RESTRUCTURING: Ten Steps to Survive the Crisis and Grow Your Company

If they want to emerge from the crisis, companies must start acting – now! Only then will they be able to seize opportunities for expansion

Written by: Dr. Vladimir Preveden, Executive Partner of the Zagreb Office of Roland Berger Strategy Consultants
www.rolandberger.hr

Successful companies are currently initiating significant changes during this crisis. Organize your company and restructure it to navigate the crisis and prepare for the next phase of growth.

The economy is weakening, in some countries more than in others. It is evident that companies, consumers, and governments everywhere are concerned. Just a few days ago, Željko Rohatinski, the Governor of the Croatian National Bank (HNB), speaking at a round table of Croatian exporters, estimated that economic growth in Croatia would slow to 2% in 2009. Other forecasts from the European Union indicate that the European economic downturn is expected to last two years. Even moderate scenarios do not predict that the economy will recover by 2011. While optimists believe that the worst will pass in about a year, the worst-case scenario predicts that such a state could drag on for up to five years.

Regardless of which scenario materializes, companies must prepare for a period of weaker demand and turbulent markets. Well-managed companies are aware of this fact. Although their own early warning indicators have not yet turned red, everyone – from the media to their employees – is talking about the crisis. These companies, therefore, undoubtedly know that now is the time to take proactive steps to steer and lead the company through the crisis and emerge stronger than before.

As the economy falters, where are Croatian companies? Our recent study Increase Efficiency 2008 provides answers from Croatian managers regarding their behavior concerning restructuring and reveals some alarming facts:
• While each of the surveyed Western European companies began restructuring within a year after recognizing the signs of crisis, only 20% of Croatian companies reacted in the same period. 50% of Croatian companies waited two years before taking any steps.
• While restructurings last on average longer than 18 months in Western Europe, most Croatian companies dedicate less time – and likely less effort – to this important task.
• Only 15% of Croatian companies regularly plan their liquidity – the lowest percentage of any country in the CEE region (for comparison, this percentage in the Czech Republic is 67% of companies). Croatian companies can therefore be severely affected even if the crisis is mild.

In light of these disturbing facts, it is high time for Croatian companies to take certain measures before the expected economic downturn becomes a reality. What must they do?

As always, it is important to see the whole problem – to see the ‘big picture’. Patchwork fixes here and there will not yield the desired results: the survival and recovery of the company. From our perspective, every response to the ‘big picture’ must contain all ten steps outlined in a special framework.

Compared to the international level, Croatian companies are significantly lagging in terms of size. If they want to emerge from the current crisis stronger and healthier than before, they must start acting – now! The reward will be truly great: Companies that courageously restructure now can seize unlimited opportunities for expansion that Southeast Europe and regions further east offer today and in the near future. Isn’t that incentive enough for any well-managed company?

From crisis to ten steps

1. Be proactive and think ahead
Crisis always separates the wheat from the chaff, good companies from not-so-good ones. The former are those that adopt a proactive attitude, that take the initiative. Do not just wait and watch what happens to your market, your revenues, and profits. Take the initiative and proactively take necessary measures! This is a crucial way to separate your company from rivals. Demonstrate your leadership qualities and do not hesitate to take appropriate actions. Also, start on time. Restructuring programs usually take two to three years to achieve all desired results (although quick gains can be realized much faster).

2. Retain your customers
In times of crisis, customers remain loyal to those companies they trust, those companies that treat them specially. Therefore, the first element in any restructuring is to take good care of your customers. Work diligently to convey a message of reliability and trust to your customers. Justify their trust in your products – and especially in your services – by proving yourself wherever possible. Successful companies make good use of the crisis by intensifying their service activities and fostering closer communication with customers. The goal is, of course, to encourage customers to be more loyal to you than to your competitors. Use all available means to defend your domestic market. This could include value-added services, being more lenient with payment terms, or giving reward bonuses to key customers. But do keep in mind that such benefits should be limited exclusively to key customers. A ‘one-size-fits-all’ approach generally misses its market, dilutes the impact of your activities, and thus harms your profit margin as the market stagnates.

