One of the few things I learned in the medical school is the difference between the sympotamic response to disease and opportunistic diseases. Even good managers can miss the early signs of distress. Just like medicine, good the first step is to acknowledge there’s a problem.
Comparing companies in crisis with the metaphorical frog that doesn’t notice the water it’s in is warming up until it’s too late. ‘I really do not think there are bad managers in the case of crisis response, but most often, managers work under a set of paradigms that no longer apply and letting the power of inertia carry them along.” And if they don’t realize they’re facing a crisis, they won’t know that they need to undertake a turnaround, either.
Sometimes managers underestimated how critical their situation was—or they were looking at the wrong data. Others took advantage of easy access to cheap capital to stay the course in spite of poor performance, believing they could push through it. Still, others got so caught up in the pressure for short-term returns that they neglected to ensure their company’s long-term health—or even willfully sacrificed it.
1. Throw away your perceptions of a company in distress
There are many definitions of stress when it comes to businesses and enterprises. It’s hard to come up with a definition and also think there is a one-way approach to what stress will look like in your company.
2. Be your first critique
Business plans are living documents. They do not just sit on the shelve staring at entrepreneurs but are periodically engaged, reviewed and revisited. That is one of the best ways to ensure that you connect your business model and strategies to the reality out there. The biggest thing you can do to avoid distress is to review your business plans periodically.
When you’re creating them, whether at the beginning of the year or the start of a three-year cycle, build in some trigger points. A simple explicit reminder can be enough: “If we don’t have this type of performance by this date or we haven’t gotten the following 9 things done by this date, we will simply go back to review our plans and restrategize. .”
Such trigger points should be oriented both to operational and market performance as well as to basic financial metrics and cash flow. Look at where you are as a company using basic financial and cash milestones, and then look at where you are with respect to your industry and competitors. If you’re not moving with the rest of the industry (or not outpacing it, if the industry is struggling), then your plan may be obsolete. And don’t forget to look back at your performance over past cycles to identify any trends. If you keep missing performance targets, ask why. Take a step back to review your performance always and see why you miss targets and goals every time. Review your performance and see maybe your plans are obsolete.
3. Expect more from your board
Unlike what many people think about setting a board for your company, the beauty of a board is that it has enough distance from the company to see the forest for the trees. Board members are those who work with your company from the outside and they can easily spot your delusions and identify if the managers are far from the reality. The board is one of the best forms of an early-warning system when a company is heading for distress.
It’s also the board’s responsibility to look the CEO, the CFO, and the chief operating officer (COO) in the eye and say, “OK, we like your plan. Now let’s talk about what it would take to cut costs not just by 3 percent but by 20. Let’s talk about all the things that can go wrong—the risks to the business.” The board is always in the best position to make such proactive move for the entire company. But in a typical distress situation, a company has usually just had 18 to 24 months of poor performance, and the board hasn’t been aware or hasn’t asked the right questions. Independent board members—truly independent ones—can have a big impact here.
The senior team at one company maintains a list of risks to the business, employees, and the plan. They review those risks with the board on a quarterly basis to ensure that they’re staying top of mind.The board brings to the team so outside perspectives, unique and relevant conversation that wouldn’t normally be started in the normal business operation. 4. Cash is King
Whatever great change that happens in business is all about cash! A successful turnaround really comes down to one thing, which is a focus on cash and cash returns. Whatever you will measure performance against, cash should be top on the list- that is the basic element of business success. Is it generating cash or burning it? And, even more specifically, which investments or activities in the business are generating or burning cash?
I like to think about this in the same way one would if running a local hardware store. By that, I mean asking fundamental questions, such as whether there is enough cash in the register to pay the utility bill, for example, or to pay for the pallet of house paint that will arrive next week or how much more cash I can make by investing in a new delivery truck. When you bring a business back to those basic elements, the actions you need to take to get back on track become pretty clear. In many of the cases I have seen, the management team and board are focused on complex metrics related to earnings before interest and taxes (EBIT) and return on investment that excludes major uses of cash. For example, variations on EBIT commonly exclude depreciation and amortization but also exclude things like rents or fuel. These are all fine metrics, but nasty surprises await when no one is focused on cash.
