Prolonged downturn?
According to McKinsey’s September 2010 Economic Conditions Snapshot, executives’ hopes for the global economy consistently improved throughout 2009 - from the depths of the crisis in January through December of that year - but began to falter again in February 2010. Throughout 2010, these executives have been asking themselves whether the economy is heading into the second dip of a ‘double-dip’ recession, whether their organisations should gear up for growth or be prepared to cut costs, and how long the uncertainty will last.
To answer the questions posed above, eyes turn once again to organisational effectiveness (OE). Specifically:
- How to organise and build capability to ensure objectives are met, regardless of whether the economy - or an individual market - is expanding or contracting
- What levers are most effective for increasing organisational capability, agility and responsiveness
- What benchmarks CEOs should be asking OE Directors to focus on in uncertain times to ensure their organisations deliver on their strategy.
Recession prompts rigorous planning
According to the same McKinsey survey, after two years of recession, it appears that at many companies, ongoing economic uncertainty is being balanced with more rigorous planning and execution of everything from daily operations to M&A. Many companies are smaller, and, at many, morale is damaged. Also, it appears that companies have learned to cope, if cautiously, with 38% expecting to increase the size of their workforce during Q4 2010. This is the highest share expecting to hire since before the crisis. That choice is consistent with another finding of the survey: 39% of respondents say their companies’ response to the economic downturn was a permanent reduction in workforce size, and 32% say they’ve permanently reconfigured the geographic location of their workforces.
Three implications emerge for the immediate future:
- Companies will continue paying close attention to detailed planning of their operations given the uncertain economic climate.
- Any proposed increase in the workforce is likely to face substantial scrutiny, requiring a robust business case, detailed planning and controlled execution.
- Organisational transformation programmes will become more frequent and will increase in importance.
What is organisational transformation?
Example of an Human Resources (HR) function
Molten (www.molten-group.com) defines organisational transformation as a change in the way that all organisation’s components interact in order to deliver on a strategy. We approach it as a programme with the express purpose of establishing capability building plans and implementing them via organisational transformation levers (see Organisational Transformation Framework below).
When the majority of businesses are seeking more efficient and integrated back office functions, like all other functions, HR needs to adapt and help their businesses through difficult times. However, the reality is often that even strong HR functions muddle through a downturn with a loosely joined arsenal of talent management tools that are not aligned with nor capable of supporting the delivery of the strategic aspirations of the business. It's not unusual to see HR functions lose up to half of their headcount in downturns, often due to a lack of decision-maker visibility of the essential tasks that HR functions must be able to perform in times of crisis. The stronger and longer the pinch is felt by the business, the less room for maneuver the HR function seems to enjoy.
We believe that in prolonged downturns, the HR function more than ever needs to redefine its value proposition to the business and communicate it appropriately - in order to avoid excessive and strategically imprudent top-down downsizing across the board.
Molten’s Organisational Transformation Framework
We have helped our clients to redefine their organisational value proposition following prolonged crises by implementing an Organisational Transformation Framework (see Figure 1), which refocuses available resources onto higher value activities.
Comprehensive organisational transformation model
At a minimum, a comprehensive organisational transformation model includes the following:
- It builds on embedded culture and values, established through the strategy, implemented in its organisational blueprint, and supported by processes, interfaces, and IT systems
- It embraces the entire talent management cycle, including:
- Competency-based personnel recruitment, assignment, planning and development
- Frequent and individual performance evaluation with consequent management of poor performance and reward of excellent performance
- All-inclusive development means (on the job, off the job, near the job)
- Professional exit process based on the culture of "second chance"
- The ability to flex through project work, e.g. organisational transformation, business transformation, change management and communication initiatives. These should not be viewed as ad-hoc activities, but levers to enforce values and strategy via organisational transformation levers like planning (found in the first ring in the wheel above), execution (found in the second ring in the wheel above) and support (found in the third ring of the wheel above) processes
- Supported by HR departments, but with significant execution by the business.
Supporting continuous organisation transformation
Example of HR function
We increasingly face the client situation where urgent efficiency improvements are required to address a ‘profitability crunch’. In these situations, HR functions still need to be able to execute the minimal elements of the Organisational Transformation Framework, but this time with fewer resources and while carrying the additional task of continuous organisational transformation support.
