Study on restructuring in Germany

• Companies today are reacting much slower to crises than they did three years ago
• The three crucial factors for successful restructuring: committed management, comprehensive strategy and quick implementation
• Cutting costs is still important, but saving jobs is becoming more and more important
• Private equity and distressed debt investor financing is still relatively low
• Companies want to grow after restructuring

Today, German companies are much slower to respond to crises then they were three years ago. According to a Roland Berger Strategy Consultants survey of executives and CEOs at German SMEs and large companies, about one-third (30%) of managers take action in the first year after identifying a crisis. Three years ago, well over half of these companies (64%) would have reacted within the first 12 months. The three crucial factors for successful restructuring include management's commitment, a comprehensive strategy and quick implementation. Cutting costs remains important to successful restructuring, but saving jobs is becoming increasingly important. Companies prefer to finance their restructuring using traditional bank loans and by increasing their capital. Monthly management information systems are the early warning systems of choice. Once restructuring is complete, most companies intend to grow again in Germany and abroad. All participants surveyed in 2006 had completed a restructuring project within the past three years.

Delayed reaction to crises

German companies are slower to react to crises than they were three years ago. 30% of the surveyed companies stated that when problems become apparent, they take action within one year. In 2003, 64% of the companies would take action during the first 12 months. In the meantime, an average of 20 months pass before a company starts to react to a crisis. In 2003, only 14 months elapsed before action was taken.

"If management reacts rigorously to the first signs of a crisis, then the chances of successful turnaround are good," says Michael Blatz, Partner and Head of the Restructuring & Corporate Finance Competence Center at Roland Berger Strategy Consultants. Max Falckenberg, author of the study and Principal in the Restructuring & Corporate Finance Competence Center, adds: "Unfortunately, not all companies use early warning systems. These can help avoid life-threatening crises in a tough market environment. It's also important to look ahead: many companies realign and then look for growth opportunities both in Germany and abroad."

The length of time it takes to restructure also increased over the past three years. 38% (2003: 28%) of the companies stated that it takes 12 to 18 months. 35% (2003: 30%) of the companies need more than 18 months to restructure.

Three crucial success factors when restructuring

Key factors for successful restructuring include management commitment, a comprehensive strategy and quick implementation. However, there appears to be a strong discrepancy between the importance of these actions and their actual implementation. For example, 75% of those surveyed feel that management commitment is extremely important. However, only 53% feel that management has successfully implemented the necessary actions. 56% of those surveyed feel that a comprehensive strategy is very important, but only 29% believe that management has effectively realized such a strategy. 52% of those surveyed stated that quick implementation is crucial, but only 38% believe that restructuring was "very successfully" implemented.

The significance of the top three success factors has increased significantly over the past three years. The importance of management commitment rose by 12 points, comprehensive strategy by 5 points and quick implementation by 13 points. At the same time, the level of implementation improved for two of the three success factors: management commitment rose by 18 points and successful implementation by 15 points. Only successful implementation of a comprehensive strategy dropped 4 points.

Cutting costs is a major lever for restructuring success

The respondents said that rigorous cost cutting remains crucial for success. 80% of those who considered their restructuring efforts as very successful said that that success was due to reduced personnel costs. 60% said it was due to lower materials costs, and 50% mentioned improved purchasing terms.

As in the survey conducted in 2003, redundancies have remained the most important cost-cutting action (2003: 40%; 2006: 42%). However, companies are using more part-time retirement programs and voluntary pay cuts. This is because cutting average personnel costs is as important as retaining existing expertise and as many jobs as possible. Accordingly, part-time retirement schemes have become more important over the past three years (2003: 17%; 2006: 29%); wage cuts and voluntary concessions have gone up from 9% to 24% over the same period.

Traditional forms of finance continue to dominate

Distressed companies use mostly traditional sources of finance to solve a crisis. Companies give high ratings to inventory reductions, capital increases and bank loans (31% each). Distressed debt investors (15%), regional government guarantees (23%) and supplier finance (38%) are given much lower rankings.

Early warning systems need to be improved

Companies need management information systems (MIS) to steer the ship in the right direction and recognize crises early on. Such systems are the most important early warning system. 58% of the firms interviewed favor monthly MIS reporting, and 57% have already fully implemented such systems. They attach almost equal importance to monthly review meetings. 55% of the responding companies consider them very important, and 52% call them successful.

Companies also consider strategic planning crucial. 42% of the respondents think such planning is very important, although only 20% have implemented it successfully.

After successful restructuring, companies look for growth in their own countries (33%) or abroad (43%). And they use different means to finance such growth. 12% favor additional bank loans, 10% use shareholder loans, 8% favor a capital increase by the existing shareholders and 8% look for new equity investors.