Organizational resilience as a human capital strategy for companies in bankruptcy

Abstract

BACKGROUND: Bankruptcy is a crisis that generates severe stress and anxiety, resulting in maladaptive behavior and inappropriate decision-making at both individual and organizational levels. There is limited research or guidance for management to address the consequences of bankruptcy on an organization’s human capital.

OBJECTIVE: This study examined the human capital management principle of organizational resilience that was employed by a company that successfully reorganized and emerged from bankruptcy.

METHODS: This study translated seven principles of organizational resilience proposed by Mallak to operationalize a conceptual model of organizational resilience for companies operating in bankruptcy. The model is evaluated using a qualitative research approach comprised of an original case study of Integrated Electrical Services, Inc.

RESULTS: The results of the research points to the importance of de-centralized operational decision making, expanding communication channels, ensuring adequate external resources, and engaging external stakeholders in the management of an organization seeking to successfully operate and ultimately emerge from bankruptcy.

CONCLUSIONS: The research identified the central importance of expanding decision making boundaries in the resilience of organizations and their ability to adapt when under adverse conditions such as bankruptcy. The implications support an organization developing a human resource strategy to develop organizational resilience.

Keywords

Human resource management organizational adaptation turnaround adversity coping

1 Introduction

Companies in bankruptcy represent the extreme consequence of organizational decline and typically an unsuccessful or failed turnaround attempt [1]. In the United States, Chapter 11 of the Bankruptcy Act provides an opportunity for a company unable to meet its debt obligations to reorganize its affairs in lieu of liquidation [2]. When a company files for Chapter 11 bankruptcy reorganization, its attention becomes focused on survival and not just operational turnaround. Under normal circumstances, organizations would adapt to a changing environment and adjust their routines and processes to find stability in a new equilibrium. But a bankruptcy situation is not normal. Typically an organization in bankruptcy is in a turbulent environment, one which is constantly changing and does not settle into a new equilibrium.

Judgmental errors in decision making are particularly dangerous in a bankruptcy situation which is an “emotional and chaotic time” [3] and forces management to make quick and decisive decisions in order to avoid its economic demise [1]. The impact of the organizational decline and economic turbulence from the bankruptcy, and resulting stress and anxiety, can lead organizations to centralize authority and decision-making, lapse into rigid decision-making rules, and narrow channels and flow of information [4, 5].

Stressors are also particularly pronounced on individual employees when firms declare bankruptcy. Most turnaround models emphasize the need for retrenchment and cost reductions, commonly including employee layoffs, as the path to recovery [6, 7]. In this respect, employees are often ignored in bankruptcy as a stakeholder group, and as a consequence, often suffer as a result of the company’s failure [8]. Studies have demonstrated that job insecurity from working in a bankrupt company is positively linked to stress and anxiety of employees in the workplace [9]. Other reported negative effects of downsizing on employees include: “(i) the destruction of interpersonal relationships, shared values, trust and loyalty, and commonality and strength of culture; (ii) reduced information sharing and increased secrecy, deception, and duplicity; (iii) increased formalization, rigidity, resistance to change, and conservatism; (iv) increased conflict, anger, vindictiveness, and feelings of victimization; and (v) increased selfishness and voluntary turnover, as well as deterioration in teamwork and cooperation” [6].

Responses to adversity, stress or trauma can have at least four possible consequences: Deterioration in functioning and the individual or organization eventually succumbs; survival with some degree of reduced functioning or impairment; resilience or a return to the pre-adverse event state of functioning; or fourth, a state of thriving or a return to a higher level of functioning than in the pre-adverse event state [10]. It is the existence of these latter two states of functioning, resilience and thriving, which provided the foundation for resilience theory. Resilience theory in individuals has described how individuals use positive coping strategies to enable resilient individual functioning despite stress or trauma [11]. Crisis management theory developed to understand how organizations adapt to crisis situations [12].

Organizational resilience theory grew out of a fusion of the concepts of individual resilience and crisis in organizations. However individual resilience is not a sole condition for resiliency at the organizational level. Resilient individuals in an organization do not alone make a resilient organization [13 –15]. Organizational resilience theorists argue that management can build resilience into organizations to enhance their ability to withstand crisis situations [10–13 , 16].

An organization operating in bankruptcy, like any other organization, must ultimately enjoy some competitive advantage over its competitors if it is to survive and maintain profitability [17]. Bankruptcy is a crisis to an organization that generates severe stress and anxiety, resulting in maladaptive behavior and decision-making at the individual and organizational levels. Where human capital is a critical element of competitive advantage, organizations seeking to successfully reorganize and emerge from bankruptcy must then seek to employ strategies to enable their people to perform and thrive.

