- Stopping the downward spiral.
- Kick-off of the turnaround plan.
- Getting traction.
To turnaround, a firm is a race against time.Turnaround situations result often from situations of rapid change, where accelerating dynamics of (involuntary) transformation exceeds the capabilities of the fir to adapt. Possible root courses can often be found in the legacy of a company. Hence, the main objective in a turnaround situation is, to plan and execute fundamental changes to a company and its stakeholders, making up for mistakes, wrong assessments, and shortcomings of the past. Hence, moving fast forward, the company is to catch up with market standards on an accelerated path.
Rules of engagement change, when the sh*t hits the fanThe rational of cause and effect rules markets. Hence, in most business situations, managers focus on understanding market metrics good enough, to create positive results, based on established logics of inputs and outcomes. This translates into sales results, operational efficiencies, ROI….. basically anything, measured and monitored by a KPI. The setting is suddenly changing, once a company is slowly sliding from “having reached a plateau of growth” to “the usual cuts and saving programs” to “eroding customers and losing money everywhere” Once in the distress situation, stakeholders are getting quickly nervous and change their objectives. Consequently, asset protection and risk mitigation is stepping in for many as a rational reaction; emotionally, many individuals are anything but prepared to deal with distress situations, hence, decisions and activities start to become increasingly irrational.
With uncertainties, complexity rises.Focussing on an impactful transformation, managing uncertainties comes on top for a turnaround executive. These may include, but are not limited to (e.g.):
- Employees may be leaving
- Terminated Loans and credit lines
- Increasing difficulties to refinance
- Customers leaving
- Suppliers changing terms of payment
- …. etc.
How long should a turnaround take?It is the core objective of a turnaround, to deliver quick results and impact. Because there is nothing like “the typical turnaround”, there is also not a precise and reliable timeframe. The size of the firm, industry, and economic/regulatory environment is impacting the dynamic of a turnaround. From experience and market observation a rule of thumb is established. It is fair to say:
- The bigger, the longer
- Industrial/production (asset-heavy), longer than services
- The more regulated, the longer
- A stable economic environment (general market trends, competition, etc.) may support or hinder a quick turnaround. This is kind of a wild card, which can turn our to be either good or bad for a turnaround.
Signs of an arising distress situationThe actual distress situation is often the result of a longer process, where various KPIs are heading south. Among other signals, financial KPIs, as well as interdependencies inside the organization, provide evidence about an arising distress situation. Hence, signals are visible to the inside as well the outside of an organization. As a rule of thumb, these indications can accumulate over a period from anything between 6 – 24 months. Consequently, the distress situation becomes evident, as soon as on the one hand side goodwill (in terms of trust and reputation) with employees, customers, suppliers, financial partners, and shareholders and on the other hand side, residual cash reserves are consumed. The consumption of residual cash sets the tipping point. Therefore, as long as the firm has access to cash and financial liabilities are serviced, it is relatively easy for the management, to convince stakeholders of the going concern. Coming next: How long should it take, to turnaround a company?!
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Thanks so much for the blog post.