3. WHAT EXACTLY IS A CORPORATE TURNAROUND?
How different is it from normal sound business practices?
Some turnaround specialists define corporate turnaround as "a
substantial and sustained positive change in the performance of a
business". Corporate turnarounds are also often described as Back
to Fundamentals and Back to Entrepreneurship — not one or the other,
but both at the same time.
In theory, turnarounds should not be necessary, but in reality they
are. In most companies turnaround actions commence only after the CEO or
the board of directors accept two facts : One, that the company
is in a real danger, that this is a real crisis, and Two, that
the problem is huge and small incremental improvements will not solve
it.
Once the CEO or the directors face the fact that the moment of truth
has arrived, they empower someone (often on an interim management basis)
to take steps necessary to save the company. Most of the time, the first
task is to manage the crisis, and because of this, in recent years for
many persons the expression crisis management has become
synonymous with turnaround management. However, in most cases there
is a lot more to turning the company around than overcoming the initial
crisis.
It is often said that it takes entrepreneurs to start companies and
that it takes professional managers to run established companies. Well,
a turnaround requires both mentalities at the same time. The repeated
finding of many studies in North America and Europe, is that in 80% of
cases by the time the company is foundering and needs a turnaround, it
has already moved far away from sound business practices and the spirit
of entrepreneurship.
Rules for turning companies around. I wish I could tell you that our
company, Alex Wolf & Associates, would do magic with your company,
but in reality no magic is involved – there are proven rules for
turning companies around. Most of this site is devoted to these rules
and my experience in applying them.
The first broad rule is that no matter what else you do, you must pay
close attention to customers. You must assure that they really receive
good product, good-value, and responsive service; and in a turnaround
this requires personal contact with customers by top management. Another
broad rule concerns characteristics of people who succeed in turning
companies around. The turnaround leader / manager has broad business
knowledge (including knowledge of many industries), an ability to learn
very fast, very disciplined thinking, very disciplined and timely
action, and absolute integrity – the turnaround leader / manager must
possess these attributes to an incomparably greater degree than is
required of managers in non-turnaround situations.
Typically the turnaround leader / manager is an individualist. At the
same time, my own turnaround experience has made me realize that
turnarounds are much more works of science than art. Turnarounds are
primarily based on disciplined and systematic application of planning,
controlling, organizing and motivating functions, taking many calculated
risks, planning for contingencies, much independent creative
thought, and steady hard work.
This means doing what has to be done – when it has to be done. It also
means not playing favorites, and doing what has to be done – whether it
is popular and pleasant or not. It means doing all of the essentials,
and letting some other things go. Turnarounds are not big on formality,
but big on real business discipline. Furthermore, in turnarounds, time is
always of the essence.
Turnaround Priorities, particularly
in the crisis management stage and for considerable time afterwards, are also very different from priorities
involved in operating a profitable business, for reasons which may be
summarized as follows :
-
Hemorrhaging must be stopped, i.e. positive cash flow must be
restored and on-going losses must be stopped. Likewise, the decline
of morale and good will, must be terminated – by putting an end to
destructive rumors of future cuts, layoffs, discontinuation of
product lines and closing of facilities.
-
This stabilization must be achieved quickly – at a pace that the
troubled company is not used to. Almost nothing can stand in the way
of actions that are required to achieve these objectives. It is by
reaching them that a troubled company gains some breathing room and
time – to reposition, restructure and re-engineer itself (the 3Rs).
-
The breathing room and time so gained is vital, and the turnaround
manager (crisis manager) knows that this is a limited reprieve to be used wisely and
that the momentum of changes must continue. The room for making
expensive errors, and for tolerating non-performance is gone.
Turnaround is the moment of truth.
-
Not the largest profit but the shortest payback is king, until
basic viability is restored. Projects
with very short-term payback (days, weeks, a few months) are an
absolute priority well past the crisis management
stage and almost until the end of the turnaround.
-
In addition, during the critical stages of a
turnaround, there is no time for formal studies before certain drastic actions
are taken and decisions guiding these actions must be based on a
quick and penetrating analysis.