This study examines the case of Integrated Electrical Service, Inc. (“IES”) a national electrical contractor that entered Chapter 11 bankruptcy proceedings in 2006. Price Waterhouse Coopers estimates that only 39% of companies entering Chapter 11 will successfully reorganize and emerge from bankruptcy within 18 months [18], and Payne and Hogg [8] determined that historically 80% of the companies filing for Chapter 11 bankruptcy eventually resorted to Chapter 7 bankruptcy, the liquidation of the organization.

The central thesis of this paper is that bankruptcy is a crisis that generates severe stress and anxiety, resulting in maladaptive behavior and decision-making at the individual and organizational levels. A human capital strategy that consists of implementing an organizational resilience model is examined as an element of operational and organizational restructuring in a bankruptcy turnaround model (Fig. 1). As theorized in the conceptual model, organizational resilience principles provide the coping mechanisms within the organization necessary for learning and adaptive responses to occur.

2 How resilience influences organizations and individuals

2.1 Sources and impact of stress on individuals and organizations

In a seminal work on stress (and individuals’ reaction to stress) in the fields of biology and medicine, Selye [19] proposed that individuals react to stress in three successive physiological stages: Alarm (choice between coping and avoidance), resistance (attempts to cope), and exhaustion (prolonged exposure and diminishing ability to cope). Beehr and Newman [20] demonstrated a link between stress at work and the human and organizational consequences that lead to physical, psychological and behavioral responses among employees. Subsequent researchers have supported this link between job stress and human responses [21, 22] and have further investigated ways to moderate the negative effects of job stress. Research findings have identified that significant differences exist in individual responses to threat. The concept of resilience deals with individual traits and how people deal with stress or trauma, and the varied coping mechanisms that are employed. Genetics, past experiences, personality, social environment and context, all apparently interplay in the individual resilience displayed by a particular person [23].

Under stress, individuals can maintain performance where performance requires the use of rule-based or knowledge-based levels of response. These are referred to in the literature as primary task performance [24]. Performance under stress tends to deteriorate when individuals are required to operate at a higher level of mental effort for any extended period of time [24]. It is the trade-off between level of cognitive effort and performance that is the key to understanding changes in an individual’s performance under stress [24].

The threat-rigidity effects theory and model presents a more specific explanation of the threat-rigidity effect in individual, group and organizational behavior [5]. The threat-rigidity effects theory proposes that individuals and organizations, in response to adverse environmental conditions, engage in behaviors that lead to rigidity of action, which can be maladaptive where the threat involves major environmental change [5].

The threat-rigidity effects theory proposes that under conditions of crisis or threat, organizations experience, and are often overwhelmed by, an increased level in the number of sources of information and data, and a multiplicity of alternative courses of action. In response, the organization reduces communication channels by restricting information to higher levels in the organization, reduces and simplifies alternatives, and tends to rely primarily on prior experiences when formulating responses. The net effect is a restriction in the information processing within the organization leading to an increase in judgment errors in decision-making [5]. A second observed effect proposed by the theory is a major change in control processes such that the organization centralizes control and emphasizes standardization of policies and procedures to ensure conformity and control [5]. The third observed effect relates to the increased focus on the internal environment reflected in cost-cutting and efficiency measures including layoffs, asset dispositions, change initiatives and increased accountability measures [5].

2.2 Coping and individual resilience theory

Individual resilience theory, in the context of the organization, addresses the behavior of employees subjected to the stress of a company’s operational and financial difficulties. Individual employees of an organization operating in bankruptcy will have been subjected to cost-cutting, efficiency measures including layoffs and job insecurity, continuous change initiatives, and breakdowns of identity within the organization [2, 6]. These conditions have been demonstrated to create stress and anxiety in individual employees. The organization is influenced by individual employees and small groups of employees through (a) the aggregation of individual behaviors influencing the organization; (b) individual action masquerading as organizational policy; and (c) powerful individuals influencing organizational structures [1]. The research supports the position that individual behavior influences organizational behavior and vice-versa [1] and the conclusion then is that resilient individual employees will contribute to, but not necessarily make, a resilient organization [13].

The work of Carver [10] focused on coping behaviors and identifying coping strategies for strengthening the characteristics of resilience. Carver argued that the key attributes of resilience in individuals in relation to organizations are persistent engagement, drive to survive, and strong relationships both with superiors and with peers. Female employees under stress tend to seek social-focused instead of problem-focused coping solutions [25]. These attributes, combined with coping behaviors of positive reframing and acceptance of reality, suggest better positive outcomes in an organizational setting by strengthening the characteristics of resilience [3].

