The IMF is already predicting setbacks for the global economy, with many countries still in the middle of a lockdown. What main problems are companies facing?
That varies from sector to sector. The automotive industry and its suppliers are doing much better in the second lockdown than in the first, for example, while sectors like retail, hospitality, and services have lost the bulk of their income. So, companies in these areas are having difficulty finding financing and counterfinancing for their current and noncurrent assets.
Does that mean companies can learn from the first lockdown?
Generally speaking, companies were far better prepared for the second wave than for the first. Back in April, many companies had no idea of how to plan their liquidity against the backdrop of such a crisis. Cash management was the dominant topic on my projects. Now it’s about more strategic questions, like how to maintain our supply chain in the long-term. Right now, companies need to make sure that they can access their goods quickly once the lockdown is lifted—ideally without tying up too much capital.
You advise companies facing the challenge of completely restructuring. How exactly do you approach that?
Here at BCG, we break down the turnaround into two phases—the first phase is about making sure the company can survive in other words, liquidity management. In the short term, having access to financial resources is the sole focus. Companies don’t just become insolvent if they have negative equity or returns are poor; they have to declare insolvency if they are no longer able to finance or refinance themselves and their value creation.
Once this critical phase is over, the focus switches to becoming competitive; in other words, how companies can achieve good returns again in the long-term. In the current crisis, it’s also important that companies don’t simply look after themselves—the partners in the ecosystem needs to pull their weight. In an ideal situation, companies will reach separate agreements with each of their suppliers, which is why procurement also plays such an important role within the company. The objective of procurement is to communicate proactively, identify the current economic status of crucial suppliers, and find ways for the various parties to support each other. One potential strategy, for instance, could be to place an order and make an (partial) advance payment now but not purchase the goods until a later date, because these strategic suppliers will become vital once business picks up again.
In other words, everything is scrutinized first?
Exactly; nothing is sacred. On that point, far too many companies fall back on routine, whereas external consultants who step back and try to create necessary transparency can usually identify areas for improvement pretty quickly. Let’s say a department orders the same quantity of components month in, month out. The obvious question is whether they actually need that level of stock, as every penny counts in this phase, so it can make sense to run stocks down initially. Another example is recruitment: New appointments might have to be put on the backburner for a while under some circumstances. Taking tough action right at the start is better for staff as well; there’s nothing worse for them than a turnaround that drags on and on for years. They’ll burn out and lose the will to actively support the transition.
How long does a turnaround like this normally take?
The actual restructuring takes place in the first year. The more steps a company works through in that period, the earlier it will achieve positive results. It has to implement 80 % of the measures in the very first year, so that the effects are visible quickly. The second phase is then about looking further ahead, making the company competitive again in the long-term and setting overarching goals—we refer to that as a North Star.
A North Star?
Yes, it’s all about shaping the strategy and communicating it, so that everyone in the company can be guided by it. On the one hand, it’s important for motivating all the staff and, on the other hand, it’s important for the financiers as well—after all, they have to believe in the mission, too. Specifically, the company must define what its future business model will look like and where performance improvements are required.
That then determines the products it will offer in the future and what organizational structure makes sense. We use standard competitive returns to predict a target balance sheet and give a top-down definition of what cost components can be generated and where. Then we lay the groundwork step by step, so that the company is successful and stronger when it emerges from its turnaround.