A major benefit of reengineering is that it drives down costs. Most reengineering business cases are extremely compelling. The improvement in margins and profitability can be dramatic. To illustrate the extent of cost reduction, let us compare the cost of approving a loan in the current process and the reengineered process presented earlier. Labor costs are driven down in two ways—through time reduction and step elimination. Time reduction is a simple concept. Time is money. Assume that the analyst in the loan-granting process reduces the time he needs to review a loan from two hours to thirty minutes by using technology. If his hourly labor rate is fifteen dollars, then his labor cost per loan is thirty dollars using the current process. In the reengineered environment, the cost would be $7.50. The total labor cost in the reengineered process is 75 percent lower than in the current process. Second, the reengineered environment mitigates the number of steps required to perform a process. Looking at the financial implications of the process changes illustrated in Exhibits 3-2 and 3-3, the current environment requires eight steps to render a loan decision. At most it takes five steps to make a decision in the reengineered process. The elimination of these steps results in savings of approximately twenty-six dollars per loan. The cost per loan declines by 55 percent if an analyst reviews the loan and 90 percent if it is automatically approved (see Exhibit 3-4).

Exhibit 3-4: Cost reduction.

Table cost Reduction Illustration—Loan Granting
Current					Reengineered (Analyst Review)					Reengineered (System Review
Step	Employee	Time (minutes)	Labour Cost (per hour)	Cost of Step	Step	Employee	Time (minutes)	Labour Cost (per hour)	Cost of Step	Step	Employee	Time (minutes)
1	Sales	15	20	$5.00	1	Sales	15	20	$5.00	1	Sales	15
2	Sales	10	20	$3.33	2	NA	1		$0.00	2	NA	1
3	Sales	5	20	$1.67	3	Analyst	30	15	$7.50	2	NA	0
4	Manager	10	25	$4.17	4	Analyst	10	15	$2.50	4	NA	0
5	Manager	5	25	$2.08	5	Sales	20	20	$6.67	5	Sales	20
6	Analyst	90	15	$22.50
7	Analyst	10	15	$2.50
8	Sales	20	20	$6.67
Total		165		$47.92			76		$21.67			36

Cycle time is the time it takes to perform a certain process. We talked about how time increases efficiency. Reducing process time helps the competitive position of a business. Competitive abilities improve by reducing the time it takes to accomplish a project, process, or a reaction to customers. The definition of project completion is broad in scope—it could mean anything from product development to rolling out new technology. Process completion is critical in a fast-moving environment. Compression of the product development process is critical in high technology.

Firms can optimize the use of resources by reengineering. Resources are anything that costs money, such as people, materials, and computer time. The loan-granting process can be improved through shifting resources in steps four and five from high-cost management time to lower-cost analytical staff (see again Exhibit 3-4). Management review time is no longer required, saving approximately six dollars per loan. In the reengineered process, the responsibility of sales is to enter the application into the digital approval system. This creates a win situation for sales staff. The elimination of steps two and three allows salespeople to sell more by focusing their efforts on calling potential applicants, which increases their income potential. They no longer need to be involved in screening loan applications. The