It is no secret that the business rescue process is the immediate intervention for companies who find themselves in financial distress. The process of triaging the businesses addresses areas of immediate and ranks them in the order that they need to be addressed.
The true indicator of whether a company can move on from its financial distress is in the implementation of its turnaround strategy. This is more complex than the business rescue process and while not as intensive, it involves a more detailed approach and a requires significantly more resources than the business rescue process.
While each business turnaround strategy is unique in that they need to address different challenges, there are specific processes that one can follow when faced with implementing a business turnaround. I came across an interesting article from the journal of the American Bankruptcy Institute. While it was published in 1999, and a lot of disruption has taken place since then, some of the principles discussed in the article remain relevant.
The article points out that there are a number of critical factors in a turnaround situation. Usually, in addition to money, time is the biggest constraint. The window of opportunity to assess the problem and implement the change necessary is usually very short. Secondly, in order to have the best shot at success it is important to have a game plan and a clear vision of the methodology that needs to be used in the business turnaround. A turnaround cannot be left to chance. There is little leeway for trial and error.
The third critical factor is having the right people to implement a business turnaround. An effective turnaround manager needs to fulfil a number of key roles at virtually the same time. He/she needs a strategic mindset to be able to conceive the turnaround strategy quickly.
Facing the problem
The article adds that the first and most important step is to squarely face the issues and problems confronting the organization. A management denial of business problems and a successful business turnaround never go hand-in-hand. The earlier and more clearly and comprehensively a business problem is faced, the greater the chance for a successful and relatively less painful resolution.
Quite often when things start going wrong, even a previously successful and capable management group can have difficulty in facing the reality of a business decline. Some of the very management traits that made the business successful in the first place conspire against the management recognizing the problems and the changed reality. These factors can include a misplaced sense of optimism, an intolerance to bad news and a differing viewpoint, and a strong sense of commitment to an action plan even when it is not providing the hoped-for results. Very often the entrepreneurial instinct is to throw even more resources at the problem instead of recognizing a mistake and changing course.
The article points out that, in order to implement a successful business turnaround, the business problem needs to be defined both quantitatively and qualitatively. The quantitative factors include a trend analysis of various profitability and cash flow measures, stock prices, market share, inventory turns, asset utilization, analysis of financial ratios, market share, change in share of customers’ business, returns and repeat purchases—to name a few. The qualitative factors include confusion in the organization, poor morale, lack of management control, employee dissatisfaction, bad press and analyst reports, a lack of focus, a lack of awareness of what an organization stands for and where it is headed, audit problems, lawsuits and complaints, loss of key suppliers or customers—you get the drift.
The common-sense point here is that you cannot administer change without realizing what you are changing from. The logical sequence of questions after that is: To what are you going to change? How will you get there? What do you do when you get there? In other words, the tasks are making a strategic assessment and plan, executing the turnaround strategy and determining how to exit the turnaround mode, i.e., the point when the organization should exit the emergency mode and return to normalcy.
Strategic assessment and planning the business turnaround
The article adds that, during the strategic assessment phase, the most critical question to be addressed is the amount of time available to turn the business around. The time available is usually based on the cash position and availability of financing.
The next step in this phase is to carry out a comprehensive situation analysis. This analysis needs to be comprehensive and to cover the financial situation, the state of manufacturing and operations, marketing analysis, an analysis of process engineering and research and development, an analysis of human resources and the state of organization development. The turnaround manager needs to assess the internal strengths and weaknesses of the organization based on this analysis. In addition, the turnaround manager must analyse the external competitive and regulatory environment.
The article points out that, from this assessment, the turnaround manager needs to pinpoint the opportunities for improvement and prioritize the issues by ease of accomplishment and the time frame required. It is very important during this process to not get lost in an inward focus, but to keep the eye squarely on the most profitable customers and what it will take to keep them happy, satisfied and on-board during the turnaround process.
Next, the turnaround opportunities identified have to be translated into quantifiable results and form the basis of the financial business plan. It is important that the business plan be simple, have a clear rationale and enable people to easily identify what they have to do to attain the planned results. The turnaround plan should be broken down into specific action items with a specific person responsible for each action, along with a date for completion and a quantified and measurable financial benefit to the organization.
Executing the turnaround strategy
People are the most critical factor in successfully executing a turnaround plan. It is important that the people in all the top management functions be willing to act as catalysts for positive change.
The article adds that in order to execute the turnaround, the strategy should be clearly and frequently communicated. Great care should be taken to ensure that all decisions and actions within the organization are consistent with the turnaround strategy. Nothing destroys management credibility faster than for the rank and file to see management actions that are inconsistent with what management is saying. It is important to have informal upward channels of communication to confirm that management’s intended message is being heard within the organization. There needs to be a clear rationale to the turnaround strategy, and it must be communicated in a way that everyone can understand. Each person in the organization should be able to relate his role to the overall turnaround strategy and develop a perception of what he can do better to facilitate the turnaround. This could be machine efficiency, set-up times, scrap rates, the time it takes to close the accounting books at month-end, time taken to disposition requisitions, etc. People within the organization should clearly understand how their roles enhance business value.
The culture must be one of urgency. One does not have the luxury to deliberate issues for days. Data need to be gathered and decisions need to be made quickly.
The article points out that in order to navigate the treacherous waters of a business turnaround, a sound feedback and measurement mechanism should be developed, so that it can be relied upon to measure actual performance results against the turnaround plan. Critical financial and operational measures should be monitored daily, key financial and operations parameters must be looked at weekly and the financial books need to be closed promptly at month-end and a comprehensive financial and operational review carried out. The focus needs to be squarely on results. It is important to step back and make sure the operational goals set and being measured will indeed enable the financial goals to be achieved within the time frame desired.
The turnaround manager needs to be flexible in trying different ways of accomplishing the plan, but relentlessly unyielding on results. A judicious balance needs to be struck between a revolving-door approach to the management ranks and persisting with people who are not producing the required results within committed time frames. Accountability and ownership of projects needs to be pushed down to the people close to the action. Successes need to be celebrated along the way in order to bolster confidence and morale and reinforce positive actions.
Critical within the context of the country
The above conversation is critical within the context of the country.
Last year saw the first State Owned Entity placed under business rescue. While SAA exited the business rescue process relatively unscathed, the implementation of the airline’s turnaround plan is not looking to good.
SAA facing these problems is one thing, what happens if Eskom goes into business rescue? All indications are that Eskom is facing the same management issues and the same degradation of assets that SAA faced. Eskom looks primed to be an ideal candidate for business rescue in the future. As an industry, we need to get serious about addressing the success rates of business rescues and business turnarounds. If Eskom does go into the rescue and turnaround process, it needs to succeed. If it doesn’t, any economic can recovery (whether it is from the Covid-19 Pandemic or the lack of clear economic policy) gets kicked further down the road.
Robin Nicholson is the Director of Corporate-911 and is a Senior Business Rescue Practitioner