Restructuring for Lower Costs and Greater Efficiency - Four Groups

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Information about Restructuring for Lower Costs and Greater Efficiency - Four Groups

Published on November 8, 2009

Author: fourgroups



There are always unforeseen risks associated with any corporate restructuring programme. In terms of a metaphor, restructuring can be seen as undertaking major organisational surgery, with all the attendant risks and uncertainties. One route to reducing the risks and raising the possibility of a successful outcome comes from gathering information on both the structural, tangible elements of the organisation and complementing this with a focus on the more subtle or intangible factors. Such an approach is likely to increase the chance of achieving the twin goals ofshort term cost cutting and long term efficiency and agility in a far more measured and precise manner.

Restructuring for Lower Costs and Greater Efficiency Linking Behaviour to Bottom Line Performance Restructuring for Lower Costs and Greater Efficiency There are always unforeseen risks associated with any corporate restructuring programme. In terms of a metaphor, restructuring can be seen as undertaking major organisational surgery, with all the attendant risks and uncertain- ties. One route to reducing the risks and raising the possibility of a successful outcome comes from gathering infor- mation on both the structural, tangible elements of the organisation and complementing this with a focus on the more subtle or intangible factors. Such an approach is likely to increase the chance of achieving the twin goals of short term cost cutting and long term efficiency and agility in a far more measured and precise manner. Recent research has raised a number of for measuring apparently nebulous Wikipedia states that “a company that questions regarding the different information such as communication, has been restructured effectively will approaches companies adopt when culture and relationships, a clearer path theoretically be leaner, more efficient, going about their restructuring activi- to identifying higher margin activities better organized and more focused on ties. Firstly, there is evidence that cor- and increased efficiency becomes its core business with a revised strate- porate restructuring programs are by apparent. gic and financial plan.”1 and large unsuccessful at delivering other long term goals and that they can This article also discusses the idea that It is true that leanness and efficiency even cause damage to the business. better organisational information lie at the heart of any restructuring Secondly, whilst companies are able to enables companies to adapt to a con- project. However, being able to do identify cost cutting measures, these stant state of change and increased more with fewer resources is a com- programmes often fail to deliver corre- responsiveness in order to achieve the pelling yet notoriously difficult goal to sponding increases in productivity and optimum balance of performance and achieve. A restructuring programme efficiency. efficiency. In the long run, organic can be triggered by obvious catalysts change should be a constant within an for change such as; This article argues that the traditional organisation’s culture, which, when measurements used by companies to aligned with clear communication and • A change in management identify cost and efficiency improve- a measured strategy, in all but the • A merger or change in ownership ments do not facilitate long term per- most extreme situations negates the • External economic factors formance benefits. Indeed, managers need for radical and traumatic structur- • New or disruptive technology may inadvertently be using informa- al change. • Regulatory issues tion that encourages an indiscriminate or haphazard approach to reducing Why restructure? There are also more subtle reasons to costs. By extension, one of the key seek out structural change; omissions companies can make is fail- Put simply, restructuring is a catch all ing to factor in the intangibles of the term for significant organisational • Changing market conditions organisation in any restructuring pro- change. • Perception of systemic weaknesses in gramme. By combining new methods the organisation

