there is often no market internal to the organization to determine
the price of information. As a matter of fact, the cost of producing and disseminating
information appears to be the critical factor behind most organizational structure,
where utility plays a more restricted role of providing a threshold to determine what
information is worth producing and maintaining [15].
Each decision task Ii is characterized by two parameter types: The cost ci' and the
s; v
selectivities for each input variable oftask i. The cost of a task is intuitively defined
as the resources used to execute the task, such as the value of the decision maker's
time for a typical decision task, or the value of the computer time for automated
decision tasks. Formally, the cost of a decision task is defined by the complexity
function of the implementing algorithm, which is a function of the size of its input
variables. Complexity functions are used widely in algorithm analysis [32], and they
are positive nondecreasing functions of the sizes of input variables, measuring the
amount of (computing) resources used to execute the algorithm. The size of the input
variable v of a task Ii is called the search space of the task ti with respect to the variable
v. Tasks facing large search spaces are more costly than others given the same
complexity function due to the nondecreasing characteristic of complexity functions.
Similarly, the tasks with higher-order complexity functions are more costly than
others, given the same search space. The cost of a task is also referred to as its
s;
"complexity." The second type of parameter is the selectivities of a task ti for each
input variable v, or Si when the variable involved is obvious. Selectivity is defined as
the remaining search space after the execution of the task as a percentage of the initial
search space or alternatively I-the percent reduction in search space affected by the
execution of the task.
Example 1
A commercial bank has a simple decision model with two tasks for processing
mortgage loan applications. Task tl enforces the constraint that requires the applicant
to be a homeowner. Task t2 involves the constraint requiring the applicant to have an
annual income over 30K. Those who satisfy both constraints are approved for a loan.
Mortgage loan decision model
t I: homeowner constraint
t2: salary> 30k constraint
The complexity function for both t I and t2 is given as ex where c is a constant and the
input variable x is the daily number of applicants. Assuming 100 applicants per day,
60 percent of whom are homeowners, and 20 percent of whom have a salary> 30K,
the resulting parameters are c i = c 2 = 100c, SI = 0.60, and s2 = 0.20.
The definition of complexity function implies that the cost of a task is dependent on
the search spaces of its input variables, and the reduction in any search space achieved
by executing a task influences the cost of subsequent tasks. In decision theoretic terms,
reduction in uncertainty achieved by executing a task reduces the uncertainty faced
by subsequent tasks. Such interaction among the tasks implies that some sequences of
tasks are better than others, and (at least) one sequence is the optimum for each model.
The structure of a single model is determined solely by the sequence of its tasks, and
the optimum structure is the sequence that minimizes the total cost of the model. The
extension to multiple interacting models is introduced in the next section, leading to
more complex hierarchical structures.
Example 2
Case I
Given the mortgage loan decision model of example I, with two tasks t l , t2 , costs c i
= c 2 = 100c, and selectivities SI = 0.60 and s2 = 0.20, the cost of the sequence (tl' t2)
is c i + sIc2 = 100c + 60c = 160c, but the cost of(t2' t l ) is c 2 + S2cI = 100c + 20c = 120c.
Different sequences lead to different costs since the execution of a task reduces the
search space for the subsequent tasks (e.g., if an applicant does not meet the home-
owner test, then there is no need to check his or her salary). Clearly (t2, t l ) is the
optimum sequence with cost 120c, as opposed to 160c. Intuitively, (t2' t l ) has lower
cost since t2 is a more stringent test, and the costs are the same.
Case 2
Now assume that t2 is more costly to test than t l , with c2 =400c and c i = 100c, possibly
because of the need to verifY salaries, but home ownership is a public record. Now the
cost of(tl' t2) is c i + SIc2 = 100c + 240c = 340c, and the cost of(t2, t l ) is c 2 + s2CI =400c
+ 20c = 420c. Clearly now, (t I' t2 ) is optimal, demonstrating the critical importance oftask
complexity in structure. In general, the cost of a sequence tj , ... ,tj is
I "
where Vj are the set of variables obtained by substituting <EQ> or variable v, where
Vois the search space for variable v.
Case 3
Similarly, now further assume that sl = 0.90. Now the cost of (tl' t2) is c i + SIc2 =
100c + 360c = 460c, clearly higher than the cost of (t2' tl)' whose cost remains 420c.
192 LEVENT V. ORMAN
(t2' t 1) is once again the optimal solution, demonstrating the critical importance of
selectivity in determining structure.
So far, the selectivities of tasks were assumed independent of the structure, when in
fact selectivity of a task may depend on the uncertainty it faces and, hence, what tasks
have already been executed. Borrowing Bayesian terminology, Sij will refer to the Joint
selectivity of tasks ij (i.e., the selectivity achieved by executing tasks i andj); Si/j will
refer to the selectivity of task i given that task j has already been executed. If the
selectivities are independent, sij =s,s; follows from laws of probabilistic independence.
Similarly, sij =sill; follows from the definition of conditional selectivity. It is important
to note that independence of selectivities does not imply that the tasks are independent.
Task independence in common parlance implies no common variables, and that means
selectivity = I for all tasks that do not involve the variable in question.
Example 3
An extended mortgage loan decision model is given with three tasks:
Extended mortgage decision model

t1: Homeowner constraint
t2: salary> 30k constraint
t3: life expectancy> 20 years constraint
with parameters c i = c 2 = c3 = 100c, sl = 0.60, s2 = 0.20, and s3 = 0.70.
Case I
Assuming independence of selectivities, the optimum sequence is (t 2, f l, t3) from the

most stringent test to the least since the costs are the same. The total cost of the
optimum sequence is c2 + s2cI + SI2c3 = 100c + 20c + 12c = 132c since s2 = 0.20 and
sI2 = 0.20 x 0.60 = 0.12.
Case 2
Now assume interdependence ofSI and S2 since those with salary> 30k are more likely
"*
to be homeowners. Assuming S12 = 0.15 0.20 x 0.60, the optimum sequence is (t2 ,
t3 , t l ) with total cost of c2 + S2C3 + s23CI = 100c + 20c + 14c = 134c since S23 = 0.20 x
0.70 = 0.14. The second best sequence is (t2, fp (3) with total cost of c 2 + s2cI + s12c3
= 100 c + 20c + 15c = 135c since SI2 = 0.15. The cost of sequence (t2' fp t3) has
increased from 132c to 135c due to the interdependence between S I and s2' Clearly,
the interaction among the tasks is a critical variable in determining structure.
Example 4
A retailer has a simple decision model with three tasks to make an advertising decision
Ina given region:
Adverfising decision model

