Reorganisation

What is reorganisation? Definition and example - toolshero

This article explains the concept of reorganisation in a practical way. After reading, you will understand the basics of reorganisation in an organisational context, and you’ll know how human resources management plays an important part in restructuring or reorganisation.

What is reorganisation?

Reorganisation is the process of reorganising an organisation facing financial difficulty in order to revitalise it. Restructuring means changing the structure or even ownership of an organisation through mergers, consolidation, or by selling it. Reorganisation is an important step for a company because it offers potential to capitalise on new opportunities and increase profits.

Reorganisation can also refer to the restructuring of the activities of a business to focus on core activities, and to combine two or more business units in order to create a new entity.

If the reorganisation has to do with the capital structure of an organisation, it’s a formal process. It will be something that will be monitored by the courts, for instance. This is mainly done to restructure the finances of a business during or after bankruptcy. The business will be protected against creditors for a certain period, while the bankruptcy court evaluates a plan for reorganisation. During this period, interviews will also be held with creditors to propose payment plans, and the company finances, the management, and the business activities will be restructured to prevent the issue in the future.

Types of reorganisation

Reorganisation can occur in different ways. It does not always mean a core organisational aspect will change, but the change will still have far-reaching consequences.

Mergers and acquisitions

A merger is when two companies combine to become a single business. This means that one of the two company names will cease to exist. Both boards of directors will first have to get approval from the shareholders. An acquisition takes place when an organisation gets a majority share in another company. This target company will retain its name and legal structure. Consolidation is when an entirely new company is founded, and shareholders receive stocks of the newly formed entity.

Mergers and acquisitions are done for a number of reasons. One of those is that, as a result of combining business activities, efficiency will increase while costs increase. Each company will then take advantage of the other company’s strengths. Another reason for mergers and inquisitions is growth. A beer company might buy a local brewer to remove local competition and to produce more beer.

Suppliers or distributors are also often bought out. This can help companies save a lot of money. By buying out a distributor, a company can ship its product for less money.

Management restructuring

It also happens that traditional management hierarchies are replaced by horizontal organisational structures to make the company more flexible. This is crucial for responding to new market opportunities. The implementation and use of a flat business model requires a restructuring approach that allows departments to work together in new and more efficient ways.

Downsizing

As businesses come up with new strategies or go into a different direction, it’s possible that some of the employees will be let go. In such situations, organisations have to part ways with staff to shrink and restructure. During this process, positions are redefined, and teams are reformed to ensure that the rest of the workforce will be able to efficiently meet the job requirements.

Downsizing can also be the result of mergers and acquisitions. If after merging two companies there is an overlap between different positions, employees will either be reassigned or let go.

Reorganisation and consequences for employees

The words restructuring and reorganisation are often used as euphemisms for firing lots of workers. That doesn’t always have to be the case. If a reorganisation does affect the number of employees, it’s important to communicate openly and honestly about that from the very beginning.

The impact of losing one’s job is significant, but the situation surrounding restructuring can also result in fear, paranoia, and uncertainty. There have been numerous studies, including one by McKinsey, that show that much of this fear is due to the organisation.

Minimising the impact of reorganisation on employees

One of the reasons why companies cause this fear is because they fall short when it comes to involving employees in the process. In addition, they fail to communicate well or build trust. It’s primarily the human resource department that bears responsibility for this. The various interests at play in the event of a restructuring are great, so organisations should go about them with care. There are a number of steps that have to be followed in order to make the change as comfortable as possible for employees.

Reorganisation minimising impact on employees - toolshero

Step 1: Communicate intent

A reorganisation usually doesn’t come as a surprise. It’s often preceded by months of uncertainty and waiting. That’s why it’s very important that the organisation clearly communicates the intention to restructure. When the intention has been made clear, the board – or boards – can join the debate.

Step 2: Showing necessity

A reorganisation in the form of mergers and acquisitions requires the supervision of, for instance, the works council. If there are consequences for workers, the organisation will also contact unions during this stage. Unions will analyse the exact consequences for employees and will come up with a severance scheme together with the company.

Step 3: Communication

When organisations have weighed different options and determined the best course of action, it’s necessary to communicate the restructuring plans to the employees and externally. Remember that reorganisation can have a huge impact on employee performance and well-being. That’s why communication and transparency should be priorities during this time.

Step 4: Severance scheme/union

The company will ensure that the employees are compensated in a severance scheme. Employers are not required to offer a severance scheme. However, if it involves a large group of employees that might lose their jobs, the organisation has to limit the effects for them.

Items that can be part of a severance scheme for a reorganisation:

  • Severance Pay
  • Transition compensation
  • Changes in work locations (moving)
  • Provisions from the collective labour agreement

Step 5: Execution

This is the phase when the organisation implements the reorganisation. This is done in accordance with the agreements that have been made in the severance scheme. There are often committees that monitor developments in large reorganisation efforts.

To summarise reorganisation

Reorganisation can refer to reorganising the activities of a business to focus further on its core activities, combining two or more units for efficiency, or a necessary reorganisation resulting from financial policy. The most common types of reorganisations are mergers and acquisitions. A merger means one or more companies merge into a new business. In the case of acquisitions, one company takes a majority share in another company. Mergers and acquisitions are often done to improve efficiency by combining the strengths of the different companies.

A frequent consequence of reorganisation is downsizing, which involves employees losing their jobs. Although this cannot always be prevented, it’s important that the organisation makes the process as painless as possible for the employees. A severance scheme forms the basis for compensation and agreements made between the organisation and unions/employees.

Now It’s Your Turn

What do you think? Do you recognise the explanation of reorganisation? Have you ever experienced a restructuring, or do you know someone who has? What should employers look out for during a restructuring? Do you have any tips or additional comments?

Share your experience and knowledge in the comments box below.

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More information

  1. Bruner, R. F., & Perella, J. R. (2004). Applied mergers and acquisitions (Vol. 173). John Wiley & Sons.
  2. Dignum, M. V., Sonenberg, E., & Dignum, F. P. M. (2004, August). Dynamic reorganization of agent societies. In Proceedings of workshop on coordination in emergent agent societies.
  3. Fligstein, N., & Markowitz, L. (1993). Financial reorganization of American corporations in the 1980s. Sociology and the public agenda, 185-206.
  4. Todnem By, R. (2005). Organisational change management: A critical review. Journal of change management, 5(4), 369-380.

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Ben Janse
About the Author

Ben Janse is a young professional working at ToolsHero as Content Manager. He is also an International Business student at Rotterdam Business School where he focusses on analyzing and developing management models. Thanks to his theoretical and practical knowledge, he knows how to distinguish main- and side issues and to make the essence of each article clearly visible.

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