For the first months of the lockdown, most companies focused on taking the pulse of the organization, grasping the health crisis, making sense of government programs, and putting in place infrastructure and processes to work from home. Very little thinking went into the question: What will our organization look like going forward?
As the pandemic continues, a massive restructuring of the economy is already underway. Companies in many sectors are starting from a zero basis of activity, which is daunting, but this gives them license to reinvent their organizations in ways not previously available to them except in their imaginations. It's an opportunity, but perhaps also a necessity for survival: companies must rethink every aspect of the previous business-as-usual, from finance to operations to products to people.
Pre-pandemic economic landscape
Even before the onslaught of the virus, the 2020 economy was looking dicey. In October 2019, the International Monetary Fund (IMF) voiced ¨concerns about downside risks to the global economy.¨ It cautioned that rising debt burdens—fueled by low interest rates—and deteriorating debt servicing capacity would put forty percent of total corporate debt, or approximately $19 trillion USD, at risk of default in major economies such as the US, China, Japan, Germany, Britain, France, Italy and Spain.
With corporates already increasingly stressed, the arrival of COVID-19 was like pouring gasoline onto a fire. In the first half of 2020, bankruptcies rose in Japan for the first time in 11 years. In the US, through September, more large companies (those that earn $1 billion USD or more) filed for bankruptcy than ever before with 45 such cases. Overall, global insolvencies are projected to grow by least 26% by year's end.
Seizing the opportunity
In this environment, It's hard to think of a company that isn’t having to make dramatic transitions – in a matter of weeks, not months – in any scenario: whether the company is optimizing itself to survive and continue on, preparing itself for sale, acquiring crucial new competencies, or whether it's been recently acquired. To be successful, these transitions require clarity of vision, a decision-making process that arrives at conclusions quickly, line-of-sight into the operational factors that led to the current predicament, and an understanding of how the market context will change over the near, medium and long term.
In all of these circumstances, there are three fundamental areas companies must focus on to successfully reconfigure and emerge from this crisis stronger:
- Buy time and space for transformation with liquidity strategies. Every corner of the organization must be scoured, but beyond that, companies have to be creative in addressing “blind spots” in cash visibility and finding non-obvious sources of capital.
- Locate, and then quickly execute on opportunities to rapidly improve performance. Companies must take a full-spectrum approach covering all relevant top-line and bottom-line areas to rapidly transform overhead costs and improve performance.
- Align the talent platform with the operating platform. Company leaders must assess the necessary skills, competencies and knowledge required to make the transformed business successful. In most cases, those needs will have shifted.
Pragmatism, clarity, speed of decision-making, and sharpness of execution are fundamental in each of these exercises.
Improvement of liquidity is dependent on an assortment of actions and levers available to distressed organizations, which vary greatly in overall impact, effort needed, timing, and risk. Companies must address “blind spots” in cash visibility and identify sources of liquidity the company is not recognizing. As one example, insurance captives can make loans to parent organizations or invest in other parent company assets, including real estate and trade receivables. Companies need to develop tracking procedures using forward-looking indicators and early warning signals related to cash and working capital to ensure sufficient cash reserve availability.
Alignment across the board and executive team is vital. Senior leadership must quickly agree on liquidity thresholds, define scenarios, and estimate the relative costs and benefits of different levers. Leaders must then formalize required protocols within a governance playbook defining a prioritized plan to address immediate, medium-term, and long-term gaps. Finally, they must sort-out workforce costs in a way that preserves talent crucial to a well-defined business strategy.
Key liquidity questions distressed companies often ask themselves:
- Should we sell assets to preserve a smaller yet viable business? If yes, which assets should we sell?
- Should we do a capital raise or draw from lines of credit? Do we have a sufficient line of credit from which to draw?
- Should I discontinue financing for customers?
- Are there ways to reduce workforce costs as well as retain the right people whom we will need to return to profitability?
Rapid Performance Improvement
Lenders, investors, shareholders, and potential buyers will first look to metrics related to EBITDA to get a sense of the health and value of the company. Companies must take a broad view across the organization and first isolate the functional areas where optimization can produce immediate impacts. This buys time. The goal is to produce the flexibility needed to create longer-term value gains.
Like liquidity improvement strategies, EBITDA improvement opportunities are not always obvious. The distressed organization must swiftly assess where it can strip out cost without compromising value. Seizing on these opportunities will help calm stakeholders, or else boost the valuation of the company to attract buyers prior to a sale. An improvement plan for an acquisition target that can be quickly executed post purchase, especially in the current global situation, is key to an investment thesis. Buyers can confirm the areas ripe for uplift during due diligence.
There are things that can be done right away, like centralizing the procurement process and reducing indirect spend. Sourcing as a whole represents an opportunity for fast gains. Meanwhile, a pricing and customer profitability analysis often reveals paths to boosting margins quickly. Optimizing supply chain and logistics typically uncovers openings to strip out cost, such as stock reduction strategies and better planning based on more concise demand forecasting. Companies should also assess how they can streamline product development, optimize real estate and footprint, and hone the manufacturing process, among other areas.
Aligning the talent platform with the operating platform
When optimizing a business, even if survival is the focus, the assumption is that the transformed enterprise will sustain and flourish over the medium and long term. In order to ensure that occurs, organizations must apply the same analytical rigor they have applied to liquidity and performance improvement exercises to their primary value driver, their people. A company in transition won´t create sustainable accretive value and competitive differentiation over the long term unless its talent platform is congruent with the newly optimized business model.
The results of all employees´ tasks must align with and support the company´s business objectives. If those objectives, outputs, or the means by which they are achieved shift, then tasks and talent requirements shift as well for optimal results. Those new requirements must be understood in real time; the company can´t lag in identifying them and locking them in.
Company leaders must know which teams and individuals, more importantly which capabilities and capacities have most impacted their past and present value. Further, how has the present situation changed that equation? Needs are likely not the same as they were just a short time ago. Finally, what will the new business model require? Which elements currently exist in the organization, what must be acquired, and how can that be done without greatly affecting the cost the company has worked so tirelessly to reduce?
What makes the current environment unique is its suddenness. Firms’ nosedive into the financial danger zone has been startlingly abrupt. Some are prepared to withstand it, either by preparedness or good fortune. Others now find themselves in circumstances wholly unfamiliar, navigating uncharted waters. Many companies must reinvent themselves to survive and prosper beyond the Great Restructuring, and in many cases that transformation is already underway. Time is of the essence. Nuanced liquidity strategies are crucial for creating the breathing room necessary to execute transitions. Quickly finding ripe opportunities to increase EBITDA and implementing them efficiently will buy time and confidence. Finally, ensuring that the workforce strategy is drawn up and carried out to drive home the business strategy, and at the same pace, will determine success. Boldness in all phases is the only option.