Companies are responding too slowly to crises

Austrian companies wait 14 months on average before responding to crises. The frontrunners among them take action after just three months, while the laggards need up to 22 months to do so. The most effective restructuring levers are reducing headcount and increasing sales. These are the conclusions of a study published recently by Roland Berger Strategy Consultants, entitled "Restructuring in Austria". Due to the current development of prices, 80 percent of the companies surveyed consider further restructuring action necessary.

"All the companies surveyed are afraid of further price falls. But management must pay more attention to the upcoming credit restrictions resulting from Basle 2," says Rupert Petry, Principal responsible for restructuring and corporate finance at Roland Berger Strategy Consultants. The desired goals of restructuring are cost reduction and, in parallel, increased sales and capital restructuring. "Pure cost-cutting is out," says Alexander Kainer, author of the study and consultant at Roland Berger. Among the companies surveyed, some 20 percent of the earnings improvement was generated from action taken to boost sales. A change in the capital structure had an impact at over 35 percent of the companies.

Last-minute response too risky

Corporate crises normally happen in this order: strategic crisis, earnings crisis and liquidity crisis. The consultants' main criticism is that 67 percent of the companies take action only upon noticing the earnings crisis and then require, as stated above, 14 months to start a restructuring program. Just one third of companies identify strategic problems such as overoptimistic growth expectations, the wrong market alignment and product strategies, and respond to them. "The room for maneuver gets smaller as action becomes more urgently required, and the likelihood of a liquidity crisis increases," warns Kainer. SMEs (with sales from EUR 100 to 500 million) respond on average fastest to an impending crisis. Large companies with a sales volume of over EUR 1 billion require eleven months to respond. At companies with sales of less than EUR 100 million, as many as 22 months can go by between identifying the crisis and starting to implement restructuring.

Faster implementation increases success

The quicker restructuring projects are launched, the greater the satisfaction with the success of the project: If the response time was less than a year, over 35 percent of the senior managers surveyed said they were "very satisfied" with the action taken. Among those who waited over a year, the satisfaction rate was a low 25 percent. Collaboration with experienced restructuring consultants also boosts output: projects assisted by consultants showed a success rate up to 50 percent higher.

Further restructuring cases expected

"The number of turnarounds in Austria may have fallen, but there is a continued need for restructuring," explains Petry. "All companies interviewed fear further price falls. These price falls put enormous pressure on profits, especially in industries with high fixed costs. Thus 80 percent of companies are planning further restructuring action."

Headcount reduction - Close collaboration with the works council

Headcount reduction is the most effective lever for improving earnings. Close collaboration with the works council can also push down wage costs by getting employees to accept pay cuts. Around 83 percent of the companies surveyed, who work in partnership with employees' representatives, use this method. But achieving consensus-based solutions is not necessarily the main focus. "The most frequently used method of reducing labor costs (at 85 percent of companies) is through natural fluctuation in the workforce. This means not hiring new staff to replace those who leave," says Petry. Other restructuring tools such as pre-retirement part-time working and compulsory or voluntary redundancies are also used.

A comparison of Germany and Austria

A comparison with a similar German study shows that in Austria there are 40 percent fewer consensus-based solutions than in Germany. This is due to the more frequent usage of fluctuation as a method of reducing headcount in domestic companies. In responding to identified crises, the neighboring countries take on average the same amount of time, 14 months. But in Germany one third more companies manage to respond within a year. In view of this fact, it may be surprising to know that Austrian companies are the leaders in using tools to spot and tackle the crisis (over 60 percent). "This is a massive lead over Germany. But Austrian companies need to make intensive use of it! Further promotion of early warning systems and quicker decision-making by management are urgently needed," says Kainer.

About the study

In the study "Restructuring in Austria", Roland Berger Strategy Consultants interviewed chairmen of the board, chief financial officers and general managers of top Austrian companies from a range of industries: the focus was on the reasons why turnaround was necessary and the success factors of restructuring projects. The findings of the latest Austrian restructuring study were compared with a study conducted in Germany in 2003.