In search of growth

In an era of persistent weak demand and conditions of oversupply, organisations continue to find new ways to save costs and gain efficiencies. Domini Stuart reports.

In the heady days just before the global financial crisis, restructuring was practically synonymous with growth. Today, boards are more likely to turn to restructuring as a way of cutting costs and improving efficiency.

“In this sense, restructuring is a continuous process in most large organisations – many employ a business improvement team to ensure they take a systematic approach,” says Terry McGuirk FAICD, managing director of McGuirk Management Consultants. “But a lot of the larger-scale restructuring we’re seeing at the moment is an attempt to halt a decline.”

However, the board of a company in serious financial stress does not have the luxury of time. “The directors must act immediately to stop the bleeding,” says John Park, senior managing director of FTI Consulting. “This means making difficult decisions fast and adopting an unrelenting focus on cash.”

Companies under less duress can approach the process more thoughtfully, identifying the associated risks and considering how they can best be mitigated. “In the short term, risks tend to revolve around business dislocation, confusion and ‘FUD’ – fear, uncertainty and doubt,” says Ian Watt MAICD, vice-president APAC at technology solutions company InEight Inc. “Sales or productivity can stagnate, employee morale can be eroded due to uncertainty and key staff can become skittish and start looking elsewhere.

“Over the longer term, the worst outcome would obviously be that the end state is no better than the before state.”

Watt adds: “Risk is inherent to any change in an organisation but I believe that the primary threats can be overcome with thorough planning and due diligence in the preparatory phase.”

Early mistakes

McGuirk agrees that the biggest mistakes are usually made in the early stages. “It could be that the decision to restructure is a mistake in itself,” he says. “Once directors have clarified what they want to achieve they should think about possible alternatives to restructuring and encourage management to do the same. Restructuring is often the most obvious course of action, but not always the best.”

Any plan put forward by management must address the root causes of problems within the organisation. “Directors need to satisfy themselves that senior managers have asked the difficult questions and that the plan shows no evidence of anchoring bias or favouritism,” says Park. “It must also have a realistic time-frame and budget. One of the most common mistakes is to underestimate both the time and money needed to see it through.”

One of the board’s first tasks is to decide whether management has the appropriate experience, skill set and independence to lead the project and, if not, appoint someone who has, such as a chief restructuring officer.

“You need someone in charge who has the capacity to listen and analyse and also make quick and decisive decisions,” says Park. “As the project progresses, the focus will shift from crisis management, stabilisation and securing buy-in from employees and external stakeholders to growth. This requires different thinking and it’s up to the board to recognise when the change occurs and, if necessary, appoint a new leader.”

The board must also resist the temptation to micromanage or burden management with requests for non-essential reports and information.

“Trust your team, provide them with the necessary resources then leave them to get on with executing the plan,” says Park.

Finding a balance

Some companies undermine the restructuring process by attempting too much too soon. “When changes are too big to be assimilated, or people’s work life is affected before they are properly engaged, you can have a backlash that depletes your value very quickly,” says Paul Bakker MAICD, lead partner, business advisory at accounting and consulting firm Crowe Horwath in Sydney.

Others do too little too late. “It’s like death by a thousand cuts,” says Watt. “The longer a restructure takes, the more it costs, the more likely you are to lose key people and the greater the risk to your reputation. I believe that, once you’ve decided to go ahead, you do it once and you do it cleanly.”

While the board is walking the fine line between the two it must also safeguard the company’s operational rhythm. “If the business is temporarily out of action, or just not operating at full strength, clients and customers may look elsewhere,” says Bakker. “Once they have defected it can be very hard to win them back.”

Scenario testing is critical at the planning stage and can also help the board and management to remain agile and responsive.

“Restructuring is a dynamic process and a good board will remain open to changing scenarios,” says Bakker. “The American futurist Alvin Toffler said that the illiterate of the 21st century will not be those who cannot read and write but those who cannot learn, unlearn and relearn. I think a board with the ability to unlearn and relearn during a restructure will be of the greatest benefit to the organisation.”

Managing the culture

Some of the board’s most significant challenges concern people and the culture of the organisation. “In the first place, directors need to establish whether culture is part of the underlying problem,” says McGuirk.

“If it is, the restructure needs to fix it. If it isn’t, there’s a danger that the restructure will do damage and, as a consequence, the wrong people will leave. Either way, it’s important to remove people who oppose the change empathetically but quickly before they have a detrimental effect on overall morale,” he says.

