When I began my assignment to turnaround this company in the beginning of last year, I could not find any public source on web about turnarounds. I struggled to figure out key issues that can stimulate my thinking and clarify my actions. Now after 1 year of struggling with saving the company, the job is by no means complete or successful. So I cannot claim to post a definitive How-To on turning around companies in crisis. However, I believe that by sharing my ideas and principles with a wider and knowledgeable audience will help me a lot. I will learn more, crystallize what might be vague notions and also excite somebody more experienced than me to carry the torch forward. Since I have a lot to say on this topic, I want to do this post in 2 maybe 3 parts. So without much further ado, let's begin.
I believe there are 3 dimensions to a successful turnaround:
- Secure the company's survival in near term
- Stabilize the company's cash flow
- Grow the company's cash flow
A turnaround is a simple problem in the sense that the starting point is usually crystal clear: Survive! Even the number of variables or paramteres at our control are limited. For a successful turnaround, there are basically only 2 parameters that we can play with:
- Financial structure
- People
That's it. I believe that to successfully come out of any turnaround situation, these are the only levers that we get to play with. I can hear some objections at this point: "what about customers?"; "what about suppliers?". Apart from financial structure and people development, everything else is external to the company. Even financial structure could be constrained if there is too much debt and consequently too much oversight from lending institutions.
These 2 parameters are quite interesting; financial structure is a low quality lever in the sense that any benefits we achieve by manipulating this are short term and quickly dissipated. People development is an extremely high quality, powerful lever. However, it takes time and builds momentum slowly. Thus in order to successfully execute the first stage of the turnaround, secure the short term survival of the company, financial structure is the only tool at hand for the CEO.
The common perception is cash is the most important resource in a turnaround situation. However, I think differently; after leading this company for the past 1 year, I realize now that the resource most in short supply is "time". Typically in a turnaround situation, the company, the people just do not have enough time; enough time to get new orders, enough time to mentor and develop people, enough time to figure out what is going wrong and enough time to fix whatever is wrong.
However, time is a derived resource; we can get more time by getting fresh cash into the system or by freeing up existing cash locked in unproductive assets.
The interesting conflict that we have to resolve very quickly is whether the company has a long range competitive solution and thus worth saving. Unless this is clear, there is very little sense in securing fresh funding from external sources. However, figuring this out usually takes time. And as I mentioned earlier, time is the most scare resource a turnaround situation has. This is where cash locked into unproductive resources comes into play. In order to get the time to figure out if the company has any long term competitive solution, the interim CEO has to apply great amount of rigor and determination in freeing up cash locked into low quality assets. At this point the CEO, together with all key stakeholders can figure out if the company is worth saving and if yes, whether they would need external credit or investors to refinance the company.
So that's it for the 1st part. The next part will deal with the second stage of a successful turnaround aka Stabilizing the Company Cash Flow.
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