Far too often the CFO and Controller have been too distant and remote when a reorganization is proposed. If anyone is to talk sense to the board and senior management team, it has to be the CFO. This article will explore the full costs of such an exercise.

A major reorganization is as complex as putting in a new runway at Heathrow Airport while keeping the airport operational. The steps, the consultation, the dynamics, and so forth are as difficult. The CFO needs to ascertain the costs of such an exercise. To assist, I set out what typically happens in a reorganization.


Loss of key staff in the third- and fourth- tier management ranks.  There is a period of chaos, where staff members are disillusioned and many key staff in the third – and fourth – tier management ranks walk out the door with a golden parachute and straight into employment elsewhere.


Dysfunctional management teams. A reorganization can leave you with the also – rans, and the piranhas (those nasty individuals busily burying hatchets in all those around).  The talented staff moving on to fresher pastures often with a nice payout.


Higher costs as ex-employees come back as contractors. The bedding – in process starts to kick in somewhere between the seventh and twelfth months. The completion of all the redundancies takes longer than expected and, yes, more than a few will come back as contractors at a higher cost. These costs must not be ignored.


Consultants’ fees will increase.  Consultant’s costs will go through the roof, as you will need help with counselling staff, the culture change and communication.


Designing a new logo, letterhead, signage and stationery. Look back to the last time these were done for a reasonable estimate.


Extra recruiting assistance is required as all staff affected will need to reapply for their position, additional HR resources will be used up.


Property leases. Releasing the property that will become surplus can take up to 24 to 36 months especially in an economic downturn.


About 24 months after the reorganization was announced, productivity is back to normal; thus for the duration you effectively have been going backward. In the 24 – to 36 – month period advantages may kick in provided that the reorganization has been successful.


When faced with a situation where the business is contracting, there are a number of options you need to explore before undertaking a reorganization and have everybody reapply for their jobs:

  • Discuss the issues with the affected operational units and ask them to find new initiatives that can help part fund their salaries. Often there are a number of income generating possibilities that have not been explored.
  • Can you redeploy the staff and buy some time so staff members have time to seek further employment while employed? This is a managed staff reduction process and will save a huge amount of money on redundancies, while, at the same time giving your staff an opportunity to find employment. This option is unlikely to be available in a major recession.
  • Working with the human resources team design a voluntary redundancy program. This has some downsides, as you can’t directly target staff members with lower skill sets.

As a CFO, you should never underestimate the long – term impact of downsizing staff. Wherever possible, I believe the CFO should argue that it is better to fund the shortfall out of retained earnings. The cost of firing and rehiring, when added to the public relations disaster it creates, often is much higher than holding on to the staff.


By my calculations an organization with 500 full – time employees that is contemplating dismissing between 50 and 70 staff members would be no worse off if the staff members were kept on and redeployed, where possible, for up to two to three years.


Next steps

  1. Analyze the last downsizing performed in the organization so you have a benchmark cost available
  2. Email me (parmenter@waymark.co.nz) and I will send you a checklist to put you off a reorganization and a spreadsheet to work out the hidden costs of dismissing staff