Organizational restructuring: four common pitfalls to avoid

    Restructuring

     

    2015 was a difficult year for Canadians – with the price of oil plummeting organizations were forced to significantly downsize their workforce. All told it was estimated that over 100,000 jobs were lost across the Alberta oil fields. On top of this, some of Canada’s largest companies (Bombardier, TD, Scotiabank) undertook major organizational restructuring initiatives.

    The terms downsizing or restructuring generally refer to organizations reducing their operating costs through reductions in labour costs. When an organization makes the decision to reduce labour costs, they’re faced with major organization design challenges in identifying which positions to cut and which positions to keep. While this is not an ideal scenario, it’s sometimes a business reality; and when faced with this reality, leaders should look to avoid a number of common pitfalls.

    Don’t fall into the trap of benchmarking exercises.

    It’s often said that we act on what we can easily measure. This holds particularly true when we compare spans of control across an organization (internal benchmark) or between organizations (external benchmark). While span of control is a useful statistic – it provides a window into the reporting relationships and managerial accountabilities of your organization – it shouldn’t directly and independently drive decision making (e.g. using a magic number as a single decision factor). The spans of control across an organization vary for a multitude of reasons including business unit size, types of work required, and experience of the manager, etc.; all factors that should be incorporated before any decisions are made. Look to optimize the span of control – not arbitrarily reduce it.

    Don’t assume people are working at the appropriate level.

    Most employers assume that their workforce is performing the complexity of work that they’re being paid to do – which in reality, is not often the case. As employees move to higher levels in an organization it’s expected that their complexity of work increases as a result. However, what often happens is they perform the same complexity of work as the lower level, are paid higher wages, and directly micromanage and impede the workers below. If an organization is able to identify these positions – they’ll be able to identify significant labour cost savings while improving organizational effectiveness, efficiency and employee satisfaction.

    Don’t delayer without a clear framework.

    Many consulting firms have been selling ‘delayering solutions’ over the past decades with the intention of making organizations leaner, pushing decisions downward, and enhancing customer and market responsiveness. The perception of ‘flatter is better’, coupled with the need to save money, has led business leaders to remove managerial layers that are deemed redundant. Unfortunately, these decisions are not always driven by clear evidence and may result in unintended consequences. A recent study conducted by the Harvard Business School actually showed that delayering had the unintended consequences of moving more control and decision making to the top. We recommend managers identify the work required to achieve the corporate strategy, and based on this, determine the number of layers (or strata) their organizations require. From there, they may find managerially redundant layers, but they may also find that the organization has the optimal number of layers – with managerially redundant positions spread throughout.

    Don’t ask managers to proportionately cut.

    We’ve seen organizations in the past identify a proportionate percentage dollar value they expect all business unit leaders achieve in labour cost savings. While seeming to be equitable, this approach naturally moves away from the key principle that organizations should be designed to achieve strategy. If there is an economic downturn, a company’s strategy may be to reduce their product mix and focus on the core products that are large revenue generators – but if the business proportionately cuts, the large revenue generators could be seriously inhibited.

    In summary, restructuring is rarely ideal, sometimes necessary, yet often poorly executed. It requires a thoughtful approach that can deliver both shorter term cost savings and longer term performance improvements. If done correctly, restructuring can greatly improve an organizations ability to both weather a downturn and position itself for the future.

      2 Responses

      1. Bob MacIntyre Bob MacIntyre

        at |

        Great summary and timely.
        In the section on span of control (last sentence), my experience is that in cost reduction exercises that leverage structural change, the inclination is to increase the span of control, not “arbitrarily reduce it”. am I interpreting this correctly?

        Reply
        1. Ron Capelle Ron Capelle

          at |

          Bob, thanks for your reply and good catch. Yes, the tendency is to increase the span of control, and that is how the sentence should have read. The objective would be to optimize the span of control… set it up in a way to find the best balance between managerial effectiveness and cost efficiency. As you correctly point out, the tendency is often to have a sole cost reduction focus, which can lead to less effective managerial work and reduced performance.

          Reply

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