10. Major Restructuring—Gaining Sustained Value from Your Reorganization
Chapter Contents
Handling Related “People” Risks
Applying Tangible Culture to Shared Services
Partnering with Internal Customers
Overview
This chapter applies Tangible Culture to major restructuring efforts, using shared services as an example. The business and culture challenges are discussed, along with steps and examples of applying Business Practices, Right vs. Right, and Outcome Narratives using our composite experiences. This chapter will help people who are planning and executing major restructuring efforts. Also, depending on the nature of their restructuring, readers may also benefit from insights in Chapters 8, 9, and 11 (“Mergers and Acquisitions—Managing the Common Sources of Culture Clash,” “Alliances—Finding Ways to Leverage Your Collective Capabilities,” and “Major Transformation—Addressing Your Plan’s Hidden Barrier,” respectively).
Introduction
Often triggered by a specific event, companies restructure their operations in a fairly significant way. The triggering event could be
Change in the market (either threat or opportunity).
Indication that costs need to be significantly reduced (for example, drop in stock price).
Regulatory change.
Change in leadership.
This list represents only a fraction of the possible triggers.
By definition, restructuring takes what currently exists and rearranges it into a new, and often a smaller, form. Restructuring can be unsettling and is often much like internal mergers and alliances. Companies that want good success with their restructuring efforts are wise to consider culture as a risk that needs to be proactively evaluated and addressed.
Business Challenges
The business challenge for restructuring depends greatly on the intent. For example, there may be the need to
Create collaboration and reduce silos by combining previously separate groups.
Integrate earlier acquisitions that are operating autonomously for consistency and efficiencies.
Consolidate fragmented capabilities to manage business risks or respond effectively to regulatory requirements.
Also, the centralization/decentralization pendulum swings back and forth. Sometimes it is driven by a specific event, but often it is simply an acknowledgement that the current choice is not perfect. However, the alternative is not perfect either—hence the swing.
Because restructuring is so vast, we use shared services throughout this chapter because it is a good example of the benefits companies seek by restructuring.
Shared services combine functional groups into one or more centralized units, and often target reduced costs and improved delivery through standardization, control, and integration—which enable process rigor over time. When regulations change (for example, Sarbanes-Oxley), this rigor helps companies to quickly and effectively implement the requirements.
Shared services are a way for companies to consolidate capabilities and knowledge, which can improve insights and decision making, and provide better career paths for professionals. They can also be a route to outsourcing and additional benefits.
By adopting shared services, companies have produced savings of 25 to 50 percent and an average ROI of 27 percent. These benefits are impressive alone, and even more impressive because they often come with improved service and increased customer satisfaction. (Fahy)
Shared services can help companies rapidly implement technology. Because changes are made in fewer locations, less time and coordination are needed. Also, companies growing through acquisition may find that simply having the shared services center can reduce the number of integration decisions—all applicable functions go directly to the shared services center. For many reasons, shared services are growing both in the number of companies using them and in the size and breadth of the functions covered.
Most often, companies implement shared services for their support functions, although some companies have expanded into other cross-organizational areas. Table 10-1 shows some examples.
Table 10-1. Common Shared Services Functions
“Cost savings can’t be the sole objective for shared services—quality of service from the internal customer’s perspective is equally, or sometimes more, critical. Why? Because the quality of service provided internally can have a ripple effect that influences productivity, employee morale, and satisfaction, and ultimately the satisfaction of end customers. A shared services strategy initiated without a customer focus may actually cost more than it saves.”
Mary Jo Bitner, Ph.D.
Petsmart Chair in Services Leadership
Academic Director, Center for Services Leadership
W. P. Carey School of Business, Arizona State University
Shared services can take on many forms, such as consolidating Finance and Accounting functions for the entire enterprise, or providing all of the back-office functions for a particular business unit. Another shared service model creates a separate business to provide the services to the company and external customers.
It is easy to see that the effort depends greatly on the shared services details and intent. However, no matter the type, several business challenges need to be addressed:
An overall strategy needs to be created that includes the approach to shared services and targets for standardization vs. tailoring to business unit requests.
