In this paper we presented the diagnosis and re-design of farm systems as part of an innovation process involving farmers and scientists to improve the sustainability of family farms in south Uruguay. Although we selected farms with a large variation in resource endowment, they shared the main critical points of sustainability: low productivity and deteriorated soil quality. The participatory approach followed to diagnose and re-design the farm systems was successful in improving significantly family income and labour productivity and at the same time reducing soil erosion and improving SOC on most farms.