Appendix A

Cost-Driven Reorgs

It is, unfortunately, often the case that at least one reason for a reorganization is to reduce costs.¹ Our advice here would always be to stop and consider if there are alternatives before reducing head count, because in addition to the human cost, there are significant reputational as well as disruption costs. We have seen many organizations reduce costs without significant head-count reduction through various other means:

• Reducing non-head-count spending (travel, training, accommodation, legal costs, consulting costs, and so on). We would always advise looking at the full set of indirect costs of the organization before deciding how much cost needs to come out of personnel alone.
• Redeployment of head count to growth areas if the skills of the staff being moved are appropriate for the new roles.
• Offering leaves of absence instead of layoffs during periods of lower demand.

If none of these is possible, you need to start looking at the actions below, but when implementing them, you should try doing so through natural attrition as people move out of the organization. This approach is less disruptive and will reduce layoff costs but, of course, means that the savings will take longer to be realized. Nevertheless, if significant personnel reductions are likely, all of the advice from earlier in the book is especially relevant: be transparent on the process, and move as quickly as possible to minimize the upset for people involved.

We would also advise against making cost reduction the only aim of a reorganization (although, by the same token, it should never be concealed if it is part of the motivation). Reorganizations are an opportunity to reorient an organization to make it operate more effectively. As people are being disrupted anyway, it is an opportunity to consider revenue benefits as well as costs. Even in the most challenging cost turnaround, it is important to have some chink of light around revenues. Companies that only cut costs often go out of business. As Neil Hayward, group people director of the UK Post Office, told us: “Our big learning is that efficiency—in our case, cutting functions within our organization’s silos—is easy to achieve but only scratches the surface and will not be long-term sustainable. You only get real gains on long-term effectiveness. But this is harder to get to.”

Taking costs out of an organization is not easy. Here’s an ­example of how things can go wrong. An international energy company that needed to save money fast started by simply defining the amount of savings it needed and then required each department to cut costs by a similar amount, primarily through head-count reductions, which varied from 17 to 22 percent. The reality, however, was that the ­company needed to invest more in certain technological areas that were changing quickly, as well as in operations, where performance was far below industry benchmarks. What’s more, the HR and IT departments substantially duplicated certain activities because different layers in the organization were doing similar things. Much deeper cuts should therefore have been made in these functions, with little strategic risk. But the company cut costs across the board, and just six months later, technology and operations were lobbying hard to bring in new staff to take on an “uncontrollable workload,” while substantial duplication remained in HR and IT.

We suggest that a better way would be to start by understanding your business strategy and, within the strategy, which activities drive value and which activities do or could make the organization competitively distinctive. In the public and nonprofit sectors, good proxies for these activities might be delivery of policy outcomes, number of people helped out of poverty, events staged, school performances, etc. When you have done this, then you need to invest in the value-creating activities and cut the costs in others.

The changes that result from this kind of thinking can be ­dramatic. A government-funded environmental organization, for example, spent a lot of time on monitoring individual species and campaigning against their extinction rather than on climate change, which the organization’s leaders actually regarded as more important and where they could have a greater impact. The organization took cost-cutting as an opportunity to look intensely at what it did. It decided to stop the extinction-related lobbying and policy activities, undertaken by about 20 percent of its employees, and instead move the work of another 20 percent of its staff—along with some of the people who had been undertaking the extinction work—into other nonprofits with suitable mandates. The organization then reinvested a large portion of the savings to increase the number of staff members working on climate change. It also invested in building the capabilities of its relatively weak HR and finance functions. The result was an organization that was significantly smaller and lower cost but also one that had been strengthened in delivering its most important purpose. It also meant that the organization’s story, although difficult, was not just about cost-cutting but was also about how the group was going to be able to make a real difference in critical areas of public policy.

Getting to practicalities, eight savings ideas can help to identify pure cost savings and put objective facts behind decisions that can be emotional and contentious. As you will see, all these ideas, apart from the first one, involve a detailed understanding of the activities undertaken in an organization, not only its head count.

