Restructuring must be about more than cost-cutting

When expe­ri­enced finance leader Amr­ish Shah worked at Unilever, he faced the task of restruc­tur­ing its cen­tral Euro­pean ice cream busi­ness due to rapid­ly melt­ing prof­its. Some com­pa­nies may have con­cen­trat­ed only on cut­ting costs in such a per­ilous sit­u­a­tion.

But a cost-only focus would nev­er have suf­ficed as it risked weak com­mit­ment or even resis­tance from employ­ees, with no brighter future to inspire them, says Shah.

“Instead, we decid­ed the restruc­tur­ing plan must go hand in hand with a five-year strat­e­gy of rein­vest­ing ben­e­fits to deliv­er a win­ning, thriv­ing organ­i­sa­tion. It was reward­ing to be part of that com­pelling change nar­ra­tive.”

The out­come was Unilever was able to action most of the restruc­ture plans with­in two years and finan­cial results were in line with, or bet­ter than, the busi­ness case. You might say they had it licked.

Need to cut costs is a pressing dilemma

This is a famil­iar dilem­ma for many finance and oper­a­tions lead­ers, but it is becom­ing more urgent in the coro­n­avirus pan­dem­ic. Many are under intense pres­sure to cut costs quick­ly. But if they do it too hasti­ly, it could dam­age the company’s long-term prospects.

Shah says, as organ­i­sa­tions have become more sophis­ti­cat­ed, agile and respon­sive to mar­ket needs, busi­ness restruc­tures should now aim far beyond sim­ple capac­i­ty and head­count reduc­tion. Unless it is a des­per­ate bid for short-term sur­vival, the main goal should be to improve long-term health and capac­i­ty.

Such a strate­gic focus could encom­pass many fac­tors, such as free­ing cap­i­tal to invest in growth, divest­ing units that no longer fit your port­fo­lio, strength­en­ing sup­ply and dis­tri­b­u­tion net­works, reduc­ing risk or boost­ing com­pet­i­tive­ness.

For exam­ple, a restruc­ture fol­low­ing a merg­er could cre­ate cost syn­er­gies. But a high­er pri­or­i­ty should be to boost com­pet­i­tive­ness by, say, increas­ing influ­ence with dis­trib­u­tors and enabling the new group to com­mer­cialise its intel­lec­tu­al prop­er­ty across geo­gra­phies.

COVID triggers mass restructuring

COVID-relat­ed uncer­tain­ty is trig­ger­ing a vast array of busi­ness restruc­tur­ing activ­i­ties. These range from for­mal insol­ven­cy pro­ce­dures to restruc­tur­ing debt, redesign­ing oper­at­ing mod­els and sup­ply chains, man­ag­ing new areas of risk and nego­ti­at­ing long-term stake­hold­er sup­port.

But, too often, lead­ers are forced to react to the cri­sis so quick­ly that they act irra­tional­ly. For exam­ple, they forego strate­gic analy­sis for an eas­i­er top-slic­ing approach, cut­ting a set per­cent­age of costs from every depart­ment.

This sweep­ing approach often fails because it removes crit­i­cal areas that sup­port future sales or growth. For exam­ple, remov­ing a company’s prod­uct devel­op­ment team may improve short-term prof­it, but bad­ly dam­age future sales.

To man­age this chal­lenge, chief finan­cial offi­cers should start by run­ning a thor­ough strate­gic analy­sis of every cost in the busi­ness, esti­mat­ing the long-term effect of cut­ting each on met­rics such as sales, prof­itabil­i­ty and cus­tomer loy­al­ty.

Ben Col­lett, man­ag­ing direc­tor of UK advi­so­ry at Duff & Phelps, says: “When mar­kets change rapid­ly, com­pa­nies often need restruc­tures to define and accel­er­ate the oper­at­ing and finan­cial respons­es need­ed. They may need to reduce costs in line with low­er demand or prices, or make costs more flex­i­ble to match uncer­tain demand.

“But suc­cess­ful busi­ness restruc­tures tend to fea­ture much wider strate­gic goals that posi­tion them for future growth. These may include cus­tomer ser­vice improve­ment, new prod­uct devel­op­ment, invest­ment in plant and machin­ery, sup­ply chain stream­lin­ing and work­ing cap­i­tal effi­cien­cy.”

A cur­rent exam­ple is the risks high­light­ed by the pan­dem­ic of using sup­ply chains in far-off coun­tries. If such a chain breaks, it could take weeks or months to restart, over­shad­ow­ing cost-sav­ings ben­e­fits.

Many busi­ness­es are look­ing to move sup­ply chains near­er their home mar­kets, enabling them to fix dis­rup­tions faster, flex for demand changes, and reduce stock and work­ing cap­i­tal.

