In the turnaround and corporate restructuring world, repeat business is usually a bad thing. When we do our job well, a client should no longer need our services. When a turnaround cannot be achieved, or the process fails, the result is generally a liquidation or a sale. In either case, there should be no need for further restructuring services.
As a turnaround professional, one of the most frustrating experiences is seeing a former client fall back into distress after a successful restructuring and return to profitability. We would like to think that the difficult experience of the turnaround process would motivate a company to avoid a return to the abyss. However, we have all seen companies that just cannot seem to resist the vortex of trouble.
There are a plethora of reasons why a company lapses after righting the ship. Management cannot control some of the causes. However, a myriad of situations are absolutely in management’s control. It is lack of attention to these factors, coupled with poor planning and failure to address industry changes that management could have controlled, that are most maddening to a turnaround professional. Like an addict returning to a drug, we know each successive trip through the corporate recovery cycle only gets more difficult.
Tools for Success
In my 20 years of turnaround experience, I have found that one of the most predictive characteristics of long-term success following a turnaround is whether management continues to use the disciplined tools introduced during the restructuring process. If I get a call from a former client about a “small” liquidity problem, my first reaction is to ask for two things: the organization’s cash flow forecast, and the weekly scorecard of metrics. If the answer is, “Sure, I will send them right over,” I know the problem is most likely small and ultimately manageable, allowing time to react and make modest course corrections. A positive answer to the request for the forecasts and metrics is tangible evidence that management is looking forward across the horizon and identifying challenges before they come. Management is reaching out for ideas and reacting to potential concerns and opportunities.
However, a response like, “Well, we have been really busy and haven’t been able to update those for a little while,” indicates the opposite. I generally find that “a little while” is actually code for “we have not updated them for months, maybe even years.” Management will often have no idea how big the problem is, the core causes of the problem or what options are available to address the challenge. This call is a last minute SOS,
and the ship is sinking (or perhaps has already sunk). When I get onsite, it will resemble a goat rodeo: lots of activity, lots of stress and no one who knows what’s going on or what actions to take.
Staying on Course
Do the cash flow forecast, weekly metric reports or similar tools used by turnaround professionals, actually cause companies to stay on track after a turnaround? Of course not. These companies face the same challenges that all companies face: changing market conditions, downward pressure on margins, new competitors, obsolescence and many other pressures. However, companies that do the small things right often do the big things right as well and can face the challenges of a volatile business environment. Maintaining these tools allows companies to see the changes in their businesses more clearly. Using these tools indicates discipline and is generally a sign of a management team that can sustain a turnaround.
All turnaround practitioners know that turnarounds are tough. They sap resources and can take a lot out of a company. This results in smaller margins for error after the turnaround. Generally, liquidity is tight and stress may develop in relationships with customers and vendors. Customers will hesitate to do business with a company that may not be able to service their needs. Vendors may be nervous that their invoices may not be paid in a timely manner. Employees may worry about job security. High levels of uncertainty do not improve a company’s prospects while trying to navigate the return to sustainable performance.
However, these tools allow a company to look at data in a timeline, both backward and forward, thus highlighting patterns or trends that monthly and quarterly results reporting may not reveal. There is nothing magic about time series data other than having critical metrics easily available to a broad group of managers. Managers can see how their specific area of influence may affect other important areas of the company.
Avoiding the Icebergs
This ensures that the managers who have responsibility for inventory levels have a greater appreciation of the impact these inventory levels have on working capital and liquidity. For example, when a manager can see how changes in inventory levels over time affect the ability to manage cash properly, they gain a better understanding of required inventory levels. Conversely, if inventory levels need to increase to handle more business or new offerings, those in finance and accounting can have a better appreciation for future working capital needs. This may seem obvious, but it is amazing how often this small communication fails to occur. Further, this type of communication failure is not limited to small, inexperienced management teams. We have seen companies with experienced boards of directors or with heavily involved sponsors that fall victim to these problems.
Successful turnarounds show that this type of time series data regularly distributed in all management meetings allows executives to make small changes to avert a looming crisis. Just as an object on the horizon appears small and grows in size at it comes closer, so it is with business challenges. The iceberg miles away can be avoided by making a small course correction. If that iceberg is already up close, it takes the entire crew to stop what they are doing to avoid imminent catastrophe. Not seeing the problem doesn’t make it go away, it merely makes it more difficult to address when it becomes full-blown.
The Challenge of Discipline
Management teams that have been through a turnaround and remain disciplined understand how little margin for error they possess. These individuals understand that execution must be tight to continue on the road to sustainable profitability. They understand that business is a challenge and a battle to face each day, but the cost of addressing a problem with time to handle it is much cheaper than facing a catastrophe requiring all hands on deck.
When management continues to take resources off the lookout — financial reporting and modeling for example — the company has no idea where it is heading. If management remains disciplined in investing the relatively small amount in resources to maintain future visibility, it is able to focus on both today’s opportunities and challenges and manage tomorrow’s small challenges instead of leaving them unaddressed to become a major crisis.
Cash flow forecasts and weekly dashboards or scorecards are not magic bullets. These tools should not remain static over time. They must adapt to reflect the changes in the business and industry environment. Using these tools will help management guide a company through rough waters.
Most importantly, use of these tools reflects a management team that is laser focused and ready to adapt. The focus and adaptability of the management team are really the traits that predict the success of a turnaround.