Only 16 percent of companies fail due to economic crisis, while 54 percent fail due to wrong strategy

A.T. Kearney study analyzes most frequent reasons for insolvencies and the opportunities for sustainable restructuring

Dubai (1 September 2009) — The majority of all insolvencies can be traced back to questionable strategy and investment decisions according to global management consultancy A.T. Kearney. Instable cost structures, insufficient liquidity and belated respectively inconsistent management response to the crisis are among the most frequent reasons for company insolvencies. This is the key finding of a study in which top-management consultancy A.T. Kearney surveyed more than 1.200 insolvencies.

Insolvencies are often a result of incorrect long-term decisions. Every second (!!), insolvencies (54 percent) are caused by incorrect strategic and investment decisions, which is thus the most common reason for corporate insolvencies. In particular hasty expansions before the crisis are now severely punished as uncontrolled investments have eroded financial means to adequately respond to the crisis.The natural reasons for corporate insolvency such as excessive cost structures (39 percent) and insufficient liquidity (38 percent) follow on rank 2 and 3. However, the fact remains that the top eight reasons for company failures are internal issues, from failed strategies to cost structure to inadequate controlling.

“The current economic and financial crisis drastically unveils the failures of the past. Managers then often react too late and again lack strategic foresight. Enterprises are paralyzed; although the crisis is omnipresent it is often underestimated and counteractive measures are taken too late,” said Robert Ziegler, vice president, A.T. Kearney Middle East.

Organizations often respond too late and too slowly. Most corporate crises have their origin in strategic decisions that had partly been taken long before the crisis without anybody recognizing the impending imbalance of the company in time. Basically, only 15 percent of the enterprises in a crisis situation pursue an overriding strategy in the sense of “Sustainable Restructuring“. Most enterprises focus their counteractions on operational areas and mainly react with freeing liquid capital (62 percent), cooperating with customers and suppliers (46 percent) and implementing cost reduction programs (42 percent).

An unexpected finding of the study is that management adheres to traditional patterns of behavior and strategies and responds either with delay or inconsistently, even if they recognized the crisis on time (34 percent). “Often the principle of hope predominates and companies believe that they will be less affected by the crisis than others,” said Ziegler.

Another key reason for corporate insolvencies is the mutual dependency between suppliers and customers along the value chain (23 percent) which in particular applies to key industries with many network relationships and based on division of labour.

Although major reasons for corporate crises can be spotted on a strategic level, most enterprises implement mainly short-term, operational measures to respond to a crisis. Almost 62 percent of the companies take measures to ensure liquidity when they face insolvency. 46 percent of the companies surveyed employ cooperative solutions with customers and suppliers, while 42 percent rely on cost reduction programs and 34 percent take debt and equity capital measures. Only 33 percent of the enterprises change their strategic orientation in a crisis situation.

“Lack of management response to shifting markets and environment can be fatal,” said Ziegler. “Coordinated action is needed to avoid company crisis. Most enterprises still have sufficient scope and are not limited to short-term response and sooner or later demand will recover. Companies should therefore implement short-term measures to ensure liquidity and at the same time realign their long term strategy.”

Most frequent reasons for insolvency:

Incorrect strategy/investment decisions: 54 percent
Cost structure too high: 39 percent
Insufficient liquidity: 38 percent
Belated/inconsistent response of management : 34 percent
Value chain dependency: 23 percent
Management conflicts: 20 percent
Conflicts between workforce and management: 20 percent
Inadequate controlling : 18 percent
Industry crisis: 17 percent
Economic crisis : 16 percent
Uncooperative attitude on the part of banks: 15 percent
Weak competitive position: 15 percent
Lack of skills management: 13 percent
Attitude of shareholders: 5 percent
Fiscal problems: 4 percent

Top 15 measures taken in insolvency situation / severe crisis:

Freeing liquid capital: 62 percent
Cooperation customer/supplier: 46 percent
Cost reduction: 42 percent
Debt & equity capital measures: 34 percent
Strategic alignment: 33 percent
Staff reduction: 25 percent
Communication enhancement: 24 percent
Employing consultants: 22 percent
Leveraging public subsidies: 18 percent
Strict control: 14 percent
Shift in management: 13 percent
New products / markets: 12 percent
Consolidation / M&A: 11 percent
Short-term sales push: 10 percent
Process improvement: 10 percent

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About A.T. Kearney

A.T. Kearney is a global strategic management consulting firm known for helping clients gain lasting results through a unique combination of strategic insight and collaborative working style. The firm was established in 1926 to provide management advice concerning issues on the CEO’s agenda. Today, we serve the largest global clients in all major industries. A.T. Kearney’s offices are located in major business centers in 33 countries. During our 80 year history, we have provided management consulting services to most major corporations and governments around the world. From our fast growing Middle East offices in Abu Dhabi, Bahrain, Dubai and Riyadh, A.T. Kearney actively contributes to the operational excellence and profitable growth of industries and services in the region. For more information, visit www.atkearney.com.