Managing a Successful Business Turnaround
There are a number of critical factors in a turnaround situation. Usually, in addition to money, time is the biggest constraint. The window of opportunity to assess the problem and implement the change necessary is usually very short. Secondly, in order to have the best shot at success it is important to have a game plan and a clear vision of the methodology that needs to be used in the business turnaround. A turnaround cannot be left to chance. There is little leeway for trial and error.
The third critical factor is having the right people to implement a business turnaround. An effective turnaround manager needs to fulfill a number of key roles at virtually the same time. He/she needs a strategic mindset to be able to conceive the turnaround strategy quickly. This requires an ability to absorb a lot of information in very little time, put it in perspective and be able to draw the right conclusions. The ability to conceive strategic plans has to be coupled with an ironclad ability to execute plans and follow through with a single-minded focus to achieve the desired results. Perhaps the most important role is to provide leadership within the organization, inspire people and make everyone pull together with belief and conviction in order to turn the business around. So the turnaround manager needs to be an architect of strategy, an implementer with an eye for detail and a dynamic leader all at the same time.
Culture & Work Environment
The environment in a declining business is one of chaos and confusion. People often do not have the right information to make decisions, and accountability within the organization is poor. The most capable employees have already left the organization or are extremely frustrated. The turnaround manager needs to bring order, accountability and an action orientation to the organization, while at the same time making the organization comfortable with the idea of constant and dynamic change and a process of continuous evaluation and improvement.
Very often the root cause of a declining business can be traced to its culture and values. The most important aspects of an effective culture in a turnaround situation are a sense of urgency, an orientation for action versus discussion, accountability to implement decisions and a low level of tolerance for excuses instead of results. In addition, barriers between different business functions and personal fiefdoms need to be broken. Most business processes, like taking and executing a customer order and collecting the money, flow across business functions. Functional barriers and personal fiefdoms prevent the smooth delivery of value to customers and lead to sub-optimal performance. Furthermore, the culture needs to be driven by a strong dose of common sense and hard-nosed reality.
To change the culture in a turnaround situation, the turnaround manager needs to exhibit strong leadership and tackle issues head-on. In addition to the shock therapy of getting rid of the non-performers and the defenders of status quo, the turnaround manager needs to set the right performance measures and incentive systems and set up mechanisms to recognize individual and group achievements that reinforce desirable cultural values. Non-performance needs to be dealt with swiftly and the organization needs to be focused on results. By carefully going after low-hanging fruit, an astute turnaround manager will seek to win converts and enthuse the organization with the ability to overcome the tougher challenges. However, none of this will work if the turnaround manager does not lead by personal example, to use an oft-cliched phrase—"Walk the talk."
Having addressed the importance of time, the skill set required of a turnaround manager and the culture needed to be created within an organization, let us now focus on the actual methodology of a business turnaround.
Facing the Problem
The first and most important step is to squarely face the issues and problems confronting the organization. A management denial of business problems and a successful business turnaround never go hand-in-hand. The earlier and more clearly and comprehensively a business problem is faced, the greater the chance for a successful and relatively less painful resolution.
Quite often when things start going wrong, even a previously successful and capable management group can have difficulty in facing the reality of a business decline. Some of the very management traits that made the business successful in the first place conspire against the management recognizing the problems and the changed reality. These factors can include a misplaced sense of optimism, an intolerance to bad news and a differing viewpoint, and a strong sense of commitment to an action plan even when it is not providing the hoped-for results. Very often the entrepreneurial instinct is to throw even more resources at the problem instead of recognizing a mistake and changing course.
In order to effect a successful business turnaround, the business problem needs to be defined both quantitatively and qualitatively. The quantitative factors include a trend analysis of various profitability and cash flow measures, stock prices, market share, inventory turns, asset utilization, analysis of financial ratios, market share, change in share of customers' business, returns and repeat purchases—to name a few. The qualitative factors include confusion in the organization, poor morale, lack of management control, employee dissatisfaction, bad press and analyst reports, a lack of focus, a lack of awareness of what an organization stands for and where it is headed, audit problems, lawsuits and complaints, loss of key suppliers or customers—you get the drift.
The common sense point here is that you cannot administer change without realizing what you are changing from. The logical sequence of questions after that is: To what are you going to change? How will you get there? What do you do when you get there? In other words, the tasks are making a strategic assessment and plan, executing the turnaround strategy and determining how to exit the turnaround mode, i.e., the point when the organization should exit the emergency mode and return to normalcy.
