3

Step 1

Construct the Reorg’s Profit and Loss

First, a quiz for you. For your current reorganization, or one you have been involved with before, what answer would you give to the following questions?

How precisely did you define the value the reorganization was supposed to bring?

0: No value defined; reorg simply seen as a good thing to do.

1: Some ideas about where value would come from (e.g., better sales productivity), but not quantified.

2: Overall value target set for the reorganization (e.g., reduce head-count cost by 10 percent), but not broken into specifics.

3: Value precisely defined and quantified (e.g., $x million cost savings and $y million increase in sales revenues).

To what extent did you consider the costs and risks of the reorganization?

0: We assumed that we could deliver the reorganization without any costs or disruption.

1: We identified some high-level risks (e.g., staff disruption, exit of key people) to help plan mitigations.

2: We created a budget for the project team or external support and identified some high-level risks.

3: We created a budget for the project team or external support and quantified the potential risks of the reorg (e.g., 5 percent decline in sales during the period of uncertainty).

How did you judge the timeline for delivering the reorganization?

0: No timeline set; it takes as long as it takes.

1: We set a timeline for the first phase of the work (e.g., drawing the new lines and boxes).

2: We set an overall timeline (e.g., the reorg must be complete by April).

3: We set an overall timeline, broken down into the phases of the work.

Add up your scores for each question. What score did you get? If you scored 7 or more, then you are doing pretty well: you are clear on why your reorganization is happening and what it will take, and you have a timetable in place. A score of 4 to 6 means you have some of the basics in place. Below that, and you are in serious trouble. We hope that this chapter helps you recognize the gaps in your program and do something about it. Without clarity on these questions up front, how can leaders even know if a reorganization has been successful or not?

To better understand the challenges that reorgs face, we introduce you to our central case (where we have anonymized the characters and changed the industry).

John has just become the CEO of an energy utility company straddling the United States and Western Europe, with recent investments in Eastern Europe and Asia. The company was ­originally established in Europe. John is the first CEO from the United States and is relocating with his family to Europe, to live near the company’s HQ. He is excited about the chance to improve performance and wants to mark the start of his new role with a dramatic act. From his previous position as head of the US ­business, John concludes that the company is deeply inefficient. It is ill prepared to navigate growing environmental worries, consumer choices, price pressure, and regulatory change. He believes that the firm is currently less than the sum of its parts. Several local businesses have been bolted together, with limited sharing of approaches across them, and the corporate HQ sits on top, adding cost but little clear benefit. With the current structure, his scope for improvement seems limited. He becomes convinced that what is required is a root-and-branch reorganization. He will have plenty of other things on his plate in his first hundred days. So, he turns to a trusted employee, Amelia, who worked with him on a previous business issue in the United States.

Amelia was excited to get the phone call from John, who advised her of her next challenge. He had briefed her in broad terms. But since then, she has been struggling to meet with the new CEO in person to understand the challenge in more depth. John has been traveling around the world, meeting the board, investors, and his new leadership team. In the meantime, having found little help in the available literature, Amelia goes back to first principles. As she comes from a capital-projects background (her last job was managing the construction of new onshore wind farms in Texas), Amelia decides to use the stages in a capital project as an analogy for the reorg: first, understand the opportunity; then develop the scope, choose the concept, detail the design, and deliver; and, finally, run the new organization. Starting at the beginning, she concludes that there must be a concrete business objective for the reorganization.

Two weeks after the first phone call from John, Amelia is finally able to speak to John by telephone. She shares her thinking on the reorg. John likes her approach. “But let me take some time to share my thoughts on the reorg,” he adds. “Look, I figure that the way we are set up today, it just gets in the way of doing what we need to do. Take capital projects. All that good work you did with the wind-farm projects. That has no influence on how we are approaching renewables in Europe. Those guys are just ­reinventing the wheel. Then, let’s take a look at the folks in HQ. We have so many people working in the center, asking for information from each of the businesses. This creates a hell of a lot of work. But the businesses never hear where that information goes, what gets done with it. And next time around, there is a whole different template to fill in. As I compare our company with our competitors, they have 10 percent lower costs than we do. I hate to say it, but we have too many people, too much inefficiency. And with the traders, it feels like we are still approaching everything from an engineering perspective. If we compare ourselves with the banks—and I know those guys don’t always get things right, either—we are in the dark ages. And again, each country seems to have its own process for doing this. My vision is that we have one central organization, one single system, that can deliver a trading platform across all our country businesses, done in the best way. So many of these issues come down to how we organize. Without a reorg, I see little chance of delivering the results I’ve promised to the board.”

“I’m also concerned about safety performance across the company,” Amelia says. “We have really driven some improvements in the United States. But if I look at the performance in some of our other business units, especially in emerging markets, the injury statistics are very worrying. It is only time before we have a ­fatality. We need to get this right for the company and for the ­people who work for us—whether they are staff or contractors.”

