Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
No company plans to fail or to find its way into difficult situations – but it happens all the time. Over the years, I have worked with a range of companies that were facing the need to turn things around. The paths that they traveled to reach such a desperate condition were varied but the best ways out had a lot in common.
Times of corporate distress present special and strategic challenges to management, the board of directors, shareholders, employees and the sources of financial resources so critical to a company’s success. At the extreme, a company may be in either bankruptcy or nearing bankruptcy. Most often, there is a great deal of uncertainty arising from one or a number of problems – with bankruptcy only the last option.
As a turnaround specialist, I first determine whether the company has enough potential to make it worth saving. I undertake a quick assessment. If the answer is positive, I begin to devise and execute a plan of corporate renewal. It the answer is negative, I pass the engagement on to professionals better positioned to deal with those situations. However, let us leave the negative for another day and assume that the company does have sufficient potential to merit a turnaround effort.
The first key to any corporate renewal plan is an accurate assessment of the root causes of the crisis. It is important to separate the symptoms from those causes – an action plan that treats symptoms will often only make the situation worse. Before a viable turnaround strategy is possible, I need to identify the root causes of the crisis. Then I need to figure out which of these causes lay towards the epicenter of the crisis and which are merely symptoms of those causes. Here are just a few of the causes/symptoms that I have encountered:[1]
- The Wrong CEO: I encounter this one all the time but not always in ways you would think. Sometimes the company has simply outgrown the current CEO.[2]
- The Wrong Board: This is another one that I frequently encounter. The board of directors is an important part of the corporate structure. Often the board is populated with individuals who are well based in the technology of the company but inexperienced with the process of professional governance. Governance, not technology, is the appropriate focus on the board. If it cannot meet this responsibility, its oversight of management will be ineffective and the company will suffer.[3]
- Poor Strategic Choices: This is a large category with lots of sub-categories. For the most part, it indicates problems with the strategic planning process. In some situations, it is an indication of the lack of good judgment on the part of the senior team – particularly the CEO. In others, it arises because the team has relied on partial or inaccurate information in their decision-making. Whatever the reasons, a flawed strategic planning process is usually at the root.[4]
- Poor Execution: I have worked with teams that are very good at planning and failures at execution of those plans. For the most part these teams would be better off becoming consultants to other companies.[5]
- Inadequate Controls: You name it; I have seen if – from shoebox accounting to SWAG approaches to quality control. At some point in its growth, a company needs to have professional control systems put in place. Failure to do so will put the entire operation at risk – but it happens that way far more often than it should.
- Insufficient Resourcing: Companies need resources in order to grow. That includes personnel, financial and informational resources. Companies often neglect or under-perform on one or more of these resource allocations strategies – and that can severely limit growth.
- Revenues Are Trending Downward: There are many reasons why this might be the case. Business development, marketing and sales may simply not be up to the job. A company’s value proposition may have become obsolete or simply non-competitive. It may be a downturn caused by a weak economy. The financial statements will show the downturn – the key is to figure out why the trend is negative.[6]
One Response to “Turnaround Management – Initial Steps”
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Thought provoking article.
Sharing some views on prevention. Where estimates are provided by M&S they need to carry a +/- to indicate a level of planning fexibility. Risk management would involve asking the questions: What if we only get half or what if we double? They should then have the strategies to back up the flexibility. This would require supply chain flexibility, financial flexibility anf maybe even a ‘throttle’ on the sales force to slow down or reschedule customer agreed deliveries so that operations can cope. They in their turn need to have plans in place to downscale eg 3 day week or upscale eg overtime and or agency. Where customer is at the heart of a company, you may even decide to divert surplus into a ‘Partnership’ which could involve some form of structured reward sharing when this ‘overflow’ is needed. Once again it’s all in the preparation and communication between departments and how well they each prepare for a given scenario. ‘Joined-up thinking’ being the buzz words currently used in ‘lip-service’ to this concept.
On the root cause analysis, many large companies sruggle to do this because of the size of the operation, the fact that a symptom appears in one department as a result of failure in another, is often addressed where it becomes ‘visible’, politics ensures that the levers of change necessary to fix the cause, are inaccessible to the department suffering the symptoms and short sighted fixing will put resources into the wrong area as an expedient. This usually allows the problem to grow as volumes increase, and encourages the department fixing to become ‘more efficient’ (reduce the cost) on what is a cost of failure process ie one that should not even be there if the root cause was fixed.
Regards
Mili