Leading Corporate Turnaround How Leaders Fix Troubled Companies

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Presentation explain leading corporate turnaround how leaders fix troubled companies.

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Leading Corporate
Turnaround
How Leaders Fix Troubled
Companies
Stuart Slatter
David Lovett
Laura Barlow
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Leading Corporate
Turnaround
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Leading Corporate
Turnaround
How Leaders Fix Troubled
Companies
Stuart Slatter
David Lovett
Laura Barlow
iii
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Copyright
C
2006 Stuart Slatter, David Lovett and Laura Barlow
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Library of Congress Cataloging-in-Publication Data
Slatter, Stuart St. P.
Leading corporate turnaround : how leaders ?x troubled companies /
Stuart Slatter, David Lovett, and Laura Barlow.
p. cm.
Includes index.
ISBN-13 978-0-470-02559-8
ISBN-10 0-470-02559-X
1. Corporate turnarounds – Management. 2. Leadership. I. Lovett, David.
II. Barlow, Laura. III. Title.
HD58.8.S58 2006
658.4

092 – dc22 2005027090
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
ISBN 13 978-0-470-02559-8 (HB)
ISBN 10 0-470-02559-X (HB)
Typeset in 11/13pt Plantin by TechBooks, New Delhi, India
Printed and bound in Great Britain by TJ International Ltd, Padstow, Cornwall, UK
This book is printed on acid-free paper responsibly manufactured from sustainable forestry
in which at least two trees are planted for each one used for paper production.
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Contents
About the Authors vii
Acknowledgements ix
Introduction xi
1 The Leadership Challenge 1
2 The Turnaround Framework 19
3 Before the Turnaround Begins 49
4 New Leadership 71
5 Crisis Stabilisation 97
6 Stakeholder Management 113
7 Strategic Focus 135
8 Changing Critical Business Processes 159
9 Leading Organisational Change 177
10 Financial Restructuring 197
Appendix Society of Turnaround Professionals 227
Index 229
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About the Authors
Stuart Slatter Founding partner of Stuart Slatter & Company,
Chairman of Stuart Slatter Training and a Visiting Fellow in Strate-
gic and International Management at the London Business School
(LBS).
Stuart Slatter has over twenty-?ve years of experience in providing
strategic consultancy advice and management education to senior
management throughout the world. While a full time faculty mem-
ber at LBS, he was Dean for Executive Education, Director of the
Senior Executive Programme, and Chairman of the Strategic and
International Management Department. He has been a Visiting Pro-
fessor at the University of California (UCLA) and at the University
of Capetown. Prior to joining LBS, he was Managing Director of a
subsidiary of a UK public company, and a senior management con-
sultant with Booz, Allen & Hamilton in New York specialising in
marketing strategy.
He holds a law degree from Cambridge University, an MBA de-
gree from Stanford Business School, and a PhD in marketing from
London University. He is a quali?ed barrister-at-law, and is the
author of a number of books and articles, including “Gambling
on Growth”, Wiley (1992), and “Corporate Turnaround”, Penguin
Books (1999). He was one of the founding directors of the Society
of Turnaround Professionals in the UK, and can be contacted via
www.slatter.co.uk.
David C. Lovett David Lovett, a Managing Director with AlixPart-
ners and a member of the European Executive group of the ?rm, is
a business graduate, a fellow of the Institute of Chartered Accoun-
tants of England and Wales, a fellow and a founding member of the
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viii ABOUT THE AUTHORS
Society of Turnaround Professionals. Before joining AlixPartners,
David was with Andersen for 18 years, where he formed Andersen’s
London-based turnaround practice in the early 1990s and subse-
quently led the Global Turnaround practice. He co-authored “Cor-
porate Turnaround” with Stuart Slatter in 1999.
During the last 30 years, David has advised all the classes of stake-
holders in troubled companies. He has led many corporate restructur-
ings and turnarounds in both an advisory and of?cer capacity serving
as Chief Financial Of?cer and Chief Restructuring Of?cer.
David has extensive cross border restructuring experience and is
familiar with the changing trends in insolvency and restructuring
legislation. He is driven by a desire to minimise economic loss to
stakeholders while his clients manage the turbulence of forced trans-
formation.
AlixPartners is recognised internationally as the “industry standard”
for solving complex business challenges, helping companies improve
operating and ?nancial performance, and restoring corporate value.
Founded in 1981, it has been retained by hundreds of companies
throughout the USA, Europe, Asia and Latin America and has
worked in virtually all industries and sectors.
Laura BarlowLaura Barlowis a Director in AlixPartners’ European
Turnaround and Restructuring practice. Over the past 15 years she
has been an adviser to both creditors and debtors in troubled situa-
tions and has worked with numerous companies to help themachieve
operational turnaround and ?nancial restructuring. She has taken
interim management roles in several troubled companies, restor-
ing stability and leading the development and implementation of
turnaround plans. Her current focus is on providing restructuring
advisory services to corporates, including taking Chief Restructuring
Of?cer positions where appropriate.
Laura is a graduate of Oxford University, a Chartered Accoun-
tant and SFA Securities Representative. She is a regular speaker at
European conferences on turnaround and restructuring and at the
London Business School on the Managing Corporate Turnarounds
course.
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Acknowledgements
The research for this book was only made possible through the co-
operation of the Society for Turnaround Professionals (STP) in the
UK. Ian McIsaac of Deloittes and John Harris, who were respec-
tively the Chairman and Chief Executive of STP when the research
commenced, were most supportive and encouraged STP members
to participate. The Appendix provides more details about STP.
Sixty members of STP and twenty other leading turnaround prac-
titioners were interviewed by students on the MBA and Sloan pro-
grammes at London Business School (LBS) during the spring and
summer of 2003. We would like to thank all those individuals for the
generous amount of time they gave to talk to the LBS students. We
have only named a few of those interviewed in the book although
the quotes are taken from a wide cross section of those interviewed.
The students who undertook the interviews did so as part of an ex-
tremely popular course on Managing Corporate Turnarounds, which
is taught by Stuart Slatter at the London Business School. We are ex-
tremely grateful for their efforts and analysis.
We have also drawn heavily on the experiences of Chairmen and
Chief Executives who have come as guest speakers to the Manag-
ing Corporate Turnaround course at LBS over recent years and to
bankers, private equity players, AlixPartners, and other senior ex-
ecutives who have given generously of their time in conversation
with us. Two colleagues at AlixPartners, Peter Fitzsimmons and Lisa
Donahue, were particularly helpful in sharing the applicability of their
transatlantic perspectives to the European markets. We should em-
phasize that the views and opinions expressed in this book do not
necessarily state or re?ect those of AlixPartners, Ltd. or its world-
wide af?liates and employees.
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x ACKNOWLEDGEMENTS
We are hugely indebted to the leaders who took time out of their busy
schedules to read the manuscript and provide us with their comments
for the cover of the book.
Barbara Meade of Stuart Slatter Training and Petra de Souza
Thomson of AlixPartners have been wonderful in preparing the
manuscript, working tirelessly and cheerfully on it while juggling
other priorities.
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Introduction
T
nis nook cxiLoncs 1nc noLc or Lcabcnsnii iN coniona1c
turnarounds based on interviews with over 80 turnaround prac-
titioners (75% of whom are members of the Society of Turnaround
Professionals in the UK and our collective experiences as advisers to
companies in trouble. The book does not set out to develop any new
theories of leadership but seeks to describe howleadership is provided
by turnaround practitioners throughout the turnaround process.
In our earlier book, Corporate Turnaround (Penguin Books 1999)
?
we identi?ed seven key ingredients that characterise a successful
turnaround, and described what turnaround practitioners need to do
to rescue a distressed company. We have taken this same framework –
describedinChapter 2 – andlookedat howleading turnaroundpracti-
tioners provide leadership for each of these ingredients (Chapters 4 to
10). In the course of our research we discovered that good leadership
is critical even before the start of the turnaround – often many months
in advance – since stakeholder commitment to the turnaround pro-
cess must be obtained before any turnaround can begin. Chapter 3
explores how leadership is provided at this stage of the process.
There is often a debate about where turnaround ends. Is it after
stabilisation? Is it after refocusing and ?xing the business? Or is it
after rejuvenating the company and embedding a new organisational
culture? Our de?nition of a turnaround stops short of the latter al-
though, as we will see in the book, a few turnaround leaders are
able to adapt their leadership style towards the needs of longer term
transformation and growth. What is clear is that the leadership style
necessary in the early stages of a turnaround is not appropriate for the
?
Published as Corporate Recovery in the USA. (Beard 2004).
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xii INTRODUCTION
transformation challenge of building a sustainable organisation in the
longer term.
The emphasis on survival early in the turnaround process implies
the need to achieve rapid performance improvement, usually within
a 6 to 18 month time frame, and sometimes even sooner. The need
to deliver short-term results is what turnaround practitioners focus
on; leaving the longer term success of the company to a subsequent
leader.
Our experience in advising companies that need to change but are
not in ?nancial distress leads us to believe that the book has wide
implications for all managers whether or not their organisation is in
crisis. If under-performance is the problem and rapid improvement
in ?nancial performance is required by the key stakeholder(s), then
the leadership approach used by turnaround practitioners is required
to achieve results. This is what happened at Gillette between 2001
and 2003 when a new chairman/CEO, Jim Kilts, was brought in to
improve performance. The actions he took and the leadership styles
he used were “textbook” turnaround even though Gillette was not in
a ?nancial crisis.
We would go one step further and say that in any business where there
is a recognised need for transformation, because the current success
formula is approaching the end of its life, the transformation process
will not take root unless it is kick-started by the type of leadership
approach used by turnaround leaders. Most corporate transforma-
tion efforts fail because there is no sense of urgency for immediate
results, and senior management is not willing or capable of adopting
a short-term, results-oriented leadership style.
Leading change, which this book is about, is an enormous topic
and has been the subject of many good books. However our focus
is on radical short-term change which delivers fast ?nancial gain. We
believe that the book we have produced here on leading corporate
turnaround is a major contribution that is easy to read. We hope you
will enjoy it.
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1
The Leadership Challenge
T
cnNanocNb inac1i1ioNcns anc nc or1cN associa1cb
with ruthless “downsizing” rather than the more inspiring con-
cept of leadership. Yet leadership is never more important than when
survival is at stake, and corporate turnarounds are no exception.
Management skills are a critical ingredient but exceptional leader-
ship is required at nearly all stages of the turnaround process if a
sustainable turnaround is to be achieved.
There are many dif?cult leadership challenges facing the turnaround
practitioner, particularly the turnaround executive (usually a new
chairman or CEO) who has the ultimate responsibility for achieving
the turnaround of a distressed corporate. He or she faces all or most
of the following challenges:
r
Convincing the key stakeholders that turnaround is the best op-
tion for recovering value in the distressed company.
r
“Grabbing hold” or taking control of the company so that all
stakeholders and particularly the staff realise that new leadership
is in place.
r
Changing management as appropriate and building a new man-
agement team to support the turnaround.
r
Instilling an immediate sense of urgency and performance orien-
tation into the distressed company.
r
Implementing tight management and ?nancial controls.
r
Developing and communicating a vision for the business and
obtaining ownership and buy-in to the vision by managers and
employees.
1
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2 LEADING CORPORATE TURNAROUND
r
Prioritising what needs to be done to ?x the business, and ensur-
ing that the necessary actions are implemented.
r
Rebuilding the organisation’s effectiveness which is likely to in-
volve embedding a new culture into the business.
r
Providing ongoing stakeholder management, including leading a
?nancial restructuring of the corporate entity.
Turnaround Practioners
We ?nd that leadership is provided in turnaround situations by
turnaround executives, ?nancial stakeholders (both equity owners
and creditors), advisers and occasionally by interim managers. Re-
cently a new category of turnaround leader has emerged, the Chief
Restructuring Of?cer (CRO), who is usually an adviser but will as-
sume line management and Board level responsibility for speci?c
aspects of the turnaround. We will look at each brie?y in turn.
Turnaround Executives
Popularly known by journalists as company doctors, these individ-
uals take executive responsibility in the distressed company. They
usually come in as chairman or chief executive of?cer, and have full
authority to take decisions within the limits imposed or agreed by
the controlling stakeholder(s), who are either the debtors (the equity
owners) or the creditors (usually the bankers or increasingly spe-
cialist funds that hold debt in distressed companies). Sometimes the
turnaround professional is brought in as deputy chairman or chief
operating of?cer – as in a family-owned business for example – but
if he or she is to do the job, then that individual is de facto the chief
executive.
Financial Stakeholders
Although shareholders and in particular banks almost never have or
want executive responsibility (except perhaps in an owner-managed
business where the shareholders are also executives), they often play a
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THE LEADERSHIP CHALLENGE 3
key leadership role in triggering the start of a successful turnaround
process. The reader will see examples of this in Chapter 3, when
we talk about the decision to undertake a turnaround; and again in
Chapter 10 on ?nancial restructuring. Private equity houses, mezza-
nine funders, banks and specialist recovery funds play bigger lead-
ership roles in turnarounds than many observers realise, particularly
given the rapid growth in secondary debt trading and distressed asset
investment in recent years.
Advisers
Until recently corporate recovery departments of accounting ?rms
often played a leadership role in galvanising incumbent management
to take action – usually when there was a leadership void and oc-
casionally they provided leadership in a speci?c area such as cash
management or ?nancial restructuring where they had specialist ex-
pertise that did not exist within the incumbent management team.
The increased regulation of accounting ?rms following the corpo-
rate governance failures predominantly in the USA has resulted in
these ?rms reconsidering their service offering with the result that
the number of specialist advisory ?rms who perform this work has
grown considerably. Specialist teams within certain investment banks
are increasingly involved with the balance sheet restructuring work
that was once the preserve of the corporate recovery departments.
Chief Restructuring Of?cer
This is a relatively newcorporate role which ?rst emerged in the USA
and is now gaining popularity in Europe. The Chief Restructuring
Of?cer (CRO) is always an experienced recovery professional who
focuses on crisis stabilisation, stakeholder management and ?nancial
restructuring.
The CRO usually acts as a special adviser to the chairman, CEO or
Board with responsibility for leading whatever ?nancial restructuring
is necessary – ?rst, to allow a turnaround to take place and, second,
to ensure that there is an appropriate ?nancial structure for the longer
term. The demand for the services of a CRO re?ects the increasing
complexity of capital structures even in mid-sized corporates, and
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4 LEADING CORPORATE TURNAROUND
therefore of the ?nancial restructuring process. It is also a recognition
that many turnaround executives, while capable chairmen or CEOs,
lack the expertise – and indeed the time – to lead a complex ?nancial
restructuring in parallel with an operational turnaround. The CRO
is not a permanent position, but while working with the company he
or she becomes central to everything that is occuring.
The appointment of a CRO is increasingly a precondition of support
by ?nancial stakeholders who need this aspect of the turnaround to
be led by an experienced restructuring practitioner.
Interim Managers
Short-term management resources are sometimes introduced by the
turnaround executive to deal with immediate business problems, par-
ticularly if radical changes are immediately required in the senior
management layer. Sometimes these interim managers are part of
a “commando” team who move around with a turnaround execu-
tive. They sometimes provide functional leadership but their role is
primarily to bring experience to the management of critical tasks.
Turnaround Executives: What they Do
and Who they Are
There is a wide spectrum of capabilities among turnaround execu-
tives. While we advocate that the complete turnaround leader should
be able to lead and manage all the critical ingredients that make up
a good turnaround, the reality is that many do not have the desire or
capability (or both) to lead all aspects of the process. This is not in
itself a bad thing. They are all experienced, con?dent individuals who
knowtheir limitations which initself is anattribute of goodleadership.
What we see in practice is a spectrum of turnaround executives rang-
ing from those who specialise in crisis stabilisation to those who un-
dertake the complete turnaround and are prepared to stay on after
the turnaround is complete to lead future growth and organisational
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THE LEADERSHIP CHALLENGE 5
transformation. All turnaround professionals undertake crisis stabili-
sation, but relatively fewhave the desire or capability to continue once
the company has been returned to a stable condition. The particular
skills and attributes of the typical turnaround executive (as discussed
in the next section) do not ?t with the needs of steady-state or growing
organisations.
We see a sharp distinction between the turnaround executive who
only does crisis stabilisation work and is rarely in a company for more
than 6 to 12 months (and many for as little as three months), and
the turnaround executive who does the stabilisation and also ?xes the
critical underlying problems of the business. This takes longer and is
likely to involve leadership over at least a 12- to 24-month period.
The crisis stabilisation specialists will take management control, im-
plement strict cash and cost controls, negotiate with the key stake-
holders and change a few key managers at the top. Their aim is to
ensure not only the short-term survival of the business but also that
there is a management team in place who can ?x the business prob-
lems that caused the crisis in the ?rst place. These turnaround ex-
ecutives often have a ?nancial background, and many have worked
in their early careers in the insolvency profession. They stick to what
they are good at – managing ?nancial crises – and believe that the
business should be ?xed by managers who know the industry and are
going to be responsible for its future performance.
The complete turnaround executive, as we like to call that person,
believes that a turnaround is not complete unless and until the un-
derlying causes of distress have been dealt with. He or she believes –
and we agree – that an effective turnaround usually requires strategic
refocusing, critical process improvements and some degree of organ-
isational change if the business is not to revert into a turnaround
situation. Not surprisingly many turnaround executives fall some-
where between the two “types” we have described – they initiate and
lead strategic change and critical business process improvements to
rectify the business problems, but do not participate too deeply in
all the detailed management activities that are necessary to effect a
complete turnaround.
In a large organisation, particularly one with many diversi?ed busi-
ness units, the turnaround leader operating at the corporate level
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6 LEADING CORPORATE TURNAROUND
would not be expected to be involved in detailed competitive strategy
analysis and process improvements (although many do in practice).
However, in smaller companies, where it is more dif?cult to have
good-quality senior managers, it is extremely risky to delegate re-
sponsibility for making decisions that are critical to the success of the
turnaround. Although the senior managers may know their industry,
their analytical and decision-making skills may be woefully inade-
quate. Furthermore, their capability to implement change through-
out the organisation is still likely to be weak, unless a suf?cient critical
mass of new high-quality middle managers has been brought in. This
is particularly the case where the previous leader or CEO was highly
autocratic and senior management are not accustomed to managing
change.
Who are the individuals that work as turnaround executives or com-
pany doctors? They are a relatively small group of experienced exec-
utives who at some stage in their career – out of choice or serendipity
(but usually the latter) – became involved in managing a company in
?nancial distress. Having done it once they become hooked on the
buzz, the challenge and the adrenalin rush that comes from turning a
company around. Anecdotal evidence suggests that many turnaround
executives are unemployable in a large company environment, since
they are quickly frustrated by what they see as bureaucracy and slow
decision making. They are tough, competitive individuals with enor-
mous will power, who “call a spade a spade” and “are happy to take on
anybody who wants a ?ght”. They are also “loners” who do not need
or want social relationships in the workplace. As one executive put it:
“I don’t need friends at work . . . respect will do very nicely thank
you.”
This is at the heart of leadership. Leadership is not about being loved
by everyone: it is about being understood and respected by enough
people to get the job done.
We have been fortunate to have had access to a piece of propri-
etary research carried out to look at the psychological characteris-
tics of leading turnaround executives in the UK. It shows remarkable
consistency with the anecdotal evidence in that the vast majority of
turnaround executives are logical, objective decision makers, who are
very task focused and want to control their external environments.
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THE LEADERSHIP CHALLENGE 7
Very few individuals show a tolerance for ?exibility and ambiguity.
Most want to exert a great deal of control over others’ actions and
decisions, but do not want anyone else to have control over them!
They will happily accept a lot of responsibility – perhaps even over-
extending themselves – and are very competitive with both themselves
and others. They thrive on authority, responsibility, predictability,
stability and consistency. Ambiguity and change are tolerated only to
the extent that this is necessary while they return the organisation to
a stable state.
Turnaround practitioners are detached and logical, and seen as tough
and uncompromising. They like clear objectives, and when they are
convinced of something they make it happen. They push people hard
to achieve deadlines, can be extremely impatient and do not hesitate
to “ruf?e feathers” in the process. They do not show much empathy
and have a low need to be included in social activities. They prefer
not to socialise with work colleagues and are highly selective with
whom they choose to interact. They are self-suf?cient and exhibit
healthy levels of con?dence, although most are not charismatic lead-
ers. Another characteristic of turnaround executives is their stamina.
Turning a company around is a “24/7 job”; it requires long hours,
the ability to work under (often quite extreme) stress and, of course,
total commitment. “I was breathing, living and dreaming about the com-
pany for months . . . in a quest for the best solution,” said one turnaround
executive.
Box 1.1 provides a glimpse of how turnaround executives describe
themselves.
Box 1.1 How Turnaround Executives Describe Themselves
r
“Tough, fair and above all decisive.”
r
“Highly communicative, fast acting, trustworthy, inclusive, tough
but fair.”
r
“I listen quietly, I tell it straight and then I take action.”
r
“I select a team, I call a spade a spade, I ?x the issue, I keep
control, I don’t expect to be liked, I’m dogged but I get out before I
lose the buzz.”
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8 LEADING CORPORATE TURNAROUND
r
“I am matter of fact, straightforward. Don’t suffer fools gladly.
Detail minded. Like good quality information, like numbers and
business propositions. I am quite aggressive and direct.”
r
“Decisive and persistent.”
r
“I am highly communicative, fast acting, trustworthy, inclusive,
tough but fair.”
r
“I amquick to get to the point, quick to decide, ruthless in execution,
cold and ef?cient, a hard worker. People who work for me feel
included, are informed about what is happening and know what
the milestones are.”
What is Turnaround Leadership?
Turnaround leadership, in broad terms, is the role a person plays in
trying to change an organisation for the better. A leader is someone
who has the ability to convince others to follow the path he or she
decides. Much has been written on the subject of leadership and there
is no shortage of options when looking for a de?nition.
Since this book is about leadership, albeit in the speci?c context of
corporate turnarounds, we need to be clear on how we have de?ned
leadership for the purposes of our research. The de?nition we like –
because it is simple and has been widely accepted – is that used by
John Kotter in his seminal book, Leading Change, where he describes
the difference between management and leadership:
“Management is a set of processes that can keep a complicated sys-
tem of people and technology running smoothly. The most impor-
tant aspect of management include planning, budgeting, organising,
staf?ng, controlling and problem solving. Leadership is a set of pro-
cesses that creates organisations in the ?rst place or adapts them to
signi?cantly changing circumstances. Leadership de?nes what the fu-
ture should look like, aligns people with that vision and inspires them
to make it happen despite the obstacles.”
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Managers and leaders have different strengths. Richard Kovacevich,
chairman and CEO of Wells Fargo Bank, puts it this way:
“Managers rely on systems, leaders rely on people. Managers work
at getting things right, leaders work on the right things. The answer
to every problem, choice or opportunity in our company is known to
someone or some team in the company. The leader only has to ?nd
that person, listen and help them effect the change.”
Never is this more true than in a corporate turnaround. The answers
are usually there within the company but what has been missing is
the leadership to deal with the problems the organisation faces. As a
turnaround executive put it to us:
“You are destined to fail unless you can get the plans you present
implemented. . . . It all comes down to leadership . . . it’s about people.”
Yet the people you need are often in denial when a crisis hits – not
just the management of the distressed ?rm but sometimes even the
?nancial stakeholders. It is an emotional time: people’s behaviour
is not always rational. The turnaround leader is the one who has
to provide the leadership necessary to bring sense and order to the
situation.
Turnaround executives display many of the classic characteristics of
good leaders but the big situational difference in turnarounds is that
time is of the essence. A conclusion of a recent Harvard Business
Review article was that “the (new) CEO must learn to manage organisa-
tional context rather than focus on daily operations”. It went on to say that
“the CEOmust learn to act in indirect ways . . . to create the conditions that
will help others to make the right choices”.
?
This is ?ne for a successful
business, but such an approach would be completely inappropriate in
a turnaround situation. The priority for turnaround executives is to
save the company, which means being “very hands on” and extremely
focused on three or four mission critical objectives. The need for the
turnaround leader to become involved in management detail – even
in large companies – is one of the de?ning features of turnaround
?
Harvard Business Review, 2004.
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10 LEADING CORPORATE TURNAROUND
leadership. The leadership skills required to achieve dramatic short-
term change requires the use of several different leadership styles.
While there is a wide range of leadership styles among turnaround ex-
ecutives, virtually all exhibit the following leadership characteristics:
r
They quickly develop clear short term priorities and goals.
r
They exhibit visible authority.
r
They set expectations and enforce standards.
r
They are decisive and implement their decisions quickly.
r
They communicate continuously with all stakeholders.
r
They build con?dence and trust by being transparent and honest.
r
They adopt an autocratic leadership style during crisis stabilisa-
tion.
While it is generally accepted that coercive or autocratic leadership
usually has a destructive impact on organisational climate and longer
term results – because it restricts the development of people and
ideas – the early phases of a turnaround are the exception. Decisions
have to be taken very rapidly to ensure survival and there is little
time to win over management and staff. Having a new leader take
complete charge quickly may come as a relief to much of the work-
force if previous management was seen to be weak or if high levels of
anxiety exist due to the uncertainty caused by the crisis. Aligning and
motivating people to achieve short-termresults requires considerably
more communication than is normal in a “steady-state” organisation.
While the turnaround leader must take control quickly he or she risks
being too aggressive to achieve successful buy in. Success requires
decisiveness, clear direction, and a high level of communication, in-
spiration and motivation. Achieving quick results without being too
hard line is an “art”, born of considerable situational experience. The
leader must achieve a ?ne balance between gaining co-operation and
directing purposeful action to save the company.
The best turnaround leaders are able to develop and articulate a
medium to long-term strategic vision for a sustainable recovery and
embed a new organisational culture, which ensures that the com-
pany does not slip back into crisis. However, the objective of many
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THE LEADERSHIP CHALLENGE 11
turnaround situations is not long term sustainable recovery. A high
proportion of turnaround situations are sold off after stabilisation or
once recovery has started, so the turnaround leader does not need
the leadership skills required to bring about true transformation.
Leading and Managing
In successful organisations, leaders can emerge who are not neces-
sarily good at management but are able to choose good managers to
work for them. If good leadership is missing at the top in a successful
organisation, good management may be able to keep the business go-
ing successfully if major change is not required. However, this does
not apply in a turnaround situation.
Turnarounds usually involve a failure of both leadership and manage-
ment with the result that, at the start of a turnaround, the company
lacks both direction and control. If a successful turnaround is to be
achieved what is usually required is a quantum leap in performance
at the same time as restoring the disciplines necessary to provide pre-
dictable results. We believe that it is primarily leadership skills that
allow the quantumleap to occur, and management skills that provide
the discipline and predictability (see Figure 1.1).
MANAGEMENT
Planning and budgeting
Organising resources
Monitoring
Controlling
Sustainable viability
Quantum change Predictability
LEADERSHIP
Establish direction
Aligning people
Motivating and inspiring
Rebuilding self belief
Producing a success culture
Demonstrable change
Earning credibility
Figure 1.1 Leadership vs Management.
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12 LEADING CORPORATE TURNAROUND
While advisers and interim managers can and do provide some of
the management skills necessary in a turnaround, the turnaround
executive must be prepared to structure the management detail. As
one executive put it, “they must roll up their sleeves and tackle problems
personally”. This is as true with large companies as it is with small
companies. When Gillette brought in a new chairman/CEO – Jim
Kilts from Kraft Foods – in 2002, he personally undertook a de-
tailed diagnosis of each business unit on arrival. Every experienced
turnaround executive knows that the true ?nancial situation is nearly
always worse than the ?nancial stakeholders thought at the start.
Only by getting involved in some of the management detail can the
turnaround executive be certain he knows what is really happening
in the business.
We ?rmly believe that a good turnaround executive has both
good leadership and good management skills. In looking at what
turnaround practitioners do to deliver the seven key ingredients
that characterise successful turnarounds (described in more detail in
Chapter 2), we observe that both leadership and management skills
are required to varying degrees in all aspects of the turnaround pro-
cess. We have already mentioned in the Introduction how the need
for these skills starts prior to the beginning of the turnaround. In
some areas, such as changing management, stakeholder management
and organisation development, leadership skills dominate. In other
areas, such as implementing controls and critical process improve-
ment, management skills dominate, while in yet others a combination
is required.
Figure 1.2 shows our assessment of the relative importance of lead-
ership and management skills throughout the turnaround process.
The fundamental reason why turnarounds require a broad range of
management and leadership skills is because the turnaround process
is not just about crisis stabilisation but also about putting in place
a strategy, new processes and an organisation that will prevent the
company slipping backwards into another crisis.
The ideal turnaround leader during crisis stabilisation is the rare
breed of individual who is absolutely decisive and autocratic when
necessary, yet has the ability to motivate and energise people to attain
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THE LEADERSHIP CHALLENGE 13
Before the turnaround begins
New leadership
Crisis stabilisation
Stakeholder management
Strategic focus
Critical process improvements
Organisational change
Financial restructuring
Management Leadership
Necessary
Important
Critical
Figure 1.2 Relative emphasis on leading vs managing.
their best under intense pressure. Such leaders have the focus and
unwavering determination to see their organisation survive. They are
fantastic communicators. They are aware of their own shortcomings
and choose senior teams with skills that are complementary to their
own. However, a consensus leadership style is required to convince
stakeholders to support a turnaround in the ?rst place and for ?-
nancial restructuring. Fixing the business requires an authoritative
but moderately autocratic style, while moving to sustainable recov-
ery requires a complete shift towards a more af?liative and coach-
ing style of leadership. Unfortunately most turnaround professionals
lack the entire spectrum of leadership and management skills to do
this. For a turnaround leader to take a business all the way through
the turnaround process to sustainable recovery, he or she needs to
demonstrate an extremely wide range of management and leadership
capabilities, adopting the right approach and emphasis at the right
time and in the right measure.
Providing they knowtheir weaknesses, which appears to apply in most
cases, then the necessary capabilities can be either brought into the
top team or temporarily hired from outside sources. One of the most
common areas where this occurs is in ?nancial restructuring, where
many turnaround executives do not have the necessary experience or
specialised management knowledge.
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14 LEADING CORPORATE TURNAROUND
Goodbye Stereotype
Turnaround executives have often been characterised as tough, no-
nonsense managers who “do not suffer fools gladly” and “do not
take prisoners”, and are often depicted as ruthless, autocratic indi-
viduals. Carlos Ghosn, who turned around Nissan and is now also
CEO of Renault, was dubbed “Le Costcutter” and Al Dunlap, a US
turnaround practitioner, was referred to as Al “chain saw” Dunlap.
Jon Moulton of Alchemy, one of the more successful investors in dis-
tressed companies, talks of the need to be “brutal” or “violent” –
by which he means being courageous in making tough decisions
quickly, to remove or ?x problem areas. While there is an aspect
of successful turnarounds that usually requires deep cost-cutting and
asset reduction, with the inevitable loss of jobs, this will only stabilise
the business temporarily. Cost and asset reduction by themselves will
buy breathing space but will never lead to a sustainable recovery situ-
ation. Most practitioners realise this and most acknowledge that they
are not the right people to lead a turnaround beyond stabilisation and
into subsequent growth.
Good turnaround leaders recognise that while they need to be auto-
cratic to ensure that decisions are made and implemented rapidly –
for survival – they also recognise that such a leadership style should
be as short-lived as possible.
Many of the competencies that contribute to turnaround leaders’
effectiveness in a crisis hinder them from being able to sustain lead-
ership roles in the same organisation over the longer term. Their
decisiveness and desire to control may breed caution among their
subordinates. Furthermore, as they often lack patience they also lack
the temperament to nurture new ideas. A few exceptional individuals
can make the transition, but not many.
Individuals interviewed for our research all echoed the need to iden-
tify reliable, capable people, to build teams, to make managers ac-
countable and to delegate decision making as quickly as possible.
However, they also recognised the need to maintain tight controls
during the transition phase until they could trust their managers
to deliver the necessary results. Companies in trouble are often
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THE LEADERSHIP CHALLENGE 15
ill-disciplined, and lack any sense of a performance-oriented culture,
so delegation without control is totally inappropriate.
We see two reasons why turnaround professionals have begun to pay
more attention to people management. First, and probably most im-
portant, business managers are generally better educated and are
not prepared to work in an autocratic environment – at least not
for any length of time. Many turnaround situations today are in
knowledge-based industries where the departure of key staff can make
a turnaround extremely dif?cult to achieve. The turnaround leader
must therefore get buy-in to the need for a turnaround and involve the
staff to ensure that the recovery strategy is executed swiftly. Second,
turnaround management is growing and developing as a profession.
Historically, in the UK, it evolved from the accountancy and insol-
vency professions. Until recently most turnaround executives were
accountants by training and so, for many, turnarounds were syn-
onymous with a work-out, with a role akin to that of a receiver or
administrator, focusing on cash management, cost reduction and ?-
nancial control. This bias is still evident, but there are now more
practitioners who have had senior general management backgrounds
and recognise the link between good people management and cor-
porate performance. Nevertheless such individuals also need strong
?nancial capabilities to effect a successful turnaround, or at the very
least know they need to bring in such capabilities into their team.
Our Findings and Conclusions
This book is ?rst and foremost a review of how the best practitioners
provide leadership in turnaround situations. From our research, we
can draw a few general conclusions:
1 There is a wide spectrum of leadership styles among turnaround
practitioners: they do not conform to a single stereotype and dif-
ferent leadership styles can achieve a successful outcome.
2 While there is no single successful style, some common charac-
teristics and approaches are exhibited by turnaround executives
when acting as chairman or CEO.
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16 LEADING CORPORATE TURNAROUND
3 Turnaround leaders, like good leaders elsewhere, are passionate
about winning.
4 Turnaround practitioners are sceptical by nature: over-
con?dence and over-optimism are traits you will not ?nd in a
successful turnaround leader.
5 While turnaround practitioners are all quite autocratic in the early
phase of the turnaround process, most recognise that they need
to start to build teams and delegate as early in the process as
possible.
6 All good turnaround leaders are also good managers, interested
in detail.
7 Practitioners vary from those who are very short-term “cash cri-
sis leaders” to those who are capable of ?xing the company’s
underlying problems and can lead the business into subsequent
growth.
8 Only very few practitioners have the capabilities or desire to re-
main with a business after it has been stabilised.
9 A few practitioners prefer to provide quiet leadership from “be-
hind the scenes” – for example, as a chairman – rather than adopt
the more visible leadership style of a CEO. However, the majority
are outstanding communicators and recognise this as one of the
most critical aspects of their role.
We conclude that the best turnaround practitioners are “hands on”
leaders – highly visible inside their organisation and capable of deal-
ing with broader strategic issues while remaining focused on the
operational detail. They are comfortable moving back and forth
(“morphing”) between leadership and management roles. The best
are true transformational leaders who help stakeholders recognise
the problems, articulate a vision of the desired end state and moti-
vate managers and employees to do what needs to be done. The
range of leadership styles exhibited by practitioners leads us to con-
clude that it is crucial that debtors and creditors choose turnaround
practitioners who are “?t for purpose”. While some practitioners
may be broad enough to have chameleon-like capabilities, many are
only suited to “what they know”. At a minimum, turnaround leaders
must have leadership qualities appropriate for achieving crisis stabili-
sation.
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THE LEADERSHIP CHALLENGE 17
While turnaround management is a generic subject and the same
principles apply across nearly all industries, the leadership challenges
are likely to differ as much as the management challenges in different
situations. As we will see in Chapter 4, the turnaround executive
needs to exhibit the 3Cs – clarity, credibility and courage – to grab
control of the situation. The better the ?t between the turnaround
executive and the leadership challenges, the easier this will be. For
example in B2B technology-based ?rms, where a crisis can spiral out
of control very quickly, persuading customers to stay with the ?rm
is usually a critical short-term action for the turnaround leader. We
saw this with Archie Norman at Energis, Michael Capellas at MCI
and Mike Parton at Marconi – all of whom needed to be “up front”
and inspire con?dence.
We now turn to Chapter 2 which provides the underlying framework
for this book, but those readers who are familiar with our earlier work
may prefer to move straight into Chapter 3.
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2
The Turnaround Framework
A
sccccssrcL 1cnNanocNb bcicNbs oN bcvcLoiiNc aN
appropriate turnaround prescription and effective implemen-
tation. The ?rst point addresses “what” needs to be done and the
second addresses “how” to do it. In our earlier book, Corporate
Turnaround, we developed an approach for achieving a successful
turnaround that consists of seven essential ingredients, and an im-
plementation framework consisting of seven key workstreams. This
chapter summarises those two frameworks, since the rest of this book
looks at how turnaround professionals provide leadership at each
point in the turnaround process.
Seven Essential Ingredients
The recovery of a sick company depends on the implementation of an
appropriate rescue plan or turnaround prescription. Characteristics
of the appropriate remedy are that it must:
r
address the fundamental problems;
r
tackle the underlying causes (rather than the symptoms);
r
be broad and deep enough in scope to resolve all the key issues.