“I very much agree,” John replies. “I know this is all new to you, but I’ve got a lot of faith in your abilities, given the improvements you delivered in the North American business. I’d like it if you could also move to Europe—for the time being at least. You can have the office around the corner from mine. It’s going to make it easier to work together on this. Now, I know I’ve got a lot of other things to do. But I want you to get time in my diary at the beginning and end of every week. Work with my assistant, Richard, to get this booked in. I’d also like you to interview my direct reports. Find out what they think we need to do. And put together a team of people to help you on this. Whatever you need to get this done, let me know. I want the reorg put in place, at least for my reports and their reports—let’s call it the ‘new operating model’—by Christmas latest.” (It is now August.)

Amelia follows John’s suggestion to interview the top team of country CEOs and functional heads. Again, it takes time to get the meetings and phone calls set up—partly because the European leaders are on summer vacations. Some calls take until September to set up, the CEO’s urgency notwithstanding. The leaders are split fifty-fifty in their opinions: one side agrees with John’s assessment; the other, while recognizing external problems faced by the business, sees the current organization as working well. This second group accepts that they need to make some changes to fit in with the CEO’s ideas. But it’s obvious they would prefer that the changes are minimal.

In mid-September, Amelia creates a project charter based on her discussions with John and his team (figure 3-1). This charter helps, but Amelia still feels that there is insufficient clarity on what the reorg is supposed to deliver. Some of the company’s leaders, particularly those in the corporate center, see the change as a turning point in the company’s history. Others, particularly in the country market units, see it as an incremental change, building on the company does already.

At least the cost-reduction target is clear: a 10 percent reduction in the cost of people. However, this does not specify if every part of the organization should have the same cost reductions or not. Even from her short visits and interviews with business units, it’s clear to Amelia that each one has a different starting point. Some business units have achieved significant cost savings already; in others, a simple walk around their head office and a look at the cars in the parking lot (their makes and numbers) reveal that efficiency is not a priority. Also worrying is that some leaders see the 10 percent as a stretch target rather than a commitment. Finally, even if these reductions can be found, Amelia is already worried about how she is going to handle ­conversations with her colleagues, some of whom are friends, about job losses that could affect them.

Beyond cost reductions, the other objectives are less clear. What do “best-in-class capital efficiency” and “world-class trading performance” mean in practice? Amelia is new to senior management discussions and worries that she might be seen as not getting it if she raises these kinds of questions. Hopefully, it will become clear, she thinks to herself.

Although John told Amelia that she can have “whatever she needs,” the line organization is reluctant to free up experts from the different market units and functions. It does not take her long—through the input of friends and colleagues in the different bits of the business—to work out which thoughtful, experienced people she would need. But the business unit leaders seem ­reluctant to free up these people full-time (“the people you’re asking for come out of my budget; you can have them full-time if you put them on your own payroll!”). For now, these experts are still focused on their local businesses, mostly doing their day jobs. In practice, they are only joining a weekly call and adding comments. Amelia feels that she is doing all the work and then having her homework marked by others. Maybe it would be better to get some external help? But how much would this cost?

But on one part of the process, Amelia feels more confident: the discussions with John and his leadership team have at least settled the timeline of the project. Within three months, before she and her colleagues break for Christmas, she needs to deliver the operating model design, which means the top three layers of the company’s reporting structure: the CEO, the market unit and corporate leaders, and the leaders of their teams below. At that point, the project will be handed over to HR and other experts in the organization. This timeline means that, by Christmas, Amelia should be able to return to her day job.

By using her intuition and natural intelligence, Amelia is doing better than most leaders at this stage in a reorganization. However, she is right to be worried. John has identified a few areas where his company could perform better, but he has not articulated a clear rationale for why a reorg is required and how it will help his company compete in the market.

Iain Conn, the CEO of Centrica and the former CEO of BP’s downstream business, shared his view on the secret of effective reorgs: “You must know, with real clarity, what you want the organization to be and stand for, ensure that the goals you set are realistic, and reorganize to deliver that. For our recent reorganization, we spent twenty full working days meeting as a top team over the course of six months, understanding what we do today, the markets in which we operate, where those markets are going, and what our strengths are.” This clarity should cover the benefits that the reorg should deliver, the costs and risks of the reorg, and the time frame for delivering. It’s critical that you focus on the future—on where your market is going and how your company should compete in it—not on fighting the battles of the past.

By contrast, John and Amelia are falling into three of the most common pitfalls of step 1.

