Tag: Resiliency

Can Your Business Partners Handle Disruption?

As discussed in “Five Keys to Dealing Effectively with Disruption” posted last month, denial is a hallmark of disruption.  Successfully navigating disruption requires not only avoiding denial yourself – but also ensuring your business partners do not live in that state.

The importance of dealing with the “brutal facts” is not a novel concept in business or elsewhere.  Jim Collins made the point in Good to Great as summarized here:

Productive change begins when you confront the brutal facts. Every good-to-great company embraced what we came to call “The Stockdale Paradox”: you must maintain unwavering faith that you can and will prevail in the end, regardless of the difficulties, and at the same time, have the discipline to confront the most brutal facts of your current reality, whatever they might be.

Unfortunately, even if you understand the brutal facts, you may very well have a business partner who does not.   A partner’s denial can destroy value and create unnecessary expense.  Check out my posted publications and presentations for a small sampling of the types of consequences that may result from an optimistic yet reality-denying partner.

As noted in “Why Optimism May Not be Enough to Carry us Through Times of Crisis” by  Dr. Tomas Chamorro-Premuzic in Fast Company recently: “Even if people crave optimism in tough times, our objective well-being is more important than our subjective well-being, and that depends more on competence than confidence.”

Indeed, employees, customers, vendors, investors, lenders, and other key constituents need more than optimism and confidence from leaders of a partner firm dealing with distress.   Deriving false comfort from such traits from a partner is tantamount to cohabiting their state of denial.  A better approach is to ensure essential business partners develop a credible plan and demonstrate an ability to complete the hard work necessary to implement.

In situations where a key partner needs help in constructing a well-grounded plan, consider the role mediation can play in helping to introduce objective standards in reaching a reality-based solution that achieves mutual interests.  Mediation remains an option even in these days of social distancing as tools exist to help bring parties in remote locations together virtually as this article by Leslie Berkoff notes.  When a partner’s plan cannot be adapted to reality after good faith efforts to address, then alternatives to that business partner must be considered.

In sum, be aware of a partner’s optimistic plan that is not vetted by adequate forward thinking.   This series of tweets from a British town this past week (focused on best practices for social distancing)  helps to make the point.   The tweets highlighted the decision-making behind the use of a half a ton of dynamite to remove a 45-foot, 8 ton whale from the coast of Oregon in 1970.

As the bemused eye-witness reporter observed in this  vintage television news report, “the blast blasted blubber beyond all believable bounds” including on spectators and cars parked a quarter mile away.  Others vested in a better outcome (such as the town and nearby property owners) surely would have enjoyed a less odious outcome by ensuring the removal crew’s optimism was matched with an adequate amount of forward thinking in developing the removal plan.

Thinking Strategically About Business Outcomes

In  The New Boardroom Imperative: From Agility To Resilience Julian Birkinshaw, (Professor of Strategy and Entrepreneurship, London Business School) discusses the critical issue of strategic resilience –  the ability  “to make smart choices about the scope of business activities in the face of uncertainty.”

Recent posts here have outlined key strategies for tackling business challenges and provided a sampling of resources helpful in developing an effective plan.   See Five Keys to Dealing Effectively with Disruption and Resiliency Resources.

This post “zooms” out (the word choice clearly reflecting too many videoconferences) to focus on three business outcomes in a time of disruption. What are those three outcomes?  Fundamentally:  reorganization, sale or liquidation.   There are many paths to reach any of these outcomes – including in-court and out of court avenues.   Each outcome, of course, has significant consequences.

Although some businesses strategically implement a sale or a liquidation on their own terms, many find themselves dealing with those outcomes only because the opportunity to achieve a reorganization has evaporated.  Indeed, the inability to reorganize can lead to a sale or liquidation – voluntarily or involuntarily.  Resilient business leaders work to avoid such results by strategically assessing higher value reorganization options and then working to implement successfully.

What options exist in aid of reorganization?  In the United States, the federal law governing business reorganizations is Chapter 11 of the United States Bankruptcy Code.  Unfortunately, over the years, Chapter 11 has proven to be an imperfect mechanism for allowing small or medium sized businesses to reorganize.   Last summer, Congress attempted to address that situation by passing the Small Business Reorganization Act of 2019 (SBRA), which became effective in February 2020.

The SBRA adds a new subchapter V to Chapter 11 with the goal of making business reorganization more affordable and more achievable for the nation’s small businesses.  Specifics about subchapter V are detailed here.  The Coronavirus Aid, Relief and Economic Security Act (CARES Act) passed yesterday expands the availability of  subchapter V by making its provisions applicable to a broader range of businesses.  Specifically, as amended, for the next year the debt limit for a small business eligible for relief has increased from $2,725,625 to $7,500,000.  Of course, businesses with debt above that limit can still seek relief under the non-small business provisions of Chapter 11.

