The Disadvantages of Restructuring Organizations

While your business may need restructuring to survive and grow, the process presents risks as well. Employees who aren’t let go may look for more stable environments elsewhere, resistance from within may inhibit implementation and the financial costs can be greater than expected, particularly if filing for bankruptcy is required.

Restructuring organizations is hard on employees, and the stress and uncertainty that it brings can reduce productivity. In addition to losing the redundant employees, companies may have a hard time retaining valuable employees. Your top performers are more likely to seek opportunities elsewhere if they feel uncertain about their future, and they may feel that way particularly if your business has been through several reorganizations in the recent past. The vivid reminder of a lack of a commitment to the workforce can leave your top performers with a reciprocal lack of commitment to the business.

A reorganization is no guarantee of success, particularly if the reasons behind it aren’t well-communicated. Some may resist changes that they feel negatively affect their business areas. Others may dislike their new roles or hope that if they delay implementation of key measures, the company will abandon the reorganization quickly and the organization structure will resume its previous form. You have to stay on top of every reorganization to make sure things are progressing smoothly.

Particularly for a publicly traded company, a key goal of a restructuring is increasing the business’s market value. But the more complex a reorganization is, or the more creditors and stakeholders that have to be managed, the less likely it is that investors are going to appreciate how that value increase is going to happen. For a closely held, non-public company, this disadvantage may be less apparent, but that doesn’t mean it’s not a concern. For example, without investors to please or a stock options as a carrot, it can be harder to incentivize managers to maximize value in the company.

Reorganizations that result in bankruptcy can help a company get relief from catastrophic financial burdens, but they come with disadvantages as well. You’ll have to operate under the gaze of a court-appointed trustee, which can limit your flexibility. Changes in the law have also made the process more difficult and expensive, so it may not be as easy to survive as a business going this route as it was in the past.