One of the challenges for any turnaround leader is to ensure that the
rescue is built on a robust plan. Plans that try to tackle every prob-
lem of a troubled company, no matter how big or small, will fail as
limited resources are wasted on tackling “non-mission critical” is-
sues. The key is to focus on tackling the life-threatening problems.
A recovery strategy that is based on the symptoms rather than the
19
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20 LEADING CORPORATE TURNAROUND
underlying causes may make the patient feel better temporarily but
any long-term recovery strategy must be based on sorting out the
underlying causes of distress. Turnaround plans must be suf?ciently
broad and deep to ensure that all the mission-critical issues are ad-
dressed. Turnaround management involves radical rather than incre-
mental change. Very sick companies have serious problems that can
only be tackled through fundamental, holistic recovery plans.
In our experience, we have seldom encountered a turnaround plan
that was too drastic. The chief danger to avoid is doing “too little too
late”.
A successful turnaround or recovery plan consists of seven essential
ingredients:
1 Crisis stabilisation
2 New leadership
3 Stakeholder management
4 Strategic focus
5 Critical process improvements
6 Organisational change
7 Financial restructuring.
Successful turnaround situations are characterised by signi?cant ac-
tions in each of the seven areas. Failure to address any one of these
may endanger the successful outcome of the turnaround.
We put crisis stabilisation at the top of our list because it plays a criti-
cal role in any successful recovery situation. By securing a short-term
future for the business the turnaround leader creates a window of op-
portunity within which he or she can develop and implement medium
and long-term survival plans. Creating that short-term breathing
space is an essential prerequisite for a successful turnaround, as is
our second ingredient, new strong leadership.
The third ingredient addresses the critical role of stakeholders in
the recovery process and the importance of reconciling their often
con?icting needs and rebuilding their con?dence. The next three
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THE TURNAROUND FRAMEWORK 21
elements recognise the integrative nature of a business. Successful
organisations are based on developing a viable strategy, and then
aligning and integrating it with effective business processes and an
appropriate organisational structure. Our ?nal ingredient, ?nancial
restracturing, addresses the prerequisite of establishing a sound ?-
nancial base and appropriate funding for the recovery.
Each of these core areas of the turnaround plan is supported by a
range of generic strategies that address the problems most usually
encountered in each area. Our list of generic strategies is set out in
Figure 2.1. Clearly it is not an exhaustive list since each situation has
its own speci?c characteristics that require a tailored solution. Nev-
ertheless, there are a number of actions that are suf?ciently common
to most situations that we consider them to be generic turnaround
strategies.
1. Crisis Stabilisation
In most turnaround situations crisis stabilisation will have to com-
mence immediately. Substantially under-performing companies typ-
ically suffer from a rapidly worsening cash position and a lack of
management control. In many situations companies are in “free
fall”; senior management are paralysed in the face of an apparently
hopeless situation and, very shortly, the business faces the very real
prospect of running out of cash. The turnaround leader or who-
ever has effective management authority at the time must move very
rapidly to take control of the situation and commence aggressive cash
management.
The objectives of crisis stabilisation are:
r
to conserve cash in the short term and thereby provide a window
of opportunity within which to develop a turnaround plan and
agree a ?nancial restructuring;
r
to rebuild stakeholder con?dence by demonstrating that senior
management have taken control of the situation.
The approach requires very strong top-down control. The turn-
around leader moves quickly to impose a very tight set of con-
trols for the entire organisation. Devolved authority to spend money,
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22 LEADING CORPORATE TURNAROUND
3. Stakeholder focus • Communications
4. Strategic focus • Redefine core businesses
• Divestment and asset reduction
• Product-market refocusing
• Downsizing
• Outsourcing
• Investment
5. Organisational change • Structural changes
• Key people changes
• Improved communications
• Building commitment and
capabilities
• New terms and conditions of
employment
6. Critical process improvements • Improved sales and marketing
• Cost reduction
• Quality improvements
• Improved responsiveness
• Improved information and control
systems
7. Financial restructuring • Refinancing
Asset Reduction
Seven key ingredients Generic turnaround strategies
1. Crisis sabilisation • Taking control
• Cash management
• Asset reduction
• Short term financing
• First step cost reduction
2. New leadership • Change of CEO
• Change of other senior management
Figure 2.1 Generic turnaround strategies.
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THE TURNAROUND FRAMEWORK 23
incur credit, commit the business, etc, is removed. Short-term cash
generation becomes the top priority.
Acritical element is to rebuild predictability into the business and the
generation of rolling short-termcash ?owforecasts becomes an essen-
tial management objective. The process of forecasting the short-term
cash position, communicating the information to the stakeholders
on a regular basis, and subsequently achieving the forecasts is crucial
if their con?dence is to be rebuilt. Crisis stabilisation requires very
robust leadership; in most cases the turnaround leader is forcing a
radical mindset change on the organisation.
It is also essential to implement a series of cash-generation strategies.
Working capital is reduced by liquidating surplus stock, improving
debtor collection and stretching creditor payments. All capital expen-
diture, except the most essential, is put on hold. Sometimes there is
an opportunity to increase short-term revenues by price increases or
promotional events – but this is the exception rather than the rule.
2. New Leadership
New Chief Executive
Inadequate senior management is frequently cited as the single most
important cause of corporate decline, and therefore many, but not all,
turnaround situations require a new Chief Executive Of?cer (CEO).
Many investors and turnaround practitioners argue that in almost
every case a change of CEO is required for two reasons. First, since
the CEO was the principal architect of the failure it is very unlikely
that he or she can form part of the solution. Second, a change of
CEO has enormous symbolic importance; it sends a strong message
to all stakeholders that something positive is being done to improve
the ?rm’s performance.
An alternative view, however, is that the immediate removal of a CEO
may not be in the best interests of the company. It is a decision that
may make stakeholders feel positive in the short term but one that
they may come to regret at their leisure. It is important to remember
that many CEOs of troubled companies have a strong track record of
prior success; today’s villain was yesterday’s hero. Furthermore, the
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24 LEADING CORPORATE TURNAROUND
CEO is often the person with the most knowledge and experience of
the company andthe industry-skills that may be vital to the company’s
recovery.
A second important consideration is the type of CEO to appoint to a
turnaround situation. The basic choice is between a candidate with
substantial industry expertise but no prior turnaround experience or
the converse, an experienced turnaround leader or company doctor.
The appropriate choice will inevitably depend on the speci?c circum-
stances. On balance, however, for most situations we would tend to
favour a candidate with previous turnaround experience rather than
industry knowledge. A good turnaround leader is usually a highly ef-
fective general manager, and experience suggests that effective gen-
eral managers can usually work across most industries, other than
companies that are highly specialised.
A further consideration is whether one person can lead an organisa-
tion through the complete recovery process from crisis stabilisation
to restructuring and on to corporate renewal. The manager who is
good at taking control, generating cash, downsizing and cutting costs
is often weak at developing and implementing viable market-lead
strategies for the longer term.
The immediate task of the turnaround leader is to rebuild stakeholder
con?dence by re-establishing a sense of direction and purpose. The
leader must move quickly to initiate the development of a rescue plan,
and communicate it to stakeholders. Finally, the leadership must be
seen to be taking action quickly; it is essential to achieve some “early
wins”.
Other Senior Management Changes
Apart fromthe change of CEO, many turnaround situations are char-
acterised by other senior management changes. Again views vary
enormously among experienced turnaround professionals. There are
those who argue for wholesale change, irrespective of the competence
and willingness to change of the incumbent management. Proponents
argue that such action eliminates resistance to change, sends a strong
message throughout the organisation, and is a necessary part of the
shock therapy that troubled companies require. The opposing view
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THE TURNAROUND FRAMEWORK 25
is that, as far as possible, the new CEO should work with existing
management, with the proviso that the individuals are suf?ciently
competent and show a willingness to change. Irrespective of which
approach is taken, most turnaround leaders will introduce a new ?-
nance director because of the critical importance of strong ?nancial
management in a turnaround environment.
Turnaround leaders rarely have the luxury of working with a world-
class management team and workforce. However, large scale man-
agement change is rarely an option in the early days because it is not
easy to attract good managers to highly unstable situations. Conse-
quently, one of the major leadership challenges for the turnaround
leader is to deliver superior performance from a relatively weak team.
Notwithstanding the above point the organisation requires suf?cient
human resource for the challenge ahead. Embarking on a turnaround
with a teamthat lacks the basic expertise and experience required is a
foolhardy exercise. At the early stage the turnaround leader needs to
conduct a rapid management skills audit. The objective is to establish
where the “gaping holes” exist and consider ways of ?lling the skill
gaps. At the very least most organisations require effective ?nancial,
operations and sales and marketing management.
3. Stakeholder Management
Troubled companies typically suffer from poor relationships with
their key stakeholders. Stakeholders, comprising debt and equity
providers, suppliers, customers, management and staff, regulators,
etc., can normally be split between “mission critical” and less im-
portant. The power, in?uence and importance of stakeholders will
vary according to each situation. In most cases some or all of the
stakeholders will be aware of the distressed nature of the organisa-
tion and will be concerned primarily about their own risk exposure
to a failure of the business. A history of poor trading, inadequate
communications, unful?lled promises from management, and un-
pleasant surprises, coupled with the risk of failure will have eroded
their con?dence in the business. The other key issue is that the stake-
holders will have different objectives and priorities. If the company
is going to be rescued, these differing agendas have to be reconciled
and stakeholder con?dence rebuilt.
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26 LEADING CORPORATE TURNAROUND
The guiding principle is that the turnaround leader must start to
rebuild stakeholder con?dence through a process of open communi-
cations and the provision of reliable information. Predictability must
be restored and unpleasant surprises avoided at all costs. The role
requires both impartiality as regards facts but also a robust advocacy
of the company’s position. Success depends on persuading the stake-
holders to recognise and accept the reality of the company’s position
and work co-operatively towards a solution to the actual problems of
the business.
Gaining stakeholder support requires careful stakeholder manage-
ment, and the ?rst stage involves the clear unbiased communica-
tion of the company’s true ?nancial position to relevant stakeholders.
Based on that, the turnaround leader can commence a preliminary
assessment of stakeholder positions, and identify at an early stage the
level of support for a turnaround plan (compared to other options
such as sale, insolvency etc). It may be necessary to reach a stand-
still agreement and negotiate ongoing support from the company’s
bankers during this period. During the early stages of the turnaround,
there should be regular communication of the short-term cash and
trading position, and the turnaround leader should seek the involve-
ment of stakeholders inthe development of turnaroundplans. Finally,
the stakeholders’ formal approval and agreement to the company’s
detailed rescue plan should be obtained. Ongoing communication of
the trading performance and progress of the recovery should occur
during the implementation process.
4. Strategic Focus
Substantially under-performing companies generally face one or
more serious strategic problems. Strategic issues are invariably “mis-
sion critical” because they impact the raison d’ˆ etre of the business.
Few organisations have a natural right to exist. Continued existence
depends upon establishing a business that delivers a service or prod-
uct in such a way that it generates a return on capital that exceeds its
cost of capital. This requires a robust and viable strategy that incorpo-
rates a clear sense of purpose and direction, realistic long-term goals
that are based on genuine commercial opportunity, viable plans for
achieving those long-termgoals andanability to outperformcompeti-
tors based on genuine competitive advantage. Our experience with
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THE TURNAROUND FRAMEWORK 27
troubled companies is that they very rarely have a robust and viable
strategy. Typically, a formal strategy has not been clearly articulated
and written down, resulting in confusion across the organisation. Any
strategy that exists is usually based on long-term goals that are either
unrealistic or lack commercial common sense. Alternatively, the busi-
ness may not be well equipped to achieve its long-term goals, lacking
the basic resources and capabilities required to develop any com-
petitive advantage, and the key business objectives for a turnaround
leader is to develop a recovery plan that tackles these generic prob-
lems.
All the basic principles of strategic planning apply in turnaround sit-
uations. The strategic problems faced by many troubled companies
may be very serious, but are often not complex, and although the
solutions tend to be simple in concept they are not so simple in their
execution. The desired end state or vision for the business must be
clearly understood across the organisation. That destination must be
intrinsically attractive – that is, pro?table and based on an underlying
demand for that service or product. The business must be capable
of delivering a range of services or products, taking into considera-
tion the resources it has at its disposal (infrastructure, people, know-
how, technology, etc.) and it must be able to do so more effectively
and more ef?ciently than its competitors. The strategy must be writ-
ten down and widely communicated throughout the organisation. It
should incorporate a simple de?nition of the goals and objectives of
the business, and should encompass the “what” and the “how” – that
is, what products/services are we going to deliver and to whom, and
how are we going to do it.
The choice of strategy must take into account the existing resources
and capabilities of the organisation. To the extent that the recovery
strategy depends upon skills and capabilities that the organisation
lacks, the gap must be manageable. A focus on the key success fac-
tors for the strategy must be at the heart of the recovery plan, since
they provide the parameters within which the entire recovery plan
must be developed. The product/market mix provides the target or
focus for the entire organisation; it de?nes what products/services
will be sold to whom. The importance of clarity on this issue cannot
be overstated. Establishing a viable product/market strategy must be
based on identifying a genuine customer need.
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28 LEADING CORPORATE TURNAROUND
In many cases the strategic analysis will have to be quick and dirty. In
our experience it is better to be “80%right and act” than “100%right
and have missed the opportunity”. Despite being “quick and dirty”
the approach must be bold and broad. The danger for any turnaround
leader is to use the excuse of insuf?cient time and analysis to postpone
major strategic change. However, a sense of balance is also required.
Belowwe set out a brief summary of the most common generic strate-
gies used in recovery situations.
Rede?ne the Business
This is the most fundamental formof strategic change. The long-term
goals and objectives of the organisation are changed; the management
mindset changes and the nature of the business is rede?ned. For
example diversi?ed multi-industry conglomerates become industry-
speci?c focused businesses, vertically integrated companies split, and
multi-process organisations restructure around a single core process.
Divestment
A divestment strategy is often an integral part of Product/Market
refocusing. As the ?rm cuts out product lines, customers or whole
areas of business, assets are liquidated or divested. The focus here is
the disposal of signi?cant parts of the business (division or operating
subsidiaries), rather than the liquidation of current assets or disposal
of surplus plant and machinery that we consider to be part of crisis
management.
Growth via Acquisition
Asomewhat surprising but quite common recovery strategy is growth
via acquisition. This does not necessarily mean diversi?cation into
newProduct/Market areas totally unrelated or only marginally related
to the ?rm’s existing business. It may mean the acquisition of ?rms in
the same or related industries. Acquisitions are most commonly used
to turn around stagnant ?rms; that is, ?rms not in a ?nancial crisis
but whose ?nancial performance is poor. The objective of growing by
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acquisition rather than by organic growth is related to the faster speed
at which turnaround can be achieved by following the acquisition
route. It is a strategy available to few?rms in a crisis situation because
they lack the ?nancial resources to make an acquisition although,
once survival is assured, acquisition may be part of the strategy to
achieve sustainable recovery.
Product/Market Refocusing
Less radical than a complete rede?nition of the business but still
involving fundamental strategic change is a refocusing of the prod-
uct/market mix. This occurs at the operating company or business
unit level and involves the ?rm deciding what mix of products or ser-
vices it should be selling to which customer segments. The distressed
?rm has usually lost focus by adding products and adding customers
while continuing to compete in all its historical product or market
segments, i.e. adopting a strategy of being “all things to all people”.
Pareto (80 : 20) analysis quickly shows that there is usually an exces-
sively broad product range and broad customer base, much of which
consists of loss-making or low-margin business. In the early stage of
turnaround the appropriate product/market strategy usually involves
exiting unpro?table products and customers and refocusing on those
that are relatively more pro?table.
Outsource Processes
Outsourcing addresses the position of an organisation within the
value chain of the enterprise system within which it operates. The ra-
tionale behind outsourcing is to focus on pro?table processes where
the company has a relative advantage and to outsource the remainder
to third parties who can perform them more effectively. Outsourc-
ing one or more businesses or functions is a core element of enter-
prise transformation. Traditionally, outsourcing has been applied to
non-core support processes with a heavy emphasis on ?nance and in-
formation systems. Increasingly, however, it is being applied to core
functions and processes as multi-process organisations restructure
to focus on only one or two core processes. Outsourcing is equally
relevant to turnaround situations and is one of the generic strate-
gies available as part of a strategic change plan. The emphasis within
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30 LEADING CORPORATE TURNAROUND
a turnaround environment is usually the urgent need to replace or
enhance a substantially ineffective process.
5. Critical Process Improvements
Substantially under-performing companies typically have serious
problems with both their core and their support processes. These
processes are often characterised by high cost, poor quality and lack
of ?exibility/responsiveness. The underlying causes of these prob-
lems vary. Many processes are poorly managed due to a lack of focus
on cost, quality and time. Problems with the physical infrastructure,
such as state of machine repair, outdated ITsystems and an organisa-
tional structure that breaks natural links in processes can exacerbate
problems.
The tools and techniques of mainstream business process re-
engineering (BPR) substantially apply. However, it is important that
the turnaround plan does not become a BPR project. Turnaround
plans are broader and deeper than conventional BPR. The emphasis
in turnaround situations is on “quick win” process re-engineering.
Standalone BPR projects are typically characterised by a strong
link with technology and improvements to management information
systems (MIS). These projects tend to be large scale and long term,
with the emphasis on process improvements through improved com-
puter technology. In a turnaround environment the reverse tends to
be true. The approach is “quick and dirty” with the objective of focu-
sing attention on the core processes. Typically this will cover procure-
ment, conversion, logistics and sales and marketing. The emphasis
is on achieving a rapid quantum leap improvement in time, cost or
quality without the need for major MIS improvements.
Business process improvements generally fall within the following
dimensions:
r
Time improvements: Typically the focus is to make the organisation
more responsive and more ?exible by reducing the time taken to
bring a product to market or by reducing manufacturing lead
times.
r
Cost improvements: The approach is to simplify processes to reduce
both the ?xed and variable costs.
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r
Quality improvements: This is self-explanatory and is about reduc-
ing rework loops, systematically analysing the reasons for non-
conformance and putting in place corrective actions to improve
processes.
Generic strategies deployed across the various business processes can
be summarised as improvements to demand generation processes,
demand ful?lment processes and support processes.
Demand Generation
Assuming that product/market refocusing decisions have been taken,
improving the selling process and the effectiveness of the salesforce
is a key area for process quick wins. Marketing mix improvements
include brand management/repositioning, promotions and, partic-
ularly, pricing. New product development and improved customer
responsiveness may also provide important improvement opportu-
nities. Although this area tends to be more important in enterprise
transformation rather than turnaround situations, increasing the in-
novation rate and improved product engineering can sometimes have
a signi?cant short-term bene?t.
Demand Ful?lment
Typically this is the core area for process improvements and will in-
volve substantial cost reduction and improved effectiveness in pro-
curement, manufacturing/conversion, logistics and after sales service.
Simple procurement initiatives can reduce cost, working capital and
inventory risk and improve quality and service. Gaining control of
the shop?oor and improving ef?ciency may involve layout changes
and introduction of new practices such as cellular manufacturing,
JIT and Kanban principles.
Support Systems
The introduction of a production planning function to balance the
supply and demand side of a business is an important generic re-
sponse to a very common business problem. Other improvements
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32 LEADING CORPORATE TURNAROUND
will be targeted at “head of?ce functions” and will include the
introduction of new performance measures, improvements to the
management of the physical infrastructure, and the restructuring
of the ?nance department to deliver timely, relevant and accurate
information.
6. Organisational Change
People problems are usually among the most visible signs of a trou-
bled company. Typical symptoms include a confused organisation
structure, a paralysed middle management, resistance to change and
demoralised staff. Staff turnover is probably high, the most able peo-
ple have left and the remaining workforce lack key skills and capa-
bilities. Dysfunctional behaviour, where employees fail to co-operate
towards achieving the corporate objectives, may be encouraged by
silo thinking, a rewards system not aligned with the strategy, and
a culture of non-performance. Signi?cant organisational change is
therefore required.
New Organisation Structure
Changing the organisation structure can be a powerful way of rapidly
changing the operations of an ailing business. Arevised structure that
facilitates clear accountability and responsibility will make the imple-
mentation process more straightforward. The turnaround leader will
be able to see clearly who in the organisation is delivering against the
plan and who is not. Any revised organisation structure should em-
phasise an external market-facing perspective, remove unnecessary
hierarchical levels and seek to breakdown “silo thinking”. Structural
change should, however, be kept to a minimumin the early stages of a
turnaround, as it canvery easily leadto unnecessary confusionas indi-
viduals learn new ways of working and build new relationships. Even
if no structural change takes place the turnaround leader is usually
well advised to re-clarify management roles to ensure that there is no
misunderstanding about what is expected under the new “regime”.
Accountability and Performance Management
Failing companies are nearly always characterised by a non-
performing culture where managers are never held accountable for
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THE TURNAROUND FRAMEWORK 33
results. When a turnaround leader arrives his or her focus is totally
short term and results driven. This is often the biggest shock to
incumbent managers, and the single most important lever to improve
short-term organisational effectiveness. New leaders quickly intro-
duce performance goals and measure performance against them –
often on a weekly basis in the early stages of a turnaround.
Terms and Conditions of Employment
We believe that an effective reward system can play a major role in
tackling the people problems of a business. The entire organisation
should be strongly incentivised to implement the recovery plan. It
seems to us quite obvious that people who feel they have a stake
in the business, and who are ?nancially motivated to implement a
recovery plan successfully, are more likely to give their best efforts
than those who are not.
In recent years changing contracts of employment and Union agree-
ments have also been used as effective mechanisms of organisational
change.
Focused Training
Effective implementation of some-short term strategies may require
some rapid capability building among certain employees, particularly
where new systems have to be introduced. Focused training in such
“hot spot” areas can lead to dramatic short-term improvements.
Improved Communications
By far and away the most noticeable change brought about by
turnaround leaders, and often their biggest legacy from an organisa-
tional perspective, is improved communications throughout the or-
ganisation. Good leaders, as we saw in Chapter 1, are good and con-
sistent communicators of simple messages. Most companies could
have better internal communications, but in a turnaround situation a
quantum leap is usually necessary. As the company has gone into de-
cline, less and less information has been communicated, cynicismhas
increased and morale has declined. The turnaround leader and his
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34 LEADING CORPORATE TURNAROUND
top team have to develop external credibility very quickly if they are
to harness the organisation’s resources. They therefore have to decide
what to communicate, how to communicate it, to whom and where.
In doing this it is crucial that they all communicate the same message.
An early stage initiative for the turnaround leader is to motivate the
whole workforce. The main priority is to prevent good people leaving
and to start to mobilise the organisation for the challenge ahead. Par-
ticularly during the early stage of the recovery, the organisation will
move through very turbulent times, and having a committed work-
force is a key factor for success. Frequent and open communication
is critical.
7. Financial Restructuring
Companies in need of a turnaround typically suffer fromone or more
of the following:
r
Cash ?ow problems i.e. insuf?cient future funding or an inability
to pay debts as and when they fall due.
r
Excessive gearing (too much debt/too little equity).
r
Inappropriate debt structure e.g. excessive short-term/on-
demand borrowing and insuf?cient long-term debt.
r
Balance sheet insolvency.
Irrespective of the health of the underlying business, if the operating
cash?owcannot ?nance the debt andequity obligations, the company
will remain fatally wounded. In these circumstances the only solution
is a ?nancial restructure.
The objectives of any ?nancial restructure are to restore the business
to solvency on both cash ?ow and balance sheet bases, to align the
capital structure with the level of projected operating cash ?ow, and
to ensure that suf?cient funds in the form of existing and new money
are available to ?nance the implementation of the turnaround plan.
A?nancial restructuring usually involves changing the existing capital
structure and/or raising additional ?nance. Capital restructuring usu-
ally involves an agreement between the ailing ?rm and its creditors,
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THE TURNAROUND FRAMEWORK 35
usually the banks, to reschedule and sometimes convert interest and
principal payments into other negotiable ?nancial instruments. The
raising of new funding may involve additional debt, typically from
the existing lenders who may be persuaded that the best prospect of
recovering their existing investment is via the provision of further in-
vestment. The provision of new equity from existing shareholders via
a rights issue or fromoutside investors (vulture funds, etc.) frequently
accompanies new bank lending.
The Implementation Framework
The starting point for the implementation of the turnaround process
is always a diagnostic review to establish the true position of the
troubled company and to determine whether a turnaround is a viable
option, as opposed to insolvency, immediate sale or liquidation.
Once the decision to proceed with a turnaround has been taken by
the principal stakeholders, sevenseparate implementationprocesses –
or, as we prefer to call them “workstreams” – have to be under-
taken to ensure that the seven key ingredients are in place. Figure 2.2
illustrates how the seven workstreams are linked to the seven key
ingredients.
The seven key workstreams have been identi?ed as:
r
Crisis management: Taking control of the distressed business and
implementing aggressive cash management.
r
Selection of the turnaround team: Appointment of a turnaround
leader and selection of his or her direct reports.
r
Stakeholder management: Rebuilding stakeholder con?dence and
reconciling their different interests within an overall recovery
plan.
r
Development of the business plan: The development of a detailed
recovery plan for the business covering strategic, operational and
organisational issues.
r
Implementation of the business plan: The implementation of the de-
tailed turnaround initiatives contained within the recovery plan.
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36 LEADING CORPORATE TURNAROUND
Diagnostic Review
Key Ingredients of
Turnaround Management
Crisis Stabilisation
Leadership
Stakeholder Support
Strategic Focus
Organisational Changes
Critical Process Improvements
Financial Restructuring
Implementation
Workstreams
Crisis Management
Selection of Turnaround Team
Project Management of
The Turnaround
Stakeholder
Management
Development of Business Plan
Implementation of Business Plan
Preparation and Negotiation of
Financial Plan
What? How?
Figure 2.2 Key ingredients and workstreams.
r
Preparation and negotiation of the ?nancial plan: Restructuring the
capital base and the raising of the money to fund the turnaround.
r
Project management: The integration and co-ordination of the
above six workstreams, i.e. overall management of the turnaround
process.
Our experience is that in most turnaround situations the turnaround
leader will have to undertake all seven workstreams, although ?nan-
cial restructuring may not be required where the troubled company is
a subsidiary of a healthy parent. These workstreams are the essential
implementation tasks of the turnaround process. Together the work-
streams address the priority issues of managing the immediate crisis,
?xing the operations, managing the various interests of those with a
stake in the company, and ensuring that the company has suf?cient
cash to survive in both the short and the long term.
Clearly a diagnostic analysis phase must be commenced ?rst because
the turnaround leader cannot cure the patient unless he or she knows
what is wrong. However, in many situations it will be crucial to com-
mence other workstreams in parallel with the diagnosis, particularly,
in stakeholder interface management and crisis management. One of
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THE TURNAROUND FRAMEWORK 37
the priority actions for the newly appointed turnaround leader is to
advise the stakeholders of his or her appointment and explain how
he or she intends to tackle the situation. On day one the discussion
may be limited to an explanation of the process the leader he intends
to follow. Such early initiatives start to rebuild con?dence, demon-
strate management control, and can help to prevent the stakeholders
taking any adverse action prematurely. The other immediate priority
is crisis management. The turnaround leader needs to rapidly assess
whether the company has suf?cient cash to survive in the short term,
and while a diagnostic review is being conducted, he or she starts to
formulate the recovery plan.
The analysis phase typically lasts between one week and three
months, depending on the size and complexity of the problem. Dur-
ing the later stages of the analysis, the turnaround team will have
already started to develop the detailed business plan. Our approach
to business planning is intensive. The plan is “the bible” for the res-
cue: it sets out in detail the speci?c actions required to restore the
business to pro?tability, together with associated trading projections.
The process involves several interactions as each stakeholder inputs
into the plan. How long this takes will depend on the size and com-
plexity of the company but we would normally expect the plan to be
fully developed within three to four months, and much more quickly
in some cases. Even before the plan is ?nalised, implementation can
commence. Many of the initiatives are “no brainers” and can be im-
plemented before the plan has been fully and ?nally approved. The
implementation phase typically lasts between six months and two
years, and comprises an emergency phase, a strategic change phase
and a growth phase. The ?nancial restructuring is probably the last
workstream to be undertaken. The key inputs for the ?nancial re-
structuring are the operating cash ?ow forecast and funding projec-
tions for the business, and are usually contained within the business
plan. As soon as these projections have been ?nalised, work can com-
mence on restructuring the debt and equity and raising new money.
8. Diagnostic Review
In a turnaround process, the ?rst task a prospective turnaround
leader will want to commence is an analysis of the situation. Vari-
ously described as a strategic review, a diagnostic review, a business
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38 LEADING CORPORATE TURNAROUND
assessment, etc., this initial and critical phase has the following ob-
jectives:
r
To establish the true position of the company from a strategic,
operational and ?nancial perspective.
r
To assess the options available to the company and to determine
whether it can be turned around.
r
To determine whether the business can survive in the short term.
r
To establish the stakeholders’ position and their level of support
for the various options.
r
To make a preliminary assessment of the management team.
In many situations the troubled company may be rapidly running
out of cash and the priority is therefore to move as quickly as possible
through this phase. The approach is likely to be “quick and dirty”;
analysis is high level, broad in scope, and in-depth only with respect
to the key issues.
The diagnostic review needs to combine the elements of a conven-
tional strategic and operational review with those of a corporate re-
covery/insolvency analysis. The team carrying out the review will
therefore use traditional consultants’ methodology: the strategic and
operational review will cover both the internal and external environ-
ment with a view to establishing the causes of decline and possible
recovery strategies. The ?nancial reviewwill focus on establishing the
current ?nancial position and future trading prospects.
The review will need to consider the various options available to
the company – which are, typically, sale of part/all of the business,
turnaround, insolvency or closure/liquidation – and evaluate the ?-
nancial outcome for the stakeholders under each scenario.
The techniques for the review phase follow conventional consulting
methodology, that is, analysis of ?nancial and operational data, in-
terviews with management and staff, tour of facilities, discussions
with suppliers, customers and industry experts, and industry and
competitor analysis.
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THE TURNAROUND FRAMEWORK 39
At the end of the diagnostic phase the turnaround leader must have
decided whether turnaround is a viable option, the outline shape of
the turnaround plan (and the approximate level of funding to sup-
port it), preliminary management changes and the extent of stake-
holder support. At this stage the turnaround leader may be either a
turnaround adviser, a banker or a turnaround executive (as de?ned
in Chapter 1).
At this early stage, it may not be apparent whether turnaround is a
realistic option or not. However, within a relatively short period of
time (a few days to a few weeks) the key stakeholders have to decide
whether they wish to support a turnaround and, if so, who is to lead
it – at least inthe short term. If they decide to undertake a turnaround,
them there are seven key workstreams to be implemented.
1. Crisis Management
As soon as the turnaround option has been decided for the distressed
company, crisis management should commence forthwith – if nec-
essary, even before a turnaround leader has been appointed. Where
this is the case interim management or turnaround advisers can be
brought in to deal with the crisis. The most likely cause of failure in
the short term is that the business runs out of cash thereby prevent-
ing the wages, rent, etc., from being paid. The priority is therefore to
establish the critical payments that have to be made in the short term
to keep the company alive and determine whether the existing bank
facilities, together with short-term cash receipts (such as debtor col-
lections), will be suf?cient to cover the critical payments. If the anal-
ysis indicates a funding shortfall, the turnaround leader must move
rapidly to bridge the ?nancial gap by arranging additional funding,
pursuing aggressive cash realisation strategies and restructuring crit-
ical payments, wherever possible.
Simultaneously, the turnaround leader must move rapidly to take
control of the organisation. The priority in the short term is to try
to limit the scale of the continuing decline by focusing attention on
the most serious and urgent problems. The key issue is to determine
the factors, if any, that are an immediate threat to the survival of the
business.
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40 LEADING CORPORATE TURNAROUND
2. Selection of the Turnaround Team
Ideally an appropriate person will be appointed to lead the
turnaround – usually a chief executive, but sometimes as chairman
or Chief Restructuring Of?cer – as soon as the turnaround process
is triggered by one or more of the stakeholders. This may or may not
be before a diagnostic review has been undertaken. If the diagnos-
tic review has been carried out by advisers or investigating accoun-
tants, their report is usually the trigger to appoint a turnaround leader
and/or begin crisis management. Changing the top teammay however
take time: incumbents have to be assessed and where a replacement
is necessary the recruitment process can take several months. Getting
the right top team in place is usually a time-consuming task for the
turnaround leader.
3. Stakeholder Management
We strongly believe that stakeholder management should commence
at or even before the diagnostic phase begins. We will see in Chapter 3
how experienced turnaround leaders often commence stakeholder
management prior to starting the diagnostic phase. The duration of
the process varies considerably but our strong preference is towards
a longer than a shorter duration. Experience suggests that debt and
equity providers like to remain closely involved at least until the “pa-
tient” is almost fully recovered. In practice this is likely to be towards
the end of the implementation phase, which can have a duration of
up to two years, although this can sometimes be much longer, as in
the case of Brent Walker, which went on for almost six years. One
certainty is that the recovery path will not be smooth and uneventful.
The company will probably experience continuing uncertainty and
turbulence during much of the early recovery period, and it is much
easier to retain the con?dence of the stakeholders if they are kept
fully informed of both positive and negative developments.
4. Development of the Business Plan
We believe that successful leaders of turnaround situations move very
quickly to commence the development of a business plan which sets
out their rescue strategy.
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THE TURNAROUND FRAMEWORK 41
The conventional consulting model is followed. Problems are initially
identi?ed during the diagnostic review. Further analysis will identify
the underlying cause(s) of the problem and from this one or more
than one remedy is developed. Clearly there is a natural link between
the diagnostic review and plan development workstream. In our ex-
perience the two have a “paralinear” relationship, i.e. they are partly
sequential and partly parallel processes. Obviously, recovery strate-
gies cannot be developed until the problem has been satisfactorily
diagnosed; however, turnaround initiatives for problems that have
been rapidly diagnosed can be developed while analysis continues on
other more complex issues.
We strongly believe in the development of a comprehensive business
plan. The plan should clearly state the long-term goals for the busi-
ness together with the chosen strategy for achieving those goals. The
plan should clearly de?ne the products or services offered by the com-
pany, together with its chosen markets. The core business processes
for delivering those products/services must be explicitly de?ned and
the plan should contain a detailed programme of turnaround ini-
tiatives that together form the rescue process. Each turnaround
initiative should be described in terms of responsibility, proposed
action, implementation timetable, required resources, and proposed
impact.
The number of initiatives varies according to the size and complexity
of the organisation. The size and scope of each initiative may also
vary from a major restructuring improvement (such as rationalising
10 factories to 4) to a more modest action such as the hiring of a new
design director. Clearly the larger initiatives may comprise a major
project on a standalone basis and thus involve a number of sub-tasks.
In our experience turnaround plans usually comprise 50 or more
recovery initiatives.
Finally, the plan should contain detailed ?nancial projections for the
?rst year and higher level projections over a three- to ?ve-year period.
The plan forms the ‘bible’ for the implementation process over the
next six to 18 months. By the time the plan is endorsed, all the exec-
utives who are to play a part in its implementation must understand
it and their roles. Managing the implementation of the plan becomes
the key focus for the senior management.
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42 LEADING CORPORATE TURNAROUND
5. Implementation of the Business Plan
The focus during this phase is the implementation of the turnaround
initiatives incorporated in the business plan. The implementation of
the business plan becomes the principal role of senior management.
Although it may appear simplistic, it is generally the case that if an
issue has not been addressed in the business plan, it should not be
an issue for management during the implementation phase.
We believe that rigorous project management is the key success fac-
tor for implementation. The plan sets out a programme of prioritised
actions with timing, responsibility, and planned impact. The imple-
mentation process employs conventional project management tools
(Gantt charts, progress reports, etc.) to drive accountability; the pri-
ority is to get people/teams to deliver their initiatives on time and
on budget. The progress of the plan must be monitored on a weekly
basis, key issues must be dealt with when they arise and ensuing ac-
tions must be continuously identi?ed. “Action” becomes the de?ning
watchword for the implementation phase.
Management of the implementation process is driven by regular
progress meetings supported by continuously updated rolling imple-
mentation reports. Ordinarily the co-ordination or steering group will
meet on a weekly basis during the early stages; as the turnaround pro-
gresses the frequency of these meetings may to reduced to fortnightly
or monthly. The focus for the meetings is the review of progress
against each initiative.
6. Preparation and Negotiation of the Financial Plan
The business plan is the basis of the ?nancial restructuring plan – if
that is necessary. The ?nancial projections accompanying the busi-
ness plan will be from the basis of the cash ?ow forecasts, which form
the key input into assessing the future funding requirements of the
business.
7. Project Management
We have already mentioned the need for detailed project management
of the implementation initiatives. However, the whole turnaround
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THE TURNAROUND FRAMEWORK 43
process needs to be project managed by the turnaround leader. He
or she needs to ?t the various parts of the turnaround jigsawtogether,
and must be able to mesh the seven key ingredients together at dif-
ferent stages of the turnaround process.
