Rethinking Bankruptcy: The Importance of Focusing on Technology
Emerge to Grow Series
November 17, 2022
Rethinking Bankruptcy: The Importance of Focusing on TechnologyDownloadsDownload Article
Bankruptcy is a formal process geared toward preserving stakeholder value. Often, the proceedings include negotiations between stakeholders that are arduous, time-consuming and expensive. As such, the main focus during bankruptcy tends to be on completing the process, rather than positioning the company for healthy and sustainable growth after emergence.
Technology is often the critical element that enables a bankrupt company to turn itself around and become a competitive business, although it is often the most overlooked transformation aspect in bankruptcy.
This limited focus is certainly understandable, given all the pressures and constraints that accompany bankruptcy. And it is amplified by the rise of pre-packaged and pre-arranged bankruptcies, which primarily focus on solving capital structure challenges (with minimal attention to operational changes to the business). However, some of the constraints that companies operate under during bankruptcy may be self-imposed or driven by conflicting priorities that restrict management’s options and limit the ability to grow and thrive post-bankruptcy.
To gain real-world, quantifiable insights about the bankruptcy process, FTI Consulting recently conducted an in-depth survey of senior executives with direct experience leading large companies through bankruptcy. Our experts then created an emergence playbook to help companies in bankruptcy design and execute more effective strategies for achieving post-bankruptcy success.
The full report, “Emerge to Grow: An FTI Consulting Report,” provides a general overview of the bankruptcy process and landscape, including a broad look at the five key business dimensions of capital, cost, growth, technology and talent. This report, takes a closer look at the technology dimension, which is critical to post-bankruptcy success but, according to the survey, is often overlooked during the traditional bankruptcy process.
Key Survey Findings Related to Technology
Our survey revealed critical gaps in the traditional bankruptcy process, with a clear need and opportunity for more effective emergence planning. According to the business leaders we surveyed:
The bankruptcy process does not fully prepare emergent companies for post-bankruptcy success. Across all five dimensions, relatively few survey respondents believe their companies were substantially prepared for post-bankruptcy success. Technology ranked the lowest (14%), followed by cost (22%), talent (26%), growth (28%) and capital (32%). The speed of the bankruptcy process likely hampers the ability to address these topics.
Other important business issues are often not meaningfully addressed. Looking beyond the five key dimensions, like business planning, ESG, risk management, among others, nearly half of respondents (44%) also did not feel they were able to meaningfully focus on other important business issues during the bankruptcy process — an oversight that is likely to limit their ability to succeed after emergence.
Technology is not a high priority during bankruptcy. Of the five key business dimensions, capital was the top priority for most respondents (56%), followed by cost (34%). The other three dimensions were prioritized much lower: growth (8%), technology (2%) and talent (0%).
Technology enablement during bankruptcy or emergence was uncommon. Among the companies surveyed, roughly a third or less used digital technology (such as enterprise resource planning (ERP), cloud and automation) to enable key functions: customer service centers (34%), technology/IT (32%), finance (32%) and supply chain (28%). Technology enablement in other parts of the business was even lower.
Technology implemented during bankruptcy was more for reporting and analytics than for transformation and modernization. The top focus area for technology implementation was financial reporting and analytics (58%), followed by reporting and analytics for risk (34%), and reporting and analytics for business/management (30%). Implementation levels were significantly lower for transformational technologies such as cloud (22%), IT modernization (22%) and enterprise data management (20%).
Focusing on Transformational Technology
When it comes to the bankruptcy process, there are a number of common myths or misconceptions that limit companies’ ability to position themselves for post-bankruptcy success (see the article by FTI Consulting entitled “Five Bankruptcy Myths That Stifle Success for Emergent Companies”).
For the technology dimension, the myth is that companies in bankruptcy already have adequate technology and cannot afford the time, money and effort to implement new and improved technologies that are truly transformational. However, in many cases the exact opposite is true. Often, a key reason companies enter bankruptcy is that their technical capabilities are insufficient to meet market needs and their IT operations are costly and inefficient, contributing to poor overall financial performance. Their emergence business plans are anchored on their need to solve these IT problems; however, the problems often go unaddressed during the bankruptcy process.
