Joe Hanson, RBL Partner and CFO, gives an in-depth look at what organizations should consider when facing strategic restructuring and cost reductions. Decisions like these can be laden with emotion, as leaders deal with harsh realities. RBL’s approach is results driven and focused on the differentiation of each organization.
Q. What is the context for strategic restructuring and cost reduction?
The current crisis is fostering a restructuring environment unlike any we've seen in 25 years at RBL. Well-established companies have had to take drastic and scorched-earth approaches, like Marriott laying off 67% of headquarters employees; restaurants shutting down operations, unable to pay rent; airlines facing dramatic 60% share price decline; the oil industry implementing across the board cost and salary reductions. Even those less dramatically impacted know that their economic models will shift and they will need to restructure their costs in what is likely to be a drawn-out recovery. Right now, we’re seeing an enormous need for businesses to both restructure in a smart way or recover from a drastic cost reduction.
Q. How can companies recover or restructure in a smart way?
Typical approaches begin with cuts across the board. A CFO knows how to take out 10–15% across the board pretty easily. Other restructuring approaches really just move boxes and people around across the business and reduce some costs in the process. Then there are incremental approaches looking at a supply chain or certain part of the business versus other parts. Some of these approaches work better than others, though they all tend to be short-term focused. While they can get the costs down for the next six months to a year, the research is clear that they are not sustainable. There is over 70% failure rate—i.e., those costs just return over time.
When we work with clients, we use an outside-in, capabilities-based logic to ensure we cut fat and help build muscle. We focus on helping clients identify how to be intentional and highly selective on the front end. By dedicating a little front-end time to establish strategic capabilities, we are able to help clients make more strategic and targeted decisions about where to cut and where to invest. This process is very intentional and may feel counterintuitive as select parts of the business may have drastic cuts, while others may have an increase in investment. Each move is deliberate and differentiated. An entire function may get cut; or part of one function, but not the other. Functions may need to be split and realigned. Each move depends on what part of the function contributes to building the strongest, prioritized, long term capability. In the end, not only are costs less likely to return in the short run, but the whole performance of the organization is improved—and employee engagement tends to remain stronger.
Q: What are the steps you follow to do this?
There are five key elements of this kind of approach to strategic cost restructuring:
1. Clarify the business model and strategic intent of the organization. These are identified by these two questions: What is the core business strategy? and What is the customer value proposition that differentiates the business? These two clarifying questions are vital in creating the framework to drive the strategic cost reduction redesign. Decisions about making cuts would depend on what the business focus is. For example: Product-focused companies would cut differently than customer-focused companies. Apple, a product-based company, has product driven processes with a with a value proposition of innovation. Disney, a customer model, focuses on a family with a high-quality service experience. Other models including distribution platforms like Amazon and natural resource suppliers like BHP Billiton tend to require very service and cost-oriented processes.
Our intent in this first step is identify what work processes differentiate the business in the eyes of the customer. These work processes, need to be front and center of any design process because this is not where you want to cut. Across the board cuts will absolutely hit your competitive work and negatively impact performance.
2. Categorize the work done by the organization. All the work of any organization belongs in one of three areas: Competitive Work, Strategic Support Work, or Essential Support Work. Competitive work is the work that enables the growth and creates the differentiation identified in step 1. As part of the work categorization, we also consider where each type of work should be performed (centralized, decentralized) and the degree to which the work is proprietary or more generic. Each business and support function identifies these processes and outputs and classifies them around whether they impact the competitive work the business or they support work that's either strategic or essential.
3. Evaluation cost reduction scenarios. One of the pitfalls of the across-the-board cost reduction approaches is that there isn’t the transparency of information needed to strategically weigh tradeoffs across functions and businesses. This makes it harder to prioritize costs or reinvestment against the capabilities they believe will best position the organization for the long run. Across the board costs can result in unintended consequences that aren’t visible in the short run.
What is helpful across the board is a consistent process to evaluate work and cost reduction opportunities.We recommend asking each business unit and function within the scope of the analysis to present multiple “what if” scenarios back to the leadership team of cost ranges of 10% to 30% or 40% to 60% for example.Each group determines not only how they would change the work to meet the cost targets but also the need to invest in competitive or strategic support work to deliver the impact needed for the business. No one is exempt from this drill.
