Is your company in a “turnaround” condition? The common definition of a turnaround is very broad. It is basically about improving performance from one state to a better one. Being in this situation can cover more than just those companies that are about to go under. It can also be companies that have great opportunities for growth ahead of them, but need to change the way they do business in order to capitalize on them. While there are common lessons that apply to all, in this article we will focus on turnarounds from a negative position.
In the recent economic climate, we have become accustomed to companies struggling, with many going out of business. They haven’t been able to control their costs effectively or create the sources of revenue that will sustain the company. The majority of respected surveys put the success rate of turnarounds in these situations at between 20% and 35%, depending on the definition of under-performance and success. Those with turnaround experience know that turnaround situations are usually highly stressful and, if unsuccessful, very poorly rewarded.
Yet, they offer some excellent insights on what is important for a new CEO to consider. Clearly, there are factors that are unique to certain situations but in general these seven factors have led to success in most turnaround situations for troubled companies. For those companies who are not in turnaround mode but need business acceleration, there are some gold nuggets in here too.
1. Identify the real problem.
There are two generic reasons. Either something major went wrong for a short time, usually loss of a dominant customer or a dramatic market change; or something minor went wrong for a long time, usually poor understanding of customer or product profitability, that led to misguided allocation of capital and resources. Given the economic climate, it is tempting to blame market changes when things go wrong. That may also be true. What matters is the need to establish what went wrong and fix it.
2. Take control of time.
Senior teams, and particularly new CEOs, experience relentless demands on their time from all stakeholder groups from the Board, down through the banks, suppliers and customers. At the same time, management is constantly harried by a series of apparently urgent tasks, each of which is critical in its own way. The CEO needs to create breathing space for actually working on the business operation as a whole. While there are the fires to fight, there is also a necessity to protect the time that they and their team need to think, understand the problems in the business, formulate the plan, and implement it.
3. Get the finances under control.
Creating a bottom-up budget and making the team accountable for every part of income and spending. In addition to problems of solvency and profitability, most companies in turnaround situations have issues with liquidity. Whereas profitability can be addressed internally by sensible planning and performance management, liquidity usually requires external support from financiers, ranging from payment holidays through to cash injections. Sources will need to be reassured that there exists a viable business both in the short and mid-term, and that they are not throwing good money after bad. This liquidity brings breathing space that allows management to make calm, rational decisions that support long term survival and profitability.
4. Make promises you know you can keep.
In a turnaround situation, all of the stakeholders are concerned: employees, shareholders, banks, creditors, business partners, customers and suppliers. Increasing their confidence is critical to making any progress. Management has to be proactive and make a series of promises, which it knows it can keep. Hitting these checkpoints is the most effective tool management has to build its credibility.
5. Upgrade the executive team.
New plans almost always require a new team that is committed and able to execute the plan. Seldom is there a dramatic change in the fortunes of a company without a corresponding change in the senior team. This means at least two or three changes in senior personnel and that started with the change in CEO. It should be done quickly and bringing in senior consultants with specific experience is an excellent short term aid.
Complexity is a double-edged sword in turnarounds. Companies often get into trouble when they take on too much and when they are in trouble they try extra benefits to get out of what they are doing. When resources and time are constrained, the business needs to concentrate on doing a small number of things well. This can mean reducing product lines, cutting or selling business units, outsourcing business processes or numerous other simplifications depending on the situation. The process of simplification needs to go far enough to give the remaining activities the focus of management time and investment required to do them well.
As you are reading this article, you might think that all of these tips are common sense and relatively obvious. However, all of them are also easy to dismiss, overlook or delay. DON”T!!
Let us know how we can assist you. We have experience across a broad range of industries and turnaround situations.
Maver Management Group