Introduction
In today's rapidly evolving economic landscape, businesses are navigating challenging shifts in the operating environment. From geopolitical tensions and the resultant supply chain disruptions to technological advancement and sustainability agendas, market dynamics have transitioned from an era of growth and low interest rates to one characterised by rising inflation and high interest rates. This transition has exposed underlying vulnerabilities of certain corporates, pressing the need for a strategic response to ensure business continuity.
To effectively address these challenges, managers must embrace a holistic approach to business restructuring. At the heart of successful restructuring lie two pivotal aspects: financial and operational.
Financial restructuring is primarily concerned with stabilising the company's financial position (i.e. “fixing the balance sheet”) and recapitalising the business.
However, this alone is not sufficient for continued success. Operational restructuring, the focal point of this article, is equally crucial as it involves “fixing the P&L” to drive sustained business recovery and growth.
From Quick Wins to Lasting Change: The Roadmap for Operational Restructuring
As businesses grapple with these complex challenges in the operating environment, a well-structured roadmap becomes indispensable.
In the short to medium term, the focus is on designing a turnaround plan with clearly defined performance improvement initiatives that deliver quick wins, before stabilising operations. The core question then becomes identifying which turnaround initiatives should be prioritised and which ones offer the highest return on investment, considering direct and indirect benefits, as well as ripple effects on the wider business. This necessitates that this operational turnaround plan is examined through a financial lens to enable informed decision-making. A cost-benefit analysis is thus essential for informed decision-making and strategic clarity; without financial alignment, the company risks running blind.
These tactical changes provide companies with the necessary breathing space to reassess and realign business objectives. However, true resilience and growth require embracing a longer-term vision. This involves embarking on an operational transformation journey i.e. implementing strategic shifts that fundamentally alter how a business operates. These changes are designed for sustained performance improvement, ensuring that the organisation is agile and adaptable. Whether it is redesigning business models or adopting new technologies, strategic initiatives are integral to fostering a culture of continuous improvement and building a long-lasting competitive advantage.
Strategic Pillars for Effective Operational Restructuring
“Increase revenue and cut cost!”
In today's highly competitive business environment, the mantra “increase revenue and cut costs,” often the subject of consulting humour, is more intricate than it appears.
Thriving amidst economic challenges may require businesses to embark on a dual journey simultaneously — growing revenue and optimising cost. This requires rethinking:
- the value proposition of the company, i.e. whether the business is still creating value and thus able to sustain and grow revenue, in light of changing market dynamics; and
- the modus operandi or the way the business operates, i.e. whether the cost structure is optimised to be commensurate with revenue levels.
Revenue Growth
In substance, this requires ensuring that the underlying business model remains robust considering the prevailing market dynamics, in order to grow sales value. Without a viable business model, companies cannot survive, let alone thrive in the competitive landscape. An understanding of customer needs within each of the target markets is required for the products or services to meet those needs effectively.
As such, a market assessment is essential for companies aiming to expand geographically, tap into new customer segments, or diversify their product base. Growth can be achieved through upselling and/or cross-selling to existing customers by diversifying the product base, or by selling existing products to a new customer base.
Management must consider key questions to make this vision a reality: How will this growth be achieved — can the company accomplish this independently, or are strategic partnerships needed?
Price optimisation is another essential element when exploring revenue growth opportunities. By employing dynamic pricing strategies that adjust based on market demand, competitor actions, and customer behaviour, companies can maximise revenue potential. Value-based pricing for instance, which aligns prices with the perceived value to customers and their “willingness to buy,” can also enhance profitability and strengthen customer relationships.
That said, developing growth strategies involves not only redesigning routes to market but also aligning the operating model to achieve the vision and realise growth.
Cost Optimisation
The art of doing more with less revolves around the operating model and involves implementing lean management techniques for companies to streamline operations and optimise cost bases. This is typically done through agile utilisation of the main resources that drive cost, including capital and human.
Capital optimisation involves strategic management of fixed assets, machinery, and equipment to enhance operational flexibility and efficiency. For capital-intensive businesses, the degree of operating leverage is impacted by the business’s ability to operate an “asset-light” model, without compromising operational requirements.
When it comes to human resources, a multi-disciplinary workforce may be essential for fostering innovation. It has become increasingly evident that the calibre of a company’s management team is likely to determine whether this company could become a market leader.
Furthermore, departments are being redesigned and job descriptions revamped to create leaner organisational frameworks. Today, organisations are developing operational excellence and centralised management functions with company-wide oversight, which not only optimise the workforce but also enhance employee visibility and reduce the prevalence of a "siloed culture."
Operational Efficiency and Financial Resilience
Once key performance drivers (i.e. revenue and cost) are established, management should focus on examining the surrounding operational processes to improve efficiencies. Streamlining business operations across key functions such as sales, procurement, and supply chain management, while instituting appropriate governance structures, is crucial for success.
