Chapter 22
The Hidden Costs of Reorganizations and Downsizing
A major reorganization is as complex as putting in a new runway at Heathrow Airport while keeping the airport operational. The steps, the consultation, the dynamics, and so forth are as difficult. Then, how is it that we are unable to fully understand the ramifications and costs of a reorganization? Why do organizations appear to have an addiction to reorganizations? This chapter, while not a cure for the addiction, may help management be more aware of the symptoms so that advice can be sought.
RAMIFICATIONS AND ASSOCIATED COSTS
The CFO has historically been far too silent about the associated costs when a reorganization is muted. If anyone is to talk sense to the board and senior management team, it has to be the CFO. The CFO needs to ascertain the costs of such an exercise. To assist, I set out what typically happens in a reorganization.
- Loss of key staff in the third- and fourth-tier management ranks. There is a period of chaos, where staff members are disillusioned and many key staff in the third- and fourth-tier management ranks walk out the door with a golden parachute and straight into employment elsewhere.
- Dysfunctional management teams. A reorganization can leave you with the also-rans, and the vultures (those nasty individuals busily burying hatchets in all those around).
- Higher costs as ex-employees come back as contractors. The bedding-in process starts to kick in somewhere between the seventh and twelfth months. The completion of all the redundancies takes longer than expected and, yes, more than a few will come back as contractors at a higher cost. These costs must not be ignored
- Consultants' fees. Costs begin to escalate, especially consultants' fees. You will need help with the culture change and communication.
- Designing a new logo, letterhead, signage, and stationery. Look back to the last time these were done for a reasonable estimate.
- Recruiting assistance required. As all staff affected will need to reapply for their position, additional HR resources will be required.
- Property leases. Unwinding of the property leases that may become surplus can take up to 24 to 36 months until the organization is released from its prior commitment.
About 24 months after the reorganization was announced, productivity is back to normal; thus, for the duration you effectively have been going backward. In the 24- to 36-month period advantages may kick in provided that the reorganization has been successful. It is useful to remember that only one out of seven takeovers or mergers actually works. While reorganizations may have a greater success rate than this, it may well be less than 50 percent.
AN ADDICTION TO REORGANIZATIONS
CEOs seem to think restructuring operations are good for efficiency, improving service, and, of course, their future aspirations. In some sectors, it is an addiction. Government agencies are forever splitting up and then amalgamating. The only purpose I see is to distribute some of the public purse to the private sector advisers, consultants, and contractors (some of whom were previous employees).
As Francis Urquhart, a fictional character in the BBC's ‘House of Cards’1 might say, “Some of you may think that restructuring a department frees the newly formed teams to deliver, others may think that the confusion, miscommunication that often goes with a reorganization undermines people's confidence in what they do and in their team, giving rise to a period of stagnation. You may think that, but I cannot possibly comment.”
TYPICAL REASONS FOR A REORGANIZATION
Let us analyze four typical reasons for a reorganization. None of these reasons, in my opinion, really warrants a reorganization.
Reorganizing to Remove Certain Staff
In government and nonprofit agencies, it is not uncommon for a reorganization to occur in order to remove one or two senior managers. It is quite remarkable how much will be done to conceal this real intention. This not only is weak management, it is also stupid.
As Jack Welch2 points out you need to apply candor and allow these senior managers to move on. In many cases, it is to the benefit of both parties.
Reorganizing to Improve Efficiency
Merging two units/teams together or splitting teams up and re-forming into new teams certainly does create a climate change. The question is whether it leads to efficiency. In order to become more efficient, there needs to be a behavioral and procedural change. Staff members need to change work habits so that logical efficiencies can be introduced.
One energy sector company has made much progress with continuous improvement programs. Senior managers are heavily involved in the change management, and now this is part of the culture. The company has workshops to identify areas where change needs to occur, and people at the meetings agree to take on the process of change. They have had a number of successful projects.
One finance company has had a number of successes with business reengineering. It has made significant inroads by using preferred suppliers and eliminating paperwork or passing over the paperwork to suppliers. Continuous improvement is now part of company culture. There is an ongoing requirement for staff members to keep up in their field, bonuses are paid if you pass a tertiary exam, and so forth.
The interesting point about these two stories is that they arose from business reengineering as opposed to business reorganization. Any efficiencies that reorganizations achieve are simply those that are associated with reengineering the processes. Thus, one can surmise it would have been better to have performed a reengineering exercise in the first place.
One mistake that the uninitiated often make is assuming that large savings are available when merging corporate service functions, such as merging two accounting functions together. In many cases, the costs of changing systems far outweigh the savings from eliminating any duplication of labor costs.
Reorganizing to Improve Service
As stated earlier, a reorganization or merger is like putting in a new runway at Heathrow Airport. Surely, you might think, simply laying down foundations, concrete, and a bit of infrastructure is not that hard. You try telling that to the management at Heathrow Airport.
Likewise, a reorganization is a lot more complex than your planning will have indicated. Day-to-day routines are disrupted with meetings to discuss the new organization, staff members applying for new positions, staff members searching the papers and recruitment agencies for alternative jobs—need I go on? Service does not improve, not in the first two years anyway.
