Coping with corporate crises
Business crises take very different forms. With increasing dynamic complexity, crises increasingly occur completely unexpectedly because essential framework conditions suddenly change. Much more insidious are crises that result from gradual changes. In any case, the earlier a crisis is recognized, the more effectively its effects can be limited.
About the author
Dr. Werner Boysen
Dr. Boysen helps companies stabilize their organizations with his Dr. Boysen Management + Consulting GmbH. He makes companies resilient. In doing so, he uses insights from systems theory in combination with his many years of experience in the operational restructuring of companies. In economically difficult and uncertain times, the importance of resilience increases.
In 2021, Dr. Boysen developed and launched the first virtual management consultancy www.consultingcheck.com.
Table of content
- Identification of corporate crises
- Root cause identification
In addition to the numerical development, the strength of the strategic orientation, the fresh assessment of the business model, the quality of the processes and the performance and motivation of the workforce are important prerequisites and thus indicators of future viability. Investing in strategic and operational risk hedging also helps stabilize companies. You can identify such rather soft factors with a SystemScan and receive action-oriented recommendations.
Crisis management in companies therefore begins with recognizing the signs of the impending crisis. Leading indicators, some of which are derived from the development of financial figures, are suitable for this purpose. In order to recognize correlations, do not only pay attention to individual values, but also look at relations. The revenues generated and the current liquidity are useful facts, but they do not say anything about the future development. Look at the development of inquiries, incoming orders and the development of the customer structure. A checklist will help you focus your attention on suitable key figures.
The causes of a crisis are often deeper than they appear at first glance. Allow your company to be ruthlessly examined and accept identified weaknesses.
Take remediation steps consistently.
In the current turbulent times, the framework conditions for your business are changing for many companies and triggering crises. Often, inconsistencies already exist that are now having a negative impact. Therefore, dealing with crisis management is highly relevant now.
At the beginning is the identification and acceptance of a crisis
The first challenge is to identify an emerging crisis and to accept it.
Root cause identification
No crisis can be effectively managed without determining the root causes.
The reliable identification of the actual causes of the crisis is not trivial.
Measures must not only be identified and decided upon, but above all implemented.
Both the planning of effective bundles of measures and their spirited implementation are demanding.
Identification of corporate crises
The first challenge is to recognize an emerging crisis and to embrace it. Crises that result from gradual changes are difficult to grasp. You can sense that it is getting harder to keep the business, but a concise trigger for a crisis is not visible. The more involved you become in operations and the more you are already mentally and emotionally consumed by the impact of a crisis, the less attention you will pay to opportunities for fundamental change.
Regular reflection on your own actions can help. For this purpose, it is best to withdraw from the operational side for 1-2 days at intervals with your management team and determine your position from a higher vantage point. Don’t talk each other up in the process. Past success factors do not necessarily apply to the present or the future. A corporate foresight process can help by proceeding from the outside in. In any case, deal with the framework conditions that are essential for your business and with the possibilities of your organization. If necessary, compare the changing expectations and opportunities that your environment presents with the possibilities of your organization. This will enable you to recognize critical developments and the need for action. Free yourself from inner reproaches that you should have recognized the crisis earlier and taken countermeasures sooner. That is of no use. It is important to name the crisis now and to stand by it.
When general conditions suddenly change, it is easier to identify a crisis.
The following key advantages result from this solution approach:
- With a corporate foresight process, you remain attentive to changes and the need for action
- You reflect on your company and your own behavior without reservations and in an insight-oriented manner.
- You can counter emerging crises at an early stage.
Examples for the identification of corporate crises
Disruptive onset crisis
We are experiencing disruptive-onset crises more frequently than before. Framework conditions change radically without companies being able to adjust to them. Here I give an example of a freight carrier.
Creeping crises have always existed. Here I discuss an example of a winegrower.
There are crises for which discrete triggers have provided, but which also experience discrete defuses. Here I give an example of a campground operator in the Corona era.
Disruptively occurring corporate crisis
We are experiencing disruptive crises more frequently than before. Framework conditions change radically without companies being able to adapt to them. Here I will give an example of a freight carrier.
