Day-to-day business of corporate restructuring

Are restructuring methods also suitable for day-to-day operations?

Bankruptcies are the entrepreneurial worst-case scenario. However, the factors that lead to insolvencies can also be found in many other companies. It therefore makes sense to know the sources of errors in insolvent companies and to check whether similar errors have crept into your own business, as they can cost even apparently healthy companies a lot of money. The circuit board assembler Semecs, Neunkirchen, which went bankrupt with the entire Semecs Group last year and is now operating successfully on the market under the name Neways-Neunkirchen in the Neways Group, also based in the Netherlands, illustrates some of the frequent planning and growth errors in day-to-day business.

“Many companies lack both the willingness to react to market changes in good time and the expertise to implement them consistently, as the current insolvency figures show,” says
Dr. Götz-Andreas Kemmner
founder and owner of the medium-sized company Abels & Kemmner Gesellschaft für Unternehmensberatung mbH, Herzogenrath/Aachen.

It is Wednesday, November 7, 2001, 9:00 in the morning. Dr. Götz-Andreas Kemmner, management consultant for restructuring cases, enters the premises of electronics manufacturer Semecs in Neunkirchen for the first time together with his colleague Martin Jürgens. A modern building in the style of the 90s with a functional ambience. The outdoor facilities are well maintained and the Semecs Group flag flies in the entrance area. Dr. Kemmner receives a friendly welcome at the reception desk and is shown into the meeting room. He is already waiting for you and there is freshly brewed coffee on the table, which is served in Semecs’ own cups.

So far, the procedure is no different from a normal business meeting. But for the management and staff of Semecs, appointments have ceased to be routine in recent weeks. Three weeks ago, the company had to file for insolvency. The sword of Damocles hovered over the company for several months, but the hope of the company’s continued existence was not given up until the very end. But when going to insolvency court could no longer be avoided, a feeling of paralysis spread. Nobody was aware of what would happen afterwards. How could it be, insolvency administrators are not in the company every day. However, the professional actions of the insolvency administrator and the management consultants called in to help quickly shook everyone out of their lethargy of hopelessness and set the remaining workforce into a frenzy of activity. Restructuring becomes day-to-day business.

After the insolvency administrator initiated formal legal and financial accounting tasks in the first three weeks, the consultants are on site for the first time today to review the existing sales planning and develop a continuation concept in cooperation with employees, customers, banks and suppliers. In the next six weeks, the concept, backed up by reliable figures, is to be finalized and implemented following the approval of the creditors.

Root cause analysis

The analysis of the cost structures had revealed that the Group’s planning, which was primarily geared towards expansion, was producing unreasonably high fixed costs that were difficult to reduce. The attempt to close a German plant and distribute its production to the other plants failed. It was realized far too late that the closure costs could not be financed. Cost adjustments could no longer be made in time or were too expensive. This was followed by an unstoppable chain reaction via the Group allocations. When sales collapsed due to the weak telecommunications market, Semecs Neunkirchen was also affected. This mistake is made in planning by anyone who extrapolates past developments into the future without paying attention to the life cycles of products and markets or who forgets that the reduction of fixed costs initially causes additional costs. But even if you take these factors into account, you should pay attention to your own flexibility during growth phases, keep the marginal employment rate as low as possible and plan growth carefully and with reliable figures.

Careful and resilient planning

Cautious and resilient planning therefore applies not only to restructuring cases, which are scrutinized particularly closely by potential investors, but also to discussions with investors during normal business operations and talks with banks. From this perspective, the Basel II discussion and the disquiet of some entrepreneurs about the behavior of their commercial banks is also put into perspective. Anyone who presents a plausible business plan backed up with reliable figures will still receive funding today. Understandably, in such cases, income statements that lead to short-term earnings are more acceptable than planning scenarios that only promise profits years down the line. In practice, it has been shown that in restructuring cases, discussions with new investors and banks only make sense if a “black zero” in the first financial year is the result of conservative planning.

Work out core competence

At Semecs Neunkirchen, operational planning was based on existing relationships with well-known customers from the automotive, industrial and telecommunications sectors. This has resulted in a sufficient mix of sectors, so that there is no longer any reason to fear any serious sector bias in the future. In addition, Semecs Neunkirchen had a certain technological leadership in the assembly of flexible printed circuit boards, a market segment that is growing and is not dominated by every PCB assembler. The less lucrative, because labor-intensive, purely manual assembly component (THT) in the series business is to be further reduced or outsourced through cooperation with less technologically oriented contract assemblers.

The resources required to fulfill the sales plan data could be determined relatively quickly using the key figure “value added per capita” and used as a benchmark for comparison with competitors. The sales plan figures resulted in the tough but justified requirement to reduce the workforce by 56%. Sales, technology and logistics were merged into a process-oriented order center and the originally function-oriented organizational structure was given a cross-functional, customer- and process-oriented structure for the first time. In addition, the independent maintenance and process technology departments were integrated into production, allowing the highly qualified staff to contribute to ongoing production and thus add value. All these measures led to a significant reduction in the marginal employment rate. A benchmark confirmed that the restructuring measures that had been introduced had brought the cost ratios back to the right level. Semecs was only 1 to 2% higher than the potential buyer with its budgeted figures for the first year in terms of personnel costs. In the second year, the cost planning was in line.

Successful new start

With Neways Electronics International N.V., a strong buyer was found that represented the most sustainable solution for the company and its employees, as Neways has an excellent market position and brings additional orders to the company. Neways’ goal of improving its access to the German electronics market, which is the most important in Europe, with the acquisition of Semecs Neunkirchen also promised a prominent position for the company within the Neways Group. The company made a promising new start with 49 employees, less than half of its previous workforce. On the basis of conservative, investor-neutral planning with a “black zero”, a clearly positive result can now develop.

The case study shows that companies must and can cope with serious cutbacks in the event of restructuring. The external pressure from insolvency makes it possible to implement such measures consistently. If comparable measures were implemented just as quickly, consistently and with external support in companies that are still healthy, many insolvencies could be avoided and Basel II would no longer be as hotly debated as it currently is.

Point of view

Dr. Kemmner sees a significant factor for this sharp increase in SME insolvencies in 2001 in the fact that in the (German?) perfectionist mania, production and the supply chain were optimized and automated in many places to such an extent that people and machines could only work profitably with large batch sizes. A low marginal employment rate, on the other hand, offers security. The Fraunhofer Institute for Systems and Innovation Research also attests to an excessive degree of automation in a market research study from 2001.

Picture of Prof. Dr. Andreas Kemmner

Prof. Dr. Andreas Kemmner

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