"Fast Consolidation:" Creating Value In A Brutal Economy

“Fast Consolidation:” Creating Value in a Brutal Economy

by Ana Dutra, Ken DeMeuse, George S. Hallenbeck, Greg Janicik

Definition: “Fast Consolidation” occurs when organizations are quickly combined, business units are consolidated or the workforce is drastically reduced – all of which demand strong leadership from the top.

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n the current sea of negative news, there is a real opportunity for companies that have the courage and strategic agility to act quickly. Sustained adverse market conditions provide the

impetus and cover for strong leaders to reshape their organizations quickly and emerge from the crisis in stronger shape than before the downturn began.

Companies that view recessionary times as an opportunity to revisit operating models and take fast and systematic action will emerge as the clear winners in the recovery.

Long before man arrived, nature created wildfires to clear out dying and unproductive vegetation and to re-germinate the forest with stronger, more robust plant life. For a few select organizations the current economic recession could prove equally beneficial.

Key Takeaways:

Leading in prosperous—and not so prosperous—times

he role of leadership during T fast consolidation is to ensure that proper alignment occurs so that the strategy identified to carry the organization through the downturn can be implemented.

In prosperous times, the most effective way to launch organizational transformation is by clearly defining strategy and value proposition, and then positioning the overarching structure, core processes, culture and leadership to support the strategy. The level of centralization of decision-making, the required degree of standardization, and the geographic dispersion of human capital support the strategy in a way that is consistent with how the company wants to differentiate itself in the market.

uccessful leaders often find S that the skills and styles that served them well under growth economies will not suffice in managing transformation and alignment under fast consolidation conditions.

For example, a company focused on being a top-tier performer in its industry through operational excellence might likely focus on supply chain processes and gain competitive advantage by operating in a more centralized and standardized way than its industry peers.

ompanies that take fast C and systematic action [in an economic downturn] will emerge as clear winners in their industries.

Creating blueprints for managing in crisis Even in the best of times, effective transformation and alignment is easier said than done. Company leaders must thoughtfully design an organization model that builds a blueprint for alignment, while managing a wide array of internal and external variables that get in the way of a well designed implementation plan.

And when a recession hits, the process can be utterly derailed.

Suddenly, the orderly and structured path to an answer around an operating and organizational model can no longer be exercised. A forced merger, a mandate to reduce costs across the organization by 15 or 20%, or the stark realization that functions or business units will have to be consolidated are just a few examples of situations where “putting the cart before the horse” is driven by economic circumstances.

In times of crisis, the organization blueprint is usually determined well ahead of strategic alignment and value proposition considerations.

“Fast Consolidation” occurs when organizations are quickly combined, business units are consolidated or the workforce is drastically reduced – all of which demand strong leadership from the top.

The Role of Leadership in Fast Consolidation Successful leaders often find that the skills and styles that served them well under growth economies will not suffice in managing 2

transformation and alignment under fast consolidation conditions.

External pressures do not allow adequate time for exploring different contingency plans, and relying on well-developed heuristics for decision-making becomes problematic as well.

While solutions must be quickly developed, there must also be some semblance of strategic foresight or the probability of failure increases significantly. The role of leadership during fast consolidation is to “put the horse back in front of the cart”, and ensure that proper alignment occurs so that the strategy identified to carry the organization through the downturn can be implemented.

The role of leadership during fast consolidation is to “put the horse back in front of the cart”…

Four common missteps in a downturn Once the immediate fate of the organization blueprint is set, however, many leaders stumble due to four common missteps:

1. I gnoring the new constraints. Believing that the organization will continue to effectively operate under the new reality in exactly the same way it operated before the change – let’s call it “ignoring the new constraints.”

2. C ounting on the end game. Deciding that, because the “end game” from an organization design perspective is established, nothing else can or should be done from an organization structure standpoint.

3. D ismissing the emotional component. Ignoring people’s emotional response to unexpected mergers, downsizings and consolidation. Unless new roles and responsibilities from an organizational, team and individual perspective are clearly defined and communicated, land-grabbing mentality and chaos will ensue.

