Restructuring and Downsizing

State Owned Enterprises

SOEs Restructuring

What thoughts come to mind when you hear the word “restructuring?”

Changing an organizational structure in order to make it more efficient and cost effective.

“Restructuring” can take many forms

Efficiency studies Fundamental expenditure reviews State sector review Functional reviews Organization reviews Organization and efficiency reviews Business process reviews

The choice of diagnostic tool depends on objectives The choice of diagnostic tool depends on objectives and focus neededand focus needed

Objective of Restructuring

Reduce public expenditure

Improve efficiency

Improve effectiveness

Enhance service delivery

Which types of diagnostic review best serve these objectives?

Model of the State

Provider

Commissioner and regulator

Enabler of small firms

Protector of poor in the market

Functions of the State(World Development Report 1997)

Addressing market Addressing market failurefailure

Pure public goods Regulating monopoly Tackling externalities Overcoming market

imperfections Coordinating private

activity

ExamplesExamples

Law & order, public health

Utility regulation Environmental

protection Consumer protection

Fostering markets

Functions of the State(World Development Report 1997)

Improving equityImproving equity

Protecting the poor

Providing social insurance

Redistribution

ExamplesExamples

Disaster relief, poverty reduction programmes

Family allowances

Asset redistribution

Functional reviewsClassification of functions

Where should these functions be carried out?

Policy formulation Coordination, supervision, monitoring Service delivery Regulation Support services (e.g. HRM, Finance, Procurement)

What are the alternatives? Are they practical?What are the alternatives? Are they practical?

Restructuring: Good practice?

Clear objectives – Effectiveness, efficiency or fiscal savings? (Determine type of review & methodology)

Breadth of reviews – Ministries only? Public institutions? Local government? Health & education services?

Layered approach – 1 Policy; 2 Effectiveness; 3 Efficiency

Political guidance – Focus on government’s priorities; avoid “capture”

A change process – Key to staff morale & long-term effectiveness

Functional + sector expertise – Use teams; involve ministry staff

Downsizing

What thoughts come to your mind when you hear the word “downsizing?”

Downsizing refers to the permanent reduction of a company's workforce and is generally associated with corporate reorganization, or creating a "leaner, meaner" company

Downsizing may stem from restructuring efforts to maximize efficiency, to cut corporate bureaucracy and hierarchy and thereby reduce costs, to focus on core business functions and outsource non-core functions, and to use part-time and temporary workers to complete tasks previously performed by full-time workers in order to trim payroll costs

What about “rightsizing?” Downsizings such as these are also commonly called reorganizing,

reengineering, restructuring, or rightsizing

Downsizing - Goals

Reduce expenses Increase profits Improve cash flow Increase productivity Increase competitive advantage Reduce bureaucracy Improve decision making Increase customer satisfaction Improve product quality Advance technology Increase motivation Avoid takeover

No simple answer to the “right” size

Is the civil service too large?

are aggregate non-wage public expenditures being “squeezed?” how large is the wage bill as % of GDP?

“Right” size is country-specific and depends upon functions assigned to the State and levels of skill and technology

Need to examine staffing in individual ministries, not just in aggregate

Appropriate staffing levels in ministries will depend on goals for improving service delivery and labour productivity

Downsizing is a means to an end

Objectives

Reduce civil service wage bill in order to reduce public expenditure

Shift structure of public expenditure towards non-wage recurrent and capital costs

Improve employee pay

Improve labour productivity (by multi-skilling, by replacing leavers with more productive employees)

Improve ministry effectiveness & efficiency

“Rightsizing” as a second phase of restructuring

Phase 1 New institutional map – ministries, departments &

public institutions Alignment of mandates with core functions of

government

Phase 2 Step 1 - Alignment of organization structures with

new ministry mandates Step 2 - Analysis of staffing and skill requirements Step 3 – “Rightsize” (what strategies?)

