October 2013

Embracing Change… The Foundation for Successful Turnarounds

For an underperforming company, embracing change is vital to completing a successful turnaround. By recognizing the value in doing things differently, these companies can create a more solid foundation and effectively prepare for a rewarding future.

Brian Gleason Senior Managing Director Phoenix Management Services

Brian Gleason
Senior Managing Director
Phoenix Management Services

Although Einstein is often attributed with the phrase, “Insanity is doing the same thing over and over and expecting different results,” it is turnaround professionals who often remind and repeat the axiom to clients. For an underperforming company, continuing to do business as usual in the face of financial losses, shrinking liquidity and significant industry challenges is foolhardy. Change is critical to return to profitability. Yet companies tend to struggle with not only recognizing the need for change, but also how to approach the turnaround process.

There are best practices for a structured approach to a turnaround. The first step is to conduct a thorough scrutiny of the organization to determine what business practices still work and which ones require an overhaul. The second step is to identify and discuss any sacred cows that are holding the company back and then put them permanently out to pasture. As companies go through this process, it is essential to adopt an enterprise-wide willingness to embrace new behaviors and initiatives. There is no doubt that the resulting changes can be challenging, especially when company history and long-standing traditions stand in the way. Yet, without implementing change, achieving different, better results, is next to impossible.

Recognizing the Need for Change

When it comes to business operations, poor performance, regardless of the reason, is a clear indicator something needs to change. Acceptance of this fact can be a hard pill for many companies and industries to swallow. Take for instance the decline of the buggy whip. The turn of the 20th century ushered in many exciting innovations, but none as revolutionary as the introduction of the automobile. Costly, loud and often unreliable, the original horseless carriage provided little or no immediate threat to a thriving buggy whip business. But by the late 1920s, the writing was on the wall as Ford began mass production of the Model T. The buggy whip industry nosedived. Individual companies that failed to change their business models to meet the needs of the future were forced to close. Although this example is often overused, it clearly illustrates the consequences of failure to adjust.

Today’s business world is no different. Staying competitive continues to be the key to business success. That means continual evaluation of products and services, business models and technological advancements that can impact the marketplace.

Challenges to Change

Adhering to the adage, “That’s the way we’ve always done things,” prevents many underperforming companies from successfully turning around. Comfortable with the status quo, management may believe it understands its business better than anyone else. As a result, it refuses to look outside its own walls for new ideas or to seek advice. Adopting this insular approach prevents the company from realizing its true potential. In the same respect, it gives management permission to revert to older ways of doing business, ignoring the fact that the industry has changed. As a result, the company misses a golden opportunity to move forward.

Many turnarounds get railroaded by paralysis by analysis. Decisions are held up when an executive makes the case that further review is necessary. Although careful considerations of this nature are useful when a situation demands more clarity, this foot-dragging tactic is often a ruse for not wanting to change. Obsessive analysis can also be the result of wishful thinking that things will get better and the urgency to change will no longer be there. Unfortunately, in today’s competitive market a company in jeopardy can’t afford to put the brakes on the turnaround process and expect to remain in the game very long.

Sacred cows present yet another stumbling block to the turnaround process. More common in family businesses, they generally arise from a sense of family honor. For example, current management may decide not to vary the way it operates out of respect for the grandfather who started the business. This limited view is more apt to put the company out of business.
Sacred cows also result from a sense of entitlement, especially in family-run companies that provide the livelihood for multiple branches of the family tree. Everyone from the older son to the first cousin assumes they deserve a piece of the company pie, from salaries and benefits to country club membership and classic cars. Because keeping up appearances is equally important, raiding the company till in this manner continues regardless of how the company is performing.

The notion that the company must survive at all costs can also be a sacred cow. For instance, management may refuse to close a division started years ago, even though it is pulling the company down, because it is branded with the family name. Similarly, removing long-term and/or unskilled employees or family members is considered taboo. Dominant personalities within the company who are unwilling to compromise further quash any chance for a successful turnaround.

