40% of executives brace for "major" reorganization, including layoffs: PwC

By Suman Bhattacharyya for CFODive.com

• Four in 10 executives are planning a major restructuring of their firm’s operating model in the next 12 to 18 months — up from 24% last August, according to Big Four firm PricewaterhouseCoopers’ Pulse Survey released Tuesday.

• While staff reductions might occur as companies reallocate resources, headcount cuts aren’t the focus, Venky Jayaraman, a partner at PwC, told CFO Dive. Instead, firms are making operating model changes to boost productivity and grow revenue. Technology is the biggest factor influencing organizational changes, he said, with some 51% of executives saying they’ll invest in new technologies — including generative AI — in the next 12 to 18 months, according to the survey.

• Margin compression is one of the key drivers for operating model reorganization, Jayaraman said. Companies are “seeing the increases in cost are much higher than the increases in revenue,” he said, noting that’s a result of higher labor and product component costs. “Margins are getting squeezed.”

Firms facing margin pressure might not be as easily able to pass on these added costs to customers. Consequently, they may need to rethink their operating structures with a pivot to focused models over diversification strategies.

“The market broadly over the last few years is increasingly beginning to reward pure-play focused companies,” including those that have split into separate corporate entities, said Jayaraman.

Recent examples include DuPont’s plans to split into three companies, announced last month, and General Electric’s breakup into three corporate entities, a process that was completed in April. 

“Pure-play companies are able to grow faster,” he said. 

The likelihood of operating model changes varied by industry. Survey respondents in tech, media and telecom were most open to operating model changes, with some 85% of respondents claiming a readiness to “execute business model changes at scale.” By contrast, 53% of financial services executives said their business model needs to change to support the company’s vision.

Operating model reorganization doesn’t necessarily mean layoffs, but that can be the result, especially when firms reorganize and shift resources between different business units, said Jayaraman.

“When I reinvent my business models in a new way…those capabilities that are required to support the traditional business models [prior to restructuring] either had to be redirected using upskilling or training and all those things, or some of those skill sets will have to go away,” he said.

The survey also underscored a focus on investment over cost cutting. Asked which strategic business changes respondents expected to implement over the next 12 to 18 months, just 30% listed cost cutting on their priority list. Nearly two thirds (58%) of CFOs surveyed said they’re spending more time on tech investment compared to one year ago.

“AI is attention grabbing, but if I peel the onion to what companies are thinking about and working on … [it] is addressing the core of end-to-end processes, breaking down functional silos, unlocking value from data,” Jayaraman said. 

The cross-industry survey, which PwC conducted last month, sought views from 673 U.S. executives, including CFOs and finance leaders, tax leaders, CROs, risk management leaders and CEOs.