15 Jul 2016 21:59 IST

Why it’s important for SMEs to restructure

For SMEs wanting to scale up to the big league, a shift from the conventional structure is essential

Restructuring is almost always associated with big corporates, and the usual perception is that such an exercise mostly concerns financial restructuring, necessitated by an over-indebted situation and /or poor profitability, or to set up an improved legal framework.

Management restructuring is, however, also an important tool for small and medium enterprises (SMEs) looking to grow and become part of the big league. “Make in India” initiatives by the government, and the kind of increase in economic activity businesses are seeing today, augur well for SMEs. They should be planning expansion, and restructuring should be an essential part of that exercise.

For an SME unit wanting to scale up to the big league, a number of initiatives are needed. They need to “break free” from a conventional management style or structure that has seen them grow into a successful SME. A mentality of “owner knows everything” and so “he” has to initiate and control everything, will not take a company far. To take the leap to the next level, a new approach is essential.

Bigger challenges

Most owner-proprietors argue, and understandably so, that if they have been successful, it is because they followed certain practices and so, logically, these practices should take them even higher. Maybe the company’s culture has stood it in good stead, in which case it must be nurtured and care should be taken that the restructuring does not destroy it. However, such cases are few and they happen only where the owner is prepared to learn to manage growth and professionalise.

I have come across companies that are successful but, if we look deeper at their operating parameters, such as line rejections, receiving rejections, inventory ratios, enquiry conversion ratios, receivable days, and so on, they are not even close to professionally-run and efficient manufacturing plants.

In today’s market, with the breakneck speed at which changes are happening, not only in technology but also in business models, one has to keep running to stay in the same place, let alone to grow. In fact, it entails different and bigger challenges, and the evolution of a new management “character” that is more focused on producing benchmark results in all spheres. An equitable distribution of authority and power, putting in essential controls at all levels, robust processes and structures to facilitate a learning organisation, are all key elements of managing growth of this scale.

Keep transformation seamless

My tryst with restructuring happened when I was given the responsibility of an enterprise that was the subsidiary of an MNC. A good challenge in restructuring because that is exactly what it required. Nothing else. Great products were being made, and sold at globally competitive prices, to very reputed customers, in good volumes, and so on. But it was still not making the mark in terms of operating and financial parameters. A bit of tinkering with the organisation on cost control may have achieved better numbers but I was sure they would not have been sustainable. There wasn’t an organisation in place that could support the drastic transformations in processes and people that was needed.

Without a proper structure the company ran the risk of something going out of control without sufficient warning and probably not enough time to fix. And the likelihood of that happening was great in a growing market because of the pressures on deliveries supplies and production rate hikes. Anything going wrong within the organisation can be fixed but if customers are impacted as a consequence of that, it is an irreparable loss. Even small failures are recorded by customers and it is forever thrown at you during commercial negotiations, not to mention the financial penalties that are levied these days.

Some of the processes in that business were handled by people who did not fully understand its purpose, let alone being competent — people without sales background or even sales aptitude were handling customers directly, quotes were prepared by individuals who did not understand the market, part of the HR functions were with Finance Department, and there was a general lack of coordination across departments in Operations, causing disruptions in production and obstructing the free flow of information or communication, which is so important.

Have a clear plan

The result was that, even though it had good products and good customers and, to top it all, the backing of a big corporate, it still ended up with bad numbers in the final analysis. A classic case of a business trying to achieve growth without a robust organisation to support it. Restructuring was an undeniable need.

Restructuring needs to be a well-thought-out process, with a clear plan of action and expected deliverables. Each and every change one makes has to be duly justified. Process improvement and measuring tools such as lean manufacturing, balanced score-cards, budgeting and financial analysis must be implemented effectively and embraced by the entire organisation.

The leader, or the implementer, has to explain the purpose of each and every change to all the stakeholders, and implement and execute them in such a way that it does not disrupt day-to-day functioning or create a panic in the organisation. One needs to make sure that customers and suppliers and, indeed, the financiers/investors see this is as a good, justified move and not some knee-jerk reaction to low profitability and bad financials.

Any restructuring is bound to look at the contribution of each and every individual — laggards infiltrate every organisation. Hiring/ firing/ lateral movement/ kicking upstairs/ changing roles are all part of this exercise and one should not be afraid of doing this in the interest of the business. These are growth pains the owner should be happy about and learn to execute professionally. It sometimes leads good employees to quit, fearing they will be sacked.

Key support

The key employees, who will play an important role after the restructuring, must be taken into confidence, lest they also leave. Confusing messages should not be allowed to spread as they are a feast for rumour-mongers. Any change meets with resistance and so it is in this task as well. As an implementation strategy, some sure-shot, short-term successes are vital and need to be advertised. This is proof that the actions are bearing fruit, and will ensure wider support.

Transformation by restructuring is a difficult exercise — and if handled by an experienced professional the probabilities of success are greater. It is also something that every company has to look at periodically as a business improvement process. The right processes and the right people in a complementing organisational structure are critical as the production process itself becomes more and more complex as you expand.

An aspiration, with a well-thought-out strategy for growth beyond an SME size, should not fail for want of such a structure.

(The writer is a Chennai-based independent consultant.)

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