Deckchairs and Titanic are the two words that come to my mind when I hear that a struggling company is about to undergo an organisational restructure. The thoughts are borne of watching organisations restructure over the last thirty years with only rare instances where organisations benefit from realigning their organisational structure. Not only do I observe that a large majority of organisational restructures are failures, but that the first reorganisation is only a precursor to other reorganisations, as the proffered benefits of the J-curve of the restructure fail to materialise.
A range of studies support my observations.
A 2006 study by McKinsey (Fraser & Strickland, 2006), themselves a consultancy firm of note when it came to restructures, found that companies whose performance averaged -21.5% below industry norms in terms of total return to shareholders and which underwent restructure outperformed the industry norm by 17% two years after the restructure. However, a control group which underperformed the industry by -17.5% outperformed the industry by 22.1 % two years after the restructure.
Research by Towers Watson (Luss, 2010) found that, in restructured firms, high performers are:
- Fifty percent less likely to be highly engaged
- Twice as likely to have low engagement
- Twice as likely to be among the employees most at risk for voluntary turnover
A recent survey conducted by The Boston Consulting Group (Toma, Roghé, Noakes, Strack, Kilmann, & Dicke, 2012) of 1,600 executives in 35 countries found that over 90 percent of companies with more than 1,000 employees had recently changed their organisation structure. Less than half of the reorganisations were considered to be successful by the executives.
In in all three studies, there was clear evidence that restructures materially benefit organisations in a minority of cases. Yet, organisations commit themselves to restructures one after another like the lemmings in the Walt Disney movie, Wild Wilderness, plunging over the cliff.
Organisations centralise and decentralise their support functions such as human resources, information technology, and financial management seemingly on a seven to ten year cycle. They centralise to gain the apparent benefits of reduced duplication and costs and then decentralise to gain the benefits of closer alignment of corporate strategy and that pursued by the function. They buy their distributors to maximise the share of the profit margin available and get synergies in marketing, sales and transport costs. They sell the distributors to maximise sales though local network development and take working capital off their balance sheet. The cycle is unrelated to external economic cycles, but is related to the cycle of management turnover in organisations.
Why restructures fail
The lack of a powerful reason
They don’t have a powerful reason to reorganise and therefore the purpose of the reorganisation is unclear in people’s minds. It is difficult to communicate, in a way that is easy to understand and believe, the answer to the question, “Why are we doing this?” Without a self-evident and powerful rationale for people to change their behaviours to adopt the change in structure and processes and adapt to the change in relationships, people will resist the change, often unreasonably so. The “vision thing” needs to be alive and well in employee’s minds to get them engaged and committed to making the required changes to make the reorganisation a success.
Most reorganisations are entirely internally focused and have little impact on the externally driven indicators such as sales or customer satisfaction. For example, organisations restructure along product/geographic/function (take your pick) lines, cut out layers of management and or outsource operations to cut costs claiming that the actions they are taking are designed to turn around a deficient sales outcome.
Reorganisations need to be focused on delivering to whoever the customer is, be it a consumer, other businesses, government departments or the general public. They must also be focused on delivering against the long-term goal of the organisation.
Nothing really changes
Organisations change their structure but not their business model, strategy, key performance indicators, rewards and recognition schemes or culture. The reporting lines change, the cost centres change but nothing else does. Business goes on underperforming as it was before the restructure but probably more so as a result of the reduction in employee engagement as a result of the restructure.
When should an organisation restructure?
There are many reasons given as the reasons for undertaking a restructure. They include, but are not limited to:
- Merger or acquisition
- New leaders
- New strategy
- New business model
- Realigning the business
- Improve communication
- Improved decision making
- Improved execution
- Downsizing (reduced costs)
- Improve innovation
All of these reasons, to my mind, miss the point. An organisation is structured in the first place to group together people who are working within like processes and have like competence sets. Hence, we rarely see a group of scientists working on research and development in the same organisation groups as Legal. We can see, however, in some organisations Marketing and Sales cohabiting within the same organisational grouping.
Two parameters impact on the design of organisations other than around like processes and like competencies. They are geography and size, although the influence of the former has declined as high speed high bandwidth communication has become more the norm.
Geography and language that often goes with geography has an impact on the communication effectiveness of an organisation and often it may be better to organise within a geographic boundary rather than across it.
Size has the simple impact of making it more sensible to split the organisation as it grows along more specific process and competency aggregates. For example, as an organisation grows it may split Sales and Marketing. While it is small, it generally makes sense to keep them together as there may only be one or two marketing resources.
The key reason to reorganise then is not the event itself as depicted by the list above, but to redress issues where the event has led to process changes that have meant that the current structure now groups unlike processes and unlike competencies. A subsidiary but important additional reason is when there is a need, in response to an event, to lift the profile of a function and to shorten the decision making process for the function by elevating it within the structure. For example, making the Health, Safety and Environment function report directly to the CEO instead of reporting to Operations.
What is the alternative to reorganising?
Instead of reorganising, organisations are better on most occasions to focus on their vision, mission and strategy, communicating clear goal and objectives, making roles and responsibilities clear with single point accountability for processes, creating a culture sympathetic to their vision and mission, managing people’s performance addressing both willingness and ability and providing rewards and recognition that supports their goal and objectives.
Fraser, C. H., & Strickland, W. L. (2006, February). McKinsey Quarterly. Retrieved April 21, 2013, from www.McKinseyQuarterly.com
Luss, R. (2010). Towers Watson. Retrieved April 21, 2013, from www.watsonwyatt.com
Toma, A., Roghé, F., Noakes, B., Strack, R., Kilmann, J., & Dicke, R. (2012, April). Organization Design Publications. Retrieved April 21, 2013, from Boston Consulting Group