Vistra Insights

Entity rationalisation and the road to recovery

The pandemic has changed the global economy as we know it. From the board room to the mail room, employees and the businesses they work for are reinventing how, when and where they work, as well as what they do.

All businesses — whether survivors or thrivers — are struggling to determine what will matter most to their organisations when we emerge from the pandemic. They know today’s “normal” is unlikely to be considered normal when we do emerge. For the moment, they are adapting to new realities — from supply chain disruptions to immigration restrictions to stay-at-home workforces. Amid these changes, companies must indeed struggle to determine what matters most and what will matter most to their businesses.

Vistra has called this business progression “Act. Recover. Thrive.” Essentially, an organisation will move from acting to withstand Covid-19 challenges to recovering from these setbacks, to thriving in a new global economic reality after discovering what matters most to the success of their business. The journey requires a series of business changes, including operational and strategic changes. For many, especially multinationals, this will entail simplifying, rationalising and reorganising, a process that can take months.

Taking steps now to protect your business

We all know the saying “cash is king,” but it now has a renewed sense of urgency. Ensuring there is liquidity for funding future operations has become increasingly important. Businesses need to pay close attention to cash collection, projection and protection. They also need to focus on identifying and mitigating financial risk factors, including controlling cost escalations and negotiating with customers, suppliers, contractors and partners.

Ensuring supply chains are resilient and operating efficiently is essential. If not already in place, businesses should consider creating back-up plans to ensure business needs are fulfilled in the event of local lockdowns.

Evaluating and planning for workforce changes should be on the forefront of business leaders’ thinking. The sudden impact of lockdowns and significant revenue losses have proved a large burden for many businesses, forcing financial and HR directors to make headcount changes and consider workforce restructuring.

Remote working has of course increased dramatically during the pandemic. Employers should evaluate related opportunities, such as providing more flexible working arrangements, reducing expensive property overhead and drawing on a larger talent pool.

There are risks involved in a remote working model, such as those related to employee engagement and productivity. Business leaders must carefully consider these risks and develop sound policies before implementing remote working permanently. Work policies and practices should not only be based on widespread best practices and local labour laws, they should also be suited to the particular business, as they will have broad operational impacts.

Businesses must also be properly structured to support a mobile workforce. In some cases, this may entail setting up a new entity to mitigate tax risks and sponsor work permits. This in turn may involve a host of employer obligations, such as those related to expatriate payrolls, HR policies and tax obligations.

Businesses that aren’t suited to full remote working or a hybrid model must carefully manage how their employees return to work, or they’ll risk damaging their reputation as a good and conscientious employer. They should, for example, create sound, equitable policies related to social distancing and workplace hygiene that account for any local regulations.

Looking at the bigger picture

Despite ongoing turmoil, now is the time for senior executives to take a step back and look at the bigger picture. Many will find opportunities amid the changing markets.

Increasingly, businesses are exploring various lines of capital and business development, such as carve-out acquisitions or joint ventures, start-ups, fundraisings and investments. Many new products, services, service-delivery models and markets are emerging during the pandemic, and collaborations may be the best way to take advantage of new opportunities without taking on a high level of risk.

At the same time, businesses should start engaging with customers to understand trends and behavioural changes that may become permanent post-pandemic. They should also recognise and prepare to take advantage of technological advances hastened by current events. This should in turn help with identifying ways to improve business performance and allocate resources to where they will perform best.

Additionally, businesses will have to start adapting to new environmental, social and governance (ESG) norms, including changing norms in the physical, digital, emotional and financial spaces.

Finally, it is crucial to continue investing in human capital and talent management, even during periods of great uncertainty.

Simplifying and rationalising your business

Businesses that are best positioned to thrive after the pandemic will have identified steps to simplify and rationalise their corporate groups. The following is a partial list of related considerations.

Simplifying group structures

  • Conducting business strike-offs and liquidations.
  • Generating operating-cost savings, improving efficiencies and lowering compliance risks by consolidating service providers and other vendors.
  • Lowering risk by removing uncertain areas of the business, such as cross-border governance.

Reviewing and managing corporate structures

  • Changing the corporate structure as necessary to facilitate cost-savings and improved operational efficiencies.
  • Restructuring through closing non-performing, no-prospect or hived off loss-making businesses.
  • Capitalising on opportunities to increase the use of technology, automation, analytics and e-commerce.
  • Preparing for international expansion — in some cases through joint ventures — when opportunities emerge.
  • Restructuring existing facilities and raising new equity to allow for better intra-group funding, financing and cash movement.

Restructuring workforces

  • Creating savings through headcount reduction, redundancies and adjusted employment terms and conditions.
  • Moving staff to the most promising business areas as part of a more major restructuring exercise.
  • Moving staff to other countries to facilitate international expansion and align staff with updated supply chains.
  • Ensuring talent is properly rewarded, safeguarded and incentivised in each country of operation, based on local labour laws and practices.

Every business’ situation is unique, so there is no such thing as a blanket or one-size-fits-all approach to rationalisation. A successful rationalisation involves looking at the big picture as well as weighing all elements of a company.

Simplifying a business is not easy, nor is a corporate restructuring necessarily essential in response to the pandemic. That said, the pandemic should act as a trigger for businesses to evaluate their model to ensure it is still fit for purpose given new realities. Those realities will continue to evolve and their effects on businesses will be felt for years.

Businesses will therefore need to continue to evaluate their own structures and operational practices and adapt accordingly. This may involve relatively small and continuous transformation or more significant restructuring or rationalisation.

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