Why reorganize a company

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The management of an unprofitable company may impose a drastic series of budget cuts, staff layoffs, management ousters, and product line revisions with the aim of restoring the health of the company. In such cases, the company is not yet in bankruptcy and is hoping to stave it off. This is sometimes called a structural reorganization.

When supervised by a court during bankruptcy proceedings, a reorganization focuses on restructuring a company's finances. The company is temporarily protected from claims by creditors for full repayment of outstanding debts. Once the bankruptcy court approves the reorganization plan, the company will restructure its finances, operations, management and whatever else is deemed necessary to revive it. It also will begin paying its creditors according to a revised schedule.

Through the terms of Chapter 11 bankruptcy, firms can renegotiate their debts to try to get better terms. The business continues operating and works toward repaying its debts. The process is complex and expensive. Firms that have no hope of reorganization go through Chapter 7 bankruptcy, also called liquidation bankruptcy. A court-supervised reorganization is typically bad for shareholders and creditors, who may lose part or all of their investments.

Even if the company emerges successfully from the reorganization, it may issue new shares, which will wipe out the previous shareholders. If the reorganization is unsuccessful, the company will liquidate and sell off any remaining assets.

Shareholders are last in line to receive any proceeds and receive nothing unless money is left over after repaying creditors, senior lenders, bondholders, and preferred stock shareholders in full. A reorganization by a company that is in trouble but not yet in bankruptcy is more likely to be good news for shareholders. Its focus is to improve company performance, not stave off creditors. It often follows the entrance of a new CEO.

In some cases, the second type of reorganization is a precursor to the first. When a corporation decides to reorganize it may do so in a relatively straight-forward manner or by a more complex change in operations or service. Reorganizations also can occur during the bankruptcy process. A business may combine two or more of its departments to save money or to streamline activities. A more complex change might involve refocusing the company's mission statement, drastically changing its marketing plan or even laying off employees that are underperforming.

A McKinsey survey of 1, executives identified the most common pitfalls for reorganizations in order of frequency. Employees are distracted from their day-to-day activities, and individual productivity declines. Unplanned activities, such as an unforeseen need to change IT systems or to communicate the changes in multiple languages, disrupt implementation. During our careers we have seen many reorgs, read lots of books and articles about which type of organization companies should adopt, and watched countless fads come and go.

Many practitioners assert that reorgs are so fluid and dynamic that it would be naive and counterproductive to try to impose a process on them. Our conclusion, based on experience and analysis, is the opposite: How you go about your reorg is as important as—and sometimes more important than— what you do.

To help maximize the value and minimize the misery of reorgs, we have developed a simple five-step process for running them. But we do know that companies need to take a more systematic approach if reorgs are to deliver on their potential. And we have personally advised companies through the five steps in more than 25 reorganizations—companies with , employees or a handful, in the Americas, Europe, the Middle East, Asia, and Africa. In fact, survey data shows that companies using this process are three times as likely as others to achieve their desired results.

A reorganization is not some esoteric pursuit but a business initiative like any other—similar to a marketing push, a product launch, or a capital project.

So you should start by defining the benefits, the costs, and the time to deliver. Remember that the costs are not just those of employees and consultants involved in the reorg; they also include the human cost of change and the disruption it can create in your business. We have accumulated data on these factors for 1, reorgs. Previous reorgs in your company, and the experience of employees who have worked elsewhere, can help you estimate the impact.

Both the objective of the reorg and the process for running it should be as fair, transparent, and reasonable as possible. Not only is that right for your employees, but it will make them much more likely to accept, get behind, and improve your ideas. To be considerate of your employees and get their buy-in, the process needs to be fair and transparent. Its reorg started with an exercise to define the revenue-improvement opportunity worldwide.

At the time, it was a federation of local businesses with no net growth. Teams of company strategists and business experts estimated that a more integrated global approach could significantly grow flat revenue and set a specific target for the reorg. The cost of internal project support and external consultants was agreed on, and a timeline was proposed: The new organization would ideally be set up and running within a year—in time to deliver results in the latter half of a new three-year business plan.

No surgeon would start operating on a patient before conducting tests and reaching a diagnosis.