By: Patrick Daoust and Paul Simon
This article was first published in BRINK News on April 21, 2020.
Editor's note: Oliver Wyman is monitoring the COVID events in real-time and we have compiled resources to help our clients and the industries they serve. Please continue to monitor the Oliver Wyman Coronavirus hub for updates.
Business reorganization and reinvention will be a high priority to ensure survival as COVID-19 takes its toll on businesses across the world — and a bottom-up approach may be the best way forward. Previously, top-down approaches have proved to be rapid and effective for reshaping organizations. Yet, as we slowly emerge from this ongoing crisis, firms must take a bolder approach to ensure they identify and capitalize on all sources of value.
Previous experience shows that top-down processes result in intangible value going out of the door with the talent. We’ve seen cases where, despite the backing of major investors, a redesigned company saw a 50% fall in brand value when implementing a basic cost reduction-oriented top-down restructuring approach.
The main stumbling block is that cost reduction is never just cost reduction. When it is treated as if it is, it can prove to be a blunt ax, unintentionally harming the bottom line by reducing innovation, agility and flexibility — capabilities at a premium during the present crisis.
One solution is to introduce a bottom-up rather than top-down approach, which we refer to as zero-based organization redesign.
One solution is to introduce a bottom-up rather than top-down approach, which we refer to as zero-based organization redesign. While like other procedures it focuses on organization optimization, it does so while listening to people and using a triangulated methodology that identifies sources of value hidden within the organization. This approach is designed to be both engaging and collaborative, conserving an organization’s flexibility and adaptability, building on its strengths in its people.
A Triangulated Approach to Organization Optimization
When taking a zero-based organization approach, it is important to start by acknowledging the interrelatedness of organizational optimization, cost reduction and the centrality of people to furthering enterprise. It treats each of these aspects as if they really do impact each other.
The zero-based organization is quite unlike other reorganization techniques in that it triangulates clean-sheet organization design with external data and that generated from within the organization. Think organization optimization rather than mere cost reduction.
It identifies resources to enable reprioritization. Costs are taken out to reinvest where they are most needed and create greatest value — of critical importance during this ongoing crisis. It reorients the organization through the following actions:
- Aligning key activities and projects to the immediate strategic priorities.
- Eliminating low-value work and identifying high-impact processes and routines.
- Right-sizing each function at the corporate level, as well as the country and business levels (where relevant), to support strategic goals.
- Resolving organizational pain points.
- Implementing process reengineering and automation opportunities to produce a nimbler organization.
- Optimizing the organizational design, supported by the most appropriate reporting structure and shared services.
- Leveraging the enterprise’s most important assets — its people — in redesigned roles (taking into account skills, experience and salary bands) and by refocusing them on high value-adding activities.
The real power of the approach is that it reenergizes the enterprise to support the coming rebound by freeing up resources and helping people create more value through reprioritization.
Our approach to zero-based organizations can also be used to identify new opportunities. One global quick-supply restaurant chain was able to reduce its general and administration costs by more than 40%, allowing it to refocus on core strategic areas, such as marketing, product innovation and improving the time to market for new franchises.
Likewise, a well-established health care provider sought to improve organizational efficiency across 20 functions. By supplementing its analysis with qualitative data, it uncovered improvements that addressed the pain points in clinical and administrative team interactions. As a result, it enhanced its delivery capacity while reducing its operating costs by greater than 20%.
It is also a very effective cost-reduction tool. A global life sciences client was able to generate an 18% reduction in its selling, general and administrative costs over nine months, enabling enhanced focus on research and development, product portfolio expansion and the acquisition of a new high-profit business.
The Power of Target-State Triangulation
Three main elements are combined in target-state triangulation:
Defining the current organizational state: The initial exercise defines the organization’s baseline state and tests its validity against zero-based organizational design principles. This analysis leverages human resource data and is supported by interviews with the organization’s leadership.
This process maps the various aspects of the current organizational design on such dimensions as reporting spans, managerial layers and number of direct reports, identifying anomalies in the organizational structure (most organizations develop these as a result of changes in leadership and the gradual evolution of reporting structures). This results in a preliminary list of areas with improvement potential.
Benchmarking against leading practice and external data: Our approach treats benchmarking with a degree of caution. Every organization is necessarily different in numerous dimensions, depending not just on its sector, scale and areas of activity, but also in terms of its mix of products and services, as well as its culture and geographical location. The nature of this variation produces innumerable challenges in obtaining data from organizational peers that are fully relevant. Crude benchmarking tends to ignore such nuances, seeking to imagine uniformity where there is none. We recommend using benchmarks solely as a heat map to highlight glaring discrepancies, with the intention of stimulating further thinking and examination.
Bottom-up evaluation: People are at the heart of this methodology, including individual ways of working and culture. This approach brings employees within the circle of trust: The process is not being “done to them.” Instead, they are an integral part of it, helping determine its outcomes.
This bottom-up approach identifies and analyzes all the organization’s current routines (recurring tasks) and projects (non-recurring tasks addressing one-off needs), establishing exactly what is done, when and by whom. The next step breaks with traditional top-down approaches to cost reduction and asks both why the task is being done the way it is and what value is created by doing it that way.
Firms must ask the right questions to distinguish between those activities that add real value, or are essential for the company, from those that produce little value. Some are of such low value that they can be stopped altogether, and others can be outsourced. Others, however, are of sufficiently high value that the company might wish to invest in them for the coming bounce-back.
Reenergizing the Organization
If organizations are to survive long term, let alone the coronavirus pandemic, they must free up resources to pursue strategic priorities. By comparing data from the bottom-up evaluation to that from the current state assessment and the benchmark data, target-state triangulation provides a clear view on all the organization’s activities. It also takes full account of the company’s unique circumstances, and thereby ensures the organization is able to reinforce its flexibility and adaptability. This is absolutely required to enable a strong bounce-back position.
It also offers visibility over where and how employees are producing real value and where they are not, revealing opportunities for cost-reduction and improved efficiency, including process reengineering, automation and opportunities for shared services. The approach not only right-sizes the organization, but right-shapes it, too, producing an optimized organization and operations that match the executive’s strategic priorities.