Stages of a Turnaround

Stage One: Changing Management

Management change can begin only when company leaders have decided that changes are necessary. As most CEOs or company presidents do not relinquish power easily, the motivation for management change must often come from the board of directors. Even if incumbent mangers are willing to implement changes in an effort to turn a company around, they often lack the credibility or objectivity to do so because they are viewed as having caused or contributed to the problems in the first place.
During this stage or after Stage Two—situation analysis—steps are taken to weed out or replace any top managers who might impede the turnaround effort. This may include the CEO, CFO, or weak board members.

Stage Two: Analysing the Situation

Before a turnaround specialist makes any major changes, the individual must determine the chances of the business’s survival, identify appropriate strategies, and develop a preliminary action plan.

This means that the first days of an engagement are spent fact-finding and diagnosing the scope and severity of the company’s ills. Is it in imminent danger of failure? Does it have substantial losses but its survival is not yet threatened? Or is it merely in a declining business position? The first three requirements for viability are analysed: one or more viable core businesses, adequate bridge financing, and sufficient organizational resources. A more detailed assessment of strengths and weaknesses follows in the areas of competitive position, engineering and R&D, finances, marketing, operations, organizational structure, and personnel.

In the meantime, the turnaround professional must deal with various constituencies and vested interest groups. The first and often most vocal group is angry creditors who may have been kept in the dark about the company’s financial status. Employees are confused and frightened, and spend more time worrying about their own job security than fixing the business. Customers, vendors, and suppliers are wary about the future of the company. A turnaround specialist must be open and frank with all these audiences.

Once the major problems are identified, the turnaround professional develops a strategic plan with specific goals and detailed functional actions. The individual must then sell the plan it to all key parties in the company, including the board of directors, the management team, and employees. Presenting the plan to key parties outside the company—bankers, major creditors, and vendors—should restore confidence that the business can work through its difficulties.

Stage Three: Implementing an Emergency Action Plan

When the condition of the company is critical, the plan is simple but drastic. Emergency surgery is performed to stop the bleeding and enable the organization to survive. At this time emotions run high. Employees are laid off, and entire departments may be eliminated. Having sized up the situation objectively, an experienced turnaround leader makes these cuts swiftly.

Cash is the lifeblood of the business. A positive operating cash flow must be established as quickly as possible. In addition, a sufficient amount of cash to implement the turnaround strategies must be sourced. Often, unprofitable divisions or business units are sold as a means to raise cash. Frequently, the turnaround specialist will apply some quick corrective surgery before placing these businesses on the market. Units that fail to attract buyers within a given time frame may be liquidated.

The plan typically includes other financial, marketing, and operational actions to restructure outstanding debt obligations, improve working capital management, reduce operating costs, improve budgeting practices, correct product line and customer mix pricing, prune product lines, and accelerate high-potential products.

The status quo is challenged, and those who change as a result of the turnaround plan should be rewarded while those who don’t are sanctioned. In a typical turnaround, the new company emerges from the operating table as a smaller organization that no longer is losing cash.

Stage Four: Restructuring the Business

Once the bleeding has stopped, losing divisions have been sold, and administrative costs have been cut, turnaround efforts are directed toward making the remaining business operations effective and efficient. The company must be restructured to increase profitability and its return on assets and equity.

In many ways, this stage is the most difficult of all. Eliminating losses is one thing, but achieving an acceptable return on the firm’s investment capital is quite another.

The financial state of the company’s core business is particularly important. If the core business is irreparably damaged, the outlook is bleak. If the remaining corporation is capable of long-term survival, it must now concentrate on sustained profitability and the smooth operation of existing facilities.

During the turnaround, the product mix may have changed, requiring the company to do some repositioning. Core products neglected over time require immediate attention to remain competitive. In the new and leaner company, some facilities might be closed; the company may even withdraw from certain markets or target its products toward a different niche or market segment.

The "people mix" becomes more important as the company is restructured for competitive effectiveness. Reward and compensation systems that reinforce the turnaround effort get people to think "profits" and "return on investment." Survival, not tradition, determines the new shape of the business.