f 1: low demand constraint
f 2: low advertising cost constraint
f3: low production cost constraint
The decision rule is to advertise if all three constraints are satisfied. The complexity
of each task is cx, where x is the number of regions.
Case 1
Given 100 regions c i = c 2 = c 3 = 100c. The probability Off l , f2' or f3 being satisfied in
a region is Sl' s2' or S3' respectively. sl = 0.60, s2 = 0.20, s3 = 0.70. Assuming
independence of tasks, the optimum sequence is (f2' fl' (3) with total cost of c 2 + S2CI
+ s12c3 = 100c + 20c + 12c = 132c.
Case 2
By changing the cost c 2 = 400c, the optimum sequence becomes (fl' f2' (3) with total
cost of c i + slc2 + sl2c3 = 100c + 240c + 12c = 352c.
Case 3
Assuming interdependence of Sl and s2 with SI2 = 0.15 "# 0.20 x 0.60, the optimum
sequence is (f2, f3' fl) with total cost of c2 + s2c3 + s23cI = 100c + 20c + 14c = 134c, as
in the previous example.
Some variables are created within tasks rather than being input from the environ-
ment. The task that creates a variable is called a "source," and the task that uses such
a variable is called a "target." Such derived variables are assigned an initial size of
arbitrarily large M to prevent target tasks executing before the source task in the
optimal solution. Only the source task with its especially small selectivity can bring
M down to its realistic size. This special case corresponds to the dependency graphs
of systems analysis [34].
The decision model approach to process design can be generalized to continuous
variables and infinitely large search spaces. So far, search space has been used to
measure the uncertainty faced by a task, and the reduction in search space has been
used as a measure of uncertainty reduction achieved by executing a task. These
measures are intuitive and useful when finite discrete search spaces are involved, but
they fail for continuous or infinitely large search spaces, which are commonly found
in decision models. A more general concept than the size of the search space is
provided by information theory to measure uncertainty, which is the concept of
entropy [16]. Entropy is commonly used to measure the uncertainty related to a random
variable, and can be used to measure the uncertainty faced by a task. Similarly, change
in entropy can be used to measure the change in uncertainty due to the execution of a
task. More importantly, for finite discrete search spaces with no additional information
194 LEVENT V. ORMAN
about the search space, entropy specializes to the size of the search space, justifying our
initial intuitive choice. Given a random variable with a probability distribution p(x), its
-J
entropy is defined as p(x) log (P(x)) dx.
Similarly, for a discrete random variable with
probabilities Pi associated with each distinct outcome i, its entropy is defined as
-L: PI log(P).
For the loan decision of example 1, a binary predicate (i.e., YESINO decision) defined
on a search space of I 00 customers leads to 2 100 possible outcomes. With no additional
information, each outcome is equally likely, that is,
I
Pi = 2100 .
Entropy = - L: i loo log2 [21100 ) = _ioo 2~00 log2 [2 1100 ) = 100,
which is equal to the search space.

Search space is an appropriate measure of uncertainty for discrete variables with the
assumption of no additional prior information. The existence of prior information
would require the use of entropy for an exact measure of uncertainty. Similarly, for
continuous variables, entropy would be the appropriate measure of uncertainty since
search space would involve infinitely large spaces.
Example 5
A product pricing decision requires meeting a revenue goal within a short-term

capacity constraint. This model involves two tasks:
Product pricing model
t I: capacity constraint test
t2: revenue goal test
Assume that the feasible prices initially have a uniform distribution over the $10-18
range. The capacity constraint selects only the range $10-14, and the revenue goal
selects only the range $12-18, resulting in acceptable prices within the $12-14 range.
Note that a revenue-maximizing model would be similar except for possibly returning
a unique price (entropy =0). Assuming uniform distributions:
i (i) dx =
18
Initial entropy =-10 log 3;
14
Final entropy = -fz ~ log (~)dx = I;