The turnaround leader does not therefore have the luxury, enjoyed by
many other participants in the turnaround, of being able to concen-
trate solely on one key ingredient of the turnaround at a time. This
is a dif?cult challenge for the turnaround leader as the objectives of
each ingredient can be quite different. For example, the mindset and
style required for crisis management are quite different from those
required in business planning, yet these phases of the turnaround are
managed in parallel.
Timing
The turnaround process is characterised by considerable overlap of
the planning and implementation phases. We identify four distinct
but overlapping phases in the implementation process:
r
the analysis phase
r
the emergency phase
r
the strategic change phase
r
growth and renewal (beyond turnaround).
Figure 3.3 illustrates how the workstreams discussed in the previous
sections are phased throughout the turnaround process.
Analysis Phase
This phase encompasses more than just the diagnostic review. We
have already stated that stakeholder interface management and crisis
management often need to begin in parallel with the diagnostic re-
view, and that the diagnostic review itself is the starting point for the
development of the business plan. Thus we may begin to see some
generic strategies – such as cash management, change of chief ex-
ecutive, tighter ?nancial control – starting to be implemented in the
analysis phase.
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44 LEADING CORPORATE TURNAROUND
Analysis Phase Emergency Phase
Strategic Change
Phase
Growth or Renewal
Phase
Diagnostic
Review
Crisis
Management
Develop
Business Plan
Financial
Restructuring
Implementation of Business Plan
Selection of
Turnaround Team
Stakeholder Management
Project Managing the Turnaround
Figure 2.3 Phasing of workstreams throughout the turnaround process.
Emergency Phase
The emergency phase consists of those actions necessary to ensure
survival and therefore tends to focus on those generic strategies that
can most easily be implemented in the short term. The distinction
between implementation of the business plan and crisis management
can become blurred. Thus, one ?nds cash generation, cost reduction,
increased prices and increased selling effort as the principal generic
strategies used in this phase of recovery. Organisational change to
facilitate control and management may also take place.
The emergency phase is often characterised by surgery: divesting
subsidiaries, closing plants, making employees redundant, ?ring in-
competent managers, reducing surplus inventories, selling obsolete
inventories, eliminating unpro?table product lines, etc. – all of which
are designed primarily to improve the cash out?ow and stop the
losses.
It is during the emergency phase that the ?rm may seek additional
?nancing to implement its recovery strategy and there is therefore an
overlap with the ?nancial restructuring workstream. The emergency
phase will, typically, last from six months to one year, but may be
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THE TURNAROUND FRAMEWORK 45
longer if appropriate recovery strategies are not adopted or are not
well implemented.
Strategic Change Phase
Whereas the emergency phase tends to emphasise operational factors,
the strategic change phase emphasises product/market reorientation.
By good implementation of an appropriate recovery strategy in the
emergency phase, the ?rmhas assured its short-termsurvival and can
begin in the emergency phase to focus strategy on those productmar-
ket segments in which the ?rm has most competitive advantage (usu-
ally, but not always, those segments in which it is pro?table). How-
ever, product/market change usually takes time to implement and
may require some investment, which may not be possible in the early
phase of recovery. It is at this strategic change phase that management
and/or shareholders may realise that the long-termviability of the ?rm
looks doubtful, or that the investment of money and time required
to achieve sustainable recovery is not worth the risks involved. They
may, therefore, decide to look for a suitable purchaser for the business.
Assuming that productmarket reorientation appears viable, the
strategic change phase is also characterised by:
r
An increased emphasis on pro?ts in addition to the early emphasis
on cash ?ow. Return on capital employed is still unlikely to be
satisfactory at this phase, although losses have been eliminated.
r
Continued improvements in operational ef?ciency.
r
Organisation building – which may be important, bearing in mind
that the organisation may have been traumatised in the emergency
phase.
One US writer refers to this phase as one of stabilisation, because
the organisation needs time to settle down and prepare for a phase of
renewed growth. New management will probably have brought with
it a new organisational culture which will take time to become insti-
tutionalised. Stabilisation is important, but alone it is insuf?cient to
give the ?rm a sound base for the future. That can only be accom-
plishedby refocusing the ?rm’s productmarket positionor sharpening
its existing competitive advantages.
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46 LEADING CORPORATE TURNAROUND
Growth Phase
Before this can begin, the ?rm’s balance sheet must have improved.
Once it has, the ?rmcan start to grow, either organically through new
product development and market developments, or via acquisition
or both. This is the ?nal phase of the turnaround process and the
beginning of what is sometimes called corporate renewal. However,
in some industry sectors, such as high technology, a rapid return to
growth may be a prerequisite for a successful turnaround.
Characteristics of Successful Recovery Situations
There are substantial differences between the recovery strategies
adopted by successful turnaround leaders and those that are not.
Successful recovery situations are characterised by:
r
A rescue plan that incorporates the seven essential ingredients. A very
common source of failure is to initiate too narrow a turnaround.
The turnaround leader has to not only manage the immediate
crisis and tackle the strategic and operational problems of the
business, but also to rebuild stakeholder con?dence and ensure
that the company has adequate funding for the future.
r
An approach that addresses the key issues simultaneously rather than in
a linear sequence. In the early days, the turnaround leader should
start the process of rebuilding stakeholder support in parallel with
the early stages of managing the crisis and developing the business
plan.
r
A rescue plan that is broad in scope. That is, the plan should tackle
cost reduction and revenue growth, deal with hard and soft issues,
incorporate strategic and operational initiatives and address both
short-and long-term priorities.
A study comparing successful and unsuccessful turnaround efforts
undertaken by one of the authors in the UK and the USA showed
that successful turnarounds are characterised by:
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THE TURNAROUND FRAMEWORK 47
r
management changes, particularly the appointment of a newchief
executive and a new ?nancial director;
r
the use of multiple cash-generating strategies;
r
improved ?nancial control systems that are really used by man-
agement to install a performance-oriented culture;
r
an understanding that cost reduction strategies, although impor-
tant, may be insuf?cient to effect a successful turnaround;
r
fundamental product market reorientation alongside improved
operational marketing;
r
signi?cant organisational change in terms of structure processes
and improved communications.
Two key messages stand out in examining successful turnarounds.
First, successful ?rms use twice as many generic turnaround strate-
gies as unsuccessful ?rms: they undertake a number of generic strate-
gies in parallel. Second, they implement strategies more vigorously.
There is nearly always a need for more action rather than less.
We see this in practice when the initial turnaround leader is replaced
because he or she is failing to make a real ?nancial impact within
the ?rst 12 months. The replacement turnaround leader will always
use more strategies and implement those of his or her predecessor
more vigorously.
This chapter has summarised the seven key ingredients necessary
for a successful corporate turnaround and what this means in terms
of implementation. Further details of each of the seven key ingre-
dients can be found in our earlier book, Corporate Turnaround. The
remainder of this book will look at howturnaround executives provide
leadership throughout the turnaround process.
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3
Before the Turnaround
Begins
T
ncnc anc 1nncc cni1icaL s1cis 1na1 navc 1o nc 1akcN
before a turnaround can begin:
r
Someone, or often a small group of individuals, must initiate the
process.
r
A diagnostic review has to be undertaken to determine if a
turnaround is a viable option for the distressed ?rm.
r
The key ?nancial stakeholders have to be convinced to support a
turnaround.
These steps are usually led by the key ?nancial stakeholders – either
the debtors (the shareholders and/or the management) or the cred-
itors (the banks, bond holders and other credit suppliers). They, in
turn, are likely to bring in advisers – accountants, lawyers, investment
bankers, consultants, restructuring experts and company doctors –
to assist in the process.
This chapter explores each of these steps and the nature of the lead-
ership task from the perspective of the major players. All the players
have the potential to participate in a leadership role that can affect the
success of the turnaround process. As a general guide, where there
is no equity interest left, the process will be led by the creditors oth-
erwise the management or debtors keep the initiative and lead the
process. In a recent case in which one of the authors was involved,
management led the turnaround process even though the equity was
lost, since existing equity providers were prepared to provide addi-
tional funding as a critical ?rst step.
49
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50 LEADING CORPORATE TURNAROUND
Initiating the Turnaround Process
Some individual or group of individuals has to trigger the turnaround
process, and this in itself may require considerable leadership skills.
These individuals are normally ?nancial stakeholders in the business
or their representatives. In some situations the “writing will have been
on the wall” for some time and the stakeholders are either waiting for
the right opportunity to trigger change or they reach a point where
they no longer believe that the incumbent management can deliver
the required ?nancial performance. In other situations a crisis will
arise unexpectedly, and the stakeholders may only become aware of
the problem when the company cannot meet its debt repayments, is
in breach of its banking covenants, has a black hole in its accounts,
or the reputation of the ?rm suffers a massive blow (as occurred at
Andersens, for example).
Ideally the deteriorating ?nancial situation will be picked up by the
equity owners through their knowledge of the business and the ex-
pertise of the directors they have elected to the board. However, it is
often the creditor banks, bondholders and other creditors who trigger
the turnaround process because management (and the owners) fail
to realise the gravity of the company’s situation, or are just in plain
denial. We will therefore start this chapter by looking at the leadership
role in both debtor-led and creditor-led turnarounds.
Debtor-Led Turnarounds
In publicly – quoted companies, it is usually a coalition of directors,
often non-executive but not exclusively so, who lose con?dence in the
current leadership of the chief executive. They trigger the turnaround
process by ?ring the CEOor by ?rst initiating a strategic reviewof the
business by outside consultants/advisers, which eventually leads to
a newchief executive and a newstrategy. In boardrooms, where there
are a relatively large number of executive directors (as is often the case
in the UK), and many of the non-executive directors owe their po-
sitions to their relationships with the chairman or CEO, it can be
very dif?cult for an individual director or even a small group of di-
rectors to “take on” the incumbent chief executive, particularly if
many of the directors feel they ought to be, or need to be, loyal – for
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BEFORE THE TURNAROUND BEGINS 51
whatever reason. A power struggle can easily arise unless the direc-
tor(s) advocating change can gain the support of the Board and/or
shareholders, as occurred at Marconi in 2002. If they fail to win the
day – even if they are correct in their diagnosis of corporate distress
and the need for a turnaround – the director(s) concerned are likely
to be marginalised by the majority, and their best option is to resign.
A public resignation is likely to have maximum impact on sharehold-
ers, and can be a powerful leadership statement about the need for
change.
Fund managers are increasingly taking a leadership role in triggering
change when they lose con?dence in the management of a company
in which they are signi?cant shareholders. They often work behind
the scenes putting pressure on non-executive directors to remove in-
cumbent management, but there have been a number of instances
recently where some fund managers have publicly raised their con-
cerns about management.
Historically, debtor-led turnarounds of public companies have oc-
curred as the result of under-performing companies being acquired
either by more aggressive competitors in their own industry or by ac-
quisitive conglomerates, and then being turned around. In the 1980s
there were a number of UK companies such as Hanson Trust and
Williams Holdings, that followed such strategies – although in the
1990s this type of activity was largely taken over by the private equity
houses (the larger of which are increasingly looking like the conglom-
erates of the 1980s!).
In companies controlled by private equity houses, we see many exam-
ples of shareholders taking extremely active leadership roles both to
trigger change and, in some cases, to manage the turnaround process.
The process is helped by the shareholders’ access to management in-
formation and their direct control over management and often the
Board. The more “hands-off ” private equity houses may bring in
third party advisers to undertake a business review and/or change the
chief executive, while some of the more “hands-on” houses will do
the business reviewthemselves and become actively involved in ?xing
the problems. Private equity ?rms that have invested in turnaround
situations, such as Alchemy Partners, are nearly always in the “hands-
on” category. The trigger for change is usually under-performance
against budget or loss of con?dence in the management. The ?rm
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52 LEADING CORPORATE TURNAROUND
might not actually be in a cash crisis, but the combination of the pri-
vate equity house’s control and its desire for quick value realisation
triggers the turnaround process.
For example, in the case of Target Express, a parcel delivery busi-
ness, the venture capital group 3i bought a stake in early 2000.
At that time operating pro?ts were £18 million on sales of around
£200 million. In September 2001 it became clear that operating prof-
its for the year were going to be only £14 million against a budget of
£21 million. The company was also in breach of its banking covenants
and would not be able to meet forthcoming principal repayments.
This was the trigger for one of 3i’s investment directors, Stephen
Keating, to become actively involved in the turnaround of the com-
pany (see Box 3.2).
In an ideal world debtor-led turnarounds would be the norm since
management and shareholders would pick up any signals of corpo-
rate distress very quickly and act upon them to avoid a ?nancial cri-
sis. In practice, however, the leadership action required to initiate
a turnaround is often left to the creditors. For debtors to initiate a
turnaround, existing management has to accept blame or, at the very
least, to admit that there is a serious problem. In most companies,
management, and the chief executive in particular, wield a consid-
erable amount of power, either directly as in owner-managed busi-
nesses or indirectly in public companies where there is no dominant
shareholder and often rather poor corporate governance procedures.
The power of management to “do their own thing” and believe their
own hype has been well documented in the recent scandals at Enron,
Parmalat, Tyco and MCI.
Improved corporate governance measures ought to increase the num-
ber of debtor-led turnarounds, but it will depend on the leadership
skills and, most importantly, the courage of non-executive directors
to challenge management. Nevertheless, the vast majority of small
and mid-size ?rms that get into trouble are likely to be creditor-led
turnaround situations.
Creditors can and do play a supporting role in debtor-led
turnarounds by aligning with the debtors who recognise the need
for change and exercising their powers accordingly.
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BEFORE THE TURNAROUND BEGINS 53
Creditor-Led Turnarounds
Creditor-led turnarounds are more often than not initiated by the
banks, although bondholders, credit guarantee companies, asset-
backed ?nanciers and even unsecured trade creditors can play a role
in starting the turnaround process. The major banks all have credit
assessment systems (usually using a 1–10 scale) whereby loans are
regularly assessed. When the larger loans – limits vary by bank but
are usually somewhere between £1 million and £4 million – slip from,
say, a “5” ranking where some bad debt provision may already have
been taken to a “6”, the loan is transferred to a special corporate
department dealing with corporate rescue.
The UK clearing banks have non-threatening names for these de-
partments, such as Business Support Services at Barclays and Lloyds
TSB, Special Lending Services at Royal Bank of Scotland, and Loan
Management at HSBC. US banks are normally more direct and refer
to them as “Corporate Rescue” or “Work Out” departments.
Client-relationship managers and senior divisional credit managers
may sometimes have taken the initiative to persuade management
about the need for change, but this is either ignored or insuf?cient
action is taken. Bankers are usually loathe to become too involved for
fear of acting as shadow directors. Furthermore, these managers deal
with large portfolios of corporate clients – usually over 100 at a time –
and have neither the time, the detailed knowledge of the company,
the capability nor the incentive to become involved in a turnaround
process. For bank management the key to success in minimising bad
debt is to identify problems early enough and transfer the account to
the internal departments who have the necessary expertise in corpo-
rate turnarounds.
Once management responsibility for the bad debt reaches the cor-
porate rescue department, the banker will typically take an active
leadership role in kick-starting the turnaround process. This involves
three issues:
r
Making the management realise just how serious the situation is,
through clear communications (“straight talking”) and/or putting
pressure on the chairman or non-executive directors to take
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54 LEADING CORPORATE TURNAROUND
urgent action. Straight talking often requires no more than in-
forming the company of its obligations under loan documenta-
tion, and indicating that the creditors will exercise their rights
unless a turnaround begins immediately.
r
Initiating a detailed diagnostic review which is either carried out
by the bank’s staff, independent advisers (often from the cor-
porate recovery departments of the accountancy ?rms) or some
combination of the two – for which the company is forced to pay.
r
Initiating a meeting of all the principal ?nancial stakeholders with
or without the presence of management (although they will usu-
ally be invited).
On occasions banks will decide to kick-start the process by announc-
ing without warning that the company’s borrowing limit has been re-
duced. This can happen when a company is working within an agreed
overdraft limit and receives a big cash in?ow. The bank credits the
account and reduces the overdraft by the amount of the credit! Such
action on the part of a bank is only used if the bank feels that manage-
ment is refusing to listen or act responsibly, and that the perceived
risk of default is high. Any new borrowing is then made available
on terms that trigger the turnaround. Unless it is carefully applied,
the sudden reduction of overdraft limits can trigger insolvency instead
of a turnaround!
The way the major banks deal with crisis situations in their portfo-
lios depends partly on the leadership style of the senior executive re-
sponsible for the “recovery unit”. However, Kendall Taylor of Lloyds
TSB’s view of his role is fairly typical:
“I’m a stakeholder – rather than an adviser or practitioner – and
I think the importance of this role varies from business to business,
depending on how the funding is split and whether it is a quoted
company. I am a stakeholder who at times becomes the pivotal stake-
holder. I try to manage the business relationship with other ?nancial
stakeholders and the board of the company, to try and ?nd a solution
that trims the business back in the right direction.”
Besides the obvious need for good “straight talking” communica-
tion skills, there are two key leadership characteristics are needed by
bankers at this stage.
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BEFORE THE TURNAROUND BEGINS 55
r
Courage to make quick decisions. A number of senior bankers
stressed that while they all have approval processes, given the na-
ture of turnaround situations, they sometimes have to take quick
decisions that are outside their “theoretical” authority. They take
advice but as one said:
“When push comes to shove I use my own judgement to do it, I
accept that I won’t get all of them right, but I wouldn’t be here if
I couldn’t do it. It’s what I’m paid for – to make decisions.”
r
Relationship building. The sooner the bankers can build a relation-
ship with management and other critical stakeholders, the more
chance there is of avoiding insolvency. Building relationships with
management teams, and owner managers in particular, can be ex-
tremely dif?cult because as one banker said: “Denial still runs rife
in our customer base . . . it is still the biggest impediment in kicking off
the turnaround process.” The later the rescue unit becomes involved
the more dif?cult it is. Kendall Taylor commented as follows:
“Customers don’t say ‘I’d love to go to business support’, so one of
the key things is trying to establish a rapport with a customer when
he is very concerned, even if maybe he doesn’t show it. There are
different times when we get involved and the nearer the business
is to cash crisis the more dif?cult it is to establish a relationship.
This is because for most businesses we deal with, while if we lent
them more money it would take away the pressure, it would lose
the bank more in the long run and in many businesses it would
prevent them from realising the changes necessary.”
The Diagnostic Review
The ?rst substantial action once the process has been kick-started is
to undertake a diagnostic review, which has six key objectives:
1 To assess whether the business can survive in the short term (a
minimum of three months) or the extent to which additional
funding is required to underwrite short-term survival.
2 To determine whether the company may be viable in the medium
to long term.
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56 LEADING CORPORATE TURNAROUND
3 To assess the options available to the company and identify those
that offer the best value to the various stakeholders. These op-
tions could include turnaround, immediate disposal, workout or
formal insolvency.
4 To diagnose at a high level the key problems, whether these are
primarily strategic, operational or both, and the mix of strate-
gies and actions that are needed for short-term survival and
beyond.
5 To assess the positions of the key stakeholders (lenders, share-
holders, management, employees), their willingness to support
and, if necessary, to help to fund a turnaround, their relative bar-
gaining power and their ability to in?uence the outcome.
6 A preliminary assessment of management. Who is part of the
problem? Who is part of the solution? Can we work with them?
Should anyone be asked to leave immediately?
One turnaround adviser described the review process very simply:
“It is important to determine the situation the company is in, exactly
how bad things are, how much time it has and what options exist for
a rescue.”
The ?nancial stakeholder(s) driving the diagnostic review have three
principal options:
r
They can undertake the diagnosis themselves.
r
They can bring in a third party advisory company to undertake
the review. Historically the corporate recovery departments of the
accountancy ?rms have been dominant in this area.
r
They can bring in a turnaround executive or a specialist
turnaround ?rm (such as AlixPartners) who they believe might
be able to implement a turnaround if this option looks viable.
In theory, the process is relatively straightforward: gather data, pro-
cess the data and make a recommendation about the best option for
the stakeholders. Of course this is not always easy because there is
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BEFORE THE TURNAROUND BEGINS 57
very often a complete lack of reliable management information. Ian
McIsaac of Deloittes sums up his approach as follows:
“I ?nd that all the answers are usually in somebody’s head in the
company, and not necessarily at senior management level. The key
thing is to tap into the experiences and knowledge at all levels of
the organisation. Using workshops and creating project teams is often
quite useful. Time is the main constraint as decisions need to be made
quickly and often on the basis of incomplete information. This requires
a lot of judgement: anecdotes and facts need to be synthesised to
yield good answers. At this stage, a true leader will use his personality
to establish a relationship of trust and con?dence.”
Obtaining the views of individuals further down the organisation, at
middle management levels and below is most important. Thus, at
Lee Cooper, the apparel company (see later, Box 7.3) Paul Hick, the
turnaround leader, found that the 65 people he spoke to below the
directors had a very different story to tell fromthe reports provided by
the nine directors during his ?rst week in the company. Jon Moulton
is also a fan of this approach:
“In addition to hard analysis there are several simple ways to ?nd out
what is going on. Get an accounts clerk and relatively junior manager
into the of?ce – one at a time – and take 15 minutes asking about
the problems. This will give you a pretty clear idea of what’s going
on . . . . Another thing I do is ‘pull the string’: simply chase an issue
all the way through the company if it does not feel right.”
Many advisers and turnaround leaders see the diagnostic review as
essentially a classic management exercise requiring good analytical
and technical skills allied to experience. Comments from advisers
about this stage of the process support this view. Aidan Birkett of
Deloittes described a recent assignment in the hotel industry:
“I started by forming a team of people that understood the hotel in-
dustry both at the economic and operational levels. At the micro level,
I needed people who understood levels of discounting, room rates, and
typical levels of occupancy. They began by working on models to un-
derstand the cash-generating capabilities of the company, what levels
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58 LEADING CORPORATE TURNAROUND
of debt it could serve and where the value lay within the business.
Following extensive modelling and review, the team and I identi?ed
what options were available to raise cash to support the company in the
short term. . . raising new equity, increasing the borrowings, divesting
some of the company or even just putting it all into receivership. We
needed to be very sure of what we could get from the company in
terms of pro?ts and cash, and how we could improve it given the
existing business and assets. Once we had decided what option was
best for the stakeholders, we prepared detailed plans and forecasts and
submitted a recommendation. Above all else, after three weeks of the
diagnostic phase, I wanted to know ‘more than the existing manage-
ment team’. The remainder of the team that I put together consisted
of individuals with experience from within the hotel industry and an
insolvency practitioner to understand the company’s negotiating po-
sition. We calculated what each creditor stood to gain or lose under
differing scenarios and outcomes.
The initial diagnostic review usually has to take place quickly, partic-
ularly if the cash crisis is already acute. Indeed it is not unusual for a
turnaround practitioner, particularly an adviser, to arrive at a com-
pany to undertake a diagnostic review only to ?nd within hours of
arrival that the wages cannot be paid at the end of the week, suppliers
have already stopped supplying or key assets are about to be seized. In
such a situation the crisis stabilisation phase must start immediately
in parallel with the diagnostic review. Similarly, in the turnaround
of an operating company within a larger group, a new CEO is of-
ten unable to begin a diagnosis until he or she has accepted the job.
However our interviews with turnaround executives indicated that
they all felt it important to undertake at least a one-day “quick and
dirty” analysis, before accepting an assignment. A number of com-
pany doctors spent up to four weeks undertaking a detailed business
analysis, including a fairly detailed review of the industry and the
?rm’s strategic position within its industry, in addition to the normal
?nancial and management review.
Very often the problems are obvious. David Hoare, an experienced
turnaround executive, says:
“Within the ?rst few days of being inside an organisation the major
issues should stand out without signi?cant detailed analysis . . . . At
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BEFORE THE TURNAROUND BEGINS 59
Virgin Express, the charter business, the inef?cient route network and
the second hub in Ireland stood out as different from the operating
models of other low cost airlines.”
One adviser, specialising in the recovery of smaller companies, nor-
mally makes a conclusion by the end of the ?rst day:
“You need to make a decision by the end of the ?rst day on whether
the business is recoverable or not. The decision then forms the basis of
the work you may need to conduct . . . such as preparing the business
for sale, ?nding a buyer, allowing receivership to occur.”
At Liberty’s Department Store in London, John Ball (Managing Di-
rector of Retail Operations) says:
“Even without information one can work around the business and
quickly notice what is out of order. . . . Liberty, for example, had ?ve
full warehouses supplying only one department store, providing a
strong indication that the company was overstocked.”
While good analytical and technical skills are obviously important, it
is our contention that the manner in which the diagnostic review is
undertakenimpacts both the quality of the reviewandthe chances of a
successful turnaround. Anumber of company doctors – more so than
advisers – are extremely aware of this. In our interviews they stressed
the importance of listening to employees and the way in which trust
can be built during the diagnostic review. It leads not only to more
and better information but can also make the early stages of crisis
stabilisation easier for the turnaround leader.
One turnaround executive put it this way:
“The availability of information is vital for the diagnostic review.
Although analysis of ?nancial data may provide a lot of valuable
background data, to truly understand the root causes of the company’s
problems, it is vital to talk to the people in the business. . . . Your im-
mediate task is to listen to the concerns and learn from the experience
of as many staff members as possible. In the inevitable climate of fear
and uncertainty that usually exists, winning the trust of employees
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60 LEADING CORPORATE TURNAROUND
is extremely important. If a more aggressive approach is taken, it
may actually have the opposite effect, making people suspicious and
resentful . . . a more emotional approach may encourage staff to offer
more information and analysis voluntarily. When emotions are
running high, to make progress, you have to work with
them.”
Another interviewee’s approach and philosophy on undertaking a
diagnostic review is also illuminating:
“After looking at background information in a brief consultation with
the management team, I form a preliminary hypothesis about the
primary causes of the problem. I then question members of the board
and senior management in more detail as to their concerns, percep-
tions . . . as well as eliciting their reaction to my preliminary hypothesis.
I focus as much on what is not being said, knowing that managers can
be defensive and unforthcoming in dif?cult situations. . . . I try not to
be adversarial and to make incumbent executives see the problems
for themselves. It’s all about asking the right questions in the right
way.”
Asking the right questions and interpreting the responses (based on
one’s experience) and then framing the problems correctly is what a
good turnaround leader should do. Listening rather than talking is
important during the diagnostic review to help to establish trust and
credibility with the incumbent management. It is important not only
how questions are asked in the diagnostic phase but also to “hear”
what is not being said. Box 3.1 shows the outcome of the diagnostic
reviewundertaken by TomDriscoll and colleagues at a family-owned
producer of private label soft drinks.
Box 3.1 Crisis and Diagnostic Review at a Soft
Drinks Company
The company manufactured and bottled carbonated soft drinks,
spring water andsquash concentrate. Until 1995, the Group had
a turnover of £63 million with £3 million pro?t. The carbon-
ated drink division focused on low-cost, private label products.
The bottled water division had a well-established brand name,
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BEFORE THE TURNAROUND BEGINS 61
with signi?cant UK market share, and the squash (concentrate)
division was one of only three major suppliers in the United
Kingdom.
The Group was 100% family owned and operated. It had been
in existence for over 40 years and had well-established, good
relationships with its ?ve major customers, the leading super-
market chains. While margins on the soft drink business were
under pressure from increasing competition, margins from the
bottled water and squash concentrate businesses were relatively
healthy.
The company ran into operational and ?nancial dif?culties af-
ter a total relocation of its manufacturing facilities in 1996. The
move from an old-established facility in Shropshire to large,
modern facilities in Northampton was meant to provide the
company with state of the art manufacturing facilities with
greater capacity and closer proximity to its major customers.
In order to pay for the expansion, the company increased its
debt level from £4 million to over £35 million, leaving it highly
geared. The initial plan was for this debt to be serviced from the
proceeds of expanded production and lower costs.
Unfortunately, about the time of the move to the new facility, a
new bout of intense price competition among supermarkets be-
gan, resulting in pressure on suppliers’ margins. In addition,
the company focused the development of much of its new
production capacity on carbonated soft drinks exactly at the
time when price competition became intense and drove down
margins.
As of 1998, the Group was in severe ?nancial distress. The com-
pany was unable to service its outstanding debts. Worse yet, this
?nancial distress threatened to become operational distress: new
facilities were running at only 25% ef?ciency, due to the fail-
ure to commission the new factory, combined with the lack of
quali?ed workers who were not in place to run the facilities
(old workers had been laid off prior to the move); and suppli-
ers became concerned about extending trade credit. Over an
18-month period the company had gone from having little debt
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62 LEADING CORPORATE TURNAROUND
and high pro?tability to having dangerously high debt and losing
money.
David James was called in by the banks to identify a solution,
supported by John Darlington, and later Tom Driscoll.
Diagnostic Review
Before accepting the assignment, about four weeks of due dili-
gence on the Group was undertaken. This included a study of
the Group’s ?nances, a study of the competitive environment
and an overall industry analysis. Particular reference was paid
to a consulting report commissioned by the banks to indepen-
dently assess the viability and possible liquidation values of the
Group. This report, by PricewaterhouseCoopers (PWC), iden-
ti?ed a break-up value of £17–24 million.
Leadership at this stage of the process required independent
thinking and judgement, and a willingness to put reputations
on the line. Accepting the assignment and failing could make it
more dif?cult to win additional projects in the future. This was
particularly true as an immediate capital injection of £4 million
was needed to keep the company in operation. The banks were
very concerned about making an additional commitment and
the family, although still involved, was also unable or unwilling
to donate the necessary funds.
David James and his team concluded that the banks could get
more of their cash back by continuing operations rather than by
a quick sale and/or break up. The banks agreed to a turnaround
but David James and his team only agreed to take the assign-
ment if the additional £4 million were made available. The bank
agreed to the funding on the basis that David James took exec-
utive control of the business and the family withdrew from the
day-to-day running of the business. It was nowSeptember 1998.
The new management team were keen to repay this additional
funding as soon as possible.
See Box 7.2 for further information about this turnaround.
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Gaining Support for the Turnaround
Since turnaround is only one of the options available for dealing with a
?nancially distressed company – the others are insolvency, immediate
sale, etc. – there has to be an agreement (of sorts) among the key
players before the turnaround can really begin. This is sometimes
very hard to achieve and advisers or company doctors might have
already started the crisis stabilisation phase of turnaround without
the agreement of the key ?nancial stakeholders. This is not ideal but
not necessarily bad since some quick wins on cash management may
convince wavering stakeholders that it is worth trying the turnaround
solution.
Whether it is a debtor-led or a creditor-ed turnaround, the key ?-
nancial stakeholders – usually the banks or investing institutions with
the most to lose – have to agree a way forward. Financial stakehold-
ers, company doctors and advisers all stress the importance of good
leadership at this stage of the process.
Chapter 6 looks at stakeholder management in more detail through-
out the whole turnaround process, and in particular the leadership
role of the company doctor. He or she may indeed play an important
role at this early stage in the turnaround process but often we ?nd
that it is the bankers, private equity houses and advisers who play key
leadership roles in getting the agreement to follow the turnaround
path. Target Express (Box 3.2) and a UK Telecoms company (Box
3.3) provide examples of good leadership in both debtor-led and
creditor-led multi-banking situations.
Box 3.2 Debtor Leadership at Target Express
Background
Target Express was acquired by 3i in a leveraged buy-out. Hav-
ing performed strongly as one of the leading players in the
business-to-business express delivery sector, it suffered a sig-
ni?cant decline in pro?tability after taking on a major home
delivery contract and allowing its costs to spiral.
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64 LEADING CORPORATE TURNAROUND
Review and Standstill
The initial diagnostic review of Target Express, undertaken
by Stephen Keating of 3i, the equity holders, concluded that
the company had a viable business with genuine turnaround
potential but was in deep ?nancial distress. His review was
very dif?cult due to lack of good ?nancial control systems,
but he concluded that it was worth while investing six months
to determine whether 3i should give support to a turnaround
process.
Stephen concluded that he could work with the CEO and that
he would be capable of delivering the turnaround but he needed
coaching and extra support. However, Stephen needed to be the
person who focused on external relationships with the ?nancial
institutions. In particular he felt that he needed to manage the
?nancial institutions’ expectations, not only on what they had
to do, but also on what it was possible to achieve. It was a ?ne
balancing act.
In January 2002 Stephen managed to agree a standstill for six
months with the mezzanine and senior lenders. The company
serviced interest but did not make scheduled principal repay-
ments. He knew he it would need more time but also knew
that six months was the maximum the lenders would give him.
His strategy was to go with the six months and make sure the
company lived up to the lenders’ expectations during that time.
He thought that it would put him in a position to ask for more
time after the initial six months standstill period. In June there
would be something concrete to negotiate about; in January
there wasn’t from the lenders’ perspective. This also gave him
the six months he needed to determine if recovery was a genuine
option.
Relationship Building with the Management Team
Stephen realised that the success of his task greatly depended
on the management. He had to make sure that they were all in-
volved in making the change happen, and that they understood
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BEFORE THE TURNAROUND BEGINS 65
the what, the why and the how. To achieve this shared under-
standing he ?rst had to establish trust and build binding rela-
tionships with the management team.
Although the management team were 10–20 years older than
Stephen, he gained their respect and built relationships with
them by displaying his professionalism, commitment to their
company and making sure they understood that they would
bene?t from his involvement. He earned credibility by asking
pertinent questions, listening and re?ecting: all the time slowly
building trust.
Stephen had almost daily contact with them. He believed that
the only way to get management on his side and together move
the company forward was to build “robust relationships” with
them. He positioned himself as a partner and a coach to the
management. He found that open communication and being
direct about the issues was the way to in?uence management ef-
fectively. He believed that making people understand why they
need to do something was necessary to get them to respond.
He needed to be demanding as to what he expected from man-
agement and he constantly found himself asking for more and
more information. However, Stephen didn’t always share his
concerns with the management in order to keep them upbeat
and to stop them panicking. He learned that the management
team could be very emotional at this stage and he needed to
take them through the issues rationally, “using both soft and
hard words”. He was supportive of them but also very clear
about what had to be achieved by June in order to save the
company.
During the initial six months the management were prone to
being overly optimistic as to what could be achieved. Stephen
knew that over-promising to the lenders in this situation would
be fatal and he had to work closely with the management to
ensure that they never promised anything they couldn’t deliver.
This was not a situation where they could afford to miss targets.
If anything, they had to over-deliver to rebuild their credibility
and be in a position to negotiate with the lenders when the
standstill period was over.
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66 LEADING CORPORATE TURNAROUND
Stephen found management very willing to change; however,
there were some issues where he encountered tension. One
of these issues was the subject of bonuses, when he told the
management that they would not have their bonuses that year!
He made management understand that it had to be done and
in the long run it was in their best interests.
Stephen spent a lot of time coaching management on how to
use internal ?nancial controls to monitor the company’s perfor-
mance and how to effectively manage the relationships with the
outside stakeholders.
Dealing with the Financial Stakeholders
There were three important groups of external ?nancial stake-
holders: an equity syndicate, mezzanine ?nanciers and senior
lenders. Altogether there were 33 stakeholders in this group.
Early in the process it became clear that the senior lenders
(eight banks) did not believe that Target could be a success-
ful turnaround. Stephen realised that talking to all eight would
consume all his time and more, if he didn’t design a simple pro-
cess for communicating and negotiating with them. He used his
in?uence to create a steering committee of the three most in?u-
ential banks to drive things forward. He understood that it was
important to demonstrate to other stakeholders that the most
in?uential lenders were supportive of him. The committee had
all the stakeholders’ trust and was where the major discussions
were held. Stephen also initiated a couple of meetings with all
stakeholders present. He used those meetings as an opportunity
to let management perform, and by taking a step back himself
he was able to demonstrate 3i’s support and endorsement of
management.
Stephen described how frustrating his experience was when
someone failed to co-operate. He tried all sort of ways of in-
?uencing his fellow stakeholders, even threatening to withdraw
3i’s business with them! In the end he says the invaluable trait
was to stay calm.
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Box 3.3 Creditor Leadership in UK Telecoms
and Internet Service Company
The ?rst sign of ?nancial distress came as a complete surprise to
all the ?nancial stakeholders as the company had re?nanced and
acquired a newloan only six weeks earlier. A?ve-member steer-
ing committee of bankers was formed to rescue the company,
one of whom was George Arkle from one of the big US banks.
Arkle advocated a creditor-led recovery instead of an immedi-
ate sale to a private equity ?rm, believing that the debt holders’
recovery would be dismal in a market ?lled with disinterested
buyers and opportunistic private equity ?rms.
Initially Arkle’s viewwas met with scepticismby other members
of the steering committee. He did not have the power to force his
views on the group but through clear analysis, persuasiveness
and good communication skills he eventually won over their
support. “All I was able to do was to advocate a vision, propose a
viable alternative and guide others to ‘see the light’,” said Arkle. “I
had to read the situation and not push too hard, otherwise I would
surely have failed.”
