Turnaround & Restructuring

Corporate Finance Restructuring: Swinging for the Fences Through Transformation

Corporate finance restructuring projects are challenging to get right, especially when they are large in scope to the overall organization. I believe there are a few important strategic ingredients for success to get right before you ever get to the tactical project side of the equation. This article will walk you through them and then give an example of a significant project at a company where I worked.

Transformation Success Criteria

The most important aspects for transformation success are culture, realistic evaluation capabilities and project management.

Culture

Some companies have cultures with bandwidth for transformation. I have worked at companies that had significant success in strategic relocation and evaluating impact of third-party changes or even the impact of natural disasters. These companies spend time and energy to make sure their path forward is the correct one, and then they implement accordingly. From my experience, these companies tend to be large industry leaders with the expertise and experience to not only come up with the plan, but also execute it. Some of this is hard to gauge, but it is that type of great corporate leadership that you know when you see it.

Learn more about cultures and change in this article: Change Management: Preparing Your Team.

Realistic Evaluation

Next is the ability to evaluate plans for transformation realistically and reasonably. A best-in-class plan can only be a success if it can be executed. This is tough to learn, as we all try to reach for the stars. However, hope is not a strategy, and just being positive isn’t enough. The goal is not to be negative, but to be realistic and reasonable in your responses to questions like:

  • What can we accomplish?
  • When can we accomplish it?
  • What experience do we have at our disposal?
  • What are our core competencies?

If I said I am going to fly to the moon tomorrow, no amount of positivity will make that possible. That doesn’t mean it isn’t possible, but it would realistically require a long (long long) timeframe as well as the right technology, budget, staff and manufacturing capabilities.

I worked with a consulting company that put it like this: You must take the end state (which might seem impossible) and walk backward to build the structure to get there. This to me is the most important requirement to turn an idea into reality.

Project Management

Last, but not least, are project management skills. One of the successful companies I worked with had a significant investment in their structure as a project-driven organization. It wasn’t always perfect, but the project structure was significantly ahead of other companies, and their ability to execute was apparent.

Many of the project leadership also had PMP certifications (i.e., Project Management Professional). The project CEO and CFO always had control of the scope, schedule and financials. They had a mantra: Safety, Quality, Delivery, Cost. The focus started with keeping everyone safe and moved through the other important pieces of the puzzle to ensure our (and our customers’) success. Many of the projects seemed like an orchestra with all of the instruments tuned to the key of success.

Now I will get into the details of a project that I worked on and some of the challenges that we faced during the execution stage. Spoiler Alert: The project was ultimately unsuccessful, due to the lack of the success criteria we’ve just reviewed.

Corporate Finance Restructuring: The Challenge Project

Sometimes, companies must swing for the fences to manage much-needed transformation. During the Great Recession, I worked with an aerospace manufacturing company that was under joint private equity ownership. The company manufactured and offered parts and services for aircraft ranging from piston aircraft to turbo-prop planes to business jets and military trainers as well. At that time, their volume had been cut roughly in half, making it difficult for the company to right-size and optimize their operations. No matter how fast you change any company, it is hard to manage with volume dropping to 50% of the manufacturing structure the company has in place.

The company faced a host of challenges:

  • The cost profile was uncompetitive.
  • Image was a problem: the corporate jet was vilified as a sign of overcompensated executives at companies looking for government handouts during the recession.
  • The recession had also left lightly used business aircraft on distress sale to essentially become another competitive stream of products.
  • A Brazilian competitor was doing more with less, with the advantages of lower costs in Brazil and a more optimal relationship with their government regulators.

Despite all of these challenges, the owners were willing to roll the dice. I used to joke that the entire company’s valuation had been written down to the value of one private equity executive’s bonus, and it was time to roll the dice and see what the company could do. They had two years to do ten years of work and get the company well-structured for debt renewals.

These challenges were clear when I joined the company. I had run a rough-math Z-score that showed they either needed an infusion of cash or they could end up bankrupt. However, I relished the challenge (pun intended) as I joined to lead finance for the “Challenge” project – a multifaceted structure to remove $200 million in annual costs from the business over the next two years. There was a full structure of dedicated personnel along with the consulting team to devise a strategy and then execute the plan.

Project Debrief: Was Our Evaluation Realistic?

The biggest issue for the overall project was the sheer scope and timeline. A company of this size, magnitude and industry takes time to process change. The recession outlined the scope and the pressure from debt refinancing outlined the time. However, if you’re in such a place, it makes more sense to scope out a reasonable sense of what could and could not be achieved. This would counteract your eyes being bigger than your stomach and keep some items off your Thanksgiving plate.

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How We Structured Our Corporate Finance Restructuring Project

As companies work through corporate finance restructuring projects, they should answer a bunch of structural questions before getting started. They should isolate the categories that offer them the most opportunity and impact. As you build the structure of the project, it is important to put in place a methodology and process to review, approve and document each action. Last but not least, it is important to determine the structure of personnel dedicated to the project part-time or full-time and ultimately who will lead the project. The company also has to define success metrics that can be measured in time, dollars or other performance indicators.

We segmented the project into three main sections aligned with the largest cost categories:

  1. Materials Cost Reduction (materials),
  2. Lean Manufacturing (labor), and
  3. Facilities Footprint Review (facilities), including allocation of core and noncore tasks.

We worked with IT to build a tracking system for each one of the individual activities, which ended up at more than 750 in total. Some were big and some were small, but each had the opportunity to save the company money. We set a baseline and managed the project to validate savings across the various activity streams.

It was tough to keep all of us honest: if you move cost from one department to another, that is not savings. If one group lays off three employees, and another group then rehires them, that is again not savings – but yes, it was good for the affected employees.

