I believe that there are two major opportunities for companies to achieve a quantum improvement in performance. One is external integration, or the integration of processes with customers, suppliers, and other intermediaries, such as third-party providers. This is often referred to simply as collaboration.

The second, which I address in this column, is internal integration—an operating model and processes that fluidly span organizational units within a company.

Both offer opportunities to reduce operating costs, improve customer service, and enhance asset productivity. In theory, those improvements can be achieved in a straightforward manner. In practice, however, it often proves difficult to capture those significant but elusive benefits.

It's surprising to see how many companies fail to realize the benefits of internal integration. It's a shame and a pity that they don't take advantage of the operational improvements this approach can offer, since all of the factors leading to those improvements are within their control.

There are several reasons why companies overlook internal integration. They include:

Metrics and incentives: In a well-intentioned effort to drive accountability and motivate managers to achieve high levels of performance, most companies have created separate metrics and related incentives for each function or department. Thus, manufacturing is evaluated and rewarded based on product costs; warehousing on handling cost per case; transportation on cost per ton-mile; and inventory management on the number of turns.

What this does is reinforce the creation of functional "silos." It leads companies to miss opportunities to maximize system performance in favor of boosting performance in isolated areas. To complicate matters, this tendency to reinforce silo thinking becomes even more prevalent as companies grow larger.

Lack of process thinking: Management often fails to recognize the benefits of managing processes as well as specific functions. Not only do companies need to create effective cross-functional processes, but they also need to assign process owners and define metrics for key processes such as product development, supply and demand planning, and fulfillment/replenishment.

Functional rotation: Companies that rotate managers through different functional responsibilities tend to create structures where there's better understanding and cooperation across the boundaries that exist between functional areas. In companies without such a program, on the other hand, I have found that ignorance of the management issues of other areas, as well as rivalry—in some cases, downright antagonism—between functional groups preempt those companies' ability to achieve internal integration and thus enhance performance and competitiveness.

It's important for companies to foster and develop deep functional expertise within management. It is one of the keys to achieving a more efficient operation. To gain maximum impact, however, that expertise must be combined with a perspective that integrates functional activities with horizontal processes. Without that combination, functional silos will limit your company's potential.

William C. Copacino is group chief executive of the Business Consulting Group at Accenture. A frequent speaker before business and professional groups, Mr. Copacino has a number of publications to his credit, including the book Supply Chain Management: The Basics and Beyond (The St. Lucie Press, 1997). He is based in Accenture's Boston office, 100 William St., Wellesley, MA 02181. Phone (617) 454-4480.