The most effective way of gaining support from employees at all levels of the organisation is to get them involved, particularly at the diagnostic and planning stage.

“It is absolutely essential that there is ongoing and open communication between managers and employees, especially early on in the process where anxiety tends to be the highest,” says Park.

They are far more likely to view change in a positive light if they believe their opinion has value. “I’m on the board of an organisation that will be moving into a new head office in a few months’ time,” says McGuirk. “This isn’t restructuring in the traditional sense but, as our people are going into a flexible environment with no permanent desks or work stations, it will involve a massive change in the way they work. We have set up a space where they can try this out for a week and we plan to make adjustments based on their feedback. There’s no point in collecting feedback unless you’re prepared to act on it,” he adds.

Pulse surveys can keep directors in touch with how people are responding to change and Bakker has seen some boards extend direct representative channels deep into the organisation.

“This gives directors access to information that hasn’t been filtered through management,” says Bakker. “It can also give employees an insight into the vision and intentions of the board.”

Keeping stakeholders informed

Good communication also plays a vital role in maintaining relationships with external stakeholders. As these could include governments, regulators, shareholders, financiers, customers and the media, this needs to be handled carefully.

“Different stakeholders have different priorities and your communications need to reflect this,” says Park.

The board as a whole may be involved in shaping the message but for the sake of consistency, the chair and chief executive officer should be the designated spokespeople.

“It’s their role to be active with stakeholders so it’s important that you have the right people for the job,” says McGuirk. “I’m on the board of a company that started a restructure by bringing in an independent chair with good political contacts. We needed someone who could help us communicate effectively with stakeholders in general and the government in particular.”

Watt believes that messages should be strong, clear and candid. “People like straight shooters,” he says. “When you tell it like it is there’s a much greater chance of people believing and trusting what you’re saying when the news is bad but necessary as well as when it’s good.”

Good news encourages optimism and it can also be used to strengthen the brand. “If you’re doing something innovative, for example, you can talk about it in a way that builds your reputation for thought leadership and positions you as a market leader,” says Bakker.

Rewards for effort 

McGuirk once helped a client to consolidate four businesses into one. For 12 months, senior managers worked long hours in order to meet all of their targets. When the restructure was complete, the board announced that, as times were tough, there would be no financial rewards for their achievement.

“Their effort wasn’t even acknowledged, and I think that was a critical error,” says McGuirk. “When you ask people to work exceptionally hard on a restructure there’s a very big risk that you will lose them if you don’t build recognition and reward into the process.”

Some companies use “golden handcuff’”agreements to ensure they retain key staff and Watt recommends that they offer both short-term and longer-term “earn-out” components.

“All rewards should be aligned with clear and quantifiable objectives,” says Park. “It’s also important to focus on the measures that tell you whether the plan is being executed successfully. Too many measures can become confusing and lead to over-analysis, which is more likely to hinder than aid decisive decision-making.”

Directors must also remain cognisant of the behaviours they are encouraging.

“A ‘win at all costs’ approach from executives can do more harm than good,” Park continues. “The board needs to find the right balance between securing short-term results and preserving long-term viability.”

Few major restructures will unfold exactly as planned.

“Most boards find themselves in the trough of despair at some point,” says McGuirk. “But, even in the most challenging situations, I can’t stress enough how important it is that directors stay confident and decisive. That doesn’t mean sticking rigidly to a plan that’s clearly not working – the board must always be ready to reassess – but, if you believe your strategy is right, you need to show you’re confident of the outcome and that you have trust in your management team.”

Questions to ask before signing off on a restructure

1. Do we have the skills and experience needed to carry out a restructure – should we seek input from external advisors?

2. Have we considered all possible alternatives to a restructure?

3. Is a restructure in the best interest of all of our stakeholders?

4. Is the plan appropriate, affordable and achievable?

5. Have we identified all of the risks and developed strategies to mitigate them?

6. Do we have an accurate picture of the company’s current strengths and weaknesses and a clear vision of what we want to achieve?

7. Do we have a clear reporting cycle that will identify whether key milestones are being achieved?

8. Do our managers have time for all of the extra work? Should we consider getting outside help to ensure the day-to-day operations of the business don’t suffer while they are busy elsewhere?