Locations need to be selected, built out as “greenfields” and/or shut down.
Funding, budgeting, and transfer prices need to be designed and implemented.
Organizational structures and roles/responsibilities need to be designed.
Governance mechanisms need to be created, including service level agreements.
Processes need to be selected, combined, redesigned, and rolled out.
Technologies need to be selected, and migrations and shutdowns handled.
Employees need to be selected for positions, and layoff plans may be required.
Relocation packages may be needed and/or new employees may need to be hired and trained (typically within very compressed timeframes).
And there are other challenges. Companies implementing shared services for the first time should consider getting support from those who have experienced the challenges.
Culture Challenges
Despite its benefits, restructuring is disruptive to all involved. It often requires new relationships, processes, technologies, and roles and responsibilities. It may require a physical relocation, which may change commutes or uproot families. And, it typically requires new expectations and ways of working, which is where culture gets into the act.
Not every restructuring effort has culture risk, but many do. Anytime there is a change to how people need to perform their work, team with others, or respond to new expectations, Business Practices are in play and culture may be a barrier to success.
Within organizations, subcultures typically exist and need to be considered. These subcultures may be based on leaders’ styles, history (for example, a previous acquisition where the prior culture is still prevalent), occupational practices, and the tenures, nationalities, genders, and ages of employees, just to name a few.
Shared services run the risk of two types of culture clash. First, shared service centers are often created by merging two or more internal groups. Each group will have its own subculture, and often will have some differing Business Practices. And, if that is not enough, there is the chance for an alliance culture clash between the shared service organization and its internal “customers.” Culture clash inside an organization can be just as damaging as between organizations—and two types simultaneously is double trouble.
Compounding the culture clash risk, shared services often seek to change some parts of the existing culture. For instance, there may be lack of customer focus, an unbalanced view of the importance of administration, or near oblivion to the market and important external events. Implementing shared services centers may be an opportunity to help change these culture issues by infusing a customer mindset, clarifying organizational priorities, and motivating external interest through benchmarking.
Finally, part of the culture challenge may be to infuse motivation for continuous improvement. Status quo is comfortable, and just changing this expectation may be one of the greatest challenges to be faced.
Handling Related “People” Risks
As with other efforts, there are important “people” aspects to address. We spend time on culture in the rest of this chapter, so here we offer these other pieces of brief advice:
Organization design is vital to create a shared services structure that will stand the test of time yet be flexible to changing requirements. Departments and groups need to be identified, reporting relationships need to be clarified, linkages need to be devised, and role and responsibility definitions need to be developed. Then, all of it needs to be communicated thoroughly because these changes tend to be very important to employees at all levels. Often, the organizational infrastructure needs to be tailored to the requirements of specific countries or regions, and many human resource issues need to be navigated (for example, employee selection, processes for layoffs). The organizational infrastructure also needs to support key decisions such as the chosen overall strategy and location.
Governance both inside the shared service organization, and between the organization and its internal customers, is a key to success. As with alliances, service level agreements are needed, as well as ways to coordinate and communicate across the impacted parts of the enterprise. Governance structures, roles and responsibilities, processes, measures, and policies are all part of a well-designed governance function for shared services.
Organizational change management can really help address peoples’ hearts and minds during restructuring, which can be a key driver of a successful transition. Recognize that former colleagues and peers will now have a “customer/service provider” relationship and this shift needs to be nurtured, perhaps through new knowledge and skills.
In addition, it may prove helpful to develop some principles, values, or behavioral statements to convey the new expectations. Finally, remember that it is important to reduce the sense of loss that people may feel (especially because it helps reduce the potential for exaggerating how good things were before).
“We outsourced most ‘noncore’ functions to deal with semiconductor economic cycles. We recognized we’d need new competencies to manage a ‘variable virtual company,’ new approaches to dealing with long-term business partners, and new ways to manage ‘core’ functions. Results have been excellent—along with some unexpected benefits: ‘Core’ employees’ morale and retention have improved; management focuses more time on customer requirements; [sic] and, as a result, market share has significantly improved.”
