How rightsizing can help organizations thrive in an economic downturn

It feels like we’ve never known a more turbulent business environment than the one we face today. In the last 15 years, we’ve been forced to consider changes in every respect—from political risks to bank failures, the economic and social costs of a pandemic, the war in Ukraine, and the pressure on supply chains.

Many of us face constant retooling in our businesses to meet these challenges. Agility and execution become critical in delivering the right capabilities to support our long-term strategies. The most pressing challenge for all of us now is how to manage our cost base.

Acting fast is the best answer 

We asked 500 business leaders how they’re approaching this environment as part of our recent survey. We found that 93 percent of senior business leaders have made snap decisions to cut costs in response to the challenges they face. Of these, 38% said they later regretted those decisions and three in five said their organization subsequently took a negative view of the decisions made. 

I’m not surprised by this. My initial interest in this area began in 1992 when I read an article entitled The long fuse of the human time bomb. The article featured research that showed how management decisions around redundancy had a hugely negative impact on morale. And when poorly executed, redundancies inevitably led to a reduction in productivity that made further cuts necessary.

Rightsizing versus downsizing

In the modern world, a significant part of most organizations’ cost base comes from the workforce. So, in many cases, the easiest and quickest route to protect profits is to turn to downsizing. 

That said, we’d argue that organizations would be far better off taking a rightsizing approach to their organizational design, looking to optimize their workforce by balancing their response to current pressures with longer-term objectives and forecast planning. 

This would put them in a much healthier and more sustainable position, having one eye on the present and the other on the future. Rightsizing gives the business the flexibility to meet new challenges but also capitalize on opportunities as they arise. 

Conversely, downsizing tends to impact roles indiscriminately, or at least in a way that feels indiscriminate to employees. Rightsizing helps ensure the right number of people with the right skills and experience are doing the right work at the right time to deliver business outcomes. 

We think it’s possible to have a mindset of continuous rightsizing throughout the decision making process, and that doing so will help organizations improve performance and keep their people engaged and motivated.

Rightsizing needs good data and analysis 

For rightsizing to be effective, it’s important to recognize that most organizations will grow organically in size in the absence of a guiding design framework. This usually means that dominant personalities and internal politics influence how resources are allocated, over and above objective business requirements. While it’s understandable that leaders will advocate their teams and will have a biased view on their future impact, this approach is open to error because lacks data insight.

Yet, with a design framework that’s detailed enough to align role clusters to business drivers, ratios to structures, and position count to activity execution, we’d see less need for rightsizing in the first place.

Having the right data, analysis, and monitoring reduces the chance of affecting the workforce negatively. What’s needed is a proactive approach to organizational design. And we’d argue that it’s worth making forward investments to avoid the risks that comes with speedy, regrettable decision making.

Bring everyone on the rightsizing journey

It’s also worth taking stock of the fact that workforce reductions have a human impact that’s inescapable and it’s the leadership team’s responsibility, working with HR, to reduce any negative effect on morale. Trust in decision making comes when it’s transparent and data driven, even if the outcome is unpopular.

In our survey, we found that employees with a tenure of two to three years were more likely to feel negatively about their organization in the aftermath of a workforce reduction than those that have served less time. Recent publications on the impact of employee engagement on performance underscore why this is important.

Without a proper understanding of the process by everyone involved, the gap between those that make strategic business decisions and those that are subject to them will widen. This could lead to cultural implications that undermine the future prosperity of the business.

Rightsizing needs HR & Finance to come together

When managing environmental factors, such as regulatory compliance, macroeconomic factors, and competitive threats, reducing business risk is essential. Yet most organizations lack the discipline in HR and Finance to contain the risks associated with running a large-scale restructuring or reduction program effectively. 

We often hear about the expected benefits, but far less about the costs incurred when it comes to a major organizational change. These costs can come in the form of consultancy, severance, and technology, on top of impact on productivity of low morale. 

As for the benefits, these invariably never materialize. So, why is it that businesses don’t actively foster collaboration between HR and Finance to avoid the high financial and morale costs that often come with such business events?

The organizational change merry-go-round

Organizational effectiveness, proactive design, position and role KPIs, and analysis and data management all require a risk mindset. The largest shift we see when working with customers that are going through, or about to go through, a major change is they start thinking in practical terms about how they’re going to manage their organizational change to achieve the benefits they anticipate.

This is when change comes into conflict with existing operating norms and why consultants are often brought in to manage political situations, difficult conversations, financial targets, and strategic outcomes. This effectively hands off responsibility to the leadership team.

Those leaders then pass responsibility back down to their regional directors and functional heads to turn into something real. As time passes, the original plan becomes unrecognizable. Data teams can’t see how the consultants arrived at their targets, but still the first round of decisions is made, communications are rolled out, then news headlines appear as people lose their jobs.

Then comes the post-match analysis as leaders are asked to match the changes with the original benefits case. Blame subsequently passes externally to the consultants, the leadership changes, and the organization finds a new equilibrium.

Be sure before you act because your employees won’t forget

After all this, was it worth it? Whatever the answer to that question, the people remaining in the organization will remember what it felt like and, more often than not, that’s not a good thing. 

But with the right data, a rightsizing approach, and organizational design discipline, businesses can get off organizational change merry-go-round and begin looking for longer-term opportunities that don’t risk undermining their organization’s structure as it is today.