Once a creditor-led turnaround was agreed in principle, Arkle
changed from a selling leadership style to a more participative
style, working with the other steering committee members to
identify a new management team. During this stage, Arkle suc-
ceeded in improving the creditors’ bargaining power against the
private equity ?rms by keeping all alternatives in play and bal-
ancing the needs of the different stakeholders. Today the com-
pany trades healthily and Arkle’s role is that of a non-executive
director.
Specialist restructuring ?rms and experienced company doctors
stress the importance of obtaining stakeholder support, prior to ac-
cepting an assignment to turn a company around. They want full
authority to make whatever changes they think are necessary and
usually want to ensure that there is suf?cient support to ?nance the
crisis stabilisation phase of the turnaround.
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68 LEADING CORPORATE TURNAROUND
David Hoare says that the effective use of power before one accepts
the role of turnaround leader is critical in ensuring support from key
stakeholders: “The ability to say no thanks is very powerful.” Thus at
Virgin Express, where he was already a non-executive director, he
ensured that Richard Branson had bought into his plan for shrinking
the airline before taking the role of Executive Chairman. David even
tries to ensure the support of major stakeholders before undertaking
a diagnostic review. At Target Express he obtained full support from
3i, the shareholder, mezzanine player and the chairman before under-
taking his review. He says that this made his investigation much easier.
Several turnaround executives also expressed the need to negoti-
ate stakeholder ?nancial support – when this is necessary – as a
condition of accepting a turnaround assignment. Once the assign-
ment has been accepted they feel they have less power. Not all
company doctors operate in this way. Peter Giles, who has been a
turnaround executive for over 25 years, stresses the need to take a
risk and step into a situation when the real management issues are
still unclear and stakeholder support is uncertain:
“Building the necessary support from the different (?nancial) stake-
holder groups to the turnaround process requires strong persuasion
and negotiation skills. This is a judgement call and requires a lot of
courage as none of the stakeholders will provide their full support until
they feel comfortable with the situation . . . often later in the process.
In one situation I was involved with there were six banks with £160
million of exposure to a company with a valuable core business but
underlying value of only £65 million. The banks could not agree how
to proceed. Rather than demand a set of conditions . . . I was willing
to take the risk and get the banks’ agreement later in the process.”
While most boards of directors of companies in trouble have, in ef-
fect, failed by not dealing with declining performance at an early
enough stage, many company doctors and advisers stress the need
to obtain Board approval for their appointment and their ?nancial
plan. One individual insists on the appointment being unanimously
approved by the Board before he will accept an assignment. Another
says he likes to be very clear about the authority levels when he goes
into a situation. Where family-owned businesses are involved, the sit-
uation is often more challenging, and there may be no chance of a
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BEFORE THE TURNAROUND BEGINS 69
successful turnaround unless the turnaround leader (company doc-
tor or adviser) “bangs heads together” and threatens insolvency. Box
3.4 provides one such example.
Box 3.4 Dealing with a Feuding Family
Charles Richardson was approached by a major high street bank
to help a local company in the ship maintenance industry. It
was losing about £2 million on revenues of £8 million, and was
seriously short of cash. The only reason the bank continued
to support it was because of its key asset – a valuable piece
of land. The Board consisted of 11 family members, spanning
three generations, most of whom had not talked to each other
for years and refused to sit across a table from one another.
When he arrived at the company Charles had to make a series
of “short and blunt” talks to various family groups gathered
in separate rooms. He told them if they did not get together
within 10 minutes, he would leave and the bank would put the
company into receivership. They agreed. At the Board meeting
that followed, he explained the perilous state of the company –
much to the astonishment of many – and said the bank would
give them a ?nal chance if they would get their act together.
Charles was made managing director with speci?c power “to
call the shots”.
Before accepting an assignment, the turnaround executive will have to
be convinced (as far as possible given the available information) that
the situation is recoverable or, at a minimum, that the objectives set by
the ?nancial stakeholder(s) are achievable. In arriving at this decision,
experienced turnaround executives will assess the value they believe
they can add to the speci?c situation. Most are good at knowing their
own strengths and weaknesses and will decline situations if they feel
the “?t” between their skills and the needs of the situation is wrong.
The ?nal issue, but by no means the least important fromthe percep-
tion of the turnaround leader, is the need to negotiate and agree the
basis of his or her remuneration. In practice one ?nds there is a wide
variation in the ways in which company doctors are remunerated for
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70 LEADING CORPORATE TURNAROUND
their work. In large public companies there is the normal package of
salary, bonus against targets and share options to align the CEO or
turnaround team with shareholders’ interests. In smaller companies,
company doctors usually work on the basis of a daily fee plus an incen-
tive (cash and/or equity) linked to either pro?t improvement or debt
recovery. Rewarding company doctors by giving them a percentage
of debts recovered is common in creditor-led turnarounds, but can
obviously lead to emphasis on a workout rather than a turnaround.
Advisers tend to work on a per day consultancy basis although they
are increasingly negotiating performance-based incentives. Aligning
rewards with the interests of the stakeholders can be an important
signal which engenders trust – a critical ingredient for the success of
any turnaround.
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4
New Leadership
I
N no1n bcn1on- aNb cncbi1on-Lcb 1cnNanocNbs, i1 is
usual for a new leader to be appointed at the instigation of one
or more major stakeholders. The new appointee may already have
had considerable exposure to the company – for example, by con-
ducting a diagnostic review in an advisory or consultancy capacity.
In such cases, he or she will have conducted a preliminary assess-
ment of management and will have identi?ed the key problems and
initial actions to be taken. In other situations, he or she may have had
little more than a one-day “quick and dirty” analysis or even just a
brie?ng and some limited ?nancial information. In Chapter 3 we ex-
amined how the leader uses the diagnostic review process to evaluate
the company and enlist the support of the key stakeholders before
accepting an assignment. In this chapter and the next, we examine
howthe newleader takes control of the troubled company and begins
the process of stabilisation and recovery.
The immediate challenges facing the new leader are:
r
to become established as the “de facto” leader and take manage-
ment control of the organisation;
r
to put in place an appropriate senior management team to drive
the turnaround;
r
to establish a clear sense of urgency among the existing manage-
ment and workforce.
There is relatively little time in which to accomplish these tasks when
a company is in ?nancial crisis. Therefore, from the moment they
arrive, turnaround leaders must drive down the twin tracks of man-
agement and leadership, “morphing” between the two as necessary
71
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72 LEADING CORPORATE TURNAROUND
to achieve their purpose. They do not need or seek the affection of
those they lead but must quickly gain their attention, support and
respect if they are to succeed.
The arrival of the new leader is therefore a key moment in the
turnaround process – a physical separation from the past and the
tangible beginning of a new era. The words and actions of the new
leader during the ?rst few days in of?ce will lay the foundation for
his or her relationship with the company and show his or her ability
to create a shared vision, common direction and sense of urgency.
On rare occasions the new turnaround leader may come from within
the company, as Mike Parton did at Marconi. Interestingly these
individuals, where they are successful, adopt a virtually identical ap-
proach to that of experienced company doctors (see Box 4.1 for Mike
Parton’s actions at Marconi).
Box 4.1 Marconi: A New Leader from Within
Marconi was one of the most complicated ?nancial restructur-
ings ever seen in the UK. From the ?rst sign of trouble – a
pro?ts warning in July 2001 – to ?nal court approval of two
schemes of arrangement, the restructuring lasted almost two
years and encompassed fundamental management, operational
and ?nancial changes including a Board clear-out, disposals of
over 20 businesses, reducing headcount by over 50%, two sepa-
rate schemes of arrangement and a stock market de-listing and
re-listing. As the ?nancial restructuring progressed, supported
by armies of advisers, the management teamwas simultaneously
leading a major operational turnaround to ensure the long-term
viability of the stricken telecoms supplier.
In 1996, George Simpson took over as Managing Director of
GEC, after Lord Weinstock had spent 33 years at the helm,
building it into the undisputed leader of the British electri-
cal industry. Under Simpson and his new management team,
GEC pursued a strategy of focusing on communications and
IT, which culminated in 1999 in the demerger of GEC’s Elec-
tronic Systems business (which merged with British Aerospace),
the debt-funded acquisition of two major US businesses (in
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NEW LEADERSHIP 73
telecoms and internet switching) and a change of name to
Marconi plc. By mid-2001, it was apparent that the telecoms
boom was slowing and that demand for Marconi’s products
would fall considerably short of expectations. Pro?t warnings
followed and the share price collapsed from a peak of over £12
to below £1, as the markets worried about the company’s debt
mountain and continuing cash out?ows due to operating losses.
By September 2001, the chairman, chief executive and chief ex-
ecutive elect had all resigned and the company had commenced
discussions with its lenders to restructure over £4 billion of debt.
A change of leadership was inevitable after Marconi’s very pub-
lic fall from grace. Unusually for a large-scale public company
turnaround, the replacement CEO came from within the group
in the person of Mike Parton, a divisional CEO. On taking con-
trol, Mike’s ?rst action was to establish a new ‘cabinet’ consist-
ing of six key managers, each charged with overall responsibility
for one of six key areas: customers, costs, strategy and planning,
re?nancing, asset disposals, and people and communications.
He abandoned the group’s complex matrix organisational struc-
ture and centralised control, managing through 12 senior man-
agers in total including his “cabinet” of six and six key regional
managers. In an important symbolic act, the “cabinet” was se-
lected from across the group and Mike did not “import” his
former divisional management team to ful?l these roles.
Mike describes his leadership style at this stage as a “trench war-
fare mindset”. Like Mike, his senior managers had been with
Marconi for some time and believed that their careers would be
?nished if they did not succeed in turning the business around.
Failure was not an option and Mike adopted a dictatorial ap-
proach to ensure that everyone was focused on survival, through
delivery against short-term imperatives. Mike described his job
as to “focus on the things that will kill us”, in particular ensuring
there was suf?cient cash to see the restructuring through.
Having established a high-level recovery plan with the “cabi-
net”, Mike’s key leadership task was to communicate with the
rest of the management team, with employees, with customers
and with the outside world. Marconi’s distress, after years
of stock market adulation, was attracting tremendous media
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74 LEADING CORPORATE TURNAROUND
interest, and it was vital that customers, suppliers and employ-
ees heard management’s views rather than press speculation.
Mike established a series of internal communication channels,
including:
r
weekly 1-hour call with the senior management team (top 50)
to communicate and monitor progress on critical issues;
r
quarterly off-site conference with the same top 50 managers,
to establish short-term priorities;
r
“town hall” meetings in each major of?ce, enabling all em-
ployees to hear at ?rst hand from the leadership and to ques-
tion them directly;
r
a website, “Ask Mike”, where every employee could ask Mike
questions directly;
r
sending a fortnightly email (“Mike’s view”) to all employees,
supported by regular voicemails and conference calls. These
were always focused on the key priorities – cash and costs – re-
inforcing the many operational initiatives that were underway
(see Box 5.1 in Chapter 5).
Mike’s other major task, after communication, cash and costs,
was to retain and motivate his senior managers through the
tremendous challenges of the long restructuring operation. A
series of redundancy programmes and disposals had reduced
group headcount by over 50%, but it was vital to ensure that
certain key managers remained. Mike implemented a retention
plan for key individuals and subsequently rolled this into a se-
nior management share option scheme, which took effect once
the restructuring was completed.
Finally, Mike put himself on the line. The pay-offs to the former
Marconi leaders had caused widespread outrage in the press.
On his own initiative, Mike requested that the Board amend his
contract so that there would be no pay-off if he were removed as
CEO. Mike aligned his interests completely with his stakehold-
ers; substantial rewards were available for success, but there was
to be no “reward for failure” if the turnaround did not succeed.
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NEW LEADERSHIP 75
Making an Entrance
In the majority of cases, the new leader will replace the incumbent
chief executive, or arrive as Executive Chairman. Turnaround prac-
titioners recognise that their style, methods and above all their words
will be subject to the closest scrutiny on arrival. Their personality will
be inferred from their physical presence, style of dress, choice of car,
mode of address, even the parking place they select or the of?ce they
choose. Experienced leaders do their homework in advance and are
well prepared for day one, as indicated by the following quote:
“The very ?rst day, when you arrive, the people understand that it is
the beginning of a new phase. I usually spend a lot of time preparing
for the ?rst day, as ?rst impressions are critical . . . I choose my words
very carefully.”
Thus, at the Royal Mail on the day after his appointment as chair-
man, Allan Leighton turned up at the Leeds sorting of?ce for the
early morning shift to talk to staff. Such actions send strong signals
throughout organisations.
The approach of one turnaround leader is perhaps typical of what
some might expect of a company doctor. He is conscious that his
physical presence gives him a certain amount of gravitas. He con-
sciously dresses in a black suit with a white shirt and there are no
smiles. He arrives early in a big car (he drives a Mercedes 500) and
if he feels that a symbolic gesture is needed, he sometimes rips out
the reserved parking spaces near the entrance. It must be said that at
around 6ft6 with a beard, he has an intimidating physique that helps
him to convey the required image. He emphasises the need to grab
people’s attention. In most companies people are afraid of him when
he arrives. In his own words: “It’s about putting the fear of God in them
and then just sitting back and looking presidential.”
Styles certainly vary. One described his fellow turnaround profes-
sionals as ranging “from practitioners who were physically threatening to
those so smooth that you wouldn’t feel the knife going in”. Whatever their
approach, turnaround leaders need the ability, from the earliest days
of their appointment, to convince people to trust and follow them,
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76 LEADING CORPORATE TURNAROUND
to make them feel that “you are their best chance to get there” and to
accept and eventually embrace the changes necessary for survival and
recovery.
Staff in most troubled companies will be at least vaguely aware be-
fore the new leader arrives that all is not well. However, it is almost
certain that they will not know just how bad the situation is, since
incumbent management may not have realised it themselves and will
often have been denying the dif?culties and seeking to reassure staff
with optimistic messages for some time beforehand. Therefore, the
sudden change of leader is likely to come as a shock to some, if not
most, employees.
Taking Control
The leader’s ?rst task is to take control. In some situations, the mere
fact of the new leader’s arrival (particularly if the previous CEO has
just been removed) can be enough to shock the organisation awake.
The new leader must move swiftly to establish control. The initial
point of contact is usually a meeting with the Board and/or the senior
management team. If the CEO is still present, removing him may
be the ?rst priority. In extreme situations, the whole Board might be
removed at the outset. As one turnaround executive described it:
“At the AGM, the Chairman asked how I would like to run the
meeting. I became Chairman, took out [?red] the ?nance direc-
tor, took out 6–7 other directors and was left with one, the company
secretary.”
In another situation a company doctor arrived with undated resigna-
tion letters which he gave to all the Board, saying “nothing happens
until you all sign these”. By doing this he was getting them to accept
that the crisis was their fault and that he was now in control.
The initial meeting may not always be quite that dramatic, but it
should achieve three key objectives:
r
To establish that the new turnaround leader is in charge; as evi-
denced by the removal of his predecessor and others if necessary.
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NEW LEADERSHIP 77
r
To communicate with absolute clarity the nature and extent of
the problems, the absolute requirement for change and the new
rules of engagement.
r
To expose the attitudes (and to some extent the capabilities) of
the remaining senior management.
The leader’s style at this meeting is usually extremely autocratic and
these can be highly charged occasions. The facts will be unpalatable:
the causes and severity of the company’s situation, the extent of the
cash crisis and the limits to ongoing stakeholder support that should
be assumed. Typically, under-performing companies have entered a
downward spiral. Information is deliberately or subconsciously with-
held as managers seek to avoid sharing or hearing bad news, and
increasing isolation and secrecy result in blame or denial. Inappro-
priate actions are taken (or, more typically, insuf?cient or inadequate
actions) and the decline accelerates. Therefore, it can come as a great
shock even to senior management to hear the extent of the problems
and be informed of the short distance that stands between survival
and failure. Such a shock may be necessary to galvanise the remaining
management into action:
“You lay out very clearly the status of the organisation including the
consequences of failure in order to have them understand the urgency
of the situation.”
“You have to leave people in absolutely no doubt that there is a cliff,
a precipice.”
“You have to shock the organisation awake. . . . You have to be pre-
pared to ride roughshod over people to get the job done.”
It is important to bear in mind the likely psychological state of the
audience. Aidan Birkett of Deloittes describes it thus:
“By this time, the management team have usually arrived in a situ-
ation that . . . they have lost their pride, they have no energy or they
are out of their depth. People within the business often do not want to
be disturbed from their slumbers, so sometimes you have to ?re people,
but you have to be fair and straight without any preconceived notions
or prejudices. Sometimes the management are in a hole and they just
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78 LEADING CORPORATE TURNAROUND
have to stop digging. If they don’t stop, you have to take the shovel
off them and hit them on the head with it.”
The turnaround leader has to maintain a ?ne balance between de-
scribing the problems in suf?cient detail to convince his audience
and reciting a litany of failure that creates or perpetuates a culture
of blame and fear. It is likely that some or all of the architects of
the crisis will be present and are, in effect, being held to account.
Their responses are likely to be instinctive and defensive. One leader
summarised it in this way:
“They don’t like you, they resent you. No-one likes being told they
are a failure.”
The main leadership challenge is to take executive control and to
change senior management’s mindset quickly towards crisis stabili-
sation and short-term survival. This means letting go of those who
will not or cannot actively buy into the turnaround process.
It is the leader’s role to steer the management team away from blame
and counter-blame and towards taking the actions necessary to ad-
dress the resulting crisis. However, this is not a time for soft words.
The message to management must be explicit and unequivocal; they
can acknowledge the problems, accept the new regime and work to-
wards a solution or they must go:
“If they stand in my way, I remove them, but I give them the option.”
The task of the turnaround leader is to deal routinely and unemo-
tionally with these highly stressed situations, remaining calm, con?-
dent and detached. At the same time, he or she must anticipate and
manage the turmoil of emotion around them, as described by one
experienced leader:
“What is normal to me causes people to have heart attacks. Gen-
uinely [because of] where and how we operate, I have seen people
physically collapse from tension. One of my problems is not to lose
sight of that. Because what is to one person a show-stopping incom-
prehensible problem is to me just a step in the process so that I can
make it to the dinner party later tonight. There is a clear need to lead
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NEW LEADERSHIP 79
with a clear and controlled process and not go too cold and too fast
so that I leave a vacuum of the management team behind me. They
[the management team] have already been through hell two or three
times before and I can’t forget that just because I’ve seen it and done
it before . . . I must not forget to see it from their perspective.”
The initial meetings will set the tone for the new leader’s relation-
ship with his or her senior managers and may ultimately dictate the
success or failure of the turnaround. As we will discuss in subse-
quent chapters, at certain phases of the turnaround a more consen-
sual and consultative approach becomes necessary but at this initial
stage coercive leadership is typically more appropriate. Nonetheless,
the turnaround leader walks a tightrope between galvanising his or
her audience and alienating them, stirring them to positive action or
inciting fear, resentment and obstruction. Although leaders have the
power to remove those in their way, they risk destroying the business
if they drive too hard, too fast and are not seen to be objective.
“It’s a fool that goes in with the macho style and just blindly says ‘do
this, do that my way’. We put in a very tough ?nance director in a
company and he very nearly trashed the company. He robbed people
of their creativity and almost killed the company.”
Pippa Wicks at AlixPartners says:
“Instead of ?ring somebody – take action quickly to solve something
the previous leader was unable to do. Quick wins are important in a
crisis because they help build the new leader’s credibility.”
Many leaders make an early “easy” decision of a symbolic nature
to demonstrate that “from now on things are going to be different”.
Sacri?cing sacred cows, such as cancelling a major overseas trade
exhibition that has become the annual outing for senior management,
or killing a pet project of the former CEO, can send an immediate
and powerful message to the organisation.
Patrick O’Sullivan who led the turnaround of Zurich Financial Ser-
vices in the UK (see later, Box 9.2) says:
“Never judge a book by its cover. Give yourself time to assess the
strengths and weaknesses of your team. It is generally good if colleagues
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80 LEADING CORPORATE TURNAROUND
say he or she is a tough performer provided they share your de?nition
of tough performance.”
Experienced turnaround leaders knowthat their leadership style may
not be appropriate in all circumstances. In professional services and
some high tech ?rms, where there are high levels of intellectual capi-
tal, turnaround leaders still need to be ?rm but must to some degree
respect individuals’ professional values. This requires less telling and
more listening and convincing as a style.
Meeting the Team
Having “seized control” at the “top table”, the next round of meet-
ings address both a management objective – to get to the detailed
information – and a leadership task-to establish a core team to drive
the turnaround process. Many practitioners use a series of one-on-
one meetings with senior managers to achieve this. Prioritising the
people you want to talk to is important, and simple criteria are usu-
ally applied, such as focusing ?rst on those who either generate or
consume cash. These meetings serve multiple purposes:
r
To assess the individual’s capability and value to the turnaround
process.
r
To identify key in?uencers and use them to “spread the gospel”.
r
To draw out detailed information from those closest to the
business and get all the problems on the table as quickly as
possible.
r
To establish the new way of thinking and operating, based on full
disclosure and open communication.
r
To clarify job responsibilities and reporting relationships.
Some practitioners recommend visiting people in their of?ces rather
than “summoning” them; they ?nd that managers are more con?dent
and willing to “open up” on their own territory. They are also mindful
of the symbolic message, particularly in a hitherto hierarchical or
formal organisation, that the new leader “rolls up his sleeves and gets
stuck in.”
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NEW LEADERSHIP 81
In our experience it is also vitally important for the new leader to
clarify job responsibilities and reporting relationships. We ?nd that
complicated and confused management organisations are a common
feature of larger companies in trouble, leading to poor or non-existent
decision making. We often ?nd companies – of all sizes – in which it
is unclear who is responsible for even the most simple decisions. The
problem can be compounded when a new leader arrives, as “every-
thing stops” as managers and employees alike become insecure and
unsure whether they can make any decisions at all! It is always worth
clarifying roles and responsibilities in these early meetings with man-
agers even if it is no more than con?rming that they should continue
to work in exactly the same way as before, until told otherwise.
If the new leader has not had the opportunity to conduct a diag-
nostic review prior to his appointment, these initial meetings can be
critically important in getting access to reliable information. Experi-
ence demonstrates that managers in the so-called “marzipan layer”,
(unseen until you dig beneath the executive board “icing”, yet con-
tributes much of the substance and ?avour) usually have a very good
understanding of the issues. Time and time again we hear:
“Most of the time someone in the organisation has a solution . . . my
job is to dig through the organisation and ?nd these people.”
“Management get in the way of people trying to do a job. People
actually want to do a job well.”
“I try to work with the team. I have to rely on them for my under-
standing of the business.”
An integral part of the leadership role is to know not only the ques-
tions to ask but also how to frame them and how to listen. Commu-
nications are usually broken in a distressed company environment;
previous management having become less and less inclined to solicit
the truth or explain their actions, making them increasingly remote
from the real problems. Simply listening while allowing employees
to talk not only provides valuable insight into the business but also
allows themto relieve the stress built up in an organisation in turmoil.
As two experienced professionals describe it:
“You are not being judgemental – you are trying to coax them to
communicate with you, displaying the body language of a kindly old
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82 LEADING CORPORATE TURNAROUND
professor. I make sure that John (my numbers guy) keeps his bloody
mouth shut. He not only sounds like a pompous git, he is a pompous
git!”
“Build trust in them ?rst to open the team up. Act as a listener and
use body language that does not imply blame, simply that you want
to learn.”
There is never enough time in a crisis and the tendency can be to
rush through these early communications and “get on with the job”.
Experience suggests that it is important not to short-cut this critical
leadership task. A prominent and experienced turnaround executive
emphasised this point to us:
“The place I stayed and stayed until I was happy the message had got
through was in face-face talks with the team members. While my style
changes to suit the environment of each assignment, my philosophy
remains the same – ‘explain why you are there . . . then listen’.”
Another said:
“You have to spend a lot of time with people in a turnaround talking,
pushing, reassuring . . . you have to change agendas.”
The best turnaround leaders attempt to share understanding and
decision making early in the turnaround process. They recognise
that turnaround work is a people thing . . . that it’s about getting staff
inside the company to trust and believe in them.
Building the New Team
The new leader must be careful not to be in?uenced by personal
feelings towards individuals. It is not unusual for individuals who
are deeply committed (and of value to) the organisation to be ve-
hemently opposed to the change of leader or direction, perhaps out
of misguided loyalty to the previous CEO or a failure to grasp the
nature of the crisis. If the new leader can persuade them to give their
support, they may in time become powerful advocates of change.
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NEW LEADERSHIP 83
However, time is very limited and more typically the leader has to
reach a decision quickly and let them go. As Calvyn Gardner, the
turnaround leader at South Africa’s Trans Hex Group, noted:
“The most important thing is to take decisive action under less than
ideal circumstances. One simply cannot wait for better information,
better economic conditions, better personnel or psychometric pro?ling
of your senior management team – nothing is ever perfect and waiting
for perfect conditions invariably leads to missing out on what might
be good enough to survive and begin to improve.”
Gardner also acknowledges that it can be worth while winning over
key individuals if they are of long-term value to the business. Box 4.2
describes the situation that Gardner found at Trans Hex and the style
of leadership he provided.
Box 4.2 New Leadership at Trans Hex Group
Trans Hex Group (THG) is the second largest diamond min-
ing company in South Africa but only a fraction of the size
of DeBeers. In September 2001 Calvyn Gardner, who had a
track record of turning around companies within the Anglo
American Group, was brought in as CEO. He found a company
with little or no cash reserves, extensive debt and mines that
were nearly at the end of their productive life cycles with no new
mining prospects on the immediate horizon. Employee morale
was poor with high staff turnover and long-time company
veterans quitting. Relationships with the mining unions were
extremely poor (see Box 6.2). Adding to these problems was a
complete hiatus in the all-important US diamond market fol-
lowing the September 11 attacks.
However, Gardner’s diagnostic review determined that THG
had the right conditions for growth, in part due to the political
change in South Africa. “What was needed was a structure to
support the growth. . . . What I was asked to do was put a plan in
place to achieve the turnaround.”
Gardner’s immediate focus was on crisis stabilisation. He
was relentless in implementing centralised cash management
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84 LEADING CORPORATE TURNAROUND
controls and initiating draconian cost controls. This caused
some disgruntlement among the managers and Gardner moved
swiftly to remove those “deemed unsuitable to the new environ-
ment”. Others elected to leave of their own accord, but even
then he did not bring in many new people. One situation pro-
vided a particular insight into Gardner’s style.
One who resigned was Altie Krieger. Altie Krieger, a mining
specialist and 25-year veteran of Trans Hex, was sympathetic
to the mine managers he oversaw, many of whom were up in
arms at seeing organisational power transferred away from the
mines – where it clearly belonged, in their view – and given over
to remote ?nance managers at company headquarters. Krieger
protested Gardner’s changes in a somewhat heated conversation
that led to his resignation.
But Gardner felt Krieger to be a highly desirable asset, and
while Trans Hex would survive without him if it must, Gardner
wanted Krieger on board. As Gardener recounts that episode,
he called Krieger into his of?ce, subsequent to Krieger’s res-
ignation – after tempers had cooled – and explained to him
that without the changes that were being instituted, the com-
pany faced failure, and those Krieger sought to protect would
be without jobs altogether. Krieger had a choice: leave, or stay
and help those he cared for to turn the company around and im-
prove their own personal circumstances in the process. Krieger
decided to stay and became Director of Land Operations for
the company.
Two years later, Krieger said of Gardner simply, but with a
distinct note of admiration, “he’s tough”. He seemed further
impressed with Gardner as he described how Gardner spent
time on the ground, visiting every mine, and getting familiar
with every detail, no matter howsmall or howtechnical. Trained
as an engineer, Gardner also won praise from Krieger for his
ability to grasp the technical issues involved in running a mine.
“He’s tough, but he’s fair, and he really understands every aspect of
what’s going on here,” said Krieger.
When asked about this, Gardner said:
“If you want to be a team player, then you’ve got to know
what’s going on, no matter where it is. You’ve got to be tuned
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NEW LEADERSHIP 85
in to what’s going on. And that just means putting the effort
in. Again, like the captain of the team, you must train probably
harder than all the others. And in our case, getting responsibility
down (throughout the various levels of the organisation) was
absolutely critical. It was impossible to control from the centre.
All I could do was try to at least understand what was going on,
and then when advice was needed, I could give it. You’ve got
to get your people on board as a team, so that together you can
‘stop the bleeding’.”
And getting a handle on costs is where that process must in-
evitably begin. Gardner told us:
“Cost control is one of the easy ?xes. You’ve got to cut costs and
capex to boost your margins. We implemented cost controls at
all levels. We got all the contractors and suppliers in and gave
them an ultimatum: we said, ‘If you want to supply to us, I
want to see a 10% drop in your cost to supply to this company.
Otherwise, you’re off the list. If I die, you’re going to die with
me, and what’s the point?’ We put a huge amount of effort into
doing that.”
And this process must be closely monitored so as to determine
the level of success – the size of the window of opportunity – it
is creating for you.
“At the end of the day, it’s all about measurement: if you start
measuring your costs, you ?nd you can manage them.”
Once he’d stemmed the cash out?owat Trans Hex and had con-
trol over the liability side of his balance sheet, Gardner focused
on what he clearly felt to be his most critical asset: his core team
of people.
“Initially, that was a small group, but we slowly grew an exec-
utive team that joined the crusade. We took the view that you
were either part of the solution or part of the problem. If you were
part of the problem you faced something of an ‘exit strategy’. In
those beginning days my style was probably dictatorial.”
Gardner was unequivocal in asserting that being dictatorial was
not only appropriate, but necessary.
“If there were any mistakes in those days it was that we didn’t
make more drastic personal changes. We probably gave a few
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86 LEADING CORPORATE TURNAROUND
individuals a little bit too much rope. I always like to believe
that you can give someone a chance, but I’m afraid I would
recommend that if you do go in [to manage a turnaround] you
must be absolutely sure that the team you are working with
fully believes that this process can work. You only have a few
people who can sound the rallying cry – you can’t have guys
that you think are on board and really are not. It’s just too
disruptive.”
After initial tensions, Altie Krieger became one of those changed
agents who’d sound the rallying cry. Today he echoes Gard-
ner’s concern for getting the people right. Throughout our in-
terview, Gardner stressed the importance of this point: more
than simply taking control, he had to create conditions under
which his people could – and would want to – understand and
implement the changes that were necessary to turn the com-
pany around. Communications and leading by example were
crucial to that task, and Gardner’s approach to this aspect of
his turnaround challenge re?ected his strong predisposition to-
wards the primacy of the “stakeholder” philosophy over the ?-
nancial focus that perhaps typi?es many USandUKturnaround
executives.
See Boxes 6.2 and 9.3 for further discussion of the Trans Hex
turnaround.
In addition to identifying and removing obvious insurgents or in-
competents, the other key considerations in evaluating who to re-
move and who to keep are the relevance of their management skills
to the future of the organisation and their current value – for exam-
ple, relationships with key customers or critical technical knowledge.
If the turnaround leader has had the opportunity to observe man-
agement for several weeks in the course of a diagnostic review, he
or she may already have identi?ed the “stayers” and “goers” and
planned to ?ll any resulting gaps with interim resource where neces-
sary. Without prior knowledge, he or she may choose to defer changes
of senior personnel for several weeks and ensure that adequate re-
sources are in place to mitigate the risks of change. Loss of corporate
knowledge is an issue that leaders take into account but rarely is
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NEW LEADERSHIP 87
on is are they c
Retain if they
accept
responsibility
for failure and
do what they
are told
Use their
knowledge to
get through the
crisis
Fire
immediately
Transfer
relationships,
then fire
Low High
Current Value
High
Low
Management
skills
for the
future
Figure 4.1 Reviewing the management.
this a signi?cant issue. Figure 4.1 provides a simple decision-making
framework.
The key question on which to judge a management team is: Are they
competent to address the task they now face rather than spend too
much time judging what they have done in the past.
“ Although I had received detailed evaluations on all staff from for-
mer management and investigating accountants, many of their eval-
uations recommended the replacement of what turned out to be some
of the most valuable people to the turnaround process. . . . You have
to keep an open mind.”
In the majority of situations, the leader has to rely a great deal on
his or her intuition and experience in putting together an appropriate
team:
“You must be able to understand people’s strengths and weaknesses
almost intuitively. Being able to understand and do this on the job is
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88 LEADING CORPORATE TURNAROUND
crucial. People in a company are essentially all part of a team, albeit
a dysfunctional team, but it’s your job to bring this team together so
they can perform.”
“If you’re creating a teamyou need to hire people that are complemen-
tary to you. I won’t go without people who add to my skills – like a ca-
pable accountant because I am not an accountant. It’s a fool that goes
in with the macho style and just blindly says ‘do this, do that my way’.”
“I look people in the eye and decide if I can work with them.”
“When you bring in new people make sure that the people who are
there do not feel that you are parachuting a new team in because they
are at fault. . . . What you are doing is complementing existing skills
with new skills.”
Practitioners unanimously recommend swift action to deal with re-
sistors and objectors, as there is no time to be wasted in dealing with
in-?ghting or politicking. It is important to be seen to take action and
con?rm the authority vested in the new leader:
“Sometimes you have to be seen to be taking out people who are part
of the problem. You generally ?nd three types of people; real dogs, real
stars and a big population of in-betweens that are highly sceptical and
need to be convinced of the plan. People make up their minds about
you (as the turnaround leader) in the ?rst 30–60 days. People have
to see change and you have to be seen to be dealing with problem
individuals.”
“If you get a nasty feeling someone is not on your side, get rid of them.”
“Don’t ?ght with anybody; you have to carry them with you or move
them out . . . you lose momentum if you stop and ?ght.”
“It’s a waste of time trying to manage those that don’t want to
help . . . it is far easier to ?re them.”
“I give people some limits and constraints. Some don’t like this because
they’re used to operating with a lot of free reign. If people don’t like it
and can’t change they go.”
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NEW LEADERSHIP 89
If someone is behaving inappropriately, you let them go as quickly as
possible but you have to be careful:
“Firing someone too soon could send the wrong signal . . . that you are
not listening or haven’t bothered to assess the situation before taking
action. It’s important to ?nd the right balance . . . somewhere between
two weeks and a couple of months is usually about right.”
“You have to be sensitive to people’s feelings and insecurity but you
do have to be ruthless. You cannot be a nice guy, otherwise everybody
is out of a job.”
Putting a credible top team in place that is going to help the leader
to achieve the turnaround is the critical ?rst step in any mid-size to
large corporate entity. Failed organisations usually require a radical
change in senior management. This does not always take place im-
mediately, but even in those rare situations where an organisation in
trouble has a lot of talent (as was the case at IBM, for example), sig-
ni?cant change still takes place, albeit often at a slightly slower pace.
If the turnaround leader is to make more than a few senior manage-
ment changes, he or she must be aware that a lot of time must be
invested in a careful selection process to ensure that quality people
are appointed. If the turnaround leader comes in as chairman and
the existing chief executive is unsuitable for the turnaround task –
as is usually the case – the ?rst priority is to ?nd a new chief execu-
tive. This can easily take 6 to 12 months with the chairman playing
the role of acting CEO in the interim. The critical leadership task of
building a top team is well illustrated by what Archie Norman has
done at Energis (see Box 4.3).
Box 4.3 Building a New Top Team at Energis
Archie Norman, who had led the turnaround at Asda in the early
1990s and before that had been Group ?nance director during
the 1980s’ turnaround at Woolworths, was appointed executive
chairman of Energis in 2002. Energis had become insolvent with
approximately £800 million of debt, but the leading institutions
believed that the best way to preserve value was to rescue the
UK operations by injecting £150 million of new cash. This was
contingent on the appointment of new, credible leadership.
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90 LEADING CORPORATE TURNAROUND
One of Norman’s immediate priorities was to establish a new
management team capable of taking the enterprise forward. He
?lled 12 of the 14 top positions with recruits from outside the
company. Norman spent a lot of time on the recruitment pro-
cess ensuring that the backgrounds of likely candidates were
thoroughly researched to ensure that both the leadership and
management capabilities of the successful candidate(s) would
meet the turnaround challenges at Energis. He believes it is ap-
propriate to utilise the support of external experts and adopts a
variety of assessment methods, including psychometric tests.
The new chief executive, John Pluthero, had previously been
CEO of Freeserve, one of Energis’s largest customers. He is
described as having “a strong controlling instinct and a strong
focus on customers” – exactly the traits required in the Energis
turnaround.
Norman recognised that to attract top-quality people to a dis-
tressed situation he would have to change the senior manage-
ment reward system. He put in place an incentive system, which
linked personal rewards for the top team to any gain in the en-
terprise’s value beyond £400 million, closely aligning manage-
ment’s interests with the interests of the stakeholders who were
supporting the company through its turnaround.