The majority of survey respondents (58%) said they had addressed financial reporting and analytics technology to a great extent during bankruptcy, presumably to help them get through the process more quickly and meet the reporting requirements of the process. However, a significantly smaller number implemented transformational technologies such as cloud (22%), IT modernization (22%) and enterprise data management (20%). Also, only 2% of respondents identified technology as their top priority during bankruptcy, and only 14% said they had substantially addressed technology issues or were substantially prepared to be a viable enterprise in this area.
The COVID-19 pandemic has exacerbated the problem, triggering many technology-related changes to the way companies do business, including dramatic increases in remote work and omnichannel commerce. Failing to keep pace with these changes is a key risk, particularly for emergent companies that require digital transformation in order to compete effectively through new services, products, channels and business/operating models. For these companies, strategically addressing technology during or immediately after bankruptcy is not just a good idea: it is a business imperative.
FTI Consulting Emergence Playbook
With a conventional bankruptcy, the optimal time to think about making a bankrupt business stronger is during the Chapter 11 process, not waiting until after it emerges. In bankruptcy, a company has unique opportunities to focus on the more profitable aspects of its business and establish a stronger foundation for healthy, sustainable growth.
FTI Consulting’s Emergence Playbook℠ can help companies in bankruptcy quickly develop effective strategies, plans and business/operating models that address all five core performance dimensions: capital, cost, growth, technology and talent. Of the five dimensions, the two that vary most widely — and therefore determine which playbook archetype is applicable — are technology and capital.
- Technology. In some situations, profitable and sustainable growth is achievable through traditional mechanisms such as organic growth, market expansion and acquisition (an “Emerge to Grow” model). In other situations, however, profitable and sustainable growth can only be achieved through longer-term technology transformation — using innovative technologies to dramatically improve a company’s performance and competitiveness (an “Emerge to Transform” model).
- Capital. Under either model, an emerging company might need to closely manage its liquidity and capital needs, particularly credit availability, before it can consider an aggressive growth or transformation strategy.
The resulting emergence playbook features four different archetypes that increase in complexity, risk and duration depending on a company’s need for technology transformation and/or capital (Figure 1).
Figure 1 - Four Archetypes for Successful Emergence
Each of these archetypes provides a valuable starting point for post-bankruptcy planning that fits a company’s unique needs and ultimately can help it thrive and grow after emerging from bankruptcy.
Putting the Playbook into Action
Each archetype in the emergence playbook requires a unique three-phase approach, but with numerous elements that are common across archetypes. The first phase focuses on stabilizing the business and generating immediate cost savings that can help the entire emergence process become self-funding. The second phase focuses on improving profitability and initiating organizational readiness. The third phase focuses on achieving profitable and sustainable growth (Figure 2).
Drilling down on the technology dimension, many companies make the mistake of limiting their technology focus to reporting and analytics, instead of looking for ways that technology can be used to dramatically improve and transform the business through IT infrastructure investments and, especially, digital enablement.
How to Address Technology Issues During Bankruptcy
To plan efficiently for emergence, companies in bankruptcy need to quickly and realistically assess the current state of their information technology. The two key factors are:
- Technology capabilities — the extent to which the company’s current-state technology and data capabilities support its business needs in the context of its strategy (including plans for business transformation as part of emergence). Technology investments need to be prioritized, as there is only a finite amount of dollars to invest; that is, investment must be prioritized on strategic technology capabilities.
- Technology cost — the cost structure (CapEx vs. OpEx) required to operate the current state and support the buildout of additional functionality (if required by the emergence business plan). This also may imply that it is critical to have a transformation plan that is self-funding.
A company in bankruptcy must start with an honest assessment of its current-state IT in order to understand what needs to be done. In layman’s terms, this can be thought of as evaluating the technical “debt ” that the company has accumulated over time (i.e., what additional IT capabilities are needed to adequately and efficiently support the company’s current business requirements, and also to achieve its post-bankruptcy business plan).
Figure 2 - The FTI Consulting Emergence Playbook℠ in Action
In the past, the company’s IT capabilities might not have kept pace with its changing business needs. Over time, the gap grew between “what’s possible” (given the company’s existing technology) and “what’s available” in the technology marketplace.