14
Entropy after tl = -10 -± log (-±)dx = 2;

Entropy after t2 = -li (i)dx

18
log = 2.5 .
The next step is the computation of uncertainty reduction: When computing with
search spaces, we have used reduction in search space as a percentage of the initial
search space to measure the reduction in uncertainty. This measure fails with entropy
since the initial entropy may be zero or negative. The appropriate measure of
uncertainty reduction is the change in entropy due to a task as a percentage ofthe total
change in entropy due to all tasks, since entropy changes can be meaningfully
compared, but comparisons between changes and absolute entropies are not very meaningful
[16]. Most significantly, this measure of entropy change again specializes to search-space
reduction as a percentage ofinitial search space, with the assumption that initial search spaces
are much larger than the final search spaces remaining after all the tasks have been executed.
Selectivity is still defined as a one-percent reduction in uncertainty.
Example 6
The product pricing model of example 5 leads to the following selectivities by each
task:
Total change in entropy = 1--1 = 2.
Entropy reduction by tl = ~2 = 0.50
Selectivity SI oftl = 1--0.50 = 0.50
Entropy reduction by t2 = 1--;.5 =0.25
Selectivity s2 oft2 = 1-0.25 = 0.75
Entropy reduction by t l , t2 = ~1 = 1.00
Selectivity sI2 of t l , t2 = 0
where the selectivities are consistent with the intuition about uncertainty reduction.
In summary, entropy reduction as a measure of uncertainty reduction specializes to
search-space reduction when:
a. The search space is finite and discrete.
b. No prior information about the search space is available.
c. The initial search space is much larger than the final search space remaining
after the execution of all tasks (or, alternatively, the final search space is nUll).
We will continue to use search space as a measure of uncertainty because ofits intuitive
and practical value, whenever these assumptions can be reasonably expected to hold.
196 LEVENT V. ORMAN
Multimodel Structures
AN ORGANIZATION CAN BE VIEWED AS A COLLECTION OF INTERACTING decision
models. Structuring each model independently, without considering its interaction
with others, is likely to be suboptimal. Complex organizations containing such
multiple interacting models require a complex architecture involving multilevel,
multi component structures to minimize information-processing costs [17]. The prin-
cipal tool of structuring is decomposition. Decomposition is often touted as the basis
of all structure [1]. It has been studied extensively, but there is no consensus about
why and when systems should be decomposed into smaller components. The oldest
theory is information overload. It suggests that organizational activities are decom-
posed into smaller tasks and assigned to different employees to prevent the complexity
of a job from exceeding employees' complexity tolerance [39]. This theory is simple
and quite effective in explaining the cognitive limitations of humans, but it does not
capture the essence of structure. It does not explain the structure often found within
an individual job, nor does it explain extensive structure imposed on relatively idle
components of an organization (e.g., when large processors are assigned to relatively
small tasks in computerized systems).
The second theory proposes a reduction in the complexity of a system by dividing
complex units into small relatively independent units [34, 41]. The reduction is
claimed to follow from the multiplicative effect on complexity of the variables within
a unit, as opposed to the additive effect on complexity when the variables are split into
multiple independent units. This theory elegantly explains the effect of interdependent
variables on complexity in contrast with the effect of independent variables. It further
suggests that complexity could be reduced by splitting interdependent variables into
separate independent units, but only by ignoring their interdependence and producing
a suboptimal solution. That tradeoff between reduction of complexity and sub-
optimization has not been clearly quantified and is addressed in this paper.
The third theory suggests that processors (human or machine) are more efficient in
repetitive execution of the same task than in switching from task to task, leading to
savings when the tasks are decomposed and processors are specialized [2, 25, 40].
This theory is related to information theory and information economics since it deals
with the information content of each unit. However, the theory acknowledges that,
while saving switching costs, decomposition introduces communication and coordi-
nation costs in all cases except when the tasks are completely independent. Moreover,
specialized processors introduce additional risk associated with processor failure,
since any failure by a specialized processor has an impact on all tasks that share it
[19]. This theory also has difficulty quantifying the tradeoffs, and demonstrating why
and when the switching costs would be so significantly higher than the communication
and failure costs to provide the basis of fundamental structures.
This article adopts a variant of the last two theories and proposes "sharing" as a
fundamental basis for structure. Interacting models of a complex organization have
many common tasks, and avoiding duplication of a common task, for every model
that needs it, can be a significant source of efficiency. However, tasks exist in a
context; they are rarely identical in multiple contexts, which makes sharing difficult.
More specifically, tasks are optimized to fit into the context of a specific model, and
shared tasks cannot be optimized as effectively since they need to serve mUltiple
objectives. This tradeoffbetween savings resulting from sharing and the costs resulting
from suboptimization of shared tasks is critical in determining optimum structure.
The relationship to structure is through decomposition. Decomposition creates
smaller components that are more readily shareable by more models. The savings
produced by more sharing, and the costs resulting from suboptimization of the shared
components, determine the optimum level of decomposition and the variety of
structures it causes.
Example 7
The commercial bank in example I has two decision models associated with each
mortgage loan application: one for a short-term loan and one for a long-term loan.
Each model is executed for each loan applicant, and each consists of two tasks as
shown below:
Shorf-ferm loan decision Long-ferm loan decision
f I: homeowner constraint fl : homeowner constraint
f2: salary> 30k constraint f3: life expectancy> 20 years constraint
The complexity function for fl' f2' and f3 is given as cx where c is a constant, andx
is the number of applicants. Assuming 100 applicants per day, 60 percent of whom
are homeowners, 20 percent of whom have a salary> 30K, and 30 percent of whom
have a life expectancy> 20 years; the resulting parameters are c I = c 2 = c3 = 100c, s I
= 0.60, s2 = 0.20, s3 = 0.30.
Case I
If the two models were executed independently, the optimum sequence would be (f2'
f l)and (f3' f l ), respectively, leading to the costs of c2 + S2CI = 100c + 20c = 120c, and
c3 + s3cI = 100c + 30c = l30c, respectively. Total cost = 120c + 130c = 250c.
Case 2
Alternatively, consider the decomposition of these two models into three models, each
containing only one task, with fl shared by the two decisions. To achieve the benefits
of sharing, fl has to be executed first, otherwise f2 and f3 will produce different sets of
customers to be processed, and the benefits of sharing will be lost! With decomposi-
tion, fl will be executed only once at a cost of c I = 100c, and f2 and f3 will be executed
next each at a cost of s l c2 = s l c3 = 60c. Total cost 100c + 60c + 60c = 220c. Clearly,
decomposition pays since 220c < 250c.
198 LEVENT V. ORMAN
Case 3
However, by changing the homeowner percentage to SO percent, sl = O.SO, the decom-

posed model would lead to a cost of c I + SI c2+ SI c3= l00c + SOc + SOc = 260c, which is
clearly higher than the undecomposed models whose costs remain unchanged. In this case,
the savings of lOOc on the home ownership test task comes at too great a cost of
suboptimization of each model by changing the optimum sequence of executing tasks.
Case 4
Now also change the cost of tI by reducing it to 50c. The cost of un decomposed models
now is c2 + S2CI = 100c + IOc = 110c and c3 +s3CI = 100c + 15c = 115c, respectively,
with the total cost of225. The cost of decomposed models is c i + sIc2 + sIC3 = 50c +
SOc + SOc = 210. Clearly, decomposition is the optimum solution again.
Decomposition does not in and of itself reduce complexity; rather, it facilitates

sharing. Sharing reduces complexity since shared tasks do not have to be duplicated
for every decision model that needs them. Sharing also leads to local suboptimization,
since models cannot do their information processing in the optimum sequence but
have to accommodate the structure imposed by the shared task. This imposition is
realized through communication between the shared task and the models that receive
information from it, and it is often called "communication and coordination cost" [19].
Clearly, this cost is much higher than the cost oftransporting messages. It also involves
the cost ofaccommodating the messages received, by rearranging the tasks comprising
the receiving model.
Example 8
The retailer in example 4 has two decision models to make an advertising decision
and a production increase decision in each region:
Advertising decision model Production increase decision model

