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Avoid Cost Creep after Expensive Re-Organisations

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COVID-19 has been the trigger for a round of reorganisation including individual businesses, as well as industry sector rationalisation with accompanying M&A activity.  We also know that many reorganisations fail to deliver sticky cost reduction after expensive redundancy programs.  Costs creep back into the business over time and in different ways.

How do you stop this cost creep after an expensive and emotional restructure?

Hopefully, the days of the swingeing 10% flat across the board cuts are rare. I have not seen one of these “across the board cuts” produce sustained margin improvement.  These cuts are typically a scramble to keep a company afloat through the bottom of a commodity cycle or an imminent existential crisis.  Businesses are typically more thoughtful and considerate of business strategy, customer value and processes than simplistic across the board cuts.  Will this remain true in the VUCA world of COVID-19?

 

What Do Successful Re-Structures Look Like?

 

Successful and sustainable restructures are:

  • Based around a deep understanding of “core business”
  • Clear about the purpose of the change and measures of success
  • Survivor-centric not casualty-centric
  • Change managed with genuine collaboration
  • Closed out with a post-implementation review

Know Your Core Business and the “Why” of the Re-Structure

You need to have a deep understanding of your core business before you start re-structuring.  It is often assumed that “of course we know our core business”.   Many businesses have had epiphanies about their core business which has triggered divestments, acquisitions or outsourcing of ‘non-core’ activity.

Over the last 30 years, we have seen the rise of outsourcing in many forms.  This includes Shared Service Centres, 3PL and other outsourcing variants. This trend has happened as businesses look deeply at their core business with a LEAN mindset including attention to the seven wastes.  One of the seven wastes of LEAN or Muda is “transport”.  Retailers realised that moving goods was not core business and outsourced it to 3PL providers when their own margins were squeezed.  It is amazing how many companies have retained their own fleet of vehicles with all the associated costs, risks and overheads without deeply considering their core business.

This anchored thinking may lead to inherently inferior economics which ultimately lead to dramatic and damaging cost cutting in other areas to prop up the underperforming non-core area.  Standardised business processes such as Finance and Payroll are typical outsource targets as these overheads do not provide a competitive or, typically, a comparative advantage.  These functions can be performed more efficiently and effectively by businesses where transactional processing is their core business.  Think here about journaling, debtor management and payroll processing.

I remember the argument of “we’re special so that won’t work here” from a line manager during a re-organisation and implementation of radical process standardisation.  The response from the project owner was a curt and brutal response of “Special means expensive. Expensive means divestment.”  Know your core business and what is genuinely special about your core.  It is probably not your transactional work.

Clarity of Purpose and Measures of Success

The swingeing cut of 10% has clarity of purpose.  BUT, It is accompanied by the risk of cutting into current and future core capability needed to execute strategy.  This cutting now often leads to later and insidious cost creep greater than that saved by the original cost cutting.  Why are you changing your structure?

 

“are we re-structuring or re-configuring? “

Re-structuring is a likely best option if it re-enforces a business existing comparative or competitive advantages.  This takes us back to understanding your core business and how that aligns to your advantage in your current sector or an aspirational adjacent sector.

 

Re-configuring does not change the company’s underlying structure.  Re-configuring is an option if you are exploiting advantages of internal interdependency or grouping organic business units with acquired business units to realise synergy.

Whether you’re re-structuring or re-configuring, build in steps to find underutilised assets.  This may be building space, vehicle fleets, business processes or people.  People may be underutilised if there is not sufficient flexibility to deal with peaks and the troughs.  Remember the adage that work expands to fill the available time.  Transaction-centred functions should be considered for outsourcing along with other potential Muda wastes including any transport costs and inventory holdings.

