Placing a company into business rescue is the last resort to return that company towards a profitable core.
The aim of the business rescue plan is to lay the foundation for a more intensive (and all encompassing) business turnaround strategy. This is the true measure of a BRPs success.
It must be remembered that you are leading a company out of a crisis. While each rescue is different, there is always a quest to establish a set of ground rules which will help any company navigate its distress. In 2014, McKinsey published a report which aims to set these rules. Are they relevant in the current market we operate in?
Force yourself to criticize your own plan
The McKinsey report points out that the biggest thing you can do to avoid distress is periodically review your business plans.
When you’re creating them, whether at the beginning of the year or the start of a three-year cycle, build in some trigger points. A simple explicit reminder can be enough: if we don’t have this type of performance by this date or we haven’t gotten the following 12 things done by this date, we’ll step back and decide if we’re going down the right path, given what’s happened since our last review.
Such trigger points should be oriented both to operational and market performance as well as to basic financial metrics and cash flow. Look at where you are as a company using basic financial and cash milestones, and then look at where you are with respect to your industry and competitors. If you’re not moving with the rest of the industry (or not outpacing it, if the industry is struggling), then your plan may be obsolete. And don’t forget to look back at your performance over past cycles to identify any trends. If you keep missing performance targets, ask why.
Expect more from your board
The McKinsey Report points out that the beauty of a board is that it has enough distance from the company to see the forest for the trees. Managers often treat their board as a necessary evil to placate so they can get on with their business, but that undermines the board’s role as an early-warning system when a company is heading for distress.
It’s also the board’s responsibility to look the CEO, the CFO, and COO in the eye and say: ok, we like your plan. Now let’s talk about what it would take to cut costs not just by 3% but by 20%. Let’s talk about all the things that can go wrong—the risks to the business. Sometimes significant events happen that no one could have foreseen, of course. But in a typical distress situation, a company has usually just had 18 to 24 months of poor performance, and the board hasn’t been aware or hasn’t asked the right questions. Independent board members—truly independent ones—can have a big impact here.
The report adds that the senior team at one company maintains a list of risks to the business, employees, and the plan. They review those risks with the board on a quarterly basis to ensure that they’re staying top of mind. It’s an excellent way to have conversations that you wouldn’t normally otherwise have in a business operation.
Focus on cash
The report points out that a successful turnaround really comes down to one thing, which is a focus on cash and cash returns. That means bringing a business back to its basic element of success. Is it generating cash or burning it? And, even more specifically, which investments in the business are generating or burning cash?
The report adds that it may be advantageous to think about this in the same way one would if running a local hardware store. This may mean asking fundamental questions, such as whether there is enough cash in the register to pay the utility bill, for example, or to pay for the pallet of house paint that will arrive next week, or how much more cash I can make by investing in a new delivery truck. When you bring a business back to those basic elements, the actions you need to take to get back on track become pretty clear. In many cases the management team and board are focused on complex metrics related to earnings before interest and taxes (EBIT) and return on investment that exclude major uses of cash. For example, variations on EBIT commonly exclude depreciation and amortization but also exclude things like rents or fuel. These are all fine metrics, but nasty surprises await when no one is focused on cash.
The report also adds that keeping track of cash isn’t just about watching your bank balance. To avoid surprises, companies also need a good forecast that keeps a midterm and longer view. For example, failing to pay attention to the cash component of capital investments routinely gets companies in trouble. Project net present values can look the same whether the return begins gradually at year two or jumps up dramatically at year five. But if you’re not focusing on the cash that goes out the door while you’re waiting for that year-five infusion, you can suddenly find yourself with very little cash left to run the business, sending you into a spiral you may not recover from.
Build traction for change with quick wins
The report points out that the tendency of most managers is to put all of their focus and resources into three or four big bets to turn a company around. That can be a high-risk approach. Even if big bets are sometimes necessary, they take a lot of time and effort—and they don’t always pay off. For example, say you decide to change suppliers of raw materials so you can source from a low-cost country, expecting 30% lower direct costs. If you realize six months later that the material specifications don’t meet your needs, you’ll have spent time you don’t have, perhaps interrupted your whole production schedule, and probably burned a bunch of cash on something that didn’t pay off.
In addition to going after big bets, managers should focus on getting a series of quick wins to gain traction within the organization. Such quick wins can be cost focused, cutting off demand for some external service they don’t need. Or it could be policy focused, such as introducing a more stringent policy on travel expense.
The report adds that not only do such moves improve the bottom line, they also generate support among employees. In any given company, you’re likely to find that a fifth of employees across the organization are almost always supportive. They work hard. And they will change what they’re doing if you just ask them. These are the people you’ll want to spend most of your time with, and they’re the ones you’ll promote—but you’ll probably spend too much time with the bottom fifth of employees. These are the underachieving ones who actively resist change, look for ways to avoid it, or are simply high maintenance.
The report also adds that what often gets ignored is the remaining 60% of the organization. These are the fence-sitters, and they are tuned into action, not just talk. They see the changes going on, and if you proactively work with them, then 80% of the organization will be behind you. But if you don’t give them a reason to stand up and be positive about the company, they’ll go negative. That’s the importance of quick wins. When you quickly take real action, and when those actions affect the management team as well, you send a powerful message.
While the report is written from the perspective of a company executive implementing a business turnaround strategy, the information in this article is pertinent to BRPs as they lay the foundation for the implementation of these plans and they often keep in touch with companies during the business turnaround process to keep an eye on checks and balances as well as if the company is reaching its stated targets. The key question is: this report was published in 2014. Bearing in mind the level of distress that we face today, as well as the unique conditions that we are forced to operate in, is this report relevent today?