t I: low demand constraint (3: low production cost constraint
t2: low advertising cost constraint t4: adequate capital constraint
(3: low production cost constraint
The decision rule is to advertise if (I' (2' t3 are satisfied, and to increase production
ift3, (4 are satisfied. c i = c2=c3=c4= lOOc. sl =0.60'S2 = 0.20'S3 = 0.72'S4 = 0.30. The
critical question is whether to decompose (3 as a separate model to be shared by the
two decisions.
Case I
Assuming independence, the undecomposed models have the optimum sequence (t2,
t l , (3) and (t4, (3), respectively, and their costs are c2 + s2cI +s12c3 = 100c + 20c + 12c
= 132c, and c4 + s4c3 = 100c + 30c = 130c, respectively, with total cost of262c. The
decomposed models would lead to the optimum sequence of(t3' t2, t l ) and (t3' t4), with
the total cost of c3 + s3c2 + s3c4 + S23cI = 100c + 72c + 72c + l4c = 258c. Clearly
decomposition is optimal.
Case 2
Now assume interdependence of t2 and t3 where s23 = 0.20 < 0.72 x 0.20. The cost of
undecomposed models remains the same at 262c, but the cost of decomposed models
is now c 3 + S3C2 + S3C4 +S23cI = 100c+ 72c + 72c+ 20c =264c. Clearly, decomposition
is no longer optimal, demonstrating the critical importance of task interdependence in
determining structure.
Example 9
The continuous version of example 8 has the same decision models where the
advertising decision requires the tasks offorecasting demand, determining the adver-
tising cost function, estimating the production cost function, and maximizing yield;
and the production decision model requires forecasting demand, estimating the
production cost function, applying the short-term capital equipment constraint, and
minimizing cost. Past sales and production data are input into both models.
Advertising decision model Production decision model
t I: forecast demand tl: forecast demand
t2: determine advertising cost function t3: estimate production cost function
t3: estimate production cost function 15: apply capital equipment constraint
I ...
t4: maximize yield 6: minimize cost
Each task imposes a constraint on the decision and reduces uncertainty. Assuming
(I and (3 convert large input spaces to a small number of alternatives, and hence have
very small selectivities, and the task complexities are approximately the same, the
optimum solution would involve a decomposition and sharing of tl and t3. Many
organizational processes have such clear decompositions, leading to intuitive and
simple designs without formal analysis.
Structure and Reengineering

DECOMPOSITION, INTRODUCED IN THE PREVIOUS SECTION, HAS A NUMBER of implica-
tions for organizational structures. It explains a variety of commonly observed
structures and processes and predicts a variety of empirically testable characteristics
of structures and processes.
Decomposition Leads to Hierarchical Structures

Consider a model MI shared by a set of models E 1, ••• , En. Call MI the "manager,"
andE; the "employees," sinceMI produces an outputthat reduces the uncertainty faced
200 LEVENT V. ORMAN
by E 1, ••• ,En' and the output of Ml can be viewed as a directive since it restricts the
activities of E 1, ••• , En' Ml in return, can share a model T with other models M2, •••
,Mk• Call Tthe "top manager" for the same reasons, and possibly continue to create
higher-level managers in the same fashion. The resulting multilevel hierarchy is a very
common structure in both automated systems and human organizations. The structure
is constrained to be hierarchical since every model has only one manager whose output
is the starting point for that model's information processing. Each model can have
only one manager, since each model can share only a starting sequence of its tasks.
Sharing from the middle of the sequence will not lead to savings, since the shared task
will face different search spaces in each model due to the execution of different tasks
preceding it as demonstrated in example 7. (This assumption will be relaxed in the
muItimodel formulation presented later, leading to nonhierarchical structures). Obvi-
ously, the manager itself can share a starting sublist of its list of tasks, leading to a
multilevel hierarchy so common in structural design. Hierarchies follow directly from
the assumptions that models execute their tasks in a linear sequence and share from
the top of the sequence to realize the benefits of sharing.
Decomposition and Its Consequent Hierarchies Concentrate

"Power" in Certain Models
The shared model M (manager) described above is in a critical position within the
organization. It provides a critical output shared by many models (its employees), and
its failure affects many models. This is the essence of a manager's "power" in an
organization, measured in terms of its contribution to the organizational performance,
orin terms ofthe cost of its failure. Lower-level models E 1, • •• ,En are in a precarious
position with respect to the manager model. On the one hand, they depend on it for
their performance; on the other hand, the communication (directives) from the
manager often forces them to suboptimize locally and limit their contribution to the
organization. It is not unusual then for an employee to perceive the manager model as
limiting its performance and contribution, and robbing it of organizational power, as
we will see in the next proposition.
Decomposition and Hierarchies Lead to "Bureaucratic Alienation"

The organizational literature is replete with references to the alienation employees feel
within highly bureaucratic hierarchical structures [25, 27]. It is possible to explain the
alienation as the discrepancy between the contribution an employee could make to an
organization and the contribution that she or he is allowed to make by the structure.
The bigger the discrepancy, the more the employee would feel constrained by the
structure and prevented from making her or his maximum contribution and deriving
the benefits thereof. Consider the employee assigned to the short-term loan decision
in the decomposed model of example 7. Clearly, this employee would think that the
short-term loan decision model is grossly inefficient. Ifhe or she were allowed to make
the decision alone, as in the undecomposed model of example 7, as opposed to being
instructed by the shared model, he or she could make the decision much more
efficiently by changing the sequence of tasks, and reducing the cost from 160c to
120c. Consequently, the employee is likely to feel restrained by his or her manager
and unable to contribute his maximum to the organization, leading to alienation.
Of course, his narrow specialization limits his vision and prevents him from
observing the long-term loan decision model; hence, he is unable to see and
appreciate the sharing and its benefits to the organization. Sharing, and the
consequent benefits to the organization, put a straitjacket on individual employees
and prevent them from maximizing their own impact on the organization, as they
perceive it.
Automated Components of an Organization Have

to Be Structured Together with Human Components to

Create an "Organizational Fit"
Information systems literature is replete with references to "organizational fit" where
computer-based models and human-based models, each designed alone to be efficient,
do not work well when they are brought together [14, 29, 37, 44]. It is possible to
explain the organizational fit problem as the suboptimization resulting from structur-
ing each component separately, as opposed to designing a single efficient structure
that encompasses both components. Historically, the components were designed
separately since there was no effective framework to subject both the human and
the computer-based organization to the same type of analysis. Decision models
appear promising to provide that framework. Consider the two models of example
7, and assume that the short-term loan is an automated and the long-term loan is
a human decision model. When each one is structured separately, no decomposi-
tion is justified, since the benefits of sharing tasks between the two are not
considered. Alternatively, structuring the system as a whole leads to a decompo-
sition, as shown in example 7. Clearly, designing human and machine-based
models separately is suboptimal. Moreover, sharing small-model components
between systems and humans has been suggested; this forms the basis of "decision
support systems" [30, 39].
Automating Some Tasks May Have Extraordinary

