leadership styles to accomplish a turnaround

8/3/2019 Leadership Styles to Accomplish a Turnaround

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lIN M. COLLARD,J Certified Turnaroundrofessional and chairmanf Anncpolis, Marylaud-ased Strategic Manage-ment Partners, Inc. He islso past chairman of tileurnaround Management

Association.tra!~gist@alll .coml V w. st ra te g is t. w s

FA,\.I 2Dl~2

S te e r in g C le a r o f th e B r in k :E a r ly W a rn in g S ig n s P in p o in t B u s in e s sT ro u b le s -C h a n g in g L ea d e r sh ipSty l eto A ccom p lis h . a T u rn a ro u nd

JOHN M. COLLARD

Wether you are an investor,

serv, 'e on a ,b ,0,a tc ,l o fC , h , 'rector,S,'own or manage a company,you face business risks, All of

the stakeholders accepr additional risk whenthe company is heading for trouble. Balancingthese risks" C;Hl cause a predic am ent . .By rec -ognjzing some early-warning signs that indi-cate business trouble on the horizon, you caneliminate, overcome, or, at the very lea st,sidestep many of those risks.

Business trouble means different things to

each of us at different times. The; perception.differs depending on the stakeholder, but thefear is always the same-loss of their invest-ment (money, time, energy, goodwill, reputa-tion). The anticipation of'Ioss is unacceptable.

No one likes to Iose-e-anything.Lenders. creditors, and shareholders may

lose their investment. OWl1eJ;Scan.. Glee finan-cial ruin, disgrace, or humiliation. But worstof a n ,the employees have the most to lose,They can lose a life force, their income, and

ha ve li ttle to say over che decisions cha timpacted that loss. In these times of miserablejob climate. stubborneconomic recovery, anduncertain accounting practices, this lo ssco mbe the most devastati ng.

Tap management is often aware thatproblems exist. The trouble is, they wait (,00

long to do anything about them. Why? Per-haps it's hope. "Thingswill get better soon . "Perchance it's naivete: "Management doesn'tknow how to manage in this situation." Maybe

it's guilt: "If I'd been a better manager, T

wouldn't be facing failure in the first place:"Perhaps i ts Founders Syndrome: The. ownerbelieves that only he/she can run the com-

pany. But what is the most dangerous troubleof all? Denial (not the river in Egypt). Denialmakes owners, or managers un 'Willingto admitthat problems even exist, 01' worse ... it canblind them to the very problems thar are head-

ing their companies toward sure demise, Here'sthe bottom line: The longer it takes to getnecessary help, tbe harder it will be to relieve

the trouble and the mere risk YOLl aSSU111e .When a company is in trouble, the rules

change. Management is often "out of itsdement"; it is entering untrodden ground.

People haven't had to manage in this envi-ronment before. Why will they succeed now?The odds are that theywill, at the very least,

have d if fi c ul ty.Time and again, the obvious signs of

business trouble aI?Erarely its root causes. Los-ing money for example isn't the problem.

Rather, losing money is the result of otherproblems. Diminishing s ales , dec lining pro f-its,ma ss em p lo yee exit, c redito r s uits ,the threatof bank foreclosure, and 110 cash are only partof the equation. These problems can berepaired, The true dilemma becomes, \ :V l 1Ocan handle the crisis Inanageru,ent role?

TIIEJOUI~N"L 01' P.IUWdEE~ul,rY 25


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ALL LEADERS ARE NOT CREATED EQUAL

To S3\1e the company you must change the style ofleadership to effect change. Clear thinking mustprevailand a spec ia lsee o f sk ills m us t beapplied.

If there is a qualified leader within thecompany,then delegate the job cfturnaround to him/her, and pro-

vide proper support, If there is not a qualified leader inthe company, and there usually isn't, don'[ hesitate to

locate a.professional at chis type of work.Let's put this leadership role into pmper perspec-

tive. Leadership requirements differ between those forhealthy; growing companies find for those in a troubledsituation ( s e e Et


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may have deserted the ship long ago. leaving behind thesecond string. You must exploit the talents of those remain-

ing employees who can perform and bring them to newlevels, then recruit talent that is lacking. It means build-ing permanent management teams that can bring the (Om-

pany back to health-and acid value to the company.Communication.is critical-e-with everyone who has

a stake in the company's success. Talk eo employees, butmore importantly, listen to what they have to say Beassured, they know when and where problems exist, ando tle n. h av esolutions.

