Companies are currently facing many challenges and uncertainties. Each of these—but especially when they occur simultaneously—has the potential to plunge companies into a crisis that threatens their very existence.
Consequently, it stands to reason that these risks—energy prices, supply stability, inflation, chip shortages, interest rate hikes, and a shortage of skilled workers—may necessitate increased restructuring in the foreseeable future.
According to an analysis by the Harvard Business Review*, only two-thirds of all restructurings are successful. This raises the question of what factors are key to ensuring success.
As part of a recent study, we surveyed two key players in a restructuring—financiers and Chief Restructuring Officers (CROs)—about their views on the success factors and compared their insights with our own experiences. Both groups were surveyed twice as part of the study: in the year before the pandemic and most recently in March 2023.
The results showed that both groups agreed on the various success factors. However, the two groups differed on some details, which can be explained, among other things, by their differing perspectives: From their external perspective, the financiers emphasize different aspects than the CROs, who have an internal perspective from within the company.
Crisis-Driven Restructurings – Balancing Different Interests
For restructuring practitioners, the prevailing view—that restructurings are often only partially successful—comes as little surprise: They are generally complex undertakings in which multiple initiatives with significant impacts and feedback loops at a wide variety of points and levels must be weighed, prioritized, and—in the best-case scenario—successfully implemented in parallel.
In addition, several parties—known as stakeholders—with interests that are sometimes different and at times significantly divergent are directly or indirectly involved:
Employees and management are interested in the company’s continued existence, ideally with as little financial or time-related contribution to the restructuring as possible on their part.
Shareholders are interested in preserving their invested capital.
The focus of the financiers is on ensuring the repayment of the funds provided and the preservation of the value of the collateral transferred.
Suppliers are interested in maintaining their supply relationships and the (full) settlement of outstanding receivables.
Customers want to ensure they continue to receive supplies at the lowest possible prices.
Potential new investors/shareholders are looking for a low price with few, calculable risks.
The Chief Restructuring Officer—Captain in Rough Waters
Since restructurings require a comprehensive skill set of interpersonal, technical, and methodological leadership abilities, it makes particular sense—especially in critical situations—to engage an experienced Chief Restructuring Officer in addition to the current management team.
CROs take on company-wide leadership of the restructuring with the authority to act, in some cases even serving in an executive capacity. In doing so, the CRO relieves the existing management team of this burden, assumes responsibility for the restructuring, and contributes his or her many years of experience in the “trade” to achieve short-term liquidity and cost optimization while simultaneously realigning the company for the long term. Due to their extensive experience and neutral position within the company, CROs can often assume the less popular role of “tough enforcer,” particularly when current executives face the risk of future difficulties in collaborating with employees due to unpopular measures.
The CRO occupies a unique position in this regard: commissioned by the company, he is, by definition, obligated to the company; in most cases, this aligns with the interests of the shareholders. At the same time, CROs are very often appointed on the recommendation or at the urging of financial backers, who thereby attach their own expectations and interests to the role of the CRO. As a rule, the CRO will want to meet these expectations, as he also wants to be recommended by the financiers in future cases.
Due to this intermediary position of the CRO, conflicts of interest can arise in restructuring practice. This conflict becomes apparent if one or even both stakeholders no longer identify with the CRO’s actions. In extreme cases, such a situation can delay or even jeopardize the restructuring. This turns the intention of using a CRO as a catalyst into its opposite.
The results of our study also illustrate that—in addition to rapid-impact restructuring measures—active liquidity management, holistic stakeholder management, and transparent and honest communication are essential for a successful restructuring. Here, the CRO should be supported by additional external experts as needed.
Rapid-Impact Measures—External Expertise Drives Success
Restructuring always involves actively transforming the company from its current state to a defined target state. This transformation is achieved through a bundle of measures and initiatives.
Such a transformation is unusual for the vast majority of companies, meaning they lack the necessary experience for such a task. In addition, in a restructuring situation, liquidity and time are scarce, and “speed over perfection” often applies.
For this reason, the majority of financiers also favor bringing in additional external experts—in addition to the CRO—in areas critical to success for this core element of restructuring.
It is advisable to involve functional experts who are capable of driving and supporting the development of concepts, their elaboration, and implementation, combined with relevant experience in special situations.
Additional benefits of involving subject-matter experts include:
additional management capacity, since the development, implementation, and execution of measures must take place alongside day-to-day operations, and
further reduction of the CRO’s described conflict of interest, as the subject matter expert(s) provide an additional fact-based layer of mediation.
