Overall, 30% of companies that successfully restructured –those firms whose restructuring meets their goals and has a positive impact on the firm– achieved a 216% TRS from 1993 through1997. On the other side, the remaining 70% that did not successfully restructure, reported a 143% TRS over the same five-year period, according to data from Watson Wyatt.
“With market volatility and continued uncertainty in the US economy,companies are again looking at restructuring and cost-cutting initiativesincluding downsizing, reorganizing existing operations, or merging,acquiring or divesting units to protect their bottom line,” SylvesterSchieber, director of research and information at Watson Wyatt, said in a statement. “At thesame time, companies have been cutting back on hiring, thereby placingtremendous pressure on HR to retain and boost worker productivity.”
Three types of restructuring – actions taken by management to reorganize the business – were examined in the original Watson Wyatt study:
- mergers and acquisitions or divestitures
- downsizing or workforce reductions
Overall, of those surveyed, 83% downsized or reduced their workforce, 77% undertook reorganizations, and 52% engaged in a merger and acquisition or divestiture. Each restructuring program typically involved letting go of a substantial number of employees. In terms of success rates, the study found firms that engaged in mergers and acquisitions (33%) and reorganizations (32%) were slightly more likely to succeed than firms that downsized or undertook workforce reductions (29%).
Examining reductions in force (RIF), Watson Wyatt found on average, firms that succeeded in their restructuring efforts reduced their workforces by nearly the same amount as firms that failed (14.2% versus 13.5% of the workforce). However, the context in which the layoffs occur is where success and failure diverged.
Successful restructures tended to lay off workers in one fell swoop rather than in stages, were also more likely to report that their restructuring efforts will decrease in the future (27% versus 21%) and less likely to report these efforts will increase or stay the same (57% versus 64%). This is due to the uncertainty and anxiety surrounding the significant changes and the longer they continue, the greater the potential for a negative impact. Moreover, it is extremely important for management to limit job losses to the targeted positions. During a restructuring, valued and necessary employees may become uncomfortable amidst all the uncertainty and leave the firm. These employees must be replaced, which is difficult to do while others are being laid off.
While the method of workforce reduction is an important factor in determining how many lost workers a firm will have to replace during or after the restructuring effort, the most influential attribute is the use of an RIF. Whether a firm is engaged in a merger, acquisition and divestiture and/or reorganization, the likelihood of having to replace a portion of the workforce lost during the restructuring is roughly similar. However, firms that use an RIF are much more likely to rehire or replace a high percentage of employees than those that do not (53% versus 19%).
The factors that contribute to success or failure are the same for firms that use RIF as for firms that use other restructuring strategies. In addition, the factors that affect the probability of having to rehire or replace employees are the same regardless of the type of restructuring.
Watson Wyatt points to effective communication and training programs, along with greater employee involvement as keys to a restructuring program. The survey found it "absolutely essential" that companies keep employees informed of their plans, the reasons behind them, and how the efforts will pay off for the organization in both the near- and long-term.
Interestingly, certain types of communication - such as large group meetings, small group meetings, hotlines, regular employee publications or special restructuring publications - did not significantly affect the outcome. What separated success from failure was active employee participation. Successful restructures used more interactive communication methods, such as town hall meetings, and involved employees on task forces and committees either through self-directed work teams, continuous improvement initiatives or restructuring project teams. In successful restructuring firms, written communication and meetings were used to reinforce the messages from the daily actions of employees directly integrated into the restructuring process.
This led to a message to employees that was not about what was being done to them or what had been decided for them, but rather what the employees decided they were going to do themselves, Watson Wyatt found.
Further, successful restructures not only managed the effort effectively during the period of transition, they also performed measurable follow-up actions to ensure that organizational changes were understood and accepted by remaining employees. Those that were successful took steps to ensure employees fully recovered from the dislocations caused by the restructuring effort and got on with their work through a variety of programs. They were much more likely to have implemented new communications initiatives and revamped existing publications to support the restructuring recovery effort. Other tools successful restructures weremore likely to use effectively included:
- employee surveys and focus groups
- recognition programs
- retraining for employees.
These programsenable an organization to reestablish a commitment to employees following the restructuring. Furthermore, using these programs can be very effective, resulting in nearly a 26% increase in the likelihood of a successful restructuring, Watson Wyatt concluded.
Successful restructuring firms used various cost-cutting tools just as often as firms whose restructuring efforts did not succeed, with both groups reporting similar levels of effectiveness. Differences emerged between the two groups in the use of salary freezes, hiring freezes and pay cuts. Specifically, successful restructuring firms implemented hiring freezes 7% less often than unsuccessful organizations, enabling them to hire employees with new skill sets as necessary.
This could be critical if the firm significantly changes the way it does business or needs to respond to changes in the marketplace such as technological advancements. But while successful firms were slightly less likely to implement hiring freezes, 71% used them and were still successful, when taken as a group; these cost-cutting programs were not a significant predictor of restructuring outcome. There is simply no evidence that cutting costs gets in the way of successful restructuring, as long as firms do other things well, Watson Wyatt deduced.
Further, compensation redesign must be taken into effect. Successful restructures were more likely to have effectively redesigned their compensation policies than unsuccessful firms. In particular, they were more likely to increase the overall pay at risk, reevaluate jobs and set new performance criteria for payouts. They were also more likely to report these changes as very effective in supporting their restructuring effort.
Overall, the study identified several rules that companies should follow to achieve asuccessful restructuring that reduces costs and paves the way for futuregrowth. These include:
- setting goals, such as survival or independence, that are easy to communicateand to rally behind
- cutting costs or laying off employees do not necessarily reduce yourchances of success, but take care to keep unwanted turnover to a minimum.
- involving HR early as a champion of change.
- initiating all layoffs at once rather than prolonging the process with roundafter round of layoffs.
More information about the corporate restructuring results can be found at http://www.watsonwyatt.com/research/whitepapers/wprender.asp?id=wp-16 .
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