Turnaround Management: The Mission, the Methods

Article excerpt

"The trend is for creditors to bring turnaround experts into a company during its early-to-mid decline, rather than in its final liquidity crisis."

Helping troubled companies survive the present economy has recently brought forth a new management specialty, the "turnaround expert." These "business doctors," often installed as chief executive officers in troubled companies by worried creditors, are charged with the daunting task of reviving declining companies.

The turnaround job is not for everyone. Negotiations with creditors must be handled while attempts are made to remedy the inefficiencies of the declining company. Morale of a shaken work force must be maintained.

The trend is for creditors to bring turnaround experts into a company during its early-to-mid decline, rather than in its final liquidity crisis.

There are two types of turnaround experts hired to salvage declining companies. One is the "slash-and-burn" kind who concentrates on short-term tactics and is indifferent to a corporation's long-term future. The other is the strategic thinker who is concerned with enhancing the value of current assets and preserving the firm's long-term viability.

Before deciding on whom to retain, the creditors' committee or bank workout department hiring the turnaround experts should consider the desired results--a quick liquidation of existing assets or a rebuilding process to preserve and enhance current values.

Different Strategies

When the slash-and-burn experts appear, they frequently concentrate on three short-term tactics: immediate head-chopping to reduce expenses; juggling short-term financial matters to boost cash flow; and negotiating with creditors and banks to prevent a liquidity crisis and perhaps a visit to bankruptcy court. The latter two tactics are necessary expediencies but the first, head-chopping, often tends to produce three general results.

First, indiscriminant dismissals often result in age discrimination and wrongful termination suits brought by fired managers and white collar workers. Unionized workers frequently engage in slowdowns or strikes at a time when the company can ill afford such actions.

A second result of short-term tactics is that the survivors of the Black Friday dismissals fear for their job security and often lose initiative. Surviving managers are overwhelmed by the new, unexplained responsibilities generated by handling their jobs as well as the assignments of those managers who were let go. The better middle managers seek our other more stable jobs.

Most importantly, the third result of slash-and-burn tactics is that productivity and product quality fall. Faced with the short-term need to cut, personnel expenses are the easiest to slash. The ensuring head-chopping done to save cash is often executed before identifying and remedying the organization's inefficiencies.

Perhaps one reason turnaround experts adopt these short-term tactics is their background. Most have broad financial experience and can steer their way through a balance sheet or P & L statement far more readily than they can navigate around a factory floor. These turnaround experts are more apt to try some type of financial legerdemain to improve a sickly P & L statement rather than seek new ways to increase the efficiency of manufacturing, restructure the distribution system to speed deliveries to customers, or develop new products.

The second type of turnaround expert is a strategic thinker interested in obtaining employee cooperation and knowledge to bring about long-term resolution to the problems facing a distressed company.

Almost invariably, these turnaround managers take a quick look at the financial statements to see when or if the company will run out of working capital. They then attempt to negotiate a stand-still agreement with the company's creditors and obtain some additional short-term cash and time. …