New ways to add value to insolvency risk

As an industry that runs counter-cyclical to all others, can insolvency continue to thrive while economic conditions are strong? Only if practitioners focus more on restructure advisory while liquidation and receiverships remain relatively quiet.

In general, business liquidation industry revenue was forecast to decline by an annualised 0.4 per cent over the five years through to 2017/18.1 But some firms have found alternative ways to attract new client matters.

Shift from administration to advisory

Luke Goss

Even when the economy is positive, business leaders unfortunately still make poor decisions – and some commercial risks will fail to reap the anticipated rewards. So while traditional insolvency work may currently be at a low, senior management teams and boards still need specialist advice to mitigate these risks, through restructure or asset divestment.

“The recent safe harbour changes will make a significant difference in the insolvency landscape, giving directors more confidence in engaging an advisor earlier,” says Luke Goss, National Manager, Insolvency & Turnaround at Gallagher. “Early engagement is the key to survival, and an impartial consultant can help directors understand the benefits of making some suggested changes to their business model.”

The recent safe harbour changes will make a significant difference in the insolvency landscape, giving directors more confidence in engaging an advisor earlier. Early engagement is the key to survival.

The Treasury Laws Amendment Bill brings restructure opportunities to the forefront, encouraging proactive action to save businesses with good potential – safeguarding jobs and encouraging a more entrepreneurial approach to innovation.2 It has been estimated almost $4 billion could be saved through this new safe harbour law by maintaining business viability. Ipso facto clause reform also gives business leaders time to improve performance without risking the loss of existing contracts.

Insolvency firms could expect to be more involved in establishing the right capital structure and advising on restructures to increase the chance of turnaround (or at the very least, protect capital values). This could also shift their underlying earnings and expense structures.

Rising costs add to pressures

“The costs of compliance, risk mitigation and administration are all going up, and these businesses need to be mindful of their own profitability as well,” comments Goss. Insolvency firms are adapting to the current economy and shifting their focus from pure insolvency work to advisory. Key is early engagement of advisors to provide specialist advice to mitigate risks, through restructure or asset divestment.

Insolvency fees need to be approved by creditors and are subject to tight review, and this makes any additional costs challenging to absorb. ASIC is now charging per document lodged as well as a flat fee per year, and professional indemnity insurance premiums have risen by as much as 30 per cent due to a few recent claims.

Finding new ways to manage every process more efficiently is crucial, especially within treasury teams. Macquarie’s Active Banking will fully integrate with insolvency practice software later this year, eliminating the need for manual bank reconciliations across hundreds of accounts.

It’s early days, but new technology is emerging

There are three clear tiers in the insolvency market, with major firms servicing large corporate restructures and administration appointments – typically appointed through the banks. With fewer large-scale insolvency appointments, this work is under pressure and some major firms are leveraging technology to streamline their efforts when working with small and mid-sized businesses – providing operational efficiencies and improving margins. For example, Deloitte uses integrated software and in-house automations to replace manual, paper-based processes.

The costs of compliance, risk mitigation and administration are all going up, and these businesses need to be mindful of their own profitability as well. Finding new ways to manage every process more efficiently is crucial.

“We’ve found ways to fast-track standard documentation production, through automation and systemised checklists to facilitate a speedier resolution,” explains Sal Algeri, Partner, Deloitte Financial Advisory. “It’s more engaging for our teams: they can do more value-adding work to maximise the outcome, not just paperwork.”

Another major firm runs its proprietary algorithm over the ASX to identify companies with potential issues – and then proactively contact them.

Specialised second-tier firms tend to deal more with small and mid-sized businesses, and are referred through accountants and lawyers. This puts them in a good position for advisory work. They are able to tap into external tech like Resolve, an online marketplace for distressed businesses, to manage specific requirements more efficiently.

Opportunities to thrive

Find new ways to attract pre-insolvency matters

Insolvency is not a recurring income or retained client model, so you need to keep that pipeline of matters filled. This may mean expanding your network of referral partners, and proactively seeking clients whose businesses still have potential to turn around.

Goss suggests proactively showcasing the ‘good news’ business turnaround stories. “Unfortunately insolvency tends to create bad headlines, but with the recent changes, there’s a real opportunity to profile the difference professional advice can make, with insolvency practitioners at the boardroom table helping to keep people in work, and helping directors save their own businesses.

By building this pipeline of lower-risk work, you may also positively impact your business valuation – worth considering given recent consolidation in the market. Payments are typically made for work in progress rather than fee-multiples, and this can vary substantially at any given time in a market cycle.

Match talent and technology

Think about the current mix of skills in your team. Do you have the capabilities in place for higher-value advisory, such as capital restructure or debt equity structures?

It may be important to buy in expertise working on larger corporate deals, but you also need people with the right client service and consultancy mindset – not just experience managing the administrative processes of insolvency.

“You need a commercial mindset to get results quickly at the lowest possible cost, and recycle capital to maximise the return,” notes Algeri.

Consider how diverse your team thinking is as well. Can you make your workplace more flexible and supportive to attract people with different perspectives and backgrounds? Identify how you can fill the gaps – whether through new hires, or new technology to automate or improve efficiency in the back office.

Make the most of your data

“We expect to see more scrutiny of the role of an insolvency practitioner, including more focus from vigilant regulators,” notes Algeri. Transparent and robust data management and reporting will become essential.

The market can turn quite quickly and if interest rates do rise we could expect to see a sudden upswing in pressure on individuals and businesses. You already have significant data within your business on what that means, and what you can do to manage that process and protect shareholders or employees from a worst-case scenario outcome.

This is valuable IP to build up now and test through advisory work while this side of your business is relatively quiet. It may prove the defining differentiator when the market changes again – as history has proven it inevitably will.

A strategy for growth

Businesses are operating in a completely new landscape, dealing with uncertainty, volatility and an accelerated momentum of technological change. And that may mean re-thinking the way you define your strategy.

In 2000, McKinsey defined three horizons of growth based on the maturity and relative risk of different types of projects.^ We believe this is a useful way to describe the three growth initiatives that will need to happen concurrently in order to sustain business growth in this changing business landscape.

What are the three horizons of growth?

Re-frame your perspective

This is a time of opportunity, not threat. We believe business owners are in a strong position to thrive.

To grow sustainably and profitably, it’s important to acknowledge that traditional rules no longer apply. Business models have been democratised and boundaries have dissolved. Customer expectations are driving the pace of change.

Consider your innovation model and mindset, the broader business ecosystem you can tap into, and the capabilities you need to put in place.

We trust you found this report informative and insightful, and we’d be happy to continue the conversation with you.

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