Competitiveness and organisational structure - a great example of delayering

Students familiar with the concept of delayering will know that the benefits of successfully reducing the number of layers in the management hierarchy are not just limited to lower costs. Of course, there can be significant cost savings from delayering, particularly if the roles concerned are highly-paid. However, the strategic rationale for delayering is also usually linked with the need to improve the effectiveness of decision-making and making the business more responsive to customer needs.

There is a great example of delayering which was in the news yesterday (19 April 2012) concerning a decision by insurance firm Aviva to remove an entire layer from their organisational structure.

You can read more about Aviva’s plans here. Essentially Aviva is removing the regional management layer from its organisational structure as it has decided to focus its growth and activities on a small number of geographic markets. It believes that national management in each country can now report directly to the Board rather than via a layer of regional managers. The change is expected to result in annual cost savings of around £100m which seems pretty significant!

A quote from an investment analyst who covers Aviva sums it up quite nicely:

“Aviva is basically removing the regional layer between the individual countries and the group level top management. It is a positive in our view because it should lead to some cost saves and should also mean a simpler management structure.”

Aviva has also split its divisions into two based on the speed of economic growth in countries in each of the two groups.

Aviva will focus one arm of its business on the slower-growth developed economies of the UK, Ireland, France, Spain, Italy, the USA and Canada. Its stated strategy in these mature economies will be to increase profits and cash generation through efficiency and taking advantage of economies of scale.

Aviva’s higher-growth arm covers mainly emerging markets such as those in Asia, Poland, Turkey and Russia, where Aviva said growth is high but penetration of insurance products low.

The new structure tallies with an 18-month-old retrenchment strategy by Aviva which has reduced the number of countries the insurer operates in from 30 to 21.