What is a reorganization?
A reorganization is literally the changing of organizations. In most cases, it involves changing the following:
- Basic organizational form (e.g., from line to matrix organization)
- Procedures and business processes
- Roles, governance, and reporting structures
- Composition of teams
In a broader sense, such a reorganization also changes other components of the company. This can involve, for example, structurally necessary IT tools, requirements for employees, the type of collaboration and leadership within the organizational structures, or even the corporate culture. The scope of a reorganization varies greatly from case to case. For example, it can cover changes in individual business units/functions, departments and divisions, or the entire company.
The term reorganization is often confused with restructuring. In practice, however, the difference is clear: Restructuring takes place in a company that is in acute economic difficulties. The main aim is to cut costs and return to profitability as quickly as possible. It is not uncommon for employees to be laid off for this purpose. However, reorganization also makes sense for economically successful companies. It aims to make the company “fit” for future challenges.
Typical reasons and triggers
From time to time, companies adjust their strategy to ensure their long-term competitiveness. Perhaps certain markets have become more important. Or a new product changes the company’s entire business model and value creation logic. Or an innovative business unit deserves more attention. In such and similar cases, a reorganization is the obvious choice.
Reorganizations are also typical after major personnel changes, such as the change of top executives. It is not uncommon for new priorities to be set, and the organization must be optimally positioned to be able to pursue them in a targeted manner.
Time and again, however, we also experience that organizations have grown historically and have stuck to existing structures and workflows for decades. Since markets, society, and technology are subject to constant (and ever faster) change, however, this can lead to the organization no longer fitting in with its environment. This can also lead to frustration among employees and managers, as well as creating limited performance. Then the time for reorganization has come.
Timing and procedure
A decision tree can help to approach a reorganization as consciously as possible. Of course, the risks and costs can be considerable. Initiating a reorganization is not a gut decision. The following questions can provide clarity:
- Is a reorganization necessary, or can we achieve our goals in another way?
- If a reorganization is necessary, what should its scope be?
- Do we have the competencies for it?
- Do we have the capacity for it and when is the right time?
- Is the organization or, more importantly, are the employees ready for a reorganization?
Goals of the reorganization
The most important thing: The goals of a reorganization must be defined early on. Here, every case is different. Is it a matter of speed and innovation? Should the organization adapt to new regional priorities? Or is it primarily about efficiency? Clarity is extremely important here—which is also helpful in anticipation of the subsequent change process.
It is also important to keep both the market and the perspective of the employees in mind at all times. Only organizations that create value for both customers and employees are successful in the long term. It must be clearly defined in which phases of the reorganization who will be involved, in what form, and how. And, of course, at which level decisions are made on which issues. This is the only way to manage expectations of the reorganization. This contributes significantly to the success of goal-oriented planning and implementation of the reorganization process.
Three typical mistakes in reorganizations
Reorganizations do not have a good reputation among many employees and managers. The same mistakes are made again and again. These can be easily avoided by a well-thought-out procedure and professional implementation. Three mistakes are relatively common:
- The illusion of the “perfect” organizational form: Time and again, top executives look for the one organization that can really do everything best. Fast, innovative, close to the customer, and, of course, highly profitable and cost-effective. Everyone wants such an organization, but there is no such thing as the one-size-fits-all solution . Rather, priorities must be set. What is really important, now and in the future? What fits the positioning of the company, the skills of the employees, and the corporate culture? And what can we afford? Only when there is clarity on these questions can the basic cornerstones of the reorganization be defined. Adjustments can always be made later.
- One-sided focus on “lines” and “boxes”: Often, the focus is solely on cutting the organization. A lot of work is invested in defining structures, processes, roles, and governance. This is necessary, but not sufficient for a successful reorganization. The fact that in the end it is people who fill in these “boxes” and work together is often forgotten. Against this backdrop, it is crucial to also pay attention to the “soft” issues of leadership, collaboration and culture, and to consider them in the design as well. This does not mean “designing” a reorganization around people, but by considering these factors potential challenges can already be identified for attention during the design and change process.
- Lack of communication with employees: Often, top executives have clear ideas about what “their” organization should look like in the future. During the reorganization process, employees are often presented with a fait accompli, which can lead to resistance without necessity, despite the fact that they may agree with the content. Instead, employees should be meaningfully involved in the development process. This makes it possible to bring in perspectives on the challenges in day-to-day business and thus contributes to better results of the reorganization. In addition, this approach safeguards later implementation. However, this does not mean that reorganizations are “grassroots democratic” processes. Rather, clear rules of the game must be established as to which cornerstones are “set” and where the opportunities for shaping the new organization exist.
The role of biases
Unconscious thoughts and attitudes—known as biases or heuristics—influence our actions, especially in situations of uncertainty. In his book Thinking, Fast and Slow, Nobel Prize winner Daniel Kahneman talks about two systems. System 1 refers to simple, fast thinking. It helps to classify perceptions quickly, but also promotes biases in decision-making. System 2, on the other hand, comprises logical, rational thinking. Especially when we are under pressure, system 2 takes a back seat. This makes us susceptible to cognitive biases. These include:
- Groupthink: This is where group dynamics (especially in large groups) tempt members to make statements they are not actually convinced of: “What do you think of this idea?” And then it’s quick: “Oh, it’s not so bad, is it?” “Well, if that’s what you think … Then we can give it a try.” This leads to decisions that are not necessarily rational, because individual assessments are adjusted to the expected group opinion.