Shortly before the Corona crisis, the carrier had converted a significant part of its fleet to trucks powered by clean-burning LNG. At the time, 1 kg of LNG cost EUR0.60, while 1 liter of diesel cost EUR1.20. In the course of the energy shortage, the price of LNG climbed to over 5.00 EUR/l during the following years 2021 and 2022, causing an unexpected economic problem for the carrier. The fact that the company would face a crisis threatening its existence was quickly identified.
The carrier’s house bank was not able to understand the special matter of the gas market development and therefore expected a reorganization concept with a continuation prognosis. On its own, the carrier would not have been able to cope with this sudden crisis for which it was not responsible. Although the managing director was able to assess the market realistically, he could not afford to draw up a meaningful concept because he had to take care of running his business during this difficult phase. Moreover, in such crisis situations, commercial banks expect the expertise of independent third parties. So we created this concept, which resulted in the carrier being financially supported by his house bank in this extremely critical situation. We would also be happy to help you in a crisis caused by such disruptive developments to methodically work out the facts and assumptions about technologies, political decisions and markets in a clean way, to show probable scenarios and to recommend measures to get your business back on track. Feel free to contact me: email@example.com.
Creeping business crisis
Creeping crises have always existed. Here I will take an example of a winegrower. The winemaker has been in debt on his farm for decades until no collateral was made available for further loans. So the winemaker “sold” customers coupons that they could use to have wine delivered in the future and raised money with crowdfunding. He expanded the structures in his company to prepare it for higher sales revenues, which didn’t happen. He pushed the crisis to the hilt, and that’s probably why he never began to turn the business around in a performance-effective way.
Counteract such creeping processes by holding regular sparring sessions about your the position of your business. Advisory boards are suitable discussion partners. You are also welcome to contact us: firstname.lastname@example.org.
Temporary business crisis
There are crises for which discreet triggers have provided, but which also experience discreet defusions. Here I give an example of a campground operator whose business – due to measures to contain the spread of the Corona virus his business – was restricted for two years. The business, which was demonstrably doing well, experienced a temporary cash crisis and needed an interim loan to restart after Corona. The crisis was clearly identified.
To obtain financial support from commercial banks to bridge such temporary crises, you usually need an expert opinion from an independent expert. We regularly prepare such meaningful expert reports in the form customary for banks. Feel free to contact me about it: email@example.com.
Root cause identification
Reliably identifying the actual causes of a crisis is not trivial. Often, there is no single cause, but rather a chain and network of circumstances that lead to the crisis. The actual causes often lie far back in time. A liquidity crisis is usually the consequence of an earnings crisis. And the earnings crisis is a consequence of inappropriate structures, processes and products, which in turn result from an inappropriate strategic orientation. The latter is often the result of misguided corporate governance, which was allowed to happen by shareholders and management.
In order to identify the true causes of a crisis situation that is emerging or has already occurred, it is advisable to crystallize the phenomena phase by phase within the management circle. First, ask what difficulties you are currently experiencing. For example, you may find that you have or will have liquidity problems. Follow up this observation by taking a wide-angle view and asking yourself why this might be the case. You may find that you are losing sales volume. Again, ask what that might be due to. You may find that you have too few operational resources available; you may also suspect friction-ridden processes, perhaps a need for training, motivational problems, or a sales weakness. In turn, the causes of all these observations are often interwoven in many ways. Nevertheless, continue to go through this mental game as systematically as possible. At some point, you will come to the point where individual decisions need to be critically reviewed. You will also reach the point where fundamental, perhaps strategic decisions, perhaps even decision-making processes need to be reflected upon. Now you are close to the real causes.
Cultivate an atmosphere of open discussion in this discourse and involve employees from the key operational functions in this process. Be critical of yourself as well. Do not dismiss assumptions about the causes of crises, listen carefully to employees on the front line, and see the process through to the end. If you were to stop identifying the causes beforehand, there is a high probability that you would only arrive at bogus solutions that would not help your company, but would probably weaken it even further.
We would be happy to support you in this process. Please contact me: firstname.lastname@example.org.
The following essential advantages result from this solution approach:
- You grasp the actual causes of the crisis that is looming or has already occurred, in its pattern of effects.
- You create a common understanding of the crisis situation and crisis causes in your organization.
- You achieve identification with the results of the analysis as a necessary prerequisite for effective implementation measures.
Examples of root cause determination
Factual root cause determination
The best prospects for remediation are those who conduct a factual root cause determination. An example of this is a specialist wholesaler of components used in building construction.