2.3 Explaining crisis in organizations

While the development of resilience theory followed the individual as the focus of attention, crisis theory developed to describe and explain how organizations adapt in the face of crisis or traumatic events. Hermann [26] described causal relationships between a crisis and selected organizational variables andtheorizes that:

A crisis will increase the tendency of members of an organization to exercise withdrawal behavior;

A crisis will tend to intensify any conflicts existing prior to the crisis;

The total number of communication channels used for the collection and distribution of information will be reduced;

There is a tendency toward contraction of authority in the organization.

This behavior of organizations in crisis is similar to the behavior of individuals and organizations subjected to extended stress and anxiety pursuant to the threat-rigidity effects theory discussed previously [5].

Crisis theory emphasizes the importance of crisis management to mitigate the effects of the crisis on the organization. The crisis theory body of literature examines significant crises or traumatic events and identifies lessons learned for crisis management in organizations. Weick [15] revisits the Mann Gulch fire accident that resulted in the deaths of 13 smokejumpers in the context of decision-making under crisis. Using a clinical research method, Weick identified sensemaking in an organization as an element of decision-making that relies on past experiences to make things appear rational but that are subject to judgmental biases [15]. One conclusion of Weick’s work was that individual resilience alone does not necessarily lead to resilience at the organizational level as evidenced by the individual resilience of the foreman that did not translate into survival for the entire team (or resilience at the organizational level) [15]. In part this may be attributed to the impact of crisis on the perception of the organization’s leaders by its employees. Staw and colleagues [5] suggested that external threat increases reliance of individual employees on organizational leadership, but that leadership can lose influence and power if it is viewed as having contributed to the failure or crisis. Building upon the circumstances of the Mann Gulch case, Weick identified four characteristics of behavior that make organizations more resilient: Improvisation and bricolage (“the imaginative use of materials for previously unintended purposes” [27]), virtual role systems, attitude of wisdom, and norms of respectful interaction [15].

2.4 Organizational resilience

Organizational resilience as a theory developed out of the research indicating that there is a “reciprocal effect of crises on individuals and organizations. If these relationships are supportive, the impact of the crisis can be reduced; if they are obstructive, the impact has the potential to be severe” [28]. The degree of disruption in short and long-term functioning of the organization can be reduced by supporting and building upon the resilient characteristics of individual employees. Organizational resilience, then, is the ability of an organization to absorb crisis, trauma or radical change and maintain or exceed the previous performance levels [29]. Horne elaborated that resilience “allows a positive response to significant change that disrupts the expected pattern of events without resulting in regressive, nonproductive behavior” [29]. This is consistent with a common ecological definition of resilience as “... the time required for a system to return to an equilibrium or steady-state following a perturbation” [30].

In an early article on organizational resilience, Egeland et al. [11] suggested that, like resilience in individuals, organizational resilience consists of risk and protective mechanisms that enable positive functioning in stressful situations. In their view, organizational resilience principles represent the factors that mediate the relation between stress and adversity and processes associated with positive organizational performance [11]. Similarly, Doe [16] argued that a connection exists between the individual resilience of employees and resilience at the organizational level: “A resilient organization requires a resilient workforce” [16]. Organizational resilience as a paradigm continued to evolve in the mid to late 1990 s. Hind et al. [31] followed Doe in supporting the concept that a model of organizational resilience must consider the individual employee and the relationship to the organization. Hind et al. explored “... the parallels which can be drawn between the responses to stress and change exhibited by individuals... and those exhibited within business organizations” [31]. During periods of uncertainty and change, organizations must seek to mediate the effects of stress and anxiety on their employees in order to avoid reducing the effectiveness of the organization.

In an article that argues for organizational resilience as arising from the dual influences of individual resilience and crisis management, Mallak [12] defined resilience as the ability of an individual or organization to “design and implement positive adaptive behaviors quickly that are matched to the immediate situation, while enduring minimal stress.” Mallak viewed organizational resilience as building upon the foundation of the resilience of employees of an organization. He depicted organizational resilience as a process equivalent to organizational learning that leads to a desired outcome. Mallak [12] proposed seven principles for resiliency in organizations:

Perceive experiences constructively;

Perform positive adaptive behaviors;

Ensure adequate external resources;

Expand decision-making boundaries;

Practice bricolage (to develop solutions out of whatever resources are available);

Develop tolerance for uncertainty;

Build virtual role systems.

