Management consulting

22.5 Downsizing

Downsizing is a reduction of the workforce, often as a result of financial losses, cash flow difficulties, loss of contracts, technological changes, or action taken by competition. This reduction can be achieved by attrition, early retirement, and transfers within the company, as well as by layoffs. Indeed, downsizing – if it is managed in a socially responsible way – can be and often is a good opportunity to reduce costs, improve competitiveness and reinvigorate an organization. Radical downsizing has been a popular strategy and financial markets have usually applauded these drastic efforts.

However, downsizing can also strip an organization of valuable human assets and lead to deteriorating productivity, morale and loyalty. Downsizing can be planned and systematic, but often layoffs are done as a spectacular “quick fix” to send highly visible signals to investors. The actual impact of such layoffs on profitability may then be negligible in comparison to their magnitude. In many cases, downsizing fails to increase long-term shareholder value. The hidden economic and social costs of downsizing include the loss of key talent and valuable corporate memory, higher turnover and absenteeism, loss of customers due to a decline in quality and service, decline in entrepreneurship, innovation and risk-taking, and even an erosion of external reputation and brand image, and increased legal and administrative costs. High social costs usually stem from the effects of job insecurity, increased resistance to change, decreased motivation, stress, and loss of trust and loyalty.

Nevertheless, in certain cases downsizing is difficult to avoid. It can be both economically effective and socially responsible if it is conceived and executed as a part of wider transformation efforts. A good strategy may be continuous downsizing, with no major layoffs and a lean management philosophy and culture. The best downsizing practices normally emphasize:

●corporate social responsibility reflected in the corporate ethics and code of conduct;

●business vision, mission, strategy and goals, and aligning actions around them;

●leading transformation, not just downsizing, based on continuous improvement;

●focusing on people, communication, partnership and participation.

It is important for a management consultant to be well prepared to help with recovery measures after downsizing. These may involve defining a new shared vision and focusing on the future rather than the past, providing support to survivors as well as those laid off, facilitating changes in organization, job design, work-shifts and responsibilities, mapping out and updating in-house skills and translating them into company competencies, revitalizing sales and improving customer relationship management.

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Recently there has been a shift from downsizing to the concept of rightsizing, which begins with clarification of business strategy and core activities, and definition of the optimum organizational structure and staffing requirements. This contrasts sharply with the previous tendency to carry out broad and brutal staff reductions across the board, sometimes referred to as “dumb-sizing”.

22.6 Business process re-engineering (BPR)

Re-engineering was developed and launched in the mid-1980s as a technique for making radical and rapid changes in operating strategy that result in immediate competitive advantage. In this concept, changes in business processes must cross old organizational barriers; job descriptions must be rewritten; reward systems must be revised to foster individuality and internal competitiveness; new information systems must be designed and tested. There is a strong focus on cutting costs – particularly on making large numbers of staff redundant.

The earlier concepts of BPR were clearly centred on information technology (IT). The key message was that IT systems should be designed around the processes of an organization rather than localized within organizational units, as was usually the case. The view was soon extended to the organization as a whole to counteract the negative impact of functions, hierarchy and commandtype structures. A modernized BPR is meant to be a fundamental analysis and radical redesign of business processes to achieve dramatic improvements in performance, including costs, quality, service and speed. It also aims to eliminate all activities that are not central to process goals, to automate all activities that do not require human judgement, and, where necessary, to facilitate such judgement at reduced costs. It is a series of interrelated activities that cut across functional boundaries in the delivery of output.

The essential idea of BPR is to redesign the core processes of the enterprise so that the organizational barriers and operational impediments between processes are eliminated. Instead of a piecemeal approach – improving the efficiency of each separate business activity or operation – re-engineering starts with the premise that companies consist of processes, or combinations of activities, that, linked together, produce an output in the form of goods and services for customers. In re-engineering, therefore, the focus is on how best to organize and assemble these processes as a whole, in order to maximize benefits for customers while ensuring efficient use of company resources.

BPR consists of two main elements. Business re-engineering involves the development of an organizational architecture: identifying and linking business strategy with the required processes to ensure that the strategy is delivered. Business process redesign refers to the redesign of any organizational process, from the total supply chain process to a single process within an individual functional department. Process redesign normally includes eliminating all non- value-added activities, simplifying the process, integrating it and finally

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automating it where appropriate. The whole effort is usually structured in five stages as follows:

●Stage 1. Restructuring. Organizational renewal generally begins with a turnaround effort focused on restructuring by downsizing and/or delayering to cut “fat” and improve productivity. The main staff reductions come from retirements, closing of plants, reorganizations, consolidations, and greater span of control.

●Stage 2. Bureaucracy bashing. Get rid of unnecessary reports, approvals, meetings, measures, policies, procedures, and other activities that create backlogs.

●Stage 3. Employee empowerment. Empowering employees helps to remove barriers between employees and managers, and builds openness and dialogue. Self-directed work-teams and employee involvement should be woven into the fabric of the organization.

●Stage 4. Continuous improvement. Begin by focusing on actively detecting and preventing errors using available productivity and quality techniques.

●Stage 5. Cultural change. Employees’ mind-set – the way they think about their work – needs to be shifted.

