"I've seen my share of boiled frogs," comparing companies in crisis with the metaphorical frog that doesn't notice the water it's in is warming up until it's too late. As a consultant on more than a hundred turnaround situations under the banner of business rescue over nine years, I have witnessed first-hand how managers back right into a crisis without recognising that their situation is worsening. "They're not bad managers, but they're often working under a set of paradigms that no longer apply and letting the power of inertia carry them along." And if they don't realise they're facing a crisis, they won't know that they need to undertake a turnaround, either.
I also have regrets: sometimes managers underestimated how critical their situation was — or they were looking at the wrong data. Others took advantage of easy access to cheap capital to stay the course in spite of poor performance, believing they could push through it. Still others got so caught up in the pressure for short-term returns that they neglected to ensure their company's long-term health — or even willfully sacrificed it.
Rare among them is the executive who stepped back to review his or her own plans objectively, asking "Is this what I thought would happen when I first started going down this road?" That's a problem, because acknowledging that your plan isn't working is a necessary first step.
Maxim 1: Throw away your perceptions of a company in distress. It's next to impossible to come up with one working definition of a company in distress — and dangerous to think that you have one for your own company. Depending on the situation, there are probably 25 different signs of potential distress. The problem is seldom made up of just one or two of these things. Rather, it is the result of a greater number of them interacting together and with other external factors.
Maxim 2: Force yourself to criticise your own business rescue plan. The biggest thing you can do to avoid distress is periodically review your business plans. When you're creating them, build in some trigger points. A simple explicit reminder can be enough: "If we don't have this type of performance by this date, we'll step back and decide if we're going down the right path." Such trigger points should be oriented both to operational and market performance as well as to basic financial metrics and cash flow.
Maxim 3: Expect more from the directors and board. The beauty of a business rescue practitioner is that you have enough distance from the company to see the forest for the trees. Directors often treat the practitioner as a necessary evil, but that undermines the practitioner's role as an early-warning system. It's also the practitioner's responsibility to look the CEO, the CFO, and the COO in the eye and say, "Let's talk about what it would take to cut costs not just by 3 percent but by 30."
Maxim 4: Focus on cash. A successful turnaround really comes down to one thing: a focus on cash and cash returns. That means bringing a business back to its basic element of success. Is it generating cash or burning it? I like to think about this in the same way one would if running a local hardware store — asking fundamental questions about whether there is enough cash to pay the utility bill or to pay for the next delivery.
Maxim 5: Create a great change story. Companies in distress don't focus enough on creating a change story that everyone understands — and that creates some sense of urgency. If you can tell that story in a paragraph or less, in a way that means something to the average person on the front line, then people will get on board. The key is a simple message, not fancy metrics.
Maxim 6: Treat every turnaround like a crisis. Without a crisis mind-set, you get a stable company's response to change: risk is to be avoided, and incrementalism takes over. In contrast, a crisis demands significant action, now. Managers need to use words like crisis and urgency from the first moment they recognise the need for a turnaround.
Maxim 7: Build traction for change with quick wins. The tendency of most managers is to put all of their focus and resources into three or four big bets. That can be a high-risk approach. In addition to going after big bets, managers should focus on getting a series of quick wins to gain traction within the organisation. Not only do such moves improve the bottom line, they also generate support among employees.
Maxim 8: Throw out your old incentive plans. Management incentives are often the most overlooked tool in a turnaround. In a turnaround, take a lesson from the private-equity industry and throw out your old plans. Instead, offer managers incentives tied specifically to what you want them to do.
Maxim 9: Replace management. Experience tells me that most successful turnarounds involve changing management. This isn't about "bad" managers per se. But it's a practical reality that there are managers who must own the decline. Whether they realise it or not, they block change because they're bent on defending what they believe to be true.
Maxim 10: Find and retain talented people within the business rescue team. Beyond the leadership of the business rescue practitioner, there are two types of people I look for immediately. First are those that have the institutional knowledge about the industry. Second, a turnaround is a real opportunity to find the next level of talent — I've often found great leaders two and three levels down who are just waiting for an opportunity.
