What is organisational restructuring?
Organisational restructuring is the identification of the causes of organisational underperformance and the development of an improvement strategy.
Operational restructuring is typically targeted at improving efficiencies within a business whether by incremental steps or more substantial actions.
In this article, Nicola Kirk looks at both organisational and operational restructuring. What are they and how can they help directors improve business performance and make their businesses more resilient?
How to ensure you have the right leadership team
Throughout the pandemic, organisations have been stretched as they tried to remain cost effective, agile and profitable. The continued economic uncertainty means more than ever business leaders need to have a clear vision that restores stability and defines a future business model. When facing financial distress boards need to consider many factors including the need to develop and implement a plan to maintain stakeholder support, robust management, the monitoring of change programmes, visibility and control over cash, sustainable profit improvements and the need for experienced people who can take on the role to manage stakeholders and/ or drive change.
Boards should take an objective view on the options available, as this will provide a solid basis for decisions. A company may have the resources within, or it may be that external support and advice is necessary. Lawyers, debt advisors and business consultants can collaborate with management to help boards make the right decisions. This can also make the board’s decisions more defensible should they be scrutinised later, particularly when headcount is reduced, or facilities are closed. Robust preparation is essential to ready the company for the challenges it may face, including negative publicity and potential litigation. We have colleagues who are specialists in all areas of media litigation including reputation management and defamation.
The Gateley crisis management app enables our business clients to get in touch with our 24-hour helpline or app and call upon Gateley’s large, cross-discipline management team to help with crisis management matters. Click here to download the app, or to get in contact.
Changes to or the development of management – what to consider
A board might look to address difficulties as part of an organisational restructure through changes to, or development of, existing management.
For example, by implementing a leadership framework that sets out across all key levels of the business what management need to know, and how to operate the business successfully, and coupling this with a competency framework for the selection, development and performance of management, employee behaviours can be harmonised with the overarching business strategy to produce improved business performance and survivability.
The value of having the right people with the right knowledge cannot be understated during an organisational restructuring. Having designated leaders at all key levels of the business, who can act as a point of reference for employees during the transition can lead to greater cohesion and a clearer outlook for the future given the unfamiliarity many will have with the process.
Kiddy & Partners, one of Gateley’s complementary business lines, offers useful information and tips for a leadership framework. They work with businesses to define what leadership capabilities organisations need, assess leaders against these capabilities, and deliver ambitious acceleration programmes to fast-track leaders’ development. Click here to learn more about Kiddy & Partners and to get in touch.
Change is challenging, and this will inevitably require a shift in culture and careful communication. t -three another of our complementary businesses has experts who work alongside our clients to develop leaders, increasing what they know but also transforming what they do and the culture in which they work. Click here to learn more about t-three, and to get in touch.
The areas of operational restructuring
A typical operational restructuring plan will drive rapid change and will usually look at the best way of rationalising parts of the business to make them more cost efficient, consider selling or closing down areas of the company that are underperforming or are not part of the core business, identify any skills or resource gaps, review costs and revenues, consider cost reductions, and propose improvements for cash collection and generation.
Through the divestment of non-core assets, a company can free up cash and reduce the complexity of the business, allowing senior management to spend their time improving their core business without distraction.
A non-core asset may include:
- any kind of asset that is not essential to generating revenue and/ or the core business operations
- a non-core part of the business that is underinvested, including a part of the business that lacks senior management attention
- a factory or property that is no longer being used
- an entire subsidiary or a holding in another company.
Why might a company look to divest their non-core assets?
Divestment of non-core assets is a strategic tool that can allow a business to streamline its operating model or adjust its cost-structure by eradicating inefficiencies. These inefficiencies may be internal or created by external factors such as changing customer demand which has resulted in an asset within the business becoming underutilised. The savings made can then be reinvested into the profitable areas of the business, improving a company’s survivability.
It is recommended that you allow for a period of at least six months before the divestment of an asset, so it is important to identify a non-core asset early to help you realise full value rather than when it starts to underperform. Critical factors must be quickly addressed to limit potential damage to ongoing operations, including supply chain resilience and the maintenance of a strong corporate and brand reputation.
It may be necessary to close rather than divest a non-core business.
To learn more about closing your UK subsidiary, read our article here.
Advantages and disadvantages of sale and leaseback
A sale and leaseback involves the company selling property and immediately leasing it back, releasing and raising additional capital for the business, whilst maintaining the ongoing use of the asset.
Advantages of a sale and leaseback include:
- It releases cash and/ or existing debt.
- It can offer a lower cost alternative to the refinancing of banking facilities.
- The additional capital received can be re-invested into other areas of the business.
- Certain businesses only have access to a limited pool of funding options, and this offers an alternative source of funds.
- It has the benefit of alleviating the business from the need to maintain the property, or the risks associated with managing it.
Disadvantages of a sale and leaseback include:
- In the long term, it can have the effect of reducing the ‘value’ of the business should the directors look to sell the business at a later date.
- Depending on the financial stability of the company and the likelihood of the company entering into insolvency in the near future, there could be repercussions due to the strict regulations surrounding the sale of assets in these situations. Accordingly, any decision to enter into a sale and leaseback arrangement when a company is in financial distress should involve professional advice and a clearly documented decision-making process.