Repercussions throughout the Organization, Requiring
"Business Process Reengineering"
Mere automation of a task, and the consequent reduction in the cost of executing it,
may lead to suboptimization. Reoptimization may require radical changes in the
complete organizational structure, as commonly suggested in the business process
reengineering literature [8, 11, 12]. The intuition behind this requirement is based on
the sensitivity of the optimum structure to the cost of executing tasks. Changing the
selectivity or the cost of a task may have a dramatic effect on the optimum structure,
202 LEVENT V. ORMAN
and the effects may propagate over many models as a result of sharing and the strong
interaction it creates. Example 7 demonstrated in case 2 that decomposition was
undesirable when all tasks were equally difficult to execute. However, when one task
was (presumably) automated, and its cost dropped 50 percent, decomposition became
desirable, making the optimum organizational structure dependent on the cost of
executing each task.
Low-Selectivity Tasks Are More Likely to Be Found

at Higher Levels of the Organizational Hierarchy
High-level managerial decision models are more likely to be i11-defined, fuzzy models,
with large amounts of external information processed in cursory and intuitive fashion
to focus the organization quickly and efficiently around some well-defined goals.
These are low-selectivity models by virtue of the fact that they receive large amounts
of unorganized, high uncertainty, external information, and produce small search
spaces focused around well-defined internal goals with little uncertainty. The desir-
ability oflow-selectivity models at high levels in an organization can be shown easily
within the model management paradigm. Example 7 informally demonstrated this
proposition since a task tl with high selectivity (80 percent) was not shareable, but
when its selectivity was reduced (60 percent), it became shareable, which led to a
decomposition, which in turn pushed tl upward in the task sequence and in the
structural hierarchy to realize the benefits of sharing. In general, a task t I is more likely
to be shared with all the consequences listed above, as its selectivity is reduced,
assuming that all complexity functions are monotonically nondecreasing. Given two
models (t2' tl) and (t3' tl) where t2 and t3 correspond to all tasks preceding tl in the two
models respectively, let the complexity functions of tl' t2, and t3 be cl(x), c2(x), and
c3(x) respectively, where x is the initial search space faced by the two models, and let
the selectivities be sl' s2' and s3' respectively. The cost of the undecomposed models
is given as:
since t2 and t3 are executed first with the search space x, and tl is executed next in each
model with an appropriately reduced search space. Similarly, the cost of the decom-
posed model is:
since tl is executed once with the initial search space, and t2 and t3 are executed next
in each model for the reduced search space. The proposition is that cd - Cu becomes
smaller (i.e., decomposition more desirable) as the selectivity sl becomes smaIJer. In
other words (cd-c u) ands l change in the same direction, or
d
= ~ (CI(X) + C2(SIX) + C3(SI X) - C2(X) - C3(X) - CI(S2X) - CI(S3X)
I
= ~ (CiS IX) + c3(slx) ) since all other terms are independent of sl

I
= x ! c2(Y) + x ! c3(Y)' by substitutingy = sIx.
~ 0, since all terms are nonnegative.
The derivatives are nonnegative since the complexity functions have been assumed
to be monotonically nondecreasing, and x is nonnegative since it is defined as the size

of the search space (or total reduction in entropy). The extension to multi variable
complexity functions is straightforward. Intuitively, this proposition is equivalent to
splitting relatively independent tasks into separate units, if one defines independence
of a task from the rest of a model as its closeness to the top of the optimum sequence
of tasks. Those tasks at the top are relatively independent of others since they can be
separated and shared with relatively small communication cost. Those at the bottom
impose heavy communication costs, since the rest of the model has to be rearranged
to absorb the communication from the shared task.
Among Interdependent Tasks, Those That Reinforce Each Other

(Low Joint Selectivity) Are More Likely to Be Found in
Higher Levels of an Organizational Hierarchy, and Those
That Negatively Affect Each Other (High Joint Selectivity)
Are Likely to Be at Lower Levels
Top-level decisions in an optimum organization are likely to be those that benefit the
organization as a whole, rather than benefiting a specific department at the expense
of another. The narrow political decisions are made at lower levels through battles
among departments. This conclusion follows immediately from the previous propo-
sition that low-selectivity tasks are more likely to be at the top and shared. Treating
multiple interdependent tasks as a single task, their joint low selectivity pushes them
up as a group in the hierarchy and allows them to be shared. Joint low selectivity means
positive reinforcement among the tasks since they increase each other's effectiveness
by reducing search spaces for subsequent tasks.
Cost Reduction May Lead to a Variety of Outcomes Depending on Task