Suc­cess­ful busi­ness restruc­tures tend to fea­ture much wider strate­gic goals that posi­tion them for future growth

Andros Payne, man­ag­ing part­ner at advi­so­ry firm Humat­i­ca, says anoth­er oppor­tu­ni­ty comes from the dra­mat­ic accel­er­a­tion of tech­no­log­i­cal advances and learn­ing dur­ing the pan­dem­ic, for exam­ple with col­lab­o­ra­tion tools and online retail apps.

“That has opened an oppor­tu­ni­ty to rethink the organ­i­sa­tion­al set up for many,” he says. “But too often com­pa­nies for­get such strate­gic ben­e­fits as they rush to cut costs.”

Avoiding cost distraction

Robert Schach, man­ag­ing edi­tor at Debtwire, says the goal of many cur­rent restruc­tures is to ready busi­ness­es to bounce back in an eco­nom­ic recov­ery.

“There will be a pent-up demand after the lat­est lock­downs,” he says. “If you think your earn­ings can return to pre­vi­ous lev­els, you can avoid the dis­trac­tions of cost-cut­ting pres­sure. Focus on man­ag­ing your liq­uid­i­ty and post­pon­ing rather than cut­ting costs, for exam­ple through tax defer­rals. This will allow you to focus on more core strate­gies.

“If you antic­i­pate more long-term dam­age, for exam­ple in the hos­pi­tal­i­ty and air­line sec­tors, you may have to look more at your cost base and or need a finan­cial restruc­ture.”

Tackling management team challenges 

Shah says busi­ness restruc­tures are usu­al­ly painful for any organ­i­sa­tion due to the asso­ci­at­ed uncer­tain­ty and impact on peo­ple. They can low­er moti­va­tion among employ­ees, cus­tomers and sup­pli­ers, because they can­not see what is in it for them.

He rec­om­mends doing the hard work first to iden­ti­fy the exact prob­lems to fix, com­mu­ni­cat­ing trans­par­ent­ly and empathis­ing with indi­vid­ual and team con­cerns.

“Artic­u­late clear­ly the change in direc­tion and why it is nec­es­sary for the organ­i­sa­tion to thrive in future,” says Shah. “It may take time for stat­ed ben­e­fits to mate­ri­alise, so mea­sure inter­im oper­a­tional per­for­mance and progress as suc­cess mark­ers, shar­ing progress reg­u­lar­ly.

“Keep remind­ing all stake­hold­ers of the over­ar­ch­ing nar­ra­tive and check its impact on morale and dai­ly focus. Min­imis­ing per­son­nel loss­es also implies you will sup­port growth oppor­tu­ni­ties for key per­son­nel. All these things will build trust and uni­fi­ca­tion.”

Anoth­er dan­ger in restruc­tur­ing is doing it too late to catch up with mar­ket changes. Com­pa­nies often restruc­ture only after they have start­ed expe­ri­enc­ing finan­cial pain.

Payne says: “It usu­al­ly takes time for a new organ­i­sa­tion­al set-up to become ful­ly effec­tive. So it is crit­i­cal to antic­i­pate future cus­tomer needs and com­pet­i­tive moves to align the busi­ness in advance.

“Lead­ers also tend to under­es­ti­mate the dis­rup­tion involved. They think it just involves shift­ing employ­ees into new silos. They miss the impact of changes on man­age­ment process­es and inter­ac­tions at low­er lev­els in the organ­i­sa­tion. It is impor­tant to work out the details around that impact before a new set-up goes live.

“This cre­ates lots of work on top of busi­ness as usu­al. Man­agers most­ly do not ded­i­cate enough time to it. But it can avoid poten­tial­ly dis­as­trous con­se­quences.”

Yet anoth­er chal­lenge is that lead­ers can be reluc­tant to involve oth­er man­agers in their plans, fear­ing biased think­ing or pre-emp­tive res­ig­na­tions.

This is a fun­da­men­tal error, says Payne. Man­agers at dif­fer­ent lev­els under­stand the trade-offs, costs and poten­tial gains of pro­posed changes bet­ter than any­one.

“But poten­tial adverse effects can cloud their think­ing,” he says. “The chal­lenge is there­fore to set up a col­lab­o­ra­tive, evi­dence-based, non-threat­en­ing process with man­agers to define the new struc­ture.”

Strategising for financial and operational success

Before you start any reor­gan­i­sa­tion, analyse your cus­tomers’ future needs and pref­er­ences over var­i­ous time hori­zons and align the planned new struc­ture with these.

“If exe­cut­ed and com­mu­ni­cat­ed well, every­one knows their role, who they report to, what you expect of them, what has changed and how their per­for­mance will be mea­sured,” says Payne. “All these things are worked out before­hand, with the account­able man­agers, to avoid dis­rup­tion lat­er.”