Some suggested measures of success for organisational change:

  • Safety performance
  • Risk management plan and mitigation in place
  • Improvement in service delivery
  • Reduction in spans (Average number of direct reports) and layers in the business
  • Increased transactional efficiency and silo removal
  • Overhead to revenue improvement
  • Employee related liabilities on the balance sheet
  • Employee engagement including absenteeism measures
  • Overtime and casual hours as a percentage of a ordinary hours
  • Headcount
  • Employee turnover

Survivor-Centric

Our natural reaction is to feel sorrow or grief for employees that have left the business.  This is perfectly normal and would be a somewhat concerning cultural indicator if this was not the case.   However, you do need to manage the productivity dip that happens after a round of lay-offs.  This has been estimated at around 20% productivity loss.  This does not include safety and quality declines.

 

“After a layoff, survivors experienced a 41% decline in job satisfaction, a 36% decline in organisational commitment, and a 20% decline in job performance”.

  • Sandra J. Sucherand Shalene Gupta, 2018, HBR

 

So what does survivor centric mean?  It means leaders focus on the well-being, engagement and productivity of those people staying with the business rather than focusing on the people leaving the business.

How do you do that?

  • Live your organisational values. Any dissonance between values and leader behaviour will undermine trust
  • Treat departing employees with care, fairness, respect and dignity. This will give the remaining employees a sense of trust that the business will treat them well should the issue of headcount reduction arise.
  • Communicate what will happen, how it will happen and when it will happen. The best implemented redundancy programs are signalled to employees with few people being “walked” on the day.  It allows an orderly transition of work and process change.  It allows a grieving process as well as an opportunity for leaders to influence their teams.  I know that this is not always possible for some roles like IT or sales where there are business risks to address.
  • Communicate the change management plan intensively and extensively to your teams. Re-structuring activity should be supported by a well-thought and agreed change management plan.
  • Implement an “after care” plan to check back in with employees and, even ex-employees. Talk openly about the changes, what went well and lessons that were learned (good and bad).
  • Be clear about what “finished” looks like for customers, employees and shareholders. Use your measures to communicate progress towards “finished” e.g. when we hit x then we are finished this stage.

 

Change Managed with Genuine Collaboration

A clearly articulated change management plan with the methodical application of change leadership is mission critical during re-organisations.  During re-organisation businesses are incredibly vulnerable to customer, competitor and employee perceptions about the ability of the business to manage through the change.

I don’t think it matters which methodology is used as long as the steps are clear and planned.  Moreover, it is important that the change process is led by the line managers rather than HR.  HR has a role to provide a framework of change and technical advice on employment matters.  In my humble view, nothing damages this type of change more quickly than HR undermining or taking over the role of line leaders in conversations and communication with line employees.

Change management, clear measures and genuine leadership collaboration allows people to work with their leaders to explore options that could contribute to business targets.  People will surprise with the innovation, adaptability and speed that they can make changes when there is a well-led compelling vision.

 

Lead people away from the burning platform to a compelling vision of the future

 

 

 

 

 

The burning platform has a relatively short shelf life and ends when people are clear of the platform.  A compelling vision is energising, consistent, meaningful and well shared through communications.  I think particularly of one business that used the phrase “Survive Strive and Thrive” over a three-year period.  This came to communicate the stages of change as well as the underlying success measures.  It resonated.

Close Out with a Post-Implementation Review

The post-implementation does a couple of things.  It flags the end of the process as well as the organisation’s commitment to continuous improvement.  It also signals that this change was not a one-off and the next will be better executed.  The last step is to communicate the lessons learnt as transparently and openly as possible.  This builds trust and collaboration as well as resilience for the next re-organisation.

Finally, closely monitor your measures until

The Lessons Well Learnt by Others

If you’re leading a re-organisation, then:

  • Be clear on purpose based on your core business
  • Build simple and clear measures of success upfront
  • Be survivor-centric not casualty-centric
  • Have a clear, methodical change management plan led by line managers supported by awesome communications
  • Finish with a post-implementation review and communicate the results
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Foresight HR

Foresight HR

Foresight HR helps businesses improve their productivity, culture & performance to deliver sustained bottom line results.

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