It is not always possible to build a new team, particularly in smaller
companies where it is dif?cult to attract good-quality managers to a
distressed situation. Many leaders point out that it is essential to have
worked with people before you know what they can do, particularly
in a turnaround. In a recovery you must have people you trust – that
means working with people with whom you have worked successfully
before. As one leader said:
“You just can’t bring theminto a turnaround on the basis of references
since their background does not fully explain what they can actually
do.”
The importance of changing at least a few key people in the manage-
ment team is acknowledged by virtually all turnaround leaders. Most
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NEW LEADERSHIP 91
subscribe to the view “You can’t do anything without people” and that
“there are no bad troops, only bad generals.”
Changing some of the generals has a remarkable effect on most busi-
nesses. Bring in a few good people and the “troops with clear focus
and leadership will do the job for you”. In looking back on their ex-
periences, turnaround leaders are almost unanimous in saying that
they kept some of the old guard too long. Patrick O’Sullivan said:
“It took me two years to clear out the senior management team. They
all went. . . . It took a year too long. . . . As I had a good sense after six
months, I should have taken action earlier.”
Communicating with the Workforce
It is usual practice to take control from the top but it is vital to com-
municate at all levels of the organisation as soon as possible, if only to
pre-empt or forestall the rumour mill. In public or high-pro?le com-
panies, the new leader’s arrival may have been preceded by weeks of
press speculation and industry rumour. In almost all organisations,
many employees will be aware that there are dif?culties, manifested
in unhappy customers, delayed payments to suppliers, inability to
get decisions made or approved by senior management or rumours
of imminent redundancies. The arrival of the new leader may be in-
terpreted as con?rming their worst suspicions or fears, particularly
if the departing manager has informed them, as has been known to
happen, that his replacement is a bank appointee who is coming to
close the company – a receiver or administrator in sheep’s clothing!
In single site operations, the new leader will typically address the
workforce soon after his arrival. Most prefer to speak to the employees
directly and avoid intermediation; they have to ensure that the right
message is delivered and also recognise that it is hard for incumbent
management to acknowledge their mistakes and the consequent
dif?culties. In large multinational or multi-site businesses, communi-
cations programmes are quickly established, using regional brie?ngs,
roadshows, “town hall meetings”, conference calls and intranet web
sites to communicate regularly and openly with employees.
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92 LEADING CORPORATE TURNAROUND
Whatever the circumstances, successful leaders adhere to the same
ground rules:
r
Be direct, open and honest.
r
Acknowledge their concerns.
r
Don’t make early promises that you may be unable to keep.
In a crisis, it may be appropriate to use shock tactics, to frighten the
workforce into rapid compliance with the new world order. Some
turnaround leaders can be extremely blunt, as the following quotes
illustrate:
“How do you grab people’s attention when you ?rst arrive? You say
to 500 employees of the company ‘you’re in deep shit.”
“I open my address to the workforce with the words . . . some of you
will be going and it will be on the legal minimumI can get away with.”
The risks and bene?ts of this approach are apparent. It may be possi-
ble to shock people into compliance in the short term but it may also
make the task of the leader more dif?cult once the crisis has been
stabilised and he or she seeks to empower the workforce to engage in
more long-lasting change. If a “tough talking” approach is adopted,
it needs to be balanced with a human touch – walking around the
factory, talking individually to the foremen, operators, secretaries,
etc. As one described it, “implement brutal changes in a gentle fashion”.
It is important to identify the key in?uencers and win them over; and
it is important to realise that those with most in?uence may not be
apparent from the organisation chart. For example, in an airline the
pilots may be disproportionately in?uential over both cabin crew and
ground staff. In a business with a large minority ethnic workforce, it
may be a senior family member, rather than the foreman or union
representative, who will hold sway with the other employees. This
often means by-passing middle and senior management but, as one
practitioner said to us: “If they can’t accept this, they have to leave.”
The best leaders demonstrate their humanity, appealing to their
common interest in saving the business. They might use dramatic
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NEW LEADERSHIP 93
language or theatrical gestures if necessary to engage with and per-
suade an audience that will at best be neutral, or at worst cynical and
hostile. Rhetoric – choice of words and delivery – can be important,
as illustrated by the following comment:
“Use striking language and harness the feelings of the employees –
many of them will know what has to be done, they just want to see
that it’s ok to act.”
Sometimes it can be helpful to use humour to diffuse the tension:
“I know what you are all thinking, another fat bastard to pay here.
Well you’ll be pleased to ?nd out that I’m being paid by the day, not
by the pound!”
This leader’s objective is to grab their attention while also putting
them somewhat at ease, and he follows this attempt to relax the au-
dience with his key messages. Unintentional humour can have the
same effect; showing people that you are human gets them on side.
One leader made an impassioned speech to the assembled workforce
followed by a dramatic exit – into a coat cupboard, having opened
the wrong door. He emerged to ?nd his audience in ?ts of laughter
but quickly turned that to his advantage, following up with questions
and discussion to “humanise” the tough speech that had preceded
his abortive exit.
Whatever the approach, the desired outcome should be to build con-
?dence in the new leader and convey strongly that things will now be
done differently. The leader cannot give the audience all they want –
i.e. reassurance that their jobs are safe – but he or she can quash the
rumours by addressing them head-on and telling the listeners with
blunt honesty what has to be done and that he or she is the right
person to do it.
“Tell them what you are going to do and why it needs to be done . . . be
quite directive and autocratic in the process but in a way that convinces
them to have con?dence in you.”
“You don’t have to listen to me but I have to be here . . . if you take
my advice we will get through.”
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94 LEADING CORPORATE TURNAROUND
Communications at the beginning of the turnaround are not about
rebuilding staff morale. Infact the lowpoint instaff morale may not be
reached for 9 or 12 months after the start point, when cost reduction
and closures start to bite. A junior manager in one turnaround told
us:
“The ?rst year was very dif?cult. There were lots of leaving parties
and staff morale was low. However as the second year progressed the
atmosphere across the company improved and staff now feel optimistic
about its prospects. . . . It has only recently hit home how much staff
are being listened to.”
While the direction of the early communication with the workforce
fromthe newleader is largely one way, listening to workforce concerns
starts to send an important message, and will most likely differenti-
ate him or her from their predecessor. One company doctor actively
solicits negative comments and concerns as he likes to give staff the
chance to vent their disappointment at what has happened. He then
uses this as an opportunity to outline short-termgoals and bring staff
into the change process.
In most distressed companies, lay-offs will be necessary and the
rhetoric one chooses to communicate in these circumstances is criti-
cal. Some turnaround leaders prefer to emphasise how they are pre-
serving jobs than talk to the employees about “cutting jobs”.
Setting New Ground Rules
The role of the leader in the crisis stabilisation phase is covered
in more detail in Chapter 5. However, it is notable that the ma-
jority of turnaround leaders establish the new ground rules within
hours rather than days or weeks, re?ecting the crisis environment in
which they typically operate. New rules of engagement are quickly
established from the outset – from the behaviour expected of the
management team through to cash controls, information needs and
reporting requirements – and it is made clear that these rules are
non-negotiable.
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NEW LEADERSHIP 95
The new leader’s arrival will evoke a wide range of emotions – fear,
anger, cynicism, and resentment – but normally there is also relief
that the situation is now ‘in hand’ and optimism, however guarded,
that he or she will lead the company out of its crisis. The audience
need not like the message or indeed the messenger but they will be
reassured by the calm and con?dence born of experience.
Summary
The leader’s ?rst task is to take (and be seen to take) control as quickly
as possible. While taking the helm, he or she must also galvanise the
crew into taking action to start turning the ship around. The leader
must ?rst command; persuasion and discussion come later. To use
a military analogy, in peacetime, the army can rely on management
techniques – administration, processes and controls – but at times of
war, the leader cannot “manage” his troops into battle, he must lead
them. This is achieved by:
r
Establishing de facto control – normally by removing the incum-
bent CEO.
r
Quickly evaluating senior management and building a top team.
r
Communicating directly with all levels of the organisation.
r
Remaining calm, con?dent, utterly determined and dispas-
sionate.
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96
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5
Crisis Stabilisation
H
aviNc cs1anLisncb :aNacc:cN1 coN1noL oN annivaL,
the new leader must quickly assert control over the business
and take whatever emergency actions are necessary to stabilise the
situation. The leader’s key task is to ensure the short-term survival
of the business while retaining suf?cient critical mass to have a vi-
able platform for long-term recovery. At the crisis stabilisation stage,
the combination of management and leadership that is particularly
required of turnaround leaders is most apparent.
“Things don’t just happen because you say they’ve got to happen, but
because you ensure they happen.”
On arrival the turnaround leader has a number of immediate man-
agement tasks to accomplish:
r
to determine or con?rmthe current ?nancial position (which may
have already been assessed in the diagnostic review);
r
to establish ?nancial control (through new processes and proce-
dures if necessary); and
r
to take whatever actions are necessary to generate cash.
Turnaround leaders have to be wholly detail oriented and hands-on at
this stage and cannot delegate responsibility for their most important
task – cash management.
Due to the urgency of the problem several initiatives are likely to be
launched concurrently at the start of a turnaround. The turnaround
leader needs to carefully select trusted individuals to lead the various
task forces, such as working capital management and other short-
term cash-generating or cost-saving initiatives. He or she should lead
97
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98 LEADING CORPORATE TURNAROUND
these various initiatives while remaining very close to the detail of each
activity. The leader may need to convene several progress meetings
each day with the team leaders during the early stages of the exercise.
Leadership during crisis stabilisation requires the leader and the team
to focus on cash control and operational ef?ciency. In undertaking
these tasks the turnaround leader may be wise to take good legal
advice regarding some of the priorities and deals that have to be made.
As a director (or even shadow director) the leader has both an ethical
and a legal obligation not to continue trading and, in particular, not
to incur further credit if the company cannot meet its obligations.
We have identi?ed ?ve key leadership tasks in the crisis stabilisation
phase:
r
Grabbing the control levers
r
Taking tough decisions
r
Maintaining visible leadership
r
Delivering quick wins
r
Dealing with dissent.
Grabbing the Control Levers
As every turnaround leader knows, businesses don’t fail when they
run out of pro?t. They fail when they run out of cash. Therefore, the
absolute priority is to stem the out?ow of cash, both by identifying
additional sources of cash and by drastically reducing payments. The
other key levers to be controlled are costs and commitments, as these
will convert to cash ?ows in the near future.
The leader’s approach to controlling the levers will vary depending
on the size and nature of the business, the severity of the crisis and
his or her personal style. There are usually four key steps:
r
Establishing controls
r
Setting targets
r
Measuring results.
r
Continuous vigilance
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CRISIS STABILISATION 99
Establishing Controls
In a smaller or single-site business, establishing controls may be as
simple as seizing cheque books and credit cards and informing all
managers that no payments or expenditure can be incurred without
the new leader’s approval. In multi-site or international companies,
this is not usually practical. More commonly, controls are established
through drastically reducing delegated authority limits, freezing cap-
ital expenditure, recruitment, and even marketing or tendering ac-
tivity until the business has been stabilised.
Establishing tight controls over cash is the absolute priority. As an
experienced practitioner reports, his approach to ?nancial control is:
“Draconian . . . we grip, grip, grip. We search for exact clarity on the
?nancials. This is where we can wake up dead before we realise what’s
actually happened to us. We focus on cash, cash and cash.”
Another says:
“I will scour the business for things to sell, and personally decide which
suppliers need paying and those that can wait. I control all ordering
and focus very carefully on stocks and debtors . . . I look at every aspect
of the cash cycle and work it to the favour of the company. Cash is the
lifeblood of any turnaround. In the early days I have a daily meeting,
focused only on cash.”
The leader is dependent on the creativity and resourcefulness of his
employees to ?nd a multitude of ways to generate and conserve cash.
Many impose cash rationing, forcing the business to struggle from
day to day with the bare minimum of funding in order to motivate
managers to come up with creative ways to survive. Once controls
have been established, it has to be made clear that there are no ex-
ceptions and that the sanctions for non-compliance are severe, usually
involving the immediate ?ring of the offender.
Experienced practitioners know what they are going to do before
arriving. As one said:
“I have a set of tools, routines, methods that are not negotiable . . . they
have to be implemented because they are critical in getting control of
the business.”
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100 LEADING CORPORATE TURNAROUND
Setting Targets
Leaders employ a variety of approaches to setting targets for the com-
pany; their approach being in?uenced by the severity of the crisis as
much as by personal style or preference.
“In a company in distress, employees need ?rst targets, then a vision.”
Some prefer to set hard targets that must be achieved, for example
?xed percentage reductions in costs or absolute headcount reduc-
tions. The leader may feel it necessary to supervise closely both how
the targets are set and the necessary implementation, as there is little
scope to get it wrong. Targets must stretch the organisation, using
what one leader calls “audacious goals”. If the targets fall short of
what is necessary to save the business, failure will be a self-ful?lling
prophecy. In our experience we have rarely, if ever, seen a company
take cost reduction actions that were too drastic. This requires the
leader to push and challenge managers well beyond their comfort
zone, and is echoed by one of the practitioners we interviewed:
“You can’t cut twice. Its got to hurt, senior management have got to
lie awake at night wondering if the company can operate now that so
much has been cut out. Take out 20% more than they say they can
live with.”
At the other end of the spectrum, there are leaders who prefer to
guide rather than dictate, to set rules or criteria rather than speci?c
targets, and to rely on the knowledge and capability of management
and employees to develop appropriate initiatives and targets. For this
approach to be effective, the criteria must be simple and objective.
A good example is provided by David Hoare, a highly experienced
turnaround practitioner, who sets the following rules:
r
If the action simpli?es the business and generates cash you
don’t need tell me – do it.
r
If it complicates the business and uses cash, don’t even come
to me.
r
If it complicates the business and generates cash, let’s talk.
r
If it simpli?es the business and uses cash, let’s talk.
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CRISIS STABILISATION 101
Simplifying the business is common to the majority of turnarounds.
One leader described this as the essence of his role:
“I like to get things simple – to kill complexity – to reduce the issues
to 3 or 4 key problems and then solve them.”
Another said:
“There is a huge amount of focus on knocking a few things over . . . I
can ?x problems if I hit them hard enough.”
Even at British Telecom, Sir Christopher Bland, the new chairman
appointed in 2001, said he made a list of 10 things to do soon after
arrival:
“Don’t have more than 10 things in your list and make sure they are
the things that really count.”
Measuring Results
Finally, the leader must establish robust but simple measurement pro-
cedures to ensure that initiatives are yielding results and that targets
are met:
“At the end of the day it’s all about measurement; if you start mea-
suring your costs you ?nd you can manage them.”
Distressed companies often have dysfunctional or ineffective infor-
mation systems, particularly where multiple IT platforms are in op-
eration, perhaps as a consequence of earlier business acquisitions.
The leader cannot allow the absence of good systems to deter the
immediate implementation of effective (not necessarily 100% accu-
rate) ?nancial controls. A simple “workaround” system, often based
on spreadsheets rather than complex software, can be a critical tool if
the leader is to receive timely and accurate information. All com-
petent turnaround leaders establish a few key metrics and then
monitor these frequently – usually weekly and often daily in a cash
crunch.
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102 LEADING CORPORATE TURNAROUND
Continuous Vigilance
Having established controls, targets and measurement systems, the
leader must then adapt continuously to events and issues as they
arise. While controls must be rigorously enforced, targets are rarely
static but are updated or amended to re?ect changing circumstances.
For example, if sales decline or a major customer is lost, further cost
reductions may be required to achieve at least a break-even position.
If a major supplier demands payment in advance, compensating cash
savings will have to be found to meet the additional funding needs.
Experienced turnaround practitioners expect constant change as a
matter of course, building contingency plans and evolving their deci-
sions in response to the ever-changing circumstances. Equally impor-
tant, turnaround leaders must not become wedded to a single idea
or solution; if something is not working, they must adapt or aban-
don it and ?nd other solutions. Turnaround leaders are not, by their
nature, over-con?dent or over-optimistic but tend to be downside
managers, anticipating the worst while motivating people to give their
best.
“Constant review and reassessment of options, you will never do ex-
actly what you started out to do, you can’t think in absolutes. Don’t
let it go to inertia. You need to have a lot of things moving at once,
some will work, others will fail. We’re not magicians.”
At Marconi, Mike Parton held weekly reviews of all key performance
indicators for many months after he became CEO (see Box 5.1).
Box 5.1 Control and Crisis Stabilisation at Marconi
(See Box 4.1 for background to the Marconi turnaround )
Mike Parton introduced draconian controls over cash and costs.
The absolute priority was to ensure that cash did not run out.
Over 100 initiatives were underway to generate or conserve cash.
Cash was pooled in “lockboxes”, with access requiring both
lenders’ consent and the CEO’s approval. Cash was “rationed”
with minimal funding available from the centre, forcing local
management to be creative in managing their own cash ?ows.
Actual and projected cash utilisation was monitored weekly.
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Mike chaired the weekly cash review himself – an important
symbolic and practical demonstration of his leadership in this
area.
Cost reduction was masterminded by Mike Donovan, the Chief
Operating Of?cer, who led a world-wide project to reduce the
cost base. Every area of expenditure was analysed and targets
were set and rigorously monitored to squeeze costs down from
an annualised run-rate of £890 million per annum to below
£400 million in under two years. Mike Donovan’s weekly
progress reviews were notorious for their relentless attention
to detail, ensuring that every initiative was progressing to plan.
It is at the crisis stabilisation stage that turnaround advisers (as op-
posed to executives) are most likely to be involved in the operational
turnaround. They are available at short notice, and can provide the
vital ?nancial management skills that are missing in distressed busi-
nesses. They may have been “forced” on the company by the creditors
even before a turnaround executive has been appointed, or may be
brought in by the turnaround executive if he or she does not have a
reliable team to do the work. Advisers need to be ?rm and effective
communicators and remember that they do not have the power of
a court-appointed administrator. Their leadership can be fairly low
key since most of their communication is with the ?nance function
and the Board, with whom they will be in daily contact. They need
to deliver some tangible progress quickly in the cash ?ow situation
to create con?dence and stakeholder trust. However, before this can
occur advisers have to confront management with the reality of the
situation, outline likely crisis points and manage hubris. If advisers
are to be effective they usually need to have Board approval to control
outgoing expenditure for a ?xed period of time, which often involves
them over-riding the responsibility of the ?nancial director or con-
troller (see Box 5.2 for a simple example).
Box 5.2 Stretching Creditors
Upon entering a company, one turnaround adviser realised that
a quick win on cash management was “stretching” payments to
the creditors. He approached the Board and obtained formal
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104 LEADING CORPORATE TURNAROUND
authority to control outgoing operating expenditure for a ?xed
period of time (reviewable), over-riding the responsibility of the
?nancial controller. This accomplished a number of things:
r
It clari?ed the situation so there was no ambiguity in the cred-
itor environment.
r
It allowed a fresh view to be taken of creditor payment prior-
ities and the renegotiation of credit terms.
r
It removed the pressure on the existing ?nancial controller as
the critical cash ?ow decisions were taken from him.
r
It gave the adviser a credible mandate with which to move
forward.
The practitioner was able to control the ?owof funds objectively,
establish credibility with the Board and give reassurance to all
stakeholders about the short-term future.
Taking Tough Decisions
Common to all crises is a lack of time. In these situations, faced with
imperfect information and a multitude of issues clamouring for their
attention, how do leaders make decisions? First of all they prioritise
the issues they have to tackle and only focus on what is absolutely
critical to achieve stabilisation. Turnaround practitioners have to be
particularly good at identifying and then focusing on the short-term
priorities – to the exclusion of all else – but must remain ?exible as
they unearth new problems and face unexpected constraints.
All the turnaround leaders we interviewed readily acknowledged that
the ?nal responsibility for all decisions must rest with them. Many
assume a highly controlling role in the early days of the turnaround,
describing their style as “dictatorial” or “highly autocratic”:
“Tell them what you are going to do and why it needs to be done.
Be quite directive and autocratic in the process, but in a way that
convinces them to have con?dence in you.”
“I had to be strong and single minded . . . company doctors need to
be thick skinned, egocentric, dominant, individuals full of themselves
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CRISIS STABILISATION 105
and full of their opinions. This is required when a company is in
serious trouble – people have lost the way, management has failed,
and the ?nancial situation is precarious. Therefore during this phase
you cannot be a teamplayer and support everyone, instead you need to
be relatively autocratic and a very strong individual that commands.”
This leadership style is a pragmatic response to the immense pressure
in this crisis phase. Others are prepared to delegate some decision
making, but remain clearly in control:
“I want to be in control but I like the team to take decisions when
they can. I am not afraid to take decisions and will do so whenever
they are required.”
At the other end of the scale, a few leaders expressed the belief that it
is not in the long-terminterests of the company to allowmanagement
to become overly dependent on the leader for decision making. They
continuously solicit input and tell employees only to come to themfor
a ?nal decision. One practitioner makes it clear to his management
team that if he is asked to make a decision, then once it is made
there is no going back and no appeals are allowed. This forces the
organisation as a whole to be more decisive – people are forced to
take responsibility if they want to get the outcome they prefer. If such
an approach is to be effective, employees must not be afraid to take
decisions and although accountable for their actions, the occasional
mistake must be tolerated.
Regardless of the approach, successful leaders trust a great deal to
experience and intuition in forming their judgements and making
decisions. One turnaround leader describes his approach:
“You use judgement. Most judgement is only evaluated historically.
When you’re in the storm and you know that you don’t have all the
factual information that you normally would like to have to apply
proper judgement, you still have to make your decision – you are
applying decisions that are either right or wrong by only a knife-edge.”
There are usually some glaringly obvious moves when you start the
turnaround process, which begs the question why the old manage-
ment team have not acted. The answer is a switch in focus – caused
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106 LEADING CORPORATE TURNAROUND
by the arrival of a new leader who is better able to recognise and
respond to the situation as it exists.
Finally, perhaps the most important characteristic of decision making
in a crisis is to make the decision, and move on. The leader cannot
afford to dwell on each decision. Therefore, however democratic the
decision-making process, the outcome must be imposed, autocrati-
cally if necessary, on the organisation:
“Once the decision is made, there is no room for further discussion.
You can’t leave any room for changes or a different direction.”
However, turnaround leaders stress the need to be ?exible since not
everything you try will work:
“You need constant review and reassurance of options . . . you will
never do what you started out to do. You’re constantly re-looking at the
decision tree. You need to have a lot of things moving at once . . . some
will work others will fail. We’re not magicians.”
Turnaround leaders are pragmatic. They recognise when a course
of action is not working, stop it and reprioritise other ideas or
projects.
Maintaining Visible Leadership
As the turnaround progresses, it may become appropriate for the
leader to retire somewhat into the background, allowing the manage-
ment team to become the visible face of the leadership. At this stage,
however, the leader must be visibly in command, leading from the
front, chairing dif?cult meetings and addressing problems real-time,
preferably face-to-face. The leader will build on the communication
processes described in Chapter 4, exemplifying the actions and con-
duct he or she expects from the team.
Typically, the company will be in a fast-changing, near-chaotic envi-
ronment. The employees, most of whom will never have experienced
a crisis before, may be shocked, resentful and fearful and will need
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CRISIS STABILISATION 107
?rmguidance and reassurance to ensure themthat they are doing the
right things. One turnaround leader said:
“You have to spend a lot more time with people in turnaround situ-
ations – talking, pushing, reassuring . . . you have to align agendas.”
Another advises:
“Smother them with your presence, be there all the time.”
This proximity to the employees is vital, not only to ensure that the
turnaround leader remains focused on the key tasks necessary for
survival, but also to ensure the employees that he or she is aware of
problems and issues and is positioned to take swift corrective action.
One turnaround practitioner recalled turning up on the night shift
where he checked the time cards and looked for every single worker.
He soon found people sleeping or clocked in but nowhere to be found.
A few redundancies later the message sank in and workers started
“taking care of the shirkers themselves”.
All successful turnaround leaders lead by example, demonstrating
what they require of their employees through their own behaviour,
both in words and actions. After the initial communication process,
the next key interaction with the majority of the employees is usually
the redundancy process, as costs are cut to save the business. The way
in which this is managed and the leavers are treated will have a sig-
ni?cant in?uence on the morale and loyalty of remaining employees
and their perception of the new leader.
You need to implement brutal changes in a gentle fashion. Make it
as easy as possible for those who leave . . . err on the side of generosity
and fairness.”
Keeping track of what happens to those who leave (to the extent
possible) and “communicating about this internally to showthat they
were not coldly abandoned”, was an approach mentioned by several
practitioners.
Leading by example provides a strong catalyst for changing the norms
and ways of doing things within the ?rm. Being on time at meetings,
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108 LEADING CORPORATE TURNAROUND
delivering tasks on time, treating all employees with respect and say-
ing “I don’t know” are all examples of actions which when taken to-
gether, start to change the organisational culture. Consistency along
with integrity are critical leadership attributes if trust is to be built
quickly.
Throughout the crisis stabilisation the turnaround leader maintains
clear and open communication both internally and externally. Some
develop a clear communication programme, sometimes with the help
of external advisers, to describe “where we are and what we’ll do by
when”. Providing a time frame serves this purpose. It helps to re-
duce feelings of uncertainty and bolsters the leader’s credibility if
actions are completed on or ahead of schedule. Clear communica-
tions complete with real results are what both employees and external
stakeholders want. In communicating action plans for crisis stabili-
sation, turnaround leaders often communicate the consequences of
failure so that people (both internally and externally) understand the
reasons behind decisions and actions. As one said:
“You have to make them see that you will be cutting off a leg, the only
question is, which one?”
Delivering Quick Wins
Most turnaround leaders seek early wins. It is good for employees’
morale, and gives a sense of achievement and renewed momentum.
Companies in distress typically enter a downward spiral of over-
promising and under-delivering. It is the leader’s task to reverse this
trend and restore con?dence in the business by ensuring that the com-
pany delivers against its promises, be they to customers, suppliers,
employees or lenders.
Opportunities for early wins may be readily apparent to the employees
but someone needs to ask them – and then listen. As we have said
earlier, many turnaround leaders recognise that “the workers know
what is wrong with the company and they know how to ?x it. The
problem is that no one ever bothers to ask them.”
While quick wins are nice to have and start to generate momentum,
they are by themselves usually insuf?cient to stabilise the company,
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CRISIS STABILISATION 109
and more drastic action is required. Nevertheless, turnaround leaders
recognise the need for quick wins and help their people to achieve this:
“I look for quick wins. I encourage people to bring me their problems
and help them to analyse them and sort them out. I then try to coach
them to come up with their own solutions next time . . . when I probe
them: Is this your responsibility? What do you suggest?”
“If you want quick wins look no further than the HR department and
internal communications . . .”
Employees must be encouraged to achieve quick wins – they will
not do it without support from the top. In recent years there has
been a tendency for companies to set challenging top-down targets
(BHAGs – big hairy audacious goals) to stretch the organisation to
think more innovatively. This can be wrong in a turnaround situation
where employee con?dence is likely to be low. Where managers and
staff are encouraged to set their own goals, turnaround practitioners
sometimes ?nd staff being over-ambitious. They try to impress their
new bosses by setting tough goals, but then fail to achieve them,
which is not helpful to anyone. The secret is actually to breakdown
challenging goals into a series of smaller steps – and as the ?rst steps
are achieved, momentum develops and the steps can get bigger. This
is essentially what happens in the GE Work Out Process used by
Patrick O’Sullivan in the turnaround of Eagle Star and Zurich (see
Box 9.2 for more details).
One turnaround leader came into a business in distress, where the
company had fallen behind in delivering a consignment of half a
million potted Christmas trees to Asda. As with all seasonal products,
there was a limited window of opportunity and the consequences of
any failure to deliver were potentially disastrous, affecting both short-
term cash and the longer term relationship with a major customer.
The new leader spent time talking to the workers and was eventually
told that the major bottleneck was the root trimming process, as the
company had only three pairs of shears between 30 men. He went
straight to a nearby garden centre, purchased 30 new pairs of shears
(so that three were not left with the old ones!), distributed them to
the workers and enabled them to catch up on the delivery schedule.
This simple act ensured that the order was ful?lled and also helped
to restore the morale of the workforce.
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110 LEADING CORPORATE TURNAROUND
Another practitioner was appointed to turnaround a playground
equipment manufacturer. The company had installed equipment on
behalf of a developer in a construction project for a local government
entity. The developer had refused to pay the manufacturer until he
had been paid by his customer, the local authority. This had dragged
on for some time and the equipment manufacturer was now expe-
riencing a liquidity crisis. The new leader was aware that the devel-
oper could not get paid by his customer unless the equipment was
correctly installed and approved by the customer. He therefore in-
structed his employees to return to the site and cut away and remove
all the playground equipment, leaving 4-inch metal stubs in place of
the swings and slides! The developer quickly paid up, relieving the
cash crisis at the equipment manufacturer and the playground was
duly re-installed.
Dealing with Dissent
Turnaround leaders are unanimous in howto deal with overt dissent:
swiftly and ruthlessly. If the boat is to stay a?oat and move forward,
there is no roomfor those who want to paddle in a different direction.
The approach to changing senior management, described in Chap-
ter 4, applies everywhere in the organisation as the turnaround pro-
gresses. There are other ways in which dissent or non-compliance can
disrupt the crisis stabilisation process. Box 5.3 – the Tea Huts Story –
provides an interesting anecdote of how one turnaround leader dealt
with resistance to change.
Box 5.3 Tea Huts Story
Jim Carter, a turnaround practitioner, had been approached
by a major lending bank to help a distressed company in the
commercial ship maintenance industry. It was losing about
£2 million p.a. on a turnover of £8 million and was facing a
serious liquidity crunch. Having been appointed as Managing
Director, Jim quickly identi?ed that the key to survival of the
business was improved productivity through multi-tasking and
?exible working. Having communicated the dire ?nancial situ-
ation to the 250 strong workforce – each of whom was a union
member in one of ?ve different trade unions – Jim eventually
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CRISIS STABILISATION 111
persuaded them that there was no alternative to these changes
if the company was to avoid liquidation. The next step was to
deal with certain cherished but deeply unproductive working
practices.
The site was spread across 40 acres of land dotted with “tea
huts” – portacabins where the men stored various tools, com-
plete with hot drink vending machines and pornographic deco-
rations. Whenever a worker needed a particular tool, he would
embark upon an expedition, searching the various tea huts and
enjoying a few hot drinks on the way. Jim decided that this had
to end. He set up two easily accessible, large canteens complete
with vending machines and microwaves and set a deadline. The
workers hadthree weeks to remove their belongings anddisman-
tle the tea huts. Three weeks passed and the workers continued
to wander between the tea huts as before.
Jim therefore ordered a mobile crane that was working on the
site to pick up the nearest tea hut, carry it to the dump-yard and
dump it. The crane crew initially refused; Jim insisted, telling
them: “Do it or I’ll climb up into the crane and do it myself.” The
hut was duly dumped. The news spread through the site like
wild?re; within 5 minutes every worker knew what had hap-
pened and the remaining tea huts were quickly emptied and
dismantled.
It can be far more dif?cult to detect and take action against passive
or covert dissent. It can take several weeks or months to discover
that individuals are paying enthusiastic lip-service to the new regime
while obstructing or undermining initiatives through passive non-
co-operation or mis-communication to their subordinates. Patrick
O’Sullivan at Zurich Financial Services refers to these dissenters as
the “permafrost”, getting between the business and the new leader.
Jack Welch described them as those who “kiss up and kick down”.
Experienced leaders seek to prevent this from happening by disin-
termediation – frequent communication of the facts, direct to the
workforce, without allowing “interpretation” or corruption of their
message. Good communications can be hard to sustain through a
crisis, when there are many other imperatives, but it is the surest way
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112 LEADING CORPORATE TURNAROUND
of cutting through the “permafrost”. In addition, offenders have to
be removed without hesitation, both to set an example to the organ-
isation and to remove any credibility from their previous actions or
words.
Summary
r
“Benign dictatorship” is the most common leadership style dur-
ing crisis stabilisation, but motivating employees and having ac-
cess to their knowledge, creativity and initiative requires a ?ne
balance between authority and autocracy.
r
Asserting control is the essential leadership task in a crisis. This is
usually the most “management-like” of the leadership tasks, re-
quiring the establishment of controls and targets and continuous
measurement of results.
r
Leaders must remain ?exible and adaptable, grabbing early wins
where they can and changing course as necessary to ensure sur-
vival.
r
Dissent cannot be tolerated and should be swiftly and ruthlessly
eliminated.
r
Leaders must practise visible leadership through their presence
and communications. Successful leaders acknowledge that they
“can change everything and sustain nothing” without the support
and buy-in of the people around them.
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6
Stakeholder Management
T
nocnLcb co:iaNics Nccb 1wo 1niNcs, s1noNc Lcabcn-
ship and capital. Stakeholders include the owners and providers
of capital to the business and stakeholder management is at the core
of a turnaround: it is the engine oil that allows the turnaround process
to occur. It is a critical leadership task in any organisation and never
more important than in a crisis.
In Chapter 3 we discussed gaining support among key ?nancial stake-
holders for a turnaround and the leadership role that can be played
by lenders and other ?nancial stakeholders. This chapter addresses
the critical role of maintaining stakeholder support throughout the
turnaround process, and the key role that the turnaround executive
plays in this process.
The nature of this task will depend on the number of classes of stake-
holder as well as the relationship between the stakeholders. While
it is the ?nancial stakeholders that tend to have the decision-making
power in a ?nancial restructuring, other stakeholder groups, in partic-
ular customers and employees, ultimately determine whether a turn-
around is successful and there are others whose support is necessary
to allow the turnaround process to work. These include the Board of
directors, key suppliers, trade unions, government and even the press
– in fact “anyone who can have a negative effect on your cash ?ow”.
Bridging the Gap
When a crisis erupts in the corporate world very few of the top exec-
utives have “been there before”. In contrast, many of their ?nancial
stakeholders have previous experience of turnaround situations and
often have strong opinions on what needs to happen. As a result,
113
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114 LEADING CORPORATE TURNAROUND
there is frequently an enormous mismatch of experience and expec-
tation and a blame culture soon develops. In these circumstances,
the role of the turnaround practitioner is to bridge the expectations
gap between the disgruntled ?nancial stakeholders (“management is
incompetent”) and disillusioned management (“what is wrong with
these bankers, they were ?ne when things were going well and now
it rains a little and they want all their umbrellas back”).
It requires considerable leadership skill to realign these two groups.
Patience and listening skills are a prerequisite to establishing a mu-
tual understanding of the nature of the problem. Turnaround and
restructuring is much more likely to be successful if there is mutual
agreement among all the affected stakeholders as to the true ?nancial
and operational position of the business.
At this stage the turnaround practitioner, whether turnaround exec-
utive or adviser, needs to undertake a critical task – his or her analysis
of stakeholder positioning (see Box 6.1)
Box 6.1 Analysing Financial Stakeholders
r
Who they are.
r
What rights they believe they have.
r
What rights they actually have.
r
What interconnectivities there are, if any, between stake-
holders.
r
What they consider the key issues to be.
r
What they consider the options to be both for themselves and
for the company.
r
What realistic options they have.
r
What alternative options the company has and the extent to
which the company is a key player or in?uencer in pursuing
one or other option.
r
A worst case, or liquidation analysis that shows what each
stakeholder could achieve or expect in the event of a liquida-
tion of the business.
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STAKEHOLDER MANAGEMENT 115
Stakeholder positioning analysis is an iterative process, re?ecting new
knowledge about the company’s position as it becomes available and
the changing “temperature” of the stakeholder “pool”. Typically the
turnaround practitioner will check his or her analysis with the stake-
holders and test his or her understanding of their position. The ob-
jective is to reach an understanding of “Where are we now?” because
it is only from a common understanding and agreement of the base
position that a consensus can be established and turnaround can
begin. Successful turnaround practitioners know as much or more
about stakeholders’ options than the stakeholders or their represen-
tatives. Once it is demonstrated that the stakeholders are the most
knowledgeable players, they are then often trusted with developing a
participation process, which balances the rights and requirements of
all those involved and is mutually respected.
Typically, the stakeholder positioning analysis will be conducted in
parallel with the completion of the diagnostic review and communi-
cation of the review ?ndings to the key stakeholders.
The role of the turnaround practitioner is to understand the needs
of the company and the requirements of the stakeholders and to ?nd
an alignment that both can live with. This is not always easy. Finding
an acceptable solution among the key ?nancial stakeholders requires
the rebuilding of consensus fromwithin an environment of blame and
distrust. This can be a long drawn out process which requires con-
siderable “consensual” leadership skills. The practitioner may have
to invest time to help individual stakeholders to deal with dif?cult is-
sues or concerns, but must ensure that he or she never becomes, or is
perceived to be, a puppet or spokesperson of any of the stakeholders
or pushes a position too hard. The more autocratic turnaround exec-
utives may ?nd this need for a consensual style dif?cult and become
frustrated by the time consumed in the process. Nonetheless, failure
to build consensus will jeopardise the turnaround.