Though a sin­gu­lar cost-cut­ting focus is unde­sir­able, analysing cost com­pet­i­tive­ness is cru­cial because a lack of it can be a weak­ness. 

Julian Geth­ing, cor­po­rate restruc­tur­ing part­ner at McK­in­sey & Com­pa­ny, says if com­pa­nies can­not com­pete on costs, they need to be more agile, focus­ing on areas such as qual­i­ty and ser­vice to jus­ti­fy a high­er price.

Inno­va­tion is also key to catch up or leap ahead, for exam­ple cre­at­ing a strate­gic advan­tage through dig­i­tal routes to mar­ket.

Find­ing suc­cess through restruc­tures is a nev­er-end­ing task, though. “Busi­ness­es face ever-chang­ing macro envi­ron­ments and cus­tomer and com­peti­tor behav­iours,” Geth­ing cau­tions. “Achiev­ing strate­gic goals requires con­tin­u­ous improve­ment. Once you think you have fin­ished, start again.”

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Solar panel merger shines with empathy

Nether­lands-based Esdec is an excit­ing exam­ple of restruc­tur­ing for growth. In the last 14 months, it has shone in the US solar pan­el instal­la­tion mar­ket after acquir­ing and restruc­tur­ing three local com­pa­nies. There were no redun­dan­cies and Esdec nev­er com­mu­ni­cat­ed cost-cut­ting as a ben­e­fit.

All three com­pa­nies were grow­ing and com­pet­ing, with over­lap­ping cus­tomer bases. This allowed the new team to cut costs by con­sol­i­dat­ing dis­tri­b­u­tion and sup­ply. But it was not the strate­gic aim, says Sti­jn Vos, Esdec’s chief exec­u­tive.

“The strat­e­gy was to reduce risk by mak­ing our sup­ply chain more reli­able,” he says. “We start­ed as a small cus­tomer for lots of sup­pli­ers. The restruc­ture enabled us to cut sup­pli­er num­bers and build bar­gain­ing pow­er. This made us more reli­able, reduced our deliv­ery time from four­teen to ten days and enabled our dis­trib­u­tors to reduce stock lev­els and be more flex­i­ble with cus­tomers.”

The result was that cus­tomer feed­back scores improved every quar­ter and the firm has grown rapid­ly this year, despite the coro­n­avirus pan­dem­ic.

“We under­stood the impor­tance of being close to cus­tomers in this mar­ket,” says Vos. “Before the reor­gan­i­sa­tion, we sur­veyed and inter­viewed lots of cus­tomers. They want­ed reli­a­bil­i­ty. So we imple­ment­ed a sys­tem that mon­i­tored reli­a­bil­i­ty from the customer’s view and it is increas­ing now.”

To avoid dis­trac­tions from the strat­e­gy, Vos placed the most strate­gi­cal­ly-mind­ed peo­ple in charge of each unit and had them mon­i­tor progress against tar­gets reg­u­lar­ly.

“Bring­ing three com­pa­nies with very dif­fer­ent cul­tures togeth­er was com­pli­cat­ed,” he says. “I decid­ed to move my fam­i­ly from the Nether­lands to Amer­i­ca to lead the tran­si­tion. You need a par­tic­u­lar knowl­edge to under­stand and run this busi­ness. I knew I couldn’t man­age it from over­seas.

“Doing that meant the com­pa­nies could see we were all in this togeth­er and it helped break cul­tur­al bar­ri­ers. Anoth­er thing we learnt was that trans­par­ent and con­sis­tent com­mu­ni­ca­tion is vital. For exam­ple, I sent a month­ly let­ter to every­one about actions and progress to keep telling the sto­ry.”

Andros Payne, man­ag­ing part­ner at advi­so­ry firm Humat­i­ca, which advised on the reor­gan­i­sa­tion, says Esdec is one of the most excit­ing restruc­tures for growth he has seen.

“The chief exec­u­tive and the pri­vate equi­ty own­er both have high emo­tion­al intel­li­gence and empa­thy,” he says. “The CEO was able to antic­i­pate per­son­nel issues and head them off ear­ly. Despite all the ten­sions in the room, a sen­si­tive leader can make it work like a beau­ti­ful orches­tra.

“They also took time upfront to get deep trans­paren­cy among the three com­pa­nies, to under­stand each other’s cul­tures and ways of work­ing, which pro­mot­ed trust and col­lab­o­ra­tion. The com­mu­ni­ca­tion was all about poten­tial growth and becom­ing the mar­ket leader. When the com­pa­nies realised they shared the same vision and could achieve it faster togeth­er, that was pow­er­ful.”

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