Strategic Assessment and Planning the Business Turnaround
During the strategic assessment phase the most critical question to be addressed is the amount of time available to turn the business around. The time available is usually based on the cash position and availability of financing.
The next step in this phase is to carry out a comprehensive situation analysis. This analysis needs to be comprehensive and to cover the financial situation, the state of manufacturing and operations, marketing analysis, an analysis of process engineering and research and development, an analysis of human resources and the state of organization development. The turnaround manager needs to make an assessment of the internal strengths and weaknesses of the organization based on this analysis. In addition, the turnaround manager must analyze the external competitive and regulatory environment.
From this assessment, the turnaround manager needs to pinpoint the opportunities for improvement and prioritize the issues by ease of accomplishment and the time frame required. It is very important during this process to not get lost in an inward focus, but to keep the eye squarely on the most profitable customers and what it will take to keep them happy, satisfied and on-board during the turnaround process.
Next, the turnaround opportunities identified have to be translated into quantifiable results and form the basis of the financial business plan. It is important that the business plan be simple, have a clear rationale and enable people to easily identify what they have to do to attain the planned results. The turnaround plan should be broken down into specific action items with a specific person responsible for each action, along with a date for completion and a quantified and measurable financial benefit to the organization.
Executing the Turnaround Strategy
People are the most critical factor in successfully executing a turnaround plan. It is important that the people in all the top management functions be willing to act as catalysts for positive change.
In order to execute the turnaround, the strategy should be clearly and frequently communicated. Great care should be taken to ensure that all decisions and actions within the organization are consistent with the turnaround strategy. Nothing destroys management credibility faster than for the rank and file to see management actions that are inconsistent with what management is saying. It is important to have informal upward channels of communication to confirm that management's intended message is being heard within the organization. There needs to be a clear rationale to the turnaround strategy and it must be communicated in a way that everyone can understand. Each person in the organization should be able to relate his role to the overall turnaround strategy and develop a perception of what he can do better to facilitate the turnaround. This could be machine efficiency, set-up times, scrap rates, the time it takes to close the accounting books at month-end, time taken to disposition requisitions, etc. People within the organization should clearly understand how their roles enhance business value.
The culture must be one of urgency. One does not have the luxury to deliberate issues for days. Data need to be gathered and decisions need to be made quickly.
In order to navigate the treacherous waters of a business turnaround, a sound feedback and measurement mechanism should be developed, so that it can be relied upon to measure actual performance results against the turnaround plan. Critical financial and operational measures should be monitored daily, key financial and operations parameters must be looked at weekly and the financial books need to be closed promptly at month-end and a comprehensive financial and operational review carried out. The focus needs to be squarely on results. It is important to step back and make sure the operational goals set and being measured will indeed enable the financial goals to be achieved within the time frame desired.
The turnaround manager needs to be flexible in trying different ways of accomplishing the plan, but relentlessly unyielding on results. A judicious balance needs to be struck between a revolving-door approach to the management ranks and persisting with people who are not producing the required results within committed time frames. Accountability and ownership of projects needs to be pushed down to the people close to the action. Successes need to be celebrated along the way in order to bolster confidence and morale and reinforce positive actions.
Exiting the Turnaround Mode
For a successful turnaround, it is important to have a defined end to the process, when the financial and operational objectives are met. To continue to run the business in a crisis mode indefinitely can be counterproductive and hurt the long-term value of the business.
At the end of the turnaround, the management team needs to sit back and reflect upon the lessons learned during the turnaround process. There are two key priorities at this stage. The first is to put processes, measurements and organization structures in place that will prevent a business from declining in the future, or at least provide an early warning should the business face a declining situation. The other priority is to institutionalize the process of profit improvement and value enhancement. It is now important to crystallize the business opportunities that can be exploited in the future and the competencies and market positioning that need to be developed to exploit those opportunities.
In order to accomplish these priorities, management must focus on the value proposition that the business will offer to its customers. Put simply, an organization must be able to answer the following question for each of its market segments in each product line. What unique value do we offer to our customer? Why should a customer buy from us instead of our competitors?
After defining its value proposition, management should objectively evaluate whether the entire organization is focused on delivering this value to the customer as efficiently and cost effectively as possible.
Having done all this, an organization should develop pride in its accomplishments and shun complacency. It is only through an excellent strategic vision, the nimbleness and courage to change course when required and a never-ending quest to deliver superior value to customers that a business can continue to enhance its own value and successfully serve all its stakeholders.