Organizational restructuring risks are significant. Yet, as a leader it is tempting to see organizational restructuring, or changes in organization design, as the solution to under-performance or the key to implementing a new strategic direction.
However, in our experience significant organization restructuring frequently is an inappropriate response to a misdiagnosed problem. Furthermore, they are almost always difficult and time-consuming to implement, usually representing at least a short-term drag on the P&L, and typically not addressing the root cause issues that are negatively impacting performance.
It happens all the time. A new CEO brings in a team of new leaders and a mandate to shake things up. A particular group within the organization gets singled out for poor performance. Or a superstar executive gets tasked to lead a turnaround. The search for magic wands and silver bullets begins in earnest. HP is the classic example of “reorganization as solution”—five CEOs since 1999, acquisitions, divestitures and now splitting off into two huge companies. In the meantime, the company’s market cap has dropped from $84B in 1990 to $26.6B today.
So before you decide to restructure, take some time to reflect on the most common pitfalls we’ve observed while working with dozens of leading organizations around the world:
Pitfall #1— Doing a Great Job of Executing a Bad Strategy
Doing the wrong things even better is often the unintended outcome from restructuring. So don’t mistake a bad strategy for a structural problem. Always start by stepping back and ensuring you’re focused on the right path and outcomes to begin with. Engage with your customers and other key stakeholders to challenge and confirm your understanding of what drives value.
Pitfall #2—Relying on Intuition Over Insight
Leaders are intelligent high-achievers with a track record of making good decisions, and naturally over time develop highly attuned intuition. But there are times when intuition is not enough, and we respectfully suggest that restructuring is one of those times. Because, what we’ve come to learn is that there is no such thing as a perfect organization design, so it takes time and analysis to define the problem, fully understand the root cause, and evaluate the trade-offs between potential solutions.
It’s amazing how often leaders change the boxes and lines at the top of the organization structure, which for the most part are just about power and reporting lines, while they overlook the need to tackle the white space between the boxes and lines. And it’s usually in that white space where the real problem and solution reside, be it to do with governance and decision rights, roles and responsibilities, interfaces between teams and groups, processes and workflows, or indeed issues around workforce competence.
Pitfall #3—Overlooking Organization Capabilities
Once you’re certain that your strategy is the right one, it’s easy to jump straight into tactics. But this usually leads to poor execution and diluted impact. Instead, focus on defining the critical few organizational capabilities (i.e., knowledge, processes, resources, and skills that drive specific outcomes) required to realize value and drive successful strategy execution, and then begin to identify and pursue the associated priorities and tactics in a targeted and coordinated manner.
For example, an aerospace and auto component manufacturer had tremendous innovation and electrical engineering capabilities. But as technology evolved, and software became the centerpiece of integrated solutions, the CEO recognized that the company had to disproportionately invest in new capabilities around programming and systems integration in order to meet shifting customer demands and competitive pressure.
Pitfall #4—Dismissing Culture as “Soft”
As the saying goes, “culture eats strategy for breakfast”, so what chance does organization design stand? In short, not much unless it is aligned with culture. So, as you make changes to the formal organization, be sure you do so in tandem with changes to the informal organization (i.e., culture), which is characterized by values and beliefs, accepted attitudes, norms of appropriate behavior, informal relationships that facilitate work, leadership style, and even informal rewards and recognition that promote some behaviors and discourage others.
For example, in response to new regulatory or compliance requirements, or due to emerging cyber-security threats, many organizations have designed and implemented excellent risk management structures, roles, policies, and procedures. However, we have witnessed instances where regardless of all these positive changes in formal organization design, nothing really changes in reality due to powerful cultural norms that drive people to willingly game the system, or even just opt-out.
Pitfall #5— Restructuring Around Key People
Pitfall number five is perhaps the most common of all, because we all tend to start a restructuring exercise by thinking about matching up key people and key roles. And ultimately this is a critical task. But it’s important that the tail is not wagging the dog, and so you should always start by identifying the best possible design, to get the right work done, in the best possible way.
One company we worked with designed an important support function around the unique and mercurial talents and preferences of one key executive. When that person retired, the organization was extremely concerned about the potential impact on performance from that function, and began to consider making wholesale changes in structure and leadership to fill the gap. But the real issue was not really about one leader leaving, but rather the vacuum in clear governance and connective tissue their departure would create. By getting those fundamentals of good organization design in place first, they were able to transition a new leader into the role, and actually increase functional performance despite the loss of one top performer.
A final thought on “key person syndrome” – there may ultimately be a need to modify the best design based on current talent realities, but only go there as a backup plan.