Applying Organizational Design to Survive Difficult Times
Recent surveys indicate that as many as 70% of North American companies have made organizational restructuring as part of their plans to weather the current economic downturn. Many industries are reporting financial losses with auto manufacturers and distributors and retailers of big ticket household items leading the way. As a result companies are cutting staff to align their business with current market demand for their products and services. From a longer term survival perspective it is important that these companies carefully apply organizational design principles before going ahead with indiscriminate across the board job cuts. Downsizing must be planned and a process put in place that supports the longer term strategic plan for the company.
The pitfalls of downsizing
Downsizing done without a proper plan and rules of engagement will create substantial risk for the mid to long term future of the company. If head count cuts are administered in a haphazard and one size fits all manner it will result in organizational shock that will disrupt the normal flow of business that is geared to satisfying the needs of the clients. It also makes the high potential and talented employees nervous about the future and easy pickings for recruiting encroachment by your competitors. Your competitors will only take your most talented people who will bring knowledge of your weaknesses and key pinch points to take market share away from you.
This is why you should consider all other avenues to reduce salary expenses without layoffs. There are a number of alternatives to reduce your people cost: wage freezes, hiring freezes, natural attrition, unpaid sabbaticals, using up owed vacation time and an enhanced early retirement option.
Other options are to enhance your performance management program and change your bonus structure to drive revenue growth. You can also review your processes and ensure that everyone in the organization is supporting the sales team to achieve sales growth or make up for the loss of key accounts. It is always amazing how creative your employees can be if you challenge them to find new ways of achieving sales increases.
Furthermore, shareholders have finally learned to flee from companies that go through indiscriminate job cuts through painful lessons personified by Al “Chainsaw” Dunlop who almost ran Sunbeam Corp into the ground with a wave of indiscriminate downsizing. Dunlop’s initial impact on Sunbeam Corp had meant a 225% share price increase. Dunlop had become a corporate cult hero by having fired 18,000 employees at Scott Paper and he had authored a bestselling book called “Mean Business.” He also delivered the famous quote: “If you want a friend buy a dog. I bought two dogs.” The Sunbeam Board fired Dunlop approximately two years in his tenure when they realized that the bank covenants for loans were close to being violated. The painful lesson learned here is that a company cannot job cut itself into growth and prosperity. Also if you terrorize your workforce the survivors may just sit on their hands and let the leaders fail just as many professional sports coaches have painfully found out.
The ultimate goal of downsizing isn’t simply to shrink the company and reduce cost but rather to use organizational design and change management concepts to improve the company dramatically. The goal is to re-organize into a much more agile and focused company to be in a great position to gain more market share during the next economic upturn.
Another consideration is to understand why a company is downsizing? Is it because you have too much capacity when compared to the decreased market demand? Or is it because a company does not have the right people on the bus? Or has the technology or selling proposition changed dramatically thus requiring new talent? Each one of these questions will require a different strategy for downsizing.
The key point here is to not simply look for immediate cuts to wage expenses but think about this strategically beyond the next year. What is the company strategy, what is my optimum organizational structure and what kind of people do I need to achieve this strategy.
Optimum structure to promote organizational agility and taking care of the customer
Rather than focusing on headcount reductions, successful companies’ first figure out how the important work actually gets done and then they streamline their operations. They search for ways to eliminate or combine business units, departments, processes and eliminate entire layers of management that don’t create value. Examples are eliminating a layer in a plant or combining two departments or divisions to broaden the span of control for senior executives. Often this results in having more skilled departmental or divisional heads that have the ability to unleash the full potential of these departments or divisions. Another example is to use benchmarking to determine the optimal staffing especially for back offices and support staff.
Here is an example of the deliverables achieved for an organizational structure study:
Gain understanding of the nature and scope of current work relating to the success of the company
Identify critical management processes required to carry out this work
Analyze the existing organizational structure, the number of layers and the underlying system of roles and role relationship
Evaluate the “health” of the existing talent pool and its capacity to meet future growth needs
Understand the nature and quality of existing working conditions and their subsequent impact on worker motivation
Identify potential technical or market place developments that could have a significant impact on the work
As you can see from the above deliverables of the organizational design review there is no mention of downsizing. However this company did streamline its operations and reduce some non value added jobs as a result of the organizational structure review. This company now with the right structure and the right people was able to gain 10% market share points on its key competitor.
Sustainable downsizing with enhanced performance and an improved talent pool
There are three ways that downsizing can result in substantial improvements in a company’s talent pool.