These principles of organizational resilience, when implemented by an organization, represent the moderating mechanism that would enable employees and employee groups to adapt or learn in response to performance actions or decisions required. Resiliency involves the use of positive coping behavior. In a crisis situation, such as a bankruptcy, if an organization provides effective means of dealing with the stress of the bankruptcy, employees have a means of coping and functioning effectively in the turmoil of the bankruptcy environment. The implementation of the above principles would entail a system-wide approach as part of a human capital strategy as opposed to a piecemeal or uncoordinated implementation regimen.

Studies of threat-rigidity, crisis management, and organizational resiliency provide evidence that organizations can adopt various actions that provide their employees with positive coping mechanisms to be able to function effectively despite stress, trauma and anxiety. While individual employees, groups of employees, and organizations are unique and have different systems of organization, culture and convention, there appear to be some common elements to human behavior that can be identified such that management can apply these principles in the presence of threat and stress in order to improve the resiliency of their organizations.

3 Research approach

The research approach of this study employed a grounded theory design that was exploratory and qualitative in nature [32]. The study used an a priori specification of the construct to help focus and shape the conduct of the research. Research questions were developed to help guide a detailed review of the literature and identification of ten relevant propositions. This study’s literature review, together with conceptualizing by the author, resulted in the development of a preliminary conceptual model and theory of organizational resilience for companies in bankruptcy (Fig. 2).

A conceptual model was operationalized by drawing on Mallak’s [12] principles which had been grounded in the literature on organizational resilience. Therefore, if it is possible to match the observed pattern or factors or actions undertaken by a successful company with respect to the resiliency of its employees and the organization with the theoretical pattern or principles of organizational resilience that had been grounded in organizational resilience theory, then findings can be proposed that such organizational resilience principles or measures were present and effective within the organization.

As to the generalizability of the case study research, the case study findings are “... generalizable to theoretical propositions and not to populations or universes” [33]. The universe of companies operating in bankruptcy is so varied that any study seeking to generalize statistical results would be challenged by construct validity issues. The case study approach, however, provides the opportunity to understand and analyze behaviors and processes that practitioners might use to address their own unique circumstances. The chief limitation of using existing cases involves the limited quantity of cases available and the fact that such cases frequently provide incomplete or inadequate information about the case subject.

3.1 Research process

3.1.1 Case study selection

The original case study of Integrated Electrical Services Inc. (IES) was selected because it was a public company that successfully reorganized and emerged from Chapter 11 bankruptcy, with the author as a direct participant. Consequently, there was a rich body of data available together with access to key leaders of IES during the bankruptcy. The company’s competitive strengths at the time of the bankruptcy included technical expertise and experienced management [34] such that its human capital was judged by the author to be a key element to its competitive advantage. As such, a single case study design was employed. This study developed a preliminary conceptual model of organizational resilience that it seeks to validate, disconfirm, or modify through the data collected and analyzed in the IES Case Study[35].

A single case study design approach is supportable under multiple rationales [33]. The research has clearly specified the propositions and conceptual model and linked the model and propositions by operationalizing organizational resilience principles in the seven principles proposed by Mallak. Through a process of matching these principles with behavioral data collected from the IES case study, and seeking other behaviors or principles that might be in evidence at the company, the study sought to confirm or disconfirm each of these principles. The analysis then compared the results with the preliminary conceptual model to confirm, disconfirm, or modify that model with relation to IES. Another supporting rationale was the personal experience that the author brings to this case study as an active participant. The value of personal observations grounded in years of relevant experience, combined with a rich data source, validated this rationale.

3.1.2 Data collection and analysis

The IES case study used multiple methods of data collection and analysis within a single case study. This triangulation provided stronger support for the conceptual model [36]. The data collection consisted of four methods: A review of public documents for relevant facts and background data and to corroborate specific historical facts and other data derived through other data collection sources; a content survey of the researcher’s daily journal during the relevant period, coding relevant entries through a pattern matching process with the principles identified; open-ended telephone interviews with the CEO and COO that were present at IES during the entire period of the bankruptcy; and, recording relevant personal observations of the author.

The data collected was analyzed and findings presented using a tabular format, in which the key actions taken by IES were presented, related to each principal identified together with related outcomes expected by IES, and the observed actual outcomes. The within-case analysis involved a descriptive, detailed case study write-up in a narrative format, a separate narrative addressing data relating to each of the principles being used to operationalize the preliminary conceptual model, and a narrative of conditions or factors that were observed, but are not captured by the listed organizational resilience principles, particularly noting any disconfirming or supplementalevidence.