With so many businesses experiencing continuous organisational transformation in some form or shape, it is useful to outline the actionable framework for HR functions that have delivered results under successful transformation projects. The framework typically covers five key activities:
- Strategic realignment of HR function to cost-optimisation goals
- Development of a forward-looking HR concept
- Implementation support for reorganisation
- Post-transformation employee engagement
- Ongoing communication
The strategic realignment phase
In the HR example, during the strategic realignment phase, the HR function needs to support cost and organisational analysis. The ultimate objective of organisational transformation is to have a more efficient organisation with minimal dips in productivity as the change occurs. Therefore, the HR function's role is to support this objective, i.e.:
- Gather data on skills and capabilities
- Help identify organisational structure gaps (e.g through analysis of performance scope, organisational interfaces, tasks input/output relations, capacities/cost tied with each task)
- Define relevant productivity and cost ratios relevant for personnel across the business (e.g. personnel cost per employee, value created per employee, overheads per member of productive staff)
- Identify levers to improve capacity and capability
- Modify core competency targets in line with the new performance requirements
- Scrutinise the profiles and identify key talent (e.g. as designated by managers, existing performance reports and management audit)
- Define employee retention and motivation measures going forward, with special focus on individual key talent
By developing the HR concept, the HR function should help to:
- Derive the impact of transformation measures on the workforce (i.e. number of FTEs, headcount, non-FTE cost)
- Develop and implement tools for headcount reduction and headcount increases (e.g. different modes of hiring, up-skilling, relocation, exit, working hours)
Implementation phase
In the implementation phase, the role of the HR function is to provide hands-on support for the transformation. In this example, an effective HR role would consist of:
- Installing implementation teams for each transformation action/level
- Designing negotiation tactics and conducting negotiations with labour unions
- Managing operational staff cuts
- Controlling personnel reductions
- Performing executive coaching on "Managing in Downturn"
- Performing impact monitoring through a central "dashboard" system that tracks
- Impact on P&L (e.g. personnel cost development, transformation cost, "sticky" cost)
- Impact on employee structure (e.g. skill profile, age pyramid)
- Impact on corporate culture (e.g. overall commitment index, innovation level/suggestion scheme)
Revitalisation phase
In the revitalisation phase, the HR function should focus on post-transformation employee engagement, i.e.:
- Redefinition of post-transformation performance incentives
- Embeding of targets in performance agreements
- Conducting employee commitment surveys and developing mitigation / action plans based on outcomes
- Implement culture and capability-building measures (e.g. individual development activities/ up-qualification)
Finally, ongoing communication is absolutely key to ensure that the HR function can support the line and that management appreciates the HR function's role in a transformation. In communication, the HR function should concentrate on two key elements:
- Actively providing information and creating transparency about transformation background, procedures and HR implications – both top-down and bottom-up (wherever possible; in some cases, personnel issues may preclude this)
- Eliminating perceived obstacles to implementation
HR professionals are notoriously modest in spreading the word about their achievements and contributions to the bottom-line. In a downturn, this has to change: a perceived (or actual) lack of results often leads to a deterioration in reputation at best and a loss of resource at worst.
What works best for HR?
What works best for HR under continuous organisational transformation? Our project experience suggests ten key rules for an HR function that is set to achieve the best results – and visibility – in supporting a successful organisational transformation:
- Gain clear commitment and support from top management
- Raise company-wide awareness of the urgency of actions
- Take early decisions on the target operating model
- Put in place the core HR concepts
- Establish the strategic vision for the future
- Identifiy key talent and ensure you retain them
- Integrate key talent in the transformation
- Communicate as constructively and openly as possible
- Execute consistently and act fast
- Run a lean and transparent project and manage actions well
Human Capital alumni event
Please join us on Thursday 25 November for our next speaker and networking event,
Organising for Increased Capability, Agility and Responsiveness with Julian Birkinshaw and Clair Carpenter
Click here to register >
The Human Capital Alumni Club of London Business School has created its Organisational Development Speaker Series in order to facilitate discussion between HR practitioners and line managers. The series promotes an open debate on cutting-edge issues in strategic organisational change and talent management.
In the fourth panel of the Organisational Development Speaker Series, Julian Birkinshaw, Professor of Strategic and International Management at London Business School, and Clair Carpenter, Group Organisational Development Director at BUPA, will give insights into how to organise and build capability to ensure that organisational objectives are met regardless of whether the economy - or an individual market - is expanding or contracting.
The panel will be moderated by Oxana Popkova - the Chair of London Business School Human Capital Alumni Club. If you have queries about the event, please email opopkova.mba2006@london.edu.
The Human Capital Alumni Club Organisational Development Speaker Series
Thursday 25 November 2010
Registration 18.45, for a 19.15 start
Speaker discussion: 19.15 - 20.30
Networking drinks and canapés: 20.30 onwards