Pitfall 1: Ill-Defined Benefits

As in the case of many cost-focused reorganizations, Amelia at least has a high-level target for cost reduction. A reduction of 10 to 20 percent is, of course, the usual target, and, as usual, Amelia’s target focuses solely on employee head count. But what about the costs associated with head count (like procurement, office costs, travel, and expenses)? What about the cost savings from reducing contractor spending (which often goes up when head count goes down)? What about the savings, or increased revenues, from better managing the business? And what if some parts of the organization need increased spending on head count to deliver these results, whereas others (such as pet projects launched by previous leaders) can be cut by 90 to 100 percent? The blanket 10 ­percent cost-reduction target does not enable Amelia to negotiate these sensitivities and set differentiated targets. It also means that every conversation she will have with a business leader will be yet another battle or horse trade. Worse still, she does not have a way to hold the conversations about trade-offs with her leadership group. She has regular access to the CEO (although we will later show that other pressures get in the way of this), but so far, there is no forum for decision making across the leadership group—no way to address her nagging doubt that not all leaders are on the bus.

Now, a word on the use of benchmarking costs and head counts as a way to set targets: beware. We have experienced both ­high-level benchmarking (e.g., so many HR professionals per employee) and detailed, activity-driven benchmarking (e.g., the number of finance staff in accounts payable per invoice ­processed). Based on this experience, we have developed some firm views on benchmarking. We have grown skeptical about the use of detailed, anonymous benchmarking: it encourages a “rush to the bottom” when, in reality, the lowest number of staff does not guarantee the best performance or even the lowest cost (given differences in locations and salary). Benchmarking is also very difficult to calibrate between companies, which may make very different insourcing and outsourcing decisions, affecting the ­numbers ­significantly. In addition, few companies consider ­forward momentum when ­setting cost-reduction targets: if one business unit is growing ­rapidly, while another is stagnating, it does not make sense to hand out 20 percent cost-reduction targets to both, whatever the ­benchmarking says. Maybe the growing unit should get 10 percent—to ensure that the growth is not stunted—and the other should get a 30 percent reduction, given the more serious financial situation. Sadly, the blanket 10 to 20 percent haircut is the more common approach, whereas setting differentiated ­targets, ­according to a variety of business inputs and management judgment, is much less common. This one-size-fits-all approach is appealing probably because a fixed rule—however wrong—is much easier to stand behind in the emotionally charged context of a reorg, whereas a more nuanced approach, which by definition involved a management judgment, focuses attention on the person who made that judgment. Although it’s difficult, our advice is to be brave: it will be better for your business and fairer for your colleagues.

We have seen cost benchmarking work well in two ways. The first is internal benchmarking: the approach across one company is typically quite similar, and where it is not, you at least have the ability to find out how and why it is different. So, it can be helpful to ask, why do I have twice as many HR staff per employee in Europe than in North America? One obvious explanation for the difference in this example might be the need to speak different languages in the European department. However, with this great of a difference, there are probably some efficiencies to be had. The second form of benchmarking is shared benchmarking between a small handful of companies. When companies can share data and openly compare the differences, it’s possible to have a rich discussion to understand where the opportunities are on all sides. For example, we arranged a discussion between a global oil and gas company and one of its leading suppliers to compare their approach to HR: not only the overall people numbers, but also the approach to supporting business needs and the location of that support.

In Amelia’s case, interpreting the cost target has its problems, but at least it has a number. The challenge with what we might call the effectiveness targets is their vagueness. While reorgs are often associated with reducing costs (as this is a simple thing to do), it is equally—and sometimes even more—important to also consider how they can increase revenues. Even with the most cost-focused reorgs, it is helpful to find at least one major way of improving effectiveness too: no sense in saving the company now, only for it to fall apart, with no way of winning against the competition afterward. Alastair Swift, CEO of Willis Transport, told us about one reorg he was involved in: “We were trying to do a lot of things in one go, and the focus moved quickly from a growth agenda to a cost agenda and rationalizing our operating income. There was a palpable shift of management attention to the easier, executable cost reduction versus the tougher thing to look at—revenue growth.” For companies running reorganizations whose primary purpose is not cost reduction (it could be, for example, growth or managing risk more effectively), any vagueness around these benefits will be even more significant.

In Amelia’s case, we need to ask, What is capital efficiency? Does it simply mean spending less capital, building each wind farm or gas-fired power plant cheaper than the last one, or maximizing the returns on capital spending? And what does world-class trading performance mean? Given that you don’t get what you don’t measure, how are things measured? These are examples of the “motherhood and apple pie” statements that often get used in reorgs—that is, statements that everyone would agree with, but that imply no choice or specific action to achieve them. To avoid such statements in your own reorganization, you can apply the following test: if you reverse the statement, is it so ludicrous that no one would ever argue for it? If so, then you have motherhood and apple pie. Consider: “We want to have worst-in-class capital efficiency” or “We want poor trading performance.” No one would ever argue for these things. Yet, a statement such as “We want 10 percent capital efficiency” could be reversed and still make sense. We might not want 10 percent efficiency, because 5 percent, 20 percent, or 30 percent is in fact the right answer (of course, we still need to define what capital efficiency actually is, or, again, we will not be sure if we actually achieved it).

