Challenges in Managing a Crisis
Touched by some sad news on the growing number of companies asking for judicial financial restructuring, I share in this essay 7 key learning to save a business in structural crisis after my experience with crisis management.
Serasa Experian published on Wednesday (May 04th) the sad news that the requests for judicial financial restructuring from Brazilian companies practically doubled in the first four months of 2016 in comparison to the same period of last year: the total is 571 companies, meaning a 97.6% raise. Micro and small businesses led the requests for restructuring (327), but the number of medium (149) and large (95) businesses in structural crisis is also alarming. The causes are not new to anyone: the bitter result of an injurious matchup of decreases in sales, due to the country’s severe economic retraction, and a substantial increase in the costs to operate in Brazil. Business owners will only ask for legal assistance to help save their company when bankruptcy is imminent. Restructuring is the alternative to the organization’s euthanasia when these people still believe in their project.
This scenario reminds me of the difficult times I faced as executive president of the Casa&Video Group, leading the rescue operation of the company as it entered a structural crisis after a truculent intervention from the Public Prosecutor’s Office in November of 2008. At that time, the company had 88 stores, 7,000 employees and revenues of approximately 600 million US Dollars (almost 2 billion Reais). The analogy I used then was that of the Titanic, having sustained a sudden, brutal crash and starting to sink at frightening speed. A few months after I took over the crisis management, a request for judicial financial restructuring was inevitable in order to stave off a probable stampede effect of bankruptcy requests from frightened suppliers. I am, therefore, a witness to the fact that Brazilian legislation for restructuring (Law nº 11.101/2005) is one of the best in the world; it truly helps to save companies in profound crisis.
Saddened by the recent statistics and I in solidarity with the hundreds of business owners who have had to seek out the court system, I have decided to share some of my most important lessons from the process of crisis management.
First of all, in an acute crisis the CEO’s most evident challenge is to apply a severe and inflexible strategy of preserving cash flow, by means of a “war economy.” What is not obvious is the fact that many companies need to replace their president / CEO or remove their founding entrepreneur from the leadership of the business because both of these positions generally have extreme difficulties in saying “no” to the torrent of bills from all kind of demands that greatly surpass the scarce resources available from the cash flow. Feeling imprisoned by the “chains” of countless commitments made during prosperous times, they usually cannot withstand the suffering of suppliers and partners. Many end up leading the company to bankruptcy because they cannot stop the endless outpouring of money. It is for this reason that the Law of Financial Restructuring states, in Article 60 that allows the splitting of the company and creating a newco in order to launch a new business platform which is “free” of its past debts, the new organization cannot be managed by somebody who “led” the company into the crisis situation. This requirement is valid for the two-year period of financial restructuring through judicial means.
Secondly, the company needs to select a few good and balanced key performance indicators in finance, sales, and productivity and follow them on a daily basis. Since the company is wavering, the tendency is to relocate key players to the trenches and abandon the fundamental points of reference that could withstand the difficult decisions that need to be made in the battle intervals, thus setting out on a blind journey. Producing good, reliable indicators is labor intensive, and oftentimes painful; for this reason, the leadership gives in to the temptation of flying “by eye,” without instrumental support. This is a common mistake, but it is as dangerous as not monitoring the vital signs of an ICU patient in critical condition, which need rigorous attention.
Thirdly, it is important to revisit the business model in order to evaluate if the core business is indeed able of generating value and to verify which alternatives for optimizing or innovating the competitive strategy are necessary in order to ensure minimal and increasing oxygen levels needed to keep the organization alive. In such moments it is difficult to break away from past mental models (paradigms) and beliefs in order to define the paths that will get the company off its death bed. That is what independent consultants and counselors are for — they can act as professional outsiders who help the leadership and stockholders to think outside of the box, to select truly strategic resources and activities, and to eliminate distractions to what will really make a difference. Without a business platform that is able to overcome problems and generate value, the company will not have sustainable arguments to defend a financial restructuring plan, in the event that this is the only way to save the business. In this case, proving that the company is more valuable alive than dead is the only argument that can allay creditors’ fears of bankruptcy and obtain market support for restructuring.
In fourth place, it is very important to invest in competent, transparent, broad communication to collaborators, to the market and, in some cases, to the press. All communication initiatives should focus on transparency of facts and demonstrate the business’s sources of singularities. Furthermore, if financial restructuring begins, the crisis manager must make the benefits of this process known to the market and demonstrate why the company needs to survive. I always recommend that the company’s “number one” in charge deal directly with the most relevant creditors, customers, and suppliers in three different stages. In the first one, he or she should explain the causes of the crisis, ask for help, and demonstrate why it is not the time to give up. In the second, he or she should present the restructuring plan (judicial or not). Finally, in the third stage, after the plan’s approval or the beginning of its execution, he or she should account for the progress. Without a laborious and authentic endeavor to communicate directly, the company will most likely not receive support from the market.
In the fifth place, having defined the new competitive strategy and restructuring plan, the company must promote a transformational simplification of its processes and its organizational structure in order to accomplish a drastic reduction in costs and improve efficiency. All projects in progress should also be reviewed in order to attempt a new way out that focuses the few resources (including the time of the managers) on those must win battles which are strategic priorities. The biggest challenge of this process is to allow for agility in decision making with regard to changes and to tolerate honest mistakes so that managers can use a “GPS” approach. If a hypothesis is chosen, but does not prove to be attractive or valid in practice, the company should change directions quickly and not allow vanity to delay the choice of the best path in order to achieve the objectives of the new strategy.
In sixth place, if the only alternative is judicial financial restructuring, I have some key recommendations to make. The restructuring plan must be extremely conservative because no company survives a second letdown in market expectations. Quite simply put, the business owner has to take on a commitment that he or she can honor. It is also for this reason that a grace period for paying off debt should be negotiated and established with creditors; the company needs a reasonable time window to re-establish operations in the present before starting to pay past debts. That time period will also be needed for the company to start generating value for the creditors, without the payment of debt. This is a vital factor for the plan’s success because it reinforces the perception of eliminating the risk of bankruptcy and points towards possible reparations for the damages caused to the creditors.
The company should also consider using Article 60 of the law, which is the focal point of the Brazilian legislation and inspired in Chapter 11 of the North American law. By allowing for the establishment of a new company that carries with it the main productive units and only debts with suppliers and banks, with the “old” company retaining the fiscal and labor debts, a new business platform is created that may even attract investors. This is the legal way out for saving the core business platform, separating out the risks that most frighten the market. But the “old” company clearly needs to have enough business platforms to generate value that is capable of bearing the fiscal and labor costs generated in the crisis.
In seventh place, my last message: the leader of the crisis management process does not need to have all the answers to all the new questions that appear daily. He or she should ask for help, humbly and transparently, from whoever may have the best answers and pay the price of learning — including putting together the best possible crisis committee and paying its members well. Thus the leader should not take on an attitude of infallibility; rather, he or she should give him or herself the right to doubt and be afraid. But above all, he or she must believe in winning in the end, no matter what. Without an adamant belief in the success of transformation which will keep alive the great cause reflected in the mission statement, it will be difficult for the crisis manager to mobilize people and the market to remain at his or her side throughout the hard battles he or she will have to win. I have learned that people do not follow leaders unconditionally just because of rational arguments, statistics, and consistent projections. People follow, til the end of the battle, leaders who speak from the heart and courageously put their souls into defending a higher purpose, which would be lost together with the company’s demise.
