Business recovery: external crisis management teams

In these turbulent times, all kinds of businesses are prone to finding
themselves in some degree of difficulty.

Although crisis events are unpredictable, in the context of the present
recession they should not be wholly unexpected. In all crisis situations, there
is usually a serious threat to the organisation, and a very limited timeframe
within which to resolve the issues. Unfortunately, one of the key parts of a
successful resolution is time.

As the latest figures released by The Insolvency Service show, there were a
total of 3,560 compulsory liquidations and creditor’s voluntary liquidations in
England and Wales in the second quarter of 2008 on a seasonally adjusted basis.
This was an increase of 11.6% on the previous quarter and an increase of 15.0%
on the same period a year ago. The figures will get higher still.

Decision Paralysis

Due to the very nature of crises, panic ensues. Frequently, existing
management teams find themselves in a state of denial, and a total paralysis of
decision making and strategic thinking sets in. As the issues facing the company
escalate, the problems swiftly increase in both size and complexity. Too often
resources are directed at conducting a post-mortem ­ retracing events to
identify the root of the problem and ascertain who may have been responsible.
Generally internal politics are rife, and the blame-game takes precedence over
the crucial task of running the business.

Haemorrhaging Cash

Swift, decisive and authorative action is mandatory to provide the
organisation with the best possible chance of survival and to protect the
interests of institutional stakeholders. An external third party, who comes
armed with the ability to be objective, impartial and professional, can most
effectively manage this tenuous situation.

The existing management team is often too close to the problem to be unbiased
and typically lacks the specialist crisis management experience that is crucial
to getting the company back on course.

Reduced cash flow is a very common problem for businesses these days. The
lack of liquidity in the market is causing many lenders and investors to be far
more cautious about investing in businesses which do not show a clear return
while, in more buoyant times, they were more likely to take a risk.

Moreover, the current economic climate and troubles that have afflicted many
industries have made it more challenging for businesses to prove they have the
potential to be successful. For example, funders may dismiss businesses from
industries such as construction or manufacturing without even looking at their
business plans or proposals, just because of the reputation of the industry. As
a result, potential stars might miss out on opportunities for financial support
and success.

Rapid Response

Troubled businesses need to get help as quickly as possible. A crisis
management supplier should be able to provide a rapid response service and be
able to parachute into the troubled company at short notice to apply immediate
first aid. This involves identifying the problems, reviewing the assets and most
importantly taking control of the cash flow.

Many businesses could be saved if they ask for help before the business
really starts to fail. Unfortunately, some businesses wait too long and end up
being referred by a worried institutional stakeholder.

While this does not necessarily mean the end of the business, the later the
notice, the more difficult it is to turn the business around. For example, if a
lender refers a business to an insolvency expert, that lender is unlikely to be
willing to put more money into the business. It is far more likely that the
lender will want to recover as much as they can and get the perceived bad
business off its books.

A crisis management team from an accredited organisation is an inst
itutionally safe pair of hands. They have the ability to quickly move on from
the faults of the past, secure stakeholder assets and look decisively forward to
the future, addressing and reacting to the immediate challenges surrounding the
business. If necessary, a series of emergency controls will be implemented.

Second opinion

The first task for the crisis management team is to conduct a comprehensive
business review ­ a rapid but wide ranging analysis of the organisation,
competitors and market context, identifying the severity of the situation and
all the various options available. A full appraisal incorporates an estimation
of assets, management of cash flow and creditor payments and search for hidden
value. Clients are then provided with a menu card of the courses of action
available, along with recommendations for recovery procedures.

A successful recovery or turnaround needs time, strong management and, in
most cases, an injection of new money. Using an external crisis management team
will give a business an objective view on finding the right solution for a
business. This objectivity is useful throughout the phases of turnaround. Also,
third parties may bring new contacts to the negotiating table to find more
funding.

Secure Assets & Recreate Value

The focus of the crisis management team is upon corporate recovery,
restructuring and rescue to maximise value, recover debt for banks and create
value for institutional investors. The best solution is to turn around a
business so that it can continue to trade, pay off its debts and create value
for investors. Businesses may miss out on these opportunities if the owner
manager is unwilling to admit defeat or is in denial about the true state of
their business.

Robin Pugh is director of crisis management at
Smith &
Williamson