At the crossroads

The past few years have been extraordinarily challenging for Canadian businesses. The pandemic brought the economy to a near-standstill and the ripple effects are still being felt. Supply chain disruptions, rising materials and labour costs are our new reality. Shortages in critical materials, such as microchips and minerals, are impacting viability and timelines for many industries. Geopolitical uncertainty and shifting trade realignments are adding more instability to an already difficult puzzle. With Covid-19 cases rising again in parts of the country, there's concern that newer variants might send things spiralling again. When it's so hard to fathom what the picture might look like eight, ten, twelve months from now, it's no wonder Canadian business leaders are feeling a little unsettled.

I know from conversations with clients and colleagues that management teams and boards of directors are indeed worried, but the sentiment is more than anecdotal. We conducted a survey of over 500 medium-sized Canadian companies in February 2022 that provides a clear picture and some fascinating insight into what's top of mind for business owners right now.

Bird's-eye view
One response really caught my attention. What's the single most pressing concern for your organization? Given the interest rate hike a few weeks ago, you'd think inflation would rank high on that list. But it was ranked seventh after a long list of other issues, from pandemic fatigue, to availability of skilled talent, supply chains, energy prices, and regulatory uncertainty. Today we're talking about borrowing rates effectively rising from zero per cent to 2.5-3 per cent, and my guess is that inflation risk in the past 90 days has moved from seventh to the top three of issues facing businesses!

While these rankings will be different for everyone, the variety of responses puts into perspective the sheer force of the headwinds businesses are facing right now. People are making heroic efforts to solve supply chain and sourcing problems, and now we're asking them to manage rising materials, parts, and freight costs; rising labor costs; labour turnover; higher energy costs—the list goes on and on. And it's a scary list for management teams these days because these items have a real impact on liquidity.

Another finding from that survey that jumped out at me involved interest rates relative to viability. Thirty-three per cent of Canadian businesses said a two per cent interest rate hike would constitute a tipping point. If we think back to 2018, the Bank of Canada was targeting 2.5 to 3 per cent. Now we're targeting the same rate, but Canadian businesses are seeing it as a potential moment of truth. It's going to be very interesting to see how the next 18-24 months plays out and what effect interest rates will have on companies that are already feeling the pinch from other headwinds they are facing.

Fault lines
It must be said as well that one result outright shocked me: only 35 per cent of executives surveyed felt their Board of Directors was prepared to deal with unexpected changes or issues that impacted their business. A lot of people are operating in environments where it's hard to start conversations about challenges to their existing business model. From my 20-plus years doing restructuring and turnaround, I can confirm that this sentiment is common. There is often a negative association with restructuring, a sentiment borne out by our survey. 64 per cent thinks it's for companies on the brink of disaster. But I've seen firsthand how restructuring can revitalize companies and take them to new heights when they create a "restructuring culture."

I also know how difficult and emotional restructuring conversations can be. Even though the pandemic required four out of five businesses to reorganize, a genuine stigma exists around any kind of financial challenge. No one starts a business expecting crunches or detours down the road. In fact, only 33 per cent of those surveyed have ever faced a crisis that put their company's stability at risk. When you put these last two statistics together, that's a lot of owners who've never lived through a significant crisis and who unfortunately, due to their business culture, aren't in a position to start addressing it.

The funny thing is, when you fast forward from those difficult conversations, a fascinating counterpoint emerges from a business standpoint. While most business leaders are unprepared to talk about restructuring, the overwhelming majority of those who've done it—86 per cent!—say it was the best thing that happened to them. In other words, initiating the conversation wasn't a step back: instead, it rejuvenated their companies and gave them a better business model.

Carpe diem
These are destabilizing times that necessitate tough decisions. Entities do not have to be in a distressed position to take charge of the moment. Rather, being proactive can prevent small fires from becoming forest fires. And instead of delaying a difficult discussion for some future moment, it's the perfect time to take the temperature of your organization and your Board and dive into issues of pressing concern. Acting before a crisis hits turns that crisis into something far more productive—a shift in direction, an opportunity to change, a time to regroup. Review your business model, your cost structure, your stakeholders, and find concrete ways to improve.