Corporate Finance Restructuring Section 1: Materials Cost Reduction

For materials cost, the challenges were stifling. With the volume decreases, it was ever harder to negotiate savings with vendors. Long-time volume contracts created issues that led to excess inventory crowding the factory floor. However, the team dug deep to look for opportunities, including:

  • Moving parts production to lower-cost countries,
  • Standardizing option choices to extract vendor discounts and
  • Comparing costs across product lines to uncover variances and opportunities for savings.

The parts production was looking to move a significant part of Wichita parts production to a facility in Mexico to enable labor arbitrage. The expectation was that final assembly had to be in the United States. but parts production could move to a lower-cost country. The largest issue here was that the low-cost country employees didn’t have the advantage of years, or in some case decades, of experience so they couldn’t produce at the same quality as the local employees.

Corporate Finance Restructuring Section 2: Lean Manufacturing

Lean manufacturing would bring labor cost opportunities and efficiencies. We focused on completing work at stations on time, and we even joined two assembly lines together to bring better flow. I still remember sweating as I watched them combine the lines by rolling an aircraft between the lines with only mere inches of clearance between the facility’s upright beams and the aircraft’s tail. There was significant review of all the activities by line by station to ensure the activity was done correctly and on time.

Some of the results here would be defined by the product – long-time aircraft would continue to have better production results. You reach a run rate with aircraft where your line becomes well-managed and repetitive. Many of the products were at that run rate, but the newer products struggled to achieve it, and the struggle continued.

Corporate Finance Restructuring Section 3: Facilities Footprint Review

Last, but not least, was the facilities footprint. Facilities was one of the biggest issues as the structure was built for such a larger volume profile, so it was challenging to adjust on a timely basis. Leadership had big-picture initiatives such as moving the entire company to Louisiana to take advantage of state incentives. This eventually led to a batch of incentives offered by the state to keep the headquarters and employees in Kansas – and a promotion for the person who came up with the original idea to move away.

Defining core vs. noncore activities was also a part of this review. For example:                           

  • Did we want to bring in a seat frame, stuffing and leather to build a seat, or just buy completed seats?
  • Could an outside company build our wings? If they did, how would we transport them to our factory?

Everything was considered, and each question became an opportunity. The details were examined down to overhead allocation amongst buildings. Why would we charge overhead the same way to a 75-year-old warehouse for assembly as a building with the machinery to spin carbon fiber into aircraft fuselages using inordinate amounts of electricity? (We shouldn’t.)

This would be one of the more successful pieces of the puzzle, as the company shed less-strategic facilities and partnered with the state of Kansas for significant incentives. However, one underlying condition would be a thorn in our side. We couldn’t quickly rectify an airstrip surrounded by factories built to support twice our production volume.

Project Debrief: How was our project management approach?

The structure here made sense to me, but the scope was again the biggest issue. There wasn’t enough staff to properly manage an ongoing business while at the same time leading each of these individual projects. Many of the activities were so dramatic in size that they could have been an entire project – over a several-year transformation.

Learn about project management and scope in our article: About Project Scope Management in Finance and Accounting Projects.

Risk Overview

The biggest risk to me during my role at the company was execution risk. I always felt like the company in that time was a Harvard Business School case study. The conceptual ideas were great – the ones that best-in-class companies executed frequently. However, the company had either no or poor experience executing these types of changes. I sometimes clashed with the consulting team with realistic viewpoints that were perceived as negative or pessimistic.

The end result was not what anyone wanted – I along with the CFO lost our jobs along with hundreds of others and the company filed for bankruptcy, and the company was eventually bought out of bankruptcy by a competitor.

Project Debrief: Was the culture transformation-ready?

The biggest problem here was that it was too little and too late. The company had an insurmountable number of issues – both operational and financial – and the recession was the straw that broke the camel’s back.

In addition, the ability to achieve this dramatic transformation was not part of the inherent skill set of the company. The company had little to no experience in transformation, and the experience they had in the past was not successful. A more iterative approach might have worked, but the timeline on the debt probably still would have been too short.

Finally, it’s key to remember a strategy is only an idea until it is executed. What looks easy on a PowerPoint slide could be a quagmire of issues that your team may or may not be able to overcome. Build a level of flexibility in your strategy to allow for real-world adaptation and adjustments, and you can better set your company up for successful transformation.

Learn More

I wouldn’t change my experience in this corporate finance restructuring project as I learned more in that year than maybe any other in my career. It taught me the advantages of thinking big and rolling the dice to fight rather than just accepting the defeat. I was able to present to the entire executive and consulting team and work through issues across the entire organization. It also set me up for my next role with another aerospace company.

If you’re heading toward financial turnaround or restructuring, or you just need interim financial management support, we invite you to contact us. Our finance and accounting consulting team’s expertise and experience can help you plan, avoid critical roadblocks and manage the workload. Learn more in our services explainer:

financial turnaround restructuring and interim management services

About the Author

Bob has 25 years of finance and accounting leadership experience serving companies from the Fortune 500 to the middle market. Prior to 8020 Consulting, Bob led finance and accounting as the Vice President of Finance for Ardmore Home Design, a high growth wholesale luxury furniture company. He has leadership experience with TechnipFMC (oil and gas equipment and technology), Panasonic (in-flight entertainment and communication), Hawker Beechcraft (general aviation) and Ford Motor Company. Bob also worked with the CapAnalysis Group as a litigation consultant supporting attorneys and clients with finance, accounting and economic analysis. Bob holds an MBA in Finance and Accounting from the Ross School of Business at the University of Michigan and a B.S. in Economics from the W.P. Carey School of Business at Arizona State University.

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