"When it rains r it pours"may be cliched/ but when applied

to a troubled company, onecan be sure that "Murphy is

shaking the clouds."

.A key elernenrto a successful turnaround i~ to e tab-Iish a good relationship with your lender. Capital is alv. raysrequited in tough time , not to mention that its nice tohave in good time as well,

If the leaders who were in power while the corn-

pany's position was allowed to deteriorate are still there,why hould the lender believe that they would now beinstrumental in correcting the situation?

To. mak ematters worse, in the eyes of management,the lender is often 'viewed as an enemy instead or a keypart of the turnaround equation. With al l tile su picionthar.can surround a troubled co:mpany, it is important thattrust be re-established with the bank. Credibility with thetenders is mandatory to success-r-and to keeping-that cashflow at [he hank. Since the bank holds the [rump card,the institution must feel comfortable working with the

turnaround leader. It means laying everything out on thetable to keep the situation honesr+-and honoring COl1l-mitrnents made to the Lender.

WheJ;eas consistency is important in a, s table envi-ronment, the name of the g,lme in a turnaround situation

is uncertainty Yon can absolutely positively count on sur-prises, "Whel1 it rains, it pours" may be cliched, but whenapplied to a tr ou bl ed c omp an y,one can be sure that "Mur-phy is shaking the clouds, '

The ability to deal with -change at a rapid pace isessential. This is why seasoned practitioners Gin be the

FALl. JOI.I~

ail wer to a successful turnaround plan; they've "beenthere, don e that"

THE PROCESS

Along with specific skins and an understanding oftroubled situations, the specialist ofi~rs a new perspectivefrom which toindependently evaluate me company's cir-cumstances. The process will focus on several i ssues:

.' Is the business viable?

.' What is the ptlrp.ose of the business?hould it b e s av ed ?Why? Al:e those reasonsvalid?

Is there a COre business thancan be the source fo r theemerging business?

A re there su!Iic ient c as h reso urc es tolite!t h e r ecove ry? Which existing managers are capable of leading parts

of the company?

Remember, not all companies are salvageable.The fact-finding m ust pro ceed aquickly a s p o ss i-

ble so that a realistic assessment of the current state of thecompany can be prepared. The specialist's first priority\


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usually work witha turnaround leader+-if be or she iscredible.

Co usul rants are often a choice of the managementteam. Why? Because they are advisors, they offer recom-

mendations to management. Often the same managementthat guided the company into trouble in the first place.Why will they make those decisions now? Why risk allow-

ing the sam eperson to try Olgain?Whether a consultant iseffective depends upon management's willingness to listenand i l1 lp leJ"nen tthe specialist's reoomrnendations.

Practitioners, by contrast, are hands-on decisionmakers who actually take control of the comparry +ofienas CEO-for a period of time. They are in control of thecompany's destiny, take the decision-making reins, plot the

course, and steer the company through troubled ,..rater .,hopefully to safety They must have an active line man-ager orientation, be decisive, isolate the problems and

find solutions quicklyBe assured there are countless cases where existing

management agreed to work with ,1 turnaround consul-tant only to placate the board Or the lender. There is nosubstitute for qualified leaders with decision-makinz '0authority.

When hiring a turnaround specialist:

Check references. Review proposals versus what can realistically

be accomplished. Require engagem,el1t agreements. Hire anindividual, not the orl11-

personalchemistry with the managers is crstical,

Good practitioners have three goals: 1) get control,

stabilize the situation, jump-start the turnaround, 2) developand implement a sound plan, and 3) hire their permanentreplacement, while working themselves out of a j ob.

EARLY WARNING SIGNS

Too often, companies die unnecessarily, Why?Because most lenders and managers haven't learned torecognize the symptom:s of oncoming illness in theirbusiness.

When you wait too long to recognize deteriorating

characteristics, the company seeks bankruptcy protection.. , only attorneys and accountants benefit from this pro-cess. Ie's the astute lender 0)' manager thac recognizes infal-hbility, and has the foresight to ask for help .. , beforeserious trouble sets in.