Uncertainty and Task Specialization
The complexity of this analysis explains the contradictions in the organizational
impact literature of information systems, since automated systems often result in cost
204 LEVENT V. ORMAN
reductions for various organizational tasks. Similarly, the business process reengin-
eering literature, although explicit in the need to restructure, has great difficulty prescribing
what structural changes may be appropriate following automation and the consequent
reduction in various costs. The model management paradigm suggests four possibilities
depending on two factors. Task uncertainty refers to the uncertainty reduction achieved
by a task. Task specialization refers to the frequency of occurrence ofthe task withm the
organization (i.e., whether it is specific to a small set of decision models, or common to
many). High uncertainty-high occurrence tasks such as statistical decision models lead to
increased centralization when their costs are reduced; high uncertainty-low occurrence
tasks such as individualized decision support models lead to decentralization upon cost
reduction; low uncertainty-high occurrence tasks such as communication and coordina-
tion models lead to decentralization; and low uncertainty-low occurrence tasks such as
clerical decision models lead to increased centralization upon cost reduction. The intuition
behind these results can be summed up as a shift in resources and power toward those
models that become more efficient through cost reduction and automation.
Top-level, highly uncertain, and highly common tasks, when they are automated,
concentrate power and decision making in those models. Since they are common
within the organization, there are efficiencies to be gained from sharing these tasks,
and those who execute such tasks are in a position to make major contributions to the
organization by reducing their costs and derive the benefits by centralizing the
common task and consolidating the power resulting from the dependence of many
decision models on the common task. High uncertainty-low occurrence tasks such as
individualized decision support models, on the other hand, lead to decentralization of
structures and decisions, since these models, while gaining power, cannot wield
organization wide influence because of the specialized nature of their contribution,
and hence contribute to the dispersion of power. This is commonly observed in the
rise of staff functions and consequent dispersion of power in professional organiza-
tions such as universities and hospitals. Low uncertainty-high occurrence tasks also
lead to decentralization under cost reduction, since they push power and decisions
toward lower-level (i.e., low-uncertainty) models. This is commonly observed in
decentralization that results from communication and coordination technologies. Low
uncertainty-low occurrence tasks, on the other hand, increase centralization by
reducing their costs, since they push the power away from themselves to higher levels
in the organization. This is often observed when clerical tasks such as word processing
are automated, often leading to central control of these functions through secretarial
pools and word-processing departments. In sum, high uncertainty refers to top-level
tasks in the organizational hierarchy and low uncertainty to low-level tasks. High
occurrence allows the models to exert organization-wide influence; low occurrence
prevents it by pushing the power away to other models.
In model management terminology, assume that two models are given with tasks
(fl' (2) and (tl' (3), cost functions cl(x), cix), and c 3(x) and the selectivities sl' s2' s3 for
the tasks fl' f2' f3' respectively. Cost reduction may lead to four distinct outcomes,
depending on uncertainty and task specialization. Generalization to multiple models
with multiple tasks is straightforward by analyzing two models and two tasks at a time.
Such a restricted analysis is sufficient to determine the general tendencies. A more

general approach to determine the exact optimum solution under each condition is
introduced in the section on structural design. As demonstrated above, the cost of the
undecomposed model is:
Cu = czCx) + cix) + c1(sr:-) + c 1(s3x),
and the cost of the decomposed model where tl is shared is:
cd = c1(x) + Cis IX) + CzCSIX).
tl is the common, high-occurrence task; t2 and t3 are specialized low-occurrence tasks.

It is safe to assume that all three tasks have similar selectivities since neighboring tasks
within a shared sequence tend to have similar selectivities, and neighboring tasks are
more likely to exchange positions and lead to structural change than distant tasks in
the sequence. The difference of the two costs is:
cd-c u = c1(x) + CiS IX) + CiS IX) - czCx) -c 3(x) -c 1(s2x) -c 1(s3x).
implies that decomposition decreases costs, and hence leads

to more decomposition, that is, more centralization.
implies that decomposition increases costs, and hence reduces

decomposition, that is, less centralization,
implies no definite trend where the changes depend on the

exact values of the parameters.
Ifwe assume positive cost functions with nonzero search spaces, the following four
cases correspond to the four types of tasks experiencing cost reduction:
Case 1: High Uncertainty-High Occurrence Task (tl with low selectivity)
that is, less centralization.
lim that is, more centralization

Sl' s2' s3 ~ 0
cl~O
implying increased centralization as the cost of tl goes down.
Case 2: Low Uncertainty-High Occurrence Task (t 1 with high selectivity)
that is, more centralization

206 LEVENT V. ORMAN
lim that is, neutral

SI,S2,S3 ~ 1
cI~O
implying slightly decreased centralization as the cost of t I goes down.
Case 3: High Uncertainty-Low Occurrence Tasks

«(2, (3 with low selectivity)

SI,S2,S3 ~ 0
c2, c3 ~ 00
lim that is, less centralization

SI,S2' s3 ~ 0
c2' c3 ~ 0
implying decreased centralization as the costs of t2 and t3 go down.
Case 4: Low Uncertainty-Low Occurrence Tasks

«(2, (3 with high selectivity)
lim that is, neutral

SI,S2,S3~O
c2' c3 ~ 00
SI' s2' s3 ~ 0
c2, c3 ~ 0
implying slightly increased centralization as the costs of t2 and t3 go down.
Clearly, the impact of information technology on organizational structures depends
on a variety of factors, explaining some of the inconsistencies in the literature.
Structural Design
THE STRUCTURAL DESIGN PROBLEM INVOLVES CHOOSING THE OPTIMAL decomposi-
tion by balancing the benefits of sharing with the costs of communication (that is,
model suboptimization to accommodate shared models) [9, 18]. To determine the cost
of model suboptimization, we will formulate the problem of finding the optimum
sequence of information processing within a single model, and then formulate the
multimodel problem-that is, balancing the costs of deviating from the optimum
sequence in each model against the obvious benefits of sharing.
A model Twith tasks t l , ••• , tn is given. Each tj has a complexity function c;, and
selectivity Sj. Extension to multiple variables is straightforward by treating cj and Sj as
vectors. The selectivity si is defined as l-ri where ri is the percent reduction in search
space by executing the task Ii' The complexity of each task Ii is assumed to be
proportional to its search space, and it is reduced by the joint selectivity of all the tasks
that have been executed prior to Ii' The cost of information processing for a particular
sequence of tasks is the total cost of executing all the tasks in that sequence. The
single-model problem is to find the optimum sequence of execution for the tasks II" .. ,In
to minimize the cost of information processing. This problem is a special case of the
sequential decision making problem [24, 26] and can be formulated as a dynamic
programming problem [32, 38]. It is simpler to solve than the general sequential
decision making problem, since the tasks comprising the model (process) are given,
and they all need to be executed to satisfy the model. The only decision is the sequence
of execution that determines the amount of sharing possible. In the general sequential
decision-making problem, a strategy rather than a sequence is sought, and a stopping

