KEY MISTAKES TO AVOID DURING A BUSINESS TURNAROUND
The reasons for a turnaround situation in any enterprise are myriad and complex and include increased competitive intensity, technology disruption, financial pressures, geo politics and ineffective scenario planning. In recent years, there have been increasing instances of companies in India under performing, failing to meet their debt obligations and eventually going bankrupt. Apart from high profile examples such as Kingfisher Airlines, Bhushan Steel, IL&FS and Jet Airways, there are over 4000 companies listed as ailing in India. With the passing of the Insolvency & Bankruptcy Code in India in 2016, banks and lenders have become more involved with the operations of defaulting companies. The tipping point usually arises when an enterprise can no longer generate sufficient cash to run business operations. Boards debate the future of the industry segment concerned and choose whether a turnaround or liquidity event makes better sense. Of course, sometimes a turnaround followed by an improved valuation and then a sale offers the best path. Over the last 10 years, I have been fortunate to lead and participate in few turnarounds – some successful and others, less so. I hope some key insights shared here can help leaders to evaluate their approach because in my view, it is imperative before embarking on any turnaround journey that one reflects on the potential pitfalls.
1. Brutal Facts may remain under the carpet
The brief from the Group CEO of an Engineering company, substantiated by management data was that competition had increased and the loss of customers had led to an otherwise profitable business moving into the red over the past year. Discussions with teams at lower levels and also with customers told a different story. The root cause of the problem was loss of customer faith in product quality and significant unaccounted customer returns and claims. In addition, management had taken their eyes off manpower costs which had escalated and contributed to 23% of the top line revenue making the business EBITDA negative. These brutal facts were shared with the Board and a turnaround strategy emerged focusing on quality & restructuring manufacturing operations. The bloated cost structure was tackled rather than the perceived competitor threat. The group CEO had to exit, the organization returned to old EBIDTA levels in 18 months and further improved levels thereafter. Bringing in an experienced and capable outsider as a leader is especially important when the incumbent leadership team is of longstanding and has perhaps been responsible for the current crisis. Facts may be omitted to obscure management deficiencies and engaging with all stakeholders effectively is crucial to uncover the truth.
2. Beware of unrealistic timelines
As part of the restructuring of manufacturing operations of the same Engineering company, the new CEO had recommended the closure of two out of five manufacturing plants and increasing significantly outsourcing to establish a more dynamic & flexible cost structure linked to demand. While the Board approved this, the requirement was to do it all within 6 months which looked unrealistic in Indian context of land and labor laws. It was also clear that the supply chain could get adversely impacted if done without proper planning & alignment of outsourcing capacity leading to further disenchantment of customers. There was concern that if any desperation was observed, either by the lenders or by the unions or any external stakeholders, the expected outcome might be adversely impacted. Setting realistic timelines on such issues leads to a higher probability of success while ensuring all other actions are expedited to improve cash flows and stabilize the business. Any requirement to compress time frames should be attempted by reinforcing management bandwidth. We parachuted an experienced Interim resource with deep expertise in plant closures to expedite the turnaround of one of the plants. Such experts are able to work under compressed time pressures, communicate with clarity with everyone about how the company can balance short-term pain with long term viability and deliver greater success of the entire plan itself.
3. Be flexible and innovative with the turnaround opportunity
Most of the decisions to execute a Turnaround plan are strategic in nature. Invariably, unknown tactical challenges emerge which could derail or delay the project and flexibility and innovation are the keys to success here. I remember a project where we were relocating an overseas manufacturing plant from its current location in a major business hub to a remote rural district for cost economics. Naturally, the local trade partners were very apprehensive about service level standards and potential impact on sales. While the original plan was to service the business hub also directly from the new plant, we needed a more nimble solution. So, in the interest of protecting exclusivity and increasing the hold on the sales channel in a high market share situation, we decided to add an additional stock point with supplies to provide on-demand same-day service to the business hub market. Such flexibility in the short-term ensures that any transition does not create a long-term loss of business. Furthermore, this type of action builds loyalty and confidence with external stakeholders, in this case the channel partners.
The urgency in a turnaround situation to create and execute the plan cannot be over emphasized. While usually the plan would dismantle many unviable business segments and cost structures etc., the luxury to think in an innovative way might not be available to the incoming CEO. However, turnaround situations often present a once-in-a-lifetime opportunity to think disruptively in terms of customer offering, cost structures and more. It could be in the area of process automation, in-sourcing vs outsourcing, digital transformation, omni-channels of sales, flexible manufacturing to drive customization, moving from selling a product to selling a service etc. Depending on cash flows and timelines, many of these disruptive strategies can be introduced. Hiring an interim expert where disruption would yield exponential benefits should be consciously considered. As a lateral thinking, experienced outsider such an expert can help generate and implement disruptive strategies for long-term sustainability and growth
4. Don’t Rely on Charismatic Leadership
One final word of caution – many organizations hire charismatic leaders to drive turnarounds. While they arrive in a flurry of fanfare and appear to deliver short-term success, over time the realization is that team building & strong processes and systems have been sacrificed, eventually leading to unsustainable results. Leadership that delivers through a dedicated focus on people processes and systems is more effective for the long-term revival of businesses than leadership that relies on charisma alone.