Before defining the target state and developing the measures, comprehensive analyses must be conducted—ranging from an analysis of the causes of the crisis to an analysis of the product portfolio and the workforce. Even though financiers, from their external perspective, focus on analyses such as strategy, working capital, and similar topics and have little interest in operational analyses, these are also of great importance for gaining a comprehensive picture of the company and the crisis situation.
Active Liquidity Management – Cash Is King
Expressed in mathematical terms: Ensuring the company has sufficient funding, including all measures, through the end of the restructuring is a necessary condition for a successful restructuring.
This gives rise to certain requirements regarding liquidity planning and reporting to lenders, which the company must take into account but which are not necessarily provided automatically and to a sufficient extent by all CROs.
Given the importance of the lenders to the restructuring, the lenders’ need for demonstrably reliable liquidity planning—with external assistance if necessary—must be met.
In addition to providing financing, lenders are strongly focused on analyzing and optimizing the strategy. Therefore, at the outset of a restructuring, it must be demonstrated to the lenders that the goal of the restructuring is reasonable, feasible, and achievable through the planned measures.
The conflict of interest involving the CRO described at the outset often comes to light during the planning phase when lenders and management have differing views regarding the restructuring strategy (e.g., restructuring through cost reduction vs. restructuring through growth). In this situation, the conflict can be mediated by an external expert acting as a neutral, fact-based authority, thereby also resolving the CRO’s conflict of interest.
Holistic Stakeholder Management—All Parties Must Be On Board, Not Just the Creditors
Experience shows that any single stakeholder could prevent or at least delay a restructuring. Therefore, all stakeholders must support the restructuring, whether they are shareholders, employees, (top) management, lenders, or, where applicable, key customers.
Particularly in the case of restructuring during a crisis, agreement on a restructuring plan—which also defines the stakeholders’ contributions—can often only be reached after many rounds of intensive negotiations among the stakeholders. The negotiating parties are typically the company and the employees or the works council, as well as the company, its shareholders, and the financial backers. In many cases, potential new shareholders and/or financial backers also come into play. In certain industries, such as the automotive supply industry, major customers also join as negotiating parties. In such cases, customers are often not only negotiating partners of the company but also of the lenders and potential new investors.
In these negotiations, the CRO or an external restructuring expert is tasked with mediating the interests of the stakeholders and steering the negotiations toward a successful outcome.
In addition to involving stakeholders early on, it is essential that no stakeholder is overlooked. For example, financiers typically include not only the company’s primary banks but also trade credit insurers, leasing companies, guarantee banks, etc.
Transparent and Honest Communication – Regular and Tailored Reporting as the Method of Choice for Stakeholder Engagement
The primary means of engaging stakeholders is a communication strategy that ensures regular communication with nearly all stakeholders. It is essential that this communication be transparent and honest—a responsibility that falls on the CRO and top management.
The initial communication must address the “what” and “why” as well as the “how” of the change. In practice, it has proven effective to begin the restructuring with a few quick, visible successes in order to immediately make changes transparent through the first progress reports and generate positive momentum.
In specific situations where communication with the public is necessary, a specialized consultant should also be brought in.
For communication with financial backers, it is important to establish a regular, customized reporting system. In addition to the topic of liquidity planning and tracking, the content and frequency of the reports should be clarified early on.
Effectively Increase the Probability of Success
Actively addressing the expectations of financial backers and providing targeted support from external experts
For a successful restructuring, all success factors—liquidity, measures, stakeholders, and communication—must be addressed simultaneously and with the highest priority. Without exception, the various aspects of these factors are significant or even critical to success.
By taking the expectations of lenders into account during a restructuring, companies can avoid potential conflicts as the process unfolds and thereby increase the likelihood of success and the speed of the restructuring, since there is no need for “corrective action” later on.
For the CRO and the company, the early involvement of external and “neutral” expert assistance on various topics provides an opportunity to strengthen their position and mitigate the risk of a conflict of interest:
For the CRO and the company, the early involvement of external and neutral expert assistance on various topics offers the opportunity to strengthen their position:
By meeting the expectations of financial backers regarding external assistance—for example, in liquidity planning and the development and implementation of measures—potential substantive and technical conflicts are avoided. In addition, an external, independent expert can mediate any conflicts of interest that arise among stakeholders in a neutral and fact-based manner.
The complete study, “Success Factors in Restructuring—Financiers vs. Chief Restructuring Officers,” will be available for download on our website starting in mid-April 2023.
Footnotes
*Harvard Business Review database on crisis-driven reorganizations: 8%
