A Complete Guide to Organizational Restructuring

Jennifer L'Estrange
August 16, 2022

One of the most common questions we are asked as an HR consulting firm is how to effectively navigate an organizational restructuring without impacting business continuity, eroding trust, or damaging the culture that holds the remainder of the organization together. A good friend told me once that people decide not to buy something for one of three reasons: man, money, or machine. It’s a sales analogy, but the same is true for restructuring projects; they all come down to a people problem, a price/money problem, or a product problem.

So the question is, how do we plan, organize and execute organizational restructuring projects and deliver the return on investment that we’ve set with the business as the project goal?

What is Organizational Restructuring?

In the simplest of terms, organizational restructuring is about having the right people, in the right place, doing the right jobs. The challenge isn’t the restructuring itself, it’s the underlying reasons that drive the restructuring in the first place. That and the fact that restructuring projects are by their very nature, disruptive. So, our first goal is to try to avoid disruption in the first place. Before embarking on a full organizational restructuring, we start with smaller, incremental changes to move the business toward the goal with less chaos. However, if we have determined a restructuring needs to take place, there are three basic approaches – which we implement individually or in combination.

What are the Types of Organizational Restructuring?

Now that we know what’s driving the project, what are our options? I mentioned it earlier – all restructuring falls into one of three categories: people, price, or product.

Reorganize Roles to Optimize for Skills and Process Efficiencies

The least invasive of the restructuring options, the classic reorg, is all about identifying what people do well and letting them do more of that, more efficiently. Oftentimes, there are no specific terminations or headcount reductions, but the effort is placed on defining effective processes and getting crystal clear on who is doing what, when, and how. A classic example of this is the implementation of a centralized call center to handle first level tech support in order to free up more seasoned engineers for product development or bug fixes. If you don’t have a job description or they are woefully out of date, this is the best place to start.

Move Jobs to a Lower Cost Location

Next is labor arbitrage, or moving (certain) jobs from high cost locations to lower cost locations. While we’re seeing less of this post-pandemic as more organizations are de facto working across more locations and have integrated arbitrage opportunities into their recruiting strategy, the opportunity is still there if your employees are in a location where wage rates are higher than average and the skills are readily transferable. While this is not a great strategy for highly skilled roles or roles that require highly experienced employees, it can work for roles where there is generally higher turnover, and fewer new skills to learn in order to be successful. Word to the wise, however, financial gains from labor arbitrage erode over time, so if you’re banking on a business case that is purely arbitrage, it must have a positive ROI within a year or so to be ultimately successful.

Outsource to a Third Party

Finally, we have outsourcing as the most impacting and most disruptive of organizational restructuring. In this case, responsibility for part of all of a function is handed over to another company in exchange for a fee. Business Process Outsourcing contracts can be very rewarding on both sides of the contract, provided that terms of service are clearly understood, the financial agreement can be reviewed at key milestones to ensure that everyone is doing what they need to to be successful and the employees who inevitably leave the organization are treated fairly on the way out. This kind of restructuring usually is the longest to implement and has the highest upfront cost because of the employee job loss, so if you’re considering outsourcing a function, make sure you’re in it for the long term. It’s hard to go back once you’ve started down this path.

Why Do Organizations Go Through Restructuring?

The key to running a successful change management and organizational restructuring project is defining a clear business case and evaluating the return on investment. People transition costs money – sometimes a lot of money. There needs to be a clear, positive ROI to the project to make it worthwhile. That being said, if there is a positive ROI (and we generally look for breakeven by the two-year mark for this), then a restructuring may offer the step change to help the organization embrace the change that’s needed for the business to continue to grow. While we say that, from an employee perspective, all change is bad, there are benefits to reorganizing and re-engaging with a new set of priorities and goals.

5 Signs Your Company Needs to Consider Organizational Restructuring

But how do we know when it’s time to engage in a full restructuring project? There are 5 key drivers that lead most companies to evaluate the business case for restructuring. Let’s look at each one.

1. Seeing a Decline in Revenue

Declining revenue or profit is the number one reason why organizations decide to restructure. In this case, the goal is either to reduce payroll expenses by cutting jobs or to redirect resources to focus on building revenue. For example, this could include cutting administrative roles and then adding headcount to support marketing and sales. Fair warning, however, there is something to be said for the old adage, you have to spend money to make money. No organization ever cut costs as the road to success, so restructuring here must start with strategy and process change before addressing organizational efficiencies.

2. Seeing an Alarming Client Turnover Rate

New customer acquisition is always more expensive than client retention, so it’s natural that when leadership sees a significant increase in client turnover – or churn – they will want to understand why and then figure out how to correct it – as soon as possible. Generally speaking, restructuring projects to address customer retention often include role redesign for account management, customer service, and sometimes even product development if the turnover is directly related to the quality of the product itself. Start with solid, in-depth, customer survey data first and use that to inform the process and people change that will be core to this kind of restructuring.

3. Growth Has Slowed or Stopped

A slow down in revenue growth can also indicate that a reorganization or restructuring is needed. More often than not, we see this start with headcount and budget “freezes” to protect profit, but if growth stagnates longer than a year, restructuring is in order. But again, the change needs to be strategic, focusing on cutting in those areas that aren’t driving the business and redirecting budget and additional headcount to departments that will drive new growth. Good data is important here – so measure twice, cut once.

4. Employees are Being Over or Underworked

Sometimes overlooked, especially if the overall financial performance is good, employee efficiency gains can be a great restructuring opportunity. Again here, data is key, so start with a benchmarking exercise to look at how much people are really working and what they’re working on. Are people working on the right stuff for the right amount of time? Once you have the answer to that question, then look at ways to reorganize job roles to get more efficiency from the same headcount. These sorts of reorgs can be perceived positively by employees if they feel that they have a say in the outcome and if they understand that the goal is to correct or prevent burnout and improve or protect employee retention rates.

5. Key Performance Indicators (KPIs) Are Not Being Met

For organizations that are data driven (we think they all should, but that’s another topic), KPIs can be a great indicator of where an organization is underperforming and can sometimes give clues as to what needs to be done to correct it. This is case by case, but if you are seeing dramatic changes in KPI performance – even if it can be explained by external factors, it’s probably worth looking at reorganization opportunities to drive ongoing sustainable change in how the work is getting done.

Does Organizational Restructuring Have You Stressed Out?

Reorgs and restructuring can be a daunting task, even for the experienced CEO or CFO. Getting it right means engaging in people and behaviors as well as the financial requirements to achieve the overall business goals. The good news is that you don’t have to do it alone. Contact us to see how we can help – from support for the business case preparation through to communications planning and execution and then implementation.

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