4 The IES case study

4.1 Background

IES is a publicly-held company that experienced approximately 18 months of decline and stress prior to filing for Chapter 11 bankruptcy on February 14, 2006 [37]. Through a number of financial and operational strategies, the company emerged from bankruptcy 88 days later and continues to be one of the largest electrical contractors in the United States today [22, 34]. The author was personally involved in this turnaround for the entire period through February 28, 2008 as one of four Regional Operating Officers in charge of a number of operating subsidiaries. The author’s personal experiences have provided the case study with a rich source of data in the form of personal experiences, personal journals, organization charts, calendars and notes as well as access to other key leaders during this period. In addition, open-ended interviews were performed with the former Chief Executive Officer and the former Chief Operating Officer. An additional source of data was a content analysis of the public filings in the months before, during and after the bankruptcyreorganization.

While the outlines of the financial plan to restructure the finances and balance sheet had been largely pre-arranged, no one could predict how the company would react and function. The danger was that the organization would not be able to obtain new work, complete its existing work, and collect sufficient cash in order for the company to survive and allow the proposed financial plan to be approved by the court and activated.

IES was formed in 1997 as part of a “roll up” strategy in the electrical construction industry [38]. IES was but one of several companies following this strategy in the electrical construction industry which also included Bracknell, ARS, Building One, Encompass and Xcelecom. By the end of fiscal 2003, IES had acquired 89 companies and posted financial results with an operating income of $28.3 million on total revenues of $846 million [38]. However, during the 3rd quarter of fiscal 2004, financial difficulties and irregularities were identified at two of their subsidiaries, which due to the influence of the Sarbanes-Oxley Act, led its auditors, Ernst & Young, to decline to comment on IES’ 3rd quarter Form 10-Q [IES CEO interview notes, 2008]. This delayed IES’ ability to file their quarterly financials in a timely manner and constituted an element of default on its bank debt and long term bonds [34]. While waivers were ultimately secured, the impact rippled through the business and in October, 2004 the company’s bonding company severely limited its issuance of surety bonds for the company’s contracts [CEO interview notes, 2008]. The following month the COO resigned rather than assume another role in the company.

The company’s CEO resigned in April 2005 and the company’s Chairman took on the additional role of CEO. In July, 2005, the CEO and IES successfully closed on a new asset-backed bank line with a major financial institution. This line was secured by substantially all the company’s assets, excluding bonded project receivables and retentions [34]. Nevertheless, the now diminished company was increasingly challenged to service the interest expense on the large subordinated debt that had been created to fund the original acquisitions.

4.2 IES bankruptcy as crisis

By December, 2005, the company signaled to the investment community the potential for bankruptcy reorganization in order to restructure its debt and balance sheet [CEO Interview notes, 2008]. By February 14, 2006, the outline of the restructuring was negotiated between several of the major parties, and the company and all of its subsidiaries, filed petitions for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the Northern District of Texas in Dallas [39]. By this time, all of the aforementioned competitors that had also followed a similar rollup strategy were no longer in business.

Remarkably, the company emerged from bankruptcy 88 days later on May 12, 2006 [40], an incredibly short period of time and unprecedented for a construction company. During the bankruptcy period, backlog increased, margin in backlog improved, and overall gross margin increased [34]. Only one member of the senior leadership team and one business unit president resigned during the bankruptcy period. In its first full fiscal year following its emergence from bankruptcy, the company realized $58 million in positive cash flow, maintained a backlog of $344 million, and posted operating income from continuing operations of $6.5 million [34]. Its stock price increased during the year from $17 to over $34 a share [34].

In construction contracting, virtually every contract that IES entered into to perform work contained a default clause which included the filing of bankruptcy as an element of default and entitled the customer to replace IES on the project and suspend payment. Further, should suppliers elect to terminate shipment of equipment and supplies, IES would be unable to perform and would be defaulted. Finally, labor is the most important element of IES’ work and the loss of key personnel or loss of significant field manpower would increase the difficulty in completing its work or completing its work profitably.

In a 2002 study of companies reorganizing under Chapter 11 of bankruptcy, Pate [18] found that only about 33% of companies filing for bankruptcy will ultimately successfully emerge. The challenges that IES faced included: a) the need for continued financing and bonding which was contingent upon the ability of IES to collect its receivables; b) whether the Bankruptcy Court would authorize continued payments to vendors and employees threatening the continued involvement of both stakeholders; and c) the willingness to extend new work to the company by its customers. The filing of the bankruptcy petition by IES represented a crisis that threatened the very existence of the organization [IES CEO Interview notes,2008].