The perception of bias in favour of a particular stakeholder group
can become a signi?cant obstacle to the restructuring process. The
turnaround practitioner usually represents the company and has a
duty to all stakeholders, particularly if he or she is employed as the
chairman or chief executive, or in another of?cial role. The role of
advisers can be less clear-cut. Typically in US and UK restructur-
ing situations (although not in continental Europe), the majority of
the advisers are introduced by the creditors but are paid for by the
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116 LEADING CORPORATE TURNAROUND
company. Such advisers are often perceived as being closely aligned
with the interests of particular stakeholders – even if they are osten-
sibly working for the corporate – because the ?nancial stakeholders
represent a source of repeat business for them. This can strain re-
lationships with management and erode the quality of information
received from them to facilitate the process.
In complex ?nancial restructurings, it is increasingly common for
each major ?nancial stakeholder group to have its ownlegal and?nan-
cial advisers and for a Chief Restructuring Of?cer to be appointed to
act impartially and objectively for the corporate and all its stakehold-
ers, and to play an honest broker role at the centre. The experienced
practitioner respects the rights and views of the ?nancial stakehold-
ers, in particular the creditors who often have the major economic
interest in the entity, but does not compromise his or her reputation
or credibility by exhibiting bias or preference for any stakeholder
group.
Financial Stakeholders
The characteristic common to all of ?nancial stakeholders in a
turnaround, be they providers of debt or equity, is that their eco-
nomic interest is at risk to a greater extent than anticipated when
they invested in the enterprise.
A successful turnaround for any stakeholder who ?nds himself in
this position is one that returns the risk pro?le of the company, as
seen from the perspective of the stakeholder, to that which they ?nd
acceptable to enable them to continue to participate in the business
of the company. It is often presumed, usually erroneously, that all
?nancial stakeholders simply want their money back. More often
they are willing to remain involved and invested, but on the terms for
which they gave approval when they initially became committed.
InChapter 3 we discussedthe critical diagnostic phase. That is impor-
tant since you cannot begin to solve a problem until you understand
it and have identi?ed its root causes. Complete knowledge is a luxury
rarely available to a turnaround practitioner. The practitioner has to
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STAKEHOLDER MANAGEMENT 117
act on the basis of the knowledge available. The more experienced
will operate in such a way as to make progress without being com-
mitted to a course of action that may be attractive to one stakeholder
but will subsequently be offensive to another. He or she will endeav-
our to plot the course that maintains viability of the enterprise while
causing the least offence to all stakeholders in light of their statutory
or contractual rights. This is inevitably a dif?cult course to steer. The
process is essentially one of obtaining a balance and it is unlikely that
the ?nal balance that is achieved would have been acceptable had it
been presented to all stakeholders at the outset. This is because not
only is the turnaround practitioner developing an approach based on
a knowledge of the facts, but so too are all the affected stakeholders.
The affected stakeholders need to obtain a knowledge of the position,
prospects and plan that enable themto support the general shape of a
proposed restructuring. Many hours are spent on stakeholders nego-
tiating marginal bene?ts at the cost of others but, to a certain extent,
it is all a side show. . . frustrating as that may be.
If a breakthrough is to be achieved it will depend on the leadership
exhibited by the turnaround practitioner in understanding the po-
sitions and options of all the affected stakeholders, obtaining their
trust, and introducing enough transparency into the process to en-
able each to generally understand the position of the others. To those
outside the process, many restructurings appear to take a long time
yet to those engaged in the process the pressure of time is often felt
to be overbearing.
This circumstance arises because each stakeholder has to move from
a prejudice-driven position, where decisions are often based on per-
ception and emotion, to one where decisions are grounded in fact.
The turnaround practitioner needs to help to establish the facts
as well as guide the stakeholders through the process at different
speeds to ensure that, eventually, all are ready to deal at the same
time on the same basis. This requires focus, patience and above all
the ability of the leader to remain calm, objective and dispassionate
throughout.
Integrity and openness are the critical leadership skills in dealing with
stakeholders and ?nancial stakeholders in particular. Turnaround
leaders typically provide ?nancial stakeholders with full and frank
disclosure, ?nding that “putting all the bad news on the table” helps
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to build credibility and trust, although it may generate short-term
hostility if the ?nancial stakeholders are in denial. It is preferable to
go to ?nancial stakeholders with solutions as well as problems, but
experienced practitioners know not to delay in sharing information
and working with stakeholders to reach an informed consensus.
Inter-stakeholder Relationships
The management of inter-stakeholder relationships between differ-
ent ?nancial institutions, both within a creditor class (for example,
senior secured lenders) and between different classes of creditors,
can become exceedingly complex. In the past, when a company got
into dif?culty it typically had long-standing relationships with one or
two lenders who would either support it towards a solution or push
it into insolvency. Now even mid-sized corporates may have complex
capital structures with several types of syndicated and bilateral loans,
high-yield debt or mezzanine ?nance. Furthermore, following the
growth of the secondary debt markets, that debt is constantly traded
and revalued, resulting in a disparate group of creditors with different
motivations. Many will be sub-par investors whose economic interest
will not necessarily be the face value of their debt instrument, and
their perceptions, degree of knowledge of the company, agendas and
objectives will vary considerably.
A key part of stakeholder management is to ensure that the
turnaround does not fail because of a failure to reach agreement
within or between stakeholder groups. Relationships within a stake-
holder class such as a senior lender group are normally governed by
the terms of the loan documentation or indenture documentation
(for publicly traded debt). Occasionally, relationships between dif-
ferent classes of creditors are governed by an “inter-creditor” agree-
ment which establishes priority over security and prevents one class
of creditor from taking precipitative action. It is critical that the cred-
itor groups are led by an experienced co-ordinating committee and
more particularly that the co-ordinating committee (“co-com”) ap-
points a chairman who can command the respect and support of the
whole group and has the experience to contribute effectively to the
development of a solution. Experienced turnaround executives are
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not afraid to in?uence the choice of co-com chairman and may even
put pressure on creditors to change the chairman if he or she is not
providing suf?cient leadership of the stakeholders being represented.
A good leader works out who the other leaders are.
Experienced turnaround and restructuring practitioners will work
with the co-com chairman or syndicate leaders to help to manage
con?icts within or between the classes. Just as transparency between
the company and its key ?nancial stakeholders is a prerequisite to
stakeholder support, so there is a need, in complex cases, for an open
relationship between the co-comand the turnaround practitioner. To
achieve this the turnaround practitioner needs to develop and main-
tain the trust of all parties, with regular communication and prompt
disclosure of pertinent information. Paul Thompson of HSBC puts
it this way:
“Differing degrees of interest and in?uence will attach to different
stakeholders, between whom there may well be signi?cant tension. To
deal with such a sensitive environment the turnaround practitioner
needs to disclose the most relevant information. . . . They can avoid
unnecessary suspicion and anxiety by seeking support through open
discussion.”
Not all turnaround practitioners will have the ability to manage the
complexity of stakeholder relationships involved in a multi-banking
situation. The nature of the task is summarised by a lead banker as
follows:
“There can be a huge number of banks involved and you can get
a relatively small business having 30 banks involved. These banks
may not have people in London and the account could be run from
New York or Frankfurt. When involved with such a workout, the
communication process is something that the lead bank or the leading
group of banks need to give considerable thought to. Alot of changes in
covenants, changes in terms, etc., often need 100% agreement which
means communicating with 20 or 30 banks and persuading them to
your viewpoint. However, you may not always have the same agenda
as the others if, for example, your exposure via bonds is greater. This
exposure issue is never obvious and requires careful handling and
relationship building skills.”
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This banker emphasises that the resolution of possible disputes and
alignment of objectives requires the ability to manage a high-quality
communication process across a large group:
“This often involves understanding where other people might be com-
ing from, trying to make sure that you give the impression that you are
managing the position and keeping a lid on all communications. For
instance, I’m not very happy when I read in the Evening Standard
something that I’ve not heard through the normal channels.”
Success also requires creating a “no surprise” approach for other
stakeholders, particularly banks; a series of shocks and surprises will
undermine the credibility of the work-out banker within his or her
own institution and make it almost impossible to maintain the sup-
port of the individual or the institution he or she represents:
“The more shocks and surprises that they get, the more dif?cult it
will be for managers fronting a London based banking relationship
to convince the powers that be, in New York or wherever, that this is
being managed in the right direction.”
The leadership role that the chairman and members of the co-
ordinating committee play is absolutely critical and can make the
difference between a failed or successful turnaround. Bankers who
are successful in this role are highly experienced and depend heavily
on their personal credibility with the other institutions. They will in-
vest time to understand the different agendas of the other lenders in
the class and seek a solution that is broadly acceptable. They must be
seen to act impartially and not to seek a preferential solution for their
own institution, for example, where they have other credits or facili-
ties with the company outside the syndicated debt. With the growth
of secondary debt trading, this task is becoming considerably more
complex as the participants can change overnight, the risk pro?le for
each constituent can vary sharply and this, of course, determines the
attitude they will have to a given situation.
Personal relationships can smoothe the process and it is generally
acknowledged within the banking market that “what goes around
comes around”. In practice, if one bank “holds out” to improve its
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position, particularly when it has a small exposure and uses it to “hold
other banks to ransom”, it is unlikely that that bank will make the
shortlist for the next lucrative syndication or leveraged transaction or
obtain the support of other lenders in a subsequent case, where the
bank might have a more substantial exposure.
A successful turnaround requires all stakeholders to reach an
aligned position. The turnaround practitioner must work with the
chairman and co-ordinating committee of credit classes to ensure
that a turnaround is not derailed by inter-creditor con?icts. The
turnaround leader may be instrumental in “unblocking” creditor con-
?icts through direct negotiation with the affected parties.
Creditors
The support of key suppliers, who are usually unsecured creditors,
can be critical to the success of a turnaround. Obtaining and main-
taining their support will depend on the credibility of the turnaround
team and is underpinned by their reputation for integrity and achiev-
ing results. Suppliers have to believe that it is in their interest to
continue to supply the business and leave credit lines in place with-
out immediate clarity as to when and how their existing or future
debts will be paid. This requires good communication and delivery
against any promises made. An experienced practitioner describes it
as follows:
“Relationships with suppliers required individual negotiations. As
trade creditors are usually unsecured, requested increases in credit
lines from suppliers meant that the suppliers had to feel comfortable
that they would be treated fairly and paid. In other words, they had to
believe that the newmanagement teamwas being ethical and straight-
forward in their dealings. The shared interest in keeping production
on schedule meant there was little resistance from suppliers who had
large outstanding balances or those that were in highly competitive
commodity type ingredients. However, continued deliveries from sup-
pliers of more hard-to-get ingredients required greater ?exibility and,
at times, legal counsel to make sure that improper preference was not
being given to some suppliers over others.”
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Dealing with suppliers can be enormously time consuming so the ex-
perienced practitioner ranks suppliers according to their importance
and manages them accordingly, investing time to develop a relation-
ship at a senior level with key suppliers. If this is not achieved, the
turnaround could fail due to lack of supplier support, to the detri-
ment of both the company and the supplier, as the following example
illustrates:
“I decide which suppliers are needed and then speak to them directly.
The creditors that the company doesn’t need are ignored. I keep pay-
ments to a minimum, cutting deals with important suppliers and ig-
nore those who can be substituted. In dealing with creditors I adopt
my normal straightforward blunt style. It is important to ?nd the de-
cision maker in the supplier organisation and adopt a ‘say what you
mean and mean what you say’ attitude. In one case where British
Telecom were critical and were owed £80,000 but the company could
not afford to pay, I offered 60% in full and ?nal settlement but the
structure of BT could not handle this. The offer was rejected and when
the company failed BT received nothing.”
Customers
Customers are, of course, the life blood of any business. Without
themthere is no business. When word gets out that a key supplier is in
dif?culties, the key concern for all customers is continuity of supply.
In many turnaround situations, the company may have acceptable
or even good relations with its customers, in which case continuous
reassurance during the crisis phase may be suf?cient to maintain the
relationship. The following comment from a turnaround executive in
a small company is fairly typical:
“I always seek to reassure customers of continuation of supply. . . . I
usually let the current personnel that interact with customers continue
to do so, and will encourage them to keep talking and keep reassur-
ing the customers. . . . However I will get more involved if it is a big
customer and big order that will keep the company alive.”
In other situations, particularly in technology-based businesses and
some service businesses, the role of the turnaround leader can be
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critical in securing the support of key customers. Lou Gerstner
at IBM, Michael Capellas at MCI, Mike Parton at Marconi and
Francisco Caio at Cable & Wireless were all very active in key ac-
count management in the early stages of their turnarounds.
At MCI, Michael Capellas realised from the outset that restoring
trust with customers (and other stakeholders) was fundamental to
the turnaround. As one of his direct reports said to us:
“Amazingly enough throughout this whole period, we did not lose
a single major customer and managed to maintain industry leading
service standards. That’s because when Michael Capellas got in, he
marshalled the troops and said we have to keep our eye on what’s
important, and what’s important is take care of our customer, doing
the right thing for them and for everybody. When given that kind of
leadership people make sure that those customers were taken care of.
They understood where we were going, what was going on with the
bankruptcy, what we were doing in terms of corporate governance
and its implementation. They could see with that kind of information
that there was a light at the end of the tunnel.”
At IBM Lou Gerstner took a similar approach when he implemented
“Operation Bear Hug”. After three weeks in the job, he was con-
cerned about the loss of customer trust. To quote from his book:
Each of the 50 members of the senior management team was to visit a
minimumof ?ve or six biggest customers during the next three months.
The executives were to listen, to show the customer that we cared, and
to implement holding actions as appropriate. Each of their direct re-
ports, a total of more than 200 executives, were to do the same. For
each Bear Hug visit, I asked that a one to two page report be sent to
me and anyone else who could solve the customer’s problems. . . . Bear
Hug became a ?rst step in IBM’s culture change . . . the people re-
alised that I really did read every one of the reports, there was great
improvement in action and responsiveness.
?
While retaining pro?table customers is always critical, so is the
reverse – “losing” unpro?table customers. Implementing product
?
Gerstner, L., Who Says Elephants Can’t Dance?, Harper Collins, 2002.
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124 LEADING CORPORATE TURNAROUND
market refocusing, one of the seven key ingredients of a successful
turnaround (see Chapter 7), usually involves cutting out unpro?table
product lines as quickly as possible, which may not allowthe customer
to identify alternative sources within their normal lead time. If the
customer is still important to the business – for example, is a buyer
of other more pro?table products and services – then the turnaround
management team has to try to support the customer through the
transition.
It can be very dif?cult for sales people to lead these negotiations
as they are not accustomed to saying no to their customers. The
turnaround leader may need to circumvent the normal buying pro-
cess and negotiate directly with senior management in the customer
organisation to rede?ne the parameters and terms of the relationship.
Where there has been a history of poor service and the existing cus-
tomer relationships are damaged, this is also an opportunity to rebuild
key relationships by listening and responding to customer concerns.
Unions and Employees
Confrontation with the unions and employees is relatively rare in
turnaroundsituations inthe USAandthe UKtoday, since most union
leaders recognise the reality of companies in trouble. Obtaining their
support for fundamental change in working practices can still be very
dif?cult and time consuming, but they are nearly always aware of a
distressed company’s problems and even welcome the arrival of new
management.
Changing out-dated working practices in industries with lowmargins
may be critical to the turnaround effort, as was the case at Rolls
Royce Motors in the early 1990s. In that situation, and in order to
show the union representatives that the status quo was not an option,
the management negotiator tore up the existing union agreement
in front of them and threatened to close the company unless new
?exible multiskilling arrangements were introduced. The judicious
use of brinkmanship during negotiations is a common characteristic
of turnaround leadership, particularly where a change or decision is
regarded as “mission critical”.
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There is no substitute, however, for a strong communications strat-
egy, good negotiating judgement and lots of patience when dealing
with unions. This is particularly true in the public sector where the
unions are often the biggest obstacle to change. A Director of Op-
erations and Services in a public sector turnaround recalls meetings
“where a quarter of the time was taken up just keeping the unions informed
and two-day activities could take four weeks because the unions wanted to
know everything and have everything discussed with them”.
In less-developed countries, dealing with the unions and the work-
force can be signi?cantly more dif?cult. Ugly confrontations, some-
times spilling over into violence, are not uncommon. In one situa-
tion in Argentina, the court-appointed turnaround leader arrived at
a bank’s headquarters to ?nd the building surrounded by the army
and the workforce occupying the executive suite. Through straight
talking he persuaded both sides to “go home” and the workforce to
return to work the following day.
We talked in Chapter 4 about the need for turnaround leaders to show
courage. Fortunately, there are relatively fewsituations which also re-
quire exemplary personal and physical bravery. The turnaround of
Trans Hex, the South African diamond mining company (for back-
ground see Box 4.2), is one such example.
The workers went out on strike soon after Calvyn Gardner was ap-
pointed. The strike turned violent – of?ces, houses and plants were
burned – and at one of the mines workers ?red on management
(and the ?re was returned). Box 6.2 tells the remarkable story of
Calvyn Gardner’s response and how he defused the situation by talk-
ing openly and directly to the union leaders and the disaffected work-
force.
Box 6.2 Stakeholder Management at Trans Hex Group
(See Box 4.2 for background )
For about 13 years of his incarceration in Robben Island,
Nelson Mandela shared his sentence with a fellow veteran of
the war for black emancipation, Tokyo Sexwale. On his release
from jail, Sexwale followed Mandela into political leadership in
post-Apartheid South Africa. In 1998 he left public life for the
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126 LEADING CORPORATE TURNAROUND
private sector where, encouraged by black empowerment leg-
islation, he established Mvelaphanda Diamonds and targeted
Trans Hex Group (THG) for acquisition. In early 2000 he took
an 8% stake in THG and swiftly increased his stake.
When Calvyn Gardner was hired as a turnaround specialist in
September 2001 he faced a rapidly deteriorating situation. He
realised that for a successful turnaround he had to satisfy all key
stakeholder constituencies and not just the equity stakeholders
who had brought him in.
Gardner stresses that no turnaround strategy can succeed with-
out buy-in, both from above, at Board level and below among
senior and middle management. After 35 days he submitted his
plan to the Board, who swiftly adopted it.
“It was only a skeleton, but it was a foundation. It was a team
effort with the Board and by the end of the day we had a docu-
ment that everyone signed off on. They (the Board) were part of
the process. It was never a matter of them simply saying ‘yes’ or
‘no’. It was impossible for this (turnaround) to have happened
without the Board buying in.”
His strategy in place, Gardner then focused his efforts on devel-
oping lines of communication with his remote mine managers,
so that he might broadcast the strategy among them, win their
buy-in, and get feedback from them.
What was unique about the Trans Hex situation was the politi-
cal and social environment in which the turnaround was taking
place. Soon after his arrival THG was hit by a union-backed
strike when negotiations stalled. The situation is described by
Calvyn Gardner as follows:
“There was an atmosphere of hate on both sides between man-
agement and the workforce which had its roots in the apartheid
system of the previous government. Very little had changed from
a worker perspective since independence in 1994. Living con-
ditions for the workers, in single hostel type accommodation,
were extremely poor; catering and general hygiene of the hostel
facilities were a disgrace. Family members lived long distances
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from the workplaces and workers saw their families one weekend
per month.”
“Few people had received any new training resulting in no black
people being promoted to more senior positions. Management
was predominantly white and 95%of the white workers had their
families accommodated at the mines, in free company housing.
The human resource strategy was not in line with the Govern-
ment’s approach of fast track on-the-job training and creation of
equity in the workplace. The labour turnover was high, as was
the use of the disciplinary code (mainly used on black employees)
resulting in a high proportion of dismissals.”
“There was a shooting incident where workers ?red on manage-
ment and management returned ?re, resulting in the police and
army arriving at the mines. Of?ces, houses, buses and plants
were burned and damaged. I ?ew to Johannesburg and had
an emergency meeting with the President of the union, asking
him to stop the violence and open the doors for dialogue. We
discussed the position of Trans Hex for more than ?ve hours,
and we agreed that the current position needed radical change.
I shared all the details of my ?nancial plan with them – the ?rst
time the union had ever been treated in this way. A week later
after our ?rst meeting with the union’s regional committee, they
agreed to go back to work and to continue wage negotiations.”
“I ?ew to the ?agship operation Baken for a three-day visit.
There was still much tension on site with little courtesy being
given between workers and management. It was the ?rst evening
around 9pm that I decided to visit the hostel which is where most
of the violence had started and where the main leaders of the
workers were to be found. The visit completely surprised the hostel
dwellers. I requested to visit the facility and was conducted on
a full tour by the hostel leaders. All 300 hostel dwellers watched
as I was offered food which I declined.”
“I agreed that the facility was a disgrace and promised to up-
grade starting immediately. I requested a hostel committee be
established who would lead the upgrade and would liaise with
mine management. I also informed them this would be the last
time I would refuse food in the canteen and that the management
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128 LEADING CORPORATE TURNAROUND
canteen would be closed and all mine personnel including myself
would eat at this one facility.”
“Within three months, a new kitchen and canteen was built, all
dormitories upgraded, family accommodation built and a new
entertainment area built. The walls were starting to come down
and a new belief in the company started to take hold. The wage
agreement was signed six weeks after the initial strike and no
further strikes took place.”
Calvyn Gardner embraced the post-Apartheid focus on achiev-
ing black empowerment and ownership, appointing black man-
agers at the top of the hierarchy at two of the mines. Rather
than the engineers one typically ?nds in the role of mine man-
ager, Gardner’s managers came from a human resources back-
ground. They in turn worked to implement a broad “upliftment
programme” aimed at improving opportunities for blacks and
coloureds within Trans Hex. They introduced literacy and com-
puter training programmes for workers previously denied such
opportunity for education. These “Black Empowerment” ef-
forts went well beyond those mandated by the South African
government, and were tied in to the company’s effort to build
better relationships with the mining unions. Trans Hex reached
out to the local communities in which they operated, providing
educational opportunities for their schoolchildren, and opening
an “internet caf´ e” at the mine, available to themwithout cost. It
is hoped that these community-based efforts will help to ensure
future availability of a local labour force that feels it bene?ts by
working with Trans Hex.
Treating the workforce with respect, giving them an honest appraisal
of the risks and challenges, and keeping them informed about de-
velopments within the turnaround process are practices adopted
by good turnaround leaders. Being seen to deal fairly with the
workforce is critical to earning their respect and maintaining their
support:
“When the decision was made to close the new plant, staff were told
immediately, even though it was six months prior to the planned
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closure. Job retraining was set up on site and competitors and others
in the ?eld were contacted to help ?nd new jobs . . . no one likes redun-
dancies but people got to air their concerns and they all felt it was a
fair process.”
Government
Government at all levels is more often a key stakeholder inturnaround
situations than is commonly realised – leaving aside their potential
role as customers. They may have an economic interest as share-
holders or ?nanciers – as they did in Railtrack; a legal interest as
regulators or a political interest, either where there is a massive cor-
porate scandal as with Enron in the USAor Parmalat in Italy or where
there are potential political consequences, as in the failure of the car
manufacturer Rover shortly before the 2005 General Election in the
UK.
The rescue of the Royal Opera House (Covent Garden) provides
an interesting example of the turnaround leader’s critical interaction
with government, in order to achieve a turnaround solution. In 2000,
the Royal Opera House was in a major ?nancial crisis since, although
money had been raised to build a magni?cent new Opera House,
there was a signi?cant operating de?cit and no means of bridging it
without external funding, even if all performances were sold out and
private donations were maintained at historic levels. A turnaround
executive, PelhamAllen, had been appointed as acting chief executive
and he, together with the chairman, Sir Colin Southgate, had to make
it clear that the Opera House would be completely closed down unless
the government signi?cantly increased funding for operational costs.
A compromise was ?nally reached whereby the Opera House would
provide two-thirds of the opera for two-thirds of the funds.
At the British Library the new management team discovered that
some key stakeholders in government had not been visited for ?ve
years. They found that of?cials at the Ministry of Science and Tech-
nology, a key stakeholder, were not well acquainted with the Library;
and that another stakeholder group, Members of Parliament, were
also badly informed. The newchief executive and her teamembarked
on a mission to rebuild stakeholder con?dence through a process of
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130 LEADING CORPORATE TURNAROUND
open consultation, communication and the provision of reliable in-
formation. This process was helped by the appointment of a new
director of Strategic Marketing and Communication whose role in-
cluded stakeholder management. The subsequent appointment of a
new chairman, Lord Eatwell, in September 2001 also helped to re-
build government relationships.
In some industries, regulators can be crucial stakeholders and can
determine if a company will survive. For example, the holiday com-
pany My Travel, which underwent a restructuring in 2004–5, pub-
licly raised concerns that the Civil Aviation Authority might revoke its
company’s licence to trade if the restructuring process continued to
drag on. It was generally perceived that management sought to use
this “threat” to put pressure on the convertible bondholders, who
were contesting the terms of the deal. Nonetheless, had the CAA re-
voked My Travel’s licence due to its ?nancial instability, it would have
been forced to cease trading immediately and all hope of a successful
turnaround would have ended.
The Board of Directors
Turnaround executives appear to have widely different views about
the role played by Boards in distressed companies. Some see them as
irrelevant at best or an obstacle at worst – since they had presided over
the downfall of the business – and may seek to “work around” or even
remove the Board. Others consider that having the Board’s support
is crucial to the success of a turnaround. This depends to a certain
extent on whether it is a public or a private company and where the
power lies between debtor and creditor. The following quotations
from leading practitioners illustrate the diversity of their views:
“I generally ignore the Board . . . by the time I arrive the power is with
the creditors.”
“The role of the Board is very limited, especially in public companies.
They have slow decision-making processes, they ?nd it dif?cult to
make things happen fast . . . they are a nuisance.”
“I work with the Board as far as possible but I usually change them
all at any rate.”
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“I will not take on an assignment unless it is unanimously approved
by the Board.”
It is critical that the Board is at the very least neutral (or neutered!)
and does not overtly or covertly undermine the turnaround leader’s
efforts. The turnaround leader will not “play politics” with the Board
and will usually resign if he or she cannot get the Board to support
the turnaround plan.
Financial Analysts
In a public company the turnaround leader cannot ignore ?nancial
analysts. The turnaround leader who has not been in such a situation
before needs to tread carefully and take expert advice, typically froma
City PR?rmin the case of a high-pro?le or public company. The new
turnaround leader needs to “buy time” with the analysts and should
never be “bounced” into promising too much – for example, giving a
pro?t forecast – in the early months. There is usually a lag in analysts’
perceptions and coverage of the company during a turnaround since
they are only persuaded by ?nancial results. However, they are never
satis?ed and the turnaround leader must be very careful not to over-
promise.
The Press
Most turnaround professionals like to operate as discreetly as possi-
ble and ?nd that the press are rarely a help. Most say they go out of
their way to avoid high-pro?le press interviews and articles. However,
some large turnarounds are inevitably high pro?le because they make
a good story – particularly High Street names, and companies that
are well known to nearly everybody, such as Marks & Spencer and
Sainsburys. In these situations the turnaround leader cannot com-
pletely ignore the press. Commenting on this, one well-known turn-
around leader said:
“If you can’t ignore them (the press) make sure you use them to your
advantage . . . be very selective in who you talk to.”
Again, the support of experienced PR professionals can be critical
in putting across the message with as much positive “spin” as the
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132 LEADING CORPORATE TURNAROUND
leader feels is appropriate, consistent with the ongoing requirement
to under-promise and over-deliver. Employees, customers and sup-
pliers will read and be in?uenced by press coverage; while silence is
preferable, managing the press is increasingly a requirement in high-
pro?le restructuring situations.
No Magic Formula
In chapter 4 we discussed howthe turnaround leader needs to exhibit
the 3Cs – credibility, clarity and courage – if he or she is to “grab hold”
of the business. This applies equally to dealing with external stake-
holders:
“One has to establish a common level of trust with all the key stake-
holders fast . . . this is why track record and credibility are so important
for a turnaround leader.”
The essence of providing leadership to the stakeholder management
process during turnaround is well summarised by one turnaround
executive as follows:
“Leadership should focus on keeping all partners engaged in the pro-
cess while at the same time not over-promising. Communication is the
key . . . keep talking to people, keep them in the loop.”
Finally, a word of warning. Communicating with all interested stake-
holders can be very time consuming and their attitude(s) can change
rapidly:
“While turnaround might be possible in the morning, by afternoon
the situation may have changed.”
In summary, the following rules are applied by all successful
turnaround leaders in managing their stakeholders:
r
Be open – be honest.
r
Think straight and talk straight.
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STAKEHOLDER MANAGEMENT 133
r
Do your homework to ensure that you are communicating high-
quality information.
r
Negotiate effectively.
r
Manage both stakeholders’ perceptions and expectations.
r
Understand the personal agendas of the stakeholder representa-
tives as well as their corporate or institutional agenda.
r
And above all co::cNica1c wi1n cLani1v to the right degree.
Stakeholder management is critical for any leader in any situation.
Not only is it the “engine oil” that allows the turnaround to proceed,
but if it is done well it provides an umbrella for the management
team, shielding them from stakeholder pressures and allowing them
to focus on ?xing the problems the company faces.
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7
Strategic Focus
I
N ocn canLicn nook, CORPORATE TURNAROUND, wc ibcN1iricb
10 principles for developing corporate and business unit strategies
in a turnaround.
r
Tackle the “where” and “how” – the need to articulate a vision for
the organisation and how it will be achieved.
r
Sell into a need – the strategy must be built around a customer
value proposition that not only meets the needs of customers but
does it at least as well as competitors.
r
Maximise strengths – identifying and building fast on the com-
pany’s strengths is critical to success.
r
Business focus – almost every successful turnaround requires the
?rm to develop a focused strategy which implies withdrawing
from industry sectors, product/market segments or selected ac-
tivities in the value chain.
r
Be radical – drastic action is usually required to turn around a
company in trouble.
r
Stretch but not too much – the stretch must be enough to make
turnaround a better option than sale or liquidation but be credible
in light of the company’s strengths and weaknesses.
r
Cash is king – the strategy must ?t the ?nancial constraints
so strategies that use cash are not usually feasible in the short
term.
r
Learn to walk before learning to run – in the early stages of a
turnaround, stabilisation is the prime objective, so new strate-
gies often have to wait until recovery is underway.
135
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136 LEADING CORPORATE TURNAROUND
r
Urgency and action bias – strategic analysis must be completed
quickly and lead to immediate action.
r
Focus on key strategic issues – the turnaround leader has to “nail”
the three or four critical issues and not worry about the others.
This chapter explains how turnaround leaders achieve strategic fo-
cus using many of the principles outlined above. Our research shows
that strategic focus is a fundamental step towards achieving a sus-
tainable turnaround and must usually be implemented before any
growth strategies are considered. There are examples of companies
in trouble, such as Worldcom (now renamed MCI) where growth
was an immediate and viable option, but for companies in mature
industries – where a lot of turnarounds are to be found – fundamen-
tal competitive weaknesses cannot be eradicated without adopting a
more focused strategy.
Not all individuals who claimto be turnaround practitioners have the
capability or desire to become involved in developing and implement-
ing new strategies. As we described in chapter 1, some are primarily
crisis stabilisation experts. Even among the turnaround advisers we
see this distinction. Perspectives on turnaround strategy from com-
pany doctors and advisors vary from “I don’t get involved in this”
(the quick ?x crisis stabiliser) to “this is the most important element
in a turnaround”. By the time crisis stabilisation is completed, a good
turnaround leader should have a good strategic understanding of the
business and be in a position to lead a strategy formulation process
to create real value for stakeholders.
Divestment
The job of leading the turnaround of a multi-business corporation
nearly always involves choosing one (or more) core businesses to focus
on and exiting the remainder. Earlier research by one of the authors
showed that divestment is the single most common cash-generating
strategy used by UK public companies in trouble. A divestment pro-
gramme is sometimes referred to as corporate restructuring (although
we prefer not to use that term since it is often confused with ?nancial
restructuring).
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STRATEGIC FOCUS 137
Some turnaround practitioners argue that divestment is a straight-
forward management process, albeit time consuming, which can
be project managed from the preparation of the sale memorandum
through to the handover to the new buyer(s). While strong project
management skills are essential, good leadership skills are also nec-
essary if the troubled company is to maximise the sale proceeds of
its divestment programme, do it quickly, and implement all the other
critical aspects of its turnaround plan.
In some situations, implementing the divestment programme is the
single most important aspect of the turnaround. When Sir Christo-
pher Bland was appointed Chairman of British Telecom in 2001, he
made a list of 10 things he had to achieve in the ?rst 12 months, six of
which involved divesting businesses to reduce the crippling corporate
debt which then amounted to £30 billion, accruing interest charges
of £1 million per day. Box 7.1 describes what happened at British
Telecom over the 12-month period.
Box 7.1 Divestment at British Telecom
When Sir Christopher Bland was appointed chairman of BT in
May 2001, BT’s borrowings were £30 billion and he did not
have a lot of choice other than to lead a divestment programme.
Indeed it was made clear to himby the key ?nancial stakeholders
that he couldonly become chairmanif he agreedto the demerger
of the mobile business mmO
2
(previously Cellnet). He wanted
three months to review the decision but was given three days,
and on balance he thought it was the right thing to do. “It was
the price of the rights issue”, he says, “the biggest ever seen in
the UK”.
Within 10 months, BThad reduced its borrowings to under £15
billion, using a variety of cash-generating strategies, including a
rights issue and signi?cant disposals.
Approx. proceeds
(£billion)
Rights issue 6.0
Sale of YELL 2.0
Sale of Japanese investments 3.3
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138 LEADING CORPORATE TURNAROUND
Sale of Airtel (Spain) 1.1
Sale of other assets 1.3
Sale and leaseback of property 2.4
Total: 16.1
Interestingly, Sir Peter Bon?eld, the chief executive who had
been instrumental in buying many of the businesses, was in-
volved in the sale process and “some good prices” were ob-
tained. At the same time BT unwound its joint venture agree-
ment with AT&T(Concert), which was losing money at the rate
of US$800 million per year.
In addition to dismantling the old BT corporate strategy and
refocusing on the core landline business, Sir Christopher’s other
major achievement during the ?rst year was to hire a new CEO,
who started in January 2002. He says he started with a list (kept
in his wallet) of 10 things he had to do in the ?rst year and he
achieved nine of them; only failing to sell BT’s minority stake
in the French mobile operator Cegetel.
The analysis to determine what businesses to divest is usually sim-
plistic and pragmatic, loss-making businesses, businesses which re-
quire signi?cant cash injections to prosper, and businesses unrelated
to the “core” are usually the prime candidates. However, the need
for a quick sale and the relatively weak negotiating position of the
seller may mean that the company has to divest itself of some of its
“crown jewels” (the good businesses it would really like to keep).
Sometimes the turnaround leader is not even in control of the deci-
sion, as was the case at BT, where Sir Christopher Bland was offered
the job on the condition that the mobile phone business mmO
2
was
demerged.
By taking an active leadership role in the divestment process, the
turnaround leader can inject urgency into the process and, more im-
portantly, lead the negotiating process in order to extract maximum
value fromthe purchaser. This may involve retaining key people (who
would otherwise be let go) to manage the process or persuading, moti-
vating and even coaching the management of the company being sold
to help to sell the business. One company doctor who has worked on
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STRATEGIC FOCUS 139
several divestment programmes says:
“I look for a buyer with an ego so as to obtain a signi?cantly higher
selling price. For example, in one turnaround, I was pressurised by
the Board and the bank to ?re the incumbent CEO, but I retained
him for the purpose of selling the heavily loss making ‘core’ business.
I knew that this individual had convinced the banks to invest time
and time again. He understood the company and how to package
and present the company in its best possible light to another provider
of capital (the prospective purchaser).”
Maintaining the commitment of employees during divestment can be
partly achieved through the use of ?nancial incentives, but this alone
is insuf?cient. At the family-owned soft drinks business mentioned
in Chapter 3, David James started on a turnaround process but after
three months he decided he needed to sell all the businesses, and not
just the non-core assets (see Box 7.2). He used ?nancial incentives
but perhaps more importantly he motivated employees to feel a sense
of responsibility for successful completion of the break-up process.
What was noticeable in this situation was a respect for the contribu-
tion of employees at all levels, trust in employees to get the job done,
and effective two-way communication of what was expected from all
parties involved.
Box 7.2 Breaking up a Family-Owned Soft Drinks Business
About three months after David James and his team had taken
control of the business, it became apparent that the company’s
over-investment in carbonated drink manufacturing, combined
with increasing competition in this segment of the business,
meant that the goal had to change from potential turnaround to
workout. The pro?table portions of the business had to be sold
to pay back the liabilities. However, this required separating
out and streamlining the operational aspects of the different
business units so that they could be sold off individually. The
whole process would take about two years.
Leadership at this stage was primarily focused on choosing se-
nior managers that could contribute to the sale value of the
businesses in question. This required a quick assessment to
determine who could contribute to current business needs. The
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140 LEADING CORPORATE TURNAROUND
new management team quickly identi?ed existing talent within
the company and promoted them to key roles, while mentoring
and managing as opposed to looking outside their organisation
for new talent.