28 STEEl1INr:CU;Alt or THE BRINK

Here are 10 common s ign s . cha ta company is heading for trouble. Carefully consider whether or not they

apply. Ifyou can 'answer yes co some of these questions,it is time to take decisive action.

Define the owner's and keymanagers' jobs to clarify role

responsibility. Assesssubordinates' competence;retain them if appropriate-

replace them if not.

Is the oUlneror top' management overextendediW:bo se w ork . a re they do ing ? W h.enthey continue to pe:r~form functious that hould be done by others (once thbusiness has grown to a mote complex level), they'reoverextended. They should do the work for which 1one else is qualified,

Managers need co delegate work appropriately.Define the owner's and key managers' jobs to clarify roleresponsibility. Assess subordinates' competence; retainthem if appropriate-e-replace them if not. Monitor key

metrics so you'll remain informed about conditions . , .without being immersed in them.

Relationships of how numbers behave tell the realstory The balance sheer is only a snapshot in time (whatyou have, what you will receive, and what you owe). Theincome statement indicates what happ ened durinz a eiven, , 0 E o >period. The source and use statement shows where cashwent in and out,

But these financials don't: indicate how to run thebusiness. Movement must occur in two areas-on the [1MI'He / :1 '1(revenue/sales) side, look at where and how rev-eriue is gene.rated. Is it 6'0111 existing customers andcontracts or new business? Most importantly, keep it COU1-

ing ill. 011 the t l oh l J / ' J coul (throughput/production) side,look at gerting the product or service "out the door."Flow else can you bmfor it?

Is thetumouer I'ate. excessive? A sure sign of under-lying problems is rapid employee turnover. Employeesknow when problems exist; the good ODes will leave earlyThis 'condition Call be the result of a faulty hiring process,inadeq uate training, poor ma:nageOlem , , . the list goeson. The price for ignoring chis problem is high: low


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morale, lost \'iages, recruiting costs lack ofproductivity,

and, ultimately, forfeited business.Uncover the rea] GILlSeS early on, and rectily them,

Solutionsinclude clearly definedjob respon ibilities, per-ferrnance expectations, rewards, and scope of authoritySeveral levels of management attention should be devotedto new key-employees (and those moving to new posi-tions) during the initial days of their assignment.

As an example, during a client company (annualrevenue at $5 8 million] pla nn ing s es sio nwith the ownerand entire management team present, I was astounded attheir approach to a turnover rate i1 '1 excess of 40% peryear. The three operating unit managers were asked to

discuss their units revenue recognition and turnoven rate.To the chagrin of the EO one rnamger did nor knowthe revenue figure fur his group, and none of the threenor the human resources manager, could recite the num-ber of employees lost in the previous year. When man-agement doesn t know yOLl have uncovered one real causeof problems. Y0L16r~t have to ad ..nowledge that a prob-lem exists, look for the oause/s], then do something-identification alone i not enougb.

Ave col1'lmtlu,icatious iI1~uectilJe?Ineffective meet-ings, management information, or interdepartmental coor-dination can. destroy a business from the inside out-s-evenas it 15 growing.

If all that is accomplished during "bull sessions" is

a lot of ... well, "bull' ... then this is dearly the faultof the leader, Jr'. a leader's duty to limit the scope of cop-ies discussed, to establish an agenda-e-with specific begin/adjourn times-r-and stick to it. Limit participants. too- -not everyone needs to be involved in every topic; what,I waste of time and productivity. Demonstrate organiza-

tion by managing your meetings and your team willdemonstrate that organization by managing your company.

\)!j]l,lt message are you sending? Remember, whatis not aid is often more destructive thau what is. Unnar-ural actions or behavior, such as closed-door meetings

win most certainly set off the rumor min. People need toknow or they are lefl: to their own imaginarion-c-and thatj alwaysworse.

Equally important, l ev el w i thrhem-thengct th e s ta y1}( ' I : I" l rS11 . ( 'decision. To address the i ue s i l la torthright man-ner is no guararrtee that you will keep everyone, or thateveryone will believe what has been said. Bur not to com-municate what is gOing 011 is a lack of leadership; so don'tbe surprised when employees don t do what YOLI want,

A rc g oa ts unclear? Chronic failure to achieve statedbusiness goals suggests a problem far mote serious than a

F~T T_2002

lack of performance. Often, it implies a lack of clarityregarding the owner's goals, and usually indicates :1 fa.il-ure to secure management team "buy-in ..'

