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Fixing a company should be BAU

Fixing a company should be BAU

Amid today’s rapid rate of disruption, every organisation should be in a cycle of continual improvement, but only a third appear to be doing so. We find out why it’s vital to make change an everyday focus.

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Beech forest in winter

Few companies should be resting on their laurels in today’s disruptive business environment, so it was surprising to discover that just 34 percent are looking to undertake some form of performance improvement, restructure or turnaround in the next one to two years.

Matthew Woods, National Lead Partner, Restructuring Services, KPMG, suspects that if the question were restricted to just ‘improve’ the response would be higher, but he would like to see a bigger focus on continual improvement.

“It is a competitive advantage to be continually looking at the business model, evolve it, restructure it, and change it, in order to remain relevant with new competition,” he says.

Here we find out what is driving that 34 percent to change, and what other organisations could gain from getting on the front foot.

Costs a clear driver

Of those undertaking a performance improvement, restructure or turnaround, 55 percent were focused on active cost reduction – one of the key levers a business can pull to increase its performance. Forty-four percent said they had needed to manage or monitor cash flows more closely over the last 12 months.

Cost reduction was most prevalent in Energy and Natural Resources (ENR) companies with 88 percent citing this as their main focus. The need to monitor cash flows was most common in the Property/Construction industry (75 percent).

“In ENR we had a super cycle and commodity prices and profits were at a peak. In some scenarios inefficient cost structures were being developed, and ENR companies have to race to right-size back to current prices,” Woods says.

For property and construction, tightening of the reins is likely related to available capital.

“Historically these sectors have been overbanked by the banking sector, so they are trying to generate cash flow internally with respect to it being more difficult to obtain externally,” Woods says.

Competition keeps the pressure on

Increased competition was another force for improvement for 54 percent of respondents. The nature of this competition differs across sectors, for example retail is facing an influx of international players entering the market, both via bricks and mortar stores and online.

“That has put significant pressure on the local participants as they don’t have the balance sheets to participate in pricing wars. Few of them have the scale to have the difficult negotiations with landlords to reset leasing prices,” Woods says.

Very established organisations are also not immune to competition, with many international investors prepared to take a longer term view on investment returns, explains David Morris, Head of Mergers & Acquisitions, KPMG Law.

“It’s an interesting dynamic between the level of tolerance on returns which some international investors have, compared with that of some of the local players, and that impacts the entire sector,” he says.

Safe harbour

Over 47 percent said they were not aware of Australia’s recently introduced ‘Safe Harbour’ laws. Of those who were aware, only 17 percent said it would increase their willingness to take on additional risk in pursuing their objectives.

Safe Harbour is a provision under the Corporations Act which gives a director an exception from personal liability for insolvent trading in certain circumstances. Morris says the lack of awareness of this exception stems from the fact that the legislation has only recently been introduced, and it has not been tested in the courts as yet.

“Directors will still be very cautious about seeking to rely on Safe Harbour until there have been clear examples of this exception applying in practice. As the Safe Harbour law becomes more fully understood, we are likely to see an increasing level of interest from directors in seeking to rely on it,” Morris says.

Evolve or be Kodak

Looking to improve, restructure or turnaround doesn’t have to have a negative connotation, but should be indicative of a company keeping up with the times. Morris hopes that organisations will adopt this mindset and integrate improvement into their daily activities.

“Competition is only going to increase, and the nature of it is going to change significantly as the whole digital economy evolves. You're going to see a lot of organisations looking to pursue performance improvement through a variety of actions, so I expect to see that percentage of 34 percent increase in the future,” he says.

The outlook for M&A may be good, but there are still plenty of perceived barriers in the way. Find out what they are and how to leap over them in M&A barriers can be overcome.

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