More than just cost cutting

Matthew Sainsbury provides some tips on how to restructure your business successfully ahead of an eventual rise in Australian business confidence.

Business confidence and the economic climate remain very sketchy in Australia and the flow-on effect from struggling sectors is affecting the ability of all domestic businesses to look towards growth.

For instance, with car manufacturers withdrawing operations from Australia, local car component manufacturers are faced with a raft of new business challenges. These boil down to the need to adapt and find a more global market, or die.

The businesses that rely on these manufacturers, in turn, will need to diversify their own businesses in order to account for the expected consolidation in the space.

Elsewhere, retail, Australia’s largest employment sector and often used as a gauge of the health of the local economy, has struggled following the federal Budget. Australian Bureau of Statistics (ABS) figures show national retail revenues fell 0.5 per cent in May (seasonally adjusted). This comes after a 0.1 per cent fall in April and represents the single largest drop in retail spending for more than a year.

A drop such as this has a flow-on effect across the entire supply chain. The hardest hit areas were department stores (-2.6 per cent in May) and clothing and footwear (-2.3 per cent).

These dips in spending are significant enough to materially affect the bottom lines of local vendors and manufacturers, logistics companies and tangential sectors such as advertising.

In such a climate, the overwhelming temptation for many businesses in Australia will be to restructure in order to cut costs out of the business. But this might not be the wisest course of action, given that many Australian businesses are already running lean following the global financial crisis and subsequent economic uncertainty in Europe and Asia.

Further cuts may start to eat into important business competencies.

“Often companies will look to a restructure more as a kneejerk response,” says Brett Cox, partner at Accru Felsers Chartered Accountants.

“But the costs of redundancies can really amplify the costs to the business, so restructuring to achieve cost cutting should be a last resort plan.

“This kind of restructuring also has the very real risk of alienating clients and shareholders. In some instances, even the various levels of government can be upset by a restructuring strategy, so businesses also need to be keenly aware of these risks and the consequences if they do offend interest groups in the process.”

Cox says it is important to understand the context that has led management or the board to decide that a restructure would be the best course of action. Then communication to all key stakeholders should be of paramount importance.

“A communication strategy to ensure that everyone is involved would be wise,” he adds.

“Ensuring there is input from all levels of the organisation and that there is a wide-ranging strategy that takes into account those various concerns will help to mitigate the reputational risk in undertaking a restructuring.”

A broad view of restructuring

Of course, a corporate restructuring program does not need to exclusively involve downsizing and job losses.

Many organisations are restructuring their businesses in other ways to modernise and provide them with competitive advantage.

Technology is often seen as a key battleground, with many businesses looking to emulate the success of the Commonwealth Bank of Australia’s globally famous core platform transformation project, which has provided the bank with significant advantages over its competitors.

As an example of how a poorly articulated restructuring strategy can affect a business, superannuation administration company Superpartners, which is owned by a group of not-for-profit retirement funds, was recently forced to suspend a project to build a new core program called spRIGHT after a cost blow-out and other problems. A number of Superpartners owners had signed on to modernise their own systems through spRIGHT.

This highlights why it is so important for organisations to understand the drivers behind a restructuring and to plan for them and the many roadblocks that will inevitably pop up in the process of undergoing a major restructure.

“The board should be able to articulate clearly the strategic rationale behind the restructure,” says Raelene Murphy, managing director of management consultancy 333 Group. “If it is just a cost out exercise, it’s not really a restructure. Both the management and the board need to have a clear understanding of the end game and what the business will look like afterwards.

“This extends to stakeholders. When we see momentum lost in a restructure, it’s often because the organisation has embarked on a restructure that isn’t well understood by the stakeholders.

“The shareholders or lenders might not understand what the restructure is going to achieve and withdraw support, or management might not understand their role in the restructure or the timing and doesn’t commit to the extent necessary for success.

“We see plenty of examples of organisations getting partly through a restructure and by the time staff have been paid redundancies and there’s been some investment in IT or strategic marketing, the business has run out of cash or shareholder support. The streets are littered with businesses that nearly got there,” says Murphy.

She believes the most successful restructures are those where the organisation adopts a properly resourced and long-term perspective with shareholder and lender support.

Too often organisations are limited by a desire to hit targets in time for the next ASX release or financial year close, and this often compromise the ability of the organisation to resource properly and execute on its restructuring.

Get outside help

Another issue that many organisations face when embarking on a restructuring is the additional pressure that it can place on the management team.

As busy as management can be in running the day-to-day business, to burden it with oversight of a restructure can mean that the business begins to flounder as the executives do not give it enough attention.

“A well planned and resourced restructure will recognise the need for external assistance to bring capability, additional resources and an independent view to the process,” says Murphy. 

Boards should ask whether it would be useful to appoint independent management and oversight for a restructuring program, and possibly from outside of the business.

These project managers can be difficult to find, but giving them authority to execute the restructuring to its objectives will prevent a wide range of potential issues that could arise from leaving management in charge.

“Members of management are often responsible for getting the organisation into the mess in the first place, and so clearly they’re not going to be the right people to get it out of it,” says Andrew Whittaker, managing director of management consultancy Azurium.

“It’s not always the case, of course, but the question of whether there is an outside party that would be able to manage the restructure better is quite a fundamental one for a board to ask in the planning stages.”

Even if management is not the root cause of the issue behind the restructure, leaving management in charge of it can weaken the value that the project brings to the organisation, where an impartial third party would be better able to execute the vision.

“Restructuring can also fail when you’ve got ‘sacred cows’ in the business,” says Whittaker. “Often there will be vested interests in running certain parts of the business the way that they’ve always been run, so breaking out of that and getting people to review objectively what they originally put in place can be difficult. Change is never easy, so you want to remove emotion from the restructuring project as much as possible.”

Executed correctly, a restructure can prepare an organisation for the inevitable turn around in business confidence in Australia. At some stage the market is going to be primed for growth again and the experts believe that it is the businesses that have used restructuring to prepare themselves for that growth, rather than simply cut costs to try to ride out the wave, that will be in the best position to capitalise on those opportunities.

Tips For A Successful Restructure

• Accept that you do not know everything.
• Encourage an action orientation.
• Remember that existing management got you into this mess (except in unforeseen or unpredictable circumstances).
• Engage with all key people and experts.
• Plan/resource/monitor/repeat.
• Run effective change management and employee engagement programs.
• Do not get distracted from the core business.
• Choose speed over perfection; rapid completion of chosen initiatives equals early wins.
• Remember that all areas of the operation are open for discussion and review and require an unsentimental view.
• Gain credibility by delivering predicted results.
• Remember that overtaxing the organisation can result in poor results.
• Make the tough decisions.