A.T. Kearney study: Only 16% of companies fail due to economic crisis

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%) 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%) and insufficient liquidity (38%) 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% 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%), cooperating with customers and suppliers (46%) and implementing cost reduction programs (42%).

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%).

"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%) 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% of the companies take measures to ensure liquidity when they face insolvency. 46% of the companies surveyed employ cooperative solutions with customers and suppliers, while 42% rely on cost reduction programs and 34% take debt and equity capital measures. Only 33% 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."