In today’s challenging business environment, several factors carry potential risks even for successful companies. As a PwC study notes, those lying on the surface include worldwide economic instability; growing competition; changing legal requirements; and continuous technological progress. In this context, restructuring often comes into play.
However, timely measures – in the form of strategic restructuring guided by professional financial advisors – can help companies to find new opportunities, develop strong points and, as a result, improve overall performance.
What strategic restructuring is
Whenever the economy goes through a period of slowdown or recession, you start to hear about restructuring. Yet whether you are in a company that is going bankrupt, getting out of bankruptcy or in the midst of bankruptcy, restructuring services can revitalise the business. Restructuring is not necessary synonymous with bad news; for example, such US blue chip giants as American Express, Hewlett-Packard and Alcatel Lucent had to go through restructuring in order to maintain their positions in the market.
Businessdictionary.com gives a wide definition for the term ‘restructuring’: Bringing about a drastic or fundamental change that alters the relationships between different components or elements of an organisation or system.
This stressful definition describes the procedure itself without mentioning such crucial steps as preliminary assessment, working out a proper plan and analysis of effectiveness. Figure 1 below shows how it should normally work in companies:
Figure 1: The process of strategic restructuring
Who might need strategic restructuring services?
The number of managers who repeat the same fatal mistakes when faced with financial decline is amazing. They take rush measures and act without any contingency plan, condemning their companies to even bigger problems. In such cases, consulting the opinion of an independent professional third-party can help company to recover.
In the meantime, prosperous firms which think their potential allows them to perform better also resort to the services of financial advisors. Thus among clients of strategic restructuring services, there are relatively successful companies of different sizes, both listed and unlisted.
Measures to remedy the company’s financial situation: common mistakes
Analyses of failed companies reveal a variety of mistaken business decisions; among them are the following three:
1. Chaotic staffing cutbacks. A reduction in the number of employees often causes failures in the company’s ability to fulfill commitments to clients. What’s more, it can plant uncertainty in ‘survivors’ which will also adversely affect its business performance; so it has to be a part of a considered, forward-looking plan. For example, when Twitter announced last October that it was laying off 336 employees, or 8% of its workforce, chief executive officer (CEO) Jack Dorsey explained the rationale behind the cuts simply: “The company intends to reinvest savings in its most important priorities to drive growth.”
2. Inability to recognise assets. On the one hand, it is not that easy to think of hidden benefits when everything goes awry; on the other hand a financial crisis is an opportunity to reflect on unrecognised potential. Business management consultants insist that employees should, first of all, be considered as assets whose talents can be used as competitive advantages. A 2013 survey by talent measurement solutions provider CEB found out that 77% of human resources (HR) professionals worldwide had no idea about how personnel influences a company’s performance and less than half of the companies interviewed took into consideration the talents of their employees when making important decisions.
3. Inefficient reinvestments. While companies reduce their investments in periods of crisis, these reductions shouldn’t be equal. A study by Harvard Business School assistant professor Claudia Steinwender found that firms behaved rationally prefer to cut less severely the short-term investments that keep them going. Based on her research Mrs. Steinwender claims that the companies undergoing financial difficulties typically reduce their long-term investments by 10%-40%, which is on average 17% more than their shorter-term ones.
How does a restructuring advisor work?
When a restructuring advisory firm is hired by a company, it might be for several reasons. Most of the time it will negotiate with creditors on the best deal possible; sometimes in the form of forgiven debt. That goes through finding how best to restructure the company’s current debt obligations. However, valuation and modelling remain the core task for analysts when working on underperforming divisions. Restructuring firms generally work closely with the company’s management, helping to stabilise financial and operational performance by implementing working capital plans and, in turn, to restore creditors’ confidence. In this framework, drafting a clear timetable of results achieved is key.
Even if crisis recovery presents a challenge, never forget that the game is far from over unless or until all options are exhausted. Some changes have even occurred since the 2008 global financial crisis, according to restructuring professionals.
Robert Bartell, managing director at valuation and corporate financial advisor Duff & Phelps, observes: “There is an awareness within the financial community, whether you are a creditor, lender or equity owner. If there is a financial dilemma within a company and they are facing insolvency, the stakeholder increasingly tries to come up with a consensual solution that is in the best interest of the company. That involves negotiation, but also being financially sophisticated about the alternative options available to a company and the financial claimants.
“Clients expect the best, i.e. technical experts who have the highest standard of professionalism, who can protect confidentiality, but also who can be pragmatic. There are a lot of variables in transactions and structuring deals and in evaluating alternatives. Combining rigorous technical analysis with a thoughtful, pragmatic, client approach is essential.”
Global recovery since the 2008 crisis has been sporadic at best and the current economic atmosphere is still far from favourable for the development of business. Standard patterns, which have proved effective in better times, don’t work anymore. The best thing that distressed companies can do now is undertake careful analysis of the situation and smart restructuring under the guidance of experienced financial advisors.
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