At the same time, companies need to avoid entrusting the solution of every problem they have ever had to the reorg. Lawrence Gosden, the director of wastewater services at the UK’s biggest water utility, Thames Water, has experienced a number of reorgs. He told us about the importance of having a specific purpose for a reorg:

Getting the purpose of the reorganization right is critical. Usually, you end up with a dirty list of everything, and at some point in the reorganization, you realize that there are many things you are never going to deliver. You need to be ruthless and focus on the top few things that really matter. Ultimately, these need to link very clearly to a few numbers that count for shareholders, customers, or both. As a part of this, you need to be prepared to deprioritize other areas, which are still important, but where you are prepared for performance to be just OK—or even, on occasion, not quite good enough—in the interests of delivering great performance in the areas that matter most.

Pitfall 2: No Consideration of Resources Required (Financial and Human)

Amelia is trying to get clarity on one aspect of the resources required: the makeup of the reorganization team. This is critical. Lord Browne, the former CEO of BP, recommends that executives consider three things before launching a reorg:

First, find a dozen allies who understand the purpose of what you’re doing, but more importantly the tone and behavior that you want at the end of your reorg. Remember that you are changing interactions as well as structure. Without those, don’t even try. Second, set up a reorg project team under one of your trusted allies, whereby you have someone who can help subdivide the problem and task people to set out a micro plan for each division. Third, remember that as a CEO it’s easy to lay down performance criteria, but different to get people to change behavior.

Typically, a reorg project team would include a project manager (like Amelia), an HR representative, a finance representative, a communications expert, experts on each part of the organization that will be subject to change, and—depending on context—a trade union representative. In addition, as two of our interviewees pointed out in the introduction, leaders need to commit their personal time to leading the change, or it will not be effective. Of course, these commitments vary with the size of the reorganization (they could be part-time roles or roles combined across a few people). But they require real work and tangible responsibilities. Occasional attendance to mark someone else’s homework is not sufficient. The cost of this input can quite easily be calculated if one knows the time commitments and rough pay bands. As a rule of thumb, table 3-1 shows the levels of effort and the indicative costs for different reorganizations.

Next, as Amelia identified, is the cost of any external consulting support. As we noted, this may not be required at all if there is internal expertise and if the change is relatively simple. But outsiders may well be required if the value of the reorg is high, the solution unclear, and the change highly political (in which case having a neutral party involved in some of the discussions could help you reach agreement). Again, this element should be easy to cost, as any such support should have an accompanying, costed proposal from the third party (but be wary if this proposal is only for some of the five steps outlined here when in fact you need help across all of them).

Finally, the costs that Amelia did not consider—and which are rarely considered—are the human costs. Like many others before you, you may believe that yours will be the first reorganization to avoid the human cost of a reorg. Unfortunately, you will be wrong. More than half of eighteen hundred executives that we surveyed saw a significant dip in productivity, a 10 percent slippage in deadlines, or a 10 percent drop in sales—or some combination of these difficulties—during the reorganization.¹ This slippage is significant and far outweighs the costs of project team or consultants. Of course, there are steps you can take to mitigate some of these risks (such as retention bonuses and an accelerated tempo of management reporting, so you can identify issues early and intervene to help your people—not to beat them up), but these steps also come with their own ­financial costs.

Even if you are able to mitigate the human cost, you cannot remove all of it. All reorgs result in changes to roles even if the number of roles does not change. And some reorgs will substantially reduce the number of roles and people. All of this leads to employee stress, which has to be considered before you start the work. You need to be sure that the benefit you are creating for shareholders, customers, or the health of the organization more generally outweighs the human cost of the change, including the cost to individuals. And you have to be prepared to tell people who have worked with your company for a long time—who may indeed be friends—that their jobs have substantially changed or have disappeared entirely. So avoiding this pitfall does not mean removing the human cost—you cannot remove it. Instead it means calculating a realistic set of internal and external costs and being sure that the benefits justify both the financial and the human costs involved.

While you cannot remove the human cost of a reorganization, you can reduce it, and throughout this book, we highlight ways of doing that. Here are the most important things to do:

• Communicate as much as you can as early as you can, including timetables for when decisions will be made.
• Treat all employees with the compassion you would expect yourself, and anticipate that people will respond to the reorganization emotionally. This means setting aside substantial leadership time to support employees affected by the changes. (The affected employees are not just those who are leaving the organization.)
• Test the changes thoroughly before implementing them, and make sure they are understandable at a role level, not just at the level of a CEO or senior manager. Each employee needs to understand how his or her role will change on the first day of the new organization and needs to have the skills and motivation to make that change.

