Reorganizations Should Advance Strategy and Drive Business, Not Just Cut Costs

BOSTON, MA--(Marketwired - Mar 28, 2016) -  Companies frequently announce reorganizations in an effort to cut costs. The exercise is often one of brute force in a time of crisis: a small group of leaders and HR professionals sit in an undisclosed conference room, working to cut the head count by 10% to 15% by drawing new lines and boxes and taking their best stab at putting people into them.

But this cost-focused approach to reorganization has hidden pitfalls: people get demoralized, surviving teams don't function well, and existing inefficiencies become exacerbated. To reorganize effectively, leaders must think about how the company's new design will align with and drive their strategy of tomorrow. This kind of reorganization can have a lasting, positive impact -- and sustainably eliminate costs in the process.

"When it's necessary to decrease head count, companies that do it thoughtfully realize far greater benefits than just savings," says Andrew Toma, senior partner and coleader of the Organization Design topic at The Boston Consulting Group (BCG). "Senior leaders who invest the time in a broader approach, including restructuring their company's operating model and clarifying the roles of leaders, will see greater benefits in overall engagement and speed of decision-making. Focusing solely on hitting cost targets rather than on the effectiveness of the businesses being restructured -- that is, how the units work together to achieve business objectives and create value -- may yield short-term cost savings, but it can do long-term damage.

"The most successful reorganizations are focused on setting the stage for future growth, not only solving an immediate problem," adds Toma, who has advised on more than 50 major reorganization efforts. BCG was recently recognized by Consulting magazine publisher ALM Intelligence for having the highest-rated organization design capabilities of any strategy consulting firm. "Forward-looking leaders embrace reorganizations as opportunities to shape the teams and develop the capabilities the company will need in the future."

For example, Toma points to a highly successful and admired North American bank that designed a program to increase the effectiveness of all its businesses while substantially reducing operating costs. Instead of narrowly focusing on efficiency and cost reduction, the bank took a step back and approached the reorganization as an opportunity to realign its operating model with its strategy, simplify the organization structure, clarify the roles of all executives, and rebuild the company's teams one layer at a time.

The company became more nimble and effective, improving decision-making, accountability, and the delivery of a premier customer experience. This example underscores a few best practices of companies that get reorganizations right, including the following:

• Being Proactive--Not Waiting for the Next Crisis. Periodically, the savviest leaders will ask themselves these questions: Is my organization optimized to deliver my strategy? Do I have the right talent in the right places? Are our senior decision-makers close enough to our customers? Questions such as these help a company's leadership define organizational priorities and act before a business crisis hits.

• Synchronizing Organization Design with Overall Strategy. BCG's research surveying 1,600 executives in 35 countries shows that reorganizations are five times more likely to succeed when the top priority is to align the organization more clearly with the overall company strategy and not to simply respond to a cost agenda.

• Moving Layer by Layer and Keeping Managers and Employees Engaged. Many companies take a top-down approach to reorganization, but pushing change down from the top almost always loses the hearts and minds of managers and employees. "Morale can go down, talent may be lost, and costs can creep back in rapidly," says Toma. "Companies that take a stepwise, layer-by-layer approach, involving managers in the design of their teams, have a four-to-one success rate, compared with those that drive change from the top down."

• Building New Teams and Capabilities. A successful reorganization leaves new leaders and new teams empowered with new mandates to drive the business more effectively. It lays the structural foundation for new organizational capabilities to be further supported by the appropriate tools and capability-building programs. "Leaders should think of reorganization as a launchpad for building the capabilities the company will need to succeed in the future," says Toma.

Of course, sometimes a rapid approach to reorganization and cost reduction is necessary -- in an acute crisis, for example. But reorganizations don't have to come in response to a stock price crash or other short-term need. "If a company's back is not against the wall, it behooves the leaders to take a more thoughtful approach to organization design," says Toma. "After all, getting that right may be the most important element leaders have to drive the future success of a business."

For more information or to speak with Andrew Toma, please contact Eric Mosher of Sommerfield Communications, Inc., at (212) 255-8386 or eric@sommerfield.com. Also see Flipping the Odds for Successful Reorganization, BCG Focus, April 2012.

About The Boston Consulting Group

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