After finishing the first part of a long post on managing turnarounds, I thought I said everything I had to say on ensuring the survival of the company. But as I read it back and reflect, I realized that I peeled only the first few layers of the onion. I decided to dig deeper and see if we can create a generic approach for managing a turnaround.
How many kinds of turnarounds are there? I can think of two:
- Crisis due to structural changes. These are crises brought about because the industry structure has changed either due to stronger consumer protection laws, new and more effective business models or because of migration of profits due to changing demographics. Sometimes the structural changes could be in the enabling conditions that make the industry tick like legal environment, technology eco-systems etc. In other words, the business model is not broken but the enabling conditions be it legal environment or greedy CEOs or technology changes in unrelated industries have put the company in a death loop. Examples: DEC, Nokia, IBM, Xerox
- Crisis due to mismatch between resources & opportunities. This is where the CEO/Senior Management values and expertise do not align with reality or market expectations. It could also be that the company's expertise and resources are optimized for a specific business opportunity, market that never materializes or scales. Some examples are Iridium, Parmalat,Tyco, Apple during Sculley era (?), Disney
Interestingly, as I was writing this post, I came across this article from WSJ about the troubles at WorldCom. The point of the article is how relationship between the senior leaders of the company deteriorated as growth slowed down. We can easily jump to the conclusion that as the growth slowed down in telecom industry, management at WorldCom was forced to adopt unethical practices and continue presenting a rosy picture. However, the crisis is not caused due to any structural changes in the industry, but because the glory days of WorldCom caused the executives to lose touch with reality. This in turn led them to ignore or disregard all warning signs and continue chasing growth at all costs.
Quite clearly, the nature of the beast will never be clearly visible at first glance. Even after analysis, the situation will be sufficiently muddy for us to reach a definitive conclusion about the nature of turnaround. Does this mean, that we do not have any rules of thumb to at least get the drift ? From my experience, I can suggest a few; but it is arguable whether they can support the conclusions we can reach:
- Is the crisis sudden and dramatic? Look for changes in external world that might have caused this.
- Are the CEO and senior managers enjoying a lavish lifestyle while the rest of team is down in dumps? Look out for resource-opportunity mismatch.
- Check the status of fixed discretionary costs (FDCs). Are there too many leases, perks and credits? Look out for resource-opportunity mismatch.
- Check out the competitors. Are you the only one suffering from slow down? or is it part of a general trend?
- Open and scrutinise all the closets in the company. How many skeletons tumble out? How many of these are neglected customers? How many are contracts not being honored and potential time bombs?
- Are people inside the company surprised by the crisis? If so, at what level are they? In other words, is the senior management in sync with reality?
These are some of the questions you should ask before reaching any conclusions. Once this is done, then the due diligence phase starts. There are 3 phases to the due diligence. Phase 1 is where we get all the leaders of the company into a conference room and let them talk. Without offering any conclusions or judgments, your role would be to observe, note and file all the things that were said, things that were left unsaid and also the relationship dynamics in the room. Phase 2 is a thorough discussion with key members in company who are not in leadership team. You follow basically the same system as for leadership team. Observe, note, file. Phase 3 is “Spring Cleaning”, in other words, we go through every single document inside the company to figure out what are the potential time bombs, hidden treasures and junk.
Now we are ready to reach some preliminary conclusions about the nature of the crisis and viability of the enterprise as a going concern. Clearly, the task difficult will vary with the kind of crisis we are faced with. In the real world, we will never face a crisis that is purely structural or purely internal. However, in every case, we can reach to the core problem by digging deep and keeping an open mind.
Once the core problem is identified in terms of its nature, we move to the next stage of turnaround:
- Establish the long term viability of enterprise
- Establish if this long term viability can be achieved profitably in current context.
Establish long term viability of business. This is the toughest part of the entire turnaround. I am not saying that executing the turnaround is any easy; it is just that figuring out the long term competitive solution needs to be done early when passions runs high, confusion reigns and morale is slipping. It will not be easy to figure out a way forward in this fog and at the same time communicate with enough transparency and intensity that teams are committed to do whatever is required. The critical element in this part is the nature of crisis in the company. If the crisis is brought about because of structural changes in the industry, the task becomes doubly difficult due to lack of expertise, uncertainty about new operating environment and uncertainty about time required and resources required. I believe that where the crisis is due to structural changes in the industry, a turnaround expert brought in from outside cannot be effective. What is required is not expertise in turning companies around, rather a person who thrives in uncertainty and confusion. Turning around companies is essentially a simple task; while the uncertainty of success is high, the uncertainty of way forward is quite manageable. That is why, where structural changes are roiling the industry, we need managers adept at steering company through times of great uncertainty.
Establish if the viability can be achieved profitably. This is the fiduciary duty of the turnaround manager. Even if the long range viability is possible, it makes no sense to embark on the journey if the rate of return is less than the cost of fresh capital required. In such a case, it would be much better to liquidate the company rather than throw good money into a bad industry. Forget about people who say that industries are not bad, its only mindsets and managers who are bad. Unless some of the enabling conditions (technology, legal environment, demographics) change, industries can and will go bad. Yes, we can talking about shaping versus adapting in industries; but if you pile on the higher risk of shaping strategy on top of the uncertainty in a turnaround situation, you really need a cast iron stomach to go through your days. If you do it, great! and good luck to you. Otherwise, you have to scale down the ambitions unless the company’s short term survival is assured before executing a shaping strategy. Probably, we can use some real options based decision guides here…I don’t know. I believe that if you plan to adopt a shaping strategy in a turnaround scenario, you will have to necessarily stage your investment flow so you can get out at minimal cost if things turn sour. This in turn will make your cost of fresh capital that much more difficult to figure out.
Finally, if you believe that your company does have a long range competitive solution and that this can be achieved profitably under severe time pressures, then by all means you should seek fresh capital. If you adopt a shaping growth strategy, you should seek fresh capital in stages linked to specific milestones in turnaround or events in industry. If you adopt an adapting growth strategy, then get in some industry experts, work with them on business projections and go for fresh investments.
When I started this post, I did not intend it to be this long. As it kept growing, I had to leave out a lot of things that I wanted to say. Maybe, I will do that in another post. On the other hand, if you like what you read so far and want to see a pdf download once I am finished , drop me a comment and I will do my best!