‘Getting it Right” – Organisational restructuring in a downturn
Analysis from the US
A recent survey of more than 800 global managers found 53%[1] of all respondents believed the structure of their industries will dramatically change as a direct result of the financial crisis. To combat these changes, many organisations need to start with a blank sheet of paper and design a ‘new way of winning’ if they are to reduce cost and improve organisational performance.
Organisations that embark on mass downsizing only weaken their company, leaving it without the capabilities to capitalise once the market rebounds. Simply relying on across the board cuts to seek ‘fairness’ at the expense of competence negatively impacts performance. These poor restructuring decisions lead to a range of unhealthy side effects, including:
- Fragmented organisational culture and working relationships
- Rehiring old employees at an increased costs
- Decreased revenue opportunities
- Reduced innovation
- Inconsistent service levels and increased customer turnover
- Loss of organisational identity and increased staff turnover
A prior study conducted in 2004 found that 54%[2] of companies surveyed hired back many of the same employees they initially laid off. This was evidenced in the 1990’s when US global telecom giant, AT&T, made knee-jerk downsizing decisions to reduce costs, only to result in the mass re-hiring of the same individuals to cope with increased demand.
Smart Organisational Restructuring: The Right Way
Too often organisations simply look for immediate cuts to labour costs in areas that don’t appear ‘strategically crucial’ to the organisation. Organisations must look a little deeper. Leaders need to ask a series of simple questions to confirm why and how their organisations should restructure during market contraction. Questions relating to value propositions, capacity compared to market demand, capabilities, human capital allocation and talent requirements can identify the underlying drivers necessitating the type of restructure the organisation needs to implement now.
The ultimate goal of restructuring isn't simply to shrink the company and reduce cost, but rather to strategically apply organisational design principles to dramatically improve organisational performance and respond to changes in the external environment. To solely focus on cost limits an organisation’s ability to generate revenue, and negatively impacts an organisation’s positioning to gain market share during an economic upturn. By focusing its restructuring effort around three key principles (Market, Capability and Optimal Performance), leaders will ensure their organisations are fit and resilient enough to recover fast out of this financial downturn.
Figure 1 – ‘Smart’ Organisational Design Principles
Principle 1: Align organisation with external market
Changing market demand is leading to a shift in the customer relationship landscape. To respond to these changes, organisations need take a two-pronged approach to achieving market alignment.
Firstly, organisations need to understand what has changed, and organise around markets that will deliver the highest returns. Consumer behaviour, purchasing and priorities are shifting as a direct by-product of the current economic climate. Organisations need to understand ‘what is important’ within its core markets and rapidly react. Leadership must figure out how the important work delivers value in these markets and streamline operations accordingly. They must search for innovative ways to remove or combine business units, departments, processes and entire layers of management that don't create value. For those products and services adding value, organisations should forecast demand for these value-added products and services and position the right labour accordingly.
Proctor and Gamble have successfully adopted this ‘market-back’ approach by designing four organisational “pillars” that reflected their customer demands. Market alignment was achieved through the design of a responsive front-end structure. For large accounts (Wal-Mart, Carrefour), formal cross-functional teams were assigned to retailers “large enough to justify the effort” and who demanded closely coordinated operations. Whereas smaller customers were coordinated by regional functions – sales, marketing, operations etc. delivering a more generic service. By applying a market-back approach to restructuring, the appropriate labour is identified and positioned to directly contribute to market revenue which creates greater individual accountability for performance in a downturn
Once the organisation has understood its changing market, they must ensure relationships are forged with the multiple points across their customers’ organisation. Leaders need to organise around business-to-business (B2B) relationships so they are not reliant on single points of contact. Organisations must understand the multiple buying behaviours of its customers in each relationship and restructure around these to deliver ongoing value. The financial crisis is impacting all organisations, and employee churn is occurring in customer organisations as well. Those organisations relying on single point relationships run the risk of losing a handle on what the market actually needs due to the churn and attrition of the customer’s human capital. As a result, organisations must ensure the alignment effort strengthens B2B, not business to ‘informal’ networks.
This new way of winning creates a more precise approach to the ever-challenging human capital planning concept confronting organisations during the crisis. Positioning human capital to deliver value around the core product and service offerings gears the organisation to optimise revenue.