Steve Newberry
President and CEO
Lam Research Corporation
Applying Tangible Culture to Shared Services
Tangible Culture is applicable to two stages of shared services: (1) creating and transitioning to an effective shared services organization, and (2) establishing a workable partnership with internal customers. Let’s start with the transition to shared services.
Creating a shared services organization is much like an internal merger, so the steps from Chapter 8 are generally applicable. Figure 10-1 shows the overall process.
Figure 10-1. Method for shared services.
Example
Let’s start with some sample outputs, and then move on to the steps to get there. We will use the following story line, which is a composite example from our experiences.
Context: The effort is to initiate an enterprise shared services center for Finance, Accounting, and associated reporting functions. The company wants to reduce costs and enhance information provided to managers about financial results. The company is publicly traded and based out of Chicago, and has decided to consolidate the functions into one shared services center in Chicago. The center will support all three of the company’s business units, two of which were the result of earlier acquisitions. Currently, each business unit has its own Finance and Accounting functions, which have operated relatively autonomously reporting into the business unit and dotted line to the CFO.
Table 10-2 shows excerpts from the practices charter and the Right vs. Right decisions.
Table 10-2. Practices Charter Excerpts
Table 10-3 shows an example Outcome Narrative to define the future state.
Table 10-3. Example: Outcome Narrative 1
Table 10-4 shows gap assessment excerpts and areas to address.
Table 10-4. Gap Assessment Excerpts
Table 10-5 shows excerpts from the prioritized action plan.
Table 10-5. Prioritized Action Plan Excerpts
Table 10-6 shows excerpts from the progress evaluation and additional actions needed.
Table 10-6. Progress Evaluation Excerpts
Work Steps
To create the outputs above (for Figure 10-1), follow the steps in Table 10-7. And, visit www.almaden.ibm.com/tangibleculture to download applicable tools and templates.
Table 10-7. Work Steps for Shared Services
Partnering with Internal Customers
In parallel with creating the shared services organization, it is appropriate to launch an effort to build effective relationships with internal customers. If neglected, this area can quickly lead to dissatisfaction. When business units do not receive the support they expect, or they do not like the approach taken, they often “complain high,” which can negatively impact the effort. Instead, we suggest that companies proactively surface the conflicts, using approaches identified in Chapter 9.
When initiating this process, it is important that the strategy and intent of shared services are clear so that topics and boundaries may be established. In some cases, a customer-vendor relationship is appropriate. Accounting is a good example where this arrangement may work well and where governance, service level agreements, and problem solving will be important. However, if a collaborative relationship is needed, such as with Application Development or Learning Services, an open discussion is necessary to determine the type of internal partnership to be created.
The best timing to initiate this work is a key decision itself. In general, it is good to move forward quickly, but there may be more important considerations in the near term. However, do not neglect this work, because waiting may cause lingering negative impacts. Also, use the opportunity to identify baselines to gauge progress on the metrics and influence the designs underway in the early stages of the shared services implementation.
Benefits
In general, applying Tangible Culture to shared services and other major restructuring is a way to proactively address culture clash. In addition to the benefits you have read about in earlier chapters, Tangible Culture helps to
Support interpersonal relationship both inside the shared services center and between the center and the internal customers it serves.
Prepare employees for taking action, knowing what is expected of them.
Achieve consistency, even across multiple centers and geographies, which is often a key requirement to achieve the shared services objectives.
Conclusion
Major restructuring often is a path to improvements, and shared services are an example of how companies achieve cost savings while enhancing performance. Despite their benefits, shared services are challenging to implement and run from a cultural perspective. Tangible Culture can help a company merge internal groups into the shared services center(s) as well as crafting effective partnering relationships with internal customers. Organizations that proactively approach the culture challenge will speed their time to benefits and avoid many issues that cause internal customer disappointment.
Now let’s turn our attention to transformation efforts.
Reference
Fahy, M. “Getting shared services right,” The Shared Services and Business Process Outsourcing Association, www.sharedxpertise.org/, September 2, 2003.