Commentary: In defense of reorganizations

It is not the strongest of the species that survives, nor the most intelligent, but the one most adaptable to change.

— Charles Darwin

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A few days ago, Bill Utt (Darden MBA 1984), dropped by to teach a class. Bill is the chief executive of KBR, the Fortune 300 engineering, construction and military contracting firm. Appointed CEO in 2006 as KBR was spun off from Halliburton, he encountered three distinct challenges as he prepared the company for life as a stand-alone company.

It had an organization structure with levels of accountability that were too broad and undefined. He wanted to implement a clear and understandable culture of risk awareness. And he sought to create management information systems that would permit greater transparency, cost awareness and financial discipline.

Bill said to the students that “I expected that it would take two years to complete the three challenges … one thing I have learned over my career is that it is easy to develop a strategy and to find the organization’s deficiencies; however, the hard part is in the implementation and having the focus, determination and stamina to see these successfully through.”

During his class session, Bill described no fewer than three organizational structures of senior leadership at KBR that he implemented between 2006 and 2013.

These visits got me thinking: Why do businesses reorganize? Critics claim that this is all terribly distracting and of doubtful value. A “Dilbert” coffee mug says, “Change — What We Do To Give The Illusion of Progress.” If, as the critics allege, reorganizations are so bad, why do they remain such a regular and prominent feature of business life?

Positive motivations

Reorganizations and restructurings are often a response to strategic threats and opportunities.

[There are a] number of specific reasons why a firm might reorganize:

To seize leadership, improve response time or simply regain its mojo. The iconic business leader, Lou Gerstner wrote that the reorganizations that really matter are transformations that are “really fundamentally changing the way the organization thinks, the way it responds, the way it leads.”

To sharpen strategic focus. A “transformation” can bring a portfolio of unrelated business activities into focus. This motive proved to be decisive in the dismantling of conglomerate firms in the late 20th century. And it helps to explain the reorganizations of multinational corporations, as they shifted among a structure based on countries or regions, a structure based on products or industries, or a matrix structure. How you organize the firm explains what you think is important.

To improve accountability. A reorganization can help to align authority with responsibility, and ultimately, with results. Having a manager who wakes up every day to ask how to advance the firm in a strategically important area — and empowering that manager to do something about it — are key to gaining good results.

To improve transparency. Often, a restructuring is associated with the implementation of new forms of reporting and measuring results of a business unit. This produces better feedback to managers and faster decision-making.

To allocate scarce resources more effectively. Better accountability, incentives and transparency often result in the better use of time, talent and treasure; fewer wasted meetings; a greater sense of personal impact on the enterprise; and wiser allocation of capital.

To bring “fresh eyes” to bear on a persistent problem or new opportunity.

Put it to the test

Some research suggests that restructurings, reorganizations and transformations are associated with better financial performance. However, the practitioner should scrutinize blanket assertions about the value of these actions.

There are at least four tests to keep in mind:

Is it motivated by the purpose, mission and vision of the organization? This first question helps to fight the evils of sheer impulse and opportunism. If you don’t know where you’re going, any road will take you there.

Does the proposed structure follow the strategy? Structure should follow strategy — this was the lesson of one of the most influential business books of the 20th century, Alfred Chandler’s “Strategy and Structure: Chapters in the History of the Industrial Enterprise.”

Will the implementation bring out the “better” in people? This question addresses the “how” of restructurings and should raise considerations about communication, engagement, accountability, transparency and incentives.

Why now? The sudden shift in demand for your products, the entrant of a new competitor or a change in technology or regulations could trigger a revision of your strategy and thus, a change in the organization structure.

Adapt, or die

Utt reorganized the leadership of KBR three times in seven years because the strategic landscape changed sharply. The global financial crisis and Great Recession triggered a slump in construction spending and then a slow recovery. To some extent, the ongoing reorganization of a firm is a discovery process.

Charles Darwin got it right: the ability to adapt is the key to survival in a world of relentless change. While he was writing about evolutionary biology, his notion is nonetheless relevant to businesses. For many organizations there is no alternative. Standing still is not an option.

Bruner is dean of the University of Virginia’s Darden School of Business. This column is adapted from his blog.

 
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