4. Implement decisions by redesigning and reducing costs. The scenarios from step 3 are evaluated against overall cost reduction targets and impact on strategic capabilities. Based on these inputs, the leadership team answers the following questions:
- Where do we build competitive muscle (which processes and which locations within the business)?
- Where can we streamline the central generic work to gain the most efficiency? What can we in-source and centralize globally? What can we outsource to move to more efficient providers?
- What other central work needs to be done at local levels? How can we do it most efficiently if it's not scalable globally?
- Where do we need to improve support work that is more strategic and supports our competitive work?
- Given our cost targets and the need to protect muscle, what is the optimal model for reducing costs and reinvestment?
In the final decisions, no business unit or function typically ends up with the same cost or reinvestment impact. But decisions are made that cut fat and gets the cost out and also ensures that the organization protects and builds the capabilities needed to deliver the strategy.
5. Transition planning. Given the conclusions and recommendations of the assessment and the redesign, the leadership team develops a transition plan to begin to move these recommendations forward and begin to realize the cost savings.
We have used this approach and methodology for over 25 years to help our clients get great results. It's a proven approach. It's time effective. The models are still as helpful today as they were 25 years ago.
Q. What are the keys to success?
One of the key differentiating elements of RBL’s approach versus some of the big consulting firms is the nature of the teams to drive these results. Many companies use an expert model with consultants bringing in big teams that drive all of the analysis. They set up a project management office, engage multiple consultants per team, do the analysis within the consulting teams and then present the recommendations with very few internal client team members.
Our approach is 180 degrees opposite. RBL’s process uses a smaller consulting team and a larger internal design team of your best and brightest people. We believe that those who know the organization should do the work. Internal teams of best and brightest performers know the problems, understand the impact of different kinds of work, get the context of the targets, and have to live with the results. This talent base should be heavily involved in the diagnosis, assessments, and recommendations. In turn, they become your key change agents for implementation. By leveraging people with broad internal understanding, great technical and organizational credibility and respect deliver strong results that are more effective, more accepted, and more sustainable over time.
We often get pushback on our approach. After describing the process and requesting up to 80 team members for a comprehensive global restructuring, one CEO leaned over and said, “We have a business to run. We cannot afford to invest this kind of people in this process.” After further discussion, he agreed to fully invest. Once the project was done, he came to us and said, “That's the best decision I've ever made. My peers were criticizing me by saying we could sit over dinner with a napkin and restructure the company. They could have, but it wouldn’t have been sustainable or as beneficial. These 80 people eventually became our change sponsors and lead the turnaround. Through them we beat a takeover attempt and went public, took out $200 million in costs, jump started our revenue growth, and then grew the share price four times over the next two years.” We understand that it takes important resources away from day-to-day work. But it puts them on work that is 100 times more impactful.
Q: What are benefits of RBL’s approach?
I’ve introduced a few, but there are many:
- It's a very structured process that moves efficiently and quickly even though the front-end process takes longer than other approaches. The time to realized savings is faster in large part due to the fact that change management is built in from the beginning.
- RBL consultants provide expertise to guide, challenge, and direct the teams charged with designing the refocused organization. Internal teams know the business and its unique problems, and they can quickly and insightfully recommend solutions.
- Organizations can achieve deep, sustainable cuts, aligned with strategy, and competitive advantage work, achieving significant reduction of fat and building of muscle at the same time.
- Participating in the redesign process is a career best development opportunity for high potentials and prepares them to actually lead in the new business model.
Q: What else would you like leadership teams to know?
Across the board cost cutting approaches aren't sustainable. They're popular and tempting because they’re fast and you see cost reduction immediately. If you want a long-term, sustainable approach that will make sure you protect the capabilities you need to continue to grow into the future, you want to start by identifying those capabilities and then play with scenarios from across the business that let you allocate whatever resources are available strategically. An outside-in, capabilities-based approach can help leadership teams achieve cost reductions while still reinvesting for a more competitive long-term business model.
If you're interested in these outcomes, let's discuss your current context and range of options you could use to move forward. Then, we can help develop the next steps to move forward.