Rethinking the rules of reorganization
Play favorites. Ask for
bad ideas. Skip meetings. Here’s some unconventional advice on how consumer
companies can get the most out of an organizational redesign.
With the US consumer
sector changing at an
unprecedented pace, retailers and consumer-goods manufacturers are actively
reshaping their business and strengthening their presence in new and
fast-growing markets and channels. To help fund their efforts in these new
growth areas, companies are on a seemingly constant quest to cut selling,
general, and administrative costs—and many of these cost-cutting programs
involve reorganization. Indeed, according to our analysis, approximately 60
percent of companies in the S&P 500 have launched large-scale
cost-reduction and reorganization initiatives within the past five years.
Yet our research shows
that only 26 percent of those companies have successfully prevented costs from
creeping back up. Worse, many consumer companies are failing to reallocate
resources even as their strategies change: their budgets remain skewed toward
mature, low-growth brands rather than newer, high-potential brands, or they
continue to invest heavily in traditional capabilities such as retail real
estate while underinvesting in newer capabilities such as digital marketing and
data analytics.
How can companies
capture—and sustain—the impact of their cost-cutting and restructuring efforts?
We believe part of the answer lies in jettisoning widespread but outdated
beliefs about organizational redesign. Our extensive work with leading
retailers and consumer-goods companies has shown us that, in many cases,
companies would be better off doing the opposite of what conventional wisdom
tells them to do. In this article, we outline five new rules of organizational
redesign. By following these rules, companies can simultaneously cut costs and
drive growth—and do so for the long term.
Rule one: Shake up the core of the organization.
When embarking on
cost-cutting programs, many consumer companies adopt a hands-off posture toward
what they consider strategic functions—those they see as core to the business,
such as marketing and merchandising—and focus instead on finding back-office
efficiencies. Companies have repeatedly searched for savings in their cost
centers and support functions by implementing lean techniques as well as
through more transformative changes such as automation and outsourcing. The
core functions, on the other hand, remain full of unexplored opportunities. For
example, even companies that have shifted a considerable portion of their media
budget from print to digital media continue to retain their print-marketing
infrastructure.
The entire
organization—no exceptions—should be in scope when contemplating a cost-reduction
effort. In our experience, when companies assess the savings potential in all
their departments, they identify twice as much savings in the core functions as
they do in back-office functions.
Looking at interactions
across departments can surface even greater savings potential. Many
companies—particularly those that have been in belt-tightening mode for several
years—have already tapped into the most obvious savings opportunities within
departments or business units, but they’ve yet to examine inefficiencies in
cross-functional, cross-channel, or cross-regional activities and processes.
One example of a cross-cutting activity is retail promotions, which typically
involve the marketing, sales, and merchandising departments and require
coordination across channels (stores, catalogs, and online).
A global beverage
manufacturer had been hesitant to even consider trimming its market-research
budget, as the company had always viewed market research as central to its
success. But, as part of a broad cost-cutting effort, the company decided to
review market-research spending line by line: who had commissioned each piece
of research, for what purposes, which suppliers conducted the research, and how
the results were used across the organization. The company found that its
market-research spending was more than twice the industry average and that its
supplier base was highly fragmented, consisting of more than 50 providers.
Based on its findings, the company made several changes: it redesigned and
simplified cross-functional work flows, consolidated its vendor relationships,
and created rate cards for standard research types. These changes lowered the
company’s market-research costs by 20 percent without adversely affecting
revenues.
As this example
suggests, a cost-cutting program—which companies sometimes view as a necessary
evil—can actually help a company become more effective and more agile. Reducing
costs, especially in core functions, can be a catalyst for creating a leaner,
faster, and ultimately healthier organization.
Rule two: Play favorites.
Every part of the
business must be fair game for cost cutting, but that doesn’t mean that every
part of the business should have identical cost-reduction targets. When it
comes to budgets, management would be smart to play favorites.
An equitable
mandate—for instance, “All business units must cut costs by 10 percent”—may
sound sensible and wise; after all, it’s much easier to get buy-in from across
the organization when everyone sees that the burden is shared equally. But such
an approach misses the point of a reorganization. Setting across-the-board
targets is counterproductive if the goal is to reallocate resources from
low-growth to high-growth areas.