1. Change spans and layers. Leaders are used to seeing their organizations represented as boxes and lines. Try instead to show your organization (whether the full company or a part of it) as a demographic pyramid of the numbers of people at different levels. To the side, note the average span of control (manager to direct report) ratio. The results may surprise you: the chart may not look like a pyramid at all. In many cases, you will see a burgeoning middle layer with limited spans of control. In others, there can be a whole layer whose role is questionable and which could be removed. Significant savings can be achieved by working out how to maximize spans of control to appropriate proportions or removing a whole layer of the organization, making sure to reinvest some of the savings in improving the quality and, sometimes, the quantity of the management layer(s) that remains.
2. Transfer activities. Without laying off any employees, you can sometimes in-source activities that have, until now, been done by contractors. For example, with a utility we worked with, we found that an area of the operations workforce was heavily unionized. But the union was happy to work with us to understand which activities could be transferred in from contractors and carried out by company technicians. It was also happy to agree to work on performance improvements together and commit to higher outputs as part of this agreement.
3. Lean out activities. This is the typical savings approach of operational improvements, rather than organizational changes, and the process improvements from reorganizations often focus more on clarity of roles and effectiveness than on savings. Nevertheless, it is sometimes possible to run a traditional operations improvement program (identifying savings ideas, piloting them, and then scaling up) in tandem with a reorganization and use the reorg to embed operational changes in the organization. We have experienced doing this through a field force transformation where the lessons from operational changes in the field and the ideas on organizational changes in HQ came together in a common set of proposals. Some changes focused on cost, and others focused on effectiveness: for example, creating a new role that literally led to 90 percent savings in one area of work, through more-effective contractor management.
4. Remove activities. Often, when a leader has an idea and launches a project, a team is set up to deliver it. Very infrequently will this team declare victory, pack its bags, and go back to other activities. The team stays and the activity becomes—our favorite phrase again—business as usual. Alternatively, activities that were critical in the past become redundant because of changes in the business. Rather than simply cutting head count and expecting workers to deliver the same outcomes by working harder or cutting corners, leaders need to identify these discretionary or low-value activities and stop them.
5. Reduce the frequency of activities. Another way of reducing costs is to conduct some activities less frequently, for example, internal audits, benchmarking of pay, and internal management reporting. Of course, these decisions need to be weighed against the value at risk, but the decisions do not always point in just one direction (i.e., doing more). In the oil and gas industry, for example, compressors are typically maintained (taken apart and checked) every year. It turns out that this schedule can lead to the equipment’s breaking more often. Leaving the compressor alone and instead monitoring its condition can often save money and improve performance.
6. Centralize activities. In many companies, the same activities are replicated many times across the organization. Typically, support services—such as HR, finance, IT, corporate affairs, and communications—fall into this category. Other examples include strategy and major projects (above a certain cost), whereas sales and operations typically need to be located locally. Here we need to draw the distinction between centralization of activities in one or more geographical places and centralization of reporting lines. Only the former leads to real cost savings (through the capacity to cover each other’s work, run similar tasks together, prioritize better, etc.). For the latter, it is important to have one person able to understand and make decisions on a whole function, but centralizing reporting lines does not deliver savings by itself (except in spans and layers). Centralizing the right activities can lead to improved effectiveness as well as efficiencies (e.g., developing one standard, more efficient way of doing things). But be careful: some things are better done locally. Take HR as an example: compensation and benefits, payroll, recruitment, and training are mainly transactional activities that can be centralized. However, HR advice on business issues (usually called business partners) always needs to be close to the manager who needs it—that is, local.
7. Move activities. In a global market, high skills and good language abilities (especially English) are available in lower-cost countries around the world. The movement of activities is a constantly evolving picture: in 2016, Chinese companies were also seeing activities shift from mainland China to other, cheaper areas in East Asia. Typically, the activities to consider for this savings approach are the same transactional activities as for centralizing activities (you simply centralize them in lower-cost areas). For global companies, twenty-four-hour access can obviously also be a factor and normally leads to a selection of three or four lower-cost countries across the world. Critical to the success of these moves is knowledge of how to establish yourself in these countries, so either colocation with operations or advice from a company with experience in this area is essential. Of course, the cost of the latter needs to be priced into any savings case.
8. Automate activities. As with people who talk to you about bizarre organizational concepts, when people start bamboozling you with obscure IT words and stories about how it all worked out so well in similar companies, it is time to run for the hills! Automation can, of course, lead to huge savings. However, the savings will only happen with activities that you understand and can control. With one company we know, automation led to a savings of 20 to 30 percent for activities that were already under control. For those that were not understood, costs increased as much as sevenfold in some cases. Unless there is a common IT system already in place, we would advise running a new process first, even with IT workarounds, to make sure that it runs as effectively as possible, before applying an IT solution. Be very careful to understand what the system you are choosing covers and what it does not (or you will find out that it costs you more when you have to add in an additional, essential element of the system later). And try to understand what flexibility your IT system brings: ossifying your processes in a very inflexible system that fails to communicate with other systems is obviously a bad idea in an age of IT innovation.

Using a very structured approach to identify savings across the organization and basing everything on facts about activities will help you navigate your way through a topic that can quickly become emotional and upsetting. If the decision means that head-count reductions are required, you owe it to your colleagues to follow the most rigorous and fair way of delivering those savings, rather than succumbing to the horse trading that can so often result. In describing how the UK Post Office cut head count by 12 percent, yet increased staff satisfaction, Neil Hayward pointed out three factors: “Firstly, a coordinated, joined-up program of the cuts rather than a piecemeal approach. Secondly, face-to-face discussions and engagement with people on the change. And thirdly, creating a good working relationship with the unions so that they understood it, even if they did not like it.”