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Organizational restructuring involves making changes to the organizational setup. These changes have an impact on the flow of authority, responsibility and information across the organization.
The reasons for restructuring vary from diversification and growth to minimizing losses and cutting down costs. Organizational restructuring may be done because of external factors like merging up with some other company, or because of internal factors such as high employee costs. Let’s take a look at some of the commonly used restructuring strategies.
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Call it downsizing, layoff, rightsizing or smart sizing; in essence, it is all one and the same thing. This restructuring strategy is about reducing the manpower to keep employee costs under control. Take the case of auto-giant General Motors, which in 1991 decided to shut down 21 plants and lay off 74,000 employees to counter its losses.
Another example is that of IBM, which had never laid off staff ever since its incorporation, but had to layoff 85,000 employees to stay in business. This type of restructuring is tough to manage and is mostly adopted to overcome adverse situations. Downsizing is not always a result of business losses; it may be needed even in cases of takeovers, acquisitions and mergers, where duplicity of the staff propels this form of organizational restructuring.
Whether you are acquiring a business or some other business is acquiring your business, restructuring will be needed post acquisition. The business being acquired undergoes major restructuring to get in-line with the organizational setup of the acquiring business.
When AT&T acquired BellSouth, BellSouth was restructured to fit into the organizational setup of AT&T. And it wasn’t just BellSouth that was restructured, as AT&T too saw some restructuring to accommodate BellSouth. Altogether, AT&T had to cut down 10,000 employees over a period of three years, following acquisition of BellSouth.
Also, when two businesses decide to merge together, organizational restructuring is a must to unite the two distinct organizations into one organization. When Glaxo Wellcome and SmithKline Beecham merged together to form Glaxo SmithKline in 1999, both the companies had to undergo major restructuring, and there was some major downsizing before as well as after the new company was formed.
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This restructuring strategy involves breaking a company into smaller independent business units for increasing flexibility and productivity. This may be done either to dissect the business into manageable chunks or when the business wants to diversify and foray into unrelated areas. One of the latest examples of this strategy is Pfizer’s decision to spin off four non-pharmaceutical firms this year.
Starbursting may also be used for expansion of the existing business such as when a business decides to spin off subsidiaries to handle business in different geographic areas.
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This is the latest in restructuring trends, wherein an organization restructures itself to offer tailored products and services to cater to the requirements of a specific industry. In 2002, HCL verticalized its operations to meet the specific demands of five different industries: retail, media and telecom, manufacturing, finance and life sciences. This type of restructuring opens up avenues for specialization.
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De-layering involves breaking down the classical pyramid setup into a flat organization. The main objective of this type of restructuring is to thin out the top layer of unproductive and highly paid ‘white collar’ staff. General Electric has reduced the number of management levels from ten to four in some of its work facilities in order to improve overall productivity.
Hewlett Packard, on the other hand, has de-layered to promote innovation, build customer intimacy and increase consumer satisfaction. The major advantage of de-layering is that the decision making process becomes shorter and more effective.
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Business Process Reengineering
This type of restructuring is carried out for making operational improvements. It begins with identifying how things are being done currently and then it moves on to re-engineering the tasks to improve productivity.
Business process re-engineering usually results in changing roles. While at times BPR may lead to layoffs, it can also create new employment opportunities.
When Ford Motor was trying to reduce its cost, it found that the process at its accounts payable department needed to be re-engineered. The reengineering helped in simplifying the controls and maintaining the financial information more accurately, that too after laying off 75 percent of the staff from the accounts payable department.
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Today’s businesses prefer to outsource some of their processes to other firms. There are two ways outsourcing benefits a business; first, it helps in reducing costs and second, it allows the business to concentrate on its core business and leave the remaining tasks to outsourcing firms.
Whenever a business plans to outsource one of its processes, it will cause some major restructuring and reshuffling within the company. Downsizing is common when a business outsources its processes. For instance, Nokia plans to layoff 4000 of its employees by the year end 2012, as it will be outsourcing the production of its Symbian operating system.
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Virtualization is the last on our list of restructuring strategies. This strategy involves pushing employees outside the office to places where they are more needed like at the client’s site. It also involves upgrading to technology, which allows unmanned virtual offices to be set up. For example, the ATMs offered by banks are their virtual units.
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References & Credits:
- Franklin, Daniel: "Downsizing: is it aimed at the right targets? - employee downsizing - Cover story", BNET - http://findarticles.com/p/articles/mi_m1316/is_n11_v26/ai_15875512/
- Pitofsky, Robert, "The Nature and Limits of Restructing in Merger Review," Federal Trade Commission, http://www.ftc.gov/speeches/pitofsky/restruct.shtm
- Author unknown, "Starbursting: Breaking up companies is back in fashion," The Economist, http://www.economist.com/node/18440915
- Author unknown, "Verticalization is Neither Classification nor Segmentation of Clients," CVMark, http://www.cvmark.com/blog/?p=234
- Human Resources Planning, "Making Organization Change Happen: the keys to successful delayering," Entrepreneuw, http://www.entrepreneur.com/tradejournals/article/16108082.html
- Hammer, Michael, "Reengineering Work: Don't Automate, Obliterate," Harvard Business Review, http://userpages.umbc.edu/~khoo/re-engr.html
Image by – Sidharth Thakur