How can disruption lead to renewal? 4 cornerstones for restructuring in a crisis

June 10, 2020

Picturing what the economic recovery will look like – a ‘V’, a ‘W’, an ‘L’ or even a hockey stick – is a common exercise for trying to grasp the still uncertain economic implications of COVID-19. But for financial recovery professionals, these visuals do little to explain the real work that will need to happen in the boardroom. Restructuring efforts, both holistic and forward thinking, will be crucial for ensuring the survival of many businesses across the country.

Predicting the post-COVID marketplace will remain a challenge. The combination of health and economic data is particularly hard to gauge. “Because past recessions were primarily created by certain segments of the economy (i.e. the financial sector, energy, etc.), we don’t really have the models to forecast exactly how this crisis will pan out,” says Clark Lonergan, a partner in BDO Canada’s Financial Recovery Services (“FRS”) group. “The recovery will be industry specific and may be company specific within each industry,” he adds. “There will be some ‘Ls’ in the hardest hit sectors, some ‘Vs’, some Nike swooshes, some hockey sticks. Our goal will be to analyze each sector’s unique challenges and opportunities so we can assist a range of clients accordingly.”

Getting back to normal will take a lot of work. It’s why many businesses are busy trying to regroup, restructure, and recapture the spark that lead to their initial success. For them, COVID-19 should be a pivotal moment. “If businesses want to survive they must see the current situation as a catalyst. For many, the crisis is a unique opportunity to adapt into a more viable form,” says Lonergan.

Carpe… COVID? The term ‘creative destruction’ is a watchword for financial recovery professionals, referring to a gritty and ambitious approach to innovation that often characterizes downturns and slumps. New business ventures will emerge from the economic wreckage of COVID-19. And with it, creativity and a new wave of prosperity in the continual cycle of growth and decline.

But what does it mean for businesses that are presently struggling with the day-to-day challenges of the pandemic? We recently spoke with a few partners from BDO’s FRS group to uncover the four cornerstones on which successful transformations are made.

1. Overcoming resistance to change

Reimagining the full potential of a business and making the structural changes needed for its entrepreneurial spirit to re-emerge are central to any restructuring plan. However, faced with the uncertainty of COVID-19, many business owners are tentative and resistant to rethinking their operations from scratch. “We see companies still taking a very light-touch approach to change, cutting costs where they can, but it won’t be enough to endure the enormity of this economic downturn,” says Lonergan. For companies eager for pre-COVID levels of activity to return, the business-as-usual mentality will be a major obstacle to overcome.

Restructuring professionals have experience dealing with resistance to change. It’s no surprise that the arrival of a restructuring team within an organization is often treated with suspicion. “Communicating the transformation plan, clearly and transparently, and building commitment take time. Patience and open-mindedness are essential ingredients for ensuring alignment. Trust needs to be established very early on,” says Matthew Marchand, a VP in BDO’s FRS group. Restructuring involves debate and engagement on both sides.

Restructuring professionals understand the need for difficult conversations with directors and upper management. They are an integral part of the process.

A common side effect of having enjoyed success in the past is a rigid, steady state way of planning for the future. Management teams need help adapting to new procedures in a time of crisis.

“Management teams are usually better equipped to run a business during good times than in bad,” says Lonergan. “

Certain procedures and ways of thinking become ingrained. Our responsibility is to confront these deeply rooted patterns and deliver a new direction.”

Independence and objectivity are the key drivers of viable transformation. Creating a professional and empathetic connection with the business is a necessary starting point for overcoming the perception of the restructuring team as an outsider.

2. Meaningful financial reporting

As the partnership develops, the financial analysis provided by the restructuring team reveals neglected issues but also unrealized opportunities. Josie Parisi, a partner in BDO’s FRS group, who has recently successfully restructured businesses in the construction and manufacturing sectors, helps companies face the reality of their challenges. “When we, as restructuring professionals, deal with push-back or resistance to change, this mindset will be very apparent in the financial results. We often hear, ‘we didn’t expect that to happen’, ‘it was too late to change’, ‘that’s how we’ve always done it’ or ‘we expect things go back to historical norms’.”

Helping management teams make sense of their financial reporting is ground zero for analyzing past decision making and providing future direction. The first step is to help executives review their plans objectively. Managers can easily underestimate the critical nature of their situation. Common problems include relying on the wrong data, overly optimistic assumptions, and having an imbalanced perspective on their short- and long-term goals.

“We help businesses understand their risks. Once these are identified, it’s easier to model what different scenarios might look like. The issues are revealed in the financial models, the transaction level data, the debt structure of the business. The transformation plan is developed to deal with these issues and prepare for the future,” says Parisi.

Tailoring financial reporting to each organization so that meaningful decision making can follow is the first stage of the restructuring process. It’s about a lot more than managing costs and being lean. Accessing capital to allow for future investment and its deployment is a crucial element of the restructuring plan. That said, in a post-COVID world, being lean will be essential. As businesses and consumers all trend toward greater frugality, margins will become smaller, making change and innovation more challenging.

3. Transformation is multidisciplinary

Technology and digitization are obvious lessons from the current pandemic. But many small to medium-sized businesses have yet to fully make this leap. Investment in infrastructure requires a careful approach that draws on diverse knowledge, from technology, cybersecurity and artificial intelligence to marketing and workforce management. Businesses need a coherent voice for prioritizing the wide range of solutions that are available to them.

Restructuring professionals are generally known for being industry agnostic. But this strength can play a part in a client’s initial resistance to change. Many prefer to seek advice from within their own fields. “While every business and sector has its idiosyncrasies, there are common pain points that we recognize very quickly, such as lack of integration and siloes that create friction within the organization and create barriers with the customer more generally,” says Lonergan. A successful restructuring challenges this mentality and draws creatively from a range of disciplines.

With access to capital being tight, viable investments for the post-COVID world will need to be carefully vetted. From a client perspective, working with a multidisciplinary consultancy will give them access to a diversity of resources under one roof. The restructuring team will take down the barriers within the organization that stymie growth but also create a partnership with a firm whose own ethos is multidisciplinary dialogue and cross-pollination.

4. The importance of an engaged workforce

COVID-19 presents a unique opportunity for redefining a business’s vision. The need for transformation is widely acknowledged and the economic threat of continuing business as usual is not lost on anyone. Without change, the reality is that many businesses will fail. In many ways, companies are already primed for understanding the necessity of change.

The resistance is often most acute within the workforce. Disengagement happens when employees are blindsided by upper management’s decisions and are excluded from the change narrative. In the most successful restructuring efforts, executives build ownership of the transformation by communicating proactively with their employees.

“We encourage our clients to think about transformation in a holistic way that incorporates the whole organization, not just the C-suite,” says Lonergan. “A central part of the plan is building ownership of the transformation throughout the organization so that everyone’s mindset is pointing in the right direction.”

How BDO can help

The challenges of COVID-19 will continue to test the business community’s adaptability and resolve. More and more companies will be compelled to change, sometimes radically, in order to ensure their survival. That said, time after time, economic crises prove themselves catalytic. The entrepreneurial spirit re-emerges, often within companies that face considerable adversity.

Radical change can be a daunting and complicated endeavor. Our experienced professionals know how to plan for the survival of your business. The sooner you engage with us, the more solutions will be available to you. For more information on how you can respond to these challenges, contact BDO’s Financial Recovery Group.

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