Principle 2: Define the capabilities required to deliver
Once the ‘new way of winning’ has been determined, organisations need to identify the capabilities required to deliver it. When restructuring for the downturn they need to focus their effort to deliver a business model that plays to its organisational capabilities. Organisations must invest in the portfolios that deliver value and re-focus efforts on these capabilities by designing a structure that optimises value creation. During this economic downturn organisations need to concentrate their corporate strategy on what drives future growth and financial performance. This strategy requires organisations to prune portfolios that do not meet these criteria as described in principle 1, and refocus the structure and labour around these organisational capabilities. Once the capabilities and portfolios to be invested in are restructured, business leaders must identify high-performing individuals and match their people capabilities to the organisational capabilities that deliver results. The most challenging people issues facing business leaders relates to the retention of its outstanding performers and positioning them to roles delivering optimum value in the new organisational structure. Now more than ever leadership needs to have in-depth knowledge of its people capabilities and act fast in matching the right people to the right roles that will optimise organisational capabilities and maximise returns.
A key enabler to effectively positioning outstanding performers, is to look at talent management through a different lens. Organisations need to position their top performers, so their skills are utilised to deliver value. Organisations can no longer rely on fast-tracking their high-performers up a linear structure. By taking this strategic view, individuals need to be assessed on their capabilities, strengths, and weaknesses and position them in alignment with what the organisation needs to deliver its strategy. This may result in lateral moves, new portfolios to manage, and more streamlined operations. Talent management now requires leaders to take foresight and act fast and treat this new approach to talent management as a key organisational enabler. This approach will ensure the best talent is retained, and creates a competitive advantage that propels your business rapidly once the market rebounds. The time is now to turn human capital into a competitive advantage by creating stronger alignment between an organisation’s strategy and it’s capability at the corporate and people level to execute and return the rewards.
Principle 3: Optimal performance, measures and controls to support the future and cross skill people capital to offset reliance on more employees
Restructuring organisations must also renew performance measures and controls to ensure success can be tracked. During a recession, an organisation’s human capital needs strong direction. To complement any restructure effort, KPI’s, service level redesign, governance, and incentive management strengthens the linkage between the achievement of strategic objectives and supports people performance. Key measure and control benefits when restructuring the right way are:
- The performance bar is reset
- People performance is realigned to new strategic objectives
- Visibility into performance against refreshed objectives enables greater control and coordination
- Human capital incentives are realigned to reflect new performance targets
- Increased accountability for delivering value for each individual is achieved
As an example, IBM introduced collaborative measures and controls to create optimal performance of cross-functional teams to support their transformation from a product-based company to a customer-centric organisation. Both product and customer teams were set up to maximise revenues. IBM introduced a ‘fair share’ methodology where cross-functional teams that contributed to revenue, were measured against shared KPIs. Introducing innovative measures and controls to optimise performance during an economic downturn is essential to building cohesive integrated functions that optimise the delivery of new strategies.
Research has showed that introducing optimal performance management practices, innovative controls, measures and stimulating ways of incentive management will deliver up to 40%[3] productivity benefits. It is this productivity that is crucial to generate sufficient revenue in turbulent times. During this uncertain economic condition, organisations need to tightly monitor operations and performance in a way that maintains constructive messages to be received by an organisation’s people. Seeding positive performance metrics and targets are known to grow high performance. Encouraging high performance through smart strategic measures and controls under the new organisational design is the answer to the effective delivery of the organisation’s objectives. These measures and controls channel staff to high performance and provide the appropriate pathways and incentives to guide its top talent through a period where high performance is the difference between survival and extinction.
Finally organisations, need to equip employees with an ability to cross-functionally work on multiple operations that are not pigeon holed within their core skill set. For example, a HR professional should not be bound to work on simple strategic and transactional HR activities. In times of a recession like the looming 2011 – Recession 2.0, professionals need to be deployed on activities that fall outside the realm of their core skill-sets to help unlock and deliver value for the greater good – their organisation, whilst lowering costs of the need to introduce new talent into the company.
Conclusion
While no leader welcomes the task of organisational restructuring, the process has the potential to deliver significant improvements in both the short and medium terms. Completing restructuring activities that adhere to three principles will enable the organisation to:
- Achieve market alignment that will results in customer acquisition and retention
- Match people capabilities to organisational needs that positions the right people in the right roles
- Design optimal performance measures and controls to track success and intervene in real-time if required
If these principles are achieved, leadership ability will be enhanced to develop an appropriate structure with the right people to drive efficiencies and growth, as well as creating an opportunity to make the organisation stronger over the long-term.
[1] Banjerji, S., McArthur, N., Mainardi, C., & Ammann, C. (Jan 2009). Recession Response: Why Companies are Making the Wrong Moves.
[2] Finn, L, Onofrio, C (Feb 2009). Talent Fitness in a Time of Layoffs.
[3] Boselie, P., Dietz, G., & Boon, C., (2006) Commonalities and contradictions in HRM and performance research, HRM Journal, Blackwell Synergy
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