Domestic corporate restructuring and HR coping strategy > Insight

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It’s a bleak prospect, but the topic of domestic companies this year will be 'Downsizing'. Among them, many restructurings involving reductions in workforce are already underway.  

According to a recent survey of 711 domestic companies by Incruit, a job portal, 24.7% responded that they had undergone restructuring last year.

In other words, 1 out of 4 companies had reduced their workforce. People are more worried than ever that they could suddenly lose their job.

Global companies are also in a situation where they have to face restructuring. Coca-Cola officially announced a workforce reduction of 2,200 and Siemens Energy by 7,800. GE has barely survived through a harsh restructuring in recent years, 

cutting its workforce in its flagship aircraft engine manufacturing division by a quarter.

Restructuring types of the domestic corporation

Although it is said that most of the recent corporate restructuring is due to the financial difficulties caused by COVID-19,  

it is possible to categorize it in a broad framework based on the cause of the restructuring. 

This approach is valuable because it can suggest differentiated strategies for the target, scope, and implementation method of restructuring for each type.

Restructuring due to paradigm shift in industry

Structural and fundamental changes in some industries due to the 4th industrial revolution such as AI cause fundamental changes in the way employees work. In addition, the changes quickly tear down standards and practices of needs for workforce that have been accumulated over a long period of time.

For example, the expansion of non-face-to-face financial transactions due to the development of fintech technology and the reduction of bank branches and workforce are unavoidable. Statistics show that the number of top-ranking commercial banks 

in Korea, which was 4,640 at the end of 2019, decreased by 216 to 4,424 at the end of last year, confirming this trend. 

Another example of this type is the recent restructuring in large domestic retailers whose business areas are department stores and marts. The reduction of offline stores-related workforce occurred  as the center of distribution industry channels have been changed from offline to online.

Restructuring to secure competitiveness in the industry

In this case, the paradigm of the industry itself remains unchanged, but restructuring is carried out from a strategic perspective 

to raise the competitive position in the market. Strengthening core projects through reducing losses and creating cost synergy effects through M&A are the direct purpose and means of restructuring.

One of the leading global electronics companies in Korea recently declared that it would fully review the restructuring of its mobile business division, which had been suffering from long-term losses, and they offer voluntary retirement to their employees several times. This is a restructuring to increase competitiveness in the industry.

Restructuring to avoid temporary business crisis triggered by COVID-19

COVID-19 is affecting all industries, but especially in certain industries, it has a huge ripple effect that puts the existence of 

a company at risk.

For example, there are not only industries such as travel, aviation, and hotel businesses that where movement restrictions due to COVID-19 are directly related to loss of business opportunities, but also industries such as automobile industry that one of the case of high dependence on specific overseas markets. Companies in these industries have been suffered financial difficulties.

COVID-19 has been prolonged, and corporate restructuring for survival is currently in progress. 

One of the domestic LCC airlines has undergone a restructuring of half of its employees and has recently started the corporate rehabilitation process, while the top domestic hotel company also offered voluntary retirement to those who have been in business for more than 15 years.

Characteristics of restructuring of domestic corporations

The causes of restructuring vary as introduced earlier, but there are some common characteristics and trends that are found 

in recent restructuring of Korean companies.

Use of voluntary retirement as a major means of restructuring

The reason for using voluntary retirement is the legal regulatory environment of Korea, which has low employment flexibility. Although large-scale restructuring is possible in accordance with the 'dismissal for managerial reasons (Article 24)' of the Labor Standards Act, it is difficult to implement restructuring because of the Supreme Court's strict interpretation of 'urgent managerial need' and realistic constraints such as the employer's burden of proof. Therefore, voluntary retirement based on individual worker agreement is used as a detour option.

The problem is that voluntary retirement procedures in many companies are not based on ‘voluntary’. 

In many cases, the HR division and executives select retirees from within the company and conduct individual interviews with those people. The form is voluntary retirement, but in reality, it may be a recommended resignation or, in some cases, dismissal against the will of the person concerned.

The recent increase in labor-management conflicts and lawsuits related to restructuring is not irrelevant to the legal risk which is contained in such corporate practices.

Collapsing rank-year boundary in the restructuring 

In the past, it was common to implement voluntary retirement (restructuring) only for high-ranking and senior-level member who were receiving high salaries. Just a few years ago, media lashed out at one company over offered voluntary retirement to even 

at the junior-level.

However, this standard does not apply to recent restructuring. In fact, some construction/manufacturing-related companies offered voluntary retirement (restructuring) to both of senior-level employees and junior-level employees recently.

This phenomenon can be understood as an action for the survival of a company, but there are also some concerns.  Low-level workforce has little influence on the company's performance right now, but it needs to be considered more carefully because 

it is an important asset responsible for the future of the company. In addition, if restructuring is concentrated on low-level workforce because they do not have the strength to resist, it may become a cause of conflict within company.