Technical debt does not just affect how much effort and investment will be needed to support the evolving needs of the business; it also affects the flexibility and ease with which a company’s current IT platforms can be modernized and adjusted.
If the company’s current IT environment has a lot of complexity and on-premise legacy applications, considerable effort will likely be required to adjust course. Also, a company saddled with older technologies might not be able to pivot or scale as quickly to support its new, post-bankruptcy business plan.
Depending on the size and nature of a company’s technical debt — and the level of effort required to close the gap — the company’s ability to take headcount out of IT might be limited, especially if custom solutions will need to be developed. However, the work must be done (i.e., the technical debt must be paid before the company can successfully move forward).
As business plans for emergence and growth are developed, they should be evaluated against the company’s current-state IT capabilities. For example, if the company’s growth plan includes a shift to e-commerce and access to global markets, it is critical to understand the company’s technical capabilities in those areas. Does the company have flexible and robust e-commerce tools? Are its financial and transactional systems ready to handle currency challenges and complexities? If the answer to either question is no, then technology enhancements will be needed.
Significant technology investment is often required to achieve transformational change; however, that investment will presumably enable the company to move to a lower-cost support structure over time (Figure 2). Too often, emergent companies overlook, or neglect to make, the “catch-up” investment required to get to a better baseline for future operations. In these cases, both transformation self-funding and further “capital enablement” may be required to support these strategic needs (i.e., the “enable capital and emerge to transform” transformation archetype indicated on Figure 1).
When large-scale transformation is not needed, the required technology investments are generally much lower. In this situation, the key decision drivers will likely be cost structures associated with tools and resources; opportunities for outsourcing; and/or potential efficiency improvements from increased use of data and analytics. In this situation, simply having a transformation program that allows for self-funding may be sufficient (i.e., the “emerge to transform” transformation archetype of Figure 1).
Figure 3 - Labor Reduction Over Time as Transformation Occurs
In either case, the key to efficiently tackling whatever technology changes are required by the business plan is to have a realistic picture of the current state. Without that informed perspective, it is nearly impossible to properly scope and design the future state (or even to understand if growth is possible with the company’s existing systems and tools).
An accurate current-state assessment enables the development of an effective roadmap for the future. Also, it can enable right-sizing of IT resources, and it helps identify tools or applications that can be decommissioned (or de-customized by shifting to commercial off-the-shelf (COTS) software).
A current-state technology assessment typically includes:
- A detailed and realistic assessment of the overall IT architecture (current and planned), including an analysis of functionality and risk
- A detailed inventory of systems, tools, applications, data stores, resources and infrastructure (including cyber)
- An overview of organizational and cost structures that support the business
If the company’s current-state technology capabilities are sufficient to support the post-bankruptcy business plan, then large-scale transformation will likely not be needed. However, if major gaps exist, then the business plan (and investment plan) must reflect the larger-scale transformation initiatives that will be required to enable the emergent company to execute its plans and achieve its post-bankruptcy objectives. Under this scenario, the transformation plan may require a transformation that is self-funding, or, if not sufficient, further “capital enablement” may be required to successfully emerge post-bankruptcy (refer to Figure 1).
Conclusion: The Importance of Focusing on Technology
Since companies that undergo bankruptcy are taking the necessary and challenging steps to realign their businesses and maximize value for stakeholders, it is important that they emerge stronger and healthier. Yet the bankruptcy process has many legal and practical limitations that do not necessarily help emergent companies achieve the best possible outcomes during and after bankruptcy.
In particular, the survey shows that companies in bankruptcy need to focus more attention and resources on technology transformation and digital enablement. This is particularly relevant, as about 17% of companies are “repeat filers” in the bankruptcy process; these repeat filers are more prone to be companies that have not addressed structural issues post-bankruptcy, in particular if structural technology or capital issues are not addressed (i.e., those companies under emergence archetypes defined by “enable capital” and/ or “emerge to transform”.) We hope the findings presented here can help stakeholders challenge commonly held assumptions and norms about bankruptcy that might not be relevant to their situations — and enable them to make more informed decisions — using the emergence playbook to help a company position itself for post-bankruptcy success.
November 17, 2022
Senior Managing Director