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The role of consulting firms in business continuity

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The role of consulting firms in business continuity: A case of vulnerable SMEs
IFKAD 2017 St. Petersburg
Deusto Business School - Nekane Aramburu
OPE Consultores - Iñaki Garagorri

Published in: Business
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The role of consulting firms in business continuity

  1. 1. The role of consulting firms in business continuity: A case of vulnerable SMEs Iñaki Garagorri Nekane Aramburu IFKAD 2017 – St. Petersburg, 7th-9th June 2017
  2. 2. The role of consulting firms in business continuity: A case of vulnerable SMEs Introduction • Business failure  misalignment of the organization to the environment (Sheppard & Chowdury, 2005) • General opinions of management consulting  mixed and somewhat negative (Wright & Kitay, 2002) Purpose • To analyse the impact of consulting firms’ intervention in business continuity and survival. • Population: Basque SMEs in vulnerable situations.
  3. 3. The role of consulting firms in business continuity: A case of vulnerable SMEs Context Source: European Commission
  4. 4. The role of consulting firms in business continuity: A case of vulnerable SMEs Context Source: European Commission Regional Innovation Scoreboard 2016
  5. 5. The role of consulting firms in business continuity: A case of vulnerable SMEs Context Source: INE-Spanish National Statistics Institute Firms 2007-2014 2015-2016 Firms in Spain -6,51% 1,56% Firms in the Basque Country -9,24% 1,78% Firms in Gipuzkoa -12,60% 1,38% Firms in Spain < 200 empl. -6,49% 1,56% Firms in the Basque Country < 200 empl. -9,22% 1,78% Firms in Gipuzkoa < 200 empl. -12,61% 1,36% Firms in Spain > 200 empl. -17,06% 3,08% Firms in the Basque Country > 200 empl. -15,34% 2,66% Firms in Gipuzkoa > 200 empl. -8,82% 9,89% Unemployment Rate 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2007- 2012 2014- 2016 Spain 8,57% 13,79% 18,66% 20,11% 22,56% 25,77% 25,73% 23,70% 20,90% 18,63% 17,20% -5,07% Basque Country 5,90% 8,48% 12,13% 10,98% 13,16% 16,60% 16,58% 16,60% 12,89% 12,27% 10,70% -4,33% Gipuzkoa 5,36% 6,74% 9,15% 7,67% 10,86% 13,24% 13,80% 14,05% 10,16% 9,95% 7,88% -4,10% • The impact of the last crisis in business survival has been higher in Gipuzkoa but smaller in terms of unemployment • SMEs have suffered more than bigger companies
  6. 6. The role of consulting firms in business continuity: A case of vulnerable SMEs Vulnerability of firms • Enterprises  a bundle of internal and external resources, which help them to succeed or fail (Penrose, 1959) • “Active inertia”  an organization’s tendency to follow established patterns of behavior until they fail (Sull, 1999) • Factors to explain SME business failure: business life cycle, other competitors, commercial resources, management style, managers, cost structure, financial resources, innovation, productivity (Scott and Bruce, 1987); strategy, organization, characteristics of the enterprise's owners (Freel and Robson, 2004); access to finance, cooperation and networking (Franco and Haase, 2010); level of debt, capital management, technology, price policy, employee qualification and motivation (Ropega, 2011)
  7. 7. The role of consulting firms in business continuity: A case of vulnerable SMEs Vulnerability of firms • Business failure frameworks (Sheppard & Chowdury 2005, Ooghe & de Prijcker 2008, Pretorius 2008) • Vulnerability  the uncertainty related to risk management that threatens a company’s operation (VTT Technical Research Centre of Finland, 2002)
  8. 8. The role of consulting firms in business continuity: A case of vulnerable SMEs Knowledge-intensive business services • KIBS  Private firms providing services for engineering, technical essays, architecture, design, marketing, IT, management and organization, legal affairs and auditing (Kamp & Ruiz de Apodaca, 2017) Benefits for companies using KIBS: • Knowledge sharing that contributes to the development of co-created solutions (Hakanen 2014) • Foster the user’s innovation capacity (Kamp & Ruiz de Apodaca, 2017) • Positive impact on economic performance (Evangelista et al., 2013) • Beneficial for the competitiveness of firms (Antonelli, 1998; Jensen, Johnson, Lorenz, and Lundvall, 2007; McKinsey, 2012) • Positive influence on sales (McKinsey, 2012) • Positive impact on turnover and exports (Kamp & Ruiz de Apodaca 2017)