Complete restructuring including organizational restructuring and hierarchical adjustment, 

not simply reducing workforce

In the past, most of the restructuring was done to meet the appropriate workforce size for the purpose of cost reduction. 

In this case, there was no significant change in the organizational structure. On the other hand, in recent years, as an agile organization is needed to respond to a rapidly changing and unpredictable business environment, qualitative changes such as 

re-organization and reduction of rank/hierarchy are also becoming an important purpose of restructuring. 

A company that has recently been ranked number one in the travel industry is trying to re-organization through restructuring 

by reducing the company-wide workforce, streamlining the organization and reducing the number of executive positions/members at the same time.

HR strategies

If a company is in an unavoidable environment, its remaining challenges should be focused on 'doing well'.  

During the restructuring process, it is recommended to review the following:

Reviewing Necessity

Restructuring has a very large impact because it can temporarily damage intangible reputation that a company has accumulated over a long period of time. Therefore, thorough verification of whether it is really necessary should be preceded. 

In general, restructuring pressure on workforce increases when there is a mismatch between labor cost(input factor) and company performance(output factor). 

Therefore, it is necessary for each company to verify the level of restructuring necessary in advance by using labor productivity indicators suitable for their characteristics. For example, after setting an appropriate target for an HCROI (Human Capital Return On Investment) indicator, which means the return on investment for 1 Won in labor costs, a simulation method can be used to inversely calculate the appropriate workforce size according to the predicted future company performance.

Reviewing Alternative means

Even when restructuring is considered necessary, it is desirable to first apply the gentler approach that can prevent member churn while achieving similar effects. 

First, considering the natural reduction that occurs every year due to the retirement age, the effect of workforce reduction can be expected just by stopping new hires for a certain period of time. According to a recent survey conducted by Saramin, a job portal, about 65% of companies (254) that reduced the number of full-time employees last year used the method of not recruiting employees for restructuring.

Also, restructuring pressures can be reduced if labor-management agreements can be reached on an approach in terms of cost(e.g., a wage peak system or reduction of working hours) rather than number of employees.

The recent case of wage negotiations at a car manufacturing company where the basic wage was frozen can be seen as a positive effort to align the interests of labor and management in maintaining employment.

Communications

When organizations start restructuring, they need to focus on communication. Communication in restructuring includes all interactions that enable the client to at least accept the outcome. The traditional approach focuses on enhancing procedural fairness such as establishing a reasonable process, guaranteeing the right to participate, and prior training for business leaders who will be responsible for primary communication.

This part is of course important, but considering that most restructuring is actually linked to low-performing management, communication should begin earlier. Ex-post and one-sided persuasion in the period of restructuring has its limits. 

Accordingly, HR must continuously communicate with members about the position and company expectations through annual performance management and evaluation. By operating a continuous feedback and 360-degree multi-faceted feedback system, which has recently emerged, it is possible to establish a smooth flow of communication that continues not only to performance management while working but also to resignation.

Organizational culture

The impact of restructuring is traumatic for those who remain. A vague sense of anxiety that it might be my turn soon spreads within the organization. Employees actively avoid risky business opportunities and, in the extreme, may be reluctant to share their core knowledge and skills as a means of their survival.

According to a study by the American Management Association, about 72% of companies said they experienced an immediate demoralization and a depression in business climate after restructuring. Therefore, HR needs to track the atmosphere of change 

in the organization and strive for a certain period of time on activities to form a positive climate. It is recommended to actively conduct an organizational culture diagnosis for at least several years after restructuring.

Mulling future over

Restructuring is not the end in itself. At the same time as the scale reduction, we need to start thinking about becoming a stronger organization. 

GM has been strongly pushing for restructuring as a long-term management strategy since it suffered bankruptcy due to the global financial crisis in the past. What is noteworthy is that in the process of restructuring, it is strategically pursuing a plan to reverse the ratio of mechanical engineering workforce and electronic engineering workforce, which is currently 70:30, 

in order to transform into an eco-friendly autonomous vehicle company.

Rather than being engrossed in restructuring itself, our HR need to think about what the future image of the organization we want to achieve and how to prepare for it. 

In particular, attention should be paid to job redesign linked to business strategies and to up-skilling/re-skilling that can create high performance with small workforce.

Without hope for the future, the pain of the present is just pain. If it is a pain that must be endured anyway, it should be used as 

a strategy to retreat for long-term sustainable growth. This year, restructuring will take place everywhere.  

Do not forget that both the company and its members are partners to overcome this crisis together.  

Written by Jeonpyeo Hong, Director, Consulting Biz Unit (jphong@e-hcg.com)