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It may sound a little grim, but the dominant theme for Korean companies this year looks to be "downsizing." In particular, restructuring that involves cutting headcount is already gaining force.
According to a recent survey of 711 Korean companies by job portal Incruit, 24.7% said they had carried out restructuring in the past year.
Put simply, headcount reduction is happening at one in four companies. The visceral feeling that you yourself could be the one who suddenly loses your job has reached a higher level than at any time in the past.
The cold winds of restructuring are not sparing global companies either. Coca-Cola has officially announced layoffs of around 2,200 employees, and Siemens Energy around 7,800. GE has gone through harsh restructuring over the past several years — cutting headcount in its core aircraft engine business by a quarter — and is now considered to be only just approaching normalization.
Most of the recent restructuring at Korean companies points to COVID-19-induced business difficulties as the surface reason, but a more analytical view allows us to broadly categorize them by underlying cause.
This approach is valuable because each type calls for differentiated strategies in terms of the targets, scope, and execution of restructuring.
Structural and fundamental change in some industries — driven by AI and other parts of the Fourth Industrial Revolution — brings about fundamental change in how employees work and tears down, in an instant, long-accumulated standards and practices around workforce demand.
For example, the expansion of contactless financial transactions driven by the development of fintech, and the resulting shrinkage of bank branches and headcount, is now an irreversible future.
The fact that the number of branches at Korea's leading commercial banks fell by 216 — from 4,640 at the end of 2019 to 4,424 at the end of last year — speaks to this trend.
The recent restructuring of offline stores and headcount at major Korean retailers like department stores and hypermarkets — driven by the shift to online channels — is another example of this type.
In this case, the industry's paradigm itself remains intact. What drives restructuring is a strategic perspective: the desire to lift the company's lagging competitive position. Strengthening core businesses by reducing loss-making ones, and creating cost synergies through M&A, become both the direct purpose and the means.
One of Korea's representative global electronics companies recently declared that it would conduct a full review of restructuring its long-loss-making mobile business and ran several rounds of voluntary separation. This case can be understood from this angle.
COVID-19 has affected every industry, but for certain industries, its ripple effect threatens corporate survival.
Industries where the mobility restrictions caused by COVID-19 are tied directly to the loss of business opportunity — travel, airlines, hotels — are obvious examples,
and even cases like the auto industry, which has high dependence on specific overseas markets, have suffered acute business difficulties over the past year.
COVID-19 is dragging on, and corporate restructuring for survival is in progress. One Korean low-cost carrier filed for corporate rehabilitation after restructuring half of its workforce, and Korea's number-one hotel company also ran a voluntary separation program targeting employees with 15 or more years of tenure.
Although the causes of restructuring vary as outlined above, recent restructuring at Korean companies shows certain common characteristics and trends.
The reason can be traced to Korea's relatively inflexible labor regulation. Even though the Labor Standards Act provides for dismissals on management grounds (Article 24) for large-scale restructuring, the Supreme Court's strict interpretation of "urgent management necessity," along with the burden of proof on the employer, makes voluntary separation — based on individual agreements with employees — a more attractive bypass.
The problem is that, in practice, voluntary separation processes at many companies are by no means actually voluntary. In many cases, internal selection by HR and senior leadership and individual interviews with the affected employees take place — meaning the form is voluntary separation but the substance can resemble an advised resignation, or in some cases a dismissal against the employee's will.
The recent rise in labor-management conflicts and lawsuits related to restructuring is by no means unrelated to the latent legal risk embedded in this corporate practice.
In the past, it was common to limit voluntary separation and other restructuring to senior, high-tenure employees on high salaries.
Just a few years ago, one company was harshly criticized in the media simply for having opened voluntary separation applications to staff- and assistant-manager-level employees as well.
Recent restructuring shows that this standard no longer applies. Some companies in construction and manufacturing are reported to have significantly expanded the scope of voluntary separation to include staff-level employees and above.
This trend can be understood as an expression of corporate desperation for survival, but it is also a cause for concern. Junior employees may have less immediate impact on company results, but as critical assets carrying the company's future, they require more careful consideration. And if restructuring concentrates on junior employees simply because they have less power to resist, it can become a source of internal conflict and division.
