Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs.”

Restrucring Graphics

Business Restructuring begins with identifying barriers the company faces in growth or multi-office continuity (recent engagement Sensitech, Inc. preparation for acquisition by United Technologies).  The service can be contracted on a Project basis where EPS monitors office / business operations and prepares an extensive strategic plan for correctionsEPS would also accept the agreement on an Interim Engagement arrangement for a predetermined period where EPS maintains an active role to plan and execute structured changes and oversees the changes until the business is operating functionally at performance agreement levels.

During a major transition, a buyout or a bankruptcy,  , for example, the management may consider restructuring a company.  A restructuring may include a variety of measures to eliminate “diseconomies” of scale,  , such as reorganizing and streamlining the management and operations, integrating management teams from the buyers or new owners or spinning-off, closing, or streamlining various operating units within the company.  It may also include a debt restructuring, involving renegotiating loan terms, conditions, and covenants that may be onerous or leave no room in the company’s cash flows.  A related example might be a financial restructuring which may involve a repositioning of equity within the company, such as purchasing outstanding shares,  creating new classes of stock, or going public or even “going private” .

Restructuring usually involves new management, new capital, and a new opportunity to rethink the business organization and plan. A successful restructuring will usually result in a higher valuation of the company.

WHY IT MATTERS:

A restructured company, at least theoretically, is more focused, more efficient and more profitable.  However, a restructuring may affect and even dilute the stock  values of the current stockholders of a company.

No business can continue to function in the same way forever. With changing times and changing business conditions, restructuring is one of the options for a business to stay on track. Here’s a quick look at how businesses have used restructuring to come out of difficult situations.

  • Organizational restructuring involves making changes to the organizational setup. These changes have an impact on the flow of authority, responsibility and information across the organization.

The reasons for restructuring vary from diversification and growth to minimizing losses and cutting down costs. Organizational restructuring may be done because of external factors like merging up with some other company, or because of internal factors such as high employee costs. Let’s take a look at some of the commonly used restructuring strategies.

Organizational restructuring involves making changes to the organizational setup. These changes have an impact on the flow of authority, responsibility and information across the organization.

The reasons for restructuring vary from diversification and growth to minimizing losses and cutting down costs. Organizational restructuring may be done because of external factors like merging up with some other company, or because of internal factors such as high employee costs. Let’s take a look at some of the commonly used restructuring strategies.

  • Downsizing

Call it downsizing, layoff, rightsizing or smart sizing; in essence, it is all one and the same thing. This restructuring strategy is about reducing the manpower to keep employee costs under control. Take the case of auto-giant General Motors, which in 1991 decided to shut down 21 plants and lay off 74,000 employees to counter its losses.

Another example is that of IBM, which had never laid off staff ever since its incorporation, but had to layoff 85,000 employees to stay in business. This type of restructuring is tough to manage and is mostly adopted to overcome adverse situations. Downsizing is not always a result of business losses; it may be needed even in cases of takeovers, acquisitions and mergers, where duplicity of the staff propels this form of organizational restructuring.

Whether you are acquiring a business or some other business is acquiring your business, restructuring will be needed post acquisition. The business being acquired undergoes major restructuring to get in-line with the organizational setup of the acquiring business. Also, when two businesses decide to merge together, organizational restructuring is a must to unite the two distinct organizations into one organization. When Glaxo Wellcome and SmithKline Beecham merged together to form Glaxo SmithKline in 1999, both the companies had to undergo major restructuring, and there was some major downsizing before as well as after the new company was formed.

  • Starburst

This restructuring strategy involves breaking a company into smaller independent business units for increasing flexibility and productivity. This may be done either to dissect the business into manageable chunks or when the business wants to diversify and foray into unrelated areas. One of the latest examples of this strategy is Pfizer’s decision to spin off four non-pharmaceutical firms this year.

Starbursting may also be used for expansion of the existing business such as when a business decides to spin off subsidiaries to handle business in different geographic areas.

  • Verticalization

This is the latest in restructuring trends, wherein an organization restructures itself to offer tailored products and services to cater to the requirements of a specific industry. In 2002, HCL verticalized its operations to meet the specific demands of five different industries: retail, media and telecom, manufacturing, finance and life sciences. This type of restructuring opens up avenues for specialization.

  • De-layering

De-layering involves breaking down the classical pyramid setup into a flat organization. The main objective of this type of restructuring is to thin out the top layer of unproductive and highly paid ‘white collar’ staff. General Electric has reduced the number of management levels from ten to four in some of its work facilities in order to improve overall productivity.

Hewlett Packard, on the other hand, has de-layered to promote innovation, build customer intimacy and increase consumer satisfaction. The major advantage of de-layering is that the decision making process becomes shorter and more effective.

  • Business Process Reengineering

This type of restructuring is carried out for making operational improvements. It begins with identifying how things are being done currently and then it moves on to re-engineering the tasks to improve productivity.

Business process re-engineering usually results in changing roles. While at times BPR may lead to layoffs, it can also create new employment opportunities.

When Ford Motor was trying to reduce its cost, it found that the process at its accounts payable department needed to be re-engineered. The reengineering helped in simplifying the controls and maintaining the financial information more accurately, that too after laying off 75 percent of the staff from the accounts payable department.

  • Outsourcing

Today’s businesses prefer to outsource some of their processes to other firms. There are two ways outsourcing benefits a business; first, it helps in reducing costs and second, it allows the business to concentrate on its core business and leave the remaining tasks to outsourcing firms.

Whenever a business plans to outsource one of its processes, it will cause some major restructuring and reshuffling within the company. Downsizing is common when a business outsources its processes. For instance, Nokia plans to layoff 4000 of its employees by the year end 2012, as it will be outsourcing the production of its Symbian operating system.

  • Virtualization

Virtualization is the last on our list of restructuring strategies. This strategy involves pushing employees outside the office to places where they are more needed like at the client’s site. It also involves upgrading to technology, which allows unmanned virtual offices to be set up. For example, the ATMs offered by banks are their virtual units.

References & Credits:

  1. Franklin, Daniel: “Downsizing: is it aimed at the right targets? – employee downsizing – Cover story”, BNET – http://findarticles.com/p/articles/mi_m1316/is_n11_v26/ai_15875512/
  2. Pitofsky, Robert, “The Nature and Limits of Restructing in Merger Review,” Federal Trade Commission, http://www.ftc.gov/speeches/pitofsky/restruct.shtm
  3. Author unknown, “Starbursting: Breaking up companies is back in fashion,” The Economist, http://www.economist.com/node/18440915
  4. Author unknown, “Verticalization is Neither Classification nor Segmentation of Clients,” CVMark, http://www.cvmark.com/blog/?p=234
  5. http://www.hcltech.com/pdf/HCL_IDC%20Insight_verticalization%20strategy%20Europe.pdf
  6. Human Resources Planning, “Making Organization Change Happen: the keys to successful delayering,” Entrepreneuw, http://www.entrepreneur.com/tradejournals/article/16108082.html
  7. Hammer, Michael, “Reengineering Work: Don’t Automate, Obliterate,” Harvard Business Review, http://userpages.umbc.edu/~khoo/re-engr.html
  8. http://economicsnewspaper.com/policy/spain/nokia-will-lay-off-4000-people-19402.html