In addition, addressing structural cash flow management issues is another critical focus area. Improving cash cycle efficiency by optimising working capital will bolster overall liquidity resilience, reduce funding needs, and provide a framework for sustained cash flow improvements.
The integration of modern technology also plays a pivotal role in this process — by embracing automation and implementing digital tools for workflow automation, data analytics, and real-time reporting, businesses can significantly enhance their operational processes.
That said, operational efficiency processes should move away from lengthy, cumbersome manuals. Instead, they should be customised to align with the company's size, culture, the complexity of its products and services, and workforce. These processes need to be practical and user-friendly, designed with the understanding that they are meant for people to use. This necessitates thorough training to ensure staff can effectively implement these processes. Additionally, these processes should be tested in practice (e.g. through project pilots) not just documented, to ensure they are functional and effective.
Common Challenges and Pitfalls
Operational restructurings can be fraught with challenges that can impede progress if not addressed effectively — these include:
Strategic Alignment Among Stakeholders
From shareholders to CEO, management teams, private equities, board of directors, key creditors, and others, the stakeholders driving or wanting operational restructuring can be many.
The complexity arises due to the diverse agendas, interests, and objectives that each stakeholder group brings to the table.
Depending on the stakeholder group and the situation at hand, the objectives might vary:
Given these varied priorities, the restructuring process must establish clear objectives that are adequately communicated to and aligned with all stakeholders. A well-defined restructuring program should incorporate a strategic roadmap that outlines the steps to achieve these objectives, alongside a responsibility matrix that assigns clear roles and responsibilities. This roadmap should be robust enough to withstand potential pulls in different directions by various stakeholders, ensuring that all parties work towards a common goal.
Effective governance structures, such as steering committees or advisory boards, can facilitate this alignment by providing a forum for stakeholders to voice their concerns, agree on differences, and reach a consensus.
Regular updates and transparent communication are crucial in maintaining stakeholder alignment and ensuring that the restructuring stays on track.
Understanding Resistance to Change at Different Organisational Levels
One of the most prevalent obstacles is resistance to change from within the organisation — this manifests itself differently among employees, top management, and business owners.
For employees, resistance often stems from fear of the unknown and potential job insecurity. Restructuring can be perceived as a threat to their current roles. Thus, it is crucial to clearly and consistently communicate the importance of an operational restructuring. Employees need to understand the bigger picture and how the changes will ultimately benefit the organisation as a whole and secure their future roles. Providing reassurances and support, such as retraining or upskilling opportunities, can help alleviate fears and build confidence in the transition.
Top management, on the other hand, may resist restructuring due to concerns about disrupting established processes and potential shifts in power dynamics. They might be comfortable with the status quo and sceptical about the need for change. Overcoming this resistance involves engaging top management early in the process, including them in the planning and decision-making stages to foster ownership and buy-in. Communicating a clear vision and demonstrating how the restructuring aligns with strategic goals can help mitigate their concerns and highlight the benefits of change.
Finally, resistance from business owners, particularly those of family businesses, can be around attachment to traditional practices and emotional ties to the business, making them wary of change. For instance, owners of rapidly growing family businesses often hesitate to delegate authority, continuing to manage their operations like a small, traditional family-run shop. To address this, it is important to emphasise the necessity of evolution for long-term success and sustainability. Engaging owners in discussions about the future vision of the company and how restructuring can help achieve these goals can be persuasive. Additionally, acknowledging their emotional ties and respecting their legacy while explaining how changes can enhance the business for future generations can mitigate this resistance.
Throughout the restructuring process, it is vital to implement changes in a coordinated manner — reassuring yet firm, with a clear vision. While it is essential to strive for alignment and consensus among key stakeholders, it is also important to admit that not everyone will be on board. Recognising that some resistance is inevitable and can even be a necessary part of the change process helps maintain momentum and keeps focus on achieving the main objectives of the restructuring.
Conclusion
In a world rife with changing market dynamics, geopolitical tensions, supply chain disruptions, and technological advancements — operational restructuring becomes a strategic imperative, especially for businesses showing signs of underperformance.
Short-term restructuring efforts should prioritise quick wins through turnaround initiatives, while long-term success depends on operational transformation. That said, this success hinges on a holistic approach that blends financial acumen with operational expertise to secure long-term business stability.
The first step is to redefine performance drivers and rethink the operating model required to deliver the value proposition. It is however equally important to streamline business processes that improve efficiencies, including cash management and modern technology integration.
Yet, this journey is fraught with challenges, from diverse stakeholder agendas to resistance from within the organisation. It is crucial to establish strategic alignment among stakeholders, ensuring that all parties work towards common goals despite different priorities. Furthermore, implementing changes in a coordinated manner across the organisation can help mitigate resistance and maintain momentum.
Ultimately, the goal is to align operational changes with strategic objectives, ensuring agility, profitability, and value creation in a constantly evolving operating environment.
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© Copyright 2024. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