“Third parties are to blame”
Unfortunately, it is not uncommon to meet entrepreneurs who systematically seek the blame for crises in their environment, never in themselves. I know a case from the mechanical engineering industry that led to devastating consequences.
Sometimes the processes are too complex in their interplay that it is difficult to identify the actual causes. As an example, I cite a company from the automation technology sector.
Factual determination of causes
The best prospects for remediation are those who conduct a factual root cause investigation. An example of this is a specialist wholesaler of components used in building construction.
Nothing is worse for a company than 10 splendid years. That was the case here. The workforce always had a secure job and earned better than usual in the industry. However, sales have now been stagnating for several years, and this despite massive price increases in the market, as was possible and also necessary in 2021/22. Apparently, the organization, which was used to success, had become sluggish. The management team only woke up when earnings shrank, but then courageously set about addressing the causes of the crisis. However, no obvious cause stood out clearly.
So the management team opted for an open and in-depth discussion in which there were to be no taboos. This attitude was a key success factor in unearthing the stagnation. The discussion was facilitated by an external moderator with crisis experience at a reasonable cost. After a relatively short time, the team reached a consensus on the causes, not excluding its own behavior. It was important to realize that the stagnation was not triggered by a single cause, but rather by many superficially small causes, whose interplay was amplified. No one would have seriously considered these previously insignificant levers before the intensive study of the causes. The insight that these many small “construction sites” should now be worked on was decisive for the subsequent implementation of sustainably effective measures to increase earnings. The company was able to continue its earlier success story.
Contact us if you are facing similar challenges. We would be happy to moderate your root cause identification process. This works everywhere where management is open to factual and constructive discourse. Feel free to contact me: email@example.com.
“Third parties are to blame”
Unfortunately, it is not uncommon to meet entrepreneurs who systematically place the blame for crises on those around them, never on themselves. I know of a case from the mechanical engineering industry that led to disastrous consequences. The entrepreneur had developed his company into a significant market player, but as a technician was overburdened with the management of the now grown company. Processes were becoming error-prone and rework was putting a strain on capacity, revenue and the company’s reputation in the marketplace.
It was more than obvious that the entrepreneur made some wrong decisions due to personal overload, but then blamed others for the consequences. When the staff had solved the problems, the entrepreneur boasted that he himself had brought about the solution in a self-sacrificing manner. The company suffered from his perpetrator-victim-savior syndrome. He surrounded himself with his “bodies,” which reliably provided him with affirmation, while motivation in the workforce declined. The workforce and the entire company basically had to be protected from the managing partner.
Of course, there was a lot going wrong in the company in the meantime. The challenge, however, was first of all to carry out a proper investigation of the causes, in which the managing partner had to be constructively involved. A factual analysis would have failed because the shareholder would not have accepted it. The first task was therefore of a more psychological nature, because the entrepreneur had to be won over with his entire personality, his fears, his pride and his vulnerability, and opened up to the project. Only then could factual discussions be held, in which customers and suppliers were also involved.
This process took time that was not actually available, but was unavoidable. With the help of an external psychologically trained moderator, it was possible to persuade the entrepreneur to find out the real causes of the crisis, including his own behavior, and later to eliminate them to a large extent. As a result, a beautiful medium-sized company was saved.
Get help in time: firstname.lastname@example.org.
Sometimes the processes are too complex in their interplay that it is difficult to identify the actual causes. As an example, I will cite a company that supplies and maintains manufacturing automation equipment.
Despite a strong economy, excellent products and excellent processes, the company, which planned and implemented major projects, suffered from a sharp decline in incoming orders, which brought the company close to insolvency. The managing partner, who succeeded in significantly expanding the company in the second generation, had become blind to his environment and to his own weaknesses in the course of his success story, even towards customers.
He thought he was doing everything right, but in desperation called me and asked for a sparring session. The reasons for the relatively sudden drop in incoming orders were not obvious. So we agreed to conduct a speedy root cause investigation, in which we would also involve customers and suppliers.
