Getting off the cost-out transformation treadmill

Without active management, organizations evolve over time to lose efficiency and effectiveness.  Left unchecked, deterioration becomes so severe that drastic action is needed. 

The cost agenda has never been sharper: 2023 saw a dramatic upturn in the number of layoffs as revealed for US organizations through Federal WARN notices.  Coming off 2023, cost reduction remained the top ranked strategic priority for C-suite executives in 2024ⁱ. 

Number of layoffs by US organizations reported through WARN notices 

Part One of this article explains why leading organizations are getting off the cost-out transformation treadmill.  In Part Two we provide an overview of five key practices we see being taken: how leading organizations are preventing the pain, cost, and destructive effects of cost-based transformations through continuous management of organization effectiveness.

Part One: The rationale for getting off the transformation treadmill 

• Costs outweigh Savings:  Dramatic adjustments to the workforce cost base come at a price:  not just severance payments to directly affected employees, but the costs of reduced productivity and increased attrition experienced across the workforce.  A conservative modeling of Bloomberg’s “True Costs of Layoffs”ⁱⁱ reveals that a company of 10,000 employees seeking a 10% Reduction in Force (RIF) will spend $1.27 for every $1.00 saved.

These costs are likely conservative.  Orgvue’s analysis of SEC filings by the 130 US-based, Fortune 500 companiesⁱⁱⁱ reveals $34billion in severance costs incurred by 68 companies in 2023.  An average of almost $500m per company.

An obvious challenge is that one-off costs are being set against annual, recurring savings.  This challenge becomes less credible with our second observation …

• Savings are often wiped out within 12-18 months:  within the narrow confines of a cost-out transformation, most business leaders (83%) report target savings being achieved.  But delivering headline savings does not imply success:  over four-in ten executives of US-based companies report excised costs creeping back within 18 monthsⁱ.  In summary, less than half of all cost-out transformations deliver and sustain planned savings. Furthermore one-third of executives reported their ability to deliver their business ambition suffered due to cost-saving actionsⁱ.

• The Talent Paradox:  At a time of unprecedented layoffs, accessing talent is the #1 challenge for C-suite executives.  Over the last decade, the number of global employers reporting talent shortages has doubled from 35% to 77%^iv.   The same executives identifying cost reduction as their #1 strategic priority, perceive ‘accessing talent’ as their #1 challengeⁱ. Fire and Rehire ceases to be an option in a talent constrained era.

Part Two: Getting off the cost-out transformation treadmill

Industry leaders have felt the pain and incurred the cost.  Experience informs that prevention is better than cure.  They are getting off the cost-out transformation treadmill by getting control:  managing the size, cost, structure and composition of the workforce over the 12–18-month business planning cycle. 

Below, we outline five practical steps we see being taken.  These are deliberately focused on operational planning to overcome common barriersv: to overcome change resistance, to gain buy-in, and to focus limited resources on business priorities.  In short, to gain credibility.  Strategic-level planning is unlikely to be successful if operational control has not been secured.  Progress will be cumbersome, and impact will be limited.

1  Key Organization Measures are established to meet the business need for insight

• Key measures extend beyond structural efficiency (e.g., spans and layers) to include measures for monitoring the size, cost, and composition of the workforce.
• Targets are set for every key measure, and every measure has an accompanying business rationale.
• There is one version of the truth:  Finance, HR and business leaders apply the same measures to establish and maintain a shared and common understanding.  Measures are clearly defined to drive clarity of message without need for repeated explanation.

“Previously, you’d get a different answer to seemingly basic questions depending on who you asked.  Finance reported in-year costs based on fractions of FTE, and HR reported headcount and full year costs.  We started by getting everyone on the same page with consistent measures supported by clear definitions.  We needed to get everyone seeing the same reality.”

“When different measures are used across the business, you cannot gain credibility.  For too long we were stuck in the place of ‘HR cannot tell us how many people we employ.’”

“We lost time because people had different understandings and were talking at cross purposes.  It took too long for partners from different teams to understand different measures and the terminology being used.  There was a translation requirement in every interaction which was inefficient.  We have defined everything in the simplest of terms and eliminated any opportunity for misunderstanding.”

2  The size, cost and structure of the organization is forecast over the planning horizon

• Insights are based on the full scope of the workforce, extending beyond in-situ, direct employees:  unfilled positions and contingent employees are included.
• Unintended consequences of position-level changes (adding/ changing/ closing positions) are avoided through a consistent approach to position planning providing immediate visibility on the impact of planned changes.
• The size, cost and structure of the organization can be forecast over future reporting periods, based on planned position costs, and the dates at which changes are planned to take effect.

“To plan with confidence, you need to know the full potential size and cost of the workforce.  We needed insights which were based on all positions, not just those which were filled at a point in time.  When key measures are constantly fluctuating due to joiners and leavers, you lose credibility.”

“Leaders don’t just want to know the picture today, they need to anticipate tomorrow; how their organization will look in 3, 6, 9 months’ time and whether this is line with planned business performance.”

“Every month, as HRBPs are planning changes, they immediately get to see the effect of their work: whether the organization is staying in line with established targets or getting off track.  This is reviewed in the position approval process, so we don’t end up with hundreds of individual actions having a negative overall effect.”