  9. 9. The role of consulting firms in business continuity: A case of vulnerable SMEs Research hypothesis The use of KIBS (i.e. consulting services) by SMEs in situation of vulnerability has a positive impact on (a) growth, (b) economic performance, and (c) financial performance of the companies.
  10. 10. The role of consulting firms in business continuity: A case of vulnerable SMEs Research method In 2014 the Local Government of Gipuzkoa (Basque Country, Spain) launched a two-phase emergency plan for SMEs in situation of vulnerability: • Phase 1: Analysis of vulnerability and action plan for 105 SMEs • Phase 2: Implementation of action plans for 99 SMEs with the help of consulting firms (November 2014 – July 2015)  2014-2015 economic and financial information of 75 companies is publicly available (sample) Control group  all the similar SMEs from Gipuzkoa: • same size (2-44 employees in 2014) • same economic activities (Annex I) • in similar situation of vulnerability (ROA 2014 between 34,38% and 31,24% and Debt ratio 2014 between 98,75% and 15,35%)
  11. 11. The role of consulting firms in business continuity: A case of vulnerable SMEs Research method 2014-2015 variation of measures: • Growth: increase in operating revenue and number of employees • Economic performance: EBITDA (earnings before interest, taxes, depreciation and amortization), Cash flow, ROA (Return on assets = EBITDA / Total Assets) • Financial performance: OCF (Operating cash flow = Cash flow / Current liabilities), Liquidity (Current assets / Current liabilities), Debt ratio (Total debt / Total assets)
  12. 12. The role of consulting firms in business continuity: A case of vulnerable SMEs Findings and conclusions Interannual change (2014-2015) Garaituz (75 firms subject to consulting intervention) Control group (1.542 firms with same size, activity and in vulnerability) Gipuzkoa (whole population, 10.877 firms) Growth Number of employees change 2014-2015 3,56% 2,78% 3,71% Operating revenue change 2014-2015 0,61% 8,59% 5,00% Economic performance improvement EBITDA change 2014- 2015 63,49% 34,42% 28,44% Net income change 2014-2015 n.a. 94,42% 123,50% Cash-flow change 2014-2015 67,72% 34,44% 41,56% ROA change 2014-2015 2,00% 1,71% 1,10% ROE change 2014- 2015 n.a. 2,87% 2,56% Financial performance improvement OCF change 2014-2015 4,66% 6,81% 6,91% Liquidity change 2014- 2015 0,06 0,02 0,22 Debt ratio change 2014- 2015 0,76% -0,25% -1,62%
  13. 13. The role of consulting firms in business continuity: A case of vulnerable SMEs SME vulnerability model Origin: Structural vulnerability Size Societal structure Organization and management Strategy  Inadequate size  Business continuity  Management board  Organiz. structure  Management model  Strategy focus Consequence: Operative vulnerability Commercial Production R&D&I  Customer concentration  Commercial resources  Internationalization  Production structure  Purchasing  Quality  Innovation Causes Significance  Added value  Cost structure  Wages  Financial structure  Short-term finance  Equity Economic-financial Result: Economic-financial vulnerability Emergency Action Source: OPE Consultores
  14. 14. The role of consulting firms in business continuity: A case of vulnerable SMEs Intervention scheme Source: OPE Consultores Solve short-term cash stress Cash generation Current asset & liability management: payment deadlines, unpaid debt collection, stocks…. Action plan Cash Financial structure Profitability New current liabilities: bill discounting, lines of credit, credit accounts, factoring…. Implementation of forecasting and control procedures and tools Balance the financial structure Restructuring the debt Proposed restructuring plan  Full viability plan Defense & Negotiation Increase profitability to guarantee sustainability Revenue increase: - Business development - Short-term commercial plan Cost reduction: - Purchasing - General operating - Staff - Financial Productivity improvement: - Reduction of production costsEquity, long-term asset & liability management Finalreport Report 2-3 weeks 2-4 weeks 6-8 weeks 2-3 months 2-3 months 2 weeks 5-7 months Urgent action plan Update and elaboration of data: - Economics: P&L, costs - Financial: debt situation, cash flow - Cash: balances, treasury plan - Commercial: sales, customers Work plan Business Model – Organizational Structure Management plan – Budget – Control – Balanced Scorecard

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