Interview
Dr. Götz-Andreas Kemmner, Managing Partner of Abels & Kemmner GmbH, on the success factors of downsizing management.
Creditreform: In globalized markets, downsizing is now used as the driving force behind almost every merger. What is behind this process?
Dr. Kemmner: Basically, downsizing is about reducing the size of the company and getting rid of everything that causes more costs than it contributes to the company’s earnings. This typically involves divesting entire value chains, not just certain functionalities. In concrete terms, this means you have to ask yourself which market segments, distribution channels, products and production processes are still economically viable? Which operational functions that are not of strategic importance to us can we possibly obtain more cheaply on the market than by performing them ourselves? And finally, and here we come to the sensitive area, it is also about reducing the operational resources that are not needed, i.e. the four M’s: people, machines, materials and money.
Creditreform: Where do you see the sticking points of this method?
Dr. Kemmner: When downsizing, you have to take a close look at your costs. However, in our experience, there is often a lack of clear cost information to determine the contribution margins. But this is the only way to recognize where you win money and where you lose it – the classic sticking point in the content structure. But there is also an important point when it comes to implementation. A potentially necessary staff reduction or relocation is always associated with a psychological barrier. Nobody likes doing that. And for entrepreneurs, especially SMEs, this is always a question of how they present themselves to the outside world.
Creditreform: How should we assess the argument put forward by critics that the common restructuring method of downsizing works like Manchester capitalism in the short term?
Dr. Kemmner: Downsizing is a question of corporate responsibility. If I want to run a company successfully in the long term, then in case of doubt I have to be prepared to cut a job in one place or another in order to secure the total number of jobs. However, job cuts should be carried out in as socially responsible a manner as possible.
Creditreform: Is it true that downsizing seems to be going out of fashion in the age of shareholder value?
Dr. Kemmner: I don’t think it’s going out of fashion. It is certainly slipping out of the public eye more than perhaps it did in the past. One of the problems with shareholder value is that company value is very strongly linked to the share price. And the share price is determined much more by psychology than by facts. If I take internal measures to ensure that my company becomes more profitable, this has much less impact than if I postulate correspondingly large future projects to the outside world. The Neuer Markt offers excellent examples of this. On the other hand, it is now fashionable to buy additional markets, i.e. to merge. And behind every merger there is also a kind of downsizing, for example due to the fact that I have certain capacities twice that I only need once …
Creditreform:…so the keyword is synergy effects?
Dr. Kemmner: That’s right, the famous synergy effects, which in retrospect often turn out to be rather marginal.
Creditreform: Downsizing is about focusing on profitable customer segments, sales channels, product groups and production and procurement processes. How does this process differ from the usual focus on core competencies?
Dr. Kemmner: The first step in downsizing is to free up entire functional chains. Corresponding resources can be identified here, from procurement to production and sales. The second step, outsourcing, is about doing without certain segments. In most cases, costs can be reduced more quickly by taking the first step, i.e. giving up value-added chains, than by taking the second step of outsourcing.
Creditreform: Is it possible to identify a ranking of company-relevant areas when applying downsizing in terms of efficiency?
Dr. Kemmner: Not really. First of all, downsizing is about eliminating entire value chains – you could also provocatively say value destruction chains. In this respect, the entire chain in the company is affected. However, most costs can typically be saved in production, and in some cases also in sales.
Creditreform: Downsizing processes are associated with heavy burdens for employees and management. After all, jobs are also being put to the test. How can these burdens be cushioned?
Dr. Kemmner: There are two typical stresses that play a major role here. On the one hand, social stress and, on the other, psychological stress. In the case of redundancies, the main focus is on social cushioning. And it is typically not just the pure legal position that should play a role here. Ultimately, of course, this is also a sign to the remaining employees that colleagues will not simply be dropped. I think that is very important. The psychological burden depends very much on the individual, their psychological constitution and their family situation.
