Holding back bankruptcy: the very survival of a troubled company that is approaching—or in—bankruptcy can depend on how well HR gathers information, trims costs, retains key people and communicates with stakeholders - Cover Story

HR Magazine, May, 2003 by Robert J. Grossman

The more complex and contentious the process, the more it costs. Enron estimates its costs will top out at $700 million.

Step One Is Avoiding Bankruptcy

Long before a company slides into Chapter 11, there are hints of financial distress. "The tom-toms usually are beating well in advance; the process doesn't come up and bite you overnight;' says Dick Randazzo, senior vice president of HR for Federal-Mogul Corp., a bankrupt auto parts maker in Southfield, Mich.

In some cases, companies accurately trace their red ink to bloated payrolls--benefits, pensions and salaries. For others, LoPucki says, those human capital costs are a smokescreen obscuring a history of poor management, risky investments and excessive borrowing. Of 592 major bankruptcies that LoPucki has studied, only five--less than 1 percent--were caused by unmanageable pension commitments. "Pension and benefits problems are ancillary to the underlying causes of bankruptcy," he observes.

Ultimately, companies face bankruptcy for various reasons, says Randazzo. "Bethlehem Steel filed because it couldn't afford its pension and retiree medical costs. Kmart and Sunbeam went under because their core businesses had become unprofitable. Kaiser and Federal-Mogul filed because of potential asbestos liability."

Most bankruptcies occur because the company takes on too much debt--either through a takeover or too-rapid growth, LoPucki says. "Then, instead of going into bankruptcy, they cut back essential spending on the business. So by the time they hit bankruptcy, they're going in with a bad business, and that's usually fatal."

Integrated Health Services, a long-term-care provider based in Sparks, Md., is an example. "We grew too fast at the peak of our industry's development, peaking at 100,000 employees and 425 facilities," says Jeanne Phillips, senior vice president of HR and risk management. "We were leveraged to the hilt and crippled by the government's change in reimbursement policy. Then the bottom fell out!' Integrated, now a company with $2 billion in annual revenue--down from $5.4 billion when it filed--plans to emerge from Chapter 11 later this year with 180 facilities and 40,000 workers.

Companies on the brink invariably task HR with finding a big chunk of the savings they need to survive while keeping remaining workers on the job and motivated. Among early cost-cutting options, says David L. Wolfe, a principal in Gardner Carton & Douglas's HR practice in Chicago, is switching from defined benefit pension plan to a more modest defined contribution arrangement.

You also can consider eliminating promises of retirement medical coverage for current employees, except those nearing retirement. But employment attorneys advise against appearing mean-spirited. In a legal challenge, courts tend to look askance at employers who take away any contractually promised benefits of retirees and near-retirees, in that order.

Look also for ways to consolidate health care providers while maintaining comparable benefits. Benefits professionals such as Arthur Cohen, CEO of Benefits Analysts in Glencoe, Ill., say there is a lot of "fat" in unexamined health care plans. "It's not unusual to find ways to save 20 percent and, since most plans are month-to-month, it's possible to change quickly," he says.