First, the headcount reductions can be used to remove underperforming units, teams or individuals. Sometimes companies use headcount reductions to remove managers who have resisted change. If this is done correctly the people who remain will agree that this change was necessary for the company to become more competitive.
Second, there is an opportunity to generate better performance amongst those who remain after the downsizing. You need to get the remaining group to focus not on whether they will be next but on how to elevate their work to a higher level to help the company perform better and avoid additional layoffs. The message is that you are the people on the bus that will ensure that the company survives the recession and is poised to grow on the upturn. In terms of motivating high performance in the short term this is highly effective. Your people will say “Yeah I want to keep my job but I also want my company to succeed-lets go do it.”
Third, is the strategic talent pool approach that you will downsize not only to reduce expenses but also to improve the overall talent pool to enable the company to become fitter to survive the recession. The reductions of selected employees who are not achieving the desired results will give these companies the opportunity to bring in higher level performers who have higher potential to grow with the company. Again, I stress that this must be done selectively with clear rules of engagements. Otherwise it will be difficult, as in the Sunbean case with Al Dunlop, to maintain morale and the organizational knowledge and culture to get the work done.
Downsize based on strategic plan requirements
When contemplating a reduction in your work force it is important to look at your strategy and the resulting organizational structure and tasks that will be required to drive the strategy. Oftentimes companies will look at the seniority of their people and proceed with cuts amongst the more junior employees. The may result in the downsized company having ill equipped people to carry out the tasks that the strategic plan requires for success in a more competitive environment as a result of the reduced demand for products and services. This action while commendable based on last in first out concept can accelerate the decline in sales and eventually result in the bankruptcy or the economic extinction of the company.
Have minimum number of work layers required to do the work
It is important that you do not have too few or too many work levels or layers in your organization. If you do not have enough layers the managers will have to work in the weeds and thus neglect their longer term tasks. If you have too many layers employees will work at the same level and not add value.
The ideal number of layers for a company will depend on its size and complexity for delivering services or products. As a rule of thumb departments and plants can have 2, 3 or 4 layers depending on the size and complexity of the product or service. Business units can have 4 or 5 layers. Companies can have anywhere from 2 layers for a very small company to 7 layers for a large global company. Having too many layers or having too few layers can be very costly. If you are downsizing it is important that you get this right to ensure that you have an efficient and agile organizational structure.
Assessing the cognitive ability of your people
Another important concept to understand in organizational design is matching the cognitive ability of an individual to the complexity required at each organizational layer within the company. If you have a level 2 cognitive ability capable individual doing a job requiring level 3 cognitive ability this individual will be unable to do the required analysis and judgment in order to execute the work that is required to add value for that role. For more information on how to assess and select people based on their cognitive ability please refer to Organizational design: assessing & selecting people for cognitive ability.
Use downsizing to eliminate jam-ups
When downsizing it is an excellent opportunity to review your organization structure to identify jam ups. Jam-ups are found when you have two or more reporting relationships with the individuals working at the same cognitive ability. Studies have shown that 33% of manager subordinates relationships have the boss working at the same level as his or her subordinates. These jam-ups are very costly for companies because you are paying a premium for a manager who is not adding value to his or her subordinates. These jam- ups also cause a lot of frustration for the subordinate who feels that his superior is not smart enough to be his or her boss. In many instances these will cause the subordinate to resign because they are not being challenged by their manager.
Mergers and acquisitions and transition teams
The current recession will result in the weaker companies being acquired by their stronger competitors or smaller companies merging with each other so that they can compete on a more equal footing against a larger competitor.
Following an acquisition or a merger a company will eliminate the redundant positions and additional capacity. It is important that organizational design concepts be applied to ensure that the most efficient organization is created as a result of this acquisition or merger. In order for this to occur in a carefully planned manner companies will often form transition teams. These transition teams will use these organizational design concepts to review how it is best to organize how the work gets done and to have more consistent rules on how to assess and select the new team for the new organization structure. This result in a much more robust system being developed to select the best performers to build a stronger organization. Transition teams are also used to help shape the culture of the new organization based on the strengths of the two merging companies.
Conclusion and Additional Readings
While no leader welcomes the task of significant downsizing, the process can bring a significant upside results if managed and communicated in the right way. Part of this involves approaching this situation as an opportunity to make the company stronger in the long term. How can the organization make the most of it if downsizing is required? Also, if you get the downsizing right with the right structure and the right people that drive growth then chances are that you will not have to downsize again.
These two articles are also two chapters in the book called “Organization Design, Levels of Work & Human Capability.” This book is used in many business schools to teach organizational design principles.
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