Company restructuring: Is it worth the money?

Companies are at it again: restructuring.

The Covid-19 pandemic has wiped out several jobs as companies render several employees jobless.

This is now the talk in many corporate organisations following the numerous layoffs fueled by the Covid-19 pandemic and its resultant restrictions as several employers realign their company objectives to suit the current times.

Jobs lost

According to the Ministry of Gender Social and Economic Development, 998,665 jobs have been lost (terminated or temporarily suspended)  due to the Covid-19 pandemic restrictions in the country.

While appearing on NTV Morning Show last week, Mr Apollo Onzoma, the assistant commissioner, industry relations at the Ministry of Gender, said, most job losses are as a result of companies closing business, and salary cuts as a means to fix cash flow issues in organisations.

In a labour market report  between July and September 2020), the Labour ministry notes that Uganda Investment Authority (UIA), and Uganda Bureau of Statistics (UBOS), conducted a Covid-19 impact assessment on 870 businesses and workforce. It  showed that 16.5 per cent of the enterprises had staff layoffs countrywide, 23.8 per cent had introduced stay-at-home measures with minimum facilitation, while 21.8 per cent of the sampled companies had limited staff working hours.

“Covid-19 has led to significant layoffs, including business shrinkage and downsizing. Businesses have run illiquid and are prone to liquidation,” the report says.

Mr Moses Mbubi Witta, the president of Human Resource Association of Uganda, describes company restructuring as the change in the business model to transform into a better entity. Restructuring comes in different forms such as operations, processes, or ownership restructuring.

Downsizing is one of the forms of restructuring many companies have resorted to, to cut costs.

According to Mr Ramathan Ggoobi, an economist, companies downsize for business continuity.

“Laying off workers is the primary and most convenient strategy companies prefer during restructuring to reduce expenditure,” he says.

Value for money

Yes, restructuring by downsizing is vital to cut costs, but the fundamental question therein, is it worth the money, given the costly consequences?

Analysts allude to restructuring as dreadful because it attracts compensation issues, damages company image, affects cash flow, not forgetting the depression after a job loss.

 “To be successful with restructuring, a company ought to conduct comprehensive market research to determine the need, based on competition. Research on its own is costly which most African companies cannot afford. This is why in the short term, they end up rehiring hence incurring more costs,” Mr Ggoobi notes.

Compensation

First, companies that choose to restructure by laying off workers, have to consider workers’ compensation.

Determining workers’ compensation depends on the circumstance under which an employee was laid off, and the number of years they have worked for the company.

According to Mr Owere Usher Wilson, chairman National Organisation of Trade Unions Workers, many companies in Uganda have fallen short of the compensation aspect while downsizing. 

For instance, the 2017 High Court order to Uganda National Bureau of Standards to pay its former executive director, Terry Kahuma Shs260m for wrongful dismissal.

 Mr Owere adds: “At Kinyara Sugar Works factory and Mayuge Sugar factory where people lost their jobs and employers were offering 50 per cent compensation, we negotiated 100 per cent.”

Therefore, restructuring by downsizing, to send home hundreds of workers increases the compensation bills.

“Employers also have to consider other costs such as in-lieu of notice payment made for having shocked the employee with restructuring (termination of employment). For anybody who has worked for 10 years, he or she is entitled to a three-month salary payment. One with five to nine years of employment gets two months salary while four years and below gets one month salary payment,” human resource expert Solomon Muhiirwa adds.

He continues: “This is coupled with payment of leave,  severity pay - money to take back home to start a new life, referred to as ‘Entandikwa’.

Company image

A company’s reputation builds consumer trust, resulting in increased profits.

Company restructuring, however, harms the reputation of an organisation once the downsizing buzz explodes out in public.

Perhaps it is the reason why some employers resort to silently downsize to avoid public criticisms.

“When you restructure and you lay off workers, first, your competitors and business associates especially banks view it as running broke. For instance, if you have a loan in a bank, they begin worrying about your ability to pay,” Mr Muhiirwa says.

“Initially, it may look great to bring down the payroll and associated costs. But this could turn out to be counterproductive in the future as organisations lose talent and skills that may move on to competition,’’ Mr  Mbubi says.

By and large, restructuring by downsizing staff, according to experts, may look like the easier option yet there are other options  for a company to cut costs.

Such options can be explored exhaustively to avoid losing talent that takes ages to build. 

Employers could explore alternatives such as automating processes and redeploying impacted staff to areas that create value in the organisation such as frontline sales to generate more customer leads.

Some companies have adopted remote work or working in shifts.

“Working from home or working in shifts helps to reduce unnecessary expenditure on items such as water and electricity bills,” Mr Muhiirwa says.

Restructuring by downsizing also induces depression among employees.

Due to the anxiety that comes with restructuring, the morale for workers among employees goes down, affecting company productivity.

Anxiety results from restructuring by downsizing, without particular criteria.

Once your job role overlaps with others, you are an easy pick to restructure.

Other employers may pick on those who cannot contain the pressure that comes with the job, amidst cutting off the highly paid employees.

If you fire the highly paid, the energetic junior officers at some point also ask for more pay since they are now serving two masters at a go.

Companies further pick on employees who are perhaps a threat to the company. This is common among employees that have served for long in an organisation and the employer perceives it as a threat.

Digitalisation

The other reason for restructuring is the urge for innovation that necessitates the use of technology to provide “better” products and services.”

The pandemic has compelled several employers to embrace technology.

Although no comprehensive study on job loss due to the pandemic has been made yet, Small and Medium Enterprises are most affected by the pandemic, yet this segment of the economy is currently responsible for more than 2.5 million jobs, making it the largest employment contributor in the country.

So, the approach of restructuring by downsizing viewed purely from the standpoint of the balance sheet can be a quick way out for companies but it is not always true that in the long run, the real value of the savings derive the expected value. It is not uncommon for these same institutions to hire people afresh as they realise that gaps were created by the people they let go.

The lean office

According to Cathy Mputhia, the founder of C Mputhia Advocates, an unnecessarily high wage bill affects the profitability and eventual survival of the company. It may be more prudent to lay off unnecessary staff to grow the business.

The global direction is in favour of the ‘lean office’, where the ratio of support staff to core staff is becoming lower. Increased use of technology may also result in the lean office.