Key Strategies for a Successful Turnaround

Although every turnaround process is company-specific, here are some essential strategies businesses can follow for greater success:

Accept the situation and be open to the process. Reluctance to change is often deeply anchored in the failure to fully appreciate the depth of the problem.
Be transparent with key constituents, particularly family members, throughout the process. Keeping key players in the loop avoids ruffling feathers, which keeps everything on track and facilitates a smoother turnaround process.

Refrain from making assumptions. Jumping to conclusions without fully examining every aspect of the business is a waste of valuable time. Look at all facets of the company with the same microscope. Then, reevaluate business policies as they relate to today’s market. For instance, a long-standing business practice that allows certain companies to pay 90 days late (to retain the relationship) may need to be crossed off the books today if it negatively impacts the business’s bottom line.

Utilize a strategic approach to evaluate the business. Avoid an emotional approach that might cloud judgment and interfere with rational decision making. Ask questions to get a better understanding of the situation and pinpoint why the company is underperforming. For example, are there areas, methods or policies that aren’t working in the best interest of the company? Are there past methods or policies that should be resurrected?

Determine the key metrics, both internal and external. Every successful turnaround begins by focusing on the business model. For instance, is the company currently a high-cost/high-quality or a low-cost/low-quality model? This answer may have changed over the years due to product expansion or new leadership. Determine what and how outside factors, such as a structural market change, affect the company’s bottom line. For example, the age of a trucking company’s fleet may dramatically impact its financial prospects as gasoline prices fluctuate. An older and less fuel efficient fleet may be competitive in a low-cost gasoline environment but become unsustainable as fuel prices increase.

Decide which business drivers that impact the company’s success are controllable and which are uncontrollable. Not all non-controllable drivers impact the business or do so in the same way, and many can be overcome. Focus the majority of the energy on impacting controllable drivers. Many a failed turnaround was built on a plan that hoped for better industry-wide pricing next quarter.

Engage everyone in the turnaround process from the beginning to create a greater sense of community and ownership. Employees need to know “why” before they can move forward. Therefore, be transparent and clarify the reasons for the turnaround, breaking everything down into bite-sized pieces that are easy to digest. Additionally, encourage all employees to ask themselves the same question: “How does my job impact the business model and how does this need to change to make the company more successful?” Provide opportunities for employees to share their answers and ideas, and listen to them.

Role-model effectively. Employees look to management for clues in how to proceed, so avoid the “do-as-I-say-not-as-I-do” attitude. During the turnaround process, adhere to the same expectations and policies expected from the rank and file. Adopting this stance is especially important when using the services of an outside turnaround agent. To avoid sending employees mixed messages or forcing them to choose whose advice to follow, always work closely with the turnaround professional. Once the agent leaves, encourage employees to follow the new plan.

Stick with the plan to avoid falling back into the same trap. Although no turnaround is a piece of cake and following a plan is always easier when there is a sense of urgency, refrain from taking a breather once the turnaround is complete. Instead, keep the company focused on the goals established during the turnaround process. This might be as simple as rewarding employees for their continued efforts, which additionally helps to re-establish company morale lost before the turnaround. This, in turn, can lead to greater job satisfaction and higher employee retention.

Although completing a successful turnaround is critical for an underperforming company, change of any kind can be challenging. Yet, the fundamental truth in business is that to remain competitive, change, like death and taxes, is inevitable. Companies that embrace this basic concept recognize the value in doing things differently. As a result, the decisions and the changes they are making today are far from foolish. They are creating a firmer foundation from which they can move toward a more successful future.

Brian Gleason is a senior managing director and shareholder at Phoenix Management Services, which provides turnaround, crisis and interim management in addition to specialized advisory and operational due diligence services for both distressed and growth oriented companies. For more information, please visit www.phoenixmanagement.com.