Restructuring as a strategy to improve profitability or change direction has been used extensively by businesses in the last few decades. Most restructuring efforts are reactive. They occur in response to significant external pressures – from the market, shareholders, and/or the Board – and an anticipated or real drop in profitability. Occasionally, restructuring efforts are proactive, where leaders recognize their organization is not optimally structured to meet the needs of the future, as is often the case in M&A integration.  In both cases, restructuring signifies large changes for the workforce, and often include layoffs.

The financial results from restructuring are mixed – with many firms showing a negative impact on overall value – and it is not entirely clear that restructuring efforts are necessary or helpful in many cases. However, there are situations where a restructuring is necessary to regain competitiveness, set the business up for future success, or eliminate redundancy post M&A. In a fast-changing world, M&A activity and other significant organizational changes are increasing, with one survey reporting that 45% of the Fortune 100 firms announced layoffs in 1994 compared with fewer than 5% in 1979. Another survey of 2000 companies found that 65% announced layoffs in the 2008-2011 era.

Survive Trigger or Thrive Trigger?

Multiple research studies have shown that many restructuring efforts result in an immediate loss in productivity amongst the “survivors,” specifically in the arenas of creativity and innovation. When viewed through the lens of Kotter’s latest research and an understanding of brain science, this is not at all surprising. Human beings function within a two-channel system that detects threats and opportunities. The first of these, the Survive Channel, is activated by threats and leads to feelings of fear, anxiety, and stress. These triggers activate the sympathetic nervous system and, when things work well, direct all attention to eliminating the threat. When this system is overwhelmed by repeated or unresolved threats, it leads to a freeze response: despair and demotivation. The second channel, the Thrive Channel, is activated by opportunities and is associated with feelings of excitement, passion, joy, and enthusiasm. These triggers activate the parasympathetic nervous system and, when things work well, result in innovative, creative thinking in the pursuit of those opportunities. Crucially, while the brain-body hard wiring evolved for physical threats, the response to threats to our financial security, egos, status, or psychological security are biologically identical.

For most employees, restructuring represents a threat and triggers a loud Survive response. This leads to feelings of fear, anxiety, and anger – and trust in management goes down. All energy is directed at protecting oneself against this threat, and attention to the real business problems and opportunities evaporates. We have seen repeatedly, that the Survive Channel overwhelms the Thrive Channel, and all innovation and creativity cease, leading to a drop in productivity and specifically innovation – a disaster in an era of increasingly rapid change. Recovery of productivity, creativity, and morale comes far too slowly. In today’s fast paced, highly competitive, and mobile workplace, companies do not have the luxury of time – they have to be able to almost immediately pivot focus to growth and innovation.

Key Practices

When done well, restructuring allows businesses to reallocate resources to the most productive activities and refocus on the most important priorities. The good news is that there is a better way to implement restructuring efforts. Executing restructuring efforts successfully requires leaders to focus as much thought and energy on how the changes will be implemented as on determining what changes are necessary. We have found that the right actions help leaders avoid over-activating the Survive Channel and, by engaging employees in the right way, can even activate the Thrive Channel. In our experience, by focusing on a few key practices, leaders can minimize the loss in productivity and allow employees to more quickly return to a focus on growth and opportunity.

