Operational restructuring is the identification of the causes of operational underperformance and the development of strategies to achieve business and operational improvements and efficiencies. In other words, operational restructuring focuses on the profitability of operations. It does not address the capital or financing structure of a business.
The goal of operational restructuring is to achieve lasting improvement in the performance of the business for the benefit of all stakeholders. In some cases operational restructuring may also be a turnaround of the business.
When considering the merits of each restructuring and turnaround strategy, you should assess:
• The impact of any change on the short- and long-term profitability of the company.
• Cash flow and funding implications. Cash is often in short supply and stakeholders may be unwilling to fund turnaround strategies that require significant short-term investment but have long payback periods.
• The key advantages and disadvantages for your business, customers, suppliers and other stakeholders. You should bear in mind that simple strategic changes which produce small improvements quickly will help to rebuild the confidence of your stakeholders. They are then more likely to invest in the long-term future of your business.
• The method of implementing the change. Strategic options which you cannot simply and clearly demonstrate how to implement, given the circumstances of the business and the attitude of its stakeholders, will not be viable options for your stakeholders.
• The risks to the company and your stakeholders in implementing the changes.
Operational restructuring may take the form of the following strategic directions:
The first – and most often overlooked – area to consider when developing operational improvement solutions is the extent to which top-line performance (sales) can be optimised in order to improve profitability and cash flow.
This is an area that should always be reviewed in conjunction with an assessment of the overall market drivers as part of your initial analysis. It may appear self-evident that unlocking price and volume increases should be a fundamental aim of any business – particularly one facing financial distress; however, struggling businesses often face challenges and obstacles, resulting in some of the following mistakes:
— naively building sales volumes unprofitably
— misallocating scarce resources to push for growth at the expense of cost savings
— permanently damaging brands through short-term pricing and promotion activity
— fear of real or imagined customer backlash during a difficult time.
• When identifying the right sales optimisation strategies, estimate the impact a given price increase (or decrease) could have on demand. This impact is known as price elasticity. Where elasticity is high, apply serious caution before embarking on price increases as the consequential hit to volumes will be significant. (Unless, of course, you are tactically shifting customers onto alternative products with higher margins). Conversely, the best opportunity to increase pricing is often where price elasticity is low, when the price increase would have little or no impact on sales volumes.
• Most businesses face three fundamental sales objectives:
1. Win new business, through either new customers or new products or services.
2. Leverage existing business: achieve increased sales from the existing customer base through either selling more, or selling at higher prices.
3. Retain business which would otherwise migrate away.
When planning your restructuring process, cost reduction is an important goal. Consider these factors:
— framing the cost reduction as quick wins (tactical or strategic cost reduction)
— cost reduction in relation to the drivers of both procured items and labour costs
— the transition costs of achieving the change (redundancy, new setup costs, break clause costs, relocation expenses, environmental costs and so forth).
The restructuring plans should seek to balance the business’s cost base with its sales capacity and to develop cost reductions as part of an overall cost management strategy.
Cost reduction programmes require critical enablers to be in place in order for them to be effective:
1. A clear case for change
Implementing change requires the support of many stakeholders. If they do not perceive any particular crisis or need for change, they may not be fully engaged. Clearly articulate the reason the change is required and ensure that all stakeholders are onboard with the plans.
2. Transparency around the cost base
You need a clear understanding of your business’s actual cost base, its drivers, and the interrelationships between costs. Many businesses lack this or rely on approximations or out-of-date information. A cost reduction plan will often show the business from a different perspective, illuminating areas where reducing costs can have a real impact on cash flows. For example, it may be necessarily to curtail product development temporarily in order to stabilise cash flows in an automobile company, or an airline might need to stop flying less profitable routes.
3. A supportive culture
The resistance curve tool helps you understand how and where stakeholders may offer resistance to your plans and provides tips for avoiding or overcoming this resistance and obtaining their support. The taking control and making things happen tool sets out some further considerations about creating a successful environment for change.
4. A performance management system
Implementing a transparent system with clear objectives and measurements, then subsequent remuneration and rewards, will help motivate your employees to achieve your objectives.
Labour cost reduction
The first goal for labour cost reduction should be to establish and prepare an accurate fact base that maps the heads and costs in the business. Ensure this is objective and considered from a business perspective. It is important to remember that headcount changes, or rumours of change, can be highly emotive for staff and impact productivity and attrition rates, so you should approach this issue with sensitivity. The total headcount includes not only people recorded as employees, but also temporary staff and contractors, many of whom can be largely or wholly invisible to central databases or systems.
When assessing the potential labour cost reduction options, consider the following common options:
When deciding on your strategic direction, take a closer look at the strategy clock which sets out eight generic competitive strategic options which you may wish to consider when developing recommendations. The strategy clock complements the operating model and provides a deeper insight into strategic options for your business operations.