The ?rst assets to be sold were non-core, such as a Mews House
in London, the plastic moulding division of the engineering
business and the old manufacturing facility, which was sold to
a government backed regeneration group for a good price. The
total proceeds were about £6 million, £4 million of which was re-
turned to the banks and £2 million retained for working capital.
The water company was valued at only c. £8 million in a break-
up situation, but the turnaround team felt this was too low. On
investigation it was discovered that a similar company had re-
cently been sold for £20 million. In addition, the Group had
been actively pursuing the development of a new carbonated
drink product, as a brand extension to its well-recognised min-
eral water brands. Over a six-month period this new product
was rushed to market. The carbonated fruit drink had promis-
ing sales and was deemed to have signi?cant growth potential.
Soon after this a buyer was found for £20 million.
After some negotiation, and clearance through the Of?ce of Fair
Trading, the squash concentrate business was sold to a com-
petitor. The sale included all contracts as well as the equipment
from the new plant. However, the sale was also contingent on
the condition that enough product was stockpiled to ?ll cus-
tomer demand during the estimated three months it would take
to disassemble the manufacturing equipment from the existing
factory and reassemble it at the purchaser’s new plant. To meet
this requirement, the Group had to increase capacity utilisation
at the current facility from a previous best of less than 50% to a
sustained level of above 60%. Achieving this required setting up
signi?cant incentive schemes for staff. When the decision was
made to close the new plant, staff were told immediately even
though it was six months prior to closure. Job retraining was set
up on site and competitors and local companies were contacted
to help to ?nd new jobs for employees.
Accepting the reality early in the process that turnaround was
not a viable option, the company operated for two additional
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STRATEGIC FOCUS 141
years and paid off all its creditors in full. By October 1999, one
year after the turnaround team’s arrival, over half the bank debt
had been repaid. In the end about £52 million was generated
of which £39 million principal was returned to the banks plus
£5 million interest with the remainder being used to fund the
attempted turnaround, legal fees, employee bonuses and oper-
ating costs.
In our view, the turnaround was a success. When the team en-
tered the company, ?nancial distress threatened the immediate
closure of the ?rm. When the team ?nished their job, banks,
creditors and employees had all received promised payments,
and viable business units remained in operation albeit under
different ownership.
The divestment process at the company was made all the more dif-
?cult by the need to separate the product lines into standalone op-
erating units before sale – each with senior management capable of
running the business without the decision making control previously
exercised by the family owners. While he might not have had an-
other option – because it is very dif?cult to attract good people to
a troubled business that you are about to sell – David James used
individuals within the group to manage these teams.
Strategic Vision
During the crisis stabilisation phase, the vision is usually short term
and can be summed up in one word: “survival”. However, the
turnaround leader soon ?nds it necessary to articulate something
more about the company’s future direction. Strategic leadership, as
it is known in the management literature, requires the leader to ar-
ticulate a view about the future size and scope of the company - what
businesses or product/market segments the ?rm plans to focus on
and how it plans to differentiate itself in its market(s).
Not all turnaround leaders feel con?dent about doing this or believe
it is part of their job, even though they may exhibit strong leadership
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142 LEADING CORPORATE TURNAROUND
characteristics during crisis stabilisation. Even those that do believe in
strategic refocusing often approach the process froman analytical and
management perspective rather than leading by articulating a vision.
The transient nature of turnaround leadership means that many feel
that the ongoing management of the company should decide where
the company goes in the longer term.
While this approach is shared by many turnaround practitioners –
particularly those who focus on the stabilisation phase of turn-
around – there are an increasing number of company doctors who
believe it is critical to develop and communicate a vision of the future
as soon as they have a good feel for the company and the industry in
which they are working. The vast majority of employees want to be led
and want to know where they are going. One turnaround executive
with a military background told us:
“In a turnaround people need to see a long-term picture. I can easily
see the big picture, frame it for the organisation, and ?nally commu-
nicate it simply. I try to communicate this picture to management
and employees in the very early days. I try to organise a ‘post-it’
session within three to four days which captures the major issues and
opportunities from which I develop the big picture.”
The more analytically trained turnaround leaders, whether they be
company doctors, venture capitalists or advisers, are often able to
articulate a medium term vision (say up to three years hence) for the
distressed ?rm.
Raoul Hughes, of the venture capital company Bridgepoint, provides
an interesting example. Bridgepoint having taken an equity position
in an integreted UK package holiday operator that was near insol-
vency, was faced with a reinvestment decision. Bridgepoint’s analysis
showed that the company was not viable in the long run as a stan-
dalone business because it had few assets and there were high ongo-
ing bonding requirements to stay a?oat. A detailed industry analysis
helped Hughes and his teamto develop a viewabout industry consol-
idation; and a “vision” that this company could have signi?cant value
for one of the bigger competitors as it would bring a good revenue
stream with little incremental investment or additional overhead re-
quirement. This proved to be the case as it subsequently sold for a
signi?cant premium on investors’ monies.
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STRATEGIC FOCUS 143
At Lee Cooper, Paul Hick developed a strategic vision for the com-
pany as soonas he hadcompleteda 30-day diagnostic review, andthus
provided the framework for the turnaround (see Box 7.3). The vision
and the objectives that emanated from it, were communicated to all
staff, and everyone in the organisation was expected to contribute to-
wards achieving the vision. Paul then encouraged teamwork around
each of the key objectives and empowered the teams – undoubtedly
under his guidance – to offer solutions.
Box 7.3 Strategic Vision and Innovation at Lee Cooper
From 1959 to 1994 Lee Cooper was a publicly quoted com-
pany and became the second largest jeans and casual apparel
company in Europe. It had subsidiaries in France, Belgium,
Germany and Switzerland, had licensing agreements in 27
countries, a factory in Tunisia and a logistics centre in France.
In 1994 it was taken private by a venture capital ?rm and
other investors. In 1998, with sales of £60 million and a further
£60 million through licensing and pro?t of £6 million (as against
a budget of £10 million), the key shareholders brought in Paul
Hick as CEO to turn the business around and prepare it for
sale. The banks were concerned about debt servicing and had
already appointed a restructuring partner from an international
accountancy ?rm. Paul Hick’s in-depth review (undertaken af-
ter he arrived) included one-to-one meetings with 65 people,
mostly middle managers in addition to the nine directors. After
“listening to them” for 30 days coupled with his belief that they
were the ones who really understood Lee Cooper’s business and
knewthe solutions as well as the problems, he worked with them
to de?ne what the Lee Cooper of 2003 would look like in terms
of brand, product innovation, supply chain, customer service,
channels and resources. This process took about a month and
was supplemented by Paul sifting through a large quantity of
data provided to himby external and internal sources on market
trends, competitors, sourcing costs and ?nancial performance.
By the time Paul put his turnaround plan to the Board for their
approval, he was asked to articulate his ?ve-point vision.
r
A European-focused sales and marketing led organisation.
r
A leader in product innovation.
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144 LEADING CORPORATE TURNAROUND
r
World class manufacturing in Tunisia.
r
Be a totally customer-focused organisation.
r
Create a successful “Anglo-Latin” company culture to out-
perform the European leader, Levi’s (which tends to impose
US values and ways on its organisation and customers).
Paul believed that building an Anglo-Latin culture involves tak-
ing the best of each culture and integrating them together:
putting planning, discipline, innovation and organisation along-
side fantastic creativity, style and superior commitment to de-
livery and implementation from the Latin side.
Paul set up teams to work on the key issues necessary to im-
plement the vision. One such team, the marketing team, were
tasked with addressing the brand image issue since Paul had
learned that the Lee Cooper image in France was “something
that farmers would wear” and that in the UK it was what “a fa-
ther would wear” – and it was thus unappealing to the fashion-
conscious younger age group that he wanted to target. Once he
had identi?ed the issues and agenda, the teams were empowered
and encouraged to make their own decisions. The marketing
teamdeveloped a newbrand proposition: “built in performance
for style and fun”.
Throughout the turnaround Paul’s leadership style encouraged
teamwork especially among the many different nationalities that
made up the company. The culture changed from being conser-
vative, passive and change-resistant to one that was challenging,
supportive, innovative and very results focused.
The starting point for the culture change was undoubtedly the
strategic visioning exercise, and Paul instituted the following
two informal tests to ensure that the vision (and subsequent
objectives) was getting through to the lower level in the organi-
sation:
r
The “doorman/receptionist test” – the ability of staff at all
levels to articulate the company’s vision and objectives.
r
The “Timberland test” – the ability to recreate a “Lee Cooper
shopping experience” so that a customer who does not know
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STRATEGIC FOCUS 145
about Lee Cooper will understand what the brand stands for
simply by entering a Lee Cooper store.
The company was sold in 2001 at an EBIT multiplier which
was 50% higher than that of its sector at the time.
Neither Raoul Hughes nor Paul Hick in the examples given above
had to spend most of their time on crisis stabilisation and stakeholder
management. Immediate survival was not the issue. Therefore one
could argue that they had the time to do the analysis from which
their respective visions emerged. This is not always possible and it
is often six or more months into a turnaround before the leader has
“the luxury to think beyond the next 10 days”. However, once the
immediate crisis is stabilised, the need to think more strategically
about the business will be there – and it may be at this time that
the turnaround leader exits, and is replaced with a permanent CEO,
perhaps with industry experience. There are, however, two schools
of thought on this subject. Does one bring in an industry expert who
knows the industry or an outsider who can bring fresh thinking to the
strategy process?
Sometimes it is at this point in the turnaround process that there is
a difference of opinion between the turnaround leader and one or
more of his senior managers; for example, where the leader is in a
chairman role with a CEO/MD who has been executing the day-to-
day turnaround activities. This happened at Virgin Express, where
the MD (who had industry experience) wanted to grow the company
again after crisis stabilisation, whereas David Hoare, a turnaround ex-
pert who had been brought in as chairman, believed that further con-
solidationwas more appropriate. The CEOwas replaced, because un-
less the chairman and CEOshare the same vision for the business, the
management teamand the rest of the organisation would be receiving
mixed messages – a sure recipe for inaction and/or potential failure.
Product Market Refocusing
At the operating company or business unit level of the organisa-
tion, a lot of classic managerial analysis is necessary to decide which
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146 LEADING CORPORATE TURNAROUND
products and customers to drop and the ones on which to focus. The
turnaround leader must ensure that this analysis gets done either by
the management team(s) or by advisers/consultants. He or she must
have the management competence to know what analysis needs to
be done, and must lead the process, and act decisively on the con-
clusions of the analysis. The process should be action-oriented, and
avoid multiple iterations and over-complicated analyses. One experi-
enced practitioner describes his pragmatic approach:
“Keep in mind that turnarounds should be a short term ?x . . . so the
refocusing you do is very basic. In one deal I am reducing the number
of customers from 60 to 4 – that is the type of thing you focus on. The
leadership you provide is one of guidance and you should make every
thing very down to earth.”
When dealing with a single business or an operating company of a
multi-business corporation, the starting point should always be to
determine if the company is indeed a single strategic business unit or
is actually a number of business units fusedinto a single organisational
entity (see Box 7.4).
Box 7.4 Separating the Business Units
Zenith
?
was an entrepreneurially owned stevedore and shipping
company in the North of England backed by a venture capital
company. The company was losing £0.5 million per year and al-
though there was no immediate crisis the investors asked Tony
McCann to work as Chairman alongside the entrepreneur and
his managing director. One of his ?rst tasks was to ask the Fi-
nance Director to draw up separate pro?t/loss and cash ?ow
forecasts for what he saw as two distinct business units. He dis-
covered that the shipping business was losing £5 million per year
while the stevedore operations showed a pro?t of £4.5 million
per year.
The managing director was told to sell the two ships they owned
but resisted doing so. After three months he had not come close
to a sale andwas replaced. The ships were soldwithinmonths for
£8 million in cash, which took a loss-making asset off the balance
sheet and reassured the investors of the company’s remaining
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STRATEGIC FOCUS 147
viability and solvency. The stevedore operations were sold a year
later for approximately £16 million.
?
The company name has been disguised.
The majority of company doctors recognise the critical role of
product/market refocusing; however, their degree of involvement in
the decision-making process and implementation varies considerably,
as is evidenced by the following comments:
“Future strategy must be led by the parties in the company who have
been identi?ed as being passionate about the organisation. It is for
these people to take their ideas and with their new found ability to
act on them (provided by people like myself) to lead the organisation
forward.”
“Most of the managers with whom I work have a better knowledge
of the business than I do. They must run the show and I try not to
interfere. In this situation, leadership is the capability to step aside
and look objectively at what is happening.”
“This is a stage in the turnaround that the companies themselves have
to manage. My role is to be the leader that initiates refocusing and
keeps on pushing.”
“Refocusing the business strategy is a critical part of my role.”
“This is often the most important part of a turnaround. In almost all
businesses there is a need to contract before you can grow.”
“Once you’ve analysed the problem your job is to ?nd the way out.”
“In order to develop a strategy, I invested a lot of my personal time
talking to customers directly and working with focus groups.”
“I work closely with key customers so as to be able to better understand
their speci?c needs for each of the company’s products.”
The extent to which the turnaround leader gets involved in the detail
of product and market strategies will understandably depend on the
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148 LEADING CORPORATE TURNAROUND
size of the company and the diversity of its product/market portfolio.
Leaders with industry experience are clearly more likely to believe
they can add more value to the strategy process than those from
outside the industry.
With this spectrum of views, it is not surprising that the leadership
style used to achieve strategic change varies from facilitation of the
process at one end of the spectrum, to “selling a plan”, which the
company doctor has already decided, at the other. What all agree on,
however, is that it is vital to obtain the ownership and commitment
of the key managers that have to implement the plan, and it is vital
to maintain control by monitoring the implementation process.
George Moore, a turnaround executive, says that once he has put
together a team to undertake a turnaround, he leaves them to work
out a plan of how to proceed:
“They will provide a lot of the input, as they will have detailed knowl-
edge of the business and its problems. I am only an outsider with little
industry experience, so I see my role as that of the facilitator who
draws the ideas out of the people and galvanises them into action.
During this process I get them to state what needs doing, who will
do it, and what the milestones are. It is important to have named
individuals for each task so that there is ownership of each task. The
process is ongoing and nothing is ever more than 10 days away.”
Nicholas Ward, another turnaround executive, stresses the same
point when he says:
“The ?nal strategy and accompanying plan of action is a textbook in
‘what’, ‘when’ and ‘how’ – crafted with the contributions of the top
team, so that commitment is explicit as we proceed to the implemen-
tation stage.”
He involves top management substantially in the process – not just in
the creation of the strategy document but also in the administration
of it through performance reviews and individual accountability:
“It is an ongoing process with the business plan being constantly up-
dated and modi?ed. I try to act as a mentor to top managers – a
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STRATEGIC FOCUS 149
person to whom they can turn for advice and answers on unfamiliar
aspects of their work. I encourage senior executives to be open and
creative, within the bounds of the plan . . . but the risk stays with me
and that gives senior managers the con?dence to achieve.”
One way of refocusing the business is to take management out of
their everyday roles and allow them time to concentrate on the wider
(strategic) issues. Several leaders we spoke to favoured using “away-
days” at external locations every quarter.
At one UKfurniture manufacturer, we witnessed a turnaround CEO
surface resistance early on, when formulating a new detailed plan for
the business. He designed a process to solicit formal and informal
input across the company during the business plan brainstorming
phase, without fully divulging the details of what he had in mind.
This engaged staff but also allowed him to uncover potential areas
of resistance across the organisation before the plan was released.
Careful timing gave room for some of the early resistance to subside,
giving a higher chance of buy-in and commitment to the plan. This
process is illustrated in Figure 7.1
Involvement and participation in developing the new strategic focus
do not, however, ?t every turnaround leader’s style, as indicated by
the following quote:
Time
Level
of
resistance
h e
Resistance
level without
Introduce ideas
to surface
resistance early
Release
plan er
surfacing
resistance
Figure 7.1 Timing and resistance
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150 LEADING CORPORATE TURNAROUND
“Once I have developed a plan I will hold discussions with manage-
ment to convince them that it is as much their plan as mine, effectively
forcing themto take ownership. It is much easier than you think. With
the staff I am not wrapped up in proving how smart I am. . . if you
drop an idea with the staff, they are highly suggestible . . . they end up
thinking it is their plan.”
Contrary to the notion that those that are “not with you” go imme-
diately, this turnaround executive believes that this is the time (at
the beginning of strategic refocusing) to remove the doubters in the
management team:
“Refocusing the company requires a spirit of positivism. With this in
place and the sources of negativity gone, you can ‘sell’ the plan to the
remaining managers.”
The need to obtain ownership and commitment of the key imple-
menters – by whatever approach – clearly requires a somewhat differ-
ent leadership style than that that may be necessary in the crisis phase
of a turnaround. We see autocratic leadership styles becoming more
collaborative. More support and encouragement, even coaching or
mentoring, is seen as appropriate by some company doctors. How-
ever, culture change is achieved only relatively slowly and most com-
pany doctors ?nd that they need to remain fairly directive throughout
the refocusing phase, as strong control cannot be compromised, and
there is a danger that the organisation will revert quickly to its old
modus operandi and believe that the need for urgency has passed.
Box 7.5 describes howJohn Ensall developed a newstrategy at Clares
Group by involving his business unit managing directors and grad-
ually giving them more freedom as he became con?dent that they
could deliver the necessary results.
Box 7.5 Refocusing the Business: Clares Group
Clares Group manufactures specialist industrial components.
In 1997 it had a turnover of £46 million and a net loss of £5
million. With debts of over £23 million and a negative net worth,
the company was put into receivership in October 1997. John
Ensall was brought in by the receiver with another company
doctor, George Wardale, to stabilise the business and prepare
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STRATEGIC FOCUS 151
it for sale. Six months later the business was sold and John was
asked to stay on as CEO, and rebuild the business.
Commenting on this transition John said:
“As the cash crisis eased and trading improved . . . smiles came
back on people’s faces . . . managers began to gain more con?-
dence as pro?tability improved and wanted to discuss how they
could contribute towards the medium and longer term success of
the business. I realised that my leadership style must change.”
John appointed ?ve managing directors, each with his own man-
agement team, to oversee the ?ve principal business units.
During the strategic redirection of the organisation, John,
working collectively with his ?ve managing directors, conduct-
ing a full strategic analysis (including SWOT, ?ve forces and
added-value analysis) for Clares ?ve primary business units.
Improving the pro?tability of each of these units resulted in an
“eye-opening” experience for John as he realised that Clare’s
management did not know which of their products were the
most pro?table. For each of the ?ve business units, a league ta-
ble of every single product and service sold was created, showing
key performance measurements such as turnover, gross margin,
net pro?t margin, and contribution. Prior to showing them the
results of the analysis, John asked his management to state their
unit’s most pro?table products. More often than not, his man-
agers selected the loss-making products as the ones they thought
were the most pro?table. The analysis resulted in the elimina-
tion of the bottom third of products from all league tables.
John explained that if customers insisted on purchasing these
products they would have to pay three times the price. As a
result, Clares produced a new catalogue and price list that had
a massive positive impact on pro?tability.
As part of the business refocusing, and to emphasise a gradual
change in his leadership style, John requested his ?ve managing
directors to prepare detailed three-year business plans showing
the future direction of their business unit. Shortly thereafter,
John held an off-site meeting for several days with his directors
to review these plans. Together they rejected the plans; John
and the directors then held a collective strategic session on the
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152 LEADING CORPORATE TURNAROUND
future of Clares, as a group. It was collectively decided that the
new Clares Group strategy would require a move from being
a manufacturing-focused company to a service-oriented com-
pany. The directors were requested to return to the business and
rewrite their business plans in line with the new strategic direc-
tion. John was able to get his team to buy into this collective vi-
sion, which played a great part in its successful implementation
and the subsequent movement of Clares from the refocusing
phase into the growth phase.
In mid-1999 (close to one year out of receivership, and one
month after the off-site meeting) the directors came back with
revised business plans. Subsequently, John set individual targets
for each of his ?ve managing directors and further requested all
employees to conduct an appraisal of their jobs in line with the
newstrategic direction . As the organisation progressed and peo-
ple headed in the direction of the new strategy, John gradually
released controls “as new management got up to speed”. While
he set levels for capital expenditure, revenue expenditure, em-
ployment levels, pay review and stock purchasing, he gave his
?ve directors progressively more leeway to run their respective
units by themselves. The rebuilding phase lasted for approx-
imately 18 months. As his managers continued to meet their
business plan objectives, more and more ?exibility, and power
were granted to them. John comments:
“A good leader opens the minds of his managers to the future
potential of the business, gives themsupport and encouragement,
steering them without telling them what to do. It is essential to
leverage good people to their maximum capabilities.”
During the rebuilding phase of the turnaround process, John’s
prior autocratic leadership style developed into more of a
collaborative management style. Having put in a new structure
and decision-making framework that was understandable to all
employees, John became more of a facilitator and allowed man-
agers to explore some of their own initiatives. However, more
importantly, John recognised that he still had to remain rela-
tively directive; strong controls could not be compromised as
the business had yet to reach a position of sustainable recovery.
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STRATEGIC FOCUS 153
Innovation
Strategic innovation has been more associated with corporate trans-
formation and long-term thinking than with corporate turnaround.
However, there are a number of examples where the turnaround
leader has successfully fostered innovation as a key element of an
overall turnaround strategy.
For distressed ?rms in high technology industries, continuing to
invest in new product development is usually critical for success.
At MCI (formerly Worldcom) re-energising product development
and accelerating new product introductions were core elements of
Michael Capellas’ 100-day plan. The innovation was targeted on
three areas of technology for application in focused market segments.
Capellas’ leadership style was built around one theme – the need to
“act with an outrageous sense of urgency”.
Outside the high-technology area, one of the more impressive exam-
ples of how innovation can be used in a turnaround is provided by
Head Tyrolia Mares (HTM), the Austrian sports equipment manu-
facturer bought from the Austrian government by the Swedish en-
trepreneur, Johan Eliasch, in 1996. HTM was losing market share
and “bucket loads” of money. Eliasch, in his role as chairman and
majority shareholder, personally led a major product innovation ini-
tiative with passion and enthusiasm. With little or no market research
he developed the carving (hour-glass) ski, which has revolutionised
skiing for beginners and intermediates alike. He later did this a
second time with the introduction of the titanium tennis racket. Box
7.6 provides a synopsis of the turnaround at HTM.
Box 7.6 Innovation at Head Tyrolia Mares
After acquiring Head Tyrolia Mares from the (then)
government-owned tobacco monopoly in 1995, Johan Eliasch,
a Swedish entrepreneur, focused on cash management and re-
structuring manufacturing to reduce the cost base:
“We had ?gured out a strategy that was really very simple. It
was to cut down, to de?ne the core businesses and focus on them.
If anything did not ?t the description we closed it.”
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154 LEADING CORPORATE TURNAROUND
The main actions taken in the ?rst year included:
r
Reduced headcount by 30%, including 500 manufacturing
and 400 administrative staff.
r
Streamlined management by eliminating an entire layer of
senior management.
r
Initiated an immediate creditor standstill.
r
Negotiated with the banks a substantial interest rate and debt
waiver.
r
Discontinued the loss-making US sportswear and distribution
businesses and golf operation.
r
Improved product mix in terms of SKU reduction, pricing
levels, and elimination of self-competition, e.g. Tyrolia skis
and boots
r
Reworked the manufacturing capacity to adapt to reduced
volumes.
r
Reduced manufacturing costs through automation and in-
creased productivity.
r
Reduced ?xed costs by streamlining sales and administrative
functions.
r
Improved ?nancial controls and modernised MIS and IT
systems.
r
Liquidated non-core assets (US real estate and non-core in-
ventories).
r
Improved co-ordination of group activities.
r
Relocated labour-intensive processes fromAustria and Italy to
the Far East (lower end rackets), Estonia (ski boots and diving
equipment) and the Czech Republic (?nishing and stringing
rackets).
When asked how his perception of the key strategy decisions
evolved, he said:
“The most important thing was that here was a company that
was ?ghting . . . it had the right spirit and wanted to survive.
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STRATEGIC FOCUS 155
Don’t forget . . . it has to come from within. The guy leading the
turnaround is the agent for change and has to lead people in the
same direction.”
Within the divisions, research and development was “very per-
functory and not very innovative” – as is common in distressed
?rms in mature industries. However, due to Johan Eliasch’s pas-
sion for sport and new ideas, innovation became a critical com-
ponent of the turnaround:
“There was no radical change in the budget but we changed the
culture to make people come up with ideas. We refocused on inno-
vation, ideas . . . simple ones. I said almost immediately ‘lets do
a titanium tennis racket’ . . . simple, light powerful. Gradually
we made a product that made a real difference. They (the staff)
needed to get out there, meet the customers, see what’s happening
at universities. Everyone . . . the entire company became part of
R&D.”
Between 1995 and 1998 HTM launched titanium tennis rack-
ets, carving skis and a revolutionary integrated dive system. Ac-
cording to Eliasch:
“These (innovations) were the basic reasons for HTM’s
turnaround. Titanium rackets changed the tennis industry and
carving skis changed skiing.”
From a loss of $143 million on revenues of $400 million in
1995, pro?ts were $7 million on revenues of $305 million in
1998. The company was ?oated on NASDAQ in 1999.
At Lee Cooper, the branded jeans manufacturer, Paul Hick was
brought in as CEO in September 1998 by the venture capital share-
holders. As part of his initial diagnostic review, he found that de-
signers “designed what they wanted to with virtually no attention to the
consumer”. He believed strongly that product innovation was critical
in repositioning the Lee Cooper brand (“Built-in performance with
style and fun”), and he challenged individuals to innovate when they
said they could not do so. New products such as reversible jeans
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156 LEADING CORPORATE TURNAROUND
and waterproof jeans were developed by the incumbent design team,
which not only typi?ed the rejuvenated creativity of Lee Cooper but
also allowed the brand to gain much needed publicity (see Box 7.3).
It is clear that middle management need the support of the leader in
order to innovate. Johan Eliasch’s direct involvement in product inno-
vation, particularly in a company the size of HTM, is highly unusual.
In most situations the leader sets the direction and then encourages
middle management to drive the innovation process forward. Thus
at the soft drinks company, (see Box 7.2), even though the company
was being sold off business unit by business unit, the sales value of
the spring water division was enhanced by bringing new products to
market quickly. These products had been in the development pipeline
for a long time but the new leadership made it very clear to the or-
ganisation that it was open to new ideas, and thereby unlocked value
from within the company.
Investment
Major investment in new products and/or markets is not a common
turnaround strategy due to ?nancial and time constraints, but from
time to time one sees such a bold move. One example is provided
by Carlos Ghosn at Nissan. In November 2000, 20 months after
Renault took a stake in Nissan and Ghosn was appointed CEO to
save the struggling company, Ghosn decided to invest $1.43 billion
in a new manufacturing plant in the USA. This was based on his
belief that a US production base would allow Nissan to build more
models and target alternative segments in the US markets. At this
stage Nissan had yet to show that it had turned around, but Ghosn
took a calculated risk:
“There are moments when you have to make bold decisions. Our
debt was high, we had no pro?t – just a sense that things would be
under control. At the time people followed me more by discipline than
conviction. Now everybody says it was obviously the right decision,
but the challenge was to take the decision so early in the process. We
could have waited another year, maybe two, before we had to make
an investment, but we would have lost a lot of time.”
?
?
Quoted from Independent on Sunday, 18 May 2003.
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STRATEGIC FOCUS 157
Some bold strategic steps can lead to disaster as occurred when Ann
Iverson – one of the many chief executives brought in to rescue Laura
Ashley – decided that the “answer” to the retailer’s problems were to
open large stores in North America. Within two years Laura Ashley’s
US operation was losing £20 million on sales of £80 million.
Turnaround leaders who take such bold decisions either blight their
reputations and risk ending their careers or are seen (subsequently)
as far-sighted heroes. In reality, even the “heroes” are usually less
certain of success than hindsight would suggest. As Carlos Ghosn
said:
“The most dif?cult part is when you see something other people don’t
see and you can’t back it by evidence. You question yourself: ‘Am I
doing the right thing? Am I going in the right direction?’ ”
?
Fewturnaround leaders we knowwill go so far, but successful leaders
are inclined to take more action rather than less and to refocus the
company’s strategy based on instinct and experience as much as on
hard evidence and analysis.
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158
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8
Changing Critical Business
Processes
T
nc roLLowiNc is inonanLv 1nc s1 co:N vicw
among turnaround professionals:
“I prefer to secure talented managers who can implement the critical
process improvements.”
However, just as with strategic refocusing (in the previous chapter)
there is a full spectrum of views from “I don’t really do that sort of
thing . . . I am not a detail person” to “I get heavily involved in this area
because it is crucial to a sustainable turnaround ”.
Identifying Critical Improvements
Turnarounds focus on a fewcritical processes that need ?xing quickly
and in which change can be implemented quickly. They are the ones
that are likely to have a big impact on cutting costs, reducing working
capital, improving quality or improving customer responsiveness. As
David Hoare says:
“The focus should be on processes that stand out in the diagnostic
phase and are important to the stabilisation of the company.”
The diagnostic phase will often show a breakdown or malfunction of
key processes; however, some of these may be expensive and time con-
suming to rectify, particularly where newor substantially modi?ed IT
159
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160 LEADING CORPORATE TURNAROUND
systems are required (as is often the case with customer relationship
management systems, for example). It is therefore important in the
early stages of the turnaround, that the turnaround leader prioritises
the big impact problem areas.
In many turnarounds, the lack of good-quality management informa-
tion is the key priority area. This was the case at Target Express (see
Box 3.2) where the ?nancial controls and IT systems prevented new
management from?nding out what the real problemwas. Sometimes
basic processes such as invoicing systems are totally inadequate –
as Jon Moulton found at Cedar – where he was quickly able to re-
alise substantial cash when he discovered that the company had not
invoiced many of its customers!
Outside the information area, improvements to procurement and
production processes are likely to have the biggest short-termbene?t,
since demand-generating processes (sales and new product develop-
ment, for example), while necessary in the medium term, tend to
provide little in the way of short-term bene?ts. However, each situa-
tion is different and it may be a single process that is the root cause
of the turnaround crisis. A business-to-business (B2B) courier com-
pany where Tony McCann was appointed as CEO, is just such an
example – see Box 8.1.
Box 8.1 Critical Process Improvement at B2B Courier
B2B Courier was a company with sales in excess of £ 100 mil-
lion which had been bought by a venture capital company in
a highly leveraged transaction. Pro?t expectations were in the
region of £ 10–12 million pre-tax but in reality were nearer £ 1.5
million. Under pressure fromthe venture capital company, costs
had been cut which had destroyed the fundamental processes
underlying the business model.
At the heart of the problem was a decision to eliminate a front
end computer system costing £ 0.5 million that determined
which letters they could accept for delivery, based on their couri-
ers’ locations. The result was that they were collecting mail they
could not deliver. As the volume of undelivered mail grew, they
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CHANGING CRITICAL BUSINESS PROCESSES 161
sent it by Royal Mail, ?rst class. They later reduced this to sec-
ond class which took 5–6 days, cost £ 1.5 million and generated
enormous complaints from customers who were paying to have
next day delivery before 9 am! This resulted in the company
building up a customer service team of 70 people to handle
complaints. The total cost of the inef?ciency was £ 5 million
compared to the initial cost saving of £ 0.5 million.
Within two weeks of arriving the company doctor, Tony
McCann, had solved the problem. The system was re-instated
and within weeks the customer complaints teamwas disbanded.
In the ?rst year pre-tax pro?ts returned to £ 6 million.
The experienced turnaround professional does not make unnecessary
changes as it is all too easy for chaos to ensue, as one practitioner
describes:
“I was in a situation where my predecessor had restructured the entire
?nancial reporting process resulting in accountancy chaos and lack of
responsibility. Meanwhile the company still had no budgets or bench-
marks that would allow them to measure progress against a baseline.
You have to keep simplicity and clarity.”
Management Information
The management information system (MIS) is the one area where
the turnaround professional is most likely to be involved in process
improvements. At Stormgard Plc, a textile company where the central
accountancy systemcollapsed without any back-up, the chief accoun-
tant had a heart attack and a review of inventories showed a need for
a £ 25 million write off. George Moore had to lead people through
a reorganisation of reporting and control systems, at the same time
as overseeing the recreation of 10 months of accounts. Advisers are
also likely to get involved in this work and sometimes it is their major
contribution if their role is completed – as it usually is – prior to a
completion of the turnaround.
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162 LEADING CORPORATE TURNAROUND
In leading process improvement in this area, turnaround leaders
recognise that the existing ?nance director is almost inevitably not
the right person to change the system. If he or she was, it would have
been done earlier! While a new ?nance director might often be given
the task of developing a new management information system, many
?nance directors, particularly in smaller companies, will not have the
experience or resources necessary to do this:
“The ?rst step is usually to take it [management information] away
from the ?nance director whose responsibility it was and who had
done nothing about it. . . . If the managing director is going to stay I
will ask him to get to grips with management information. This uses
the MD in a cross-functional way and gives him an opportunity to
get closer to the business levers.”
Leadership, Management or Both?
The role of the turnaround leader is to identify and prioritise criti-
cal process initiatives, initiate action and monitor their achievement.
How hands-on they are will depend on their own experience, pref-
erences and industry knowledge and the management resources at
their disposal. Management skills of analysing, planning, organising
and controlling are paramount as prerequisite for successful process
improvement. The view of most company doctors is that this work
is better carried out by operational managers who know the industry
and/or “have done it before”.
The following view is typical of many turnaround leaders:
“When it comes to restructuring or changing processes, ask the guys
on the shop ?oor what should be done. If you need to get rid of a
machine get them to decide which one . . . they have then made the
decision and will make it work. They know more than someone like
me who has just walked in and never used the machines. . . . Most of
the time someone in the organisation has a solution or will be able to
work out a way to solve problems.”
Pippa Wicks of AlixPartners, who is a former Group Finance Di-
rector of Courtaulds, says she likes to identify speci?c individuals
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CHANGING CRITICAL BUSINESS PROCESSES 163
who can “manage” the various workstreams (tasks) associated with
process change. This does not mean that the turnaround leader abro-
gates responsibility, as the following comments from two turnaround
professionals indicates:
“I am not involved unless the process improvement is critical but if it
is, it is then part of the business plan which is implemented through
performance reviews and individual accountability.”
“I let the operational experts do their job. My role is to understand
the overall picture, ensure the details are correct and challenge the
assumptions. I delegate but remain in control.”
Some turnaround leaders get heavily involved in the detail of process
improvements, partly because they think it is important and partly
because they like it:
“I work closely with key customers to better understand their speci?c
needs for each product and their frustrations in the purchasing process.
I replicate this process with suppliers . . .”
Just how involved the leader becomes in the management process
depends on the quality of the management team. Are they compe-
tent individuals to whom the turnaround leader can delegate, and, if
not, can they be trained? Implementing critical process improvements
means driving change rapidly through the organisation.
One experienced practitioner, who spent 20 years with GEC
before becoming a turnaround specialist, believes that the biggest
leadership challenges of the turnaround process are during process
improvements.
“This is the time individuals rebel against new processes and new
job descriptions. It is usually the most painful time for the company
as well: not only do undiscovered bombs explode but the ?nancial
position often gets worse before it gets better. The most important skill
in leading this step of the turnaround is communication.”
Employees need to be shown why the new methods and ideas are
crucial and be persuaded to adopt them. Entirely new ways of doing
business may have to be learned. Successful change management is
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164 LEADING CORPORATE TURNAROUND
what delivers the results, as occurred at Exide Batteries where Lisa
Donahue implemented a team leadership programme with dramatic
results (see Box 8.2).
Box 8.2 Exide Batteries
Exide Technologies is the leading global manufacturer of in-
dustrial and automotive batteries, with nearly 20,000 employ-
ees, $2.5 billion in sales and vertically integrated operations in
89 countries. In 2000/2001, Exide ran into ?nancial dif?cul-
ties, as a result of its debt-?nanced global acquisition strategy,
inadequate integration of acquisitions and a downturn in au-
tomotive demand. By April 2002, its leverage (debt/EBITDA)
was close to 16 times and Exide ?led for “Chapter 11” pro-
tection in the US courts. Lisa Donohue of AlixPartners, the
turnaround and performance improvement specialists, was ap-
pointed as Chief Restructuring Of?cer and Chief Financial Of-
?cer to Exide, charged with developing and implementing a
viable recovery strategy to take the business out of bankruptcy.
With the whole-hearted support of the CEO and Board, Lisa
led a global programme to improve ?nancial performance.
At the heart of the recovery plan was EXCELL (Exide’s
Customer-focused Excellence Lean Leadership). Exide did
not have the time or resources to reinvent the wheel but
synthesised many long-established performance improvement
methodologies such as Six Sigma and Kaizen, to create a set of
best practices in lean management while enhancing its sourcing
and distribution capability. The leadership team set audacious
goals – to launch EXCELL in 62 facilities world wide – and
communicated these through three simple targets:
1. To double output per individual and square foot at every
plant, recycling centre and distribution facility.
