Phase 1 – Safeguarding Customers and Cash Flows
The business plan called for executing the first
phase of the strategy via a five pronged approach:
1. Easier payment plans - Customers with
liquidity problems were offered revised payment schedules. Deyaar would defer
payments for projects where construction would be stretched past the originally
envisioned completion date. On a case-by-case basis, it would help companies in
a strong financial position with stable long-term cash flow by splitting larger
payments into smaller ones due over a three-month period. It would provide
financial advice and assistance with mortgage providers, and in the most
extreme cases would provide financial help from Deyaar itself through
short-term bridge financing. Noted Michev, “Some customers said they couldn’t
get a mortgage from any bank. We gave them extensions and talked to the banks
about how to help our customers avoid default. Customer by customer, we worked
on helping people that qualified for financing secure mortgages so they could
repay us.”
2. Price reductions - Cost savings
negotiated with suppliers and contractors were passed through to customers,
thereby reducing the size of customers’ loans and potential default risk.
Examples of the price reductions Deyaar was able to deliver included a 30%
reduction on the Bristol Office Tower, 30% on Oxford Tower, and 25% on the
Fairview Residency development, all located in Business Bay at the heart of
Dubai.
3. Customer consolidation – Customers were
offered the option to transfer their ownership to projects that were identified
to be completed on a fast track basis. Explained Michev, “Some of our projects
were far out of the center of Dubai while others were in Business Bay. We told
customers that if you contracted for 100 square feet in a distant location, we
could move you to a comparable amount of space in a higher value building that
was closer to completion and had infrastructure in place. This option was
strictly dominant: investors could re-sell their properties more easily and end
users could use their property sooner and more easily.” An estimated 70% of
Deyaar’s customers had been consolidated over the first nine months of 2009. It
was expected that customer consolidation would be completed by the end of 2009.
4. Project Consolidation – Giebel and his
team put each project into one of four categories. 25% of projects proceeded as
planned with no delays. Another 25% continued to move forward, but were slowed
down in order to conserve cash. 25% were consolidated: customers in these
buildings were encouraged to move to projects slated to proceed. The final 25%
of projects were put on hold, delayed indefinitely. Said Michev:
“Instead of building 25 million square feet, we decided to continue
progress on the 12 million square feet that minimized anyone’s need to default
on their payments. At the same time, Deyaar is consolidating its land bank. 50%
of Deyaar’s land is not paid for, and with values plummeting, the company is
executing a consolidation strategy that will result in reduction of the value
of land bank to close to half and outstanding payment to close to zero. We told
the master developers that if we had four pieces of land, we’d give back two
but they would be 100% paid, not 50% paid.”
5. Distressed Property Opportunity (DPO) Fund
– Said Michev, “Sometimes you can’t help the terminally ill. If people borrowed
money to make deposits on properties they intended to flip immediately and they
are over-leveraged, what can you do with them?” Added Giebel, “We needed to be
like a hospital that gives medicine to people and tries to help them. But we
needed to provide for people we cannot help, and that is why we made the fund.”
Deyaar proposed to raise a Shariah-compliant DPO Fund to acquire ‘super’
distressed property at a significant discount from Deyaar’s defaulting
customers. The fund would take over the property from Deyaar either at a 20%
discount from the current market price (which was on average 55% below 2008
prices), or at the original price minus the amount that had been deposited and
forfeited by the defaulting party. This would protect Deyaar’s receivables
while generating strong returns for investors and management fees for Deyaar.
Trying to
navigate through the legal maze of the five-pronged approach was extremely
challenging. Deyaar had consistently to deal with Dubai’s rapidly changing real
estate laws, and contractual obligations that were somewhat in conflict with
the new laws. To ensure that Deyaar was legally protected in its five pronged
strategy required practical and workable legal solutions.
Customer
consolidation was the most difficult part of the task. Legally, Deyaar had to
look at the different customer components and put customers into broad groups
(segments). For example, a “segment one” customer would be a customer holding a
single unit at a project who was not also holding another unit in any other Deyaar
project. Deyaar had to understand what consolidation meant for this segment
from a legal perspective. Then Deyaar had to balance the current laws of the
UAE with the rapidly evolving real estate laws of Dubai, without impacting the
consolidation efforts and without contravening law.
Phase 2 – Top Grading
To keep employees focused and confident, Giebel
reassured staff there would be no immediate retrenchments during the crisis.
However, it seemed clear that after consolidation of customers and projects,
Deyaar would have more people than it needed. Furthermore, the company’s vision
for 2015 implied that Deyaar would need different skill sets than it had in
2008. The business plan called for Deyaar to stabilize the company first, then
hire external consultants to conduct a talent review of all Deyaar staff. See
Exhibit 9 for the “top grading” framework Deyaar intended to employ. Said
Giebel:
“You have to keep top grading simple or it
doesn’t work. Jack Welch suggested a company should do it every year, but I
think that creates fear, uncertainty and doubt. I prefer making such an
evaluation once every 3-5 years. And if you hire people at the top of the
market, half of them aren’t the talents you need and you have to let them go as
soon as possible. We communicated to employees that their jobs were secure for
the moment, and we would do a talent evaluation later on in a rational manner,
keeping them well-informed. The key is to take emotions out of the process.
That’s one reason why we planned to use a consultant to evaluate the top 30
people, while our Human Resources would look at the rest of the staff.”
