At the start of the pandemic, many companies made cuts to personnel costs to make up for declining revenues. Now, as the recovery begins, many midsize business leaders’ instinct is to rebuild their organizations as they were before. This is the wrong approach, say Jonathan Byrnes and John Wass of Harvard Business Review.
As companies recover from their pandemic downsizing, they have a golden opportunity — and critical need — to reset their organizations to prosper in the era ahead.
When the pandemic caused the economy to crash, companies raced to stay solvent by reducing their costs to match their declining revenues. Most focused on slashing their personnel costs through downsizing or salary reductions, or both. For midsize companies without surplus resources or diversification, this was critical for survival. Time was of the essence, so most downsizing was largely implemented across the board.
In the post-pandemic period, many managers’ strong instinct is to rebuild their organizations as they were pre-pandemic. This is a big mistake — they’re facing a different business environment and set of customer needs. During the pandemic, giant digital competitors grew rapidly in response to changes in buyer behavior (e.g., B2C online ordering and direct shipment), which drove many smaller companies to the brink of bankruptcy.
The problem is that these changes aren’t going away. This means that companies, especially midsize firms, have to “skate to where the puck will be,” as hockey great Wayne Gretzky once observed. Simply rebuilding your previous organization, which seems like the obvious thing to do, is counterproductive. Your post-pandemic buildup, however, is an ideal time to make the fundamental organizational changes that the new era requires.
Fundamental Market Changes
As I’ve written about before, the phenomenal growth of giant digital competitors occurred along a relatively narrow strategic path: Arm’s-length services to small customers. These companies became experts in efficiently serving the needs of the “long tail” of small customers, which most businesses took for granted. This means that incumbent companies have a broad set of opportunities to build defensible, higher-service strategies. In the high-service segment of the market, however, customers have a diverse set of needs for largely integrated packages of products and related services.
For example, one of the first developments in what’s now called vendor-managed inventory was pioneered back in the early ‘90s by a midsize business, Travenol Laboratories, Inc., which was Baxter’s Canadian subsidiary in the hospital supply industry (this business was spun off and later acquired by Cardinal Health). The company was stuck in a price war for its commodity-like products, and there seemed to be no way out. Its managers tried to reduce their operating costs, but there were few opportunities to improve. It commissioned a small team to visit a few of their hospital customers to try to find a way out of its competitive jam.
The team was surprised to find that, after the supplies reached the hospital dock (where ownership passed), the internal hospital processes were very costly, primarily because they duplicated many of the company’s activities but without automation or scale. When they measured the actual internal hospital costs, they found that they were fighting over pennies in the price war, when there were dollars of addressable hospital efficiency gains that no one had seen.
In response, Travenol developed a new vendor-managed inventory service. The company placed warehouse supervisors that they called “materials management coordinators” in major hospital customers. They would count the products in every patient care area and clinic every day and send the information to the company’s distribution center, where it was packed into patient care area- and clinic-specific totes. The company delivered the totes to the hospital, and the materials management coordinator put the supplies away at night.
This system generated surprisingly large gains: Hospital costs dropped by double digits, company costs dropped as well (because they could optimize the number of orders), and amazingly, their sales to even highly penetrated hospitals increased by double digits. The latter stemmed from the close relationships formed between the company’s in-hospital materials management coordinators and the head nurses as they worked together to find ways to improve the system.
A complication arose. Many of the hospitals wanted different variations on the basic system. Some wanted deliveries only to certain clinics. Other hospitals only wanted the totes delivered to their receiving dock, while yet others wanted to do all the counting and putting away themselves.
The company’s managers were surprised at this proliferation of customer requirements. This was new to them because in the past, they had simply filled orders for their products and delivered them in bulk to the hospitals’ docks. Instead, they found that they needed to standardize the relationships they offered so they could produce a few variations of the new service at scale. (We call this a “relationship hierarchy.”)
They found that their functional, top-down organization was inappropriate for the new service because each hospital required a multicapability team composed of sales, product management, and supply chain management, and the teams had to be well coordinated and capable of forming tight relationships with their hospital counterparts. The company’s traditional command-and-control functional organization was actually preventing this from occurring because each team member reported to a different director with different goals and KPIs. For example, the supply chain managers were told to focus on cost reductions, not on providing new services (which were a great investment).
Instead, the company needed to decentralize planning and management into sets of multicapability teams, with specific teams specializing in each relationship. These teams required more and higher-skilled personnel than the functional organization did. They had to build personnel in order to rightsize these customer relationship teams, but this was a terrific investment.
By Jonathan Byrnes & John Wass
Read the full article here.