Dear V,
This problem is quite common. Please make sure that when you modernize the organization, retain the good points in the current system. Get a sponsor for this project at the DIRECTOR level.
You can consider:
a) Computerization of all office operations: this will encourage people to have more discipline and transparency in their work.
b) Define the roles and responsibilities clearly so that the "traditional" overlaps and ambiguities are avoided.
c) Define measurable targets for the performance of each department.
d) All new recruitment should be as per the required competence only.
e) For this, you have to clearly define the competence requirements in terms of education, training, skills, and experience.
f) Conduct workshops away from the office about the future direction of the organization.
g) Conduct training for all key people on the NEW ECONOMY and its implications. Otherwise, they will feel that what worked well for them in the past will work well in the future also.
Hope these suggestions will help you.
Regards,
Veera