Some economists claim our country is on the brink of bankruptcy. The interest on our “reported” national debt (about $15 trillion, or about $133,000 per taxpayer) represents about 20% of our federal tax receipts. But like many businesses with off-balance sheet items that is not the full extent of our federal government liabilities. Some estimate our federal liabilities are closer to $75 trillion to $100 trillion. Some states are in deep trouble as well. For example, Illinois is unable to pay its bills when due and is carrying over $26,000 in debt per taxpayer. Regardless of the exact numbers, most citizens and politicians agree we need a dramatic change or a turnaround. So why not apply the “Five Stages of a Turnaround” as outlined in the TMA’s Body of Knowledge?
Turnarounds are not easy. In today’s global economy, turnarounds are more complex than ever, requiring sophisticated tools to improve the odds of success.
The Turnaround Management Association (TMA) adopted a framework developed by one of the early turnaround professionals. In 1982, Don Bibeault published the bestselling book, Corporate Turnaround: How Managers Turn Losers Into Winners. By the early 1990s, the “Five Stages of a Turnaround” had become a cornerstone of TMA’s Body of Knowledge, providing a framework for the critical steps in any turnaround. Since then it has become a foundation of TMA’s certification process for professional turnaround managers that can earn the designation Certified Turnaround Professional (CTP) after completing a comprehensive exam and submitting cases that demonstrate over five years of relevant experience. The “five stages” is a proven tool to help turnaround managers communicate the critical steps of a turnaround to all stakeholders.
In the aftermath of the Great Recession and the potential collapse of a variety of local and national government entities, our political leaders can benefit from lessons learned in corporate turnarounds and the five stages framework. These stages, which can occur in any order, can be summarized as:
- Change Management — Change the processes and people that created the problem
- Situation Analysis — Get the real numbers
- Emergency Action Plan — Stop the bleeding
- Restructuring the Business — Renegotiate contracts; restructure operations
- Return to Normal — Install new processes to prevent recurrent problems of the past
Let’s look at how the five stages framework can provide actionable ideas for political leaders.
Change Management — Change the Processes and People That Created the Problem
Despite early warning signs, it usually takes a cash crisis like we are seeing in Greece, Italy and Spain to promote real change. Today, the warning signs are clearly flashing on the local and national level. Our political leaders are in unfamiliar territory and need help effecting deep, positive change. When things get bad, we may see riots and hear the words “Regime change … throw the bums out!” But by then it is usually too late. The political leaders have lost credibility and are forced out of office.
Outside professionals that are not wedded to the programs of the past can bring an objective view when programs must be cut. In addition, term limits provide periodic forced transitions defusing tension over change. For example, Michigan requires an emergency financial manager to be appointed before a municipality can file for reorganization under Chapter 9 of the U.S. Bankruptcy Code. The emergency financial manager brings new independent insight and experience to make the tough calls and to help municipalities take actions to help prevent bankruptcy. This built-in forced safety valve avoids the problem of entrenched political leaders resisting independent help until irreparable damage is done. Naturally, the political leaders of those municipalities resist such changes.
Change is tough in governmental agencies since there are few bold leaders willing to cut programs and change the status quo. Unfortunately, the payoff for bold moves may be loss of popularity and loss in the next election. In the face of re-election, established political leaders often make promises that they know cannot be kept. However, with good communication and a longer-term viable solution, many past political leaders have pulled their states or local entities back from the brink of disaster, usually with outside help.
Situation Analysis — Get the Real Numbers
The past decade has seen tremendous governmental pressure for upgrades in GAAP accounting for corporations. However, governmental accounting continues to fail us. Off-balance sheet accounts and a one-year fiscal budget limit long-term thinking. Political leaders choose their own numbers to hide budgetary problems, support their programs or justify their actions. When views differ, political leaders must agree on a common set of facts. Numerous citizen groups and boards will offer objective facts that effective political leaders can use. Ultimately, the leader that can present the most credible facts and programs will gain public support and solve the problems. Until then, some political entities and regions will fall into greater distress, victimized by those that spin stories from half-truths and non-facts.
