managing turnaround

Accountancy SA,  Aug 2004  by Harvey, Neil

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turnarounds require a different breed of cat from a management standpoint than do more prosaic, stable business situations

"A turnaround is to produce a noticeable and endurable improvement in performance, to turnaround the trend of results from down to up, from not good enough to clearly better, from underachieving to acceptable, from losing to winning."

Stanley J. Goodman.1

Introduction

Turnarounds, according to the above definition, can apply to almost anything - a life, a company, a country, even a continent. Have you ever studied the turnaround of Singapore? At independence, in 1965, the income per capita of that island state was less than US$1000. Today this figure is US$30 000, and the country has the world's number one airline, best airport, busiest port of trade and is a world leader in oil refining and publishing.2

The Treasury Department and the South African Revenue Service are recent examples of tremendously successful turnarounds in South Africa. Finanzauto SA, the Caterpillar distributorship in Spain and Portugal, which was acquired by Barlows in 1992, and NF Die Casting in Alrode were turnarounds in the 1990's that I regard as classics. NEPAD is a recovery programme aimed at an entire continent. Examples of turnarounds with global impact include IBM, Harley Davidson, Selfridges and, recently, Puma.

You must have heard people imply that turnarounds, or perhaps a particular turnaround, are easy. The assumption is that something was in such bad shape that it could only get better. Such statements are complete nonsense. Physics teaches us that the momentum of a troubled business is down not up. There are no easy turnarounds. Some are just less difficult than others.

I will now attempt to cover some of the fundamentals of turnarounds in brief sections: How turnarounds differ; Causes of business decline; Stages of a turnaround; Viability assessment; Turnaround tools and techniques; and the South African situation. Each of these sections could be an article in itself. I will, therefore, do an outline analysis and add in comments or highlights which I believe will be of interest to readers. What follows is based primarily on business turnarounds. Some of the practices, however, and I repeat some, can be applied to many fields of endeavour.

How turnarounds differ

A turnaround may not be that different from the management of a 'normal' business in terms of ultimate objectives, i.e. providing value to shareholders, customers, employees and other stakeholders, but it is the getting there that is different.

The major differences between a turnaround and a normal business include the following:

* A different type of leadership is usually required. "Turnarounds require a different breed of cat from a management standpoint than do more prosaic, stable business situations. That doesn't mean turnarounds require Clark Kent's better half. Rest assured that most turnarounds are accomplished by mortals, even rather ordinary mortals, who have certain strengths and, as in most mortals, weaknesses. No matter how awesome the task may seem, the turnaround job will yield to an organised approach. But that organised approach must be directed by a strong leader. Turnaround executives insist that distressed businesses require, perhaps, two or three times as much hands-on management as more stable companies."3

* The CEO and management will be under more pressure because the turnaround has to be done in addition to 'normal' ongoing management. (They really have three jobs - the ongoing task of 'normal' business plus the intensive management required by turnarounds and the intensive attention required for stakeholders - including, sometimes irate, shareholders and creditors and frightened employees.)

* Required actions are usually more severe because of actions not taken in the past.

* Faster decisions and actions are generally required because of the critical situations prevailing.

* There is generally less margin for error but also higher consequences of error.

* A different set of legal circumstances and risk.

* The situation will usually be worse than thought. It is often difficult to accept the enormity of approaching calamities, especially by those who were incumbent while the bad situation was developing. Sales forecasts of companies in trouble are notoriously off the mark.

Causes of business decline

Table 1 below lists internal and external factors which can cause corporate decline. In practice many of these are interrelated. One factor that is not explicitly listed is a product, or service, that is not competitive. Poor management is universally regarded as the leading cause of business decline.

When one considers the environmental factors - economic, socio-cultural, global, technological, political/legal and demographic - there are myriad variables that can change, either favourably or unfavourably, for a company. The situation is even more complex when Porter's Five Forces: threat of new entrants, power of suppliers, power of buyers, product substitutes and intensity of rivalry, are considered.