rule is used at each step to determine if the next step is necessary. This analysis requires
a utility function for each task to compute whether its contribution to the decision
exceeds its cost. The model management approach does not require a utility function,
which is a major advantage since utility functions are notoriously difficult to obtain
and verify. The critical problem in business process reengineering is one of structure,
as determined by sequence and sharing, rather than computing the value of processes
and tasks, which leads to the special case developed here. Extensions beyond structure
and the determination of the value and the contribution of processes are left for future
work. Finally, considerable computational simplification is possible since some tasks
in every process are fixed in sequence because of input-output relationships with other
tasks. These fixed sequences can be consolidated into a single task, which simplifies the
structural design problem considerably, as shown in the case study presented below.
Single Model
Given the tasks II' ... ,In E T; selectivities sl' ... ,sn E S; and costs cl' ... ,cn E C,
where 1'; and Si are a set of tasks and the corresponding set of selectivities, respectively.
°
The objective is to find the optimum costj(<I» wherej(1) = and <I> is the null set.
Intuitively,j(T;) represents the optimum cost of the partial model T-TI' that is, the
minimum remaining cost after the execution of the tasks Ti . It is equal to the cost of
the next task Ip + the minimum remaining cost after Ti v Ip' The remaining cost after
all tasks have been executed is j(1) = 0, and the minimum remaining cost before any
task is executed j(<I» is the objective function. The problem is computationally
solvable with complexity of O(n!).
Multimodel Fonnulation
The single-model formulation can be extended in a straightforward fashion to accommodate
208 LEVENT V. ORMAN
multiple models and the sharing of tasks among them.
Given n tasks f" ... , fn E T, with selectivities s), ... ,s n E S, respective costs c), ... , en E
C, and r models each consisting of a subset of those tasks M), ... , Mr ~ T,
i,j=r
I «illi) c i ) - I «PISi) c) +f(Tlu fl ' ... ,Tr Jt r )

i-I i,j=)
i <j
T=T
; I
t;= ~
wheref(M), ... ,Mr) =0 and the optimum solution is given by f(<1>, ... ,<1».
Intuitively, the formulation is similar to the single-model case.fiT), ... ,Tr) repre-
sents the optimum cost of the partial model M)-T) , ... ,Mr-Tr' that is, the mimmum
remaining cost after the execution of T" ... ,Tr • It is equal to the cost of the next step
(f), ... ,fr) + the remaining cost after the execution of(TIUf l ,. " ,TrUfr). The tasks
that are common to multiple models at the beginning of their sequences are executed
only once, leading to the subtraction of their costs in the formulation for every
duplicate count. The remaining cost after the execution of all tasks of all modelsf(MI'
... Mr) = 0, and the remaining cost before the execution of any tasksfi<1>, .... <1» is
the objective function. The problem is computationally tractable with complexity
O(n!r).
A Case Study: Corporate Purchasing System
A purchasing requisition originates in a department. The originating department

identifies possible vendors before forwarding the requisition to the purchasing depart-
ment. The purchasing department requests bids from vendors using a standard "request
for quotation" (RFQ) form. Once the bids are received and a vendor is selected, a
purchasing order is prepared and coded with the account number for the originating
department, and copies are sent to the vendor, the originating department, and filed in
the purchasing department.
Upon receiving the shipment, the receiving department sends a warehouse receipt
to purchasing. When the invoice is received, it is audited at the purchasing department
who compare it with the purchase order and the warehouse receipt. Once the auditing
is complete, the invoice is sent to the accounting department for payment, or returned
with an explanation in case of an error. Here is a simplified list of tasks comprising
the purchasing system:
f): select vendors

f 2: request bids
t): prepare purchase order
f 4: receive warehouse receipt
. . .
ts: receive invOice
t6: audit invoice
t7: pay
t3 t4, and ts can be combined into a single task to since their sequence is fixed and not
controllable. The vendor selection in a department takes on average 60 minutes of
search through vendor files and eliminates 80 percent of all vendors as inappropriate
for the item needed. RFQ forms are more complex. They take about 120 minutes to
fill, duplicate, and send to the selected vendors. An expected 90 percent of vendors
are eliminated through the bidding process since they submit clearly noncompetitive
bids or do not respond to the RFQ at all because they are unable to fill the order at this
time. Selecting the best vendor, preparing the purchase order, and receiving the
corresponding warehouse receipt and the invoice takes approximately 60 minutes on

average. Auditing the invoice takes 30 minutes, and an average 10 percent of them
are found to be in error and returned. Issuing payment vouchers takes 30 employee
minutes (2 employees, 15 minutes each). Using expected time of work as a measure
of complexity, and (I-reduction in search space) as a measure of selectivity:
SI =0.20 s2=0.1O so= I s6=0.90s7 = I

c l =60 c 2 =120 co =60 c6 =30 c7 =30
Case I
The dynamic programming formulation returns the sequence t l ,t2,tO,t6h as the opti-
mum solution with the cost 60+24+ 1.2+0.6+0.5 = 86.3
Case 2
Now consider two separate departments executing the identical tasks, except that
selecting vendors (t l ) is specific to each department, since the relevant vendors are
different for each department. The dynamic programming formulation of the multi-
model problem returns the sequence t2,tl ,to,t6h as the optimum sequence in each
department with t2 shared, corresponding to the centralization of the bidding process.
The total cost is 120 + 2 x ( 6+ 1.2+0.6+0.5) = 136.6, clearly less than the decentralized
bidding solution with the cost 2 x 86.3 = 172.6.
Case 3
Consider the implementation of departmental vendor databases which largely auto-

