Douglas MacKenzie
Executive Vice-PresidentSuncor Inc.
North York, Ont.
During the past 5 years, hundreds of North American companies have suffered through corporate downsizing.
In a frantic attempt to cut operating costs, chief executive officers have instituted across the board layoffs, eliminated layers of management, or chopped off entire business units.
Downsizing is an appropriate strategy when a company's survival is at risk. But once the crisis has passed, the pressure to downsize disappears. Payrolls begin to rise again, and many "lean and mean" companies resume adding layers of fat.
It's like suddenly losing 50 lb on a quick weight loss diet. In most cases, the weight returns in a few months.
A BETTER WAY
A far more sensible approach is to develop a corporate structure suited for good times and bad--adding muscle in the right places while shedding those extra pounds of flab. The goal is to build a healthy structure that allows employees and managers to work in the most productive manner, with the ability to adapt to changing market conditions and new corporate strategies.
How do you create the right corporate structure?
First, you must step back and look at how work is done in corporations. Different tasks are assigned to workers by their supervisors and managers, who in turn are given directions by their superiors. The CEO, in conjunction with the board of directors, makes strategic decisions that determine the nature of the work at the company.
The hierarchical structure has been used successfully since the days of the Babylonians and Egyptians to organize groups of workers. Each member of the organization--right up through the CEO--is held individually accountable for performing certain tasks.
When an organization is structured correctly, employees know what they are expected to do and perform their tasks efficiently. Each layer of supervisors and managers adds value to the corporation.
The reverse is true for a poorly structured organization. Employees may not know what to do, a common symptom of a company with too few layers of management. Or they may find themselves in frequent conflict with their supervisors, a symptom of too many layers of management.
THE RIGHT STRUCTURE
If workers are spending all their time trying to figure out what their bosses want or playing political games, the company ends up with wasted effort. But the right corporate structure helps motivate workers and improve productivity.
That's been our experience at Sunoco Inc., where we have applied the theories of Elliott Jaques, an internationally recognized expert on corporate hierarchy, and the experience of George Harding, president of the Harding Consulting Group, to rebuild our organization.
Sunoco, one of Canada's major oil and gas producers, is a subsidiary of Suncor Inc.
I was first introduced to Jaques' organizational thinking in 1979. A professor of management at George Washington University, Jaques is the author of two ground-breaking books, "Requisite Organization" and "Executive Leadership."
After more than 40 years of research, Jaques believes a company's success depends on having a humane, decisive, well structured managerial hierarchy.
Jaques says the need for a strong corporate structure has been ignored by many of today's popular management writers who emphasize "leaderless" teams and "self-governing" work groups. These critics share a mistaken belief that a solid corporate structure is outdated.
"Let's not attempt to replace our managerial systems with pie in the sky groups but rather work to establish new and higher standards of managerial leadership and development," Jaques wrote in his article, "Managerial Leadership," published in the October 1991 issue of The World and I.
One of Jaques' fundamental assumptions--that people operate at innately different levels of cognitive capability--goes against the American tradition of being born equal. But no matter how much he or she may want it, and no matter how hard he or she may work at it, not everyone can be chairman of Ford.
Different levels of corporate work require an increasing ability to handle complexity. It is this ability (which is different from the traditional concept of intelligence), combined with motivation and accumulated skills, that makes the true corporate leader.
THEORIES INTO PRACTICE
In 1988 as the new manager of Sunoco, I was able to put Jaques' theories into practice. I felt the one way to distinguish Sunoco from our competitors in the oil and gas industry was to clarify our vision, then build the right corporate structure.
We suffered from too much bureaucracy, and our costs were too high. Work was getting done, but it wasn't focused on a goal, so Sunoco was not achieving satisfactory financial results.
When we called the Harding Group, our goal was to improve performance, not to downsize. We simply focused on the work that needed to be done and the number of people we needed to accomplish our goals.
After extensive analysis, we found that Sunoco was a "Stratum 5" organization, with four levels of work below my position. However, in part of the organization, there were five levels of managers and workers, making one layer redundant. After removing that layer, productivity in that business unit shot up.
In another part of the restructuring process, Harding recommended that a billing function in the accounting department be shifted to the operating division that performed the work. Within months, the division found $4.8 million in extra revenue that we had never billed to its customers.
That's a typical organizational problem. The accounting department had been struggling to resolve the billing problem for 2 years. Once they reported directly to the manager in charge of maximizing revenues, there was much clearer accountability and the whole company benefitted.
Other savings have resulted in the past 2 years as Sunoco executives continuously monitor the organization's work and what is needed to accomplish its objectives.
PAYOFF FROM CHANGES
The changes at Sunoco have been phenomenal.
In 1991, every major oil company in Canada lost money--except our company, which turned in a profitable performance with $1.5 billion (U.S.) in annual sales. Our annual fixed costs dropped more than $7.5 million, and we rose from the bottom of the industry to first place in return on capital in just 1 year.
When we started the restructuring process, Sunoco had 908 employees. As we discovered duplication of work across the system and confusing accountabilities, we were able to eliminate positions that were not adding value to our company. Today we have 691 employees--and they work more effectively.
In addition to a substantial improvement in the bottom line, restructuring has helped Sunoco create a better working climate that is clearly focused on results. For the first time, level-one supervisors understand their goals.
Improvements to our organization's structure are beginning to come up from the ranks now. In response to requests from our site managers in the service station end of our business, we eliminated a layer of management that interfered with their relationship with the balance of the organization. This was another case in which streamlining added value to our organization rather than diminishing it.
It's not easy to take a whole corporate structure and reshape it. You need staying power and the support of your board. Board members need an understanding of the changes you plan to make, and you need a commitment from them to a reasonable time frame for implementation.
It probably will take 3-5 years to get your new structure working well. Don't expect instant results unless the organization is in really bad shape.
CONTINUOUS FINE TUNING
In today's environment, a corporation must restructure all the time. Technology changes, environment changes, consumers change, and your strategy changes. As a result, the work done by employees changes continuously and the organization must reflect the market.
This isn't always massive change, but it's a fine tuning of the work that's been going on and linking the work to the current strategy. Perhaps you need to eliminate functions, add functions, or realign accountabilities.
A corporation should be a dynamic, living organism--not a truncated organization, struggling to survive. By creating an effective corporate structure, a CEO can build a healthy organization that generates value for its shareholders employees, and customers.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
