After spending 14 years as a professional athlete, Tendai “The Beast” Mtawarira recently joined the corporate world and is currently the CEO of Umlindi Security. In a recent LinkedIn post, he said: enjoying the hustle and bustle of the corporate world. A little different to the dark arts of the scrum but same principles. Success definitely doesn’t come easy.
The same principle regarding success (and possibly the dark arts of scrumming) applies to companies who are in the process of implementing a business turnaround strategy. Some may even argue that it is harder with some companies because they are often distressed.
Implementing a turnaround within the context of financial distress is a company’s attempt to return to a profitable core. Do the current rules that companies follow during a business turnaround differ from those implemented in the post? I recently read an article by the Harvard Business Review (which was originally published in 1987) which discussed the future of this industry.
The article points out that, in a turnaround, the CEO needs information fast—about the company’s cash position and its prospects; about its customers, employees, and competitors; about its control systems and important constituencies. Only then can the decisions that give the company a fighting chance be made. Resources flow to the business units that can secure the company’s immediate survival and provide a foundation for profitable growth. The plug gets pulled on those that are draining profits or show poor promise.
Finally, the CEO has to devise a structure that will keep the reviving company nimble enough to compete. Turnaround practitioners almost always flatten their organization charts, often removing as many as three or four layers, to cut costs, streamline decision making, and improve mobility.
The article adds that, in taking these steps, turnaround managers don’t have the luxury of abundant time and resources. They get back to basics in a hurry. Luckier managers can do their learning before the fact and reduce the odds of ending up in trouble themselves.
The cause, cure, and prevention of turnarounds are closely related
The article points out that turnarounds are no longer special cases but an all-too-familiar part of business life. In recent years, the corporate sick list has included names like Continental Bank, Bank of America, International Harvester, Braniff, People Express, Commodore, Atari, Control Data, Storage Technology, and Fotomat. Chrysler, A&P, and Wickes seem to have recovered, and others on the list are on the road back. But W.T. Grant and Korvette have disappeared, and other ailing companies have been merged, liquidated, or acquired. Even such blue chips as Kodak, AT&T, and IBM are keeping lights burning late as they attempt to preserve long-cherished values while streamlining to compete.
None of these companies are small, nor do they come from the oil, steel, or smokestack industries that have been in trouble. Rather, it seems that no one is safe. High-tech, low-tech, manufacturing, service, large, small—companies in every category are experiencing difficulty. A brief look at the business environment since World War II suggests why.
The article adds that, from 1948 through 1973, real GNP growth averaged 3.7%. Unemployment was relatively low. Inflation was high if it reached 5%, so it kept interest rates down. American business not only served a growing domestic market but also discovered Europe, Asia, and Latin America. Every year America was a net exporter, piling up a surplus of $157 billion. Not surprisingly, this country developed a body of business practice and literature that suited this environment.
The vertical organization with short spans of control and a powerful staff made sense in a stable business climate. Executives made decisions deliberately with the concurrence of the organization’s many layers. Long-term planning became a fetish. The number of dollars thrown off for reinvestment drove investment decisions. Long-term measures like discounted cash flow were developed. Payback was scoffed at or ignored. Companies rarely fired managers or employees—afraid to rock the richly laden boat, management made concessions to unions not only in pay rates but also in work rules. Low interest rates and the stable environment encouraged liberal use of debt. No one talked of negative leverage.
The article points out that, in this amiable environment, turnarounds were rare. Certainly, some managers employed heroic measures to screw up a sure thing. The Studebaker, the Henry J, and the Edsel went under as did consumer product companies that were too firmly rooted in the past. But on balance, turnaround management was seldom necessary.
Then during the early 1970s, trouble appeared. Economists, political analysts, and social scientists can debate the causes. The effects were palpable: the rate of environmental change accelerated and competition intensified.
The article adds that most of us remember what happened to oil prices after the Arab boycott in 1973. The prime rate was just as unstable. It reached 20% in 1981 then fell to 8% in 1986. Real growth in GNP slowed way down, averaging only 2.3% from 1973 through 1985. In 1985, the U.S. net export deficit was $79 billion, equal to just half of the combined trade surpluses in the 1948–1973 period. America’s once-corpulent overseas customers have become lean; the ingrates have had the temerity to invade U.S. markets, which has invoked cries of protectionism and pleas for level playing fields.
The rate of technological change compounds these pressures. New items that substitute for once unassailable products have come to market. The film business of Kodak, for example, has been directly attacked by Fuji, Konica, and 3M and has been side-swiped by VCRs and video cameras that don’t require film and that divert money once spent on cameras. In addition, home computers, compact discs, audio component racks, and other toys divert dollars previously available for photography.
The article pointed out that accelerated change and intensified competition like this make the managers of the 1980s look inept compared with their 1950s and 1960s counterparts. Yet today’s managers are better educated, better informed, and harder working than their predecessors. Their failure may be more clearly understood—if not exonerated—in the context of their legacy. Past practice and traditional business education prepared them, like generals, to fight the last war, not the present one—much less the next.
As a result, when the prime rate soared, energy costs skyrocketed, and the Japanese, West Germans, and Koreans added their considerable skills to those of hungry domestic competitors, many leaders of respected companies found they could no longer cope. Their legacy had failed them, and their ponderous organizations could not readily adapt. Try as they might, they could not mobilize to compete.
