Restructuring: When Hope Is a Poor Advisor

Friedrich Nietzsche said: "In truth, hope is the worst of evils, because it prolongs the torment of humankind." This applies not only to people as individuals, but also to companies in crisis, whose decline is prolonged rather than ended by false hopes. And it does so for several reasons.

First, hope can lead to unrealistic expectations. When organizations face challenges, it is only natural to hope that things will improve. But when hope is the main guiding motif of a restructuring, for example, it can lead to false expectations about which goal can realistically be achieved. This, in turn, can mean that the difficult decisions required for real change are not made, or are made too late.

Hope can also encourage wishful thinking. When we are hopeful, we tend to focus on positive outcomes and to block out possible risks and challenges. In restructurings, however, it is particularly important to take a very realistic and objective look at the company's strengths and weaknesses, as well as at the external factors that may influence future success.

My third argument against hope: it clouds judgment. When we are very hopeful, we are less open to considering alternative options or listening to dissenting views. As a result, alternative scenarios or ideas are lacking, and not all options for a restructuring are considered.

Fourth, hope can also undermine credibility – for instance because managers lose the trust of their stakeholders during a restructuring. In a crisis in particular, stakeholders expect fact-based decisions.

Between Fear and Hubris: Why Hope Is So Seductive

Why are restructuring contexts in particular so often marked by insufficient insight and exaggerated hopes on the part of management? Leadership often clings to positive prospects like a drowning person to a straw and stays passive instead of acting. According to our observations, this usually has several causes:

• Fear of failure: Managers are afraid of making the wrong decision, which could lead to negative consequences such as damage to their reputation, job loss or financial setbacks.

• Lack of awareness: In some cases, executives are not fully aware of the seriousness of the situation and of the potential risks and consequences, which leads them to downplay it.

• Overconfidence: Managers are too confident that they can get the situation under control, or they underestimate the complexity of the problem.

• Cognitive bias: Managers can be influenced by cognitive bias, such as optimism. They are then too positive and underestimate the risks.

In such a situation, an experienced restructuring advisor can help overcome fears, biases and short-term thinking by fostering very specific learning processes.

Why Organizational Learning Processes Matter So Much in Restructurings

People, including business leaders, often learn only from mistakes or in crises, because such situations force them to confront the consequences of their action or inaction. When everything is going well, there is usually little motivation or urgency to examine how things can be improved.

In restructuring processes – depending on the stage of the crisis – the prerequisite for learning is in principle given, but we observe that the willingness to rethink (that is, to learn) and to act often only emerges when insolvency is imminent. By then, the room for action is usually already very limited – sometimes it is already too late. Behind this lies the fact that early crisis stages are generally not perceived as a crisis, and therefore not as a starting point for learning processes. Or the learning happens only superficially (within the existing frame of action) and not as a double-loop process.

Mastering the Crisis with Double-Loop Learning

Anyone who wants to accelerate learning processes within an organization during a crisis or restructuring, and to establish double-loop learning processes, must understand what double-loop learning is about. Double-loop learning processes are characterized, among other things, by reflecting on and questioning basic assumptions that are taken for granted (mental frameworks). It is also essential that not only rules of action are reconsidered, but also the underlying values, norms and principles. It is therefore also about identifying and examining the deeper beliefs (patterns learned in non-crisis times) that guide our thinking and actions. To guide such processes in times of crisis as well, excellent professional qualifications (for example in finance, operations, sales, HR and other areas) are needed, but above all strong leadership and change competencies.

Advisors have six proven levers at their disposal, which must be used together and in coordination to initiate learning processes and create an understanding of the need for immediate action:

1. Truth and clarity: When the advisor gives a clear and honest assessment of the current situation, highlighting the severity of the crisis and the risks of delay, changing course is often easier.

2. Consequences of inaction: The advisor should clearly outline the consequences of not acting, including the potential for insolvency or other legal and financial risks.

3. Data-driven insights: Data-driven insights and analyses help the client understand the scale of the crisis and the possible impact of different cost-cutting measures.

4. Fostering a sense of urgency: The leadership team must be made aware of the urgency of the situation and understand how important it is to act quickly and decisively to overcome the crisis.

5. Encouraging critical reflection: The advisor can promote critical reflection on the underlying assumptions and values that led to the crisis. Questions can be asked such as: "What brought us to this point?" and "Which assumptions we made were wrong?"

6. Challenging mental models: Advisors should encourage the organization to question its mental models and assumptions. It can help to analyze the underlying beliefs and values and to challenge them on the basis of new insights and feedback.

In a Crisis, Speed and Clarity Are What Count

Experienced restructuring advisors know that it takes a whole bundle of measures and skills to get a struggling company back on track. In advanced crisis stages, the first priority is above all to make hard decisions quickly – based on data-driven analysis. Clear and honest communication, actionable plans and continuous support are further success factors. With a cooperative, results-oriented approach, a good advisor can help clients overcome even the most difficult crises and emerge stronger in the long term. And without any false hopes.

Do you have questions about why organizational learning processes are so important in restructurings, and how you can master challenges with double-loop learning processes? We are happy to answer them! Schedule a no-obligation conversation with our expert Jan Ulrik Holsten now.