- There is reduced flexibility as to how the company can use the property, as landlord consent will need to be obtained if changes are to be made to the property.
- Depending on the negotiated terms of the lease the company could face long-term rental payments.
- The entity or individual looking to purchase the property may be under the impression that the company is struggling financially, because of the need for a sale and leaseback, and as such may be reluctant to lease back the property or do so under terms that protect their position.
What to consider when thinking about redundancy
As the structure of the business will be re-shaped and transformed, this can lead to the need to make redundancies during a company-wide organisational or operational restructure. This is not an easy process and is stressful for everyone involved.
There are some important rules that must be followed to ensure that the process is conducted in a fair manner, thereby avoiding any potential repercussions for the company such as unfair discrimination claims and employment tribunals. Larger companies are likely to have a dedicated HR department to ensure that correct processes are followed, however many SMEs will not have this dedicated support, so they need to ensure that they get appropriate advice.
Fair selection criteria should be adopted. Selection must not be based on age, disability, sex, race, religion, or belief, but should instead use employees’ skills, standard of work and disciplinary records as the basis of the decision.
Once the selection criteria have been decided, employees must be consulted. The consultation process varies according to the number of employees planned for redundancy, so it is important to get the consultation requirements right. Having considered any alternative options and feedback, decisions about who to make redundant must be made. Decisions could end up being scrutinised, so following correct procedures and having evidence of a fair and clear process will be vital.
For more information on HR-related matters, click here to see our app.
Being on top of cash flow and cash collection
As is often repeated, cash is king. Therefore, it is imperative any cash flow issues are addressed and there is effective cash control in play.
CFOs must set the tone for cash within the business, developing a cash conscious attitude as well as effective cash forecasting. This will ultimately improve how the business is run financially and help pre-empt any periods where the business may face a cash flow shortage.
For businesses that operate by giving customers credit, prevention is superior to rectification. Therefore, having a competent credit control team in place will set the foundation for good practices, such as undertaking thorough customer due diligence, which will help limit a company’s exposure to bad debts.
Furthermore, the process of cash collection within the business should be analysed and reviewed. A company should adopt a process where debts are proactively chased ahead of the payment date rather than on their due date, to ensure that payments are received in time. In addition, a review of the business’ payment terms should be undertaken to ensure that the current terms are fit for purpose and conducive to the effective operation of the business. For example, when supplying goods to customers as part of a supply agreement it is advisable that there are adequate provisions in the contract to protect a company’s position in the event that a customer becomes insolvent. This can be achieved by ensuring that an effective all monies retention of title clause is in place. Equally, terms of business should allow you to recover collection costs or claim contractual interest on overdue invoices. Incorporation of terms into contractual dealings with the other party is vital so that they can be relied upon.
Click here to read more about dealing with unpaid invoices.
Click here to read more about when a company can recover its goods under a retention of title clause.
Maintaining good lender, landlord or supplier relationships will assist with cash management options, as this may allow for the negotiation of a period of relief with creditors, such as a standstill agreement, or the renegotiation payment terms. The key is to engage in an open dialogue at an early stage and develop a level of trust between parties, which can be particularly useful as it will allow the business some vital time during a difficult financial period to steady the ship.
To read more about any breach of lender covenants, click here.
Where to secure additional funding
If additional funding is required during your company’s organisational or operational restructuring plan, the best place to start sourcing this is usually the company’s existing funder who should be treated as a key stakeholder. Again, proactive engagement is crucial to establish goodwill and trust. Should an existing funder no longer be right for you, there is an array of alternative funders and professional advice should be obtained from a specialist debt advisor, solicitor or accountant so that the right funder is found.
To learn more about additional funding, read our article here.
For companies who need to improve their net asset position to secure additional funding or to strengthen a balance sheet, a company could consider converting some long-term liabilities to equity. There are many different types of equity, such as preference shares which involves a change to the company’s share capital, and many require a change to the articles of association and/ or consents under a shareholder agreement.
A reduction of capital which does not involve a repayment to shareholders results in the creation of a reserve equal to the amount of the capital cancelled and is generally treated as a realised profit and is generally credited to a company’s P&L, resulting in a stronger balance sheet. In addition, many companies over time may have built up substantial share premium accounts that can be reduced/ cancelled with proceeds being treated in the same way. If the appropriate conditions (set out in the Companies Acts) can be satisfied, a reduction of capital, a creation/ increase of distributable reserves or a reduction of accumulated losses can create a healthier balance sheet and increase a company’s flexibility.
Articles of association and shareholder agreements
As with all constitutional documents, the shareholder agreement can prove to be a guiding light for companies when faced with times of uncertainty and may need to be relied upon when looking to take some of the steps above. This is particularly pertinent because the shareholder agreement can be tailored to the needs of the business during an organisational and operational restructure.
In the event of a stalemate between the company’s articles and the shareholder agreement, the shareholder agreement will take precedence and will explicitly set out how conflicts between the board and the shareholders will be resolved. This will save time and energy on unnecessary deliberation in situations where time is of the essence and decisions need to be made swiftly and with conviction.
When faced with times of financial stress, there are many methods to help a company navigate the business into a more positive position.
Our Restructuring Advisory team have the required expertise and experience to assist you with any restructuring challenges you may face. Please contact us if you would like to discuss any aspect of this article or series.