The hidden costs of restructuring

Recently, a friend forwarded me a (translated) letter a Finnish CEO had sent to his employees. The CEO reported some severe headwinds for the company, but he also emphasized he believed the most stupid thing he could do was to lay off people. The company had invested so many years in the competencies and team capabilities of these people that it would be silly to destroy these investments. He mentioned he planned to temporarily acquire different types of work for his staff to overcome the difficult time. My friend reported the company is doing fine again and all employees are still on board.

I would love to work for that CEO.

I won’t deny that, once in a while, every company needs to restructure and adapt itself to changing conditions. And each company should regularly investigate if all activities really contribute to the creation of customer value. Companies tend to pick up some fat. It isn’t always easy to identify that fat, as people may have various reasons why the fat should be there. Simple organizations with decision-making authority low in the structure will help reduce the chances of building up fat. And the longer the fat is there, the more drastic measures are required to remove it. That doesn’t mean you have to lay off staff; good companies will be able to allocate new tasks that contribute to the creation of customer value and still leverage the competencies of the people.

Everybody will understand the negative impact of involuntary attrition on the level of competencies, even when these people fulfill a role with not so much added customer value. And competencies are not only limited to technical competencies or understanding the market. It’s also about team dynamics and knowing how to collaborate. It takes some time before you know who to contact and where to get your information. It takes six months to build a good team.

I’ve seen many restructurings during my career and I noticed far bigger consequences to layoffs, often not recognized by management. They rather focus on cost reduction in a way very visible to the shareholders, securing the stock price and with that securing their own position.

In most of the cases I’ve seen, the people remaining weren’t necessarily the best in the business. They were often the best in politics and manipulation. I’ve even seen examples where people managed to convince the executive level to not integrate a business, even though the strategic benefits were clear. It was just about securing their own VP title. Moreover, these people tend to select people around them who don’t challenge them, lowering the quality of the decisions even further.

This is a self-reinforcing process: as the people making the decisions are better at politics and manipulation than at making the right business choices, the business will soon need another restructuring. For me, this is one of the main reasons why some companies keep on laying off people for many years. It’s a leadership issue, which starts at the top.

Of course, people in the organization will notice. Some will get frustrated and leave – often the best people. Others will stay but adjust their behavior. They’ll avoid risk and adopt a defensive approach, refusing to take ownership and blaming others when things go wrong. Many years ago, Google already reported that psychological safety is a key driver for productivity. This, too, is a self-reinforcing process and can totally paralyze organizations. Employees lose trust in management and management doesn’t trust the workforce, resulting in ‘control-rather-than-trust’ leadership styles.

It’s difficult to change the culture and re-create this trust and personal ownership. It helps when leaders show their employees that they’re on their side and that they’ll do whatever they can to secure their jobs. And that they also feel a bit co-responsible for their staff’s family lives. Like the Finnish CEO. They won’t need a new restructuring, as all employees are fully committed to the company’s success.