February 7, 2012
Business Realignment Strategies: An Executive Briefing
Distress in U.S. financial and credit markets continues today, with economic uncertainty likely to persist throughout 2012 due to election year politics and growing concerns about global markets. Businesses continue to be negatively impacted by market uncertainty, high unemployment effect on consumer spending, supplier constraints, lack of credit availability and inadequate liquidity. These economic and business conditions warrant a new type of leadership with a renewed focus on achieving core business objectives.
Be a hands-on leader. The CEO has significant challenges to confront in this environment, with both employees and external third-parties looking for assurances, guidance and direction. The CEO must lead by example. It is important to demonstrate intellectual honesty and facilitate an understanding of the company’s current reality, and not allow management to swim in the river of denial. Optimism can be valuable, but a misguided focus about better times or an unrealistic future recovery may paralyze the organization and impede real focus on solutions. Leaders must think strategically about what the company needs to accomplish now and convey a clear vision. They must promote the development of ideas and creativity among the management team. Status quo is not an option. Company leadership must motivate people towards action with active, hands-on leadership, and cannot do so sitting behind closed doors or by merely sending emails.
Communicate, then communicate more. A sense of urgency to address the company’s challenges must be conveyed both to the leadership team and downstream in the organization. It is not business as usual. Ongoing programs and initiatives must be reevaluated, while new initiatives and an execution plan must be developed. Decisions regarding realignment may have to be made with limited or imperfect information. Some mistakes may be made, but incremental successes with ongoing adjustments are better than inaction.
The CEO must lead the change and motivate everyone to step-up. They must encourage the team to go beyond any fears and envision a stronger future. An immediate, not tentative plan should be crafted; speed of implementation and execution matter. There can be no sacred cows with respect to people, products, divisions, projects or processes; everything must be reevaluated for its impact on short-term liquidity, and it may require some measure of pain. Managers that are not up to the task of critical thinking, reengineering or implementing change are often part of the problem, not the solution. Difficult decisions may have to be made, or the business will be at risk. Keeping all stakeholders up to date is critical, and promotes credibility.
Time for assessment. Realigning the company’s strategy requires an assessment of the financial and operational condition of the business. The first step in crafting a realignment plan involves an assessment of the sources and uses of cash, timing of each, and an analysis of real profitability. Information reporting in this regard is essential. If sufficient, detailed reporting is not being produced or available, then the CEO must ensure finance and IT personnel work together to generate the desired information quickly. This is not a task force assignment to install new systems or design the most comprehensive reporting. It is an urgent collaboration of key personnel to determine what can be produced to give management critical information necessary to make the required assessment. It is imperative this information be centralized and controlled by the finance department, which already understands reporting integrity and cost allocation issues. Reports generated by department heads are often less reliable and may not contain critical elements of related revenue and expense.
The devil is in the details. It is also important that reporting information be detailed enough to enable management to evaluate profitability, cash requirements and trends of each product produced, each store managed, each operating plant, each service provided, each office location, each project constructed, each division, and so on. Leadership must be able to take a fresh look at each of these and see what is profitable and what isn’t, what is consuming cash versus throwing off cash, and assess what positive or negative trends are likely to continue in the near term.
Working capital is critical too.
It is not sufficient to analyze only revenue and expense. Working capital components and other elements of the balance sheet are equally important.
Inventory – The amount of inventory required to produce a product, as well as slow-moving or obsolete inventory, can materially impact the company’s liquidity. Inefficient inventory turnover can be due to deficient IT systems and reporting in tracking inventory, overbuying related to purchase discounts, excessive SKU’s, and inadequate gauging of promotion response, among other things. Excessive inventory levels creates many costly issues and can lead to increased warehouse space, higher shrink, spoilage, markdowns and margin erosion.
Inventory needs to be reduced, or liquidated at a discount in the case of slow moving or obsolete products and converted to cash. Additionally, SKU’s should be reduced to what generates the
most revenue. Just-in-time inventory tracking and ordering processes should be implemented, together with a strategic sourcing program, where practical. EBITDA improvements will be realized through all of these measures, however, attaining these benefits may require additional expenditures in the form of IT and systems investment. The return on such related costs will be realized through increased analytical capability, enhanced visibility of gross profit by SKU, improved order accuracy and reduction in space and payroll requirements.
Accounts Receivable – Accounts receivable collection efforts may need to be improved in order to increase timeliness of collections and decrease days outstanding. Be aware of who may be at risk themselves and be at the head of the line to get paid. In some cases discounts may provide incentives to customers to pay sooner. Conversely, some customers may need to be culled, either because they are not good payers, or because they are not sufficiently profitable based on the resources they consume. Again, there can be no sacred cows; everything must be evaluated with a fresh perspective. Even if a company has been a long-term and loyal customer, if they are creating a drain on cash flow, terms must be adequately renegotiated.
