Management Perspectives

Company Turnaround – 5Rs Strategies for Ressurecting from Crisis

Companies in financial bleeding face serious challenges: Ensuring short-term survival while preparing for long-term success. Rare among them planned initiatives to thrive both in short-term and long-term. Some companies in the pressure for short-term returns often neglect their company’s long-term health—or even willfully sacrificed it.Symptoms of a troubled company in need of a turnaround include decline in profitability (costs > revenues), inability to pay creditors/ suppliers/ other third parties, major employees exodus/ layoffs, and salary cuts for officers and a significant decline in stock price. Poor management and/or social, technological and competitive changes may have caused the products or services the company sells to be perceived as subpar by consumers. To thrive again in these difficult times, companies must answer critical questions such as these:

  • How can we focus on the most viable parts of the business moving forward?
  • How can we stop the financial bleeding?
  • How can we ensure qualified resources and skills to stay on course?

In order to affect a turnaround, a company must acknowledge and identify its problems, consider changes in management and develop and implement a problem-solving strategy. In some cases, the best strategy may be to cut losses by liquidating the company rather than trying to turn it around.

If you find yourself struggling with a failing or dying business, here are 5 turnaround strategies to help you turnaround your company performance:

1. Ring the Bell, Let All Members Knows the Company in Crisis Companies need to use words like crisis and urgency from the first moment they recognize the need for a turnaround. A company that’s in true crisis will be willing to try some things that it normally wouldn’t consider, and it’s those bold actions that change the trajectory of the company. Crisis drives people to action and opens managers up to consider a full range of options.Without a crisis mind-set, you get a stable company’s response to change: risk is to be avoided, and incrementalism takes over. Your workers are asked to do a little more (or the same) with less. More aggressive ideas will be analyzed ad nauseam, and the implementation will be slow and methodical. Companies in distress have to create a change story that everyone understands—and that creates some sense of urgency. Tell a story in a paragraph or less, in a way that means something to the average guy on the front line, then people will get on board. Change story must be simple message (not fancy metrics) that can spur them to action.

2. Reshape the Strategy, Build Traction for Change with Quick Wins Companies must periodically review their business plans. When you’re creating them, whether at the beginning of the year or the start of a three-year cycle, build in some trigger points. A simple explicit reminder can be enough: “If we don’t have this type of performance by this date or we haven’t gotten the following 12 things done by this date, we’ll step back and decide if we’re going down the right path, given what’s happened since our last review.” Such trigger points should be oriented both to operational and market performance as well as to basic financial metrics and cash flow. Look at where you are as a company using basic financial and cash milestones, and then look at where you are with respect to your industry and competitors. If you’re not moving with the rest of the industry (or not outpacing it, if the industry is struggling), then your plan may be obsolete. And don’t forget to look back at your performance over past cycles to identify any trends. If you keep missing performance targets, ask why. The tendency of most companies is to put all of their focus and resources into three or four big bets to turn a company around. That can be a high-risk approach. Even if big bets are sometimes necessary, they take a lot of time and effort—and they don’t always pay off. In addition to going after big bets, managers should focus on getting a series of quick wins to gain traction within the organization. Such quick wins can be useful to boost employees morale and triggering them to do other initiatives with more risky. Quick wins can be cost focused, cutting off demand for some external service they don’t need. Or it could be policy focused, such as introducing a more stringent policy on travel expense.

3. Replace Bad One or Two Top-Team Members, Find and Retain Talented People Experience tells that most successful turnarounds involve changing out one or two top-team members. Whether they realize it or not, they block that change because they’re bent on defending what they believe to be true. Although it’s difficult, removing those people sends another signal to your stakeholders that there will be changes and you’re not afraid to make tough moves. In any given company, you’re likely to find that a fifth of employees across the organization are almost always supportive. They work hard. And they will change what they’re doing if you just ask them. These are the people you’ll want to spend most of your time with, and they’re the ones you’ll promote—but you’ll probably spend too much time with the bottom fifth of employees. These are the underachieving ones who actively resist change, look for ways to avoid it, or are simply high maintenance. What often gets ignored is the remaining 60 percent of the organization. These are the fence-sitters, and they are tuned into action, not just talk. They see the changes going on, and if you proactively work with them, then 80 percent of the organization will be behind you. But if you don’t give them a reason to stand up and be positive about the company, they’ll go negative. That’s the importance of quick wins. When you quickly take real action, and when those actions affect the management team as well, you send a powerful message. A turnaround is also a real opportunity to find the next level of talent in an organization. Great leaders two and three levels down are just waiting for an opportunity—and the fact that they can be part of something bigger, saving a company, is often enough to attract and retain them. It’s important to realize that retention isn’t always about money and bonuses. It’s also about figuring out the individual’s needs. Good turnaround managers actively look for those people and find a way to get them involved.

4. Recover your Business, Focus on Generating Cash A successful turnaround really comes down to one thing, which is 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? And, even more specifically, which investments in the business are generating or burning cash? When you bring a business back to those basic elements, the actions you need to take to get back on track become pretty clear. In many of the cases I have seen, the management team and board are focused on complex metrics related to earnings before interest and taxes (EBIT) and return on investment that exclude major uses of cash. For example, variations on EBIT commonly exclude depreciation and amortization but also exclude things like rents or fuel. These are all fine metrics, but nasty surprises await when no one is focused on cash. Keeping track of cash isn’t just about watching your bank balance. To avoid surprises, companies also need a good forecast that keeps a midterm and longer view. For example, failing to pay attention to the cash component of capital investments routinely gets companies in trouble. Project net present values can look the same whether the return begins gradually at year two or jumps up dramatically at year five. But if you’re not focusing on the cash that goes out the door while you’re waiting for that year-five infusion, you can suddenly find yourself with very little cash left to run the business, sending you into a spiral you may not recover from.

5. Remodel your Incentive System – Pay for Performance Incentives are often the most unnoticed tool in a turnaround. In stable companies, short-term incentive plans can be a complex assortment of goals related to safety, financial and operational performance, and personal development. Many are so complex that when you ask managers what they need to do to earn their bonus, many just shrug their shoulders and say, “Someone will tell me at the end of the year.” In a turnaround, companies need to offer incentives tied specifically to what company want them to do. The incentives must clearly be communicated to them. Do you need $10 million of enhancement from sales? Then make it a big part of your sales staff’s incentive plan. Need cut cost from procurement? Give your chief purchasing officer a meet-or-beat target. Be willing to forgo bonus payments for those that don’t achieve 100 percent of their target—and to pay out handsomely for those whose results are beyond expectations.

 

Remarkable Strategy, Excellent Executions, Great Results…

Roy Nelson Simanjuntak

Business & Management Consultant

rn_simanjuntak@yahoo.com

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