How people issues can shape bankruptcy.

• Author: Groenendaal, Mike
• Position: Bankruptcy

While bankruptcy is often viewed as a depleted and defeated condition, Chapter 11 is, in fact, increasingly used as a comeback strategy by organizations committed to achieving success, no matter how daunting the business or financial obstacles. In 2002, five out of the 10 largest bankruptcies in history were filed, representing the most assets ever in reorganization.

A company planning for a Chapter 11 filing faces many complex and risky decisions on its road to recovery--not the least of which involve choices about the people who will be responsible for its reorganization and emergence.

People: A Planning Priority The actions taken in the pre-filing, planning period of a Chapter 11 bankruptcy--which can range from a few weeks to several months--are critical to the organization's ultimate success or failure. This first phase must set the right foundation for the restructuring and emergence phases. A strategic plan for managing a company's people assets not only reduces the time spent in these phases, but speeds the financial recovery.

It can be an emotional and chaotic time for executives and senior managers, most of whom learn the ropes of a bankruptcy filing for the first time. Top management is forced to make quick decisions to address financing, business strategy and other issues--decisions that must now be approved by the bankruptcy court, often with significant creditor input, rather than autonomously, as previously.

Many senior executives mistakenly overlook the huge effect people programs have on their organization's balance sheet. A Saratoga Institute survey notes that compensation and benefit expenses make up approximately 37 percent of an average company's total operating expenses. Because of the major role played by human capital costs, decisions regarding people programs and awards must be given high priority. In particular, delaying decisions in the areas of talent retention and reward design can hurt short-and long-term financial and strategic goals.

Case studies clearly show how companies that avoided people issues and costs early in a reorganization paid the price down the road. Most often, such plans stalled in court, wasting even more precious time and money, delaying the prospects for a successful emergence.

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