Accounts Payable – Stretching out payables would seem to be an elementary step in maximizing cash flow, but it is surprising the number of companies that don’t change their payment policies, even as their own customers have slowed payment to the company. Often a significant bump in cash flow can be achieved by increasing payable days outstanding across the board. The number of customers and vendors the company uses should also beevaluated. Costs of time, resources and supplies to order/pay/process an unnecessary number of vendors is often overlooked, and can dilute volume discount potential. In some cases, the company must recognize where it has an effective partnership with certain suppliers and negotiate changes in terms or credit such that the company does not bear losses alone, benefiting short-term liquidity.
Review non-core assets. Non-core assets must be assessed for both their current cash value and their borrowing capacity. Planes, non-essential vehicles, extra parcels of land or buildings, certain leases and equipment may all have some amount of current cash value. If the company owns its headquarters, store locations, warehouses or distribution centers and this real property is essential to the business, it should be evaluated for sale-leaseback transactions to bring cash into the business today. In the case where core or non-core assets are not pledged to a lender and fully liened, they should also be evaluated as a source of additional collateral and borrowing if reasonably favorable terms can be achieved.
Take a hard look at corporate overhead. It is understandably difficult for any CEO whom has been with the company for a number of years to step back and look at corporate overhead objectively. Many times the CEO has presided over certain program and cost build-ups, and has established personal relationships with management as well as line employees. This may affect the CEO’s thought process and impact objectivity. Other times, the CEO may know the course of action necessary, but due to emotional or personal ties may prefer someone else, such as a CRO, be the “bad guy” recommending or implementing necessary reductions. Objective assessments of personnel and outputs, such as divisions/services/products/locations, can be some of the hardest to tackle for long-term management. Where a CRO is relied upon to execute a realignment strategy, the appropriate authority must be vested in that person or implementation will fall flat.
Personnel – People who have managed successfully in the past may not be up to the task going forward, and the CEO cannot afford to keep those who are indecisive or frozen in “analysis paralysis”
if they are going to effectively realign the business. Retain people who don’t have parochial interests – ones that will take initiative and rise to the challenge, who can motivate and encourage people, and build the company’s future. Be on the lookout for lower level people who have leadership capability and can step up. While it can be difficult, it is important to cut from the top down and for leadership to set the example for the rest of the company. Evaluate whether the job function is necessary, not the person in it. If the rank and file perceive inherent unfairness in personnel realignment, productivity, quality and moral will suffer. Furthermore, people remember how they were treated and certainly will be communicating with customers, suppliers, competitors and other employees as they exit. So it is critical to be fair and clearly communicate the company’s challenges and plan, especially if a reduction-in-force, or RIF, will be part of the realignment.
Personnel realignment should be attacked surgically and intelligently, not piecemeal, and can be achieved through combining functions, reducing layers, removing indecisive managers or those not current with technology, and intensifying resources where the company focus. In addition, people would rather lose benefits than their job, so it is also important to evaluate benefit plans for cost reduction, employee contribution increases or increases in qualifying benchmarks, or in some cases benefit elimination.
Programs, Products & Locations – “Economics 101” teaches us to ignore sunk costs, which means it doesn’t matter how much the company has spent on something in the past. A determination to continue spending must be made based on expected future profits and cash flow. While management might be emotionally wed to a historical program, that cannot color today’s assessment of whether or not that program/product/location should continue. Closure of negative contributing stores or products, and walking away from significant sunk costs, is understandably difficult but necessary for a company’s survival in turbulent times. Assets from shuttered programs/locations may be deployed elsewhere, or sold and converted to cash.
SG&A –There are a multitude of SG&A items that vary across industry and geography that must be evaluated for impact on liquidity and profitability, including office space, equipment, leases, contracts and services, commission and incentive structure, manufacturing, distribution and logistics, property taxes, and many others. These are critically significant and must be individually considered in any business realignment assessment.
What is your capital spending? The CEO must judge capital projects by what they consume and what they generate, and as previously discussed, ignore sunk costs and emotional ties. Projects that won’t earn the cost of capital or reduce resources, such as with IT investment, or won’t come on-line and generate net cash flows for several years, need to be evaluated for deferment or termination. Management should not, however, defer regulatory or safety issues, or maintenance spending where feasible. The CEO and finance team should also scrutinize capitalized expenses to ensure they represent true capital projects, and that department costs have not been masked as capital expenditures, artificially distorting operating results.
Realigning the company’s strategy and focus from revenue generation to cash conservation is essential in these uncertain times. It requires preparing for downside scenarios, not misguided optimism, functional realignment of responsibilities, and streamlining processes. The CEO must set a bold course and convey confidence to all stakeholders that the company is monitoring events, tackling problems and developing solutions. Management must promote awareness, establish aggressive budgeting and tracking, and enforce accountability across the organization. Understanding cash implications of decisions must take priority over blind pursuit of revenue growth or continuation of sub-par historical initiatives. Announcements regarding cutbacks and retrenchment should be made alongside good news of the company’s future stability. Maintaining communications with stakeholders, key suppliers and customers will provide credibility to management and position the company to emerge stronger and better positioned for both the short- and longer-term.
About Us: Bridgepoint Consulting provides Turnaround & Dispute Resolution services to help companies identify the key issues holding them back to realign themselves with new strategic plans, crisis management, repositioning, divestiture and more. Contact us for a free consultation today!