See More
about Priorities in Annex IX, including
Case
#4.
In turnarounds, company owners authorize drastic, unpopular and
unpleasant actions, such as laying off many employees (even some good
ones) or closing of some facilities, because if things continue on their
present course, owners will lose their equity and the loans they
advanced to the company.
A drastic and rapid turnaround is a business revolution. Can it be
anything less than that in a financial crisis when the company is hemorrhaging money, morale
and good will? Can it be anything less than that, when owners' equity is
disappearing and when there is no time to move at the usual evolutionary
pace?
Should you undertake such actions – such big changes – in your
business? It depends. The first rule in business is generally ‘If it
ain't broke, don't fix it'. If your company, or some business unit of
it, for which you are contemplating changes, is not hemorrhaging, if critical
financial problems and other
critical symptoms are not present in your company or in the
relevant business unit, then drastic and rapid turnaround actions are
probably not required. But such steps definitely must be considered when
the company or the relevant business unit is in serious trouble and when
alternatives are not available or are not attractive.
While rapid and drastic repositioning and restructuring of the
company, and rapid and drastic changes in the way the company operates
and does business (re-engineering), will scare most people, such actions
are a rational response to many emergency situations. For such actions
are required to get the company out of the rut of the Losing Track.
The expression Losing Track is used to describe "a course and
modus operandi
that generates losses and will continue to generate
losses, as long as it is continued". In effect, in 80% of the
cases, corporations get on a Losing Track because of the inability or
complacency of management. It is the inability and complacency of management
that most often constitutes the rut.
But whatever is the reason for the company following a Losing Track,
once the company is on that track, the choices are stark : face the
reality and get out of that rut, or fail in due course.
Experience shows that operating on a Losing Track often involves
following implicitly some strategy, which was once a conscious and
justified choice, but which with passage of time is no longer explicit,
and due to changes in conditions is no longer viable. The most common
reasons for not recognizing that the company is on a Losing Track are
the following :
-
the abandonment of habit to "manage by numbers"
(cost-engineering, cost accounting and cost-benefit analysis),
-
lack of periodic rigorous comparison with broadly understood
competition,
-
failure to actively seek improvements,
-
unwillingness to face reality.
In addition to moving the company off the Losing
Track, a successful turnaround requires changing the corporate
culture of the company to keep the company from sliding back on the
Losing Track.
For more details see Turnaround
Communications.
The above-mentioned requirements of broad business knowledge (of many
functions and many industries), very disciplined thinking, and absolute
integrity, come into play from the outset – in formulating, and
courageously asking tough questions that must be posed in order to
determine if the company is merely experiencing some troubles or is on a
Losing Track. Troubled companies are often stuck on the
Losing Track until the right questions are asked.
When the company is really on the Losing Track, great changes are
required, time is of the essence, and the real risk is an
opportunity cost.
Opportunity costs are not entered into accounting records, but are used in decision-making
when comparing alternatives. Some people might say that for a sinking
company, this opportunity cost does not even exist until the hemorrhaging is stopped.
Am I suggesting that if a company is in decline and bleeding, there
is no risk in experimenting on it? Of course not. The very reason for
taking turnaround actions, is the founded belief by management in the
potential for corporate recovery. But this potential must not be
squandered. The point I am making is that when a company is foundering,
bold actions are required, and the real issue is which actions to take.
My present message is
aimed primarily at owners and board members of companies that are in
real difficulty, on a Losing Track or close to it. In such situations,
the danger involved in continuing on the existing course is so great
that the real operative question is – not if – but what fundamental changes should be made.
As a rule, if a foundering company is to survive, certain drastic
changes, fundamental to a turnaround, have to be made, even though they
will be regarded by part of the management and staff as rocking the boat. In fact, typically, after a rapid
assessment of the situation, one of the first actions taken by the
manager leading the turnaround of a distressed
company, is to give the subordinate managers, at
both senior and middle levels, a clear internal Turnaround Message,
about the new direction and new rules for the company, and about the new
pace of getting things done. For more information see Turnaround
Communications.
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