  • Prepare managers to effectively deal with the difficult emotions and conversations. Leading through a restructuring is a difficult task. Managers must balance their own emotions, and help their direct reports navigate theirs. Managers may be dealing with an over-activated Survive Channel due to the anxiety of delivering bad news, which often results in avoiding the tough conversations altogether or outsourcing it to HR. Additionally, managers may not always know what the implications are for them personally. Organizations can prepare their managers to have these conversations by investing in raising their awareness to be able to better acknowledge the negative emotions, providing guidance and training on how to behave and act, and – most importantly – training on how to effectively have difficult conversations. In one case, when a manufacturing company needed to shut plants, the executive in charge of the effort held an offsite with the plant leadership to prepare them for what was coming and for the conversations they would need to have. Contrast this with the often-prescribed strategy of spontaneous communication cascades which often leaves managers in a position of getting information mere minutes before their reports.
  • Articulate both the threats and opportunities in the current situation. Studies have demonstrated that when individuals perceive that an organization has acted with process fairness, they are much more likely to support the decisions. This starts with helping individuals understand the strategic reasons for why the restructuring is necessary. Leaders are generally very familiar with the reasons, and may (falsely) assume that others are also equally aware and bought in. Without clarity on why it is necessary, employees will view the restructuring as arbitrary (or the “flavor of the month”), leading to increased frustration and even anger. Leaders must create a compelling narrative about why the changes are necessary and what opportunities the organization will be able to take advantage of because of the changes. By speaking to both the threats that led to the current situation and the opportunities in front of the organization, leaders can start to trigger the Thrive Channel.
  • Clearly articulate what and how decisions have been made. Doctors who do not take the time to explain treatment plans and answer the patient’s questions are far more likely to face malpractice suits, even when controlling for perceived quality of care. By communicating not just what decisions have been made but also how those decisions were made, leaders can help remove some of the ambiguity that leads to Survive-inducing anxiety. Knowing that the decisions of who stays and who goes were made with careful consideration and reasonable criteria – and not indiscriminately (or worse, based on favoritism or politics) – goes a long way to reducing anger and frustration. This can be difficult to do when trying to move quickly, and there may well be legal or personnel reasons that limit what information can be shared. Organizations often under-communicate because of the fear that too much information could lead to legal issues. However, sharing information (such as what other efforts are being made to save costs) can be beneficial, and organizations should look for ways to do so.
  • Avoid being penny-wise and pound-foolish. Restructuring is often driven by an intense need and desire to reduce costs. Additionally, there is often an assumption that all attention should be on the people staying not on those who don’t have a role in the new organization.  This leads to a highly transactional approach to layoffs, with a view to minimize the cost of severance. However, treating the people who have been laid-off with generosity and respect not only fosters goodwill amongst those leaving but also reduces anxiety and survivors’ guilt amongst those staying. In the medium and long term the reduction in disruption from a well-planned layoff, with career counseling support and generous severance terms, will outweigh the additional short-term costs.
  • Involve employees actively in how the changes will be implemented. One of the most effective ways of calming an overactive Survive Channel is to give people back some of the control that they feel they have lost in the change. This includes creating opportunities for employees to provide their input and express their views. Leaders who listen to concerns and express empathy will help employees more quickly come to terms with the changes. Employees that “survive” the restructuring often have complicated emotions – relief, survivors’ guilt, resentment, fear, and loss. The availability of managers and leaders to listen and discuss these emotions is paramount in enabling employees to get refocused and productive. Engagement can and should go beyond these conversations. While the decisions on what is changing may come from the top, managers can engage their teams in how these changes are to be achieved. In one example, managers at a closing plant formed a committee of hourly employees to make specific decisions about how and when specific severances would be executed. Even involving employees in seemingly minor decisions, like what mementos to present to any leaving employee, can have an impact.

Is Restructuring The Right Strategic Tool?

Research on the short-, medium-, and long-term impact of restructuring as a strategic tool suggests that often it is not the right choice for a business. Even in those instances where it is necessary, success is contingent upon many other factors, like the trust in and credibility of leadership, which cannot be shifted in the moment. However, our research and work with clients has demonstrated that there is a better way to implement restructuring; a way to help leaders minimize short-term disruption and focus on the long-term health of the business.

By giving employees a voice, leaders can shift restructuring from an entirely Survive-activating event to one that also activates the Thrive Channel. This is not a trivial shift – it allows businesses to reduce the dip in productivity, return to growth faster, and achieve better long-term business performance.

© 2019 Kotter – Gaurav Gupta and Dr. John P. Kotter