For service to improve, you need a behavioral change. Staff members need to buy into becoming more customer oriented, measuring their performance in a balanced way. You have only to see the quotes on the wall in any Tony's Tire Service (a tire company in New Zealand) customer waiting room to understand that staff members live and breathe service.
A positive behavioral change does not often occur with a reorganization; in fact, quite the reverse occurs in the first two years. So if you are looking for better service, maybe a service program is what is needed rather than a reorganization.
Reorganizing to Show There Is a New CEO
Many CEOs like to stamp their authority by throwing out systems they do not understand and reorganizing the business to fit a model they are more familiar with. They like to show there is a new broom in the organization. This is typical of a CEO with an ego problem. Many reorganizations occur within the first 6 to 12 months of a new CEO arriving, and often these CEOs are making decisions without full knowledge of the business. The cost to the enterprise is huge. In fact, as part of the recruitment process, one should evaluate the reorganizations the CEO has done.
ALTERNATIVES TO A MAJOR REORGANIZATION
Many reorganizations are totally unnecessary. Here are alternatives to a major reorganization that are worth considering.
Remove the Targeted Staff
Instead of putting everybody through a lot of pain, be direct and open and face the issues. Simply remove the one or two senior managers causing the problems. Jack Welch in his book Winning offers very sound advice on candor.3
Appoint a CEO Who Is a Successful Change Agent
I believe an inspirational CEO will create more value than any reorganization ever will. In fact it would be worthwhile looking to see if inspirational leaders ever fall back on reorganization to solve a problem. I can recall the early days of George Hickton, an eminent New Zealand CEO, taking over the reins of a newly formed government department. Very soon, with a combination of new blood and inspirational leadership, the government department was revolutionized. I believe it was one of the most impressive organizations I have had the pleasure of working for.
I can recall the time when George Hickton was presenting at the Institute of Chartered Accountants conference where the front row was taken up by his direct reports who were both interested and passionate about what the CEO was talking about. This was a rare sight, and I expected David Attenborough, safari shorts and all, to come through the curtains at any moment saying, “You are witnessing an event which is rarely caught on camera.”
Move Buildings
A few years ago, a major oil company had a top-heavy head office. The new CEO realized that the best way to change was to sell the large and spacious head office and acquire a smaller head office building, about one third of the size of the original building. He called the business leaders in and said, “Fit in that building, and the staff with members who cannot make it will be made redundant.” It transpired, after the move, that there were layers of management whose sole purpose was to attend meetings. Surprisingly enough, when these managers and meetings ceased to exist, the oil company found that operations were unaffected.
Rotate Offices
Arthur Andersen & Co's office in Manchester, UK had another solution. Each year, the senior management team (i.e., the partners) were instructed to move offices. This had the desired effect of energizing and giving the partners a chance to get on top of the paper war. The partners agreed that even though physically moving offices was an inconvenience at the time, the outcome was largely a positive experience.
Improve the Leadership from Within
A reorganization may be an attempt to get around the problem that is created by inadequate or ineffective leadership from the senior management team and the management tier that reports just below that. One way of improving the issue is to undertake a leadership survey, which is a more in-depth look at leadership than a 360-degree feedback process will achieve.
You are then able to support these leaders with mentors and follow with an up-skilling leadership program. Seek mentors who have the X factor. Many would welcome the chance to pass on their knowledge and experience. I guess that if half the people who masterminded a reorganization had talked it through with their mentor, if they had one, many reorganizations would have stayed on the drawing board.
A CHECKLIST TO PUT YOU OFF A REORGANIZATION
Before you look at a reorganization, complete the checklist in the electronic media.
HIDDEN COSTS OF DOWNSIZING
As a CFO, you should never underestimate the long-term impact of downsizing staff. Wherever possible, I believe the CFO should argue that it is better to fund the shortfall out of retained earnings. The cost of firing and rehiring, when added to the public relations disaster it creates, often is much higher than holding onto the staff.
By my calculations (see Exhibit 22.1), an organization with 500 full-time employees that is contemplating dismissing between 50 and 70 staff members would be no worse off if the staff members were kept on and redeployed, where possible, for up to two years.
EXHIBIT 22.1 Hidden Costs of Dismissing Staff
When faced with a situation where the business is contracting, you can explore a number of options:
- Discuss the issues with the affected operational units and ask them to find new initiatives that can help part fund their salaries. Often, there are a number of income generating possibilities that have not been explored.
- Can you redeploy the staff and buy some time so staff members have time to seek further employment while employed? This is a managed staff reduction process and will save a huge amount of money on redundancies while at the same time giving your staff an opportunity to find employment. This option is unlikely to be available in a major recession.
- Working with the human resources team, formally establish a voluntary redundancy program. This has some downsides, as you can't directly target staff members with lesser skill sets.
- Undertake a reorganization and have everybody reapply for their jobs. This is not a course I would recommend, for reasons stated above.
The experts in this area are the human resource team; never make decisions or move to the next stage without full consultation with them. I hope you are never involved in a massive downsizing, but if you are, prepare for it very carefully. Ensure that you have been as innovative with your solutions as possible. If done well, it could create an achievement that lasts for a career.
PDF DOWNLOAD
To assist the finance team on the journey a checklist has been provided which the reader can access, free of charge, from www.davidparmenter.com/The_Financial_Controller_and_CFO’s_Toolkit.
- The reorganization checklist