Global Recession: blessing for turnaround experts

Banking & Finance
| The European | 29th January 2019
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The last year slowdown of the economy set off alarm bells of an impending economic recession. Trade wars and Brexit are the catalysts that have pushed the developed countries into political and economic uncertainty; ripple effects of which are reaching developing countries.

At the moment there are many countries undergoing economic hardships, but two countries in the Asian continent have shown that if there is a political will, then these economic hardships can be tackled. Malaysia, where populist leader Mahathir Mohamad came into power last year, has started work on economic reforms. Mahathir has made it clear to the world that the government will review all development projects signed by previous governments, including projects signed with China. He has canceled projects which his country cannot afford to pay. Another country is Pakistan, which is trying to avoid IMF by reaching out to its allies in the Muslim world and requesting financial aid and inviting them to invest in Pakistan.

America is the only country in the developed world which has shot itself in the foot and manufactured a crisis. The longest government shutdown in American history, 35 days, for a wall on the US-Mexico border, which needs (approx) US $5 billion, caused an economic loss of US $11 billion. The amusing part of this standoff between Republicans and Democrats is that the issue of the US-Mexico border wall remains unsolved.

In the backdrop of this political and economic turmoil, who wins? Governments, financial institutions, the private sector and the public all are the sufferers. However, demand for a specialist consulting service soars in these harsh times.

Turnaround consulting

Turnaround consulting is the art of changing loss-making businesses into profitable ones.

There are two (main) types of clients that approach turnaround consultants:

  • Companies that want to right-size their businesses for efficient operations (cost reduction is the basic strategy adapted to give a breather to “operating profit”).
  • Companies that have a cash surplus and are waiting for the opportunity to buy “sick” businesses (initial acquisition is looked after by mergers and acquisitions specialists, but after purchase, turnaround experts are brought in to implement remedial measures and a new business strategy).

Turnaround consulting: methods

There is no off-the-shelf medicine, which turnaround experts carry with themselves. Every business case is unique. However, the broad working lines and focus items are given below.

Analysis of the existing state of business (to diagnose the problem)

Product/Services

Are the product/services of the client relevant to the market in which it operates?

Are the products/services of the client popular in the market?

Do these products/services need any innovation to improve the top line (sales)?

Do any of these products/services need to be discontinued (because of negative operating profit)?

Does the market want any new product/service which the client company can provide but is not currently offering?

Customers

Customer surveys (if any ever done) and feedback received

Customer satisfaction level

Do the products/services being sold require a different target audience?

Financial health

Categorising financial resources and figures (cash, debtors, creditors, loans, bonds, short-term debts, long-term debts etc)

Credit rating

Are the available financial resources enough to run the current business?

Are the financial resources sufficient to accommodate (any) turnaround strategy?

Business Process Mapping (BPM)

Documenting all the business processes. This is later used for Business Process Re-engineering (BPR).

Employees

Staff strength in relation to existing business

Does the business require employee right-sizing and/or staff rotation?

Can any employee compensation benefit be contained or culled (overtime rates, medical allowances, etc.) to improve financial health?

Employee motivation levels

Are the employees trained to function efficiently?

Business restructuring

This is the remedy part of the turnaround consulting. In the light of the evaluation of the current state of business aka diagnosis, business restructuring process is designed. Elements which require immediate attention (e.g. new credit lines) or improvement (e.g. right-sizing) are highlighted. BPR is also part of the business restructuring phase.

New business strategy

This is the test of business acumen of any turnaround expert. While existing business evaluation and restructuring plans have a past to look at, shaping a new strategy of any business requires long-term vision. The sky is the limit as far as turning around any business is concerned. From developing financial plans to devising automation (digitalisation) strategy, all of it is dealt at this stage. Business re-branding (if required) is also part of a new business strategy.

Implementation

There are two (main) types of implementation strategies used by turnaround experts.

  • First execute business restructuring then implement the new business strategy
  • The business restructuring and implementation of the new business strategy are executed simultaneously to prevent business disruption

How to approach implementation depends on clients’ business and crisis remedy priority (high, medium low etc.).

Post-implementation

At this stage, the clients expect “projected” results. Turnaround experts closely monitor how the business is performing after implementing their business strategy. They immediately bring deviations (if any) in results back to the drawing board to check where did the plan go wrong or where does the plan require fine-tuning to achieve “projected” results.

Etihad Airways

The UAE (Abu Dhabi) state-sponsored airline gave western airlines a run for their money in the period of economic boom. The UAE is an ideal hub for all major airlines, but what western airlines did not think through was that with oil money Etihad will buy a fleet of long-range commercial jets for non-stop flights to major destinations of the world.

In the current decade, Etihad spread its wings to buy international reward programs, business lounges, new routes and even minority stakes in troubled airlines. In April 2013 it acquired a 24% stake in Jet Airways (India) for US $379 Million.

Though Etihad is operating in a loss it seems committed to increasing its shareholding in Jet Airways, which is on the brink of default. However, Etihad has hired Alvarez & Marsal, a turnaround consulting firm.

Reuters (25 January 2019) reports,

“Jet Airways, which controls a sixth of India’s booming aviation market, desperately needs a bailout. High fuel taxes, a weak rupee and price competition have squeezed profitability, leaving the airline with net debt of US $1.13 billion”.

“The Abu Dhabi-based carrier plans to raise its stake in Jet Airways from the current 24 percent, but it wants the airline’s founder and chairman Naresh Goyal to give up control”.

Etihad is aiming for a 49 percent ownership stake. It is also the maximum limit as per Indian laws.

Demand for turnaround experts

Cost-cutting aka right-sizing is the global mantra these days. It cannot be achieved in isolation. It requires professional business restructuring exercise. If a company wants to turn into profit, it has to go one step further and implement a new business strategy to complete the turnaround process.

With the world economy slipping into recession turnaround consultants will get a good opportunity to establish their practice. Large companies like Etihad will benefit from their niche expertise.

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