Some companies already
play favorites, but in a way that doesn’t support their strategic priorities.
For example, at a global specialty retailer, the bulk of the merchandising
department’s staff and budget was dedicated to mature brands as opposed to
newer, high-growth brands (exhibit). This situation persisted even though the
company’s strategic plan had called for greater investment in the newer brands.
We’ve seen the same kind of misalignment at several other consumer
organizations, from food manufacturers to household-products companies.
A better approach is to
set different cost-reduction targets and investment levels based on a business
unit’s growth and efficiency potential. Leaders should also define the
capabilities that are critical to growth and invest in those capabilities while
“leaning out” other areas to free up funding.1For example, a global retailer
reduced head count in its copywriting team by having copywriters work in both
print and digital media instead of exclusively in one media channel. This
consolidation helped fund new positions in digital analytics.
Rule three: Ask for bad ideas.
An ambitious
cost-reduction initiative will have the best chances of success if people in
the organization are empowered to think creatively and to make bold—even
outlandish—suggestions. Role modeling by senior leaders goes a long way here:
when leaders aren’t shy about offering up ideas that could be controversial or
unpopular, they embolden others to do the same.
One hindrance to idea
generation is a territorial profit-and-loss (P&L) owner. Conventional
wisdom prescribes that the person with P&L responsibility also take charge
of a cost-cutting program, because that person will be the most motivated to
make it successful. The flip side is that the P&L owner has largely brought
about the current state of affairs and therefore may not have an objective
view. He or she may find it difficult—even impossible—to envision different
ways to structure the work or different roles for individuals he or she hired.
The P&L owner might concede to incremental moves but resist a fundamental
rethinking of the organization, which in some cases is what’s needed.
One proven approach for
ensuring objectivity is to form a steering committee comprising the functional
leaders and at least two C-level executives. The steering committee’s role is
to make decisions for the benefit of the entire company rather than just one
business area.
Committee members
should regularly challenge the status quo and push for a “no sacred cows”
mentality—for instance, spurring the business unit to consider options that it
may have previously viewed as off-limits (such as automation and the use of
third-party providers). What might seem a terrible idea to the P&L owner
could be an intriguing idea to committee members. Even rejected ideas shouldn’t
be permanently discarded, but instead kept on a running list to be revisited in
the future.
At a US multicategory retailer,
the steering committee asked to be informed of all cost-reduction ideas—even
those that the business unit had considered and rejected. One such idea was to
do away with the gift boxes given to shoppers during the holidays. The business
unit felt the move was too radical and would annoy customers who had come to
expect retailers to provide free boxes for their holiday-gift purchases. The
steering committee implemented it anyway, and the result was $2 million in
annual savings. The retailer’s chief competitors soon followed suit,
eliminating their own practice of giving customers free gift boxes.
Another way to ensure
the objective evaluation of ideas is to appoint a neutral “cost-category owner”
who can ask tough questions and bring a fresh perspective. At a packaged-goods
company, the head of supply chain served as the category owner for marketing
co-op funds. This executive was able to discover maverick spending that
marketing executives hadn’t been aware of.
Rule four: Move beyond benchmarks.
Managers either love or
hate benchmarks. Those in the former camp see benchmarks as valuable metrics
for understanding the competitive landscape and for triggering important
internal discussions; they believe companies should strive to meet or exceed
benchmarks. Those in the latter camp argue that every company is unique and
that it’s therefore unhelpful and illogical to compare one company’s decisions,
structure, and head count to another’s.
Both camps are right,
to some extent. Organizational benchmarks can tell a company, for example, the
average number of employees its competitors have in each department. But that
information is meaningless without deeper insights into what those employees
actually do. Thoughtful leaders use benchmarks not as default targets, but
rather as indicators that shed light on areas in which a company’s investment
differs markedly from competitors, and then as a starting point to generate
ideas for how to operate more efficiently.
