Communicate properly what’s happening to staff and keep them on board insofar as is possible. People need to be made responsible for the critical aspects of the business

FOR MANY companies, the only cure for the hangover created by the corporate overindulgence of the boom years is restructuring. Inflated cost bases coupled with the excessive debt incurred as a result of overpriced acquisitions have left some companies with little option but to restructure if they are to survive.

“Many companies allowed a bit of laziness to creep in regarding cost control,” says Brian Bergin, restructuring partner at PricewaterhouseCoopers (PwC). “They took their eyes off the ball and the basic rules of business were forgotten. Many over-expanded, with successful companies financing this expansion completely with debt. The expansion was acquisition driven, not organic. It was easy, instant and debt-led. Many companies also got into property plays creating difficulties for them now.”

The economic crisis has forced companies to slash outgoings. “There has been a short-term, massive focus on cost reduction,” says Bergin. “Quick wins were the initial priority before a more strategic focus was adopted. This included outsourcing, staff restructuring, pay benchmarking for senior people and so on.”

One measure adopted has been to delay spending where possible. “Many companies are looking for ways to defer tax for six or 12 months,” says Paraic Burke, a tax partner at PwC. “This can be hugely beneficial to a company facing cash problems.”

Deferring costs has put pressure on other businesses, however. “In the past two years, companies have been working with whatever cash they had and they are now trying to defer costs because they are running out,” says Bergin. “There are a lot of frustrated companies having to let opportunities go by because they don’t have cash. In some cases, overseas companies are coming in and availing of those opportunities.”

In these circumstances, companies wishing to move forward have to look at getting fit for refinancing or other stabilisation measures. “Companies will have to start looking more deeply at their business models,” says Bergin. “To date, there have been superficial cost-reduction exercises. There is a need now to challenge all existing relationships and see how costs can be taken out. You have to take the emotion out of this. Long-standing relationships with suppliers may have to be broken in order to reduce costs. You can’t spare any sacred cows when it comes to exercises like this.”

He recommends outsourcing existing activities where necessary and where it can reduce costs but he also points to in-sourcing as possibly offering benefits. “When it comes to reducing costs, people often think it’s outsource, outsource, outsource. This is not necessarily the case. Taking value-adding functions, such as sales and marketing, back from external suppliers can often be of real benefit.”

To do this, you have to have the information on which to base the decision. “You need quality information and many companies expanded during the boom without upgrading their information systems to keep pace. They don’t know where the money is going and they don’t know what is happening in their businesses. Companies need to put the systems in place that will give them the information they require.”

After that comes revenue and again some tough decisions are required. “People have to recognise that revenue is the only show in town and they need to reorient their focus back to this.”

In other words, it doesn’t matter how much cost you take out of the system if you don’t have the revenue coming in. Loss-making revenue streams have to be addressed while revenue-generating areas have to be reviewed. Those that don’t measure up have to be discontinued.

Bergin points to the importance of accountability and people in the process. “You have to recognise the people aspect; all these things aren’t going to happen on their own. You need to communicate properly what’s happening to staff and keep them on board as far as is possible. People also need to be made responsible for the critical aspects of the business. For example, who is in charge of margin in most companies? The answer is nobody. You have someone on sales and someone on cost but there is no one between to bring perspective. You also have to make the reward systems reflect what you are trying to achieve.”

There are some great examples of reward schemes that are based on key performance indicators and involve deferred bonuses, Bergin says. “Long-term incentive plans align bonuses with the long-term goals of a company and work very well in this regard,” he says.

The final piece in the fitness jigsaw is working capital. Bergin recommends using imagination when it comes to freeing this up. This includes moving over to invoice discounting and away from overdraft facilities; giving debtors incentives such as discounts for early payment; and reducing stock inventories through measures such as outsourcing, introducing just-in-time stock ordering and improving the quality of information systems.

These are the parts of restructuring a company can do on its own or with the benefit of external advice. And it leads naturally to the part that can’t be done alone: the financing structure.

“All of these actions and measures are aimed at getting the company fit to be able to get back into a relationship with its bank,” Bergin explains.

“The most important asset a company has, that is not on its balance sheet, is its relationship with the bank. This relationship is based on credibility and trust. You need both or you’re not in the game.

“You have to demonstrate that you know how to run the business; that’s the credibility bit. You need to go and prepare a business plan for the next three to five years and present it to the bank. This is the plan that will persuade them to support the company.

“The plan needs to be realistic and credible, and it has to be based on actions already taken to make the company fit for financial restructuring. There must be no surprises.”

Bergin also recommends that businesses prepare to meet challenges to their capital structure. “All businesses are struggling with refinancing issues,” he notes. “In many cases, they are existing on facilities that have been informally rolled over. The banks are looking to de-leverage and companies should not be surprised if they call in facilities or refuse to renew them.

“Companies have to make provision for this. This might require further contributions from shareholders. And if the companies go into default, they have to be prepared for highly rigorous due-diligence processes by the banks. It will be as if the bank is buying the business. All of this will come with costs that must be met.”

For a company already in default, its relationship with its bankers will be of critical importance. “The credibility and trust that has been built up will be vitally important and this again makes all those earlier steps crucial.

“The default might see the company disposing of assets, seeking a new investor, getting involved in a distressed merger with another suitable company, or even in a debt-for-equity swap with the bank.”

This last option hasn’t been seen in Ireland often but may become a feature of the landscape in the coming years. It involves the bank agreeing to write off a portion of the debt in return for taking all the equity in the company with an agreement that management can earn back some or all of the equity over time.

However, all of these options require the support of the bank to one extent or another and this makes it all the more critical that companies act now to make themselves fit for whatever form of financial restructuring might be required.

He adds a note of caution. “Companies have to be careful not to accelerate tax events or increase their exposure to taxes as a result of restructuring. They should always take advice before acting.”