Phase 3 – Blue Ocean Strategies (Vision 2015)
Recovering from a crisis was only the beginning of
the turnaround, in Giebel’s view. A new Deyaar would emerge that needed a new
growth path. In Phase 3, according to the business plan, Deyaar would move
toward “Vision 2015,” which sought to identify “blue oceans” of uncontested
markets that would make competition irrelevant and that were considered ripe
for growth (See Exhibit 10). Under its Vision 2015, the leadership team
identified the following blue ocean strategies for product diversification:
1. Affordable
housing.
2. Retirement
homes.
3. Fund
management.
4. Asset
management.
5. REITs
and financial products.
It also identified the need to reduce its
geographical concentration through a three stage international expansion
process, initially expanding into emerging markets where it considered it held
competitive advantage. In Stage 1, Deyaar would target Saudi Arabia, Lebanon,
Turkey and Egypt. Stage 2 would extend its footprint to the MENA region and
Indian subcontinent, while Stage 3 would continue along a path of global
expansion.
Conclusion:
The Way Forward
The board’s approval of the business plan allowed Markus
Giebel and his team to enter 2009 with a clear direction and a defined set of
actions. Nonetheless, significant
execution challenges remained. The goals, incentives, and mindset of the
employees did not yet fit the new strategy. Noted Giebel, “We swiftly found
that our chief of engineering was still spending money on some projects we had
cancelled. When I asked why, he said,
‘Markus, I thought you didn’t mean it.’” Amplified Michev:
“You have three functions with conflicting
goals. Finance and Strategy want to preserve cash for growth and rationalize
the portfolio. Engineering wants to build and spend money. They don’t care
directly about profitability, shareholders, etc. They want to pay the
contractor quickly and control quality. The sales team has to consolidate
customers. They know we need to safeguard cash, but they want an attractive
solution to which customers will agree. Every company has these three functions
but they don’t necessarily define who should do what. You can’t consolidate
randomly or you have to see 600 customers for one project. You need a rule
book.”
Krishnamurthy commented:
“We had positive conflicts between
finance, engineering and sales on a daily basis as the three departments
followed different objectives. It was our task to find the optimal solution of
aligning these three functions.”
Added Giebel:
“There was no communication inside the
company. Divisions did not talk to one another, which was insane. And the customer didn’t matter. They just
gave us checks and that was the end of the relationship. A completely
transactional business model can work in a boom market; when everyone wants
your product, you can totally ignore the customer. But you’ll fail that way if
you need your customer’s consent to do things. Changing a customer service
culture takes 6-12 months; you can’t fix it quickly.”
In the past, the customer service staff consisted
mostly of sales people whose remuneration was largely based on commissions. To
execute its strategy, Deyaar needed people who were trained and incentivized to
manage a relationship and help customers adjust to the crisis without
defaulting. The nature of the problem became apparent when Deyaar started
calling in customers to discuss consolidation. Giebel related:
“I was in my office and someone rushed in
saying ‘We have a problem— one of the sales guys has called the police!’ One of
our top salesmen felt insulted by a customer, so he called the police without
talking to anyone first. The last thing I needed was a new story saying that
Deyaar had to call in the police to negotiate consolidations with its
customers. We had given everyone extensive training and I said many times that
troubled customers would act like wounded lions, and wounded lions can attack
any time. You have to stay calm and be prepared. Clearly we still had some work to do to
manage the consolidation process.”
Executing the turnaround strategy was especially
challenging because the company was still paralyzed from its previous
experience. “There were people who were looking for a chief to come back and
tell them what to do,” Giebel recalled. The strategy was too complex for senior
executives to micromanage each customer relationship. However, lower-level
employees didn’t dare to make decisions on their own. Somehow, the senior
management team had to find a way to make employees buy in and cooperate,
despite the fear that had gripped Dubai’s commercial sector. Giebel knew their
confidence would depend in part on how Deyaar appeared in the press and to its
bankers. Yet, Giebel noted, “Some competitors were skeptical with what we were
doing because our actions forced them to follow.”
Giebel knew that to sustain clarity and direction,
employees had to understand a few clear goals and be held to a small number of
visible key performance indicators (KPI’s). He observed:
“Some KPI’s were easy. Price reductions are
easy to measure — for example, you drop the price 25% from the market. But our
measures and rewards had been built around selling more and more. We had to
change them to fit the new strategy.”
Giebel knew that monitoring progress, changing
mindsets and incentives, transcending goal conflict, providing clarity, and
keeping people motivated would be the keys to executing Phase 1 successfully.
Beyond that, sustaining faith in the company as it eventually passed through
the top-grading exercise, and building a new Deyaar capable of executing the
Vision 2015 growth strategy would require strong leadership. He mused:
“My simplistic view is that there are two
kinds of leaders. You are a designated leader if you are the CEO and people
have to listen to you. You are a chosen leader if people look up to you and
want to work with you. To be effective, we had to go from being designated
leaders to becoming chosen leaders. You get the best out of people when they
look at the person above them and want to give everything that can to help you,
because they don’t want to let you down. You become a chosen leader when people
say that you are so smart, so good, and so fair that they want to be associated
with you and they want to help you.”
Giebel believed in Deyaar’s new strategic plan. Now,
he wondered, what other steps he should take to establish himself and his team
as chosen leaders, so that employees would sustain confidence in the turnaround
even as Dubai’s economic crisis deepened?
