The need

Good reasons for a re-org are e.g., major disruptions in business, mergers or restructuring a massively bloated organization. However, when deciding on the re-organization, the reasoning is often vague and only direct costs are taken into account. As a result of this the net outcome of the change may be negative. 

Hidden costs

Even though the target is to make things clearer, more cost-efficient and more competitive, one has to deal with the costs first. Direct costs occur when people attend to re-org activities like all-hands meetings, workshops, training etc. The more challenging part is hidden costs. They occur when people lose focus and become less engaged

Its is in our genes that when the level of uncertainty rises, we fall downwards in the Maslow’s hierarchy and start to focus on more essential needs, like our own role and security. This causes an unavoidable hit on personal and organization productivity. The length of the productivity hit depends on how well people’s fundamental concerns are addressed in the change process.

According to article by Forbes, employee engagement may decrease by 10-12% during a reorganisation. In many businesses this translates directly to the loss of productivity or negative impact on customer experience.

Major risks impacting the hidden costs

A major re-org is typically a major hassle. In order to minimize the hassle and the hidden costs one has to avoid the typical pitfalls: 

  1. People do not understand the purpose of the re-organization → people become cynical and disengaged. 
  2. The communication does not address peoples’ right concerns → the trust erodes between the leadership and rest of the organisation. 
  3. The leadership checks-out from the process after the communications is done → people feel the leadership lives in a bubble and they are not really committed to the change.

However, the risks can be mitigated in a systematic way.

Business case for risk mitigation

Lets take an example with 1 000 person organisation with the following assumptions:

  • Cost per employee per month is 8000 €
  • Productivity decreases 12 % due the re-organization
  • After the initial decrease in productivity, it raises 2% every month

Standard process 

The standard process includes:

  • Well-prepared communications package including sharable presentations and relevant video.
  • All-hands presentation including Q&A in all sites.
  • Web discussion forum.
  • Workshops to discuss and plan the execution in all relevant levels and functions.
  • Potential training.

Failures of the standard process:

  • Success of the re-org communication and progress is not measured systematically throughout the process. At best some one-shot surveys are done but the utilisation of the data is not systematic.
  • Web discussion forums attract typically less than 10 % of the personnel. It is risky to use data for decision making because according to our experience the profile of these 10% differs a lot between different cases.

bc1

Mitigation example A

Standard process complemented by

  • Repetitive surveying of the key risks.
  • Traditional off-line analysis of the data (Excel, Powerpoint proposals etc.).
  • Decision making and actions based on the analysis.

This resembles the good old Dr. Deming’s plan-do-check-act cycle even though its not meant for fast-paced re-organization execution. The time from survey to action can take 4-8 weeks. However, after the measurement process is ramped-up the steering of the re-org process is more systematic than in the Standard process. Mitigation costs come from manual analysis and heavy process. 

bc2

Mitigation example B

Standard process complemented by:

  • Continuous qualitative and quantitative measuring of the key risks.
  • Real-time sharing of the trend analytics.
  • Community enabled process for analysis and actions in all levels and functions as suggested by risk management guru Douglas W. Hubbard.
  • Continuous improvement of the comms based on the qualitative signals.

Compared to Mitigation A, the steering process is 1-2 months faster since the data is shared in real-time and the process is more distributed. Compared to the Standard process, decision making is 6 times more efficient because the light-weight process produces easily consumable data systematically. The factor of 6 comes from decision making research where its found that decision making based on a process data is six times more efficient than decision making based on single-shot analysis. The mitigation costs are lower than in Mitigation A because the process is contains only little manual work. 

bc3

Conclusion

The blog focused only to the hidden costs of a re-org. Depending on the chosen scenario in an organization of 1 000 persons, the benefits must clearly exceed the re-org direct costs and hidden costs of 1.76 M€ – 3.36 M€ in order to make sense. 

bc4

The calculation is based on assumptions and the validity of the assumptions depends on many factors. The key take-away is that re-org is always a decision with major hidden costs. One should consider carefully the reasoning for the re-org and how to mitigate the key risk in order to avoid negative net outcome. Standard process and keeping fingers crossed isn’t the professional way of executing.

Please contact us if you want to challenge the business case or know more about the Mitigation option B.