Vol 7 (2010) - Issue 3

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Have Companies Missed the Boat by not Taking Advantage of the Good Times and ‘Easy’ Lending to Fund Operational Restructuring?

From debt-laden balance sheets to operational underperformance – the focus of recent restructuring cases is shifting, but is it too little too late?
Many companies now at the centre of major operational restructuring programs were riding the finance boom not so long ago – and yet have since found themselves not only over-leveraged but with deep-rooted operational shortcomings. Some of these are legacy issues which were not addressed in the good times and others have come about as markets have changed post crunch.
Why is it that these issues are now coming to the fore? Should they have been dealt with earlier? Have companies missed the boat?
There are several reasons why companies have neglected to invest time, effort and funds in addressing underlying operational issues:
– Stakeholder focus – until the current phase of the economic cycle, shareholder and equity analyst focus was, in general, on top line growth and market expansion. This drove businesses to expand capacity, enter new markets and add more marginal products to their ranges. This looked great in the heady days of 2007 and helped many companies deliver record turnover figures but also drove significant additional complexity and fixed costs into businesses.
– Difficult decisions – When boardrooms are judged and incentivised on short range financial performance, short-term strategies are encouraged. Substantial operational restructuring plans can be costly in the near-term with full benefit not generated until the mid to long-term as transition is implemented. When you combine that with the clear risks, hard yards and potential industrial relations issues in some restructurings you can start to understand why some management teams have shied away from taking decisions.
– Capability, capacity and experience – With a gap of almost twenty years since the last recession, there are few senior management teams with experience of selecting, planning and implementing turnaround programs – today’s senior execs have not built their careers on their ability to deliver large-scale restructurings. Deep operational restructuring is very complex and often involves highly nuanced decisions and trade-offs. Many teams have simply not had the capability to pursue this, particularly if there is a significant financial restructuring underway in the business at the same time.
– Mix – In the roller coaster that has been the last 18 months, many businesses have seen their top line fluctuating substantially and have been occupied with tactically responding to the trading and cash issues that this creates. What they have not always spotted is that underneath the top line, there has often been a deeper change in buying patterns and market behaviour with different products, services and geographies coming to prominence as key revenue and margin generators. If it has not done so already, this will drive management teams to fundamentally rethink aspects of their strategy – driving a greater requirement for operational restructuring.