Reorganization or Turnaround? (Part 1)

As the end of the year approaches, CEOs all over the country have a laser-like focus on performance to ensure a strong year-end finish. While many organizations will achieve their financial objectives, many others will come up short of the results they expected.

There is yet a third group in which will not only fall short of expectations, but will turn in another consecutive period of underperformance, with no recovery in sight. While this isn’t indicative of the overall organization, but rather a division or business unit struggling to correct performance issues, this still remains problematic for the organization.

For those falling in the unenviable position of this latter group, the CEO’s focus will narrow in on changes that will restore overall organizational health in order to start the New Year off right.

If this describes you, you are likely evaluating your next moves. Assuming this is the case, let’s take a closer look at what to do when you have experienced continued declines and are not seeing a recovery in the results. Is a reorganization of your division needed, or is an all out turnaround in order?

Reorganization or Turnaround?
How you diagnose the problem, and the remedy you prescribe, can either set you on the road to recovery, or lead to further entrenchment in missed results, often worse than before the correction.

Without oversimplifying an otherwise complex problem, there are three general conditions that lead an organization, division or business unit to consider a reorganization or turnaround plan. In the ensuing weeks, I will break down the three scenarios more thoroughly, but my primary aim is to provide an overview of the problem. Following are the three general scenarios most commonly experienced by business areas with ongoing, lackluster results.

The Three Business Performance Conditions:

1. Solid sales, but poor profitability

2. Solid profitability, but poor sales

3. Poor sales and poor profitability

A Common Mistake
When one of the aforementioned scenarios is experienced, the mistake most commonly made is to misdiagnose the problem and subsequently prescribe a reorganization to a turnaround situation. This usually has disastrous consequences as the characteristics of a turnaround differ significantly from that of a reorganization. In other words, a division in turnaround mode that has poor top and bottom line performance, operates much differently…much more expediently…than one that has been reorganized to bring greater efficiency and effectiveness to the division. When a leader of a failing business area makes a recommendation to reorganize the division/business unit/department to improve the underperformance, failure to meet expectations is nearly inevitable.

A reorganization done under the pretense described above just doesn’t work, but you already know this. How? Imagine that you came to me and shared that one of your divisions has a consistent history of declining business performance. Now imagine I say to you, “No problem, simply restructure your division, and this will enable greater growth and profitability.” You would be quick to tell me that 1.) It isn’t that simple, and 2.) You may even tell me that you have already tried this approach, and it didn’t work. Of course, you would be right for both reasons.

A Better Approach
When dealing with prolonged performance issues in a business area, two leadership qualities are highly beneficial: Courage and Humility. Courage will be needed to make a decision that inevitably will depart from the status quo that you have grown comfortable with. This isn’t to say that you were comfortable with underperformance. Far from it, in fact. The comfort came more in the activity of feeling that you were doing something about the problems, and the ‘activity’ itself served as justification for not having to make the more difficult decisions you feared would be necessary.

Humility will also be needed, since the potential is high for you as the business area leader, to feel as if you are conceding defeat to the previous failed approach to correct the problems. This is often linked with a belief that your leadership may be questioned if you change directions. The reality is that your staff already knows something different is needed. Your leadership is already in question until you are willing to break from the status quo and make meaningful change.

A Tip from CEOs
Savvy CEOs that have been through this before will be quick to point out that if their division leader approached them with a plan to reorganize in order to solve business performance issues, their confidence in the leader would diminish significantly and likely result in their departure. Why? No matter how reasonable the cost efficiencies and productivity gains may be, this fails to address the root issues of why the division or unit was failing. Therefore, if they cannot accurately assess the root problems, then they are ill-suited to correct them.

When this goes unchallenged by the CEO, the result is that poor performance is excused for a period of time while people settle into the newly structured organization. This is short-lived, however as soon comes the day of reckoning where all patience has run out and results are expected. Most CEOs state that they don’t have the luxury of that kind of time and money to wait for better performance. Additionally, they know that this kind of decision puts other areas of the organization at risk, thus putting undue pressures on the stronger performing divisions.

Therefore, rather than looking to reorganize to address organizational performance deficiencies, look instead at using reorganizations to address better efficiencies. In other words, a reorganization should not be used to address performance problems, but rather to take good performance and make it great through better alignment.

Reorganizations when used appropriately are liberating to the business area as it allows them to achieve their goals more efficiently and effectively. Unfortunately, reorgs have been used irresponsibly over the years for many organizations as cover for reducing headcount and other operating costs. No wonder why staff hate reorganizations.

General Rule of Thumb: The Waterline Principle
I have a general rule of thumb for whether a reorganization or a turnaround is the best approach. Every organization has a specific profitability level they need to maintain organizational health. Think of this as the waterline on a cargo ship. The waterline, or the red paint at the bottom of an otherwise black cargo ship, does two things:

1. It provides a visual indication of the ship’s relative safety in that is not overly loaded down
2. It also serves as a clear indicator that any damage below the waterline would be perilous to the ship

In either case, whether too much cargo is loaded on the ship, or damage happens below the waterline, the whole ship is put in jeopardy. No matter how healthy other areas of the ship may be, damage below the line risks the whole. For example, the ship can have state of the art electronics and navigational equipment in other parts of the ship, but all will be lost when the threat below the waterline isn’t properly handled. The same is true in business.

Therefore, when determining how to address a situation in a business area and the choice is between a reorganization or a turnaround, consider where the risks are happening – Are they above or below the waterline? This will bring clarity to your thinking in an instant.

Next Week…
Look for Part 2 of the Reorganization or Turnaround series as I address the approach for when a division, business unit or product has solid sales, but poor profitability.