Leading companies
complement benchmarks with a thorough diagnostic, encompassing internal
quantitative and qualitative analyses (such as time-allocation surveys that
highlight the activities to which employees devote most of their workdays).
Done right, a diagnostic will surface what should change: Where are the
bottlenecks in core processes? Are employees using cutting-edge tools, or are
manual processes limiting their productivity? Are they spending too much time
on low-impact tasks?
Through benchmarking, a
retailer saw that its marketing team was 45 percent larger than the marketing
teams of several competitors. Instead of reflexively cutting head count, the
retailer dug deeper and discovered that its marketing team produced more than
twice the number of catalogs as comparable retailers did. These findings led to
data-driven discussions about the retailer’s marketing investments. It decided
to discontinue its least profitable catalogs, reduce the number of in-store
events, and consolidate all marketing-analytics functions—previously dispersed
across the company—into centers of excellence. These moves helped shave 15
percent off the company’s baseline marketing spend.
Rule five: Skip meetings and stop writing reports.
A reduction in force
won’t necessarily lead to a reduction in work. Leaders must spell out exactly
which activities should cease, which ones should change, and which should
continue. Otherwise, those critical decisions will be left up to lower-level
employees, and costs will quickly creep back up.
We’ve found that, in
many companies, certain activities take up an inordinate amount of time but
yield little benefit. One example is the often dreaded meeting. In general,
meetings occur too frequently, last too long, involve too many people, and
often don’t end with clear next steps. When a US apparel retailer administered
time-allocation surveys among members of its product-development team, it found
that designers were spending an astounding 70 percent of their week either
preparing for or attending meetings. The survey results were an eye-opener and became
a powerful case for change. The retailer reduced the number and frequency of
meetings as well as the number of meeting attendees, in part by allowing team
members to give certain approvals via email or online instead of in person.
Another way to reduce
work is to examine a company’s decision-making processes. Many companies find
that they can halve the number of people involved in making certain strategic
decisions. Typically, after an organizational redesign, about 80 percent of
decision rights are obvious; only 20 percent—we call them “pinch points”—are
murky (in many cases due to shared responsibility) and thus need
senior-leadership attention. As part of an effort to increase organizational
effectiveness and agility, a global retailer identified its “high-value,
high-pain” pinch points—cross-functional decisions that had far-reaching
financial or strategic implications but that were widely perceived as slow and
painful. A clean-sheet redesign of three pinch points led to faster, simpler
decision making. In each of the pinch points, up to 20 percent of process steps
were eliminated, and the duration of one monthly process was reduced from ten
days to five days.
Like meetings, business
reports can be time wasters. At a global food-and-beverage company, the finance
function was constantly churning out financial reports. After close
investigation of who was requesting the reports and how frequently, how long
they took to prepare, and how they were being used, the company eliminated the
laborious but low-impact reports. In total, the finance staff stopped producing
25 percent of the reports, thereby freeing up time for more-valuable activities
such as deeper financial analysis.
There may be other
activities, beyond meetings and reports, that companies can either de-emphasize
or stop doing entirely. Leaders could come up with a list of such activities by
asking questions such as, “What tasks are being done purely because the company
has always done them? What tasks are employees constantly complaining about as
not being worth the time and effort? Are there operations that we could shut
down without major repercussions?” The answers may prove surprising.
An organizational redesign won’t
“stick” without thoughtful change management.2One aspect of change management can
be compared to a marketing campaign, aimed at making the case for change and
inspiring and motivating the organization—perhaps through frequent CEO missives
and heartfelt testimonials from leadership. Another is more like a military
campaign, concerned with adjusting budgets, establishing checks and balances,
and monitoring progress. Retailers and consumer-goods companies that pay close
attention to both these hard and soft aspects of change management—while
keeping in mind the five rules outlined above—will be well on their way toward
building an organization that can continually control costs while also,
crucially, building new muscle for growth.
By Camilo Becdach, Shannon Hennessy, and
Lauren Ratner
http://www.mckinsey.com/industries/retail/our-insights/rethinking-the-rules-of-reorganization?cid=other-eml-alt-mip-mck-oth-1610
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