Turnaround and retrenchment

Unemployment

Employment underlies the health, wealth and welfare of our nation. However, four out of 10 South Africans cannot find jobs.

Economic growth has accelerated over the past few years but it has so far had only a marginal impact on an official jobless rate of 25,5%.

If calculated to include people who have given up looking for work, it is close to 40%.

SA’s formal sector created 107 000 non-farming jobs in the fourth quarter of 2006, pointing to faster economic growth filtering through to the job market.

According to Statistics SA (Stats SA) non-farm employment grew by 1,3% in the three months to December over the third quarter, lifting the total number of people employed in the formal sector to 8,231 million.

Analysts have said that while SA may be showing a downward trend in unemployment, the level of joblessness remains stubbornly high.

SA’s economy expanded by 5,6% in the fourth quarter of last year, from an upwardly revised 4,7 in the third quarter, despite a rise in interest rates.

High unemployment and poverty have clouded economic gains since the end of apartheid in 1994 and are seen as the main reason for the high violent crime rate, as well as a possible future source of social instability.

Stats SA also said basic gross earnings paid to employed people rose by 10,4% in the three months to December to R220,583m compared to the same period in 2005, creating pressure on inflation.

The main creator of jobs was the wholesale and retail sector which increased employment by 4,2%, followed by the transport storage and communication industry which added 2,2% more jobs.

SA’s high consumer demand has supported the retail sectors and spending has shown resilience to interest rate hikes of two percentage points last year.

The mining and construction sectors also grew the number of jobs by 2,6% and 0,4% respectively.

The imperative of job preservation is an important driving force in establishing a business rescue culture in SA.

Turnaround and business rescue

A business that is not viable will eventually end up in liquidation with its assets redistributed into the economy, and rightly so.

Many distressed, but potentially viable businesses, however, have been liquidated in a pursuit of lucrative liquidation fees rather than turning them around.

SA's antiquated insolvency laws served to exacerbate the situation. The result has been unnecessary job losses.

The scene is set by new Business rescue legislation as contained in Chapter 6 of the Companies Bill, 2007 to allow statutory turnaround, as a formal business rescue process, to play its rightful role in job preservation.

. The draft legislation affords employees many rights:

Recognising them as creditors of the company with a voting interest to the extent of any unpaid remuneration.
Requiring consultation with them in the development of the business rescue plan.
Permitting them an opportunity to address creditors before a vote on the plan.
According them, as a group, the right to buy out any dissenting creditor who has voted against approving a rescue plan.
Ranking employee claims, in the event of a liquidation, highest after the costs of business rescue, above secured claims, post-commencement finance, and unsecured claims.
Not allowing retrenchment, since employment contracts are maintained.

Turnaround and retrenchment

Is retrenchment always necessary?

As a survival strategy, the knee-jerk reaction of managers of a distressed company is often to cut costs, and the first targets are normally:

Discretionary expenses.
Those activities not having an immediate impact on profit e.g. advertising and R&D.
Staff costs - since salaries and wages normally represent the bulk of raw material conversion costs and company overheads.

Cost reduction aimed at wastage and non-value added activities are valid turnaround tactics. However, cutting costs to the bone often impairs the ability of the distressed company to generate and satisfy demand. Retrenchment itself is an expensive option and often further contributes to the downward spiral towards company failure.

Retrenchment is often detrimental to the viability of a turnaround.

Turnaround and retrenchment do not necessarily go hand in hand

Turnaround is about reversing causes of distress. Research found the following regarding high cost structure as a cause of distress:

Not an important factor - Bibeault (1982), Gopal (1991).
A factor - Schendel et al (1976), Thain and Goldthorpe (1989), Grinyer et al (1990).
A factor in 35% of cases - Slatter (1984).
A factor in 56% of cases - Gething (1997).

A number of other causes of distress occur more frequently than a high cost structure (viability assessment provides a categorisation of causes of distress and their incidence). Moreover, a high cost structure is not necessarily as a result of high employment costs in the first place.

The turnaround practitioner applying a turnaround strategy that addresses these other causes of distress should, if successfully funded, and if not prompted by declining demand, enable crisis stabilisation and restructuring without necessarily resorting to large-scale retrenchments.

The point is that is of little benefit to cut into resources if the causes of distress lie elsewhere.

Not all jobs are sacrosanct though

A company cannot survive if it employs people under circumstances where the value they add are less than the cost of employment. There will always be distressed company situations e.g. declining demand or competitive technology changes where job losses will be inevitable to enable continued employment for the remainder of the employees.
Any business, whether distressed or not, may over time find itself with activities, departments or divisions that don't add value. Once again, should these not have a reason for existence in their present form, there may be job losses if affected staff cannot, after consultation with all stakeholders, be gainfully redeployed to other areas of the business.

What if retrenchment is unavoidable?

Please refer to the Department of Labour's Social Plan web site:

The Declaration of the Presidential Jobs Summit during October 1998 provided a framework for a Social Plan to guide the affected parties who have to deal with retrenchment. The framework included a broad proposal for implementation of this Social Plan.

The Social Plan is subject to the Labour Relations Act (1995) and the Code of Good Practice for Operational Requirements (Government Gazette No 20254 of 16 July 1999). If the provisions of the Labour Relations Act and the Code have been taken into account, and if large-scale retrenchment cannot be avoided, assistance may be requested from the Department of Labour. This assistance includes information and services to retrenched workers and employers, aimed at absorbing retrenched workers into the labour market.

If an employer contemplates large-scale retrenchments within a period of a year, the Minister of Labour should be notified as soon as possible. The employer and workers may then request assistance to prevent or minimise job losses from the Social Plan's Technical Support Facility which functions under the auspices of the National Productivity Institute (NPI).

The Social Plan also aims to ameliorate the economic impact of large-scale retrenchment on regions in the economy. When large-scale retrenchment, which impacts significantly on a province or local area, becomes unavoidable, an investigation of possible developments and opportunities in the province or local economy is essential.