Recently, many organizations have been stretched to the breaking point as they try to remain cost-effective, agile, and ultimately profitable. Reorganizations have become an unfortunate side-effect of the pandemic, and although the economic outlook appears more positive, the sense of uncertainty will continue.
Many predicted that large companies would need to restructure during COVID-19, but most have remained resilient. However, as government support and capital become more restricted, those with higher debt loads and incurring structural market changes may find themselves in need of help.
Numerous companies took on significant debt during the pandemic. Global corporate debt rose 10% in the one-year period between quarter three 2019 and 2020, compared to 3% to 4% per year in the preceding decade (with no increase following the 2008 downturn). This increased leverage will affect companies’ balance sheets for many years to come. As businesses continue to navigate challenging circumstances and restore value, there is greater pressure to chart a profitable course for the future.
When teetering on the brink of a restructuring process, business leaders must establish a clear vision that restores stability and defines their future business model. In our experience, there are five actions that should be taken to ensure successful restructuring: engage advisors early, create transformational champions, set appropriate targets, have a clear and detailed plan, and recognize the importance of change management.
Early advisor engagement helps preserve strategic options
In all cases, identifying and diagnosing issues early is the best defense. CEOs should always have, and boards often require, a downside plan. With early diagnosis, a company can fully evaluate options and avoid being cornered. Engaging early through an out-of-court restructuring is often the most viable and pragmatic option. Here, having the right advisors is crucial.
Advisors form a three-legged stool: lawyers, debt-advisors, and business consultants, who need to collaborate with company management and with each other. It’s important to select those with experience in restructuring processes and in your specific industry.
Create a leadership team that can drive transformation
At face value, restructuring looks like an economic problem that can be fixed by making swift top-down decisions to address debt loads and pushing through operational changes. However, if businesses are to truly transform, they need to start by finding the right people for the journey.
The first step is to identify and select leaders at each critical level of the organization who can become “change champions.” These well-networked go-to people and opinion makers will embrace the vision, drive the change process, and influence those around them. This strengthens the accountability and viability of the transformation.
For example, a retail client needed to restructure following a multi-year decline in sales. They assembled a transformational leadership team that was fully aligned with the restructuring vision and able to quickly implement a new course for the future. This leadership team and alignment were recognized as a key success factor in the client's return to growth and increase in profitability.
In a restructuring, leaders need to embody, own, and drive the future vision that the organization can rally behind. It’s important to recognize that, in general, not all current leaders are eager to quickly embrace a new vision. Those who are part of the future must also commit to enduring the bumpy ride.
Set strategic targets to improve restructuring performance
The future needs to be different from the past. This can be communicated through financial targets that the company sets and the business strategies it employs.
Targets should be both realistic to ensure credibility and ambitious enough to see that change occurs. Achieving this balance requires teamwork and constructive discussion within the leadership team. Once targets are set, a small number of clear and specific metrics should be communicated and brought to life by business leaders in each area.
During the restructuring process, think outside the box and set demanding goals and milestones that align with your strategic objectives. Envision where you want to be in the future instead of pursuing incremental change based on your current state.
Organizations should be wary of implementing across-the-board cuts during restructuring proceedings. While this may be a common approach, one-size-fits-all reductions can result in departments that are incorrectly sized and poor employee morale. Instead, use a nuanced analysis by function.
One transportation client began its restructuring by benchmarking itself against the lowest-cost competitor in the region and setting bold efficiency targets across every department. Many targets could be achieved immediately, while others required the company to define a plan to overcome roadblocks and reach strategic objectives within six to 12 months. This resulted in near-term cost savings ranging from 20% to 60% across several business functions, with an average cost reduction of approximately 40%.
Drive restructuring success with a clear action plan
When developing an operational turnaround plan, it’s important to gain rapid clarity about future organizational needs, minimizing or eliminating excess wherever possible. Tools such as zero-based organization (ZBO) and zero-based assets (ZBA) can help reach ambitious targets. In a restructuring, it is important to demonstrate to internal and external stakeholders that the organization is prioritizing the highest-impact activities, such as rightsizing the footprint, supply chain, and headcount to align with the future strategy.
These tools can also help either invest in activities central to the organization’s value proposition or eliminate activities that no longer support the strategy. Likewise, it’s important to pinpoint the one-time costs required to implement these changes. Digitization is a crucial enabler of long-term cost reduction; however, it should be used only when the appropriate people and processes are in place.
By using a ZBO approach, two different airlines managed to reduce their management and administrative costs by between 37% and 42%. By categorizing and benchmarking all activities against the CEO’s future-state goals, they were able to differentiate activities that would drive the future business from those that could be automated, simplified, or even eliminated. This combination of process and speed enabled business leaders to make the right decisions rapidly while maintaining alignment with their future vision.
In a restructuring, you also need to move fast. It is critical to maintain a simple, documented list of significant transformational milestone activities and dates for transparency and accountability.
Turn resistance into support through change management
Change is challenging; therefore, engage your employees using reason and emotion to help them embrace the transformation. The most successful change management programs focus significantly on shifting culture, but this change only works if there is a high degree of psychological safety, where employees can vocalize concerns and opinions without fear of repercussion. Listening to ideas for improvement that have been overlooked or thought difficult to achieve is critical, while focusing on the most impactful items.
Careful communication is essential. Before making external announcements, internal changes should be communicated using in-house forums such as townhalls and department meetings. Employee sentiments should be distilled regularly.
Your leaders should be prepared to over-communicate, clearly articulating to employees about the challenges — and the opportunities — that lie ahead as the turbulent times pass. Empathy and humility are important traits that reassure your people that leaders support them despite the hard decisions.
How restructuring creates a stronger future business
While in the very short term “cash is king,” in a major restructuring, it is vital that the collective team focuses on maximizing long-term value, which supports the strategy. This sets the context of the entire transformation and allows employees to feel a sense of ownership rather than resist change. Done well, it gives leaders the opportunity to reframe the organization for a more resilient future.
Originally published in August 2021.