Reshaping the Corporation for the Future:

Eight Lessons


Robert M. Tomasko


[This is a summary of a briefing given to senior executives in Brussels, New York, Singapore and Toronto sponsored by Arthur D. Little, Inc.]


For many businesses, the most important long-range goal, the first measure of success, is growth-growth into new markets, with new factories, new products, new employees, and new managers.

But in the last few years, many companies have learned they can be most successful by growing their sales and earnings, but not their organizations or staffing. They have reshaped their companies for future competitive success by downsizing their corporate bureaucracies.

This morning, we would like to discuss some of the reasons behind bloated U.S. corporations, the pressures on companies and governments around the world to shrink their management ranks, and some effective and humane ways to do the shrinking without losing morale or market share.

We will focus on eight lessons for managing a downsizing effort effectively and for keeping the company streamlined once the cuts have been made. Also, we'll look at some of the ways companies can evaluate what their managers and headquarters staff specialists are doing and decide how many are really needed to get the job done.

In particular, the energy crisis of 1979-1980 was responsible for a major shake-out in many energy intensive industries. This was exacerbated for the steel, automobile, oil refining, and chemical industries by a major economic recession and by intensifying international competition. The abrupt end to the energy crisis in 1981 did not improve the situation in these industries, but caused an even more brutal period of adjustment for the oil and gas exploration industry and the oil field service companies.

The Downsizing Decade
If we examine the record, we can see that many industries already have gone through the downsizing process. Others are just getting started, while still others have not yet faced up to the issue. In the past few years, mega-mergers alone have resulted in thousands of overlapping jobs. Early retirements, layoffs, and other cutbacks have brought the number of American professional and managerial positions eliminated since 1979 to over two million.

While mergers have taken their toll, changes in the competitive environments of different industries have played a part, too.

By the middle of this decade, the layoffs in North America and the United Kingdom were taking place in industries coping with the aftermath of deregulation. Deregulation is great until it happens to you. First you have a honeymoon period, followed too rapidly by new entrants and competitors, overcapacity, vicious price cutting, and m turn, the need for staff cutbacks. We certainly have seen this pattern in railroads, airlines, trucking, and the long~distance telephone business. As we enter the 1990s, we notice that many segments of the computer industry have matured, resulting in a period of shake-out and cutback for many manufacturers.

Retailing is another area where staff cuts are on the increase. Some regions of the United States are "overstored," and we're beginning to see mergers and consolidations in this business as well.

There are a number of downsizing-prone industries where it is reasonable to expect cutbacks and consolidation to occur well into the 1990s. These include financial services, local telephone companies, energy utilities, consumer goods manufacturers, health care providers, and defense contractors. And perhaps, depending on how Congress and the Bush Administration cope with the deficit, the U.S. Federal Government.

Global Pressures
Consolidation is not just an American issue. Many medium-sized companies in Europe that were right for a national market will be threatened by smaller cross-border competitors after 1992, when the Common Market becomes more of a reality. We are already starting to see a mini-boom in acquisitions there, but for different reasons than in the United States.

Some larger European corporations, such as Philips and Siemens, are streamlining their organizations to lay a groundwork for speedy new product development and fast decision making-two qualities essential for their continuing success in the global marketplace.

Elsewhere, Australia, Canada, New Zealand, the United Kingdom, and other countries have been looking hard to see what pieces of their governments they can turn over to the private sector. This privatization trend is becoming increasingly common in the developing world. It is frequently accompanied by cost reduction and productivity improvement programs.

Even Japan, the country we always thought was the home of lifetime employment-a fiction perpetrated by some best-selling writers-has seen serious cutbacks. There, however, the difference is in the way they do it, without massive layoffs, giving us something else to learn from them.

But the biggest arena for future downsizing may well be the Soviet Union. There, Mikhail Gorbachev has announced the need to cut several million positions from the Soviet industrial sector to make it sufficiently efficient to serve its domestic market. He has already started at the top, by slashing the Central Committee structure in half! And he has opened an early retirement window for many Soviet officials wedded to the old ways of running the economy.

It's not hard to find additional driving forces behind downsizing. Companies moving from making products to providing services often face strong competition and thin margins. Mature industries face earnings pressures that mean profit growth must come from taking away someone else's markets or cutting costs or both. Free trade pacts like that between the United States and Canada also make it easier to encroach on others' markets.

Each of these trends has played a role in the layoffs and restructurings of recent years, and many will persist well into the 1990s.

The Bloat of Corpocracy
The buzzword applied by Richard Darman, director of the U.S. Office of Management and Budget, to excess corporate bureaucracy is "corpocracy." There are really two aspects of this bloat that most downsizing efforts address. One is the number of layers of management in a company. The other is the size and scope of headquarters staff groups, and the fact that they tend to proliferate into the divisions, plants, and branches.