4. U sing outdated skills and techniques. Relying on the same leadership skills that successfully propelled a growing organization forward to pull it victoriously out of a crisis.

In times of crisis, the organization blueprint is usually determined well ahead of strategic alignment and value proposition considerations.

Understanding and addressing transformational challenges In addition to leadership stumbles, there are significant transformational challenges depending on the type of fast consolidation undertaken. Understanding these challenges and proactively addressing the relevant issues are critical for success.

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Smart companies take advantage of market weakness to seek good deals…

Integrating the “forced” merger As soon as an industry finds itself in trouble, the prospect of a forced merger or acquisition increases dramatically. Korn/Ferry research indicates that “earlier movers” are more likely to benefit from M&A than “later movers.” In an economic downturn, many companies become extremely cautious and conservative.

Smart companies take advantage of market weakness to seek good deals, and fast movers are often able to acquire quality assets at unprecedentedly favorable costs. But the integration of these deals is precarious and highly challenging. Processes, skills and capabilities that helped companies successfully navigate through a well-planned merger will not necessarily apply in a forced merger situation.

In the forced merger, there is a higher level of anxiety and ratcheted pressure from shareholders for immediate cost savings. These factors should dictate how the integration plan unfolds and drive decisions around leadership selection, the establishment of accountability for integration cost-savings, and revised performance metrics at all levels.

But often these strategic drivers are waylaid by several common pitfalls, including:

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• Focusing on the obvious structural solutions, such as combining back-office operations, and assuming that this is the structural “end-game” in the short-term. The new organization design should address more than consolidation of these operations. The identification of critical leadership roles and reporting relationships that align decision making across the merged organizations is a key component of managing the short-term integration priorities.

• Ignoring people’s emotional responses to the merger such that key talent leaves or is disillusioned amidst the chaos. Not just open communications and candid feedback are critical to success but also inviting high potential individuals to have the opportunity to play a leadership role in the process as a mean of keeping them engaged.

•D etermining leadership roles and organizational structure without clear identification of competency models and assessment of executive talent against those models often leads to having the wrong people in the wrong roles.

Driving internal consolidation During sustained periods of prosperity and growth, companies focus primarily on revenue generation, and generous budgets and easy funding approval are often the norm. There is nothing quite like a weakening economy, however, to prompt a thorough examination of operational and organizational redundancies, inconsistencies and inefficiencies.

In tough economic times, there are a number of drastic actions that are potentially life saving for companies facing bankruptcy, forced mergers or even insolvency. These tough strategic decisions often carry high risk, must be made quickly, and involve difficult organizational changes, including:

•B reaking operating silos to create cross-selling opportunities, cost synergies or economies of scale.

• Consolidating operating units or centralizing back office operations.

• Reducing organizational layers and streamlining corporate staff functions.

There is nothing quite like a weakening economy, however, to prompt a thorough examination of operational and organizational redundancies…

Managing internal consolidations—a case study. Managing these types of internal consolidations must be done quickly and in a way that highlights the new value proposition internally with employees and externally with customers.

For example, one global software company that had acquired over 17 small software manufacturers in less than 7 years ended up with 42 operating sites in the United States. Although they had tried to become “one company,” the structure and disparate cultures hindered their progress. This consolidator took advantage of the 2002 economic downturn to streamline the number of sites it had in the U.S. and simultaneously signaled a clearer strategy to the market while finally socially integrating its different acquisitions.

The key… was to not overlook the opportunities that consolidation can bring – aside from the expected cost-savings.

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In a more well known example, Coca-Cola overcame the operational inconsistencies and process inefficiencies that came about because of its “think global, act local” strategy. The company used the forecast of a deep economic crisis to rethink its internal cost structure, yet was able to simultaneously improve global customer satisfaction. The key in both examples was to not overlook the opportunities that consolidation can bring – aside from the expected cost-savings.

…organizational leadership usually tries to promote fairness by using a “peanut butter” approach to implementation which requires all departments to feel equal pain.