The resulting root cause analysis revealed that there was skepticism in the market as to how the company could offer such top products at reasonable prices. Customers speculated about how long this could go on at all. Because customers were dependent on their supplier for the long-term maintenance of their purchased equipment, many decided to buy from other suppliers who seemed more stable. This led to a self-fulfilling prophecy, in that incoming orders declined, customers soon stopped receiving guarantees for their down payments on projects, suppliers then stopped making advance payments due to rapidly deteriorating credit reports, and the company quickly scraped close to insolvency despite excellent operations. Apparently, the company did not communicate appropriately with its customers.
It was possible to attract an investor who valued the “diamond” that the company was at its core. Through market communication moderated by an external communications professional, the company was able to rebuild the necessary trust and, despite the difficult financial situation, win over customers and suppliers for new upfront services and stabilize the company again despite deep wounds. If you feel you may be biased, seek open sparring with us: email@example.com.
Both planning effective sets of measures and implementing them boldly are challenging and require attention, methodology, dedication and controlling.
First of all, regarding the planning of measures: Usually, the process of measures has to be designed in two parts. You often need immediately effective measures that give you “breathing room” for more profound medium- to long-term effective measures. Address both. For clarity of thought, it is advisable to differentiate between financial and performance measures. Financial measures can include deferral or waiver agreements or debt rescheduling, which have an impact on the liabilities side of the balance sheet. Performance measures include changes in practices, technologies, products, structures, or investments that affect primarily, but not exclusively, the asset side of the balance sheet.
Evaluate both the financial cost and the earnings and liquidity impact of each measure. And look for interactions among the measures you list. Also consider the personal capacity of your employees so as not to jeopardize the implementation of the measures. It is best to involve your team in the development of the action plan. Decide together on sensible priorities and realistic deadlines. A discourse based on cybernetic principles is recommended. The CyberPractice approach has proven successful. Ask your team to ensure that the catalog of measures is actually suitable for eliminating all identified causes in a reasonable time and with reasonable resources.
Now to implementation: in many organizations, there is not a lack of ideas, but a lack of stringent implementation of decided measures. If the measures have been developed according to the CyberPractice approach, it can be assumed that they are holistically designed and well coordinated with each other. Implementation requires clear management commitment as well as tight project management. If you do not have access to anyone with the necessary project management skills within your own ranks due to workload, it is advisable to call in a methodically strong and committed project manager on a freelance basis. Make sure that the project manager is experienced in crisis management. After all, crisis management requires pulling out completely different stops than implementing a project within the ordinary course of business. The ability to enforce deferral or waiver agreements or to cap existing customers who are unwilling to provide contribution margins requires special qualities. Although professional project management initially costs money, which is particularly scarce in times of crisis, a delayed or derailed implementation project is often many times more expensive. We would be happy to find you an experienced and proven project manager with crisis and turnaround experience who is available at short notice and fits your needs. Please feel free to contact me: firstname.lastname@example.org.
At the beginning of the implementation project, it is very important to align expectations and possibilities with all parties involved. This can be done in the form of a target agreement, behind which the agreed resources are also placed. Already during the implementation phase – not only at the end of the project – an active project controlling makes sense in order to recognize early on where deviations might occur and to be able to take countermeasures.
The following key advantages result from this solution approach:
- By involving key stakeholders in the development of the action plan, it is highly likely that all causes of the crisis will be addressed in a meaningful way.
- A distinction between measures that are effective immediately and those that are effective in the medium to long term, and between financial and performance measures, provides your project with a meaningful structure.
- Clear expectation management achieves alignment of interests and ensures the motivation of everyone involved.
- Through professional project management, you are very likely to achieve your implementation goals on time and within budget.
Examples of measures
Wrong measures and bogus solutions
The definition of measures at the latest shows what the chances of success of crisis management will be. For this purpose, I share an example from a premium furniture manufacturer.
Determined implementation of measures
For some companies, an action-oriented restructuring concept is not enough. They will not tackle the implementation. As an example, I cite a medium-sized freight forwarder.
Aftercare after project completion
Successfully implemented turnaround initiatives can still topple after completion because there is too much “reset momentum” in the organization. An example of this is a mechanical engineering company for the mining industry.
Wrong measures and bogus solutions
The definition of measures at the latest shows what the chances of success of crisis management will be. In this regard, I share an example from a premium furniture manufacturer.