3. Support liquidity
Croatian companies are not good at forecasting liquidity. As a result, their broader financial planning is also below average. Especially in turbulent times, it is crucial to effectively implement this function and update liquidity planning on a monthly basis. (In cases where the company has serious difficulties due to the crisis, it may be necessary to update on a weekly basis). It is important to plan cash inflows and outflows in accordance with their planned frameworks. Another key issue is to manage overdue receivables (or those that will soon be due) more proactively. Assessing the possibility of rejecting certain debt payments is equally important. Combining these steps will paint a clear, realistic picture that will ultimately clearly show your financial needs for the near and medium-term future.

4. Align costs with the best
This is generally a situation where companies react despondently and too late, too slowly and without a proper strategy. Instead of ad-hoc cost-cutting, they focus on the wrong cost items. It is important to assess every link in your company’s value chain and identify all inefficiencies. Proven strategies empower you to optimize costs at every link in the value chain. Additionally, make sure to differentiate between short-term and medium-term results. Both are crucial for recovery (sometimes even for survival). If you lack the necessary knowledge in the relevant areas, seek external help. This is what successful companies in Europe do.

Optimize the key performance indicators of your company. Define whether your company is primarily customer-oriented, supplier-oriented, or supply chain-oriented. Then compare what you do against the best players in your international peer group to optimize productivity.

5. Retain your very effective executives
Talk to your most valuable employees and managers as soon as possible. Show them that you care. Involve them in your restructuring efforts. Be positive but honest about the challenges and developments you expect. If you must lay off employees, do so as humanely as possible. Utilize, where possible, the opportunity to grant vacations and days off. Where that is not enough, first ask employees to voluntarily step down from their unnecessary positions – and offer them a fair golden handshake.

6. Reassess investment planning
Postpone all investments that are not absolutely necessary right now. Nevertheless, continue to invest in anything that will sustainably separate you from your competitors.

7. Set new foundations for the business
If cutting costs alone is not enough to compensate for declining sales, you will need to take the lead in implementing structural changes to make the company profitable again. Structural changes are painful. You will need to reduce business activities to a healthy minimum that can operate profitably on its own. This usually means eliminating departments, products, services, branches, and state activities that incur losses and have low margins, thus also reducing complexity. The result is a significant drop in sales – but also (hopefully) a profit margin that will remain positive in the long term.

8. Involve the creditor as a true partner
Every successful restructuring should be carried out with the help of a reliable bank that acts as a true partner. Some investments will need to be made to close parts of the business, resolve severance payments, bridge liquidity, etc. Better than borrowing would be financing through bond issuance, although this is often not available in the short term, dictated by the crisis situation. Financing through bond issuance allows you to avoid piling up debt and also gives you a truly committed strategic partner who shares your interests and can help you steer your business forward.

In cases of complex restructuring, one bank is not enough. Therefore, it is recommended to call in an impartial, external mediator who can professionally guide the entire process.

9. Develop a realistic business plan
The business plan includes the effects of all previous steps and contains appropriate scenarios (so you know what to expect). It is the foundation for all moves for financing and improving your business. All steps outlined in points 1 to 8 must be realistically quantified and must fit into the ‘restructuring business plan’. On that basis, you can negotiate with banks, communicate your intentions, and monitor your success. Ideally, your plan should include two scenarios. One should reflect realistic figures, while the other should anticipate slow and weak implementation and factors in unexpected market development risks. This will give you a clear picture of where you currently stand and in which direction you are heading. It helps you focus yourself, employees, and other stakeholders on a common goal: creating a successful future for your company.

10. Communicate honestly
Do not blame the market or other circumstances if your company has fallen into a rut. Take all necessary measures and communicate transparently and honestly. At the same time, never lose sight of your goal. Embracing this approach will smooth the path through tough times and ensure cooperation and support from key stakeholders and partners.