Doing more with less: After the downsizing Probably the most common response to softening markets is a topdown mandate to the leaders of all functions, units and geographies to cut a certain percentage of the workforce. From an enterprisewide perspective, this decision might be strategically sound, yet organizational leadership usually tries to promote fairness by using a “peanut butter” approach to implementation which requires all departments to feel equal pain. The implications for each function, line of business or geography, however, may be quite unique and thus require different responses.

Effective fast consolidation requires senior management to make a quick and thorough analysis of organizational leverage points and be willing to protect mission critical operations while imposing draconian measures on other parts of the organization.

Managing a downsizing—a case study. During a massive downsizing in 2002, United Airlines took advantage of the severe market environment to audit all of its once-sacred “strategic initiatives.” Hundreds of initiatives were catalogued and dissected, and only a small percentage that were deemed truly imperative survived. This not only resulted in material cost savings, but also freed up workers to be redirected to critical operational support roles.

From an enterprise-wide perspective four actions should be taken immediately after a downsizing:

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1. I nitiatives prioritization and rationalization — taking a hard look at all the existing so-called “strategic initiatives” and stopping the ones that don’t unequivocally support the current strategy will create the expected pay-off.

2. C entralization and standardization of back-office functions — once the downsizing takes place, non-client facing functions should be the first candidates for centralization. Since process standardization can create short-term costs, leaders should have visibility over the cost-benefits analysis of standardizing processes.

3. R edefinition of roles and responsibilities — very often companies go through reductions-in-force but do not take the immediate necessary steps to redefine key roles and responsibilities across the enterprise. This job can’t be fully delegated to HR or organization design functions (even though HR should partner with business unit and functional leaders to make it happen), since it should be a leadership-led exercise.

In fact, once roles and responsibilities principles, criteria and guidelines are clear, the new organization blueprint and leadership selection should be relatively straightforward.

4. C lear and timely communication highlighting the path forward — the remaining workforce should receive clear and timely communication regarding the rationale for the actions taken, the path forward and the role that they are expected to play in the new organization. If not invited to be leaders as opposed to followers, the remaining workforce will likely take a passive and reactive approach. They need to clearly understand what commitments the leadership team can make to them but also what is expected from them in the times ahead.

Taking fast and systemic action to emerge as winners Almost every seven years the global economy faces crises that have historically lasted from 16 to 24 months. In each one of these crises a group of companies—the ones that look at this downturn as an opportunity to revisit their organization and operating models— emerge in stronger shape than they were before the beginning of the downturn. According to all current forecasts, the economic crisis we are facing now seems to be stronger, longer and deeper than any of the preceding ones.

In each one of these crises a group of companies— the ones that look at this downturn as an opportunity to revisit their organization and operating models—emerge in stronger shape than they were before the beginning of the downturn.

Like the natural wildfires of old that cleared out dying vegetation and emerged stronger and more robust, the companies that take fast and systematic action will emerge as clear winners in their industries.

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Ana Dutra is the Chief Executive Officer of Korn/Ferry Leadership and Talent Consulting.

Ken De Meuse, Ph.D. is the Associate Vice President of Research with Korn/Ferry Leadership and Talent Consulting.

George Hallenbeck, Ph.D. is a Product Manager with Lominger International, A Korn/Ferry Company.

Greg Janicik is a Principal with Korn/Ferry Leadership and Talent Consulting.

about the Korn/Ferry Institute

The Korn/Ferry Institute was founded to serve as a premier global voice on a range of talent management and leadership issues. The Institute commissions, originates and publishes groundbreaking research utilizing Korn/Ferry’s unparalleled expertise in executive recruitment and talent development combined with its preeminent behavioral research library. The Institute is dedicated to improving the state of global human capital for businesses of all sizes around the world.

about Korn/Ferry International

Korn/Ferry International, with more than 90 offices in 39 countries, is a premier global provider of talent management solutions.

Based in Los Angeles, the firm delivers an array of solutions that help clients to identify, deploy, develop, retain and reward their talent.

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Š Copyright 2009 The Korn/Ferry Institute