No company plans to fail or to find its way into difficult situations – but it happens all the time. Over the years, I have worked with a range of companies that were facing the need to turn things around. The paths that they traveled to reach such a desperate condition were varied but the best ways out had a lot in common.
Times of corporate distress present special and strategic challenges to management, the board of directors, shareholders, employees and the sources of financial resources so critical to a company’s success. At the extreme, a company may be in either bankruptcy or nearing bankruptcy. Most often, there is a great deal of uncertainty arising from one or a number of problems – with bankruptcy only the last option.
As a turnaround specialist, I first determine whether the company has enough potential to make it worth saving. I undertake a quick assessment. If the answer is positive, I begin to devise and execute a plan of corporate renewal. It the answer is negative, I pass the engagement on to professionals better positioned to deal with those situations. However, let us leave the negative for another day and assume that the company does have sufficient potential to merit a turnaround effort.
The first key to any corporate renewal plan is an accurate assessment of the root causes of the crisis. It is important to separate the symptoms from those causes – an action plan that treats symptoms will often only make the situation worse. Before a viable turnaround strategy is possible, I need to identify the root causes of the crisis. Then I need to figure out which of these causes lay towards the epicenter of the crisis and which are merely symptoms of those causes. Here are just a few of the causes/symptoms that I have encountered:
The Wrong CEO: I encounter this one all the time but not always in ways you would think. Sometimes the company has simply outgrown the current CEO.
Poor Strategic Choices: This is a large category with lots of sub-categories. For the most part, it indicates problems with the strategic planning process. In some situations, it is an indication of the lack of good judgment on the part of the senior team – particularly the CEO. In others, it arises because the team has relied on partial or inaccurate information in their decision-making. Whatever the reasons, a flawed strategic planning process is usually at the root.
Poor Execution: I have worked with teams that are very good at planning and failures at execution of those plans. For the most part these teams would be better off becoming consultants to other companies.
Inadequate Controls: You name it; I have seen if – from shoebox accounting to SWAG approaches to quality control. At some point in its growth, a company needs to have professional control systems put in place. Failure to do so will put the entire operation at risk – but it happens that way far more often than it should.
Insufficient Resourcing: Companies need resources in order to grow. That includes personnel, financial and informational resources. Companies often neglect or under-perform on one or more of these resource allocations strategies – and that can severely limit growth.
Revenues Are Trending Downward: There are many reasons why this might be the case. Business development, marketing and sales may simply not be up to the job. A company’s value proposition may have become obsolete or simply non-competitive. It may be a downturn caused by a weak economy. The financial statements will show the downturn – the key is to figure out why the trend is negative.
Inaccurate Sales Projections: This one is rare but sometimes significant. Most managers do not focus on the fact that major deviations from sales projections – either grossly negative or positive – can cause significant problems for a company. I have worked with companies with one very interesting version of this problem – overachievement on the part of the sales force.
High Operating Costs: Sometimes it is the expense side of the income statement that is unbalanced. I have encountered companies encrusted with unproductive consultants and advisors – with no metrics measuring their performance. I have also worked with companies that have chosen the most expensive alternative to meeting a particular challenge.
Unsuccessful R&D Projects: Some companies have spent scarce resources pushing far down a blind alley and are facing the need to write off the entire investment. In addition to being a financial loss, this kind of situation negatively reflects on the judgment and competency of the senior management team – and that negative reflection can make it more difficult to arrange for critical resources.
Becoming Uncompetitive: Sometimes a company simply loses its edge. Many times this occurs because a culture of complacence settles in. Sometimes a company fails to see a major sea change in the market. In other situations, I have seen competitors introduce disruptive technologies that have marginalized the value proposition of a company.
Excessive Debt Burden: This is a tough one and one that I see all too often. Many of the symptoms and causes discussed above can lead management to burden the company with excessive amounts of debt. In these situations, I generally bring in specialists – companies that are capable of reducing the debt through negotiation with creditors and vendors.
With all this uncertainty, how do I go about organizing and managing a turnaround? Well, the sort answer is systematically and methodically – but at a brisk pace. Each case is unique, but the process frequently involves the following stages:
Management Change: Control of the process in critical and the focus of initial negotiations with the client. In turnaround situations, it is important that I have a level of standing that is beyond being a consultant who has been called in to manage the turnaround of the firm. We are almost always talking major surgery – and that requires the ability to move things around and make decisions which will be implemented.
Initial Assessment: I always begin with a detailed situation analysis. My first objective is to evaluate the prospects for survival. If I conclude that the company can be saved, I then set to determining the root causes of the distress.
Turnaround Analysis and Planning: Once I have accomplished the initial assessment, I set to developing a turnaround plan. Generally one or more of the following strategies will be part of that plan: Change of top management, divestment of certain assets, reformulation of strategy, revenue increase, cost reduction and strategic acquisitions. The initial plan is then presented to the board of directors for approval.
Emergency Action Plan: The turnaround plan always includes a set of actions to be taken ASAP. I call this the Emergency Action Plan or EAP. From experience, it is important to get things moving immediately after the approval of the turnaround plan. Actions such as achieving positive cash flow as soon as possible, eliminating departments, reducing staffing, reorganizing the capital structure of the company, renegotiating the funding agreements, etc are sure to be on the EAP list.
Restructuring: With the successful implementation of the EAP, the effort shifts its focus to implementing the turnaround plan. This is a much more extend effort and requires a dedication on the part of all parties involved. The major components of the turnaround plan need to be put in motion. The management team begins to focus on achieving sustained profitability.
In turnaround situations, getting the right arrangements at the beginning can make the difference between success and failure. The first steps in the process are crucial to outcome. When they are accomplished, the future of the company will start to seem brighter – the stakeholders will experience fresh hope and begin to see the possibility of success when failure seemed to be the only option.
Michael A. Evans
High-performance Profitability Enhancement and Cost Reduction Specialists