10 Reasons for Restructuring a Company
1. Changed Nature of Business
In today’s business environment, the only constant is change. Companies that refuse to change with the times face the risk of their product line becoming obsolete. Because of this, businesses experiment with new products, explore new markets, and reach out to new groups of customers on a continuous basis. Businesses seek to diversify into new areas to increase sales, optimize their capacity, and conversely shed off divisions that do not add much value, to concentrate on core competencies instead.
All such initiatives require restructuring. For instance, expansion to an overseas market may require changes in the staff profile to better connect with the international market, and changes in work policies and routines to ensure compliance with export regulations. Starting a new product line may require changes in the system of work, hiring new experts familiar in the business line and placing them in positions of authority, and other interventions. Hiving off unprofitable or unneeded business lines may require changes to retain specific components of such divisions that the main business may wish to retain.
One common reason for restructuring a company is to downsize the workforce. The changing nature of economy may force the business to adopt new strategies or alter their product mix, making staff redundant. Similarly, cutthroat competition and pressure on margins from competitors who adopt a low price strategy may force the company to adopt lean techniques, just in time inventory, and other measures to cut input costs and achieve process efficiency.
In such situations, the organization will need to redo job descriptions, rework its team, group, and communication structures and reporting relationships to ensure that the remaining workforce does the job well. Very often, downsizing-induced restructuring leads to a flatter organizational structure, and broader job descriptions and duties.
3. New Work Methods
Traditional organizational systems and controls cater to standard 9 AM to 5 PM office or factory based work. Newer methods of work, especially outsourcing, telecommuting, and flex time require new systems, policies, and structures in place, besides a change in culture, and such requirements may trigger organizational restructuring.
The presence of telecommuting employees, temporary employees, and outsourcing work may require a drastic overhaul of performance management parameters, compensation and benefits administration, and other vital systems. The newer work methods may, for instance, require placing emphasis on the results rather than the methods, flexible reporting relationships, and a strong communication policy.
4. New Management Methods
Traditional management science recommends highly centralized operations, and the top management adopting a command and control style. The new behavioral approach to management considers human resources a key driver of strategic advantage, and focuses on empowering the workforce and providing considerate leeway to line managers in conducting day-to-day operations. The top management intervenes only to set strategy and ensure compliance; strategic business units receive autonomy in functioning.
Traditional management structures were bureaucratic and hierarchical. Of late, management experts see wisdom in flatter organizations with wider roles and responsibilities for each member of the team. Job flexibility, enlargement and enrichment are key features of such new structures, but successful implementation requires changes in the communication and reporting structures of the organization. While new organizations can start with such new paradigms, old organizations have to restructure themselves to keep up with these best practices to remain competitive.
5. Quality Management
Competitive pressures force most companies to have a serious look at the quality of their products and services, and adopt quality interventions such as Six Sigma and Total Quality Management. Implementing new quality standards may require changes in the organization. Most of the new quality applications strive to imbibe quality in the actual work process rather than maintain a separate quality control department to accept or reject output based on quality specifications.
In many cases, an organizational level audit precedes quality interventions, and such audits highlight inefficiencies in the organizational structure that may impede quality in the first place. For instance, reducing waste may require eliminating certain processes, and thereby reallocation of personnel undertaking such activities.
Innovations in technology, work processes, materials and other factors that influence the business, may require restructuring to keep up with the times. For instance, enterprise resource planning that links all systems and procedures of an organizational by leveraging the power of information technology may initially require a complete overhaul of the systems and procedures first.
Such technology-centric change may be part of a business process engineering exercise that involves redesigning the business processes to maximize potential and value added, while minimizing everything else. Failure to do so may result in the company systems and procedures turning obsolete and discordant with the times.
7. Mergers and Acquisitions
In today’s corporate world, where survival of the fittest is the maxim, mergers and acquisitions are commonplace and any merger or acquisition invariably heralds a restructuring exercise. The reasons for such restructuring accompanying mergers and acquisitions are many. Some of the common reasons are:
- Reconciling the systems and procedures of the merged organizations to ensure that the new entity has consistency of approach.
- Eliminating duplication of work or systems, such as two human resource or finance departments.
- Incorporating the preferences of the new owners, and more.
Joint ventures may also require formation of matrix teams, special task forces, or a new subsidiary.
8. Finance Related Issues
Very often, small and medium scale businesses have informal structures and reporting relationships, and an ad-hoc style of decision-making. When such companies grow and want to raise fresh funds, venture capitalists and regulations might demand a more professional set up, with formal written-down structures and policies. A listed company may undertake a restructuring exercise to improve its efficiency and unlock hidden value, and thereby show more profits to attract fresh investors.
Bankruptcy may force the business to shed excess flab such as workforce, land, or other resources, sell some business lines to raise cash, and become lean and mean, to attract bail-outs or some other rescue package. Companies may try to restructure out of court to avoid the high costs of a formal bankruptcy.
9. Buy Outs
At times, the restructuring exercise may be the result of the whims and fancies of the owners. For instance, the company may have a new owner who wants to stamp his or her personal authority and style onto the business. Restructuring allows the new owner to:
- Reshuffle key personnel and provide power to trusted lieutenants.
- Start with a clean state and thereby exert greater control.
- Preempt any inefficiencies that caused the previous owner to sell-out, and more.
With or without ownership change acting as a trigger, company owners may appoint a management consultant to review the company and suggest macro-level changes, as a routine exercise.
10. Statutory and Legal Compliance
At times, restructuring may be a forced exercise, to conform to some legal or statutory requirements. For instance, the government may mandate financial and healthcare institutions that deal with sensitive personal data to monitor their computer networks. A new bill may require that private computer networks adopt the same security measures that government networks adopt, to gain immunity from liability lawsuits in the eventuality of cyber attacks.
Any organizational restructuring is basically a change initiative. Success depends on managing resistance to change by convincing the remaining workforce of the need for change and the possible benefits, an effective communication system to lend clarity to the change process, and effective leadership.
Gilson, Stuart C. “How To Make Restructuring Work for Your Company.” https://hbswk.hbs.edu/item/2476.html. Retrieved August 02, 2011.