Pitfall 3: No Agreed-On Timeline

Amelia feels that she at least has clarity on her personal timeline for the reorganization and the deliverable she needs to produce (“the top three layers of the company’s reporting structure”). However, when seen from the perspective of the reorganization as a whole, this timeline is incomplete, first, because the timeline only goes to the end of the concept-design phase (step 3) and, second, because the definition of her deliverable is itself incomplete (as we will see in chapter 5). We firmly believe that the endpoint of a reorg should not be the creation of a pretty picture of the organization’s lines and boxes, or the detailing of what this concept means, or the launch of the new organization; the endpoint should be when the new organization starts to deliver more value. This is how you would judge a business project. Of course, this is hard to do if that value is ill defined. Amelia will find this out the hard way as, inevitably, her project is extended through and beyond Christmas (lucky her!).

Because the typical approach to reorganizations can best be described as “one thing after another” or “let’s make it up as we go along,” and because most managers have limited experience running a reorg (especially a good one), we seldom see an agreed-on timeline for the full reorganization. Or if we do, it is usually much longer than it needs to be. As a consequence, most reorganizations take around eighteen months to complete. Since the average tenure of a Fortune 500 CEO is less than five years, eighteen months is a significant time commitment. Indeed, in the twelve-year case we referred to in the introduction, only the third CEO finally managed to declare victory and close the reorganization project. However, not only had this project by then consumed a huge amount of management time and attention, it had also, over the years, gradually been amended to satisfy different executives so the result was a highly inconsistent design across divisions, functions, and locations. In our experience, successful reorganizations are much more likely to be completed quicker: in three to nine months. From the perspective of minimizing the disruption to your employees, it should also be obvious that the quicker you get a reorg done, the less human stress it causes. While this should be a commonsense conclusion, many executives running a reorg fall for the line that long, drawn-out, evolutionary change will minimize disruption. Please do not make the same mistake.

. . .

So, benefits, costs, timeline—what does all this sum up to? If we know these three variables, we can understand the P&L of the reorganization (see figure 3-2 for a conceptual illustration of this through the life cyle of a reorg). More than this, we can question at the beginning whether the reorganization is worth doing at all. If the numbers do not stack up, then the answer is obvious: do not reorganize. Even if they do stack up, you should still ask: “Can I accomplish my objectives through other, less disruptive, means that would reduce the human cost?” If the answer is yes, then you should not reorganize.

Unfortunately for Amelia, the leaders of her company have not had this conversation and understand only the purpose of the reorg at a theoretical level (it is a turning point, or it is an incremental change). Given the challenges ahead, these phrases are unlikely to convince people to change. Executives who have been through a reorg process have underlined this point to us. For example, Hannah Meadley-Roberts, the director of the president’s office at the European Bank of Reconstruction and Development, told us: “The most important thing to have before you start is a really compelling reason for the change. Even if the reason is negative, such as a need to cut costs, if it is clear, then everyone can be galvanized to get on with the change.” So our advice is that you should only do a reorganization if you have the rationale clear, that it is agreed on across your executive team, and that they understand the cost of the change. If this has not happened, stop.

Of course, you may hear two objections to this approach (we certainly have): First, some argue that reorganization is a ­people issue, not a business one, and should therefore be seen as an enabler to business, not something you can measure in itself. The second objection is that reorganization is a complicated business with lots of variables, which means that you can never precisely define the value. If you have read up to this point, you can probably guess our opinion on this first point: it takes us back into the realm of pseudoscience. If the reorganization is necessary to deliver the value you want, you should certainly be able to measure whether you achieve that value. We absolutely agree that a reorg, like almost any business project (such as expansion into a new geographic region), is a people issue. But you would never dream of embarking on any other project without clarity on its purpose, so why do it for something with such a high human and financial cost? If the reorg is not necessary, and there are less costly, less time-consuming, and less painful ways to realize this value, you should probably not reorganize at all.

With regard to the second point—that you cannot precisely define the value at stake—businesses make these kind of estimates about complex initiatives all the time. For example, the oil and gas industry decides whether to invest in multibillion-dollar capital projects when they have only drilled a few wells, do not fully understand the quantity and quality of the reservoir, and certainly do not know what the oil price will be in ten years’ time when the project has been built (goodness knows what it is as you are reading right now). If they can do that, then we can certainly estimate the benefits, costs, and timeline of a reorg.

We will now take each of the three challenges (around benefits, costs, and timeline) one by one, and, using cases from our experience, point to winning ways of dealing with them.

Winning Way 1: Explicitly Define Value

Our experience with a European courier company illustrates the importance of explicitly defining the value of reorganization. This company wanted to establish a corporate university to replace its diverse range of training courses and had created a business case to support its plans. The project team, led by the HR director, saw the main benefit of the university as cost reduction, by delivering all the courses together in a more efficient way. However, the business case was marginal, and when line leaders resisted the idea in the executive committee discussions, the CEO reluctantly supported them and rejected the plan.