mates the vendor search process t l , reducing its cost to 30. This reduces the cost of
centralized bidding solution ofCase2 to 120 + 2 x (3+ 1.2+0.6+0.5) = 130.6. However
the optimum solution using the new parameters is decentralization of the bidding
process back to the departments (although the cost of bidding has not changed). The
optimum solution in each department is again tl,t2,tO,t6,t7' with the total cost for two
210 LEVENT V. ORMAN
departments 2 x (30+24+ 1.2+0.6+0.5) = I 12.6, which is clearly less than the cost of
centralized bidding solution of case 2 which is now 130.6.
Case 4
Consider the implementation ofEDI technology to link the company with its suppliers,
largely automating the request for quotations and the bidding process, reducing its cost
to 60. This reduces the cost of the decentralized bidding process of case 3 for the two
departments to 2 x (30+ 12+ I .2+0.6+0.5) =88.6.
However, the optimum solution changes again to the centralization of the bidding
process. The optimum sequence for each department is again t 2,t1,tO,t6h, with t2
centralized and shared. The total cost for the two departments is 60 + 2 x
(3+ 1.2+0.6+0.5) = 70.6, which is clearly less than the cost of decentralized solution
88.6.
Conclusions
THERE IS CONSIDERABLE EVIDENCE THAT IT HAS A SIGNIFICANT IMPACT on organi-
zational structure, although the exact nature and characteristics of that impact are not
weII understood. On the prescriptive side, IT creates significant opportunities for
increased efficiency through business process reengineering, although again the
precise nature and the direction ofreengineering efforts are not weII established. The
decision model paradigm of organizations provides an effective methodology to
describe and quantifY the organizational impact of IT, and to direct and specifY the
appropriate reengineering efforts to maximize the benefits from IT. Decision models
provide a simplified analytical model of organizations as decision-making entities,
and organizational structure as the arrangement of decision models and the decision
tasks comprising them. An analytical model quantifies a variety of organizatIOnal
issues, including the need for business process reengineering after the introduction of
IT, and the exact conditions under which IT may lead to more or less centralized
structures. Reoptimization of business processes following the introduction of IT is
formulated as a dynamic programming problem and shown to be computationaIIy
tractable.
Like aII analytical models, the formulation emphasizes some characteristics of tasks
that are heavily influenced by IT, but assumes away some other characteristics.
Behavioral characteristics such as employee skiIIs, motivation, incentives, and resis-
tance are not part of the mathematical model, although they can significantly affect
the feasibility of transition from the current structure to a more efficient structure
envisioned by BPR. The emphasis in this paper is on the determination of the efficient
structures, but not on the transition strategies from the current state to the more
efficient state. Effective transition strategies are left for future work.
A major assumption in the model is the view of organizations as collections of
decision models that process information and reduce uncertainty. This information-
processing view of organizations has been extensively studied in the literature, and its
strengths and weaknesses are well documented. It models information-processing

tasks of managers well, but it is less successful in modeling the physical processes of
a manufacturing-type environment. These shortcomings also apply here. The ap-
proach developed in this paper applies primarily to the information-processing tasks
of an organization, where successive tasks reduce uncertainty for the organization and
eventually lead to a managerial decision. It is possible to extend the model to physical
processes by modeling tasks as reducing "uncertainty" in the nature of a final physical
product. However, this is a rather unnatural model, and other process modeling
techniques may well be more appropriate for describing physical processes.
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A Model Management Approach To Business Process Reengineering

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Journal of Management Information Systems

ISSN: 0742-1222 (Print) 1557-928X (Online) Journal homepage: http://www.tandfonline.com/loi/mmis20

A Model Management Approach to Business

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LEVENT V. ORMAN is Associate Professor ofInfonnation Systems at Cornell Univer-

ABSTRACT: A prescriptive and analytical approach is taken to business process

BUSINESS PROCESS REENGINEERING IS THE POPULAR TERM for comprehensive

hierarchies since it automates some of the middle-management functions, facilitating

Business Processes as Decision Models

Extended mortgage decision model

with parameters c i = c 2 = c3 = 100c, sl = 0.60, s2 = 0.20, and s3 = 0.70.

Assuming independence of selectivities, the optimum sequence is (t 2, f l, t3) from the

Adverfising decision model

+ s12c3 = 100c + 20c + 12c = 132c.

Entropy = - L: i loo log2 [21100 ) = _ioo 2~00 log2 [2 1100 ) = 100,

which is equal to the search space.

A product pricing decision requires meeting a revenue goal within a short-term

Initial entropy =-10 log 3;

Final entropy = -fz ~ log (~)dx = I;

Entropy after tl = -10 -± log (-±)dx = 2;

Entropy after t2 = -li (i)dx

Entropy reduction by tl = ~2 = 0.50

Selectivity SI oftl = 1--0.50 = 0.50

Entropy reduction by t2 = 1--;.5 =0.25

Selectivity s2 oft2 = 1-0.25 = 0.75

Entropy reduction by t l , t2 = ~1 = 1.00

However, by changing the homeowner percentage to SO percent, sl = O.SO, the decom-

SOc + SOc = 210. Clearly, decomposition is the optimum solution again.

Decomposition does not in and of itself reduce complexity; rather, it facilitates

Advertising decision model Production increase decision model

Structure and Reengineering

Decomposition Leads to Hierarchical Structures

Decomposition and Its Consequent Hierarchies Concentrate

Decomposition and Hierarchies Lead to "Bureaucratic Alienation"

Automated Components of an Organization Have

to Be Structured Together with Human Components to

Automating Some Tasks May Have Extraordinary

Low-Selectivity Tasks Are More Likely to Be Found

= ~ (CiS IX) + c3(slx) ) since all other terms are independent of sl

= x ! c2(Y) + x ! c3(Y)' by substitutingy = sIx.

~ 0, since all terms are nonnegative.

to be monotonically nondecreasing, and x is nonnegative since it is defined as the size

Among Interdependent Tasks, Those That Reinforce Each Other

Cost Reduction May Lead to a Variety of Outcomes Depending on Task

Such a restricted analysis is sufficient to determine the general tendencies. A more

Cu = czCx) + cix) + c1(sr:-) + c 1(s3x),

and the cost of the decomposed model where tl is shared is:

cd = c1(x) + Cis IX) + CzCSIX).

tl is the common, high-occurrence task; t2 and t3 are specialized low-occurrence tasks.

implies that decomposition decreases costs, and hence leads

implies that decomposition increases costs, and hence reduces

implies no definite trend where the changes depend on the

Case 1: High Uncertainty-High Occurrence Task (tl with low selectivity)

that is, less centralization.

lim that is, more centralization

implying increased centralization as the cost of tl goes down.

Case 2: Low Uncertainty-High Occurrence Task (t 1 with high selectivity)

that is, more centralization