1.) 4 weeks – stopping the downward spiral.Initially, the core objective of a turnaround executive is, to stop the downward spiral, the company may be in. This falls into two areas:
Creating financial stabilityFinancial stability, to support day-to-day operations is core, to operate the firm. Solutions can include:
- Access to additional funding: In terms of loans or equity investments of the shareholders, to fund the turnaround.
- Reduction of existing and future liabilities (accounts payable / short term OPEX): Applying for subsidies, switching to short-time work, deploying cost saving programs (with immediate impact), negotiating and settlement of liabilities with debt owners.
- Extension of due dates: Through negotiations reaching extensions of due dates, agreements of down payment, moratorium etc., simply anything, which helps to preserve the cash on account, and prolongs the payments to third parties. Widely known is the Chapter 11 as the protection through a court decision. Chapter 11 offers a save harbour for distress companies. However, applying Chapter 11 is publicising the distress situation to a wide community. The protection from the cash drain and the risk of immediate legal actions of debt owners (with potential fatal outcomes for the company), comes at the price of further doubtful impact for the reputation. This is reflecting directly to the second area of concern:
Building trustBuilding trust with core stakeholders is more difficult and will provide less feedback and tangible elements of negotiations. To convey a positive outlook on the future is core, in order to find support and trust to compensate for the inevitable setbacks over the course of the turnaround. Addressed are shareholders, (potential) investors, debt owners, the non executive board, customers, suppliers, and employees.
- A growth perspective (beyond the turnaround) is relevant for investors not to look for alternative investment opportunities and execute a divestment; for suppliers, to perceive even a distress company as relevant account and invest also in the business relationship.
- Future-oriented with drive for innovation, is relevant (also) for customers and employees, to find themselves being serviced with / being part of a dynamic and further evolving product offering, where going concern is not at stake.
No guarantees givenNone of these elements can be guaranteed, but will be result of the vision and persuasive power of the turnaround executive. Specifically in harsh turnaround situations, personal credibility is an important lever, to foster trust, but also put at stake. The fear from financial losses of the stakeholders in case of a bankruptcy can support the trust building process:
- Often, the divestment from a distress company comes with heavy losses for the investors. To avoid sunk costs, investors are likely to stay on-board.
- Depending on employment market situations, employees are likely to stay on-board, to void immediate unemployment. However, here an adverse selection applies. Those talents, being in a liquid employment situation are likely to step out of the company, if risk and opportunity costs are perceived to be too high. The turnaround executive has to be sensitive not find herself surrounded by residual, low(er) performing employees. In addition, the process, prior to the turnaround, is for the employees very often energy draining and contaminated with negative energy. To revitalize the workforce is critical.
- The evaluation of alternative suppliers is imperative for customers, in order to perform risk mitigation. Long-term contracts, a strong value proposition, a very close communication, individual services and developments etc. are elements, which help to manifest customer relationships. Decreasing the price is also a way to increase the value proposition of a service or product. Decreasing margins in a turnaround situation is a specifically unpopular decision, whereas retaining customers at the same time is core.
2.) 1 -2 quarters – kick-off, of the turnaround plan
“No plan survives first market contact!”No experienced turnaround executive will start a new engagement, without actually having already his turnaround plan at hand, before he enters her new office for the first time. Very often, the board and / or investors prior to the nomination of the turnaround CEO approve this “master plan”. Remunerations may be tied to the plan and the achievement of the respective milestones. Yet, all stakeholders are to understand, reality may differ from the plan, volatility may shape the numbers, whereas the plan refers to smooth and stabile trends. The turnaround process will test the skills of the management at multiple occasions. Pivoting on the implementation of the strategy might be a good, if not the only way, to adjust the turnaround plan to the ever-changing economic and market environment.
“Walk as you talk.”The combined efforts and contributions of all stakeholders lead to the success of the turnaround. Hence, it is critical; the turnaround plan is in-line with explicit and implicit agreements, of the “building trust” phases. Without hard evidence of the achievements, transparency in the good, the bad and the ugly is important, to maintain the trust to the turnaround plan aka the management. Keeping a short distance and rather “over-communicating” to stakeholders is important during the initial phases of the turnaround.
3.) 2 – 3 quarters – getting tractionReinsuring stakeholders, the turnaround being on track is core to justify their prior investments, as well upholding their continuous support for the firm. Within two to three quarters, behaviour and operating change should be evident to employees, customers and shareholders, fostering morale and confidence. Relevant approvement of the turnaround strategy can come from the investor’s market as well as from the client side. With regard to investors, approvement has to be independent of follow-up financing, with considerations to asset protections. Hence, typically new investors without investment legacy can approve a turnaround strategy. Depending on sales cycles, customers are the second (and in reality most common) source of approvement. While eyes are on cash, revenue can be recognized before accounts receivable (AR) reflect the course of the business. Under IFRS, only delivered and invoiced services can be recognised as source of revenue. Additional KPIs can help, to create trust for stakeholders at an earlier state:
- Order entry, as the earliest point of time, where a legal binding agreement is in place
- Work in progress (WiP), signals the value of orders, before recognizing those as revenue
4.) 3 – 4 quarters – heading northWithin three to four quarters, operating fundamentals should show marked improvement. Market traction, in terms of proceeds from revenues, is the one critical number; investors and other stakeholders will have their focus on. Nevertheless, the critical monitoring of the turnaround includes stabile and integer business processes. Observable evidence can focus on: Increased operational performance, higher efficiency of the firm as well as increasing sales results. Hence, the company is either on a clear course for operational break-even, or on the verge to scale. Scalability of the business model includes for start-up and growth firms a situation, where an increase of resources will improve business results in a reliable and predictable way. EBIT correlates to resources, available, hence invested capital. ROIC will remain stable with the increased investments, respectively is very likely to improve, benefitting from economies of scale. Coming up: Turnaround a company for going concern? Rather go to Las Vegas!
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