After this unpromising start, the project manager forced himself to return to the drawing board. He realized that he and his team had been approaching the value of the university from the wrong angle. There was some benefit from cost savings. However, two other sources promised to deliver much greater benefits. The first was refocusing the resources already spent on training away from generalist training and toward specific capabilities that were needed to deliver the business plan (like cross-selling). And the second was making the organization more attractive to employees—which would both make it easier to hire staff and increase retention. In both cases clear business targets were set and tracked through to the bottom line.

The project manager realized that he had been lucky to have the first business case rejected, as a corporate university set up to deliver new skills and greater employee stickiness would need to be set up very differently from one focused on cost reduction. To deliver the shift in the focus of the training, the corporate university would need to have the right to recommend training priorities to the executive team (rather than just letting the current set of courses continue but in a more efficient way). To improve the attractiveness of jobs, the university would need to be closely aligned within HR and have solid links to the recruitment and retention functions.

Winning Way 2: Identify Risks as Well as Costs

The head of M&As at a major mining company was considering a big acquisition. He was aware that the biggest thing that could go wrong, after the purchase, was for the integration of the two companies (one form of a reorganization) to take too long, cost too much, or—worse—fail to deliver the business results the company needed (see appendix B). He therefore devoted his energies not only to laying out the full timeline (right through to delivering the expected cost reductions and putting in place new processes across all mines) and costs (both internal and external), but also in detailing the risks to delivery.

Almost one hundred risks were identified in total, ranging from talent loss to business disruption to delays in bringing in new managers. However, across these one hundred, he then identified twelve that, if not addressed quickly, could create bottlenecks in the integration process. For example, a delay in deciding on the pay grade structure for the merged company was identified as a bottleneck risk, because until this was decided, jobs could not be advertised. Such bottlenecks were very closely monitored through the integration, and when the timing on any of them slipped (as inevitably some did), the leadership team immediately intervened (better planning does not mean you won’t have challenges). While other decisions were monitored, intervention was less urgent when timetables changed.

This approach of identifying bottleneck risks is one that we have regularly used in reorganizations to ensure focus and rapid intervention on the decisions that will prevent progress. Incidentally, bottleneck risks are not always the biggest risks—they are just those that could substantially delay the overall reorg process.

Winning Way 3: Set an Accelerated Timeline

An international industrial company was in dire straits. When global recession struck, the industry entered a serious downturn, and demand dropped. The company needed to save over 10 ­percent of its costs in less than six months simply to survive. This could not be achieved by incremental tinkering: the company required a full-scale reorganization to respond to market changes. At the same time, the leaders of the company were painfully aware that getting this reduction wrong could accelerate the company’s demise.

The CEO of the business decided to take dramatic action, announcing to the market the savings target and the timing of the reorg. From then on, there was no debate around the timeline: the company simply had to deliver. To achieve its goal, it avoided overcomplex planning and instead set a few crystal-clear deadlines. It charged fifty of its top talent with the job of managing the transition, developed a detailed cookbook to help local businesses implement the changes, and developed a people-mapping tool to track the savings in people costs.

The company succeeded in reorganizing even faster than it had hoped, in just four months. This change was very painful, as many employees needed to leave the company, but the clarity of the objectives—and the consequences of not meeting them—meant that the employees involved were treated like adults. Moreover, a clear process for making decisions ensured that the reorg was done as fairly and sensitively as possible. Operations in a few European countries that were heavily regulated and unionized took longer to make the transition, but they were not allowed to hold up the wider effort (see appendix C).

In addition to achieving its cost-reduction targets, the CEO and his team were painfully aware that they not only needed to shed costs to survive, but also had to create a leaner way of operating that would enable them to succeed when the upturn came. Despite the accelerated timeline, the company still made time to test a new logistics IT system before it was rolled out.

Because of these efforts, the company achieved its cost-saving targets and continued to grow and improve performance despite a difficult market.

. . .

What does all this mean for Amelia and her reorganization of the energy utility? Let’s imagine that she had the advice contained in this chapter. What might she do differently?

Through her conversations with John’s direct reports, Amelia realizes that some of the leaders are buying into the program, whereas others are just pretending to play along. In her weekly conversation with John, she therefore makes the following ­suggestion: “Rather than continuing with one-on-one ­conversations, how about we have a couple of workshops, as we would do to make a major capital project decision? In the first one, we can get together with a few of the leaders who are most enthusiastic about the reorg. We can agree on the benefits of the reorganization, its risks, and its timeline. In the second ­workshop, we can bring together the full leadership team of the company, including the country market unit heads and corporate HQ ­leaders. They can see how important this is to you, and we can address the issues together. There will be no place to hide. And, John, I really need your help to free up the team members I need and get them posted here to HQ.”

“Sure, whatever this takes,” he says.

“One more thing,” she says. “Er . . . capital efficiency and world-class trading performance. I’m afraid I don’t know what these really mean . . . I mean, how we might measure them.”

“Right. Me neither. Let’s talk about them in the workshop.”