Stage Five: Return to Normal

In the final step of a turnaround, a company slowly returns to profitability. While earlier steps concentrated on correcting problems, the final stage focuses on institutionalizing an emphasis on profitability and return on equity, and enhancing economic value-added. For example, the company may initiate new marketing programs to broaden the business and customer base and increase market penetration. It may increase revenue by carefully adding new products and improving customer service. Strategic alliances with other world-class organizations may be explored. Financially, the emphasis shifts from cash flow concerns to maintaining a strong balance sheet, securing long-term financing, and implementing strategic accounting and control systems.

This final step cannot be successful without a psychological shift as well. Rebuilding momentum and morale is almost as important as rebuilding return on investment. It means a rebirth of the corporate culture and transforming negative attitudes to positive, confident ones as the company maps out its future.

Judging Success or Failure

Of course, not all turnarounds succeed in the manner outlined here. A company may put a quick end to its disastrous losses but never quite attain an acceptable return on investment position. When this occurs, management may decide to sell the business to a company and management team better able to produce an acceptable return on the funds invested. In a sense, however, this outcome is not failure at all. The company may well thrive and reach new heights under different ownership. Here, the turnaround manager can play a key role in identifying prospective purchasers, managing the information disclosure process, and negotiating a successful sale of the business at a price that maximizes the capital available for distribution to existing financial claimants.

Ironically, some companies never reach Stage Five because they achieve significant success in the earlier steps. The turnaround becomes so successful that the company becomes a target of a takeover bid. Again, this must not be viewed as a failure. The company was saved and continues to perform well with stronger sales than ever before.

Choosing a Turnaround Professional

For a troubled company, no decision may be more crucial than hiring a turnaround manager. Yet, with all the pressures and distractions building within a troubled company, this decision must be made at the worst possible and most stressful time. Time, indeed, is often of the essence.

When evaluating the decision of whether and when to introduce a turnaround professional into a company, several important questions should be considered:
• For how long will the services of a turnaround specialist be required?
• Can the company pay the turnaround specialist’s fees?
• Will other specialists be brought in by the turnaround manager?
• Is the existing management team willing to work with the specialist?
• What exactly is expected of the turnaround specialist, and are the goals in writing?
• What are the chances of success in turning around the company?
• Is the company willing to let an outsider liquidate or sell key units of the business if necessary?

Key Factors and Considerations

Background. Experience is the most important credential. MBA degrees and CPA designations count for little if a turnaround manager does not have a proven track record. A candidate should be able to produce a portfolio of success stories and satisfied clients.

Ethics and Professionalism. TMA membership is tangible evidence of the degree of professionalism, experience, and integrity of a turnaround professional. TMA also encourages professionals to pursue the Certified Turnaround Professional (CTP) designation as a further demonstration of their expertise and commitment to the corporate renewal industry. The CTP designation indicates that a turnaround specialist has met specific standards of education, experience, and professional conduct, and has successfully completed a rigorous three-part written examination.

TMA’s strict Code of Ethics is signed by all members. In addition, CTPs must adhere to the Code of Ethics and can be brought before a Standards Committee if a violations charge is made. If the person is found to have violated the code, the Standards Committee can impose sanctions, including taking away the professional’s CTP designation.

Reputation. No turnaround manager can expect to succeed without quickly gaining the confidence of creditors, as well as accessing new sources of credit. A company considering hiring a turnaround professional should check the candidate’s reputation with leading bankers, attorneys, accountants, financial advisers, factors, and trade creditors.

Managerial Skills. As the chief architect and implementer of new strategies, the turnaround specialist must be an organizational leader. One should look for a person of action who has entrepreneurial instincts, "hands on" experience, and interviewing and negotiating skills.

Fee Structure. The fee structure of the turnaround specialist should be clear and fair. A company should make sure it can afford such a service to avoid trading one set of problems for another. The company should look to see if the proposed contract includes an incentive or performance arrangement.