The 5 secrets and 3 stages of Turnaround Management
5 December 2018
It is almost a certainty that every company will face challenging and/or critical business crises at some point in their journey.
In our experience, it is the companies that aren’t implementing an effective strategic plan which are destined to fail. Similarly, companies that don’t have appropriate financial management, or aren’t implementing sound management reports and management reporting, realise far too late that there is a financial crisis looming and have fewer options to effect a successful turnaround.
The 5 secrets of turnaround management
Secret #1: Be ready to adapt
The existing management team, strategic plan, financial management and culture that were at the helm when the situation first developed are almost certainly not going to create an effective turnaround.
A new level of objectivity and independence is required to confront the brutal facts, distinguish symptoms from causes, create a compelling case for change, and re-imagine future practices. Analysing the symptoms and causes may identify changes in management behaviour or management personnel that will be required for the company to achieve the new future.
If the management team understands the challenge, it may create a change of mindset – like a sudden enlightenment wherein one realises the old ways no longer work.
Secret #2: New point of views
It’s much easier for an external adviser to be objective and identify the critical steps needed to achieve a successful turnaround – particularly so if they are a turnaround management specialist – than it is for the incumbent management team. This can be for three main reasons:
- The incumbent team running the business doesn’t have as much time to focus on the bigger picture.
- The incumbent team may be prejudiced by prior experience and collegiate relationships.
- A turnaround management specialist brings extensive experience, skills and resources.
Secret #3: Improving cash flow
Cash flow is the lifeblood of all companies – it’s more important than profitability in the short-term. By understanding their cash flow, companies can significantly improve liquidity within 4-6 weeks.
There are hidden sources of cash flow within all businesses. Usually, these sources are sufficient enough to generate a cash flow runway that is at least long enough to stabilise the business and implement a turnaround plan.
Secret #4: Stakeholder support
Stakeholders include shareholders, financiers, key suppliers, employees, customers and the ATO. Some stakeholders will be critical to turnaround strategies; so, the key to improving stakeholder relationships is understanding what’s important for them and keeping them informed throughout the turnaround process.
Secret #5: Changes in strategy
Once a company has reached a crisis point, it usually needs 1-2 significant changes in strategy for a successful turnaround.
When a company is threatened with insolvency (due to poor cash flow), smart key decision-makers realise they quickly need expert assistance. The best person to speak to first is a turnaround management specialist. By understanding and undertaking early intervention, a better outcome can be achieved.
The 3 stages of turnaround management
Stage 1: Stabilise and assess viability
The purpose of Stage 1 is to assess and improve cash flow, begin rebuilding stakeholder relationships, identify options, and assist the Board to decide the first steps of the turnaround process.
It will involve reviewing all available information, talking to key stakeholders in the organisation, and critical external stakeholders.
The turnaround management specialist will draw on significant experience in similar situations to come up with options that the management team hasn’t considered.
Stage 2: Develop a turnaround strategy, tactical plan and financial forecast
Once the issues and priorities have been identified and agreed upon, and a plan is underway to stabilise the business, Stage 2 focuses on the turnaround of the business. To ensure this turnaround plan is feasible, it should be supported by a financial forecast and implementation timetable.
The turnaround strategy consists of the following (which may occur concurrently, depending on the situation):
- Crisis stabilisation –implementing tighter control and monitoring of cash (implementing a rolling 13-week cash flow forecast), short-term financing, and first step cost reduction.
- New or improved leadership – instability in management, inadequate skills, need for fresh ideas, or to bolster a tired team.
- Stakeholder focus – advising and engaging stakeholders dependent on the outcome; this includes financiers, creditors, employees, customers, industry associations and even government officers (sometimes a source for grants). The benefit of this aspect is often underestimated and often provides the greatest source of solutions and support.
- Strategic focus – redefining the core business, restructuring, M&A, divestment and developing a 3-way financial forecast to model the effects of the proposed turnaround strategy
- Organisational change – engaging key staff, improving communication, improving morale.
- Process improvements – operational improvements that provides low hanging fruit, and focus on key issues that may be key risks.
- Financial restructuring –equity injection, asset reduction or selling under-utilised assets to generate cash or use as security for short-term funding.
Stage 3 – Implement tactical plan and monitoring
The purpose of Stage 3 is to ensure the turnaround plan stays on track and delivers an improvement in financial performance. External stakeholders may provide ongoing support; conditional upon the plan staying on track. They may require regular reports so that they can assess progress against the plan, and they place greater weight on monitoring reports that have been prepared or reviewed by the external turnaround management specialist.
Stage 3 may include setting up an advisory board to assist the owners, directors, or stakeholders to maintain focus on the implementation and turnaround management.
The business may bring on board a Transformation Officer whose prime role is to implement the turnaround strategy – this allows management to maintain focus on their core skills.
Whilst it may sound self-serving, the biggest mistake we see is companies that take short-cuts, cherry-pick strategies to save costs, pursue options sequentially (rather than simultaneously) or under-estimate what is ultimately required.
Turnaround is difficult and is not for the faint-hearted, and requires a significant commitment which may appear expensive. However, the downside of not getting it right is business failure, which will have significantly higher costs in terms of the financial cost and social impact.
Smart leaders of successful, long-term companies never regret the investment they made to turnaround their business or navigate their critical issues successfully.
Andrew Birch leads the Perth office of Vantage Performance
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