How not to fail like Debenhams

By all accounts, Debenhams - a more than two-century-old brand - fell behind the times. A 2006 public offering valued the firm at £1.7bn, when it delisted on 15 April, shares were trading hands for just 2p each, putting a measly £20m price tag on a business with 166 stores across the country. 

There are a number of factors that led to the downfall of Debenhams, not least that in the internet age a businesses can no longer be a jack of all trades and master of none. Although, the same cannot be said of its sales staff, some of whom were reportedly tasked with carrying out repairs on the company’s crumbing stores.

All the while, the firm was battling a spiralling cost base as a mountain of debt continued to grow, eventually looming over the loss-making business.

As a result, the firm’s future hangs in the balance while management desperately try to resuscitate the ailing chain to save it from the fate that has met other high street retailers like Poundworld, Maplin and Toys R Us.

But those aren’t the only firms that have failed to address the market risk in their own business plan. Philippe Cotelle a board member for risk management bodies Ferma and Amrae points to Nokia and Kodak as other examples.

Nokia lost its grip on the mobile phone market as it failed to keep up with the smartphone revolution, meanwhile Kodak’s film processing business fell by the wayside when the camera world went digital.

He says one way to avoid this type of failure is to leverage the experience of employees across all levels of the business to understand the risks those staff see on the horizon. Those points can then be plotted on a risk map.

“The cartography of risk has to take all the different elements around the companies as well as within the companies,” Cotelle says. For Debenhams, that may have led management to put more resources into the firm’s online operations, which fell behind the competition.

“And that’s probably what [Debenhams] completely missed there, which is the same way that Nokia missed completely the turn to the smartphone or that Kodak missed the turn to digitalisation.”

To avoid going the same way, Cotelle says managers need to establish a framework of analysis that captures not just internal risks, but external ones too.

Fellow risk expert Hans Læssøe, says Debenhams failure should not have been a shock to management who must have known it was coming.

“It’s a combination of things that has evolved over time where management has been unable to or unwilling to do what it took to get back on track,” says Læssøe, the former risk manager for Lego Group, who is now principal consultant at AKTUS.

“If you don’t have a building fire or a terrorist attack or a fraud case, some incident that really cripples you, which most companies don’t, the demise of a company is a gradual process,” he explains.

He said the process can often stem from a vicious cycle as management cut costs to offset falling sales. However investment is normally correlated with revenues, sending the company into tailspin.

Rather than being a “black swan” event, where a devastating event that could not have been foreseen cripples a company, Debenhams was a “grey rhino” event.

“A gray rhino is a big, hairy, dangerous risk that is charging right in front of you,” he explains. “Everybody knows it’s there and nobody does anything about it.”

In the world of Amazon and other online retailers, Læssøe says: “If you have a brick and mortar retail store with rent and big, high rent costs and stuff like that, that’s gray rhino.”

“It’s coming charging on you,” he goes on: “You know it’s coming.”

He says boards need to take a step back and ask: “Why is the world a better place with me in it than without me in it?”

“If you cannot answer that question immediately, you have a problem,” he says.

He says that, in the face of falling sales, firms need to address the reason for the drop in revenues and perhaps refocus on their core competencies and doing what they do better. But they also need to future proof their businesses by making sure they will still be able to attract staff and customers in years to come.

“It all comes back to ‘why’,” he says. “To the question, why should I work for you; why should I buy your product.”

“If you cannot answer that question, you’re in trouble. You may not be in trouble this year, but you will be in trouble in a very short time. And if you’re not doing anything about it, you haven’t done your job right.”

The owners of Monsoon and Accessorize should heed that advice. Last week, Sky News reported that the high street fashion retailer had drafted in accountants from Deloitte to prepare a so-called “company voluntary agreement” in a bid to secure shareholder approval for a wave of store closures.