It plays out in companies across the globe. Once successful brands and products are no longer as competitive or relevant and it’s become a struggle to maintain the business. Try as they might, they haven’t been able to introduce new products that will get the company growing and satisfy investors again. So, CEOs turn to their usual next step: dramatically cutting costs, reducing headcount, closing facilities, and generating cash for reinvestment.
Buried deep in the psyche of leadership in this situation are some flawed assumptions about the outcome and how employees will respond. It’s not that leaders aren’t aware of the negative impact on morale. They are keenly aware. Especially when employee turnover accelerates and they begin losing talent. The flaw is in what they assume about those employees that remain in the aftermath of a sweeping restructuring initiative and the results they will be able to generate.
Consider this simplified scenario. An employee, we’ll call him Oscar, has three job responsibilities: develop new products, manage product cost so the new products hit price points and margin targets, and attend interdepartmental meetings, i.e., participate on other teams.
Leaders of the restructuring initiative assume that once the restructuring commences and headcount is reduced, the increased workload will force Oscar to prioritize what he does and therefore he will shed low value work. They also believe that Oscar’s approach will be multiplied across the organization (commensurate with the reduction in the workforce) and the result will be lower costs, a greater focus on high value work, and therefore the ability to produce better results.
But what really happens is quite different. Oscar will first focus on minimizing his own personal risk in order to "survive". This means he will be less likely to step up with the higher risk innovations that are the very thing the company wants him to deliver. And he will prioritize in order to manage the load. But he will interpret low value work as anything that distracts him from his primary focus of developing less risky new products at the right price point. Thus, Oscar will reduce collaboration time and participation on anything other than his own direct responsibilities. He will become more “siloed” and more risk averse. And Oscar’s behavior will be multiplied across the organization reducing collaboration, cross-functional cooperation, and innovation (not to mention already sagging morale). Not at all what leaders need to happen to get better results.
The other flawed assumption made at the top is that Oscar’s more prioritized and focused attention to his primary job responsibilities will yield better results. They assume Oscar won’t be distracted by lower value work and will focus more on what’s important. But why should leaders believe that a guy whose methods prior to restructuring yielded less than stellar new products would suddenly produce higher risk, growth-enhancing new products simply by more focus on his old methods? Especially considering he’s made himself more isolated and risk-averse? Newsflash: Oscar will produce more of the same... at best.
This explains some of the reasons for the dismal failure rate of restructuring and other transformation initiatives and its heavy toll on employee morale, talent retention, and a culture of innovation. Restructuring as it is currently practiced generates cost reduction at the expense of the very things a business needs to stimulate growth: collaboration and innovation.
Companies that find themselves in need of restructuring should also be considering what they're going to do to mitigate these negative impacts. It requires a totally different strategy; one that addresses the strategic issues inherent in the situation while maximizing the company's overall returns, both now and into the future. For more information on how to do that, contact us at the link below.
