In the wake of the coronavirus pandemic in 2020, a significant number of businesses across a broad range of industries have faced uncertainty and closure.
However, while the UK may have endured one of its worst financial crises in the last 300 years following Covid-19, experts have noted that insolvency and restructuring activity has remained incredibly low during this period.
But what is corporate restructuring, and what are its core benefits and disadvantages to businesses?
What is Corporate Restructuring?
The term ‘corporate restructuring’ describes a process through which a company adjusts its core business model and operations in response to a specific challenge.
Most commonly, businesses choose to restructure following a period of increased financial pressure, whether this is caused by a squeezed profit margin (such as when product-oriented ventures enter into retail) or through a forced decline in sales.
It may also occur during a period of growth or positive transition, as firms look to scale effectively and equip themselves to cope with increased demand.
Occasionally, the departure of an owner founder or the decision to sell a business may also incur some form of corporate restructure. For example, if the company becomes subject to a management buyout, this will require a small restructure to the operation of the business.
The Pros and Cons of Corporate Restructuring
At this stage, all that’s left is to consider the various benefits and disadvantages of corporate restructuring. Let’s start with the pros:
- Reduced Operational Costs: As companies often look to restructure during times of financial pressure, it’s common for corporate restructuring to reduce operational costs (particularly in the form of payroll when certain employees are let go under the new regime).
- Improved Communication: During the process of restructuring, new management teams often look to eliminate layers of bureaucracy and similar barriers to productivity. This leads to improved lines of communication, particularly between employees and the senior leadership.
- Optimised Efficiency: New leadership teams may well bring more contemporary management ideas, many of which will be built around technology and innovation. Such changes can help to improve operational efficiency and lend themselves to accurate record keeping.
While the cons of a corporate restructure aren’t as immediately apparent as the benefits, there are some considerations to keep in mind. For example:
- Downsizing Can Impact Output: In cases where corporate restructuring follows a period of reduced sales, the subsequent downsizing can lead to the loss of top talent. This may have a detrimental impact on productivity and the quality of output throughout the business.
- Insecurity and Lower Staff Morale: If the new management team does cull jobs as part of the restructure, this can cause anxiety and uncertainty among remaining employees. This may cause additional staff turnover in the short-term, while lowering morale in the process.
- There May Be a Period of Transition: On a similar note, the introduction of new technologies and decision to retrain some employees could lead to a challenging period of transition. This may last indefinitely, impacting turnover and profitability in the process.