Across the country, many small businesses are on the brink of insolvency, knowing that in the coming weeks and months they’ll need to make tough decisions about the future of their business and employees.
When you pair the $274 billion in mortgages and small business loans currently deferred, with the 2.1 million Australians that are predicted to be taken off JobKeeper by the end of this year, the breadth of the financial crisis and the likely impact on Australian businesses starts to become clear.
In fact, just last week, ASIC commissioner Sean Hughes suggested that the sheer volume of insolvencies that are likely to emerge in 2021-22 will be difficult to manage due to the influx of cases on the horizon.
For businesses, it means that the challenge is coming. Whether it’s cutting costs, reducing staff or negotiating reduced wages, a decision made in the heat of the moment can have significant impacts on the long-term viability of the business or result in legal action.
Reducing your cost-base without panic
The overarching goal of every business in the short term is survival. Longer term, it is to shift from surviving, to thriving, in line with the business’s purpose, whether that be total shareholder returns or broader and equally valuable measures such as social impact.
Despite the turmoil and impacts of the global pandemic, it’s important to anchor yourself to the needs – both long and short term – of customers.
The first priority for businesses should be in assessing where their customer base is, the ongoing needs of those customers and how the business can continue to provide them with value.
The reality is, however, that businesses with a reduced income will ultimately need to reduce their costs to be sustainable.
So, without taking their eyes off the needs of customers, businesses will need to consider the intricacies of their cost base; weighing up the money coming in versus the money going out.
For many, the first reaction to a reduced income can be to cut employee numbers – a step that the lifting of government support in the coming months is likely to exacerbate further.
But, reducing employees can be a reactive and fairly short-term response and there are other ways to reduce your cost base reality before the reduction of staff overheads.
Instead, businesses should try taking a holistic approach to reduce their cost base. Consider instead real estate spend, discretionary spending, contractors or the cost of goods.
Introducing flexible working, reduced hours or even taking pay cuts amongst management and staff collectively can also stave off job losses.
In addition, cash is like oxygen for businesses, think about how you might shorten your cash cycle time by reducing your sales cycle, delivering goods or services more swiftly or managing your billing and payment cycle more effectively.
For many, it’s less about if, but when
Despite best efforts, many businesses navigating the current economic climate will find themselves in the position where they need to restructure and reduce headcount. Ultimately, those businesses and employers have three options:
1) do nothing and head towards insolvency
2) have discussions with employees and handle them poorly, likely ending in dispute and litigation
3) have discussions and handle them effectively, increasing the chance to maintain relationships and avoid disputes.
Ultimately, it is how these situations are handled that matters.
The actions these businesses take in the coming weeks and months are likely to determine the success of their business in avoiding all of the costly, damaging and painful parts of disputes including litigation and in some instances public reputational damage.
Failing to communicate and negotiate effectively with employees – considering and communicating their best interest from the outset – can pose significant risks.
The reality is, that when people get desperate – and these are desperate times – their reaction can be mixed and varied.
Some people get upset, some people want to post their thoughts on social media and others have a desire to fight back and bring a lawsuit.
Businesses that are restructuring and reducing their headcount are much more likely to face these risks and an array of claims.
Whether it’s cutting a deal or getting in early to come to a mutually beneficial compromise, the goal is to use the principles of interest-based mediation to lower your cost base and avoid hostility.
Avoiding litigation through transparency and trust
Building trust within a workplace comes back to the foundational culture of the business and the reality is, the businesses with a transparent and open relationship with their employees, are likely to navigate the process of reducing staff with greater ease.
This can’t be built overnight and this is where the value of using a third party facilitator or mediator can be extremely valuable to guide and support the process.
Talk openly with your employees about the plans in place for navigating the current climate. Outline the challenges the business is facing, negotiate where possible mutually beneficial arrangements.
You can’t have certainty in such volatile environments but as a leader you can provide clarity for people about what is going to happen and by when.
Consistent and clear communications between employers and employees will reduce anxiety and create a greater sense of team – even if it is to communicate that there is nothing to communicate.
It doesn’t mean don’t make difficult decisions. Instead, put the spreadsheet to the side and take your employees on the journey with you.
Facilitate compromise while helping them to understand why the decisions are being made and the implications if they don’t happen.
If you’re struggling to have those conversations effectively, consider using a mediator or facilitator to support you and your employees to work through the issues, find common ground and form agreements before things head south into dispute.
A top-down approach only builds resentment
The companies that are typically resilient in this environment have laid the cultural foundations in advance.
While on the whole, the nature of Australian business can be very top-down and corporate-driven, there is a growing understanding of the need for transparency and open communication.
In an environment that is founded on high levels of trust, people can see the decisions that need to be made in advance of them happening.
Not only do they have time to prepare for it and collectively accept those decisions but they’re part of the decision-making process.
Change is paradoxical, we all say that we want it, but any change that is forced will be resisted, undermined and reversed. Resistance – and ultimately litigation – are much more prevalent in command and control environments
There are inevitable changes that businesses will need to make as they ride the waves of pending insolvency.
It’s possible to make those changes without alienating employees, partners or investors, by enabling early deal-making to resolve disputes rather than fostering aggressive positional battles.
Quite simply, it’s about doing the right thing and facilitating compromise rather than hostility.
There is an increasingly important role for external mediators and facilitators to support Australian businesses and entrepreneurs get back on their feet by using their skills to ensure that the conversations that need to be had between employers and employees are handled clearly, consistently and compassionately.
Nick Northcott is the Executive Director of Immediation.