Federal bankruptcy relief is just one tool in the toolbox for seeking to implement a business restructuring — and not a perfect  tool.  Other options also exist both in and out of court.  For example, out of court negotiations or mediation with key constituents towards new agreements can be remarkably effective as described here.  Be sure to think critically before selecting any particular tool as each has advantages and disadvantages.   As the saying goes — once the hammer is in hand, every problem begins to look like a nail.  Be sure to act proactively to take advantage of the utility of the most value-preserving and value-enhancing tools while time exists to do so.  And be on guard against the possibility that a key business partner may start wielding a tool that could have significant implications for your own business.

Understanding the options for implementing a successful business reorganization should help in thinking critically about your own business – and (just as importantly) the businesses of your key partners.  Ultimately, part of the ability to make smart choices about current and future business activities in the face of today’s uncertainty relies on such an informed understanding.

Resiliency Resources

Many people were looking forward this March to NCAA basketball tournaments – not a march into an economic and human calamity.

Yet, with the pandemic upon us, the need to navigate serious challenges is at hand.  Last week, I posted Five Keys to Dealing Effectively with Disruption noting the importance to businesses of:

          • Avoiding Denial
          • Attacking the Problem not the People
          • Assistance – Obtaining it
          • Accelerating Communication
          • Appreciating Cash Position

A flood of information has poured forth this week  with advice on various aspects of the current situation.  Assistance is critical in developing an effective plan – and that assistance must come from credible, reputable sources.   Here are some helpful resources  from such sources that will be useful in implementing the Five Keys:

Team working remotely?  Do it safely and securely.

The National Cyber Security Alliance launched the COVID-19 Security Resource Library – a free resource on current scams, cyber threats, remote working issues, disaster relief, and more.    Do not let your focus on attacking the current problem blind you or your team to the additional threats posed by malicious actors with intent to disrupt your operations.

Stay safe and spread the message (not the virus)

The Global Resilience Institute at Northeastern University established COVID-19: How to be Safe & Resilient with the goal of providing critical tools and skills needed for people to stay safe and to help others to stay safe.   Share through your network to ensure others are informed and to promote social connectedness.  As a member of Infragard, I have attended programs at the Institute and admire their commitment to forward-thinking in managing disruption.

Business resources from corporate turnaround professionals

The Turnaround Management Association (TMA) has compiled a COVID-19 Business Resource Site to collect resiliency resources for businesses.   Contributions come from the group’s large, professionally diverse organization (almost 10,000 members in 53 chapters worldwide). Note:   as a past president of the Northeast Chapter  and as a current member of the global board, I am pleased to  co-chair the next global TMA Annual Meeting  (Boston on September 30 – October 2).

Boston business resources

The Greater Boston Chamber of Commerce has established a COVID-19 Resource Page to help businesses navigate developments, which includes periodic updates and resources from the government,  public policy analysis, and industry-specific insights into actions of employers in responding to the situation.

Other resources

Other noteworthy sites include:

Finally,  MWI (where I trained as a mediator) announced two programs:

        • Online Mediation:  the ability to mediate commercial (and other) matters using video conferencing including virtual breakout rooms .  Note:  non-profits and charities are able take advantage of this service for no charge (for one session) through the end of June 2020.
        • Online Trainings:    online training on negotiation skills and other  programs geared towards sales teams, procurement, and business leaders. Note: companies in Massachusetts can apply to be reimbursed for 50% to 75% of the costs through a partnership with the Workforce Training Fund

All of the above resources can be used to implement the Five Keys of avoiding denial, attacking the problem (not the people), obtaining assistance, communicating well and appreciating the critical importance of cash in business resiliency.

The availability of resources does not make the process of dealing with disruption simple but awareness of resources is critical in charting a path forward.

Five Keys to Dealing Effectively with Disruption

On March 10, 2020 the MIT Sloan Management Review published “How Leaders Delude Themselves About Disruption” as part of a series on Disruption 2020 published in memory of Clayton Christensen.

The article, authored by Scott D. Anthony and Michael Putz, is focused on the challenges faced by companies experiencing the effects of disruptive innovation.  As articulated by Christensen (and others) in a 2015 Harvard Business Review piece, “disruption”  in this sense describes the situation “whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses.”  More specifically:

[A]s incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents’ mainstream customers require, while preserving the advantages that drove their early success.