Before the first meeting, Amelia, now helped by her team, pulls together some facts that will help her, John, and their ­closest allies create a first version of differentiated cost-reduction ­targets for the organization. Her team looks at the financial ­comparisons with the company’s competitors and compares each of the ­businesses with each other: for example, why are there twice as many HR professionals in one business unit than another? At the same time, the team members try their best to understand the ­performance of the business units, too. It turns out that one ­country has slightly more financial controllers than the others, but also has the best control of costs. They make a note not to assume that staff members necessarily deliver the best performance. They also put together options for measuring capital efficiency and trading performance. On health and safety, all parts of the organization are obligated to monitor injuries in the same way, but only the most serious injuries are reported to HQ. With the CEO’s authority, Amelia gets hold of the full set of numbers, which increases her alarm that, in some regions, a major incident is only a matter of time away.

The forthcoming workshop with the leadership team forces Amelia’s team to raise its game. No one wants to look stupid in front of the leaders of the company. The leadership team reviews their work. Amelia points out that people ­savings alone will not deliver the targets, and she shares the results that indicate that the lowest number of people does not always deliver the right outcome. John and his trusted advisers realize that the operational expenditure (opex) savings need to be delivered through a combination of staff savings and ­reductions in other spending (such as outlays for contractors, materials, and services). The group works through each of the market units: some, with more challenging economics, are given much higher savings targets; others (such as the capital projects team) are ­allocated increased investment to build the capabilities ­necessary to drive down the costs of construction. An increased revenue ­target is set for the trading business. And the team clarifies that capital efficiency means building future capital projects 10 percent cheaper than the previous ones. Interestingly, the capital-efficiency target is bigger than many of the main opex savings, even though operational expenditures generate much more controversy.

On Amelia’s suggestion, targets are also set for safety ­performance. Without wanting to seem too callous, the team finds that it can also calculate a monetary value on safety, using recent insurance payments, regulatory payments, and project delays. John and his team are surprised to see that this makes safety one of the most important business targets, as well as a moral duty in itself.

The team next addresses the potential costs and risks of the reorganization. Before the meeting, Amelia completed some ­analysis on the performance dip during the company’s last ­reorganization. She noted almost a 5 percent drop in billing collections, asset utilization, and trading performance and hypothesizes that the distraction of employees was the cause. These potential drawbacks are then set against the benefits of the reorganization. The economics still make sense, and John is reassured that Amelia already has some ideas to mitigate the potential risks.

The group sets a timeline of nine months for the full reorganization, basing the number on the need to start ­demonstrating financial impact in the second half of the next year and the lengthy, eighteen-month duration of the previous ­company reorganization (widely seen as being poorly managed). The case for this accelerated timeline is clear to everyone in the room: the benefits will arrive earlier, and the disruption will be shorter. However, it also means that significant senior leadership time will be required through those nine months, particularly toward the end, when the human impact of the change is being managed. Given the appreciation of the longer time scale, Amelia deliberately plans around holidays—her Christmas is saved. Now the challenge is to deliver the reorg.

Finally, Amelia lays out the time commitment and the costs of her project team. She also includes the requirements of senior management time. After having shown the potential benefits and costs of the reorganization, Amelia finds the discussion much simpler than she had expected. The CEO signs off on the full project team and promises to intervene again if the business does not continue to support with resources.

The second meeting, with the full leadership team, proves much more challenging. Given the difficulties of getting senior management time, Amelia plans it for the day before the ­regular quarterly management meeting, so that as many leaders as possible can be there in person. Even so, some country market unit leaders are unable to attend. Based on what she knows about their opinions, Amelia suspects that their nonattendance may have been deliberate. On Amelia’s suggestion, John opens the ­meeting: “Let me take some time to share my thoughts on the reorg. I figure that the way we are set up today, it just gets in the way of doing what we need to do.” John tells them that the ­overall ­targets are non-negotiable; he and the board have already agreed on them. The team’s job today is to review the breakdown of these targets into country market units and functions.

Amelia then leads the discussion on the opex targets. It is a tough conversation with the market unit heads who face the ­largest targets, arguing for why they should be given more ­freedom. It is helpful that John gets to see some of the ­resistance himself. At the same time, some of the feedback is useful. For example, Amelia learns that some improvements planned for capital projects can be achieved without investment. At the end of the meeting, there have been a few adjustments to the ­targets for individual market units and functions, but the overall target remains the same. While the leadership team would not have ­originally voted for this outcome, the team accepts that the changes are necessary and that the process for agreeing on the targets was fair.

In addition, the executive team discusses the likely human impact of the transition, including the need for each team ­member to commit time personally to support members of staff who will be affected by the change. John makes clear that all the team leaders need to set aside time each week to communicate with their ­people on this.