Take a long, hard look at the goal-setting process.Set goals and hold managers accountable for success.

What is the company's goal? The mission statementshould be a directive that states this goal. What usually

cernes through is " ... we axe the best at providing a lorco everybody .. ,'. which doesn't say anything. Set .1mis-sion statement chat tells customers, employees, and stock-holders where the company is headed. If it can't bearticulated. , .. does it really exist? A goad mission state-ment should address six elements, and all six:

Se rVic e/pro du ct de fin it io n.:Whilt do 'Nt do or provide?

Generic Clistm u.c'j'need;Why will they buy? M a'rket difr.Ilitiou:

Who will we sell to? Where an: they?

Tech ll:o lo gJ '.:How will w-e deliver our products and services?

Levels of vertical integflltiolz:How much will We do?

Distinct competeuce: Why will they buy from us?

Most companies are too generic in their definition.

Their mission statement is nor well thought om. om-

petition dictates [hat you fOCLlS. Don't underestimate theim po rtance o f yourkey competencies. those strengthsthat no one else has , Be honest; this doesn't mean justshow . L 1 pat the door. Identify goals that are in sync withthese strengths. Do they meet ultimate objectives? Ifnot. , . then why use re~ources to accomplish them? Remem-

ber the ul t imate goal ... companies are in this for themoney

Au compe1lsatio.nand lllcmti11cp ro gr am s y ie ld in gJlllS,ltisfiu;toYjll 'csmts?While it seems obvious that pro-grams should clearly and directlyreward for successfiil job

performance, it's remarkable thatrnany companies unwit-tingly set up compensation structures that reward perfor-

mance altogether different from that oudincd in the jobdescription; and from what is expected by the board ofdirectors. A word of warning if this i your practice: Becarefulwhat you pay for-you might Just get it.

By eoncrast, managers who are paid incentives basedupon gross margin can be more effective than those paidon gross sales. Why? Because they share the burden ofpoor performance, they're mote likely to take correctiveaction when faced with substandard performers,


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Of all the difficult management chores, this isn't oneof them, It does assume that YOB know what you want toaccomplish. This requires planning, What i the properapproach? How are people to make it happen? TIlls

requites a great deal of thought. Then for the execution:Set rewards for performance to attain the plan, pay forperformance when achieved, and don't pay for it ifnorachieved, Set the directive and the goals ... , th en .... ,setthe incentive structure,

Is rlelVbusiness Ilmlli1f.g?If so , you a re om of touchwith the marketplace. High prices, unresponsive propos-

als .and giving more than is requited ofyou are the typi-cal reason companies lose bids.

Commitmenr to winning new business is essentialto success; so identify targetsearly on-always keeping aclose eye on the customer's specialneeds, Bid to win, andthen manage for profit and growth,

Perception is the key; it has many sides , .. to con-fuse the competition. , . to comfort the customer .. , tofool ourselves, Remember, a dol larmust be.'! dollar of rev-enue before it can be classified as any other kind. Man-

agement lT1UH work this area aggressively .. , develop a"we will. do what .i t takes" attitude [award developingnew business.

A .r e a n )'key c li e nt r el at ion sh ip s de te r io r at ing?Deter-urine whether a d ec re as e i n b us in es s :6::omlong-time C115-touters is due to poor market conditions in theirindustry-c-or poar service from yOllli' company If it's you,you're probably no longer meeting the customers needs.Worse-you may not know

Manage. customer relationships carefully. Customer

needs, like your own, change, Ass ign specific responsi-bility for nurturing customer relationships to all levels ofrnanagement-e-notjust to chose Within th e sales force. Byall means, gee out and talk with the customer. How elsewill you really know what the customer thinks? Few cus-tomers will call to tell you that they are not going to buyyour product anymore; theyjust stOp writing checks.