Guiding Principles for Downsizing

Take a broad view of objectives – civil service effectiveness, as well as cost savings

Take a long-term view – e.g. increase in employment to achieve MDGs

Involve the HR department impact on people (leavers and survivors) redundancy policy

Take steps to avoid redundancy plan ahead do the easy things first

Guiding Principles for Downsizing

Put effective manpower and payroll controls in place to ensure savings are permanent

Provide central direction from MoF but implement on a ministry by ministry basis

Is there Government ownership? moral hazard

Adopt a staged approach moving from easy to more difficult methods of

separation

Downsizing strategies – a typology

Highpain

1. “Quick fix” measures

2. Natural attrition + hiring freeze (or selective hiring)

3. Voluntary early retirement

4. Voluntary redundancy

5. Compulsory redundancy

Lowpain

1

2 3

Downsizing Strategies

Workforce Reduction• early retirement• transfers• outplacement• buy-out packages• golden parachutes• attrition• lay-offs

Organizational Redesign• eliminate functions• cut hierarchical levels• drop divisions or products• consolidate or merge units• reduce work hours• lengthen shifts

Systemic Strategies (TQM):Redefine change as--• as a way of life• ongoing process• continual improvement• simplification• enroll employees to generate and implement • accountability

Personal Modifiers on Downsizing Effects• age• gender• financial position• social support• length of employment• level of education• previous occupational level• degree of satisfaction with terminated job• career status• individual stress-coping ability

Downsizing Effects

Organizational Modifiers• method of termination*• advance notice• channels used• outplacement counseling• retraining availability• extended benefits• severance pay

Organizational Changes• changed job responsibilities• modified reporting relationships• new co-workers• new policies & procedures• fewer personnel for job• expanded role responsibilities• Additional (re)training

Survivor Reactions• lower job satisfaction\• lower commitment• lower job involvement• increased intention to turnover• decreased morale• mistrust (35% credibility drop)• anxiety• survivor guilt (depression)

About 68% of all downsizing, restructuring, & reengineering efforts are not successful

The Dirty Dozen Attitudes Associated with Downsizing

• Resistance to change-- threat rigidity • Loss of trust-- loss of confidence both ways

• Decreasing morale-- infighting & mean mood

• Lack of teamwork-- focus on individual protection

• Non-priorized cutbacks-- across-the-board cuts

• Centralization--top down deicsions, less power sharing

• Politicized special interest groups-- fragmentation

• Loss of innovation-- less creativity, low tolerance for risk

• Short-term crisis mentality-- neglect long term strategy

• Increasing conflict-- competition for scarce resources

• Restricted communication-- only good news shared

• Lack of leadership-- scapegoating, unclear priorities, siege mentality

Cameron, Whetten, & Kim (1987).

Comparison of downsizing strategies Strategy Advantages Disadvantages

Natural attrition + Natural attrition + selective selective recruitmentrecruitment

Easy to implementLow human costsSelective recruitment protects priority sectors & guards against falling productivity

Not targetedLimits young entrantsCreates aging staff profileCareer in civil service becomes less attractive

Voluntary early retirement

Can remove less effective staffRelatively low human costsPolitically acceptable

Adverse selectionHigh compensation costsLoss of institutional memory

Voluntary redundancy

Can be better targeted than early retirementSeen to objective & fairPolitically acceptable

Adverse selectionHigh compensation costsLeavers may re-enter serviceReduced staff morale

Compulsory redundancy

Targeting of employees & skills no longer neededSeen to be objective & fairMore precise cost estimates

Very unpopularFairly high compensation costsCounselling & outplacement services usually needed Leavers may re-enter serviceReduced staff morale

Voluntary early retirement & redundancy policy

The purpose is to enable ministries to separate employees when their skills are no longer required in a fair and equitable manner, and with a minimum of disruption

Use natural wastage & redeployment before declaring redundancies Communicate with affected employees at the earliest opportunity Target to groups of workers in surplus First select older workers who could be retired early Invite volunteers where redundancy is necessary - & agree

selection criteria in advance Management can reject application if the employee is essential to

the ministry’s operations Savings from downsizing may be retained by ministries

Reference

RIPA International, @ www.ripainternational.co.uk