Where do these staff groups come from? We don't know of any company that has deliberately gone out to "overstaff" itself. But most companies have assumed that as sales and earnings have gone up, employment ought to go up also. We acquire new technology and hire an expert in headquarters who can cope with it. That person gets lonely, hires some knowledgeable subordinates with whom the expert can plan ways to use the technology. Pretty soon, a critical mass is reached and they are sending out requests for information all across the company, and you find the divisions and plants hiring their own experts to respond to these requests.

In many ways, management is a trend-driven activity. For each emerging issue, whether it be productivity one year, quality another year, or whatever, we see more positions, more staff people added on. And we seldom see sunset laws applied to redeploy staff experts from last year's trendy issue to today's top management concern-of-the-moment.

Diversification has probably been one of the primary reasons for the growth of many companies since the early 1960s. One way of defining diversification is "growing by getting into things you don't know much about." That, too, has bred extra layers of management and extra staff positions in headquarters to keep things focused and under control.

Bureaucracy's Stronghold
It is useful to look at what it is that keeps corporate bureaucracy in place. Because if you don't begin to address some of the root causes, you will find that cutbacks alone are not going to bring about a sustainable change. One of the key driving forces of large management bureaucracies is the way companies price jobs and reward good performance. There is a clear rule in most companies: if you want to get ahead, become a manager. If you do well as a manager and you want to get more pay and recognition, manage more peopIe. Since the CEO puts a cap on how high the pyramid will grow, over time, this tends to breed a lot of levels, half-levels, and resting spots on the organization chart.

There is another factor that has led to excess corporate bureaucracy. This one is harder to get your hands on and weed out. It is not written in any company rule book, nor is it a value in any company mission statement. But it is a deeply pervasive aspect of many corporate cultures I call "management by mistrust." There seems to be a strong element in most corporate cultures that says we don't value learning. We don't value making mistakes and quickly correcting them. We expect everyone, at least everyone who wants to get ahead, to always get things right the first time. The signals you pick up pretty quickly when you go to work in most companies is that if you make a mistake, you hide it, you cover up the fact that you have hidden it, then you camouflage the fact you've covered it up.

So what happens? We aren't fools. We make sure we have closer supervision than we might otherwise need to weed these things out. Then we add armies of auditors or staff policemen to detect the mistakes and cover-ups that close supervision missed.

Is there a way to change all this? Yes, but not easily. But until we begin to address these issues, we will find we can do a lot of redesigning and quick-fix layoffs, but little will have really changed in the long haul.

Eight Lessons
Several years ago, some of us at Arthur D. Little examined the experience of American, European, and Asian companies that had gone through some form of downsizing or restructuring to see if there were some lessons we could learn-about how best to handle these massive changes for effectively - and humanely. We tried to look for instances where the cure wasn't worse than the disease. And we looked hard at approaches that promised to be sustainable and were not just quick-fixes.

From what we found, we drew eight lessons.

1. There's no quick fix.
Effective downsizing takes time and planning involving managers, employees, and help from people who have worked with other companies through downsizings in the past. One-shot, hurriedly implemented, across-the-board solutions are as likely to backfire as to provide quick-hit savings.

2.Build, don't destroy.
Start with your strategy, not your head count. Eliminate unnecessary or redundant work before reducing work force size. At Arthur D. Little, we use a tool we call ValuScan to facilitate this process. It helps provide our clients with a view of their organization similar to the view a CAT scan gives doctors of their patients. We urge our clients to protect and build around their sources of competitive strength as they prune back unnecessary and low-value parts of their organization. ValuScan helps them find these sources. We advise clients on ways to avoid the cutbacks resulting in situations where, as one manager has said, "Employees can often end up spending more time worrying about job security than doing the kind of things that you need to do to get the company back on its feet again."

3.Flatten the pyramid, not the head count.
This means focusing on the number of levels of management, not just the number of managers:restructure to minimize management layering and clarifying exactly what value each layer is adding to the company.

We spend a lot of time at Arthur D. Little examining organization charts of many companies. If the issue is to flatten the pyramid, to reduce the number of layers between first-line supervision and chief executive, then by definition what you need to do is broaden the average span of control of the managers who remain. Have more people report to each of them.

Where is that a problem, in terms of control? We don't usually see it at the top of companies. Many companies often have too many people reporting directly to the chief executive. And we haven't seen too many span-of-control problems at the bottom of organizations. Most do a decent job of matching how much first-level supervision is needed for the size of the work force. The real problem occurs in middle management. That's where the one-on-ones and the two- or three-on-ones show up on organization charts. That's where we create pan-time management jobs.

