September 4, 2006

The Crunch of the Turnaround - Part 2

Welcome to Part 2 of The Crunch of the Turnaround

By John Scheel

General Rules: It is important that whatever is done carries visibility. Instructions and requests should be written down and circulated to ensure controls are put in place and responsibilities assigned. Verbal communication can too often be misinterpreted by rne people who are unsympathetic to what is being attempted.

Most turnarounds can only be accomplished from a base of sound information which. if not available, should be sought out (it usually exists in one form or another). The turnaround specialist must establish himself quickly. He must ask hundreds of questions of the president to the janitor. His presence must be felt. He must require others to prove their beliefs and convictions. His decisions must be made with authority even though sometimes they will be wrong. (Making occasional mistakes should not inhibit the making of important decisions. )

Handling insecure people is never easy. Early on establish the rule, "lf you don't know - ask." This should prevent further problems and eliminate excuses. The follow-up rule is. "lf you are going to do something think." To make life easier do not overcomplicate things. Keep it simple.

One device which may help is known as the "Hamlet method." Scholars still do not agree whether the Danish prince was sane or insane, but they are interested enough to keep working away at both theories. In a similar way, the successful manager should be unpredictable at times, he should resort to doing unorthodox and unexpected things to keep subordinates awake, on
their toes and thinking about the job.

What not to do: Other specific pieces of advice include: never conduct a meeting without a clearly stated purpose for it, never leave without arriving at a conclusion to the problem under discussion, and always lay down a system of controls to ensure that those assigned to follow up on items actually do so.

When it comes to an ongoing strategy never lose sight of the fact that everything is interrelated. An improvement in one area may have lesser negative implications for another. Often this will have to be taken into account and tolerated until the new problem gets to the top of the priority list. Also, successes usually come from achieving small victories in many different areas. In operational turnarounds, it is necessary to concentrate on short-term improvements but the long term must not be sacrificed. For example, cutting maintenance staff in a factory may bring short-term cash-flow benefits. But over the long term it will produce a serious decline in productivity and efficiency.

A company can have the best financial systems in place and still be heading for disaster. It is important to remember that proper operations must feel proper financial systems. But the reverse is not necessarily true. Becoming obsessed with perfecting the financial reporting systems early on rather than stressing the need for accurate operating data can be a mistake.

Immediate actions: The first task is always to assess in-place management. A quick but thorough analysis of key personnel is essential to gaining an opinion of their individual capabilities. All functional areas should be reviewed for strengths and weaknesses. Problems, as people view them, can be identified and rated according to their seriousness. In many situations, a series of crises may have caused management to lose faith in itself and its sense of self-respect. Some managers will retreat behind closed office doors. Others will try to ignore what has happened. To counter this, frequent checks must be made to ensure that management is "out on the floor" and not sheltering somewhere or ignoring realities.

In time, the good managers will stand out. Those with limited capabilities should be moved out as soon as possible. There should be no hesitation. Often the tendency is to be too nice.

All manual and automated systems must be reviewed and changes made where appropriate. As for operating statistics, it may be helpful to superimpose new systems. Established reporting frequencies may have to be increased. Studying a firm's processes and technology can be important. But there may be little time for undertaking detailed studies. It is invaluable, however, to make an appraisal of plant and equipment. Studies of down-times and stoppages may lead to an understanding of what is wrong. In most circumstances, different departments will have different versions of what the problems are. Passing the buck is common and can cover any situation: as an example, one explanation for a machine breakdown can be that "maintenance
forgot to tighten the grease nipple." Another that "the operator just isn't greasing the machine." Usually a modest effort on the shop floor will result in significant improvements in efficiencies and yields. Sometimes it is a good practice to stay in the plant during the second shift or when cleanup crews have taken over.

In marketing and sales all major contracts should be scrutinized. A complete history of the relations with the firm's principal clients should be drawn up.

Recently lost accounts are also worth examining. Why did the firm lose a particular customer? And why might it lose others? Likewise all major agreements with suppliers must be probed. Obviously the job of the turnaround manager is to fix up the problems. This means defining the company's strengths and promoting them at every opportunity. Since time is one of the most expensive commodities, all problems should be quantified from a dollar impact and a time and effort standpoint. It should be remembered that an attempt to find the perfect solution in one area may prove costly; too much attention in one direction can result in other problems not being tackled properly.

"Once you can breathe" actions: In time, the semblance of a sound management team will begin to take shape. It may not be ideal but it should be an improvement and a promising start. Early on in the turnaround the emphasis will have been on teamwork and cooperation, with stress on the matrix management or shared-responsibility type of organization. Now, the direction should be toward strong line management.

