Over the past several years, the term “turnaround” has become more ubiquitous, attaching to a variety of companies, organizations and even sports teams that have undergone transition in one way or another. In some cases, the term has been applied to situations that truly warrant the term, such as Delta Air Lines or Ford. But in others, a more limited approach — such as a senior management change, a one-time reduction in force or the completion of a capital raise — has earned the qualifier without further actions that would typically be associated with an industry-defined turnaround situation.
For those of us in the restructuring profession, there has been a shift since the start of the Great Recession as to the number of corporate candidates for truly viable turnaround opportunities. True, the number of distressed companies has increased over the past five years, but industry and economic dynamics have also played a role in positioning those opportunities. Changes made to the U.S. Bankruptcy Code in 2005 limit the exclusivity period for debtors seeking acceptance of a plan in Chapter 11. The number of creditors around the table, often with the same seniority, has risen. And a general lack of liquidity, except for the most credit-worthy borrowers, has limited exit options for troubled companies. Each of these dynamics has resulted in a restructuring environment where the cases are generally shorter, the viable solutions more limited and the time frame to execute a turnaround plan more condensed.
And just as the stakes have gotten higher, constituent involvement has increased. Around that same table, lenders, equity owners and outside directors are requiring more information, resolute decisions and rapid execution of restructuring plans to restore or enhance profitability. It’s not just blocking and tackling the problem areas. Entire functional areas of a troubled business need to be analyzed for immediate improvement opportunities to contribute to the comprehensive turnaround plan.
All of this factors into the premise that from day one of a turnaround engagement there must be a plan not just to stabilize operations and maximize liquidity but to make lasting changes that drive value creation. Regardless of the eventual exit strategy, the turnaround practitioner’s initial mandate is to link together a cohesive set of initiatives that work in concert to boost profitability. But given the challenges in the current restructuring environment, these initiatives need to move ahead as quickly as possible, balanced against the other necessary demands of a turnaround such as vendor management, cost reductions and a well-developed communications plan.
For those of us with a view deep into the trenches of troubled company situations, the following are corporate functions that, when tackled swiftly and pragmatically, can lead to sustainable results that are fundamental to a turnaround.
Although top-line challenges may not be the main issue that led to a company’s distress, nearly all troubled companies suffer from revenue losses or unprofitable acquisition costs. Most also suffer from the lack of a disciplined sales pipeline process that would otherwise act to shore up sales activity. The turnaround manager (whether acting as chief restructuring officer or in an advisory role) should quickly assess the current process and formulate improvements. Sales leads should be tracked on a detailed level from lead generation through closing, with individual accountability for each lead. Attention should be paid to the generation date, and leads that start to get stale should be proactively reviewed for process adjustments. Tracking also identifies sales opportunities that become mired down once inside the company, such as from delayed quoting activity. A regimented process catches these items and keeps the process flowing, identifying bottlenecks and areas where attention should be focused. Tracking should also be put in place to understand why leads fail to convert to sales.
Often in troubled companies there is a tendency to attach a particular set of circumstances to failed sales conversions (e.g., pricing or new competitors) when in reality there are other factors that result in lost sales such as a reputation for poor product quality or late delivery concerns that filter into the larger customer community, negatively affecting new business opportunities. Once developed, the turnaround manager should review the status of the sales pipeline and process on a regular basis with those involved in the sales process and take ownership for its progress.
Revenue opportunities for a troubled company are certainly challenging, but bringing discipline and fresh accountability to the process will result in select new business wins that otherwise would not materialize. Particularly as a turnaround situation experiences cost and headcount reductions, emphasizing quick sales win through an improved sales pipeline process can act to stabilize the top line and demonstrates a commitment to the business that is well received by wearied management.