This issue is controversial ... hard to pin down. It'slike venturing into the unknown, and people arc uncom-fortable doing that. Address thereal issue o fhow customersperceive the COl11pariyand its productjs) relative to com-petition. Implement a plan to satisfy customers, so thatthey will want to purchase. Don't be Iulled into a false senseof security. , , those customers rnay not always be there,

Doe s th e com pa tly cre ate "pm du :ctsin s ea se h . o f m . ar -kets"? Products developed betofic market needs are assessedcan waste resources and be difficult to sell It is less expen-sive to create awareness of a product 01" service that meets

30 STIllRII'lG CLEAR OFTJIEDRIMi.

~11 existing demand than to develop ;I. new market fOTexisting productsor services that doesn't exist.

Identify how your k ey competencies satisfy cus-tomer need and produce benefits. Have your team pre-

tend they are your competition; their task is to identifythe strategy that you, the competitor, should pursue. Askyour customers .... simple but e ff ec t iv e .

It is the nature of the engineer to want to create a"Rembrandt," something special that meets the needs of

a .L1cus tom ers . This appro ach canonly add cost to theproduct, often cost that the customer is not willing toabsorb. Keep the "bells and whistles" to a minimum, Ifthe producns) is technically oriented, perhaps a modularapproach will allow a better fi t with various customerprofiles, by providing a "pick-and-choose" option.

Dofi na tt c:i al ,mdman ,! gcml1 "l 1t I 'C I JO l 't sCOlIer the wronifljin ma tio lta t th ewrOllg level?'F in an cia l a nd o per atioreports must be accurate, timely; and pertinent. Too often,

management receives only rraditional accounting mea-sures of cemparly value, in tead of cash How or new busi-ness generated, Also, information is often prepared at the

wrong level, making it difficult or impossible for man-agement co know what's going 011 inside their operations,

Specialists are hired for their

management ability; the ability tobring order out of chaos, theability to marsha] resources andmaximize value from those

diverse resources.

Cash flow is [be best indicator of business health.Prepare forecasts, and ehen manage to them. Manage-merit should determine performance at each level of the

bus in es s (i .e ,profit center, cost center, ca h center, incen-tive center), and update often.

Does the ope 'r t lt io .l l. lu l .I1 at r l 1 , ckr ec or d I !. fJ ai le d ,e ;" pasitm pians? Setbacks drain businesses of cash. time, andmorale, When companies fail in one effort, managementtends to 'pull in its horns" the next time out The result?Suppressed hopes tO Tgrowth or expansion. Efforts failbecause of inadequate cash, poor management, lack ofthorough mar-ket analysis, 01" improper control systems.

Managers who run independent operations must beadept at problem olving, decision making, team build-


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ing, and managerial analysis; skills which are 1'10.t obvi-ous. Understand why your company is successful in itsptesem marketplace, JU1d try to "model" those conditionsin a new marketplace.

Modeling success can produce growth. Theentrepreneur wants it to, grow, but want alone can onlydrive the company so far ... and often into trouble. Oneis not born to bea manager; you need to cultivate theseskills. A model allows you to depict the new environmentwithout yer being there , , ..where mistakes can't impact

the real bottom line.

WHAT HAVE WE LEARNED?

Effecting a turnaround takes an array of skills. Wbenin crisis there is [1() time for a warm-up. To effect reha-

bilitation, the tighf leader will know how to make thequick and proper decisions, put a plan into action, andkeep a talented team moving toward a healthy and more

valuable end. Specialists arehired for their managementability, the ability to bring order out of chaos, the ability

to marshal resources and maximize value from thosediverse resources,

Recognizing trouble requires no hocus-pocus. Like-wise, solving trouble's accompanying problems takes nosmoke and mirrors, If misery likes company. then trou-ble loves it; problems can multiply at a frightening speed,

Seldom is there only one reason for business troubles;more rhar: likely,you'll discover two or three. The bal-ancing act becomes weighing the risk(s) and taking action

versus letting the status quo dictatea troubled COurSE.One thing's sure: The longer you wait to admitthat

the company is heading for trouble, rhe more difficult theresulting problems will be to solve, Getting to the realissues is the catalyst toward ohange-v-and recovery.

And that's a much more acceptable risk.

1)} e rd e r ep ri nt s o f t hi s a rt ic lepl ea se c on ta ct A ja rl'l:M ',T /i k a tamal ik@iUoumals ,wmIll' 212-224-3205.

TIi.E JQU1~NAL UI' Pn.. VATE EQUITI' 31


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leadership styles to accomplish a turnaround

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