Nothing matters more than cash
The article adds that one thing traditional managers find hard to grasp is the central role of cash. Nothing is more important to a successful turnaround than cash. And cash management should be just as important to leaders in more stable situations since rapid changes in the business environment can, in only months, erode a comfortable cash position—and unceremoniously dump an otherwise untroubled company into near bankruptcy.
Unfortunately, a surprising number of companies do not make cash projections except when required to do so during negotiations for credit lines. Other companies grind out regular cash projections that are little more than extrapolations of trends. Then their CEOs, usually intent on more exciting issues, glance at the summary reports and assume that cash is adequate.
Turnaround leaders, however, know that cash is more important to their longevity than their management contracts. (Banks do not like surprises.) They scrutinize the assumptions undergirding each line item in the cash projection. And they ask tough questions that get their financial officers talking to division and function heads. Are purchase orders being cut or contracts signed that aren’t reflected in the operations or capital budget? Are sales on plan? Has the marketing department decided on a receivables-dating program to stimulate sales? What’s the financial condition of our big customers? Are they taking their discounts?
The article points out that the cash projection sums up everything happening in a company. But financial managers cannot properly summarize what they don’t know. So they have to devise a system for gathering all the pertinent information. The CEO should reinforce this task by holding regular staff reviews of the company’s cash forecast, thus dramatizing the importance of furnishing accurate, timely information to the department preparing the cash budget.
The goal, of course, is a realistic cash budget. Some companies prepare worst case and best case budgets to augment their realistic projections, but this leads to sloppiness in the budget process. Company managers should, instead, make their very best estimates then use microcomputer spreadsheets, which can present the information in easy-to-digest graphics, to manipulate all the variables that affect cash. (For example, by lowering receivables in increments of 5% or 10% while raising payables correspondingly, managers can generate a range of gloomy scenarios rather than one worst case.)
This approach to budgeting acknowledges that projections are always off somehow. But it requires managers to think carefully about their inputs and lets them examine a greater number of what-if and what-else scenarios than the best case—worst case method allows.
The article adds that, to illustrate, look what happened when a small publishing company decided to add to inventory rather than cut back. Sales slumped and the publisher’s customers slowed their payments. At the same time, its vendors refused to ship unless payables were brought current. The company foundered and almost failed. Had company managers based their decision on the spreadsheet manipulations I just described, they would have been able to plan for a range of scenarios, including the one that occurred.
Wring cash out of receivables, payables, and inventory—then keep them wrung out
The article points out that, in addition to imposing stringent controls on capital and operating expenditures, the turnaround specialist nearly always squeezes large amounts of cash from accounts receivable, inventory, and accounts payable, thus reducing reliance on banks, which may be under such pressure themselves that they no longer make reliable partners. Reliable or not, banks and other sources of debt can’t be used casually. Debt nearly always pulls the trigger on a troubled company and its management. In many instances, however, stringent balance-sheet management can reduce debt.
Ironically, the balance sheets of a surprisingly large number of troubled companies show adequate working capital—but it’s tied up in inventory and receivables. Converting these assets to cash requires close attention to inventory-decision rules, payables and receivables policies, and the impact on working capital of operating expenses and capital expenditures. To illustrate what that entails, let’s look briefly at accounts receivable management.
From time to time, the CEO should ask for an accounts receivable run, then pick four or five entries, including some from current categories as well as some that are long past due, and personally walk their paper trail. In other words, he or she should learn as much as possible about the history of the orders from the time they were received until they were shipped, billed, and collected or dunned as the case may be. When questions arise or more information is needed during this process, the executive should not accept an incomplete answer or the promise of a report. He or she should patiently but firmly insist on getting the information immediately. If the information is not readily available, the response, “I’ll wait right here” tends to turn it up much faster than would normally be expected.
In addition to reducing the company’s dependence on debt, hands-on receivables control pays an unexpected dividend: it gives senior managers a particularly useful view of the company’s customers. Specifically, which customers are paying and why. In countless turnarounds, energetic, hands-on managers have sped collections. They have also found egregious shipping and billing errors while uncovering product quality problems and bureaucratic rules that are convenient for the company’s employees but create ill will among customers.
The article adds that the volatility of their world drives successful turnaround managers as close to the source of information as they can get—as often as they can get there. Leaders of stable companies may need fewer face-to-face encounters, but the principle remains. It’s always better to discover and solve problems before they wreck the enterprise.
The article concludes that, unfortunately, the gap between perceiving the value of hands-on management and acting on it causes far too many companies to stray into turnaround condition. Lip service is easy. Performance is hard. So, while nodding assent to these recommendations (and the ones that follow), thoughtful readers should reflect on what is actually going on in their own companies. Is the legacy of a stable past still driving the enterprise, or are the challenges of the turbulent present truly redirecting its actions?
One step at a time, one punch at a time, one round at a time
In keeping with my sporing analogies, I recently re-watched the movie Creed which follows the life of the fictional Apollo Creed (from the Rocky franchise) and the start of his career in boxing. Naturally, Rocky is his trainer and suggests that he takes each professional fight: one step at a time, one punch at a time, one round at a time. Sounds like solid advice.
It got me thinking about the business turnaround process. Some of the rules and principles must have changed over the years, but the basics surely must remain the same. As the article suggests, the process of turning a business around is dynamic and should take place continuously; even if the company is not in financial distress.
This may seem overwhelming. But if we follow Balboa’s advice, surely the task becomes a little bit more manageable?