The MIT SMR article notes that disruptive innovation has up-ended many businesses such as Eastman Kodak, Blockbuster, and Toys R Us.   In the authors’ view, leaders should take affirmative steps both individually and organizationally to “confront powerful self-deceptions” that have impeded action to avoid disruption.

For example, the authors note various delusions that afflict incumbent business leaders including:

        • The “we’re safe” delusion:  to demonstrate this point, the authors point to the April 1, 2008 interview of BlackBerry’s co-CEO dismissing the introduction of the iPhone.  BlackBerry’s revenues have fallen considerably since that time of course.
        • The “it’s too risky” delusion:   in support of this point, the authors describe the significant and underappreciated risk of not investing boldly in innovation compared to the limited risk of investing and being wrong — summing up by noting that “companies increase risk by not taking risk.”

The article concludes by imploring leaders to “focus more on mindsets, awareness, and inner capacities to combat basic biases” in navigating the challenges posed by disruptive innovation.   In short – mindfulness for both leaders and their organizations.

Just one day after the article’s release, the World Health Organization declared COVID-19 a pandemic.  The public health disaster at the heart of that announcement has caused and will cause disruption for many industries and companies – not disruption caused by innovation of new entrants – but disruption nonetheless.   And the need to deal effectively with that disruption is imperative.     Here are five keys to dealing effectively with disruption in the current distressed circumstances:

        • Avoid Denial

A common expression in the restructuring world (and other places) is that “denial is not just a river in Egypt.”   Another is that “hope is not a strategy.”   When dealing with disruption, do not underestimate the scope, potential magnitude or possible implications of the situation presented.   Rather, facts must be grasped, scenarios mapped out, options identified, and alternatives understood.    Because time is at a premium, it is critical for leaders to focus on the task at hand and not debate the “fairness” of the situation, how things “should be” different or “could be” different if some uncontrollable factors emerged.   Denial is pure delusion akin to the “we’re safe” falsehood described above that can put an incumbent at risk through disruptive innovation.  Get the facts, absorb them and begin to map out a strategic response.

        • Attack the Problem not the People

A company experiencing disruption can be tempted to focus on the people involved in the situation as opposed to the problem at hand.  Unfortunately, that focus can quickly turn negative as the company conflates the problem with the people and ends up attacking both – thus compounding the problem and the chances for creating an acceptable path forward.   Your enemy is the problem.   And that problem should be viewed as the common enemy of both you and the other party.   Navigating disruption means knowing how to work effectively with others (even others who may be disagreeable) to achieve what you desire  cost-effectively in a way that is acceptable to the other side.  More discussion of this topic is set forth in this article published in CFO Magazine prepared last year.

        • Assistance – Obtain it

The best time to obtain assistance in any situation is when time remains for those rendering aid to have an impact.   Wait too long in any number of situations and would-be helpers are rendered useless.  Of course, it can be challenging to seek assistance and daunting as well to know where to turn.  But often an essential component of “avoiding denial” and “attacking the problem not the people” is lining up experienced advisors who can help navigate the path.   Unfortunately, not all would-be helpers provide much help at all.  Some will simply exacerbate a situation – causing unnecessary delay, adding burdensome cost and failing to move a situation forward.   That is not assistance – and should be avoided at all costs.   Using a trusted network, determine reputable people that might be able to help, vet carefully, listen to the perspectives offered and ensure you fully understand all options and alternatives for moving forward.

        • Accelerate Communication

Communication is fundamental in navigating disruption.   That means communication with all key constituents including employees, vendors, suppliers, board members, investors, lenders, landlords, partners and anybody else with a relationship with the company.   Communication should be concise, honest and regular.  The purpose of communication is not just to convey information but also to convey credibility.   When a company fails to communicate to key constituencies, relationships suffer not only from a lack of information but also from a lack of attention.   Relationships are critical and deserve your investment of time and energy.  If not quite sure what to say, seek assistance from informed sources.   Do not deny the need to communicate or think that since certain parties have not reached out they must have all the information they need.  Own the responsibility to communicate.

        • ·Appreciate Cash Position

Nothing spells disruption more than dwindling cash.   Of course, cash is essential to keeping the gears of any business moving and its absence can and will bring operations to an immediate halt.   Some companies dealing with disruption will not understand their cash position or will deny the reality of threats to cash.  Avoid that scenario.  If necessary, seek assistance in developing accurate and credible cash projections.  Take steps necessary to ensure the company’s runway is well supported by available cash.   If issues exist around availability, then this reality must not be denied but rather factored into a critical problem to be solved promptly with the help of informed assistance through effective communication with key stakeholders.  Cash is truly king and shows no sign of renouncing that royal title.

