Case Study: Restructuring BearingPoint, an Inside Look

b) Implement an effective cash management system to enhance liquidity and achieve infrastructure cost savings to provide time for restructuring optionality, and

c) Instill a clear and positive strategy that would stabilize BearingPoint's fragile employee base and illustrate that BearingPoint had the stamina and resources to survive sans a "fire sale."

After extensive discussions with stakeholders, the plan quickly took hold. It was obvious to all involved in the restructuring that swift and drastic actions were necessary. In a company lacking the typical hard assets such as inventory and fixed assets, the emphasis was on the people.

If the managers and restructuring team could engage and motivate employees as restructuring partners, customers would be retained and cash collections would continue, thus providing additional time to determine and execute the optimal solution.

With the risk of an extended duration in Chapter 11 eroding the customer and employee confidence, and the company's liquidity and thus enterprise value, the restructuring team, with the support of creditors, moved toward a plan to market the firm as a series of orderly strategic sales; BearingPoint's consulting contracts and accounts receivable would be sold for cash to competitors or investors, who would then hire BearingPoint's employees. Such transactions would significantly reduce employee liabilities, generate proceeds to repay debt and provide employees with future employment.

The People
The success of the restructuring strategy hinged on the employees. A company's employees are the backbone to achieving operational and financial success—this is particularly true for human capital firms. Without the support and dedication of employees, a successful restructuring is unlikely, if not impossible.

A troubled company's workforce can become either its best instrument for reinvigoration or its most significant obstacle. Employee knowledge, inspiration, execution and continuation are uniquely vital. Employees are generally aware of a troubled company's "past sins;" this knowledge is essential in establishing a turnaround plan and identifying options. The workforce must become the platform for change. It is impossible for management, counsel and the restructuring team to implement the necessary steps to return a company to vitality without leveraging the knowledge and skills of employees.

Troubled companies often face major complications in overcoming employee fear and resistance to achieve the necessary level of participation. Most employees find business change unsettling and thus become complacent and unable to enact change. Employees' fear of change is generally driven by insecurity, denial of entity-wide responsibility and poor leadership communication. Another considerable fear is business failure. Most employees find it unnerving to place their efforts and their family's financial security in a high-risk situation.

Additional reluctance is often caused by the denial of poor practices and prior alliances with those who contributed to poor strategic decisions. Unfortunately, these occur precisely when a dedicated and focused workforce is most needed to overcome operational and financial obstacles. Employee challenges and fears usually lead to extremely high turnover and customer loss, thus exacerbating the company's problems.

To combat employee concerns and construct a foundation for renewal and survival, management and its restructuring team must implement a strategy that incorporates effective leadership, clear communication, equitable compensation and a culture of participation.

Although many practitioners and executives believe enhanced compensation is the key to quelling employee concerns and providing motivation, the most effective strategy is centered on leadership and communication. Management and its restructuring team, with the collaboration of staff at all levels, must expeditiously define and openly share the corporate vision and strategy. By defining the restructuring plan/vision and effectively communicating it to all parties, management will provide employees with an overall goal and eliminate much of the inherent uncertainty. In the case of BearingPoint, this meant sharing how the strategic sales approach offered the highest probability to enhance creditor recoveries and provide employment opportunities, especially in the face of stiff economic headwinds.

Along with delivering a new vision, management must instill a sense of change and reinforce the role of each individual as an integral contributor to achieving that vision. This message must be delivered consistently to achieve entity-wide unity. It was clearly outlined to the BearingPoint employees that through their efforts alone, customers could be retained, cashflow would improve and the value of and interest in their consulting projects would grow—all improving the likelihood of success.

While managers of a troubled company are undoubtedly preoccupied with the day-to-day operational and financial issues, it is imperative that they focus on employee morale and retention. Establishing a rapport of open communication and trust is crucial to motivating and empowering employees to contribute to the entity's objectives. The relationship between managers and employees ultimately becomes the vehicle for new, innovative ideas and is an early identifier of execution obstacles and underlying employee morale concerns. Communication should take place in many forums: town hall meetings, departmental meetings and one-on-one discussions. An effort should be made to include individuals at all levels in the restructuring process.

Second to leadership and communication, compensation is an important instrument in achieving organizational goals and managing employee concerns. In the BearingPoint case, compensation was thoughtfully constructed to include sales incentives (motivation), enhanced severance (security) and legacy incentives to provide both motivation and security to non-client facing employees.

The Result

The BearingPoint strategy was a resounding success. Customers were retained and new business was originated, liquidity was adequate even without the aid of DIP financing, and employee attrition was reduced significantly from prior years. These results enabled the management and restructuring teams to complete more than 20 sales that generated in excess of $500 million.

The proceeds from the sales allowed the BearingPoint estate to repay 100 percent of its secured debt, which had previously traded in the 20 to 30 percent range, within seven months of filing. In addition to repaying lenders, additional funds ($18 million) were distributed to the company's unsecured creditors and future distributions to unsecured creditors are expected, according to John DeGroote of John DeGroote Services LLC, the Liquidating Trustee for the remaining BearingPoint Trust.

Ultimately, one of the most impressive aspects of the successful outcome is that approximately 90 percent of BearingPoint's employees received employment through the restructuring process. During the recent and ongoing market downturn, in which many companies implemented substantial headcount reductions in excess of 10 percent (particularly in the consulting business), the BearingPoint employees' efforts, in collaboration with management and the turnaround team, not only improved the value returned to creditors, but also provided employees with continuous employment.

David C. Johnston is a Managing Director in the Turnaround & Restructuring practice of AlixPartners LLP – New York and served as a restructuring advisor and CFO to BearingPoint, Inc.