The Covid-19 crisis has led to substantial human and social consequences and future impacts are still too uncertain to predict.  Many businesses face significant reductions in revenues and margins, with a negative impact on cashflow and investments. Inevitably, management of costs, is on the CEO and CFO agenda.

Organisational Design has a significant role to play in effective cost reduction strategies in response to the disruption caused by the Covid-19 crisis. In this blog, we review Organisation Design in more detail and discuss three approaches to Organisation Design for managing cost.

Why is workforce reviewed as part of cost reduction?

Cost reduction activities such as Procurement spend reviews improve performance in a specific and targeted part of the cost base.  However, depending on the sector, the workforce can make up the most substantial part of the cost base.  To address the workforce cost base, the business needs to make changes to its organisation design and ultimately the workforce. Taking the right actions will:

• Help the business avoid harsher measures in the future (e.g. large-scale divestment or closures)

• Position the business to deliver against any upturn in business volumes in the future

• Help provide funds for future investments to make the business more competitive and to enhance its proposition to existing or new customers.

Scoping a Workforce Cost Reduction Programme

There are a variety of approaches to delivering cost reduction through organisation design:

1. Target and Delegate

2. Integrated Design

3. Activity analysis

In some circumstances, the best approach might be obvious, but for most cases, it is not. There is no “one-size-fits-all” solution.  Usually a blended approach will result in the most sustainable business outcomes.  To decide on the approach, there needs to be a scoping exercise where the business defines what the objective is, what is in scope and what is not in scope.

During scoping, the business needs to consider a number of important questions:

• What are the major talent areas you want to retain no matter what?

• What are the core and non-core business activities?

• What other ongoing initiatives will impact your workforce decisions? (e.g. outsourcing, automation etc.)

 Tactical workforce actions

Cost-driven workforce actions can be taken that do not require organisation design and should be considered before engaging in a wider organisation design programme.  Examples include:

• Freeze on hiring, promotions, or transfers.Reduction, postponement, or cancellation of training schemes, graduate schemes or internships.

• One-off reduction in annual bonuses.

• Voluntary redundancy and accelerated retirement schemes.

Approach 1: Target and Delegate

The first and simplest approach is ‘Target and Delegate’. This is when leadership decides on a target based on the needs of the business and then delegates the implementation to managers of regions, functions and/or business units without much support or guidance.

The target given to management can come in the form i) an absolute number, e.g. reduce resource costs by £2m or reduce headcount by 100, or ii) a percentage e.g. reduce resource cost or FTE number by 15%.

What are the advantages of Target and Delegate?

• It is simple and straightforward.

• It is easily understood and communicated.

• The results can be tracked.

What are the disadvantages of Target and Delegate?

It can be difficult to define and agree how targets are set and allocated between Business Units.  This approach does not provide clarity on how the cost reduction will be carried out, leading to inconsistent approaches and messages.  It can also result in an unfair and reactionary process driven by instincts and personalities rather than process and data either because the managers tasked with implementation may not have the experience and expertise required or there may be dependencies between different areas of the business which will not be addressed if the cost reduction is carried out in silos. 

Approach 2: Integrated Design

The integrated design approach is one where the business will set up a dedicated team in a programme of work that will address the entire corporation (across BUs, regions, functions) in a well thought through, step by step process.

The programme typically starts with an As-Is analysis and diagnostic that details the current status of the organisation and identifies what works well, what does not and the opportunity areas for improvement. Then the programme is divided into workstreams which deep-dive into specific areas of the business (e.g. BUs, regions, functions etc.), coordinated by a central team.

This approach is deployed by businesses when they want to address large parts or the whole of the organisation concurrently.

Methodology variations

The initial scoping exercise and as-is analysis will determine how deep and complex the programme approach will be. An easy way to think about this is to break it down in three types:

A. Simple approach

The business does not look to carry out major restructuring and Target Operating Model changes, but rather to retain the core structure and optimise . Example methods include optimising spans and layers, benchmarking and aligning functions with industry averages, simplifying reporting hierarchies etc. While quick and tangible, it can be hard to realise substantial and sustainable savings from this approach and it can be very disruptive.

