A Road to Recovery: Using Benchmarking to Restore Value in a Distressed Company

After 30-plus years of experience restructuring companies large and small, I have found benchmarking to be a simple and common technique that is often overlooked. As outsiders looking in, we can usually figure out the nature of the problem(s) quickly and the potential value improvement. Getting buy-in from the company’s management team, owners and shareholders requires the concrete validation that benchmarking provides. In addition, benchmarking can help support and monitor the profitability and working capital improvements needed to reset loan covenants and value-driven EBITDA targets.

Distressed companies often find themselves navigating stormy financial waters, facing challenges such as declining revenues, dwindling profit margins, and operational inefficiencies. This usually results in breaking covenants, tightening availability, and hard-to-correct loan defaults. However, amidst the turmoil, benchmarking serves as a valuable tool that can provide a lifeline.   Leveraging it as a tool to support the change-management process can be the beacon of hope for distressed companies seeking to regain lost value.

Understanding Distressed Companies

Distressed companies typically experience one or more of the following issues:

1. Financial turmoil: This includes falling revenues, mounting debts, cash flow problems, and shrinking profitability.
2. Operational inefficiencies: Cumbersome processes, excessive costs, low productivity, or quality issues can significantly impact financial performance.
3. Loss of market share: Fierce competition can erode market share and pricing power, squeezing profit margins.
4. Unfocused leadership and strategy: Leadership problems, a lack of strategic direction, or insufficient innovation can all contribute to distress.
5. Stakeholder concerns: Investors, lenders, creditors, and employees may express worry about the company’s viability, creating additional pressure.

The Role of Benchmarking in Distressed Company Recovery

Benchmarking is a systematic process where a company compares its performance metrics, practices, and results against industry leaders, competitors, or its own levels of optimum historical performance. Benchmarking can include multiple initiatives such as: 1i) internal (best historical performance by department, location, or product line); 2) competitive (competitor comparison); 3) functional (areas such as supply chain, customer service); and 4) strategic(market opportunities, use of technology, and innovative strategies). Internal and functional benchmarking are not as common but can provide practical short-term solutions. Internal benchmarking involves comparing your Company’s different departments or units with each other. It’s particularly useful when you want to improve processes within the organization. Functional benchmarking looks at specific functions or processes within your organization and compares them with those of other companies, even if they aren’t direct competitors. This can provide insights into best practices in areas like supply chain management or customer service.

1. Benchmarking – Identifying performance gaps: In any form, benchmarking helps companies pinpoint areas where they are lagging competitors, industry leaders or their own historical top performance. Frequently, a company’s best performance was based on increasing revenues before additional headcount and capacity were added, which drove short-term efficiencies. But the performance was not sustainable because there was no consistent use of metrics to monitor value drivers. Often, there is a tendency to build production for peaks, causing excess capacity.By examining critical key performance indicators (KPIs) such as for revenue growth, profit margins, operational efficiency and key working capital measures, a company can discern specific weaknesses that need urgent attention.

1. Setting achievable goals: Once performance gaps are identified, distressed companies can set realistic improvement objectives based on agreed-upon target benchmarks. These benchmarks serve as tangible targets to strive for, offering a clear path to recovery. Realistic targets can also be used to support budgets, projections, and cash flow forecasts.  The first step is collecting data on a company’s historical performance and the performance of its chosen benchmarks. This may require internal data collection, surveys, or market research.
2. Prioritizing improvement efforts: Not all aspects of a distressed company need equal attention. Benchmarking assists management in setting priorities and focusing their efforts on the most critical areas that require enhancement. This ensures that limited resources are utilized where they will have the greatest impact. In a turnaround, the focus is often cash management with a particular emphasis on working capital management over inventory levels, accounts receivable, extended payment terms, and the order-to-cash cycle. In addition, top-level cost saving opportunities can be identified in relation to overtime and other payroll costs.
3. Focusing on best of class: Best of class is attainable and should be a benchmark to exceed. How you differentiate your business through quality, customer service, efficient production, or supply chain management needs to be top of mind. Benchmarking enables companies to learn from industry leaders and competitors who have successfully tackled similar problems. This information is often available through public company reporting and/or can be purchased cost-effectively through industry groups. By studying best practices and strategies, distressed companies can adapt and apply these successful approaches to their own unique situation.
4. Monitoring progress: Build a scorecard that can be shared at all levels. Define internal and external metrics for comparison. Beginning with simple high-level metrics that can be further refined can be as simple as revenue per employee or by production and indirect, units produced per labor hour by location or product line, or percentage scrap by product line. These simple metrics will show if labor costs are increasing or if equipment is not operating efficiently. Other basics like Days Inventory Outstanding (DIO) and Days Sales Outstanding (DSO) can quickly identify impacts on working capital. But when the economy has been good and companies have been doing well for a long time, they forget about monitoring the basics.Many companies (including large and small, public, investor-owned, and privately held) do not flag issues until after the financial reporting cycles have passed, which can be 60 days or more. The best companies and management teams I’ve worked with receive daily and weekly flash reports.  They receive end-of-day and/or early morning texts and emails.

1. Boosting morale and motivation: Measure, monitor and provide feedback. When issues are identified, provide help and support, utilize cross-functional teams to create and celebrate wins. Many people are trained in special programs for quality management, but too often, effective implementation never happens. Witnessing tangible progress in closing performance gaps can boost morale and motivate employees. This sense of purpose and accomplishment helps counteract the negative effects of distress, fostering a more positive and productive work environment.

Conclusion

Benchmarking is an effective tool for most companies. But, in a more highly distressed or turnaround situation, benchmarking will help all interested parties develop comfort that there is a realistic go-forward path to recapturing value, including lenders (bank, non-bank and mezzanine) and investors (whether public, private equity or closely held). And very importantly, as a turnaround practitioner, it helps to support an effective restructuring plan supporting revised budgets projections and rolling cash flow forecasts to get the buy-in of important external parties.

Benchmarking is not just a tool for survival but a means to thrive.  Comparing a company’s performance and practices to industry leaders can identify weaknesses, set realistic goals, and implement strategies for improvement. It’s a dynamic process that requires ongoing commitment and adaptation, but the rewards in terms of increased efficiency, enhanced quality, and financial stability can be well worth the effort.

If a company is in distress, benchmarking can provide its roadmap to recovery.