What you need to know about a turnaround

What you need to know about a turnaround

Setting a faltering company back on the right course takes immense dedication, commitment and work. But it can be done. Turnaround expert Peter McCann explains how.

Businesses go through all sorts of transitions, but one of the most difficult to deal with is a turnaround. There are many examples of companies that, for one reason or another, were on the brink of extinction but revamped their business and came back stronger than ever. It’s hard to believe now, but Apple, Starbucks and IBM have all gone through the turnaround experience.

If anyone knows a thing or two about corporate transformations, it’s Peter McCann, a Toronto-based management consultant and author of Turnarounds: Brains, Guts & Stamina. Over his career he
has served as either a turnaround consultant or turnaround CEO for about 40 companies. He’s made a living out of rescuing struggling firms, and has gathered experiential knowledge of the tough steps needed to put a faltering company on the right path.

Turnarounds, says McCann, are challenging. It’s hard to stop that downward momentum and regain lost market share. A study by Yale University’s Richard Foster and the Rotman School of Management’s Sarah Kaplan found that the probability that a failing business will grow appreciably or become profitable again within three years is less than 35 per cent. Anyway, a return to profitability isn’t the only goal, says McCann. A turnaround is complete only if it restores the business to sustainable, long-term profitability
and solvency. You don’t want just a brief comeback.

Why are turnarounds so difficult? Because the business world is more unpredictable than ever before. Thanks to rapid technological advances, markets can change nearly instantly. That’s made it harder for companies to stay on top of trends, remain relevant and be viable long term. According to Yale’s Foster, the average lifespan of a company on the Standard & Poor’s 500 Index of leading U.S. companies has plummeted from 67 years in the 1920s to just 15 years today.

Since it’s become increasingly harder for businesses to last, mastering the art of the turnaround is that much more important and, fortunately, it can be done. However, many companies don’t start this transition early enough, says McCann. “They do too little, too late.” Naturally, an executive will halt financial losses, pay down debt and reduce costs. While that helps, it’s often not enough to restore a company to competitive strength.

See signs of trouble

One of the early warning signs that a company is in trouble occurs when banks start asking tough questions. “The banker’s test,” as McCann calls it, involves banks asking probing and often uncomfortable questions about company management, spending decisions, the ability to pay back debt and more. These types of questions should raise a red flag for the company, because it’s a signal that the bank thinks the business may be heading to bankruptcy. There are other, more obvious signs, too: The company may have high losses, low working capital, trouble making payroll and wary suppliers.

Even if an executive sees some of these signs, it’s usually an alarming event that alerts the CEO and the board of directors to problems. For instance, the bank may refuse to advance more capital, a public firm may get its credit rating lowered or a company may have to cut dividends. Unfortunately, by then it could be too late to save the business, says McCann.

Before taking drastic measures, make sure your firm truly is in a turnaround position. Many companies aren’t failing, but, rather, they’re just treading water, suffering from stale marketing, low cash flow or disappointing productivity. They may need a tune-up, warns McCann, but not turnaround measures. “Rapid action to drop product lines or close positions, firing and replacing one-third or half of your senior management team – that’s highly disruptive,” he says. “You don’t want to do those things unless there’s a compelling reason.”

Be in it for the long term

Turnarounds tend to work best if your company is in a growing industry, notes McCann. Businesses in dying industries may experience sector headwinds, such as pricing pressures or overall margin compression, which will make internal problems harder to manage.

However, no matter what sector you’re in, it could take two to three years for a turnaround to be completed, and it’s not going to be a smooth ride. “Decisive, violent, determined, focused action is required,” says McCann. In nearly every turnaround, staff will have to be let go and it’s often in the senior management ranks. “Who ran the company right into the swamp?” he asks.

McCann recalls a conversation he had with a vice-president of a small, but well-known Canadian company that one Monday morning fired about 30 per cent of its staff, including a number of executives. “One of the surviving vice-presidents said to me, ‘Better that some of us go now than all of us go later,’” he says.

Bring on a new CEO

In many cases the CEO is also let go and someone new – often a person who has had experience turning around companies – is brought in. Typically, a turnaround CEO is an experienced businessperson who has seen many kinds of business problems, can generalize and is trained to make quick decisions, says McCann.

The turnaround CEO should also be mentally tough and even be in good physical health as a turnaround can take a significant toll on management. The top executive will often work six days a week at 12 hours a day for years with no holidays. “The turnaround CEO is appointed to catch a falling knife,” says McCann. “This isn’t for the faint of heart. You’re in a high-stress environment and you’ve just got to respond. If you have to agonize over everything, you’re going to give yourself a heart attack in the first three weeks.”

Study the company’s numbers

After the new CEO is in place or a new management team is brought in, the leadership has to focus on the company’s accounting. Turnaround businesses often have financial statements that look fine on the surface, but executives need to dig into the numbers to see where things went wrong.

For instance, most companies will need to revamp their pricing. Firms tend to charge too little in many segments, but that’s often hidden by too-high prices in other areas. Accounting will need to break down revenues and costs per product, revenue per customer and, crucially, revenues per customer-product combinations, of which there may be hundreds or thousands

Consider an Ontario-based B2B company with six products and 300 customers. Every customer could buy that product in a different way. If a customer lives in North Bay, for example, the cost of shipping an item may be substantially more than if they reside in Orillia, Ont. Is everyone getting the same shipping price, no matter where they live? Should that be priced differently? In other words, prices at every touch point need to be evaluated. There may be push-back from marketing if costs need to be raised, but it often has to be done, says McCann.

The executive team will need to tackle several other issues, as well. For instance, the company will need to get co-operation from creditors, so there’s enough cash to fund the transition. They’ll need the board to buy into the vision and back up any tough choices that must be made. Also, the leadership will have to be transparent with staff – if employees think the company will go under, they’ll start looking for new jobs. The company may need to refresh and reboot its marketing materials, too.

If McCann could give only one piece of advice it would be this: Be patient. No firm is going to do a U-turn in 60 days. In fact, the decline will likely worsen as the company absorbs severance costs and spends money on legal fees. Keep reminding staff, customers and yourself that you’re in the early innings and then get to work.

- Sarah Barmak / Photograph by Margaret Mulligan