Companies occasionally encounter financial and operational difficulties that could lead to their demise. One way corporations avoid a total shutdown is through a restructuring, which reduces the level and severity of financial losses. A restructuring involves negotiating the different positions taken by investors and owners who hold the equity and lenders and creditors who control the debt. The final result generally provides a peaceful resolution to a stressed condition.
A restructuring involves radically changing a company’s organizational, financial and operating structure to permanently and swiftly address serious financial and operational issues that could lead to a corporation’s shutdown or liquidation.
With a restructuring, companies change contractual relationships with debt holders and creditors, shareholders, employees and other stakeholders. Restructuring essentially acts as an in-depth reorganization conducted for the primary purpose of returning a corporation to profitability and productivity. As Stuart Gilson from the Harvard Business School points out, companies restructuring because of financial distress may have more financing options made available to them.
Financial Restructuring: Debt Swap
When corporations use a financial restructuring strategy, they change the company’s capital structure. They may replace debt with equity. When a company swaps out its debt, it eliminates existing shareholders. In lieu of a liquidation or bankruptcy, the debt holders take over the company’s assets and obtain a claim on future earnings in the form of newly issued shares. Debt holders often accept this arrangement when the elimination of the interest and principal payments significantly strengthens the company’s financial position. Shareholders typically receive nothing.
Financial Restructuring: Debt Loading
Alternatively, a corporation may load the balance sheet with debt to finance the buyout of existing shareholders. This debt loading strategy often is referred to as a leveraged buyout. Companies use the debt loading strategy to enable one founder to buy out the shares of his co-founders. The corporation repurchases and retires the shares and then uses its cash flow to pay down the debt. Of course, incurring additional debt has other consequences. As noted in a Brookings article, the more debt a company has, the higher the cost of additional debt will be.
An organizational restructuring strategy involves redesigning operations and management reporting structures to address and correct the operational issues that led to a company’s distressed position. A restructuring organization uses downsizing to eliminate costly overhead and enable a company to return to profitability. Layoffs of nonessential personnel, process redesign, location closures and renegotiation of existing contracts all result from this strategy. To further reduce costs, corporations may restructure compensation and benefit packages for employees who remain.
A divestiture strategy is a type of portfolio restructuring strategy. Companies sell, shut down or spin off unprofitable, money-losing divisions and subsidiaries or those that no longer fit its strategy. Portfolio restructuring allows a corporation to refocus on its core activities and raise much needed capital. It can use the proceeds of these transactions to strengthen its core business or acquire other businesses that closely fit its strategy and contribute to a profitable bottom line.
The 7 principles of a successful restructure
Chances are, you’ve had to make some changes to your company’s internal structure in response to the economic downturn (and in preparation for the slow recovery). As with everything in business, restructures can be done well and they can be done poorly. Here are seven principles to help you avoid unnecessary complications.
Even as the economic outlook appears to brighten, the fact remains that many organizations can no longer operate as they had been. A key feature of this changing landscape is the need for organizations to restructure.
Here are seven broad restructuring principles to help make any restructure a successful one.
Align structure to strategy
All restructures must align to strategy. This may seem self-evident, yet a significant number of organisations fail to do so. For example, if local conditions are a predominant factor, then stress local sales and marketing functions rather than a centralised behemoth that then tries to matrix with local elements.
Simply put, complexity costs. Whether it is a complex organisational structure, a complex product offering or complex transactional processes, the added cost of complexity can be a drag on performance.
To mitigate complexity, there are three considerations that help with organisational design:
- Design structure for strategy before you design for specific personnel. Organisational redesigns which are a compromise between strategic intent and line management preferences inevitably add complexity. So, while internal political intrigue is unavoidable, at least start with a clean and clear design that matches to strategy.
- Avoid making leadership roles too complex (see principle #5).
- Minimise the use of matrices. They introduce measurement overhead and a lack of clear direction to the staff.
Focus on core activity
Remove noise (inefficiency in processes) and enhance core before restructuring roles. This means that you will need to know what people are doing today by obtaining a detailed understanding of tasks by role. This ensures that no value-added activities are thrown out when removing a role. Similarly, duplication and redundant activity can be removed at the time of the restructure.
Create feasible roles
Don’t overload roles restructures generally leave an organisation with fewer people to do the same amount of work. When restructuring to reduce headcount, make sure you understand the current workload of employees.
This will help to ensure you design roles that are neither too heavily laden nor indeed too light. Furthermore, role design must take into account realistic groupings of skills. Packing a role with too many distinct skill-sets reduces the pool of durable candidates.
Balance ‘own work’ and ‘supervisory load’ of managers
The case of leadership or “management loading” can be particularly troublesome in restructures. Often, the inability of managers to focus on leadership tasks due to increased output requirements can create significant problems for an organisation. For example, time spent mentoring and coaching staff drops off, staff become disengaged, more issues arise due to staff errors and managers end up spending more time resolving them. To ensure management are appropriately loaded, it’s critical to balance three elements:
- The number of staff directly managed or supervised.
- Staff ability to perform work without supervision.
- The amount of ‘own work’ managers have to do on top of their leadership activity.
Implement with clarity
Often there is confusion in the first weeks and months after an initial restructure. After all, who is supposed to be responsible for what? The answer is to clarify roles and responsibilities from the beginning, identify all functions (activities, tasks and decisions) that have to be accomplished for effective operation, clarify who should be involved and be specific about accountability.
Finally, it is important not to cut your resources too fine. If the organisational change is material, you will need resource flexibility in the first few months. So even as you strive to operate more efficiently, be sure to give yourself some wriggle room in your staffing. Flexibility applies not only to staff members, but to staff capability.
Leave yourself and your leadership team some room to respond to capability gaps in the new structure.
Common ways to do this include: a staged transition so there are fewer capability gaps to manage at a point in time, and a temporary use of contract resources until in-house staff become familiar with their roles.