Focusing on cash isn’t just about checking the account balance! To avoid surprises, companies also need to focus on a good forecast that keeps a midterm and longer view. For example, failing to pay attention to the cash component of capital investments routinely gets companies in trouble. This is one of the reasons you should think cash always: While you are focusing on the project net present values which can look the same whether the return begins gradually at year two or jumps up dramatically at year five, you can run our of cash when you have more money going out than coming in. While you’re waiting for that year-five come back, you can run out of cash and drain your creativity.
5. Create a great change story
One of your major goals should be to create a change story that is easy to communicate. The goal of the team should be to create a strong, compelling and easy to communicate change story. Here’s an example. Mckinsey team recently did a turnaround for a mining company. It was profitable, returned a decent margin, and was cash positive. But the commodity price was dropping, and the board was worried about generating enough free cash flow to drive the capital needs of the business. The change story we created said, “Yes, we are profitable. But the whole point of profitability is to generate enough cash to expand, grow, and maintain operations. If we can’t do that, then we’re headed for a long, slow decline where equipment breaks down and lower production becomes the new reality.”
If you can tell that story in a paragraph or less, in a way that means something to the average guy in the manufacturing room or on the front line, then people will get on board. The key was a simple message, not fancy metrics.
6. Its crisis, start working
One of the basic challenges is that managers get out of the thought that there is a challenge and this creates an unreal reality in the company. You need to get into the mindset that there is something challenging somewhere and that the company is experiencing the crisis. Without a crisis mindset, you get a stable company’s response to change: risk is to be avoided, and incrementalism takes over. Your team is asked to do just a little more and even maintain status quo. Creative ideas are analyzed, and the implementation will be slow and methodical.
To effectively respond to a crisis, you must take significant action, jump at it with urgency and increase momentum.
In contrast, a crisis demands significant action, now, which is what a distressed company needs. Managers need to use words like crisis and urgency from the first moment they recognize the need for a turnaround. A company that’s in true crisis will be willing to try some things that it normally wouldn’t consider, and it’s those bold actions that change the trajectory of the company. Crisis drives people to action and opens managers up to consider a full range of options. 7. Build traction for change with quick wins
The chances of putting your entire mind on big 4 bets are high. You probably think with your attention on the first 4 big game plan, you will have a turnaround. Well, while that is highly respected, to have your team rally around your leadership- you need to achieve some small wins. While the big bets are very important, it often takes lots of efforts and energy. It often takes a lot of resources to get one big bet, but with little efforts, you can achieve many small wins and use that as a part of your story line. For example, say you decide to change suppliers of raw materials so you can source from a low-cost country, expecting 30 percent lower direct costs. If you realize six months later that the material specifications don’t meet your needs, you’ll have spent time you don’t have, perhaps interrupted your whole production schedule, and probably burned a bunch of cash on something that didn’t pay off. Such quick wins can be cost focused, cutting off demand for some external service they don’t need. Or it could be policy focused, such as introducing a more stringent policy on travel expense.
Small wins improve the bottom line, generate support among employees and help the entire company to believe in the ultimate goal. In any given company, you’re likely to find that a fifth of employees across the organization are almost always supportive. They work hard. And they will change what they’re doing if you just ask them. These are the people you’ll want to spend most of your time with, and they’re the ones you’ll promote—but you’ll probably spend too much time with the bottom fifth of employees. These are the underachieving ones who actively resist change, look for ways to avoid it, or are simply high maintenance.
What often gets ignored is the remaining 60 percent of the organization. These are the fence-sitters, and they are turned into action, not just talk. They see the changes going on, and if you proactively work with them, then 80 percent of the organization will be behind you. But if you don’t give them a reason to stand up and be positive about the company, they’ll go negative. That’s the importance of quick wins. When you quickly take real action, and when those actions affect the management team as well, you send a powerful message.
8. Do away with your old incentive plans
The most overlooked tool during turnarounds is the management incentive! Throw away the short-term incentive, and gain buy-in with incentives that are tied to achieving the meaningful results that you plan to achieve. Do you need $10 million of improvement from pricing? Then make it a big part of your sales staff’s incentive plan. Need $150 million from procurement? Give your chief purchasing officer a meet-or-beat target. Be willing to do away with the bonus payments for those that don’t achieve 100 percent of their target—and to pay out handsomely for those whose results are beyond expectations