Companies in Crisis: Hit it Hard and Hit it Early

While crises used to be exceptions, they have become a constant state due to the pandemic and wars. The business world is not exempt, with many companies currently facing turmoil. Martin Hammer, founder and managing partner of enomyc, has witnessed over a thousand companies in crisis and has successfully led many out of trouble. Here, he discusses the causes, symptoms, and the Tarragona Strategy, a proven concept in both medicine and business.

Mr. Hammer, Germans are often said to have a penchant for doom. With rising insolvency numbers, it seems this isn't entirely untrue. Is it the mood that's bad, the situation, or both?

The situation is very serious. What worries me most is the complacency and mediocrity that have taken root. We’re merely managing ourselves instead of shaping our future—this applies to both politics and business. Excessive bureaucracy, the slow decline of our once-leading automotive industry, a non-investing machinery sector, and parts of the chemical industry on the brink... Even pharmaceutical companies, long guarantees of high returns, are now topping our restructuring lists. Fueled by decades of cheap money, many managers have stopped regularly questioning their strategies. Structural problems could be easily papered over with new money, which is now backfiring in two ways. Overall, the current situation has two faces for me: as a citizen of this country, I am not very optimistic. As a restructuring expert, I can say: the times couldn't be better.

But not every crisis turns into a restructuring case, right?

We generally distinguish five phases of corporate crises. In the first phase, we speak of a strategic crisis. This leads to misallocation of capital, personnel, or other resources. The threat level is high in a strategic crisis, but management still has sufficient room to maneuver. The further the crisis escalates, the smaller this room becomes.

Strategic crisis sounds quite existential... And that's only the first stage?

Yes. After the strategic crisis comes the product and sales crisis. This happens, for example, when markets are misjudged—like with electric vehicles. Who would have thought five years ago that China would attack our home market with electric cars for less than 20,000 euros? Now, German car manufacturers are massively losing market share. In a sales crisis, revenues dwindle, and companies quickly slide into a success crisis. If the helm isn't decisively turned in this situation, sales decline, leading to liquidity problems. If capacities remain underutilized for a long time and losses accumulate, over-indebtedness almost inevitably follows. This is the fifth and final stage. Then you're standing right at the edge.

From your experience—around 1,400 projects in the SME sector—when is the point reached where action must be taken to lead the company sustainably out of the crisis?

Ideally, an intervention should occur before the company loses market share, so during the product and sales crisis. Much can still be achieved in this phase. We have found that at least eight out of ten of our clients have a sales problem. In the past twelve months, price increases were the "name of the game." Through smart price adjustments and assortment restructuring, we help companies quickly and efficiently compensate for revenue declines.

Why don't many managers seek help despite clear signs of crisis—like the sales problems you mentioned?

Because the crisis is obscured, or its symptoms are interpreted very differently by those involved. This results in losing valuable time.

What role do external partners like financiers or trade credit insurers play in this context?

Trade credit insurers, in particular, play a crucial role. If traditional credit assessments catch wind of a crisis, it’s usually too late. Moreover, lending banks often keep restructuring cases on the market side for too long. This makes later restructuring all the more difficult. Trade credit insurers, on the other hand, have a much more sensitive early warning system. This knowledge advantage allows them to withdraw quietly and minimize their risk. If a company loses its trade credit insurance, it can be an indication that the company is not doing well.

Have the causes of corporate crises changed in recent years? I’m thinking of the interest rate reversal, inflation, Ukraine...

These factors currently play a role, but they are not new in themselves. We distinguish between exogenous crisis causes such as macroeconomic or political developments, declining sales markets, or increasing competitive pressure, and homemade, so-called endogenous causes. These include inefficient cost structures, lack of transparency, and, of course, management errors.

How do these points manifest in everyday life?

Our experience shows that companies that slack on cost discipline often become crisis candidates. Incompetent management naturally leads to problems. Some leaders overestimate themselves and are resistant to advice. Deficiencies in financial accounting can also lead to crises. It’s simple: if the economic situation of the company is not transparent, you cannot draw the right conclusions.

enomyc is known for successfully leading medium-sized companies out of crises. What does it take for this?

From my experience, three ingredients are crucial: First, you need consensus among stakeholders that the company is indeed in a crisis. Second, determination to do something about it is needed. This includes promptly hiring a suitable consultant and having a realistic restructuring plan. Additionally, the restructuring plan must be implemented quickly and consistently.

This reminds me of the so-called Tarragona Strategy in medicine. It’s about treating intensive care patients with infections. One of the principles is: hit hard and early.

This also fits very well in the restructuring context.

How can I detect early that a crisis is brewing?

Detecting it early is indeed crucial. The later a crisis is recognized, the worse the turnaround prospects. Those who want to know how their company is really doing need numbers that show cause-and-effect relationships. Pure financial evaluations do not provide this information. Important are operational metrics, best compiled in a dashboard.

Which developments in various business areas can be a sign of an impending crisis?

If a company spends less and less on new developments, long-term supply contracts are terminated, or payment terms are suddenly fully utilized instead of taking advantage of discounts, these can be signs of an impending crisis. High employee turnover or quality problems should also raise red flags. Each symptom has appropriate metrics. These can be development expenditures relative to revenue, but also the hit rate in sales or the days payable outstanding.

Can you leave us with something reassuring?

If there's one thing I’ve learned and repeatedly confirmed over the past years, it’s that even in seemingly hopeless cases, there is often much that can be done—provided all parties are willing to face the truth unflinchingly and are capable of quickly and consistently implementing the restructuring plan.

Mr. Hammer, thank you for the conversation.

Get industry insights now!