4.3 Inductive analysis

Certain key attributes and protective factors discussed in the literature were in evidence that facilitated individual coping behavior and resilience. First, there was a high level of trust between the current leadership and employees, and among the employees of each particular business unit. Significantly, they did not blame the leadership for the current problems and trusted them to lead the organization through the process. This was important in that it appeared to preserve the element of trust between the senior leadership of the company and the rest of the operating leadership.

Second, most of the leadership and management remained engaged in the business [IES CEO Interview Notes, 2008]. The high level of communication from all levels of leadership tended to allay fears of immediate loss of employment. Finally, leadership tried to set positive examples of values of honesty, humbleness, and hard work, and sought whenever possible to put the best face they could on the situation. Through a regular series of conference calls, the IES CEO kept employees up-to-date, provided realistic assessments of the risks, thanked people for their contributions and, importantly, maintained a positive, optimistic demeanor. An analysis was undertaken to look for the application by management of the seven principles of organizational resilience as articulated by Mallak [12].

4.4 Application of organizational resilience principles

In the months leading up to the actual filing of bankruptcy, the IES CEO and the IES team–together with outside legal counsel, accounting firms, and consultants–negotiated a complex series of financial agreements. To the extent possible, these agreements were pre-arranged and would be set in motion by the bankruptcy filing. However, major uncertainties surrounded the company’s ability to organizationally survive in order to enable the process of finalizing the financial agreements to be made effective. The results of the pattern matching between the resiliency principles and observed behaviors from the IES case revealed ways that resiliency played a part in the firm’s recovery:

Principle #1: Perceive experiences constructively. The first principle emphasizes the importance of seeking to find positive aspects of the experience. In the case of IES, the largely relationship-driven construction industry views bankruptcy as a personally embarrassing event and an outward sign of failure, particularly since very few construction firms survive the experience [5]. Further, the former business owners that had sold their companies to IES now had to face their employees and explain their apparent failure in judgment. There was no easy way to put the bankruptcy in a positive light for most people and they were certainly not positive about it or its outcome. Therefore, recognizing the difficulty in framing the situation in a positive light, the IES leadership instead sought to frame a picture of a bright post-bankruptcy future.

Principle #2: Support positive adaptive behaviors. The IES COO rolled out a change initiative called Successful Projects and endeavored to engage all business units in profit margin improvement measures consistent with this approach [IES COO interview notes, 2008]. This initiative seemed to have a dual impact. First, employees perceived that if IES were making major changes whose impact would not be apparent until some future point, then, in their view, senior leadership must feel confident that the organization would survive the bankruptcy. Second, by focusing on positive changes in the project process, employees focused their attention on positive change leaving less time and energy for disruptive and negative thinking.

Principle #3: Ensure adequate external resources. The executive leadership put into place a team of bankruptcy experts, including lawyers, accountants and investment bankers, to help lead the company through the bankruptcy process. In addition, an outside consulting firm was engaged specifically to supplement company personnel in accomplishing key tasks such as receivable collections and cash management. It was recognized that the additional burdens imposed by the bankruptcy itself on the key element of cash collections had great potential for overwhelming the existing staff that also needed to attend to their normal day-to-day responsibilities. [IES CEO interview notes, 2008].

Principle #4: Expand decision-making boundaries. Realizing that the depth and breadth of issues that would arise would overwhelm the corporate leadership team, the IES COO directed the operating subsidiary presidents to run their businesses as best they could under the circumstances as if they were their own [IES COO interview notes, 2008]. Their limits of authority were expanded such that their practical limitations were only those imposed by the bankruptcy situation itself, and the banking and bonding restraints. In effect, they assumed much of the autonomy and authority that they enjoyed when they were private businesses. This proprietary feeling was extended and visible in their relationships with customers, employees and vendors. In fact, they often personally assured customers that they would finish projects irrespective of the outcome of IES. This decentralization of decision-making enabled quick decisions on most operational matters and enabled the local operating teams to feel that they had some control over events at their local operating unit.

Principle #5: Practice bricolage. Wielding their new found autonomy, operating business units exhibited resourcefulness at problem solving activities. With the admission that corporate could not help them solve operational problems, business unit management employed a multitude of unique solutions to address issues.