The consequences of failing to deal effectively with disruption are severe.   Whether disruption is caused by innovators entering into the market or a pandemic of significant scale, leaders must avoid delusions about the potential impact of disruption.   The five keys identified above should help in building resiliency and dealing effectively with the disruptive effect of today’s economic reality.

Trade Creditor Strategies

I was pleased to join Adrienne Walker from Mintz and Lindsay Zahradka Milne from Bernstein Shur on a business panel  yesterday hosted by Massachusetts Continuing Legal Education.   Our focus was on strategies for trade creditors to obtain  (and keep) payment in light of  issues arising in recent financial meltdowns including Sports Authority, Toys R Us, Sears,  Papa Gino’s and many other distressed companies.

We covered a lot of territory in a short amount of time with thoughtful insights and commentary from the audience.  Topics included  maximizing lien rights, obtaining critical vendor status, risks associated with post-petition administrative claim recoveries,  the value of reclamation claims, recent consignment issues, and minimizing preference exposure.

My focus was on lien issues which included the practicality of obtaining and perfecting a security interest under Article 9 of the Uniform Commercial Code.  The discussion also covered various non Article 9 liens including judgment liens, state statutory liens (including mechanics liens) and federal statutory liens (including the Perishable Agriculture Commodities Act).

My top takeaways for trade creditors from the session:

  •  Be Proactive:   Trade creditors who actively monitor and manage receivables are best positioned to avoid the pain of a customer’s financial distress.   Understand the reality that a customer’s  filing could completely extinguish all amounts owed and could also result in the forced return of certain funds paid to the creditor before filing as a “preference.”   Avoid putting off dealing with the unpleasantness of a customer issue; rather make it a priority to protect your right to payment.

 

  • Explore Lien Rights Early:   Creditors often explore lien rights only after experiencing non-payment.  A better strategy is to consider the possibility of lien rights at the outset of a business relationship.   Establishing lien rights requires strict compliance with detailed statutory elements such as those created by Article 9 of the UCC or other statutes.   If lien rights are important, take the time to ensure that the lien is properly created and not subject to attack.

 

  •  Understand Consignment:    Some trade vendors believe that shipping goods to a customer “on consignment” can insulate the vendor from any financial issues of the customer.   However, the law of consignment is highly complex drawing from both the common law and operative provisions of the Uniform Commercial Code enacted by the states.   If you intend to be protected by a consignment relationship, it is imperative that the relationship withstand judicial scrutiny.   Two decisions (available here)  issued on November 26 2018  in the Sports Authority case drill down into these issues and provide a sense of the complexities that can arise.

 

  • Treat DIPs with Care:  “DIP” stands for “debtor in possession” — the term used to describe a company that has filed for chapter 11 relief.    Conventional wisdom teaches that supplying a company in chapter 11 (a DIP) offers some protection to a creditor as claims arising from amounts due post-petition constitute “administrative expense claims” and not just mere “general unsecured claims” (the term given to amounts due for obligations arising pre-petition).   In Toys R Us, however, vendors holding millions of dollars in “admin” claims faced the prospect of no payment whatsoever given the retailer’s cessation of restructuring efforts and implementation of a liquidation.  Although a settlement was reached which provided some payment to holders of admin claims, the recovery was nowhere near 100 percent.   In short, before supplying any company operating in chapter 11, be careful to understand the dynamics of the case and the practical ability to compel payment.

 

  • Understand Preference Risk:    A trade creditor that receives payment in the 90 day period before a customer’s bankruptcy filing is at risk of having that payment examined and potentially challenged as an “avoidable preference.”   There are several defenses available to a trade creditor to defend against such an action.   The best defenses rest on good facts.  Thus, it is imperative that a creditor obtaining payment from a financially distressed firm do so with an eye towards strengthening available defenses in case of a later challenge.    Our session highlighted several recent decisions impacting the ordinary course of business defense, subsequent new value defense and other theories.   The time to think  about such issues is well before a preference lawsuit is filed.

In sum, the opportunity to collaborate with Adrienne and Lindsay was terrific.  The conference also included an excellent presentation on non-judicial options for restructuring and sales as well as an insightful judicial forum.

 

Building Resilient Businesses — Fall 2018 Collaborations

As noted on the About page, this blog focuses on essential aspects of building resilient businesses:   protecting assets, navigating change, solving problems, and getting deals done effectively.

Key components of resiliency are awareness and openness to change.  Denial is absolutely not a strategy.   Resilient business keep  pace with innovation, think strategically,  exercise sound judgment, rely on core values  and build  effective teams.