Restructuring for Lower Costs and Greater Efficiency • Pressure from shareholders and other ciency? ment processes. stakeholders Companies should launch an organiza- • The actions of competitors Recent McKinsey research2 suggests tional redesign focused primarily on that the organisations which launch restructuring only if they have com- It can be argued that doing things more radical restructuring or turnaround pro- pelling evidence that the current struc- cheaply is the simpler side of this equa- grammes rarely reap the rewards they ture is suboptimal and only if they can't tion. There is usually sufficient organi- hope for. The report suggests that with- address this shortcoming less invasive- sational data and management com- in specific industries there is an arche- ly—for instance, with increased mitment to identify and push through type or dominant industry structure accountability and better planning and measures to cut costs in the short term. which the majority of companies have performance-management processes. That said, becoming more productive or adopted and conforming to this arche- Meanwhile, businesses that deviate efficient at the same time as reducing type is likely to result in prolonged suc- from the norm should take a hard look costs is the real challenge and its cess. For example, the dominant struc- at whether an outlier organizational attainment may not necessarily lie in tural model could be focused around structure is truly beneficial. Only proven downsizing or redefining an organisa- products, functions or geographies. The industry front runners should seek tion’s structure. report also suggests that the most suc- structural ways to maintain—or even cessful companies in each sector adopt increase—their advantage.” Inherent risks a hybrid approach based on the under- lying industry archetype while incorpo- Reading between the lines, the mes- With any restructuring programme rating some local or geographically sage seems to be that cost reduction comes some element of risk. While specific elements. through restructuring on its own is not most restructuring is likely to lead to a enough to meet long term goals. Whilst short term reduction in costs, there is The takeaway from this research is that restructuring may achieve cost cutting, some chance that value is destroyed or organisations are most likely to benefit there are likely to be unanticipated diminished within the organisation and from structural reform only if their consequences with initial gains disap- in the long term this could lead to; existing structure deviates significantly pearing over time. from the industry norm. By aligning • Damage to the ‘brand’ of the organi- organisational structure with the best An alternative approach? sation models in the industry, organisations • Distraction and loss of focus at senior give themselves the opportunity to A leaner organisational structure is an level generate better results. The clear impli- enabler of short term cost cutting, up • Falling productivity cation being that when looking to to a point. However, the research • Poor morale and decreased employee address poor performance, organisa- would seem to suggest that it is only of engagement tional structure is only one factor which limited influence when it comes to the • The loss of key people needs addressing. McKinsey then go on second goal of restructuring, namely to say; improving productivity and efficiency. As a result, the organisation emerges in a weaker position with lower moti- “For many companies, structure alone With this in mind, the most obvious vation, productivity and staff who are is rarely responsible for problems such question centres around why compa- unsure of the direction that the organi- as sluggish decision making, a lack of nies would look to embark on such sation is heading in. These issues may accountability on the part of employees high profile, dramatic and risky then be compounded by a similar per- and management, or stagnant innova- changes when the evidence suggests ception amongst other stakeholders. tion processes. More often, the root that the chances of long term improve- causes of such difficulties are poorly ments are slim? Is restructuring the solution to com- defined responsibilities, misaligned bined lower costs and greater effi- incentives, or substandard manage- Perhaps the answer lies in the psychol-

Restructuring for Lower Costs and Greater Efficiency ogy of managers? It is a natural human ate 80% of the profitability? quantify and they will often be hidden reaction to changing circumstances or • Which 20% of the assets generate to traditional data gathering and man- when things go wrong that we look to 80% of the profitability? agement tools. change that which we feel we have most control over. In an organisational These are powerful and revealing ques- Ironically, restructuring is attractive setting, management teams are likely tions, yet few companies today are because it is clearly visible and deals to target structural systems and able to answer these questions given with aspects of the organisation which processes which are tangible and are the way their accounting and informa- are easily measurable or quantifiable, apparently the easiest to remodel or tion systems are set up. As a result, the this then makes targeting intangibles influence, offering a quick solution to a answers are generally hidden from seem a much less attractive or obvious pressing issue. In the case of restructur- management view. Unfortunately, the option. That said, it is estimated that ing, it is easy to see how managers will questions themselves rarely get 20% of productivity is lost to poor com- want to be seen by stakeholders as tak- asked.” munications and unproductive behav- ing decisive and visible action. iours. A focus on this area requires an The Hagel article, alongside the approach that can enhance productivity However, by their very nature, organi- McKinsey research implies that the suc- via intangible factors while maximising sations are highly complex and whilst it cess of an organisation lies only partly efficiency and reducing costs. is relatively easy to get a good under- its structure and more in its intangible standing of the structure, systems and factors such as behaviours, relation- Why are these areas valuable? processes, other key information and ships and culture. If an organisation’s most likely, the information which is structure is not enough to explain vari- At its core, any move to cut costs and going to make a difference to long term ability in performance, by definition improve efficiency should enable man- performance is much harder to gather. any problems and difficulties are likely agers to focus on the highest margin In short, the information available to to be hidden and invisible to standard activities. By definition, this requires managers may enable short term cost organisational measurements. that managers are provided with suffi- cutting but it often fails to reveal the cient information to identify and fully optimum path to long term efficiency. If restructuring is not the complete understand their operations and activi- answer to long term lower costs and ties. On a practical level, this means In a recent blog post3, John Hagel efficiency, what is? that companies benefit from investing (Pareto Paring) highlights this issue, in understanding the intangible areas pointing out the 80/20 principle that Whilst corporate structure is one area of their operations. This requires a focus states 20% of the inputs generate 80% where it seems to pay dividends to fol- on generating new insights around of the results. In his article, Hagel poses low the herd, this does not mean that activities such as; a number of questions that companies managers can let up in their pursuit of should be able to answer. increased productivity and decreasing • Change management costs. • Collaboration “The 80/20 rule provides the founda- • Culture tion for a relatively simple exercise for Instead of looking exclusively at struc- • Informal networks executives. It involves answering the tural cost cutting opportunities, the • Internal communication following questions: implication is that by focusing more on • Levels of innovation intangibles such as people, engage- • Which 20% of the products or servic- ment, culture and communication, Although these areas are by definition es generate 80% of the profitability? organisations will be able to get to the harder to measure than the explicitly • Which 20% of the customers generate root of their problems far more effec- tangible costs of the business, greater 80% of the profitability? tively. The difficulty here is that histori- control and understanding of these • Which 20% of the geographies gener- cally, these issues have been tricky to areas lie at the heart of improved effi-