Many companies are full of management positions where the managers are spending significant amounts of time doing the work of individual contributors. This leads to over supervision and under management. When this happens, a manager scoops up work from subordinates and "creams" their jobs, taking the most interesting parts and doing them himself. This, in turn, demotivates subordinates because now they've got someone who is into the nooks and crannies of their day-to-day work.

Meanwhile, the manager is more likely than not under managing-that is, underspending time on developing, delegating, controlling, or planning, because the individual contributor work almost invariably drives out attention to management tasks.

Pyramid flattening requires changing the nature of the marching orders given to middle managers-requiring them to be full-time managers with 8, 10, 12, or 15 people reporting to each. The pressure created by looking after this many direct reports, in turn, forces them to resist the temptation to do work that could be delegated.

4.Manage staff like a business.
Think about how you're managing these professional experts and try to manage each of them more like a business instead of just an adjunct. This might mean introducing sunset laws into headquarters organizations: old activities must be abandoned or decentralized before new ones are begun. It also means keeping all staff attuned to the needs of their internal customers, or looking for ways to obtain services outside the company instead of constantly adding more people to the personnel or accounting departments, management information systems groups, or strategic planning offices.

5.Avoid layoffs by managing people flow.
After most companies complete steps two, three, and four, they frequently find they have a talent surplus. This is the time to start matching people with the newly redesigned positions, and then thinking creatively about how to deal with any surplus. Layoffs, pay reductions, and voluntary "windows" may be one option. But increasingly, we find companies with sufficient lead-time can deeply downsize without mass layoffs. They make creative use of flexible hiring freezes, retraining and redeployment, vending, and staff department spin-offs. They also look for ways to convert full-time jobs to part-time and contracted-out positions. They rethink the too-long-taken-for-granted assumption that all white collar work must be done by employees working eight hours a day, 40 hours a week.

6. Anticipate downsizing's downside.
Running a lean and mean company is not necessarily an easy, simple thing, especially if it means operating in a manner you're not accustomed to. Effective downsizers develop elaborate communication systems to cut off rumors at each stage of the downsizing process. They offer counseling both to employees who are staying on as well as to those being let go. Work teams are given time to rebuild, and managers are reevaluated to make sure they can handle the bigger responsibilities they are likely to have. Investment is often increased in management training. Broadbased incentive pay plans are introduced.

7.Stay streamlined.
This lesson is much harder than the first six, not that they are all that easy themselves. It requires addressing some of the root causes that got you into the problem in the first place. If these are not weeded out and the company does not operate in a different way, the problem's just going to come back - as it has for a number of companies that made serious cuts in the early 1980s.

One way to do this is to bring down the wall between the company and the outside world. After World War II, when the economy was growing rapidly, it made sense for companies to do everything in-house. Not any more. Today, companies that want to stay lean develop relationships with innovative outside suppliers, who often can come up with new products or components faster and at less cost.

Staying streamlined also requires lowering barriers that have grown with the company. A critical one to address is the wall that tends to occur naturally between line and staff functions. IBM lowers this wall by continually rotating people across it so as not to build up separate empires with very different perspectives. TRW has a rule that staff groups at headquarters are never allowed to get large; they have to get their work done through task forces of donated line managers. If it is not worth being done by these task forces, it is not worth doing.

Another key wall is one that has grown between and among divisions. Apple Computer didn't really begin to grow until they combined Macintosh and Apple II groups. GE has eliminated an old practice of divisions being standalone with all the business resources they need.

Another major cause of management bloat insufficiently addressed in many downsizing programs is the system for compensation and career progression used in many corporations. Pay levels frequently have more to do with the number of people supervised than the individual's relative contribution. This, and the assumption of upward-only advancement built into most career paths, helps guarantee the return of excess staffing when financial pressures let up.

Attacking this cause of corpocracy requires taking a fresh look at issues like dual career tracks and skilled-based pay. Ground rules for promotion in companies with flattened pyramids need to be rethought from scratch.

Finally, there is a new human resource agenda for companies that want to stay streamlined. These companies make it hard for job candidates to get hired and harder for poor performers to stay on. They build contingent and buffer work forces as a way to manage and control their size. Then, they focus on managing their people flow for employment security, to achieve a work force that is productivity-oriented.

8. Start before you have to.
The sooner you begin, the greater your ability to control what you're doing and to plan for it. Companies that do downsize successfully will not have to react to
agendas dictated by-junk-bond-fueled corporate raiders, new competition, or the next business downturn. They will be better prepared to carry out their own strategies according to their own timetables.

© Robert M. Tomasko 2002


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