Featured Article – 2009 October

Managing the Turnaround – Rebuilding Credibility
by Millard D. Brown

No matter what its product line or primary service, nothing is more is more important to a business than its credibility. Without it, the business is destined to fail.

As turnaround professionals, we get our calls when companies fall on hard times. Whether it’s poor management, changing markets, new competition, other external forces or some combination of these factors that’s bringing the business down, a return to stability — and profitability — must start with the restoration of management’s credibility.

To make that happen, the turnaround consultant must exercise more than just financial skills; people skills count too.

When we enter an engagement, quite often we’re not popular with the managers we’ve come to help. Typically, we’re on the job because the company’s lender or other advisors have told management they’ve got to hire somebody to come in to help them straighten out. So, management sees our presence as a symbol of its own shortcomings. Often, our first challenge is to convince management that we’re on their side.

At Beane Associates Inc., we manage turnarounds through a process that usually lasts about six months, or as many as nine months for larger businesses. We start by meeting with the top management, usually the president or CEO and the CFO, to get their assessment of the problems, and then with other key managers — all the while completing a template filled with the standard questions we must ask as we wrap our arms around the problem. When we meet with management, I always pose this question: “Since you have to work with us, what do you want to get out of this process? What’s the best thing we can do for you?”

Achieving that objective requires a firm hand cloaked in a velvet glove. We’re on the job because the company is experiencing difficulties more serious than it’s ever faced before. We must build a working relationship with management, showing them what they’ll have to do to regain credibility with their stakeholders. This is often a very difficult task.

Soon after we arrive on an engagement, we have to let rank-and-file workers know that we’re on board. Usually, we accomplish this in a “town meeting” setting. We want to reassure all personnel that we’re working to put the company on a solid footing and to enlist their support as we move forward. If there are any interim changes in management, we want them to know who’s in charge.

Note the item on our list: “Tour, tour, tour.” We want to examine every last nook and cranny of the business — to talk to the accounting clerks, the people in shipping and receiving, the folks on the sales floor or the assembly line. In many cases, we receive valuable insights as to why the business is in trouble from workers on the front lines who seldom have contact with top management.

Whether we’re meeting with the CEO or the shipping clerk, we’re gathering important information about the business — not only how it runs but also which of the managers have the best balance of talent and dedication to help the company regain its standing.

Once we’ve got a good idea of how the company is being run, we start preparing the financials. First come cash-flow statements – first for four weeks and then a 13-week version. We also create a weekly reporting system, and a flash report system that helps us ensure that everything is staying on track. After that comes a short-term recovery plan, with a one-year pro forma financial statement, and, later, a long-term plan, with a three and five year pro forma.

Besides assessing the company’s operations and developing a workable system for financial reporting, we’re taking a close look at top management, as well as personnel up and down the line. We also rank all the other managers on a 4-point scale: a “1” is someone who must be retained; a “4” is someone who must be dismissed. These evaluations help us set up a turnaround team — a new corps of managers to guide the business through its crisis.

All this internal work leads up to a management-lender meeting, which usually occurs 30 to 45 days after our arrival. The session is crucial, because here’s when we find out the potential for success and support of the turnaround plan. In addition to securing the lender’s cooperation, a positive meeting will help restore managements credibility with its lender and other creditors.

Once we’re on track, we can move ahead with a new sense of purpose, executing the plan we’ve developed, helping the new management team establish itself, and making sure our new system of financial controls is working.

In working with management, by now we will have shown them that whatever they had been doing for years wasn’t working well enough. So, we need to develop a strategic business plan that will likely include significant changes, including tighter financial controls and leaner, more efficient methods of production and delivery of services.

We will also help the business create an advisory board, a team of outside experts from various disciplines that can support management and the board of directors by providing independent advice, especially in those areas where the current management team has relatively less expertise.

Having a plan for the future — and the will to follow through on it — will help management convince its creditors that it’s headed in the right direction. Assembling an advisory board to help with strategic direction and problem resolution will demonstrate additional commitment to making the right decisions. Both will help the company restore its credibility.

With its credibility restored, the business is poised to move ahead once more—to stabilize and return to profitability.

(Next: Managing the Turnaround — Creditors and Customers)