Re-engineering programmes often seek to achieve short-term results within four to six months and to complete delivery of longer-term results within one or two years. A major advantage of the BPR approach is that it avoids or bypasses the departmental rivalries and politics that can interfere with the smooth running of more organizationor process-wide projects. In designing the re-engineering processes, it is important to focus on operations – irrespective of business functions, departments, geography, authority etc. – that run across all business areas, from raw materials procurement and manufacturing, through all the internal processes to contact with customers via sales, distribution, after-sales services and customer relationship management.

Successful BPR practices indicate that the following factors should be presented or developed:

●A preoccupation with change is important for employees to feel the urgency or see the benefits of change. The key drivers for re-engineering are customer demands, regulatory changes, increasing competition, dissatisfaction with internal operations, and costs.

●The need for clear goals is paramount for implementing a successful BPR. The business objectives need to drive the technology, and not the other way around.

●Re-engineering is a top-down approach, requiring continuing top management involvement, understanding and committed leadership. Companies must focus on redesigning processes rather than functions or departments, in order to gain maximum improvements from the BPR.

●Managing the pace of BPR is critical; a pilot project approach can help the organization gain “early wins” to validate certain concepts and techniques.

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●The re-engineering task does not end once the newly re-engineered process is up and running. A monitoring system should be installed and the new process further fine-tuned and improved.

22.7 Outsourcing and insourcing

Outsourcing involves contracting with outside organizations to undertake specific activities that were previously carried out by the firm itself. It is a form of restructuring since it implies fundamental changes in strategy, organization and staffing. Specialized service companies can often provide better quality services more cheaply and more reliably, particularly in activities that require a different set of skills than the mainstream business of the company. For some time, activities such as cleaning and maintenance have routinely been contracted to specialized firms. More recently many firms have outsourced data processing, accounting, and facility management, and there is an increasing trend in manufacturing to outsource production of parts and subassembly supply. Under an outsourcing agreement, one firm purchases the ongoing provision of a product and services from another without taking a direct financial stake. It is a strategic opportunity that offers benefits over and above lower costs as a result of greater economy of scale for specialized external producers.

A management consultant has to be able to explain to the client the possible advantages and problems of outsourcing. When a product or service costs less, it frees up capital for alternative uses, or accrues to investor wealth in the longer term, and improves cash flow in the short term, as well as earnings per share.

An important source of user value is access to economies of scale and the unique expertise that a large provider can deliver. Brand or reputation value can also improve when providers deliver products and services more competently than internal personnel. Firms enter into outsourcing agreements for strategic gain as well. Value may come from an outsourcing contract if it provides for good complementarity between a user’s and a provider’s capabilities; if it allows the user to stay abreast of fast-changing technologies that it could not develop itself. Other key potential advantages include reduced capital intensity, transformation of fixed capital to variable costs, freeing-up of management time to focus on core, high-value-added activities and customer needs, and benefits that can be gained from supplier innovations.

A large and growing subset of outsourcing is contract manufacturing (between 10 and 20 per cent in some new economy sectors). The advantage of this lies in higher productivity, lower overheads and better use of expensive high-technology factories and specialized equipment. This dramatic and recent development is changing the shape of the value chain and relationships with suppliers.

PricewaterhouseCoopers proposed the following sequence of steps for business outsourcing:

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1.Analyse possibilities and cost-benefits of business process outsourcing.

Review the company’s current state and define core and non-core activities. Identify effective solutions for the company’s non-core operations.

2.Define roles, responsibilities and controls. Consider relationships between the corporation and the outsource company as a strategic, integrated partnership. Analyse various outsourcing options, identifying objectives, studying the current processes, and developing solutions. The contract must clearly address the scope of services, business processes, roles and responsibilities, organization and staffing, work plans, deliverables, schedules, budgets for time and expenses, and other management matters. It must also ensure that the company retains sufficient control.

3.Establish measurements tied to results. Include the means to provide information concerning the objectives. The contract should include jointly agreed performance targets for outputs, services, costs, and performance reporting as well as the outsource company’s effectiveness.

4.Plan for a smooth transition. Formulate a detailed transition plan, and apply the firm’s management methods to ensure a smooth, orderly hand-over of selected business processes from the firm to the outsource company.

5.Launch the partnership. Once the contract has been signed, a transition plan prepared, and internal communications plans put in place, the firm and the outsource company can initiate the new strategic partnership.

6.Monitor and benchmark for continuous improvement. The firm and the outsource company should provide for monitoring of processes and relationships; periodic evaluation of the outsource company’s performance; execution of necessary adjustments; transformation of the outsourced functions into “centres of excellence” and use of performance benchmarking against world-class companies.

Companies must also be aware of a possible downside of outsourcing – creating a bureaucracy around it that is more unwieldy than, for example, running the IT department entirely in house. As companies increasingly compete in terms of responsiveness and flexibility, and for human talent, some observers worry that outsourcing may lead to “hollowing-out”. With their value-generating activities no longer under their own roof, enterprises no longer possess the cutting edge to create innovative products, develop fresh services, or find new profit zones.

A new trend is currently leading some firms to bring their processes back in house – to “insource”. Insourcing is often realized as shared services. Companies strip out routine, transaction-based processes common to several business divisions, and group them together in a stand-alone shared service centre (SSC). The SSC then provides the service to the company’s divisions, charging each a pro rata fee for the service used. Typical processes to be insourced are financial (expenses processing, payroll, etc.), human resources (updating employee records, training, etc.), and information systems (systems support, training, etc.).

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