Troubled companies often have overly complex, burdensome supply chains that jeopardize their operations and profitability. Companies that have moved product supply to China for initial cost advantages are beginning to see erosion due to increasing labor and material cost inflation. Product quality and delivery issues can be even a larger issue. Relying solely on an incumbent supplier for engineering and research and development can further exacerbate sourcing problems, including higher customer returns and obsolete inventory. And in many cases where there are no product issues at all, international supply sources can fall prey to tight delivery schedules or logistics problems, dramatically increasing costs.
The turnaround manager needs to quickly assess the sourcing process to identify areas of exposure and areas for immediate cost reduction. Resource capabilities both domestically and internationally need assessment. To the extent it is not in place, a company with an extended supply chain often needs an independent liaison to facilitate sourcing and address problems before they create exorbitant costs. Completely overhauling a company’s supply chain is rarely the required result. But incremental improvements that better insure against cost increases, engineering flaws, or supply disruptions are almost always necessary, and integral to a successful turnaround plan.
Other sourcing wins can also be found through partnerships throughout the supply base. Often the procurement team at a distressed company has been spending the majority of its time fighting for the release of material or payment term changes. A seasoned turnaround manager can identify vendor partnership candidates through consolidation actions and competitive bidding processes that will likely lead to reduced costs and a freeing of resources.
It is easy for turnaround managers to quickly assess areas of bloated inventory that are available for cash generation, either through ordinary course channels or liquidation firms. But a deeper investigation into a troubled company’s inventory will often result in more opportunities. Enterprise Resource Planning (ERP) systems are often set with historical minimum order quantities (MOQ) that are too high given the state of a troubled company’s sales trajectory. A straight-forward analysis and adjustment to MOQs can result in significant savings in a short period of time.
Similarly, there is often value trapped in work-in-process (WIP) inventory that can be unlocked. A quick analysis may indicate that a short-term investment in overtime and production material creates borrowing availability by converting WIP to finished goods. Freeing up cash through the conversion of WIP to saleable inventory generates needed cash that can be used to fund other restructuring initiatives, create trade credit relief or pay down debt.
When corporate managers detect they are entering a crisis phase, one of the first areas they look to for cash preservation is a company’s capital spending program. New projects are put on hold, capital maintenance is trimmed back and certain equipment may be idled to reduce operating costs. In the immediate term, these actions may well be warranted. But even in a relatively short amount of time, restrictions on capital maintenance can turn liquidity savings into a major challenge. Machinery can quickly be damaged due to maintenance neglect, with repair costs far exceeding any initial cash savings. Similarly, capital equipment may often sit at suppliers in various states of completion because deposits have been curtailed.
From the initial days of starting an assessment, the turnaround manager needs to pay particular attention to the state of a company’s capital spending program to assess where additional savings opportunities may be and where cost reductions already in place may likely lead to larger losses. Thorough discussions with plant managers and operators are critical to balance out the findings. A carefully reviewed and analyzed capital spending program under the guidance of a turnaround manager may result in a restart of certain equipment to smooth out production scheduling or targeted maintenance actions to prevent capital damage during a crucial phase while at the same time increasing overall profitability and liquidity.
In the early days of addressing the myriad of problems facing a troubled company, an appointed turnaround manager finds countless issues requiring attention. Seasoned veterans will adequately prioritize the issues, run countermeasures to stabilize the decline and implement a communications program to address the company’s employee base and stakeholders. But given the rapid nature of today’s corporate restructuring situations, even more is required of turnaround professionals. The analysis and resulting action plan needs to dive deeper into company operations to find permanent improvements to functional areas that otherwise may continue to weigh on performance. Positioning a turnaround through these initiatives greatly increases the odds not just for short-term achievement but long-term recovery. Something that will make everyone around the table pleasantly surprised.
Tim Stallkamp is a managing director with Conway MacKenzie, based out of the firm’s Chicago and New York offices. He has acted as interim management, including as chief restructuring officer, for companies experiencing distress. Stallkamp has an undergraduate degree from Georgetown University and a master’s in business administration from the University of Michigan.