3  Key measures are tracked over time; reasons for changes are immediately visible

• Insight extends beyond aggregate measures to reveal the underlying pattern of Joiners, Movers and Leavers impacting the size, cost and structure of the workforce.
• Real life rarely goes to plan, so when actuals diverge from forecasts there is transparency on the underlying reasons:   there is immediate clarity on changes taking effect earlier/ later than planned or at higher/ lower cost than planned. This insight can is accessed without time-consuming manual reconciliation.
• Control over unfilled positions is achieved with visibility on the number, age, cost and recruitment status of unfilled positions.  Adaptive resourcing decisions are enabled, bringing the ability to redeploy resource investments to match changing priorities.

“We had armies of HR partners and Finance partners across the business getting together every month around their spreadsheets trying to reconcile actual headcount and costs against forecasts.  I shudder to think how much time was being spent.  We now have this insight immediately to hand.”

“We had millions of dollars tied up with unfilled positions and needed to close the gap on cost variance.  We needed to get to detail: if a position isn’t filled, what’s the recruitment status, when is it expected to be resourced, what’s the planned cost?  We earned credibility by addressing this in partnership with Finance who are now equipped to provide better forecasts.”

“It’s not enough just to show how headcount has changed since the last quarter.  I need to explain the reasons why, and what is expected next quarter.  I need the detail immediately, not in a month’s time.  This is critical for credibility.”

4  Active management is embedded in the business planning and review process

• Monitoring organization effectiveness is embedded in the cadence of regular business planning and review meetings.  Every leader is accountable for organizational effectiveness.
• A consistent reporting format equips every business unit leadership team with the insight needed to manage their part of the business.  Visualizing the organizational reality enables a shared and common understanding to be built across stakeholders.

“If you’re just turning up from time-to-time to present your analysis, you’re destined to fail.  Reactions and responses are likely to be: ‘I don’t recognize my organization … your data is wrong … my part of the organization is different’.  We only got beyond this when we were included in the regular review and planning process.  We’ve got beyond ‘my data’ and ‘your data’.  We initially had data quality issues, but now have a firm understanding of the size and cost of the workforce, how this has changed over time, and how things are planned to change over the course of the year ahead.”

“Let’s be honest, no business leader ever started their day motivated to review the status of open positions!  We’ve made this part of the regular review process.”

“The use of consistent visualizations in monthly review and planning meetings was key:  seeing the data makes a big difference.”

“People Partners, Finance Partners and Talent Acquisition get together monthly with business leaders to review the plan and ensure the committed plans can be delivered.”

“We equip every business leader with the insight and support to manage organizational effectiveness.  The message is clear:  maintain your organization or face the risk of transformation.  If you need transformation you’ve failed as a leader.”

5  Outcomes are influenced to drive organization effectiveness

• Actions deliberately seek to avoid creating turbulence in the organization which can result from even minor changes such as changing team reporting lines.
• Exceptions causing deviation from targets are identified (e.g., each micro-team manager).  Further exceptions are avoided through governance of position changes.
• Incremental action is taken as and when opportunity presents, for example consolidating teams when a manager moves to a different position.

“It’s hopelessly naïve to say a position should be downgraded to address a grade-compressed reporting line, or that reporting lines should be merged to improve spans of control.  These types of actions have real-world consequences.  Our approach is to have visibility on exceptions, avoid more exceptions being created, and converge towards targets over time.  We’re taking deliberately small steps in the right direction rather than trying to leap forward.”

Not every transformation is a cost-out transformation, but the data and infrastructure enabling continuous organizational effectiveness provides the foundation for managing strategy-led, transformations:  the baseline is in place to access detailed insights on the ‘as-is’ organization; ‘to-be’ design options can be modeled at speed with immediate insight on the impact of planned changes; complex talent processes can be managed at scale; and implementation progress tracked and monitored to ensure committed benefits are delivered to time. 

From operational control to strategic planning

Having secured operational control, leading practitioners extend their organization planning and analysis capability over a longer-term time horizon:

• Embedding job architecture to provide the basis for strategic planning
• Revealing the work activities consuming the time and cost of the workforce and where there are opportunities for process improvements
• Anticipating how the workforce will be impacted by changing work
• Identifying the extent to which people possess the skills needed to perform today, and in the future
• Projecting talent supply and demand to reveal gaps, plan gap-closure actions and track the delivery of workforce plans

Related articles

• The Data Maturity Journey
• The Organization System

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^I BCG Strategic Priorities and Opportunities in 2024.

ⁱⁱ Bloomberg, 7 August 2024, “The True Cost of Layoffs”.  The modeling of Bloomberg’s published assumptions is conservative:  average attrition has been reduced from 19% to 12% and additional costs relating to legal costs and increased State/Federal Unemployment Insurance are excluded from this projection.

ⁱⁱⁱ 10-K filings submitted by each US-based company in the Fortune 500 were analyzed (n=130).  12 Companies were excluded due to inaccessible data (Mutuals and Holding Companies)

^Iv OECD (2023), Retaining Talent at All Ages, Ageing and Employment Policies Based on more than 40,000 employers across all industry sectors in 40 economies.

^v McKinsey & Co.  The State of Organizations 2023.