Principle #6: Develop tolerance for uncertainty. The uncertain situation and future created by the bankruptcy was a real problem that at times threatened to weaken peoples’ resolve, distract them from task accomplishment, and demoralize the work force. Also, the interaction with the construction community at large did not provide a supporting framework as the general feeling was that IES would ultimately fail. As noted earlier, local leadership attempted to disconnect the local business unit’s future from that of IES. Further, senior leadership sought to counteract uncertainty with frequent communications, particularly the accomplishment of interim milestones. This feeling of positive momentum may have helped employees to tolerate the uncertain outcome. However, this principle appears to be largely a psychological state of mind that was difficult to observe in a case study methodology and was not observed to be a factor in the functioning at IES.

Principle #7: Build virtual role systems. The relative success in retaining most of the key leadership personnel reduced the need for virtual role systems, but didn’t eliminate it. The IES CEO recounted how the president of the largest residential operating unit reached out to various presidents on the commercial side of the business to use his personal relationship to assuage their anxiety and secure their continued support and commitment [IES CEO interview notes, 2008].

Other factors or principles observed. During data collection, an effort was made to be alert for instances that either disconfirmed or modified the conceptual model. These were also captured in Table 1. Two additional principles emerged that were not adequately captured in the original list of principles. These were identified as expand communication channels and engage external stakeholders. Other variables noted to a much lesser degree were positivism and conservation of resources. These latter variables did not appear to be key drivers of organizational performance during this period.

Expand communication channels. Frequent, honest communication was cited by both the former CEO and COO as critical behaviors that supported the success of the IES reorganization. Examples given were weekly conference calls with the operating units, periodic calls with updates on vendor status, relentless meetings and communications with customers and vendors, and frequent reporting to the bankruptcy court that became part of the public record.

Engage external stakeholders. External stakeholders and the forces from outside the company were also important in either stabilizing or de-stabilizing the situation at various points in time. The main external stakeholders which did, or could have a significant impact were customers and the market, trade vendors, employees, banks and surety companies, the bankruptcy court, and the construction community at large.

4.5 IES case study results and conclusions

Table 1 summarizes the results of the IES case study and relates each of the principles to specific observed actions and outcomes. In addition, two additional principles that were evident from the case study have been included. These are expand communication channels and engage external stakeholders.

In developing this case study of organizational resilience at IES during its bankruptcy, an effort was made to identify the principles that influenced the resilient functioning of the organization. At IES, it was observed that most individual attributes of resilience (optimism, realism, and intellect) were supportive of corporate behaviors (communications, trust, autonomy, and bricolage). Most of the organizational resiliency principles espoused by Mallak were also found to have been implemented at IES. However, a couple of significant observations emerged from the case study. The implementation of resilience principles at IES was largely a matter of happenstance. While there were well-developed financial and legal restructuring strategies, the company entered the bankruptcy with no well-defined strategy for either human capital management or operational and organizational restructuring during the bankruptcy. Companies forced to endure the bankruptcy experience would be well advised to prepare a human capital resilience plan as part of their operational and organizational restructuring strategy to focus on the people issues with as much forethought and consideration as goes into the financial and legal planning.

Mallak’s first principle [12], perceive experiences constructively, does not seem to adequately capture a more important principle that was observed: Expand communication channels throughout the organization. This was a similar result to that observed by Comfort in her case study of the Northridge Earthquake [41]. The former CEO noted that from the outset he promised to “always be honest, tell you the truth, and keep you informed of our progress” [IES CEO interview notes, 2008]. This commitment to inform and communicate cascaded down through the organization [IES COO Interview notes, 2008] and allowed all levels access to relevant information to enable them to address problems and successively learnand adapt.

The principle of “develop tolerance for uncertainty” appears to be a psychological state of mind that was difficult to observe. The case study research methodology did not appear adequate in this instance to determine whether this principle was afactor.

The other six principles were all identified as operating in the IES case to some degree together with two additional principles identified as expand communication channels and engage external stakeholders. Expanding decision-making boundaries, particularly with respect to operations, appeared to be a key element that facilitated several of the other principles such as practice bricolage, build virtual role systems, and perceive experiences constructively. It is theorized that employees having more control over their environment in the form of greater decision-making authority also empowered them to solve problems and take a more active role in seeking positiveoutcomes.

The role of external stakeholders and the environment appeared to impact the functioning of the organization but was not captured within the original principles. In the IES case, customers, vendors, the construction community, and the bankruptcy court all impacted the functioning of the organization. In some respects, this could be captured in the conceptual model by holding that since they were external to the organization, the resilient functioning of the organization would have developed behavioral responses to deal with these variables in order to enable a positive outcome. In fact this was the caseat IES.