In the past, the goal was cost reduction, and the dominant approach was a quantitative one — adjusting workforce size to fit a target without major change to the organization's structural essence.
Recently, however, in line with the need for an agile organization that can respond to a rapidly changing and unpredictable business environment, qualitative changes — like organizational consolidation and flattening through reduced job levels and hierarchy — are being pursued as important goals of restructuring as well.
One company that recently led the travel industry is reducing headcount across the company while simultaneously simplifying its organization around core departments and reducing executive job levels and headcount — a comprehensive restructuring of the organization as a whole.
If a company is in an environment where restructuring cannot be avoided, the remaining task is to focus on doing it "well." In the restructuring process, HR should consider the following.
Restructuring carries a very large impact in that it can damage a company's intangible reputation — built up over years — in an instant. For that reason, a thorough verification of whether it is truly necessary should come first. Generally, pressure to restructure headcount grows when there is a mismatch between the input (labor cost) and the output (company results).
Each company should therefore use labor productivity indicators tailored to its own situation to verify the need for restructuring in advance. For example, you can set an appropriate target for the HCROI (Human Capital Return On Investment) indicator — which represents the return on investment for each won of labor cost — and then run a simulation that works backward from forecasted business results to derive the appropriate workforce size.
Even when the need for restructuring is recognized, it is desirable to first apply gentler approaches that can produce similar effects while preventing employee loss.
Considering the natural attrition that occurs each year through retirement, simply suppressing new hiring for a period of time can produce a workforce reduction effect.
According to a recent survey by job portal Saramin, about 65% of the 254 companies that reduced their permanent headcount last year did so by not refilling positions left by departures.
Beyond headcount, a cost-level approach can also reduce restructuring pressure if labor-management agreement can be reached on things like a wage peak system or wage reduction tied to shorter working hours.
The recent case of one finished-vehicle manufacturer reaching a wage agreement that froze base pay can be seen as a positive effort to align labor and management interests around employment preservation.
Once you enter restructuring, you have to focus on communication. Restructuring communication includes every interaction that lets affected employees, even if they do not want to admit the result, at least be able to accept it.
Traditional approaches have focused on improving procedural fairness through reasonable processes, guaranteeing the participation rights of those involved, and pre-training the front-line leaders responsible for the first conversations.
This is important, of course, but considering that most restructuring is, in practice, linked to the management of low performers, the timing of communication needs to start much earlier. After-the-fact, one-way persuasion at the time of restructuring inevitably has its limits.
HR should therefore continuously communicate, through annual performance management and evaluation, where the employee stands and what the company expects of them. By running the recently emerging continuous-feedback and 360-degree feedback systems, you can build a smooth flow of communication that runs from in-employment performance management through to departure.
The shock of restructuring leaves trauma even on those who remain. A vague anxiety that "my turn could come next" spreads across the organization. Employees actively avoid business opportunities that come with risk, and at the extreme, may even come to view their own core knowledge and skills as a means of survival — and become reluctant to share them.
According to an American Management Association survey, about 72% of companies reported an immediate drop in employee morale and a slump in the management atmosphere after restructuring. HR therefore needs to track the mood of change unfolding inside the organization and concentrate its capacity, for a period of time, on activities that build a positive culture. We recommend actively running organizational culture diagnostics for at least several years after restructuring.
Restructuring is not, in itself, the end. Alongside cutting back, you have to start thinking about how to be reborn as an organization with a stronger constitution.
After narrowly avoiding bankruptcy in the global financial crisis, GM has aggressively pursued restructuring as part of a long-term management strategy. What is notable is that, in the process of restructuring, the company is strategically pursuing a plan to flip its current 70:30 ratio of mechanical engineers to electrical engineers — in order to transform itself into a clean, autonomous-vehicle company.
Korean HR teams should also avoid getting buried in restructuring itself, and should never lose sight of the question: what is the future state of the organization we want to achieve, and how should we prepare for it? In particular, they should pay attention to job redesign linked to business strategy, and to upskilling and reskilling that can produce high performance with a leaner workforce.
Without hope for the future, today's pain is just pain. If pain has to be endured anyway, it should be used as a one-step retreat in service of long-term, sustainable growth. The cold front of restructuring is expected to be sharp this year. Let us not forget that the company and its people are partners who must overcome this crisis together.