Creditreform: Many managers are only too happy to refuse to reflect on the paths they have successfully taken with the necessary distance and without departmental egotism. Is this a core problem in the application of downsizing processes?
Dr. Kemmner: I wouldn’t consider this to be a core problem of downsizing processes. I think this is a general core problem – and to a certain extent understandable from the managers’ point of view. If the company’s organizational chart assigns me the focus for a specific area, and if I am possibly also paid according to results, then the danger of a focused view that loses sight of the overall aspect is very great. Holistic thinking requires a lot of persuasion. This is certainly a core problem, but it is not specific to downsizing.
Creditreform: How can a company solve this problem?
Dr. Kemmner: Experience shows that resistance in a downsizing process only arises after the analysis phase. In this situation, you can only argue in a fact-oriented manner. So put the facts clearly on the table, discuss the alternative courses of action, convince with the facts. In my experience, once you have made decisions, you have to act quickly and consistently so that resistance does not build up afterwards.
Creditreform: The example of the failed merger of Dresdner and Deutsche Bank shows that the improper handling of downsizing can lead to reputational damage. What was done wrong here?
Dr. Kemmner: The basic concept behind the planned merger was certainly correct. In my opinion, however, two things were done wrong. On the one hand, external communication was poor and placed customers in a two-tier society. On the other hand, the employees were also divided into two classes when it came to combining the areas. There was no attempt to take a performance-oriented approach; instead, performance was linked to belonging to the right company. And this naturally led to internal resistance. This could perhaps have been remedied if the decisive measures had been taken quickly and swiftly and the resistance had not been given time to build up. But then it just took too long.
Creditreform: Can incorrect downsizing management lead a company to failure?
Dr. Kemmner: Yes, because it is a matter of existential questions if I do without certain customer or product segments. In my experience, however, more bankruptcies have been caused by missed downsizing than by botched downsizing.
Creditreform: In your experience, what does an optimal downsizing manager look like?
Dr. Kemmner: Downsizing can’t be done in a standardized way. Of course, there are certain steps that you have to take, but they don’t actually mark the yardstick by which good downsizing management can be measured. It is crucial that it is done in good time, carefully and consistently.
Creditreform: Does downsizing management also have to be mastered in day-to-day business or is it more of a medium or long-term task?
Dr. Kemmner: Yes and no. Basically, it is an activity that becomes necessary in phases. Downsizing does not occur all the time. However, I should always ensure sufficient transparency and the correct calculation of my cost structures.
Creditreform: How do the internal and external communication processes have to be designed in order to achieve success?
Dr. Kemmner: When it comes to job cuts, you have to put the facts on the table in internal communications and explain the consequences of not making this decision. And we must try to develop a solution that is as socially acceptable as possible. Basically, that’s all you can do. When it comes to external communication, the topic of spin-offs and sales is certainly less critical than job cuts. In general, you always have to clarify the purpose and make the future orientation clear.
Creditreform: Is downsizing only suitable for restructuring cases and mergers or is it also a strategic option for healthy companies?
Dr. Kemmner: We usually come across this topic when it comes to insolvency. But downsizing should actually be something like a regular detoxification cure for healthy companies, because it only ever involves limited measures. In reality, however, it is often an emergency operation on seriously ill patients and the consequences are correspondingly dramatic.
The interview was conducted by Klaus-Werner Ernst
Streamlining value chains
The medium-sized Abels & Kemmner Gesellschaft für Unternehmensberatung mbH in Herzogenrath was founded in 1993 by the engineers and economists Dr. Helmut Abels and Dr. Götz-Andreas Kemmner. The consulting company focuses on streamlining value chains (supply chain optimization) for series and variant manufacturers and wholesale companies. The consultants also work in the area of corporate restructuring. In 1997, Abels & Kemmner founded the first virtual company from six medium-sized automotive suppliers. Today, the consultants work in four networked teams for supply chain optimization, turnaround management, IT consulting and IT-supported inventory management.