It’s hard to believe the difference between what some governmental bodies report to the public and the actual obligations on the books. For example: The Illinois reports $55 billion in assets, but the majority of these assets cannot be used to pay the $131 billion of state bills as they become due. If Illinois were a corporation it would be bankrupt. Likewise, on the federal level, our national debt ranges from the reported $15 trillion to $75 trillion to $100 trillion when the present value of future liabilities, such as pensions are included. For a reality check on governmental accounting inadequacies go to a politically independent site such as, “The Truth in Accounting” (http://www.truthinaccounting.org/)
Turnarounds require focus on cash flow, both short and long term. Some political leaders consider the long term as the time to the next election. This must change. An annual budget that can become a “balanced budget” simply by borrowing insults the public’s intelligence, yet it is a common practice in many government entities. Because most governmental organizations can issue taxes or charge fees, unsuspecting lenders will lend them money even up to the point of crisis, when debt payments cannot be made despite tax increases.
Our political leaders should ensure their accounting is transparent and clearly communicated to the public. No “cooking the books.” Deferring problems into a distant future is no longer an option.
Emergency Action Plan — Stop the Bleeding
This is where the tough decisions need to be made.
Duplicate and wasteful operations and cash-draining programs should be cut dramatically. Political leaders must make tough decisions regardless of public outcry. A successful turnaround requires ending or cutting service levels on non-critical programs to ensure the eventual return to vitality of the economy. The real question for political leaders is: “What programs and spending are critical for the short and long term?” Every cut will be resisted. Decision makers must both see the longer-term value and convince the general public of the need. Unfortunately the concept of zero-based budgeting has been lost in the political vocabulary.
Political leaders need to go beyond the short-term Band-Aids and think long term.
Restructuring the Business — Renegotiate Contracts, Reorganize Operations
We need political leaders to understand that although many government contracts are hard to renegotiate, it is no different in the private sector. It took three rounds of contentious “unfair” and terrible bankruptcies in the steel industry over the last 30 years to bring labor unions to yield to the need for deep major concessions.
President Reagan faced the air controllers union in the 1970s and declared that government employees could not make unreasonable demands through their unions. No such statements have been made recently despite the urgent need in the growing debt crisis.
If political leaders say they cannot renegotiate contracts — they are likely to fail. Consider the apparel and consumer electronics industries. Labor unions killed any hope of any significant apparel or consumer electronics manufacturing in the U.S. Political leaders must be responsible and redirect the interests of influential groups that set destructive contracts and refuse to compromise.
Corporate turnaround professionals have the benefit of restructuring under the U.S. Bankruptcy Code or the threat of bankruptcy. Political leaders have a bigger challenge. Through laws that they created, only municipalities can file for bankruptcy under Chapter 9 of the U.S. Bankruptcy Code. Municipalities must prove insolvency and get permission of their state government. State and federal governments cannot file bankruptcy, so leaders must be better negotiators to renegotiate payments promised by politicians that preceded them.
Restructurings are difficult, unfair and painful in both the private and public sectors. However, political leaders must restructure and renegotiate past promises, contracts and agreements.
Return to Normal — Install New Processes to Prevent Recurrent Problems of the Past
Corporate turnaround leaders must often change the culture and the business model of a company to insure a successful turnaround. For example: IBM had to change from a manufacturing company to a service and software provider to survive and grow. Our political leaders need to establish a culture of pruning as well as innovation and growth to survive. The simple truths should be acted upon. Everyone knows our tax program is broken and the social security retirement age must be increased as we live longer that originally planned.
Political leaders must install incentives for growth and the long-term health of the economy. They must understand that too much regulation will kill long-term growth. Incentives for working and contributing to the growth of society must be greater than the payments to those who are living on the shoulders of others.
Summary
Our political leaders need to learn how to turn a troubled economy around. A framework like the five stages of turnaround can help. The job is difficult, but possible. There are many lessons that have been proven in the private sector, which can be transferred to the public sector. Many new political leaders are showing the way; others should follow.
Bill Hass and Shep Pryor are co-authors with Arthur Laffer of The Private Equity Edge: How Private Equity Players and the World’s Top Companies Build Value and Wealth (2009, McGraw-Hill) and Building Value Through Strategy, Risk Assessment and Renewal (2006, CCH)
Bill Hass is CEO of TeamWork Technologies of Northbrook IL, a Certified Turnaround Professional (CTP), author, speaker, consultant and a former chairman of the TMA and former president of the Chicago Chapter of TMA
Shep Pryor is managing director, Board Resources, division of TeamWork Technologies. Formerly deputy group head, Corporate Banking for Wells Fargo Bank, he serves on several corporate boards, is a visiting professor at Keller Graduate School of Management and serves as an expert witness in litigation matters involving finance, banking and corporate governance.