A good turnaround specialist should be prepared to give more control to functional managers, allowing them to extend themselves even at the risk of their failing to perform. To some, learning new ways may be difficult. But it will also be a remedial one for the firm. Staffers are motivated by incentive systems. Performance can be improved if financial rewards and incentives are raised.

For hourly-rated employees programs can be devised that will help boost morale. and these should give fair acknowledgement for the effort being put in to improving things. With good managers in place formal budgets can be drawn up for each department so that actual costs can be monitored. In the worst situations this activity may have ceased with the departure of the old guard.

Forecasts should be set for at least one year. This will be useful in itself and will permit greater scrutiny of the business. producing new ideas. identifying new problems and new areas for potential savings. All managers should be brought into this process. At this point several programs will have been put forward and entrusted to managers and vice-presidents. The vice-president of finance and administration could be reviewing long-established company policies and proposing new ones. The vice-president of operations could be searching for cost reductions. Data processing managers could be auditing existing systems and creating new ones, with a new awareness that operational data and statistical reports are an early warning sign of success or failure.

As time permits the effort can be directed more to the external side. Talking to clients and getting their impressions will be beneficial. as well as being an excellent tactic for improving relations with them. Meeting with major suppliers will give another perspective on the company's problems, its strengths and weaknesses, and the kind of competition it faces. Sometimes this will save time and expense.

Comments made about its competitiveness can head off the need for detailed time-consuming market research. Suppliers can be an important source of information. They should not be disregarded in the belief that there are other more important contacts to be made. Once in-house production and quality along with other difficulties have been sorted out it makes sense to concentrate on the sales and marketing function. It is of little use selling goods that will be returned eventually. Or trying to attract new customers, until old problems have been resolved. It is also desirable to review all "new product or business development" activity to assess future plans and the potential for each product.

Qualities of a good turnaround specialist: What qualities are required of a person managing a turnaround? The ideal candidate should be a generalist with good conceptualizing abilities. He should be able to draw up the priorities, weigh the risks and make quick decisions. Also, he should be prepared to question everything and take nothing for granted preferring to go back to basics as much as possible.

People skills are essential one must be a good listener and have the ability to evaluate people. The outsider must also strive to be tough, consistent and, above all fair in making judgments and arriving at decisions. He should neither be overconfident about his chances of success nor too optimistic. Rather it is best to work from a negative situation to be inquisitive and energetic and maintain a sense of balance about what can be accomplished.

It is important to remember that turnarounds must be accomplished within reasonable time. One competent individual may be able to handle a small situation alone. However, as size and complexity increase, time usually becomes more critical. A team of experienced professionals with different functional skills, guided by the turnaround specialist, may then be required. The perspective and tide of the turnaround are the turnaround specialist's responsibility.

Common characteristics: In comparing different turnaround situations certain common characteristics stand out. These can be summarized as follows:
  • Generally, bad or complacent management is responsible for the deterioration in any firm; this is true in perhaps 90% of all cases.
  • Firms in need of turnarounds are usually identified by banks, governments, and by their parent companies. Owner-managed firms seldom volunteer themselves or recognize they are in trouble. No matter how the turnaround candidate surfaces, things are usually worse than first descriptions and evaluations would suggest. One out of two companies can be helped by a thorough operations appraisal, even if it is being run at a profit.
  • In-place managers and their ways of doing things represent one of the chief problems. Poor or marginal managers are rarely turned out quickly. If performance is substandard then managers should not be retained or hired no matter what the circumstances. On the other hand, firms should be willing to reward god managers and well-qualified personnel to keep them.

There is nothing magical about a turnaround and it must not consume everyone's time and energy. Management must be in a position to deal with new problems that may arise in the normal course of doing business.

Patience and perseverance are needed to carry out a demanding operational turnaround. Banks in particular should be aware of this and sensitive to it. Often receivership is chosen instead because it is an easier route to take. This can be both wasteful and mistaken.

John’s Scheel’s Bio: John is a well-rounded generalist with operating experience in small and large private and public companies as well as highly technical situations and start-ups. Specific expertise is in conducting complex business turnarounds, the motivation of employees, maintaining continual open communication with owners and investors and financing and/or packaging companies for ultimate sale at attractive prices. He relies on lateral thinking and finding creative and unconventional solutions. Companies having between 100 and 1000 employees and sales up to $250 million fit best with his interests and capabilities. He holds a master's degree in chemical engineering from McMaster University and gained his MBA at McGill University. John can be reached at

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© John Scheel 2006. All rights reserved. Reprinted with Permission

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