- Fundamental attribution error: Here, we push reasons for failures away from ourselves and pass them on to others: “The fact that this plan did not work is only due to the people who did not implement it properly. It’s not because of the idea or the environment …”
- Representativeness heuristic: Here, people fall back on experiences, methods, models, and production rules that have proven useful in the past. For example, a leader has learned to lead autocratically in a reorganization and has experienced that this style of leadership leads to the desired results. If the executive now uses this type of leadership in a growth case, it may no longer work. That is, the prior experience is not representative of the current problem. Nevertheless, we tend to fall back on old behavior patterns when they have proven to be beneficial for us.
- Plan continuation bias: This is where plans are stoically pursued even when there is clear evidence that they will not work. For example, a board decides to transform an organization. At some point, they realize there are obstacles. But because they have decided to make the change and have already put so much work into it, they continue anyway, come what may—because what would it look like if they changed direction again?
- Overconfidence bias: Here, people often think to themselves, “I can do this. Who can get it done if not us as a leadership team?” Such an attitude can have positive effects because it mobilizes energy in other people as well. But often this assessment is not based on reality. Self-image and reality can diverge considerably, leading decision makers to take unnecessary risks.
These and other distortions usually have an unconscious effect. This is why it is especially important for decision-makers and those in top teams to regularly reconcile and recalibrate. We can only reduce biases in the long term if we repeatedly bring in various external data points and experience.
Successful change in the reorganization process
Psychological processes play an important role in reorganizations. First of all, a reorganization always means discontinuity, the unknown, uncertainty: in other words, classic “change.” Such changes are not always perceived positively by employees (and managers): Often, there are no immediate solutions to such challenges and the risks cannot be assessed directly. Therefore, the psychological side effects of reorganization processes should be handled prudently and responsibly. It helps to be aware of your own instincts as well as the instincts of your employees and to take them seriously. For us, this means that good change management is needed.
How do I create security for everyone involved? How do I give them the feeling that they can take their own destiny into their own hands? How do I ensure that their reputation is not damaged and that changes are made in a face-saving manner? How do I make it feel fair for everyone in the end? We believe that for successful change in reorganizations, you need to be able to answer these questions well. So they need to be thought about in organizational design, process, and also in change management. These questions are based on the neuroscientific CORE model: Certainty, Options, Reputation, and Equity. The CORE model helps to reflect whether people develop defense mechanisms against change, or can look confidently into the future.
What is the “typical” approach to organizational change?
To anticipate: Every reorganization is fundamentally different and therefore any “typical” approach is highly unlikely to work . Nevertheless, a certain logic has proven itself in the sequence of individual steps. However, these can sometimes differ greatly in their concrete design.
- The first step is to agree on the goals of the reorganization. A top management workshop is often suitable for this purpose, in which common priorities are defined. These should be reviewed again at the end of the subsequent analysis phase.
- In the as-is analysis, it is then important to uncover the specific problems and potential for improvement. Employee surveys, focus groups, and structured interviews with managers and employees provide insight into the issues that are “burning under the nails” of everyone. The works council can also be involved here. The information gathered forms the basis for later decisions.
- In the design phase, various options for reorganization are developed. These are drawn up on the basis of the diagnostic results and further elaborated in the project team. The final selection of the appropriate organization is then often made by top management, but can also be underpinned by the intelligent involvement of managers and employees.
- Before implementation, the organizational design should be tested For this purpose, use cases that are as close as possible to the daily work and simulate concrete business processes. On the basis of these tests, an ongoing, step-by-step improvement of the organizational design takes place. Planning for the introduction of the new organization should also take place in this context (e.g., timing, gradual introduction vs. “big bang,” general conditions).
- Clean communication and involvement of a broader group of employees should be thought of at the latest before implementation (ideally earlier, see above ). What is the story of the reorganization? How can its benefits be communicated? What reservations might there be? How can these be addressed?
- Day X, when the reorganization is implemented, is always a challenge. To ensure that everything goes smoothly, it is important to prepare the key players, namely the managers, for this day in the best possible way. Be it through a clear time structure for Day X or the first week, assistance for team kickoffs, discussion guides or even basic sparring on the new role.
- Follow-up: The reorganization does not end with Day X, however. The first weeks thereafter are of crucial importance, because some of the problems of the changeover only become apparent when work actually starts in the new setting. A “pulse check” a few weeks after the implementation of the reorganization with the help of a comprehensive survey helps to uncover weaknesses and, if necessary, to readjust, but also to appreciate successes. This can also be the cornerstone for further learning for the organization.
Do you have any questions or comments, or would you like to discuss a possible reorganization in your company with us? Florian Dressler, partner in our Berlin office, will be happy to share his years of reorganization experience with you. Or are you interested in other topics in the area of organization?