On a personal level, Amelia is pleased that her passion for improving safety has become one of the main targets of the ­reorganization and that there has been an explicit discussion about the change’s impact on people. On the basis of her two meetings, Amelia now updates her project charter (figure 3-3) (for changes to the scope—people, process, and structure—see chapter 5). After only a few weeks, Amelia feels much more ­comfortable about what she needs to deliver.

How to Handle Communications in Step 1

The first principle of communications in a reorg—as with ­anything else—is to start with the needs of your audience. It is a simple, commonsense piece of advice, but one frequently forgotten, as the leaders focus instead on what they want to communicate to their people.

• Staff and leadership needs: This is the one step where, potentially, you can get away with keeping relatively quiet while a small team investigates the business rationale for launching a reorganization or not. But do remember that the more people who know that a reorganization is being considered, the more likely the news is to leak. If, at the end of step 1, you do decide to go ahead and form a full reorg team, the staff will want to know what is going on and will fear the impact on their jobs. Leaders, who may know more about the plans than other employees know, will probably be even more concerned about changes to their roles, their power base, and any future progression. At the same time, both groups will have other concerns in life, will probably know that the work will take a while, and will not expect immediate changes.
• What to communicate: At this stage, you do not know exactly what the reorg will look like, but you do know the business rationale and—as we strongly argue above—you should have a plan for what happens when. This is not the time to try to excite anyone with the coolness of your early organizational ideas. Instead, communicate simple facts: the broad business reason for the reorganization, which areas will change and which will not, the milestones by which leaders and staff will know more about the reorg. If your reorg is in the European Union, be careful about the language that you use at this stage and whether it implies that certain decisions have already been made (see appendix C). It can also be beneficial to announce the people you have selected for your reorg team. If the team members are well respected in the business, your selection of them will send a message to the organization that the reorg is being treated seriously. If there will be no layoffs, say this (but people will probably still not believe you). If there are, or may be, layoffs, do not rule them out, or you risk credibility later. For leaders, identify the top talent that you cannot afford to lose; approach them and assure them that they have a place in the future organization. At this stage, many leaders worry about whether they should make a big announcement regarding the reorganization. The benefit of such an announcement is that when you associate it with a positive business objective, people can more easily follow the story of the reorganization over time. However, an announcement has the disadvantage of making the reorg seem like a very big deal, which can make people more worried if the communications are not well handled.
• How to communicate: Communications at this stage should be very simple, perhaps an e-mail from the CEO and a notice in a personal blog (or equivalent) if the CEO has one, with a focus on the process being followed, not what the reorg might look like. Ideally, a two-way form of communication should be set up for questions (e.g., a dedicated e-mail address), although the team should not be obliged to share any details of the reorganization until they are ready to be more broadly communicated. In addition to aligning communications with the decisions made in each step, it can be useful to set the expectation that there will be regular updates during the process (e.g., in the CEO’s blog or with a monthly conference call). Regular communication avoids a vacuum and lets people know when they can expect to hear news. And when the news does come, it arrives with the feeling of “Here is the latest in our monthly updates” rather than “News flash! I have an announ cement to make!,” which either can feel alarming or, if there is actually little to say, can seem disappointing.

Step 1 Summary

Pitfalls	Winning Ways
Benefits ill defined No consideration of resources required No agreed-on timeline	Explicitly define value Identify costs and risks Set accelerated timeline

How to Use These Ideas in Your Organization

• Question whether the reorganization is worth doing at all: are the benefits worth the costs (including the human cost) and risks? Use the P&L template found in appendix D, like the one in this chapter.
• Create an end-to-end plan for the reorganization, starting with defining the P&L (benefits, costs, risks, and timeline) and describing how leaders will know that the reorg has realized those benefits. You should expect your reorg to take longer if the organization is bigger, if you plan to bring in a lot of external talent to fill roles, or if you operate in countries with more complex legel requirements.
• Set up a project team, including a project manager, an HR representative, a finance representative, a communications expert, and an expert from each of the organizational units that will be affected (depending on the scale of the reorganization, some of these will be part-time or combined positions, but they need to involve real work).
• Ensure that leadership commits time to leading the change:
  • – Hold a first meeting between the project ­sponsor, ­advisers, and the project team to define the ­reorganization’s P&L.
  • – Hold at least one (potentially several) meeting with the leadership of the organization to get its input. This is not a democracy (few people would vote for reorganizations), but the voice of leadership needs to be heard now: it cannot be circumvented. Otherwise, you will later have to face the arguments in one-on-one battles.
  • – Agree now on the likely time required from the leadership to support the change, and be careful not to underestimate the time needed in the later stages, when leaders will be needed to counsel and support affected employees.
• Capture the overall objective, benefits, costs, risks, timeline, scope, decision makers, stakeholders, and sources of information in a project charter like the one in figure 3-3, using the template in appendix D, and share among the team.
• Make a wider announcement to the organization, focused on what is happening, why, how long it will take, and when they will hear more.