The CFO of a furniture manufacturer, who was experiencing capacity utilization problems, watched as a range of products positioned more favorably on the market for another brand was added to the company’s production program. While this program resulted in significantly higher utilization, it was very demanding in terms of production planning and, because it went through the same processes on the same production machines, was produced to the same quality standards that were applied to the company’s own premium range. It was not recognized for a long time that the selling prices were below the variable costs. The target was even to produce more of this range. Contractually agreed deadlines from the third-party supplier even led to the company’s own range being displaced in production in order to create capacity for the third-party supplier’s range. Staff were even hired to cope with the volume. The output in terms of volume was actually increased immensely, but with each additional production lot size, the loss increased, which had to be covered by the shareholders.
Controlling was prevented from pursuing assumptions that would have uncovered the undesirable development. Only with external support was the controlling department given the freedom to carefully analyze the situation and prove the wrong decision.
As a result, price discussions were held with the brand manufacturer, which allowed adequate contribution margins, and the company’s own product range was marketed to premium furniture retailers with more targeted marketing.
Do it better right away! Feel free to contact us: email@example.com.
Determined implementation of measures
For some companies, an action-oriented restructuring concept is not enough. They will not tackle the implementation. As an example, I would like to mention a small forwarding company.
The freight forwarder was making unacceptable losses in a submarket that was characterized by growing demand, above-average prices and recurring, i.e., easily plannable, tours.
The assumption was obvious that the organization of the freight forwarder was not optimal. In fact, during the preparation of a restructuring report with a continuation forecast, it became apparent that too many vehicles were not being dispatched due to a lack of drivers. On closer inspection, it quickly became clear that the company employed fewer drivers than vehicles were available. Taking into account absences due to illness, vacation time and fluctuation, it quickly became apparent that vehicles would have to remain idle. The company found personnel costs too expensive. He decided to leave vehicles standing. We calculated that it was cheaper not to employ drivers than not to have vehicles generate a contribution margin and recommended taking 20% more drivers on board than the number of vehicles to be moved. Despite all the arguments, the entrepreneur did not take up the core recommendation to expand the number of drivers accordingly. He saved his liquidity by occasionally selling trucks for which he obtained good prices, but did not change his approach. By reducing the number of trucks moved, the contribution margin kept decreasing until the structural costs were no longer even close to being covered. As a result, vehicle and driver dispatchers were laid off, and the downward spiral was irreversible.
Even our recommendation to formally prepare the final financial statements after our well-founded and naturally conditioned positive going concern forecast was not followed. Several months later, when the balance sheet was over-indebted and the company had run into payment difficulties, the tax advisor was naturally reluctant to close the financial year with a going concern certificate. At that time, no one would have given the company a positive going concern forecast.
And another recommendation also remained unused: Several family members were on the management board. In the event of an insolvency delay, all of them would be personally liable with a high risk that the family would lose private assets.
If entrepreneurs fail to implement sensible measures to eliminate the causes of crises, they cannot be helped. Other entrepreneurs who implement correct measures courageously, sometimes with external support and assistance from their house banks, usually find their way back into good waters. If you need support in safely implementing your measures, please feel free to contact me: firstname.lastname@example.org.
Aftercare after project completion
Successfully implemented turnaround initiatives can still topple after completion because there is too much “reset momentum” operating in the organization. An example of this is a mining machine builder that had earnings problems for many years.
A mechanical engineering company for the mining industry was successfully turned around in one year. In the course of the turnaround, three problem areas were identified, two of which were consistently eliminated and the third was conceptualized but only touched upon in implementation: (1) processes were not consistently designed, (2) the ratio of productive employees in manufacturing to overhead was unfavorable, and (3) sales was not effective.
The processes were designed bottom-up with the relevant employees and implemented in a binding manner. The manufacturing workforce was expanded vigorously despite – or perhaps because of – weak earnings, and administration was slimmed down noticeably but without reducing performance. Unfortunately, the sales department, which was led by the managing director, could not be significantly activated. Nevertheless, the company already achieved a positive result in the year of the operational restructuring.
As is our custom, we offered the company to conduct a review after six months to see which measures had taken root sustainably and where there might still be a need for improvement and what conditions needed to be created for implementation. Unfortunately, the offer was rejected on the grounds that we would only be holding up a mirror to the company. This chance for a review and sparring remained unused.
Contact details of the author
Dr. Werner Boysen
Mobile: +49-178-464 03 12
Dr. Boysen Management + Consulting GmbH