5 Discussion

The IES Case Study documented numerous instances of resilience and adaptability on the part of individual employees. What was clear, however, was the interdependence of the various employees and operating units, and the need for collective resilient functioning for organizational success. The case study supports the presence of organizational resilience principles of the conceptual model. Of the seven principles identified in the conceptual model of organizational resilience in bankruptcy, only the principle “develop tolerance for uncertainty” was not observed at some point in the case study. This may be due to its character as a psychological state of mind that cannot be readily observed in a case study methodology.

Two principles were identified in the analysis of the case study that was not among the original organizational resilience principles in the preliminary conceptual model. The first principle so identified was “expand communication channels.” This principle was noted in a number of actions concurrently with the observation of other principles and may act to mediate or enable other principles.

A second additional principle that was identified in the case studies but not among those in the preliminary conceptual model was “engage external stakeholders”. It was observed that the nature of a company in bankruptcy was one dependent on external stakeholders to a far greater degree than a normal organization. Consequently this would be an important action on the part of an organization desiring to turnaround in bankruptcy.

Finally, similar to expanding communication channels, the variable “expand decision-making boundaries” was also observed concurrently with a number of the other variables. This would appear to support the view that certain variables have a stronger relationship to the resilient functioning of the organization and may in fact mediate or enable certain of the other variables.

Comparing the results to the originally proposed conceptual model led to the revised conceptual model, depicted in Fig. 3, which retains six of the original seven principles and adds two additional principles: Engage external stakeholders and expand communication and information channels. This revised model reflects a hierarchy of organizational principles with four principles being an initial or first tier with an additional four principles representing a second tier of responses. The first tier was largely implemented at the corporate level while the second tier was largely implemented at the operational or local level. Expanded decision-making boundaries enable resilient responses at the operating or local level which lead to adaptive responses and resilient functioning. Expanded communication and information channels enable the sharing and coordination of local adaptive responses throughout the organization which leads to organizational learning and resilient functioning at the organizational level. The preliminary conceptual model of organizational resilience in bankruptcy identified seven principles, originally articulated by Mallak [12], that were proposed for implementation by an organization. The IES case study supported six of these seven organizational resilience principles as contributing to resilient functioning at IES. Four principles in particular appeared to have the greatest relevance in the successful reorganization of companies in bankruptcy: Expanding decision making boundaries (de-centralized operational decision-making), expanding communication (and information) channels, ensuring adequate external resources, and engaging external shareholders. Two additional principles not specifically included within the original seven principles of the conceptual model were suggested as operating within successful bankruptcy reorganizations. These are: Expand communication channels and engage external stakeholders. Certain principles, such as decentralized decision making, appear to have a greater relationship to resilient functioning than others and may mediate or enable other principles.

The case study identified the central importance of expanding decision making boundaries in the resilience of organizations and their ability to adapt when under adverse environmental conditions. The important role of expanding decision making boundaries found common ground with other literature on various turbulent environments such as high reliability organizations [42]. The concept of loosely-coupled organizations appeared important to an organization’s ability to adapt under turbulent environmental conditions. For organizations in crisis situations, such as bankruptcy, the business environment becomes more complex and these organizations must decentralize their decision making authority for operational decisions to ensure that critical local issues are identified and addressed timely. The central corporate function at each company continued to provide the overall central strategy and served to coordinate the learning and response that occurred at the local level.

Principles of organizational resilience were in evidence in the IES case study. This supports the view that organizational resilience is an effective human capital strategy for organizations that successfully reorganize and emerge from bankruptcy. It was noted that this might be limited to circumstances where human capital is an element of the organization’s competitive advantage. This result supported the proposal by Lengnick-Hall et al. [] that the company’s “capacity for developing organizational resilience is achieved through strategically managing human resources...” [27].

One of the weaknesses of organizational resilience theory is that there is no relative scale or importance attached to the organizational resilience principles themselves. Whether or not there are any principles more important or effective than others is not addressed. The results of the case studies in this study, particularly the IES case study, appear to support the view that certain principles mediate other principles. For instance, expanding decision making boundaries appears to enable or facilitate bricolage, building virtual role systems, and perceiving experiences constructively.

A company’s leadership in a bankruptcy is presented with unique challenges amid an adverse and complex operating environment. Legal and financial decision-making demands require management’s immediate and almost constant attention in order to keep the organization from failure and liquidation. However, the long run success of many organizations in bankruptcy will also depend on the resilient functioning of its people during and after the bankruptcy. A human capital strategy that applies principles of organizational resilience will facilitate the resilient functioning of the organization and contribute to its long term success.

Conflict of interest

The author has no conflict of interest to report.

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