Critical Components of Organizational Restructuring and Downsizing

Reasons for organizational restructure

There are lots of reasons why companies restructure. A few of the most common are:

1. Financial distress (see also: insolvency and debt restructuring)

2. New business direction or focus (see also: divestiture strategy)

3. New leadership or management style

4. New technology

5. Business performance optimization

6. Market changes

Is downsizing a type of organizational restructure?

Yes, downsizing can be thought of as a type of organizational restructure. There are types of company restructure strategies that don’t involve downsizing, whereas downsizing will always necessitate internal reorganization.

Benefits of organizational restructuring and downsizing

One clear benefit of organizational restructuring and downsizing is reduction in cost. The larger an organization is, the more staff it has, the more it spends on wages. This can become problematic when the company isn’t making enough money to sustain such a large workforce. 

Another advantage of downsizing is improvement in efficiency, as it forces organizations to home in on who and what functions are essential, as well as optimize processes. In other words, it forces organizations to find ways to do more with less.

While lots of organizations do restructure in order to lower costs, there are some obvious downsides.

• Loss of IP and employee knowledge 

• Increased workload for remaining employees

• Reduction in workforce morale and loss of trust

• Skills gaps and need for training

4 factors to consider when downsizing or restructuring an organization

1. Resistance to change

Resistance to change is the number one threat to successful change management and could entirely derail your restructure. According to Prosci, resistance to change can manifest in a number of employee behaviors, including:

• Negative rumors, gossip and loss of trust

• Absenteeism and reduced productivity

• Mutinous behavior and challenges to authority

Hoping that you won’t encounter resistance to change is pure folly. Successful leaders of a restructure or downsizing accept that it will occur and plan their approach with employee engagement front of mind.

2. Layoff packages

Suitable layoff packages are fundamental to a successful downsizing. Offer too little and there’s substantial risk of backlash in the form of negative press. On the other hand, if employees are offered a severance package that is commensurate with their status and length of service, and considered fair compensation, it can go a long way to smoothing the transition for everyone concerned. 

Learn more: Company Reorganization Terminations

3. Impact on share price

Conventional wisdom dictates that shareholders like layoffs, on the basis that job cuts are viewed as a signal the company is serious about cutting costs. However, research conducted by Bain & Company shows otherwise. Researchers analyzed the layoffs at twenty two S&P 500 companies downsizing during the early stages of the 2000-2001 economic downturn. Share prices stagnated in companies that let go 3% to 10% of their employees, and prices plummeted 38% among those that fired more than 10%.

4. Unexpected external factors

The Coronavirus pandemic is an example of the type of unforeseen circumstances that can occur and ruin even the best laid plans. Nobody can predict the future—but it is possible to game out a likely scenario, a best case scenario, and a worst case scenario.