This Fall has offered numerous opportunities to connect with others on topics at the intersection of technology and  finance – each fundamental to any resilient business.   This post  highlights a few recent and upcoming events/writings  and provides links to those interested in exploring further.

  • In late September, I was pleased to attend a TMA Global Executive Board meeting in connection with the 2018 TMA Annual Conference.   Plenty  of interesting discussions there — but I particularly enjoyed the keynote from Frits van Paasschen, who held the CEO position at  Coors then Starwood and several senior positions at other global companies before that.   He  authored The Disruptors’ Feast — which carries the apt subtitle “How to avoid being devoured in today’s rapidly changing global economy.”   Based on his remarks, I very much look forward to reading the book.
  • This summer, I received an invitation from the American Bar Association Law Practice Division to serve on the board of its Legal Technology Resource Center (LTRC).   The LTRC is focused on  providing legal technology guidance and resources for the efficient and effective practice of law.  Guidance is provided through a technology blog, regular webinars,  various publications and a dedicated website — Law Technology Today.  As  technology continues to evolve rapidly, I look forward to working with the LTRC team who I enjoyed meeting earlier this month.
  • Coming up next week on October 23,  I will join Silvia De Sousa of Thomson Dorman Sweatman LLP in Winnipeg and Kiriakoula Hatzikiriakos of the National Bank of Canada in Montreal (who recently published Secured Lending in Intellectual Property) to present a webinar sponsored by the Canadian Bar Association focused on Secured Transactions in Domain Names & Websites  As has been proven time and again, websites and domain names can be sources of value for companies and creditors — but critical to unlocking that value is successfully navigating various legal issues and understanding cross-border implications.
  • Each year, Massachusetts Continuing Legal Education hosts a New England Bankruptcy Law Conference.   This year, I will join Adrienne Walker from Mintz and Lindsay Zahradka Milne from Bernstein Shur on a business panel focused on trade creditor issues.  With stories of significant trade creditor issues emanating from the Toys R Us case and similar situations, a discussion focused on  practical tools for trade creditors is timely.
  • Finally,  the 2018 Norton Annual Survey of Bankruptcy Law  was published this Fall.  The book contains my chapter analyzing technology and intellectual property issues  in distressed circumstances — including a discussion of the Tempnology case which was the subject of  an earlier blog post here.   Since that blog post in early September,  activity before the Supreme Court has continued with petitioner Mission Product Holding filing a reply brief on September 25 arguing that the High Court should grant review and resolve the question of whether rejection requires termination of a licensee’s rights.   Stay tuned.

In sum, the Fall has offered some interesting opportunities to collaborate with others in  thinking through effective solutions for companies dealing with rapid change.   Technology, finance, and disruption are sure to remain constant partners going forward.

All Inn

The Pine Street Inn recently held a graduation ceremony to honor individuals who have completed the Inn’s job training program.  Both the Boston Globe and Boston Herald captured photos.  The Inn has been offering the training program for 20 years with approximately 200 people enrolling this past year.   Those completing the program have the opportunity to participate in a graduation ceremony like the one recently held.  For many, it is the only type of  commencement ever celebrated.

The Inn’s website includes additional information about the jobs training program — together with other targeted initiatives  including housing, street outreach, veteran services, recovery services, homeless court assistance and advocacy.  All these programs are in support of the Inn’s mission of partnering with homeless individuals to find solutions.

Last year, I was fortunate to attend a breakfast event for the Inn where I heard a beneficiary of the Inn’s services speak.   The story shared was quite impressive.  Simply put, the support provided by the Inn, combined with the individual’s  hard work and dedication,  allowed her to move forward with dignity and hope.  A short video from that event posted online called “Many Roads Home” tells the story of how the Inn is working to get people off the streets, out of shelters and into housing.

Homelessness is an intractable issue and obviously not one that can be solved with any easy answers.   The good work of the  Inn (and its long-time president Lyndia Downie and committed board, officers, staff, sponsors and supporters) is a shining example of resiliency, helping people navigating change and finding solutions.  For those reasons, I thought this short post about the Inn fit nicely within the theme of highlighting forward thinkers and problem solvers.

In that regard, it is worth noting that this Spring the Globe ran an article about Richard Ring, whose 48 year-long career in advocating for homeless issues includes many years leading the Inn earlier in his career.  At a time when people’s perception of homelessness was quite different, he was instrumental in building awareness, helping to set strategy, and exhibiting ceaseless devotion to the topic.

Perhaps someday, there will be no need for the Inn.  In the meanwhile, those served and the greater community can be very grateful.   The Inn details out numerous ways to donate in support of its mission at this page and other ways to support this mission and get involved at this page.