The Role of Chief Restructuring Officer
When a business is in turmoil and the Chief Executive Officer ("CEO") has his (her) hands full addressing the day to day problems, the best solution could be the introduction of a Chief Restructuring Officer ("CRO"). Today, the financial community recognizes the importance of companies hiring a CRO because a CRO helps creditors and shareholders gain more confidence, and more importantly, has the experience and knowledge to help stabilize a business that leads to increased value. The CRO would report to the CEO or potentially the Board of Directors ("BOD") but the CRO's responsibilities would be focused on:
- Creating a business plan that demonstrates mid and long-term viability supported by believable assumptions about the future.
- Leading forbearance and restructuring arrangements with senior lenders.
- Assisting and/or negotiating directly with trade creditors to assure continued support.
- Assisting in sale and equity transactions.
- Assisting management in identifying profit and cash improvement projects.
- Identifying solutions and assisting management in working out arrangements with unsecured creditors.
- Locating outside sources of capital if needed.
- Ensuring there is sufficient cash flow to get the business through the crisis.
- Assisting management in negotiating out-of-court settlements or preparing and navigating through a Chapter 11 bankruptcy filing if is required.
The CRO would have to be a senior professional/executive who is familiar with all of the techniques for saving a business in the short run and building a plan that has clear scalability when the economy does turn around. Depending upon the urgency and complexity of the situation, a small team of professionals will support a CRO and help ensure the projects are completed faster and with less risk.
The CRO provides a vital role for five major reasons:
- Credibility - Establishing credibility is more critical than selling a palatable vision. Executives must resist the emotional temptation to convey an optimistic perspective that will make the near-term easier but will dramatically erode confidence if the 'better' results do not materialize.
- This is a science - The management of most companies has never been through a crisis before. There are important steps to follow in buying time, stabilizing the work force and keeping the sources of capital informed in a way that enables them to be supportive. There are also important tasks related to employee communication. If this is done wrong the business will lose the best and brightest, trying to deal with complex issues using the deadwood as a source. It is essential that the Business Plan be structured from the bottoms up and not from the top down. It must be operationally based. Techniques such as Value Stream Mapping, Six Sigma, Supply Chain Management, Revisualization, Drivers Evaluations, Critical Path Techniques, along with a well researched road map for organizing the whole process so that it flows smoothly.
- The qualified CRO will immediately look into possibilities such as excessive inventory, high transportations costs, excessive use of space, high direct and indirect labor, opportunities to reduce the fixed cost, reducing the break-even of the business, reduction of cycle time, minimization of overtime, acceleration of receivables, proper management of payables and the institution of a daily cash management system.
- Resource Availability - There is no time to waste when a company is in turmoil. It is not the time for on-the-job training. The competent CRO has successfully done this before, has the tools at his command and is devoting full time to the problem. He must also have a firm behind him that can provide the other resources if they are needed because there is no time to train inexperienced employees or begin a process of hiring new untested personnel.
- Speed of Execution - The effective time for a company in turmoil is thirty times faster than for a healthy company. Healthy companies can get by with monthly reports; the company in crisis must have daily reports. The sense of urgency must be heightened throughout the organization and there are techniques to make this happen.
- Failure is not an option - In this environment, there is only one chance to do it right. It must be properly done the first time. Therefore, the CRO and his support team can not afford to lose its focus.
Many times the initial reaction to the suggestion of an outside CRO is the fear that existing management and employees will resist change. Our experience is quite the opposite. Most employees know, before they are formally told, that the company is experiencing problems and are very anxious to try new things to reverse momentum and get the company back to profitability.
The CRO's key responsibility is to make sure the process moves forward in a focused fashion. This is very comforting to nervous employees because they begin to see a new vision and a way out of the existing dilemma.
It is important for the CEO to realize there will be resistance but we have discovered if the CEO makes it clear that the CRO has the authority to carry out his responsibilities, hearts and minds will follow. The second tier of management can not do it themselves because they may be part of the problem and they will focus instead on protecting their own positions.
The CRO's job is hard work, but together in parallel with the CEO and/or the BOD, they can save a business. We have discovered that companies can be saved whether they are declining in revenue, growing or experiencing flat sales. A good CRO/CEO partnership is the best solution for the company in turmoil.
Whether a Company is struggling financially or on the cusp of breakthrough growth, KGI can help. Our seasoned experts work alongside management to solve complex cash flow issues, operational challenges and other business crises. If liquidity or sale is needed, KGI provides a powerful combination of services and expertise to achieve outcomes that cannot be duplicated by other standalone consulting firms.