Restructuring for Lower Costs and Greater Efficiency ciency. atic and comparable way, making it efficient ways of working is likely to possible to address the fundamental minimise the negative impact of any Undoubtedly and given different indus- issues of efficiency. external pressures. tries, such intangibles are likely to play a greater or lesser role, depending on The benefits of focusing on the intangi- An organisation’s structure is only part the circumstances in question. For bles has long term implications and of the wider operational and industry example, in industries such as software benefits. Concentrating on and system- dynamic and as with other competitive and biotechnology, intangibles are like- atically managing these areas means pressures, the most effective structure ly to be far more significant in driving that organisations are able to become for a particular industry is likely to coa- performance than industries which are more flexible, consistent and produc- lesce around industry best practice. By more commodity focused. Still, this tive. Change is a constant process and extension, an efficient, optimised struc- does not mean that organisations in by building this into the organisational ture can only be viewed as a short term industries such as food or construction culture, it is possible to become more competitive advantage at best and can afford to ignore them. proactive and agile. something that becomes a commodity over time at worst. In contrast, what is Making the intangible tangible Beyond change likely to drive long term performance are the intangibles and other areas Any initiative for improved efficiency Any restructuring effort should be seen where an organisation is able to differ- requires changes in behaviour from as part of a wider change management entiate itself. Even in industries where those involved. Whilst it may be possi- programme where it is necessary to the intangibles seem to be less impor- ble to impose new systems and struc- engage hearts and minds. Given the tant, their measurement and under- tures on people, without people’s availability of more sophisticated and standing is vital to achieving the high- explicit co-operation and acceptance of precise information, organisations can est possible performance levels. new ways of working, any gains from create an ongoing flexibility and these structural changes will not be responsiveness which will enable a Conclusion realised. Only by aligning behaviours more focused and targeted approach to and culture to systems and processes is their operations. By implanting change Given readily available information, it is it possible to combine short term cost into the DNA of the organisation, it is not surprising that companies focus on savings with longer term improve- possible to nip any problems or difficul- cost cutting when reacting to external ments in efficiency. ties in the bud before they have any events. In the short term, this approach noticeable impact on performance. seems to be a route to quick and tangi- As a means to facilitate this, Four Furthermore, an organisation which is ble results. However, the singular cut- Groups have developed a series of tools constantly innovating and identifying ting of costs is unlikely to yield long which provide managers with the the most efficient methods of working term benefits and by extension, organ- insight and understanding around is likely to create key performance dif- isational structure seems to have a these traditionally intangible areas. By ferentiators as a natural by-product of marginal effect on long term perform- providing information about how to such activities. ance. To achieve that goal, a far more best engage staff, improve interaction granular understanding of an organisa- and better understand and predict Calls for restructuring are often prompt- tion’s tangible and intangible elements behaviours, relationships and culture, it ed by external factors or events beyond is required. is possible to show the interdepend- the control of management. However, ence between an organisation’s tangi- the real drive for change must ulti- By addressing intangible issues along- ble and intangible resources. mately come from within and equip- side more formal, structural elements, ping an organisation and its people it is possible to not only react to and Four Groups helps by presenting infor- with the information and imperative to take advantage of external market mation around intangibles in a system- naturally seek out and adapt to more pressures but to also create an ongoing

Restructuring for Lower Costs and Greater Efficiency culture which is naturally adaptable and capable of working in a flexible and responsive manner. Footnotes and references 1. 2. When organization isn't enough, McKinsey Quarterly, February 2006, 3. Four Groups Ltd 5 St. Johns Lane London EC1M 4BH, United Kingdom Tel: +44 (0) 20 7250 4779 Email: © 2008 Four Groups Ltd, 5 St. Johns Lane London EC1M 4BH, United Kingdom. All rights reserved. No part of this document may be reproduced without Company Number: 4650494 express written permission from Four Groups Ltd. VAT Number: 817 7962 85 Registered in England and Wales

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