3 Questions Organizations Should Ask Before A Reorganization

April 8, 2020 by Kyle Kalloo

Table of Contents

• Start With A Strategy
• Communication And Team Involvement
• Think About Your Circumstances
• Management of Change Process
• Capability to change
• Willingness to Change
• The Bottom Line

Note: This article contains 1591 words, with an estimated read time of 6 minutes.

There’s every possibility that you’ve experienced at least one reorganization in your career at some point. Reorganizations are usually an excellent way to unlock value and stay in tune with the constant change in the business environment. Reorganization is an effective way to improve performance and keep up with the incredible pace of change in the business world. It is often undertaken to boost innovation and ultimately financial performance. Companies often undergo reorganization to curtail inertia or routines that may progressively undermine growth. However, the truth is that most reorganizations are not entirely successful. A survey carried out by McKinsey revealed that more than 80% of reorganizations fail to deliver the value promised. Furthermore, an estimated 10% cause severe damage to the company and they could also be a miserable experience for employees.

When it comes to company reorganization, an estimated 10% cause severe damage to the company and they could also be a miserable experience for employees.

Research suggests that reorganization often brings about uncertainty about the future and can potentially cause a greater level of anxiety and stress than dismissals. According to a study by Leadership IQ, 74% of employees who kept their job amidst a corporate reorganization leading to layoffs say their own productivity has declined since the layoffs. And 69% say the quality of their company’s product or service to their customers has declined since the layoffs. Therefore, before thinking about reorganizing your organization, there are specific things you must consider.

How you go about your reorganization is as important — and sometimes more important than the reorganization process itself. Admittedly, there’s no perfect science to how reorganization should develop, there are however some proven steps to guide you:

Start With A Strategy

A reorganization is just like any other business initiative like a product launch, marketing push or capital project. And as such it is best to proceed with a strategy. It may seem like common sense to work on a strategy before delving into reorganization, but it will surprise you to know that according to McKinsey research, about 17% of reorganization happens because a certain executive member thinks so. This most certainly results with problems within an organization.

Therefore, it’s important to work with a strategy. Start by answering the following three questions;

1. What is the organization’s current state, as it relates to the situation?
2. Where do you want the organization to be in the future?
3. How do you think you will get there?

You need to know where the organization is headed. For instance, think about specific goals and what you aim to accomplish. Before restructuring the organizational chart, it is critical to get your strategy right.

About 17% of reorganization happens because a certain executive member thinks so.

Keep in mind that structure always follows strategy. Continue the process by defining the costs, benefits and the time involved. When calculating the cost, factor in not just the costs of the consultants and employees involved, but also the human cost of change and the potential disruption in processes. It is also important to think about the previous reorganizations in the company and tap into the experience of employees who have worked in a different organization. All these can be an invaluable help in estimating the impact of the reorg.

Sometimes people need to hear that the change will be difficult (sucks), but there will be support to help everyone through it.

Communication And Team Involvement

The objective and the process for running the reorganization should be reasonable, fair and transparent with the right information being shared with the right people involved. You need to show consideration to your employees and provide specific details across all steps of the reorganization. Explain what will happen, when it will happen, and the changes that should be expected. Communication should however not be one-way. Instead of just explaining the “what” and “why”, talk about the other alternatives you didn’t consider and then acknowledge the potential disadvantages of your plan. This kind of open, honest communication is far more effective than trying to paint your ideas as the perfect solution. Sometimes people need to hear that the change will be difficult (sucks), but there will be support to help everyone through it.

However, do not expect stakeholders or employees to buy into it right away. You can hasten the process by asking for help, it is often true that people will support what they helped create, and these individuals while not directly involved in creating the new organizational structure, can play an important role in implementing the new structure. Communication should be focused on topics that matter to your employees and must be in person, not just in e-mail cascades. Your managers should also be ready to diligently explain the practicalities of the reorganization for employees and answer their every enquiry.

Think About Your Circumstances

Reorganization often involves two distinct processes; reconfiguration and restructuring. To determine the best approach, it is important to consider the unique circumstance of the company before making the decision to either scrap your existing organization structure or tweak the existing one. There are things you must consider. The first one is the urgency of your company’s need for strategic reorientation and the level of dynamism or unrest the company is experiencing.

McKinney research across a range of firms both small and large reveals that reorganization decreases profits by 2.6%, on average (this represents about $57.1 million revenue loss for the largest firm considered).

Although, restructuring increases profit (about a 0.4% increase representing about $9.6 million for the largest firms), the fact is that there is a need to develop an effective routine to manage this change especially for dynamic industries such as banking, technology, and retail. So, it’s critical to carefully consider the impact of reorganization before delving into it. Moreover, reorganization does not yield fruit immediately.

Research has indicated that even for the most successful restructuring, it takes time to notice a significant impact on profits. When it comes to reorganization, balance is key. Engage in too few, and you will not get enough practice to do them well. Take on too many, and you will end up with a flawed measure of outcomes that could potentially hurt performance. There have even been instances of companies that have literarily restructured themselves out of existence. Think about McDonnell Douglas, Texaco, Digital Equipment Corporation etc. Since reorganizations are usually about performance improvement, it is critical to understand how outcomes vary across the business. Thinking about these inputs will help you decide if restructuring is the next step or just a tweak.

Reorganization should be used as a means to build on your company’s strength and set them apart from the competition.

Management of Change Process

In a previous blog, “Management of Change — Communicating Difficult Change”, I outlined the steps to ensure people and organizations effectively communicate difficult change. For the interest of this blog, I will capture the highlights below.

Prior to communicating the change to the rest of the organization, factor these two key components:

Capability to change

Most people struggle with communicating difficult change. The good news though, is that our capability to change is really high! When we are forced into change (even if it’s unpleasant) we find a way to adapt and make it work. This is because we have the need to survive! It’s built right into us. We might do this kicking and screaming, fighting it the whole way, but inevitably we will adapt. We also know that regardless of the support provided for change, some people will just never get there! “But wait, Kyle, you just said our capability to change is really high.” Yes, that’s right, I did. Let’s understand that capability implies “unrealized potential”, such as, “Suzy Bell is capable of change” which implies that while Suzy Bell has the ability and potential to change, it’s not definite that she will discover or use this ability or potential!

Willingness to Change

Our natural willingness to change when the outcome doesn’t directly benefit us in an obvious reason why we resist. Why? Because something in our brain wants to keep things status quo and we are comfortable. Change is hard work because we have to change how we think, see, believe, act, etc. It is often said we are more motivated to avoid pain rather than to gain pleasure. Instead of focusing only on pain or gaining pleasure, consider the personal benefits of this reorganization and connect the dots for the employees/stakeholders.

Our natural willingness to change when the outcome doesn’t directly benefit us in an obvious reason why we resist.

The Bottom Line

There are several distinct stages involved in any reorganization. The secret to success is knowing all the elements that need change and planning the changes in the right sequence. All this takes a lot of effort and could be potentially dangerous if you miss anything in the design, process, structure, systems and people. If you’re thinking about a reorganization, it is your responsibility to follow a rigorous and detailed process instead of just scratching the surface. This will help you make better decisions and keep your employees and stakeholders much more engaged.

Reorganization can be a difficult time in any organization, however, if done right, performance will improve, productivity will increase and your company will be more aligned to win. If you are considering a reorganization and would like support with exploring the potential strategy, reach out to me.