B. Initiative based approach

The initiative based approach is based on identifying major improvements to the existing structure and grouping them into initiatives (often but not always mirroring programme workstreams). These initiatives should be divided based on the scope they cover. For example, a programme with three initiatives could comprise of: merging the Sales and Marketing teams, centralising regional procurement teams in one central function and creating a shared service centre for Accounts Payable and Accounts Receivable functions.

C. Zero Based approach

This is the most radical approach and involves starting a brand-new design on a blank sheet of paper, irrespective of how the organisation is structured today. This is obviously the most challenging and difficult to implement method but can potentially deliver the most benefits. In the context of Covid-19 where businesses might be looking for solutions with more immediate returns, this approach might not be appropriate due to its long lead and implementation times.

An integrated design approach is likely to trigger more detailed work on the back of its recommendations such as a deep dive into activity analysis (see Approach 3) or HR policy changes (e.g. compensation and benefits, recruitment, performance management).

What are the advantages of Integrated Design?

• It is more strategic compared to ‘Target and Delegate’ and examines the organisation as a whole as opposed to each segment individually.

• It allows for integrated designs and trade-offs between BUs, Regions and Functions.

• It utilises specialist full-time expertise in a programmatic approach.

• Delivers objective and data driven designs backed by well thought through decisions. 

What are the disadvantages of Integrated Design?

• It takes longer than Target and Delegate.

• The high impact of change may trigger resistance internally, which requires rigorous change management and communication.

• The central team managing the programme of work will not understand the entire business end-to-end which may result in unrealistic proposals being suggested.

Approach 3: Activity analysis

Activity analysis is the most detailed approach and involves examining all people-driven activities and processes. This analysis provides an understanding of how much effort is each activity requires and whether it is worth changing or improving.

Typically this is carried out by surveying the workforce to find out ‘what people do’ and ‘how they do it’. Understandably, this can be a very time-consuming analytical exercise and it is difficult to implement across the whole organisation, especially if it is large. Activity analysis can be focused on the parts of the organisation with highest improvement potential based upon the findings of an Integrated Design type programme.

What are the advantages of Activity Analysis?

• It is as analytical and objective.

• It provides the business with insights that were not previously known and can trigger further non-workforce related improvement initiatives. It is common after the organisation realises the improvement potential from an activity analysis to kick-off agile, six sigma or other operational improvement programmes.

• Different approaches can be taken for different types of business activity

What are the disadvantages of Activity Analysis?

• The process can, at times, be demotivating and disruptive to employees.

• The information collected is not always accurate or objective.

• Qualitative measures are more difficult to evaluate and analyse that quantitative ones, while people (intentionally or not) might be providing false or misleading information which then is used as the basis for the analysis.

• It is not suitable for all types of activities. For example, the activities delivering a successful marketing campaign are not always the same and cannot be modelled in a one size fits all approach.

Summary

Embarking on any cost reduction programmes is a significant effort an it is easy to become swept up in the pace and pressure to achieve the desired cost savings.    Each approach to cost savings has its merits and draw backs but they are all valid in the right context so it is important to understand the organisational and cost challenge you’re trying to overcome. Whichever approach you choose it is important to never forget the importance of people. In difficult times, it is important to treat people with respect, communicate effectively and take the organisation along the journey.

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ABOUT THE AUTHOR

Julian Holmes is an HR Professional with hands-on experience of helping businesses deliver value from Organisation Design, Strategic Workforce Planning and Workforce Analytics.  At Deloitte, he led major transformation programmes and was a co-founder of the Workforce Analytics Practice.  At Concentra, he helped bring OrgVue, a leading Organisation Design solution, to market. Julian is working with Sia Partners UK as an Associate Partner helping Clients create future value from their workforce. https://sia-partners.co.uk/ and can be contacted at julian.holmes@sia-partners.com. This article was created with Kostas Nikolaras in the Sia Partners Business Transformation team.