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Restructurings Are Painful Including Optimizing People Costs

Posted by Cliff Locks On January 4, 2023 at 10:05 am

Restructurings Are Painful Including Optimizing People Costs

A financial giant combining business units. A major pharmaceutical firm reshuffling divisions after a spinoff. A food producer scaled back after the spike in sales started fading. A big software company trimming headcount after a years-long hiring spree.

Those four high-profile announcements, all within the past week, could spell a larger wave of reorganizations, experts say. Leaders are aiming to get their organizations leaner, more accountable, and more efficient in front of a recession, which many economists believe will arrive within 12 months.

But in many cases, new changes are coming on the backs of massive pandemic-inspired shakeups, some of which haven’t been fully completed. Reorganizations are supposed to drive positive change, but if leaders aren’t careful, employees could resist a new wave of them. “It’s a nightmare scenario. When you do it too frequently you inoculate yourself to change,” says Nathan Blain, a Korn Ferry senior client partner and global lead for the firm’s Optimizing People Costs business. Indeed, employees’ resistance to change is a leading factor in why so many change transformations fail.

Even absent a softening economy, organizations often will trim payrolls near the end of the year. “Leaders often want to start fresh on January 1st,” says Jennifer Pitts, a Korn Ferry senior principal in the firm’s Merger & Acquisitions and Private Equity practice.

But this year there’s an added urgency to make changes. The US economy has treaded water for the past six months, and there’s a growing consensus that the Federal Reserve’s campaign of raising interest rates to tame inflation will throw the worldwide economy into a recession. “You don’t want to be the last person to throttle back,” Blain says.

Still, organizations can run into trouble with restructurings. Experts recommend not doing a “spreadsheet exercise,” or telling every department to cut costs by a flat amount. That tactic does not take into account divisions that are growing rapidly which could use extra investment, and it could overvalue other areas that are unproductive.

It’s also critical to communicate what’s changing and why. It’s particularly essential this time around, experts say, because, on the surface, companies are more profitable than ever. The US publicly traded firms had an average profit margin of 15.5% in the second quarter of 2022, the highest level in 72 years.

Experts say it’s important to immediately and clearly articulate the big picture – why change is important now and how it will positively affect the organization long-term. Then, keep employees informed with regular communication.

Finally, if layoffs are to happen, they should be done quickly and decisively. Oftentimes companies let the process linger for many weeks or even months, which can sap morale. Organizations also should treat employees empathetically, offering services big (such as outplacement help or training support) and small (letting people say they are still employed during job searches). “People talk about how they were treated on the way out,” Pitts says.

Inevitably, bad times will pass, and companies may want to try to rehire people they once let go. A bad experience going out the door could sour ex-employees on the organization forever.

Contributor: Nathan Blain, Senior Client Partner, and Jennifer Pitts, Senior Principal, at Korn Ferry and edits by Cliff Locks, CEO | COO | Executive Strategy Consultant and Coach | Board of Directors | Governance | Private Equity Podcast Host | Reverse Logistics | Supply Chain | Advisory Board | SaaS | Clean Tech | Med Tech | Metaverse | AI | Thoughtful ESG & DEI Email me: at [email protected], Schedule a call: Cliff Locks, or fill in the below form to start a conversation.

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