2. To reduce the cost of quality by half.
3. To instil teamwork around the group.
Lisa selected a group of “Lean Leaders” or project managers
and established them as a “Center of Excellence”. Lisa
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CHANGING CRITICAL BUSINESS PROCESSES 165
deliberately chose leaders from within the business rather than
outside consultants, in order to embed ownership within the
organisation – this process “was invented here”. The task of the
“Lean Leaders” was to provide training and coaching around
the group and to monitor progress. Measuring results was key
to driving implementation and 10 key performance indicators
were established, covering all aspects of the supply chain, in-
cluding health and safety metrics. Five levels of certi?cation for
individual plants or facilities were established. The basic level
was designed to be easily achievable, in order to demonstrate
value quickly and get early buy-in; at the highest level, “stretch”
targets were set including zero waste, 100% on-time delivery,
zero accidents and zero defects. As a result of the EXCELL pro-
gramme, WIP was cut by 30–40%, raw material levels by 61%
and purchasing savings of $50 million per annum generated.
Throughout the process, Lisa had to ensure that she retained
commitment to the changes, from Board level through to the
shop ?oor. Communication was critical and was reinforced
with incentive schemes that paid out generous bonuses if cer-
tain measurable milestones were reached. In addition, a discre-
tionary bonus pool was establishedwith bene?ciaries nominated
by their colleagues, which fostered enhanced team working and
co-operation. As well as rewarding success, Lisa took tough ac-
tion against those who impeded progress, removing the entire
Board of an overseas subsidiary when they wouldn’t approve the
necessary changes.
Two years and a day after it had ?led under “Chapter 11”,
Exide’s Plan of Reorganisation was con?rmed in the US
Bankruptcy Court and it emerged with a substantial reduction
in its gearing and greatly enhanced cash-generating capability.
Many competent managers may not have the leadership characteris-
tics required for successful change management. If this is the case,
the turnaround leader may need to provide the visible leadership,
passion and commitment necessary to drive performance improve-
ment. When changing the top team (see Chapter 4) the turnaround
leader will ideally be looking for individuals with both management
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166 LEADING CORPORATE TURNAROUND
and leadership skills, but too often they end up with managers. Even
then the good turnaround leader may get involved in the manage-
ment detail to ensure that he or she has con?dence in the actions
that are being taken. Really competent turnaround leaders appear
to have the ability to view the big picture and dive into the detail
simultaneously.
In some industries – retailing is a good example – critical pro-
cess improvements are usually at the core of any turnaround effort.
At Marks & Spencer, the priority for Stuart Rose is to improve the
product line and improve the ef?ciency of the supply chain in the
core business area. Divestment and refocusing can buy time in
the short term but the turnaround will not be considered success-
ful until the core business is thriving. The same is true at Sainsburys
in the food supermarket business.
What is required to succeed in these situations? Some of it is hard
management analysis, which one can argue does not require industry
experience, but more important are a re?ned intuition and a “hands-
on” management style, typi?ed by the following comment:
“I walk around the company to observe the critical processes and
identify those that are not performing. . . . I do not have to rely on
(dodgy) management reports that might not be accurate.”
Empowerment or Discipline?
Implementing critical process improvements, particularly in the op-
erational areas of the business, is likely to impact large numbers of
people; and therefore the way in which it is carried out plays a big
role in driving organisational change. While this is the topic of the
next chapter the experienced turnaround leader knows that achieving
some quick process improvement wins can kick-start the organisa-
tional change process.
Many of the turnaround professionals with whom we talked men-
tioned the need to empower or enable their employees to achieve
change. Part of this is for the reasons we have already discussed – that
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CHANGING CRITICAL BUSINESS PROCESSES 167
the employees inside the company have the detailed knowledge and
usually the answers – but part is due to the sheer scale of the change
task. The sheer breadth of the business and the number of issues that
the turnaround leader has to deal with are so great that he or she
often has to lead from a background role, providing resources and
pushing people to achieve change. However to undertake the change
process the turnaround leader often has to do something symbolic
to start the process. Taking a sledge hammer to the company’s prod-
ucts, in full view of the workforce, at the start of a programme to
improve product quality – a story one has heard a number of times –
is typical of such a symbolic move. Box 8.3 describes the turnaround
of a major engineering project and shows the power of symbolism at
work on “Train 18”. This is also an interesting example because it
shows how the turnaround leader looked outside the organisation for
answers to dif?cult process improvement issues.
Box 8.3 Train 18
John Adkins led the turnaround of a major engineering con-
tract. Although this was a project rather than a whole-company
turnaround, John’s leadership approach is relevant to many
turnaround situations, particularly in the areas of critical pro-
cess improvement and organisational change
John’s employer was an Anglo-French entity that had con-
tracted, through a subsidiary, to manufacture and deliver 165
new trains as part of a high-pro?le, government-sponsored in-
frastructure project. The total contract value was over £ 600
million, with a penalty of up to £ 100 million for late delivery.
When John arrived the company was over a year behind sched-
ule and had signi?cant quality problems – in fact, all 17 of the
trains it had delivered so far had been rejected. The customer
was furious and had given the contractor an eight-week deadline
to deliver train number 18 – without faults. The parent com-
pany had strongly held views as to the cause of the problem –
“ the assembly line is out of control” – and John’s remit was to
“?x it”.
John quickly identi?ed the true root cause; the design de-
partment continued to modify the design and speci?cation of
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168 LEADING CORPORATE TURNAROUND
the trains throughout the manufacturing and assembly pro-
cess, causing disruption and delay in production and delivery.
This was exacerbated by a matrix organisation structure with a
“Project Director” who was notionally in charge but was subject
to competing demands from each departmental head.
The ?rst leadership task was to take control and stabilise the
crisis. The plant was spread over a 30-acre site and the senior
team rarely met. On his ?rst day, John called together the senior
team and explained why he was there. He also established two
rules:
1. The senior team would meet on a daily basis – on Train 18!
This would force them to deal with problems as they arose
and to co-operate in ?nding solutions on a timely basis.
2. Ina move analogous to “seizing the cheque book”, he decreed
that once a design had been signed off, no further design
work was permitted without his explicit approval and that he
would only consider further changes if they enhanced safety
and/or reduced costs.
John also asked each key manager, for review the following day,
to produce a list of issues that were preventing their teams from
delivering on time and on spec. Having got all the problems
on the table, the managers were forced to co-operate to resolve
themat their daily meeting – on Train 18. Train 18 was delivered
on time and without defects or complaints and the immediate
crisis was averted.
The next leadership task was to address the underlying processes
that had given rise to the crisis and prevent a recurrence. John
started with the organisational structure. The matrix organisa-
tion was dismantled. Projects were at the heart of the business
and this was re?ected in a project-driven structure, with the
Project Director given both responsibility and accountability
for delivery. Project of?ces were built at the centre of the site
and regular team meetings were held there once Train 18 had
been delivered. John visibly led from the front, taking personal
responsibility for the ?rst project (Train 18) and walking the
two half-mile-long assembly lines twice daily, to stay close to
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CHANGING CRITICAL BUSINESS PROCESSES 169
the production process and address problems as and when they
arose.
Despite “freezing” the design process and getting Train 18 out
on time and to spec, the trains coming off the lines were still
hugely over budget, driven by inef?ciencies in production and
assembly. In particular, there was an inability to complete allo-
cated work within the required stage of assembly. Consequently,
the problems rolled forward to the next stage and by the end of
the line there were numerous incomplete sections and a huge
snagging list to address.
John did not have extensive production experience, but he knew
that the company needed a better way to operate and that “see-
ing was believing”. He identi?ed leading edge companies oper-
ating in similar ?elds and selected one – Jaguar – as an example
of what could be achieved. Jaguar’s management allowed John
to take coach loads of workers to visit their plants and learn from
their experience. This allowed him to build a shared vision of
a better way of operating. Over the next few months, several
process changes were implemented and unit rate costs dropped
towards budgeted levels. However, step changes were needed
in the technical process and this required expertise beyond the
existing management’s capability. John drew on the deep engi-
neering expertise available in the wider parent company group,
using French engineers to challenge current work practices and
re-engineer the production line. In order to implement change,
he would shut down a production line for a day or even for two
weeks in one instance. This had never been done before but it
sent a powerful message to the workforce: “We are not going
on until it’s ?xed.” By the end of John’s tenure, the company
was delivering 2.5 trains per week, a remarkable turnaround in
performance that allowed him to negotiate away any threat of
liquidated damages from the customer.
Probably more important than a few decisive symbolic moves is the
way in which the turnaround leader often has to instil discipline into
an organisation’s processes. Empowerment, and the accompanying
delegation that goes with it, may be important ingredients in building
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170 LEADING CORPORATE TURNAROUND
an appropriate organisation for the future, but are often inappropri-
ate for short-term process improvements. For example, in turning
around a shipyard that had a large Ministry of Defence contract, the
turnaround executive knew that the only way the contract could be
pro?table was to ensure that all extra work, no matter how small, was
recorded. He also required top quality work (“if I can’t eat my break-
fast off the deck of this boat when it sails, this yard shuts”). To ensure
that this happened he would arrive at any time of the day or night
and check the detail. Such visible hands-on leadership, focusing on
the detail, is often necessary in a turnaround. At Stolt Offshore, Tom
Ehret adopted a similar hands-on approach to ensure that rigorous
standards were established for bidding, contracting and risk assess-
ment (see Box 8.4).
Box 8.4 Stolt Offshore
Stolt Offshore SA (“SOSA”) is one of the world’s leading con-
tractors to the offshore oil and gas industry, building and in-
stalling pipelines and other structures to bring oil and gas from
the seabed to the surface in deep-water locations around the
world. Formerly a subsidiary of the Stolt-Nielsen Group, a
Norwegian conglomerate, SOSA sailed into troubled waters in
2002/2003 after an acquisition spree in the late 1990s.
Until 1997, SOSAwas a pro?table North Sea operator. Aglobal
expansion strategy was executed through a series of over-priced
and poorly integrated acquisitions. In particular a “turn key”
contractor called EPTMwas acquired in France but was subject
to little control or oversight from the acquirer. EPTM entered
into a number of substantial ?xed price contracts for construc-
tion work offshore West Africa on poorly negotiated terms, in
a bid to buy market share. By the end of 2002, it was appar-
ent that substantial losses would be incurred on these contracts
and debt levels soared as contractual disputes arose and SOSA
funded the losses.
In Spring 2003, a new leader – industry veteran Tom Ehret –
was appointed as CEO, with a mandate to restore the business
to the levels of pro?tability enjoyed by its peers. Tom’s imme-
diate task, assisted by new CFO Stuart Jackson, was to stabilise
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CHANGING CRITICAL BUSINESS PROCESSES 171
the crisis. While work commenced on addressing the ?nancial
challenges faced by the company (see Box 10.3), Tom took op-
erational control. He immediately put a halt to all tendering
activity while he implemented rigorous risk management and
review procedures, to ensure that further loss-making contracts
were not being accepted. For the ?rst few months every tender,
whether for $1 million or $100 million, required Tom’s approval.
He also dismantled the matrix management structure that had
made responsibility for the catastrophic projects opaque at best.
He established a clear structure of regional managing directors,
each responsible and accountable for all projects and the P&L
within his region.
It took several months to get to the bottom of the problems
on the “legacy” EPTM contracts. By the time this had been
achieved, the necessary provisions made and the acquired assets
written down to market value, 80% of the company’s net worth
had been eliminated. It was critical to get to the truth, and when
project managers were found to be holding back information or
concealing problems, they were ?red, thus sending a message
to the workforce that such behaviour would not be tolerated.
In parallel, Tom developed a strategy for recovery: the
“Blueprint” that he communicated throughout the organisa-
tion in a series of roadshows and to external stakeholders, in
particular the lenders. The strategy focused the business on
three areas where SOSA had a distinct competitive advantage
and required an exit from all non-core assets or activities. It
was supported by a framework of new commercial disciplines,
which would be set and enforced by a new corporate team of
functional heads, working alongside the regional managing di-
rectors. Seventy per cent of the senior management team were
changed over the course of a few months to ensure that the ca-
pabilities and attitudes were in place to make this happen. In
particular, Tom instilled group-wide engineering standards and
project management disciplines, including monthly reviews of
every contract. Most importantly, rigorous standards were es-
tablished for bidding, contracting and risk assessment. Tenders
that were not presented for review in the correct format, or did
not meet the new risk management criteria, were not submitted
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172 LEADING CORPORATE TURNAROUND
to customers, regardless of the impact on the order book. Tom
was determined to embed the new disciplines and was prepared
to turn away business in the short term in order to achieve this.
Tom had to rely heavily on his track record and reputation af-
ter nearly 30 years in the industry to retain the support of key
customers and suppliers and spent much of his time in direct
communication with them. His personal credibility was critical
to SOSAcontinuing to win work during a period of tremendous
uncertainty and instability. In addition, he had a very clear vision
of what needed to be done and with the support of his newman-
agement team, quickly brought the “Blueprint” to life. Within
12 months, SOSA had generated over $100 million from the
sale of non-core assets, collected over $100 million of disputed
contractual payments from customers, won the largest contract
in its history while rigorously applying the new commercial dis-
ciplines and substantially reduced its cost base, demonstrating
its viability and paving the way for a full-scale ?nancial restruc-
turing.
The leadership role in achieving critical process improvements is
often underestimated and, as a result, processes get only a “quick
?x” and do not provide the foundation for sustainable recovery. The
leader has a ?ne balancing act to maintain. He or she must combine
hands-off management to allow ownership and people development
while, at the same time, being involved in the detail.
At Lee Cooper, for example (see Chapter 7, Box 7.3), the main pro-
cess improvements were in the supply chain and in the Tunisian fac-
tory. In the factory £ 1m was saved in the ?rst 12 months and an
additional £ 0.5 million in year 2 (20% of operational costs in total),
while lead times were reduced from 26 weeks to 8 weeks. How was
this achieved? According to Paul Hick:
“We set the Tunisian factory management the challenge of becom-
ing a world-class manufacturing unit with our full support. They set
up 8 project teams of middle managers delivering 18 projects, each
sponsored by a member of the executive – their enthusiasm and moti-
vation at delivering these results was infectious between the teams and
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CHANGING CRITICAL BUSINESS PROCESSES 173
inspirational to watch” . . . For the international group as a whole we
brought together the 65 senior and middle managers for an annual
two-day workshop for three years. In the ?rst, the proportion of time
spent presenting by the executive was 80% of the time. This was their
pride and achievement in delivering their plan (rather than the execu-
tives). The year on year visible transformation in marketing, market
development, product innovation, retail development, supply chain
improvement and manufacturing was powerful and motivational for
the whole team.”
Using Advisers as Leaders
We are not great advocates of using consultants and advisers in
turnaround situations, since by de?nition they are not decision mak-
ers and implementers. However advisers can sometimes play a crucial
leadership role in bringing about change, if they can have the sup-
port of a chief executive who is prepared to “do what they say”. To
be effective, advisers have to have personal credibility and the energy
and passion to push management into decision making and action.
Most management consultants are not suitable for turnaround situa-
tions since they lack the practical experience of getting action quickly.
Change management has become a fashionable term but most of
those who practise it in consultancy ?rms either lack credibility with
top teams or take a cumbersome approach – which is too slow (and
often too expensive), at least in the early stages of a turnaround.
Box 8.5 shows an example of an approach where the adviser played
a real leadership role in achieving dramatic change in some critical
processes over a 10-week period. If this facilitation style of leadership
is to work, the CEOhas to accept and support the adviser. Usually by
the time a company is in trouble the CEO has retrenched mentally
and is not open to outsiders doing what he blatantly ought to be
doing himself. In the example in Box 8.5 the CEO was under a lot of
pressure and was only too pleased to have the new ?nance director
take the initiative of bringing in an outside adviser as a facilitator.
While the company made rapid progress as the result of this outside
intervention, it was not a surprise to anyone when the CEO was
eventually replaced several months later!
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174 LEADING CORPORATE TURNAROUND
Box 8.5 Example of how Advisers can Lead Critical Process
Change in a Turnaround
The UK division of a multinational consumer goods company
with UK sales of over £ 600 million was still pro?table but se-
riously under-performing. One of the big strategy consultancy
focus had developed a new strategy for the business two years
earlier andthere were four separate ?rms of change management
consultants working on different initiatives. None of this activ-
ity, however, was producing bottom line results. A new ?nance
director was the trigger for bringing in an external turnaround
adviser with a brief to focus on the demand generation side of
the business. While the cost base of the business was an issue,
the plants supplying the UK were not under the control of the
UK division.
Approach
The adviser took the following seven-step approach:
r
Reviewed the existing strategic plan and current market data.
r
Facilitated an initial two-day Board workshop to challenge the
relevance of each core element of strategy, to review progress
to date and to identify the current strategic priorities.
r
At the same time he undertook a rigorous analytical review of
the key assumptions driving the ?nancial performance of the
business in the light of customer and competitor conditions.
He did this by “drilling down” into each key component of
the budget and doing a reality check against recent historical
data.
r
He facilitated a further Board workshop at which the strategy
was modi?ed, and it was agreed to focus on ?ve areas crucial
to the delivery of the new strategy over the next 12 months.
r
Five project teams, each led by a director, were assembled to
prepare action plans for each of the key areas, and these were
facilitated by the adviser.
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CHANGING CRITICAL BUSINESS PROCESSES 175
r
The results of the project teams were reviewed and agreed
at two further one-day Board workshops facilitated by the
adviser.
r
The adviser project managed and monitored the implemen-
tation of the action plans.
Results
The project achieved the following results:
r
A fundamental shift in marketing strategy and tactics to focus
resources into the areas with the most potential for strategic
advantage over competitors.
r
The new product development process and associated organ-
isational support was improved to reduce new product lead
time by 50%.
r
The customer base was regrouped into more relevant sectors
and the sales approach was aligned to each one.
r
Unnecessary and inappropriate activities that wasted already
scarce resources were identi?ed and eliminated.
r
Revenue and margin growth was achieved within six months
of starting the process.
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176
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9
Leading Organisational
Change
F
on a co:iaNv 1o co 1nnoccn a 1cnNanocNb aNb reach
a stage of sustainable recovery usually requires fundamental
change to the internal processes (see previous chapter) and the organ-
isational culture. However, as they have neither the time nor patience,
the ?nancial stakeholders in a turnaround are often not prepared to
wait and support deep-seated organisational change. As soon as the
business is stabilised and/or shows improved pro?tability, they may
want to sell their investment. In most other cases, the turnaround
leader wants to leave after stabilisation is complete but before a sus-
tainable recovery is guaranteed. There is therefore a limit to the or-
ganisational change that can be achieved when the turnaround leader
either moves on after six months or has a reward package geared only
to short-term results. These individuals leave it to subsequent man-
agement to rebuild the organisation and bring about a fundamental
change in culture.
The organisational change process actually begins as soon as the
turnaround leader starts to show leadership – usually by commu-
nicating to the organisation why he or she has arrived (see Chapter
4). The normal psychological reaction of most managers and em-
ployees when faced with this situation is to feel threatened, in which
case they may “close down” and be resistant to change.
In the very early stages of the turnaround, there may be very little sign
of change for most managers and employees because the turnaround
leader is likely to be heavily involved in implementing emergency
measures to generate cash and holding frequent discussions with key
stakeholder groups. However, as soon as his or her attention is turned
177
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178 LEADING CORPORATE TURNAROUND
to changing the management team, introducing newtight control sys-
tems, cost reduction and other critical activities necessary to stabilise
the company, more and more people will start to feel the pressure
for change. Key managers will recognise that unless they accept the
need for change and implement change rapidly, they will be removed.
Financial and management controls will emphasise targets and ac-
countability. Early cost reduction measures will result in some people
working harder, under-performing colleagues being ?red and a recog-
nition that jobs are not secure. Morale may decline as the changes
start to bite. If all of this is supported by well-planned and frequent
communication, as is usually the case with experienced turnaround
leaders, the organisation culture will start to change – but slowly.
“When a company has been poorly managed for a long time managers
and staff alike will probably be quite cynical about senior manage-
ment. They will have seen top management saying one thing and
doing another, hiding the truth, not communicating and failing to
deliver as promised. Turnaround leaders are used to this and know
that if they are to develop a more performance-oriented culture they
must engage staff in the change process. They must explain decisions
and demonstrate that they are being objective and fair.”
However communications alone are not enough. Before people
change their behaviour in a lasting way something more than good
communication is necessary. It is necessary to involve people who
are willing to change in building the neworganisation. Unfortunately,
in the early stages of a turnaround where survival is the only objective,
the turnaround leader and his or her management team do not have
the time to involve large numbers of people either in decision mak-
ing itself or in discussing the appropriate implementation processes.
They tend to adopt an autocratic approach to get the short-term re-
sults (as discussed in Chapters 4 and 5) that are required, but in so
doing they have not really changed how people think and work.
The most important organisational lever for short-term change is, of
course, changing the senior management. The more that are changed
the bigger the opportunity for kick-starting the development of a new
culture. The credibility of a new management team can provide a
strong base for rebuilding morale as the turnaround gains momen-
tum. The removal of the previous management releases energy. The
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LEADING ORGANISATIONAL CHANGE 179
other short-term levers that can drive short-term performance im-
provement are:
r
Simplifying and clarifying the organisation structure.
r
Building ownership and commitment to change by involving staff
in the improvement process.
r
Ensure accountability through the introduction of simple perfor-
mance measurement systems.
r
Continuing to “over-communicate”.
r
Aligning rewards and incentive compensation to the turnaround
goals.
r
Training in focused areas to support critical process improve-
ments.
In all these areas nothing will happen without the drive and commit-
ment of the turnaround leader. Developing new incentive schemes
and identifying emergency training needs are clearly managerial tasks
but, as with everything else in a turnaround, the leader needs to be
involved in overseeing the details and project manage the processes
if the desired results are to be achieved.
Simplifying The Organisation Structure
We explained in our earlier book, Corporate Turnaround, why changes
to the organisation structure should be kept to a minimum in the
?rst stages of a turnaround to avoid the risks always associated with
structural change. While the general opinion of turnaround leaders is
that changing the organisation structure should be avoided if possible,
particularly before stabilisation is complete, it can nevertheless be a
useful tool for simplifying the business and gaining direct control over
key parts of the company. In the longer term, as the leader begins to
delegate and empower, more decentralisation can be appropriate and
the organisation structure can be adapted accordingly.
However, we did identify several situations where structural change
can be a key ingredient of the turnaround process. One of these was
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180 LEADING CORPORATE TURNAROUND
to help to gain management control over the business. This happened
at Marconi, where Mike Parton collapsed the corporate head of?ce
and the three operating divisions into one structure. Not only did
this take costs out by reducing the senior management team from 52
to 12 (excluding the effect of disposals) and do away with ?efdoms,
but also centralised control over the 12 operating units that remained
after the divestment programme.
Many companies in distress have confused and complicated organi-
sation structures, which have often been a contributing factor to the
organisation’s troubles. The most important organisational change
a new leader can often make is to simplify the organisation struc-
ture. In the process, roles and responsibilities can be clari?ed and
accountability improved. This is particularly true in large companies
with multiple business units in different geographies and/or different
sectors. As one chief executive said to us:
“The company got into trouble in the ?rst place because the business
unit general managers were always able to point the ?nger at other
units or functions when they missed their budgets . . . it was a complete
blame culture with no real accountability . . . you cannot talk about
synergy and leveraging capabilities in a turnaround . . . you must sim-
plify the structure and focus managers on their own businesses.”
Building Commitment To Change
We see the biggest variation in leadership styles when we analyse
how turnaround leaders manage organisational change. Some do
not even attempt it – they are the short-term “transactional” leaders
for whom people management skills are not an organisational prior-
ity when survival is the issue and, for them, motivational aspects of
leadership are seen as a luxury. A few are transformational leaders
building for the longer term. Most turnaround leaders, however, are
somewhere in between the two ends of this spectrum. The differ-
ence lies in their personal style and philosophy based on a combi-
nation of personality attributes and prior experience. Sometimes the
demands of the business require an immediate culture change (see
Box 9.1).
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Box 9.1 Organisational Change Critical to Turnaround
Bill Price was brought in to turn around a family controlled
of?ce-moving company, where the bank was worried about its
£5 million overdraft which was poorly secured. Management
was a shambles, priorities were unclear; and there were a lot of
serious quality issues and customer complaints. Bill described
it as follows:
“There were six females and four male dancers and a choreog-
rapher working in the company! There was nobody responsible
for quality control. So together with the bank we forced out the
owners, ?red the dancers and brought in a real ‘sergeant major’
from one of the competitors as quality control manager. We had
to coach him not just to bludgeon people all the time but also to
have a softer side, rewarding staff with a £50 bonus for quality
improvements. We completely turned around customer satisfac-
tion levels but it required a huge culture change. . . . Sometimes
the medium term issues need to be done.”
An increasing number of turnaround leaders now recognise that if
they are to ?x the business they must start to involve the middle
management levels and belowin the change process soon after arrival.
The autocratic approach, while effective in the short term to ensure
survival, will not provide the foundations necessary to ?x the business.
Even turnaround executives who stay only a short period (e.g. less
than six months) and focus on short-term wins say it is important to
push decisions down:
“Pushing decisions down to incumbent management starts to breed a
sense of self-reliance within the organisation.”
This practitioner’s approach is to try to persuade the organisation to
be more decisive by making people take responsibility if they want to
achieve the outcome they prefer:
“It is important people learn not to be afraid to make decisions which
means they must be allowed to make the occasional mistake . . . ..
Management gets in the way of people trying to do a job. People
actually want to do a job well.”
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182 LEADING CORPORATE TURNAROUND
Giving people freedom to do their job and achieve goals can be dif?-
cult if the leadership style of the previous management was autocratic
and hierarchical. In such situations it takes much longer to loosen
things up and get people to come forward and take responsibility.
Unlike the insolvency practitioner who can rely on the power inherent
in his or her legal position, the turnaround leader has to rely on his or
her ability to get people on board. One turnaround practitioner tries
to “empower all the managers and employees so they collectively make the
decision on who the non-performers are and who should be asked to leave”.
He goes on to say:
“I believe in listening to employees and allowing themto make the right
decision for the company. My style is not about taking full control of
everything and directing . . . believe in empowering people and making
them see the desired goal. A single person cannot make the complete
turnaround . . . until ownership is transferred to all employees it is
dif?cult to achieve a true turnaround.”
This practitioner’s leadership style has been heavily in?uenced by the
state of some businesses he has taken over which had previously been
through “a so-called turnaround”. These businesses had been poorly
run by turnaround managers who had a “frantic autocratic style” –
everything had to be done today – and where they did not listen to
what incumbent managers and employees had to say.
Other practitioners emphasise howit is important early on in the pro-
cess to share understanding and decision-making. One practitioner
generates early buy-in by organising what he calls strategy workshops
as a means of crystallising problems and identifying a recovery plan.
He acts as the workshop facilitator and ?nds that the process gener-
ates a strong sense of buy-in (not very dissimilar from the adviser’s
approach outlined in box 8.5).
Involving people early on would appear to be bene?cial since, in most
turnarounds, the answers are sitting there within the organisation.
However, virtually all the practitioners emphasise the need to main-
tain tight controls until the company has been stabilised. In practice
what we see is a gradual relaxation of the initial very tight controls
as the most urgent problems are solved and a recovery plan has been
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LEADING ORGANISATIONAL CHANGE 183
put in place. One practitioner says that she explains face-to-face with
the management how she intends to work with them:
“I let them know I will be speci?c, insultingly so, and closely mon-
itoring them in the ?rst assignment. I will then be less so with the
following tasks as mutual trust starts to build.”
Close monitoring of activities means just what it says. In the initial
stages, turnaround leaders will have progress meetings at least daily
and sometimes more frequently, to ensure that results are achieved.
One turnaround practitioner we knowhas a meeting at the beginning
of the day and at the end – and no one goes home until the day’s tasks
are completed! Others talk about producing and monitoring action
plans but “nothing is ever more than 10 days away”. The process is
very hands-on and controlled directly by the turnaround leader or
one of his or her trusted “side kicks”.
Early involvement does mean some delegation and the start of em-
powerment, but it is a long way from the classic textbook de?nition
of empowerment. You cannot empower an organisation that lacks
discipline and processes, otherwise chaos will ensue. Empowerment
in a turnaround means involvement not delegation, and only slowly is
this released as the organisation moves into transformation mode.
The leadership style is likely to remain highly centralised and tightly
controlled until performance is assured:
“I give managers the ?exibility to innovate and improve around the
new strategy. . . . But any nasty surprise will most likely result in the
termination of the relevant manager’s employment.”
Contrary to popular belief many turnaround leaders, particularly
those who are there beyond the crisis stabilisation stage, go out of
their way to try to convince people to change. Paul Hick, for exam-
ple, at Lee Cooper (see Box 7.3) retained people who were slow and
resistant to change but those who were “obstacles” were asked to
leave. This view is echoed by another practitioner who says:
“I prefer to understand the nature of resistance and deal with it by
explaining my objectives and trying to understand the reason for re-
sistance. If I am unable to convince the individual and build a co-
operative process, I will terminate his or her employment.”
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It is obvious from talking to practitioners that they are clear on where
they are going and what they are trying to achieve. They may be
?exible on how it is done but will not let anyone stand in the way of
achieving it. This is best summed up in the following quote:
“I try to involve as many people as possible in formulating a problem
and ?nding the solution. On the surface it looks like a collective
decision-making process but in reality . . . I arrive with a clear decision
in my mind. If this decision does not ?nd support among my colleagues,
I assume responsibility and insist on the decision I believe is the best
one.”
Involving lots of people is what Patrick O’Sullivan did at Zurich
Financial Services in the UKwhere he used the GEWork Out method
to involve all levels of his organisation in looking for improvements.
However, he was equally tough with under-performers in the man-
agement team (see Box 9.2).
Box 9.2 Culture Change at Zurich Financial Services (UK)
When Patrick O’Sullivan was appointed chief executive of Eagle
Star insurance in 1997, he had no idea how bad the ?nancial
situation was. Three months later it was announced that Eagle
Star was to be acquired by Zurich Financial Services, and would
be merged with their UK general insurance business. Patrick
became Chief Executive of the combinedentity whenthe merger
was concluded. Right from the start he attempted to involve
all employees in generating quick wins. With a background in
GE Capital, O’Sullivan used the GE Work Out Process to help
him. The process
?
allowed employees to submit initiatives to the
management team at town hall style meetings. The only rules
were:
r
The initiatives had to come from the employees, usually those
on the front line.
r
They had to be capable of implementation in 6–12 weeks.
?
See Dave Ulrich, Steve Kerr and Ron Ashkenas, The GE Work-Out,
McGraw-Hill, 2002.
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LEADING ORGANISATIONAL CHANGE 185
r
Management had to take an immediate decision as to whether
to implement the initiative or reject it. The only acceptable
answers were “yes” or “no”. No further review or analysis
was permitted.
r
The employees’ line managers could not over-rule the deci-
sion or obstruct the implementation in any way.
This process was a powerful tool, both to build employee morale
and involvement in the turnaround and to generate multiple
ideas for improvement customer services, reducing costs or op-
erating cash.
However, the challenge was to get the idea of constant change
embedded and make it happen on an ongoing basis. He says:
“How many companies go through rapid change and then go
backwards because they have not learned to make change a
permanent part of what they do?”
He acknowledges that it was very dif?cult and required total
commitment and dedication, but as he says:
“You must get buy-in so that people feel ownership of the new
environment and want to work together.”
Deep-seated change necessitated tough people decisions:
“If the culture was to change fundamentally I had to change
front to back . . . not just get rid of the senior management team
(which he did) but all the permafrost and the only way to ?nd
them is to get in the front line yourself.”
As an example, he relates how he observed a senior executive
continuing to exhibit behaviour inconsistent with the values he
was trying to embed. He gave him a chance but on the third
occasion he took him out of a meeting and dismissed him on
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186 LEADING CORPORATE TURNAROUND
the spot:
“I couldn’t afford for the team to see X was bucking the trend
of what we wanted to happen.”
O’Sullivan believes that the workout process was fundamental
in helping to achieve sustainable culture change. He says:
“There is no simple way of doing it but we had to go fast, deep
and take dramatic action to make things change.”
Accountability and Performance Management
Making managers and employees accountable for meeting budgets,
targets, deadlines, etc., is one of the critical levers of short-term or-
ganisational change. It is the ?rst step in building a performance or
results-oriented culture. In most turnaround situations we ?nd that
managers have not been held accountable for results, and the exis-
tence of a performance management systemis no guarantee that man-
agers are accountable. It is only when senior management are seen to
deal with poor performance by removing individuals from their jobs
that the concept of accountability starts to have traction. Even then, if
the reasons for removal are not clearly communicated within the or-
ganisation (perhaps through the management “grapevine”), change
will be very slow.
In the early days of a turnaround, the notion of accountability can
instil fear into many employees if it is not seen to be “fair”. There may
be some short-term wins by continually communicating the need for
accountability and ?ring some under-performers, but true account-
ability requires a simple performance management systemto support
it. Most performance management systems are overly complicated
and designed by under-employed HR departments. What is required
is something simple, objective and aligned to the immediate needs of
the business.
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Interestingly, one of the mistakes Lou Gerstner made at IBM was
his failure to put in such a system soon after arriving. It was only
18 months later, after a conversation with a senior colleague, that
he realised he needed to turn his “win, execute, team” mantra into a
simpli?ed performance management system. The newPersonal Busi-
ness Commitment programme required managers to list their actions
under the three headings – and this was linked to a newperformance-
indexed compensation system.
Performance management andrewards are closely linkedinthe minds
of most turnaround leaders (even though HR professionals often
like to keep them separate from a personal development perspec-
tive). Changing reward systems – particularly bonus and incentive
systems – is a key component in many turnaround strategies. The
leadership skills of the turnaround practitioners are clearly important
in the way they communicate why reward systems are being changed,
and ensuring that they are seen to be fair.
Strong turnaround leaders are sometimes able to negotiate very at-
tractive incentive packages for themselves and their top management
teams. At Marconi, for example, Mike Parton and his team obtained
9% of the equity after ?nancial restructuring.
Communications
Every turnaround leader interviewed for the research underlying
this book stressed the importance of communications during the
turnaround process. It underpins every successful turnaround. On-
going communication with managers and employees is absolutely
essential:
“Unless people tell you you are sounding ‘like an old record’ you are
not getting your message through.”
Many companies in trouble have historically had a hierarchical struc-
ture with poor communications, and when a new leader arrives with
a more informal style and an open-door policy there is perceived to
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188 LEADING CORPORATE TURNAROUND
be an immediate change. In the early days of a turnaround the biggest
problemfor the turnaroundleader is likely to be the inability andoften
unwillingness of senior and middle management to communicate the
new leader’s message down the organisation. Not surprisingly, many
turnaround leaders feel they need to bypass the existing management
communications system (if indeed one exists) and talk directly to all
employees. In large, geographically dispersed businesses this is not al-
ways easy and video conferencing, conference calls, e-mails and other
technology may be employed to assist the communication process.
After stabilisation has been achieved and the leader turns his or her
attention to ?xing the business, the best leaders will ensure that an
effective communication cascade is in place and will discipline senior
and middle managers who do not comply.
The leader needs to establish a regular process that must balance the
need for frequency with having content worthy of communicating.
Weekly communication is usually about right. Communication must
have some impact and be interesting to ensure that people remain fo-
cused. People like public praise: it is important to use communication
to reward and motivate.
Communication is, as we know, a two-way process and the sooner
the turnaround leader engages in dialogue with the staff the sooner
he or she can begin to have a real impact on organisational behaviour.
The informal style of most turnaround leaders means that they chat
freely and they practise “management by walking around”, asking
questions and seeking opinions. As the crisis of survival subsides, the
communication programme may become more institutionalised, but
the leader should be careful not to resume “business as normal” too
soon. One successful leader developed a three-pronged communica-
tion programme as follows:
r
Talking with the CEO – monthly meetings with groups of em-
ployees.
r
Management workshops between employees and supervisors.
r
An annual workforce assembly (on a plant by plant basis) where
the CEO shared results and plans with the workforce.
In earlier research, one of the authors identi?ed improved communi-
cation as the most noticeable aspect of organisational change during
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a typical turnaround. This is echoed by one turnaround executive
who says:
“My prime organisational concern is that the openness and commu-
nication that I foster remains after my departure.”
Transition to Transformation
To achieve long-lasting sustainable recovery – which we believe is only
possible for a relatively small percentage of all the companies that get
into trouble (say 20%at the most) – the turnaround leader has to exit
or change his or her leadership style. A few are demonstrably able to
do this and are motivated to do so – usually by equity ownership.
Their secret is their ability not just to involve people but to delegate
real responsibility as far down the organisation as possible. Only then
is a real and lasting change of culture brought about.
Those leaders who go beyond turnaround into transformation start
to involve their people as early as they can, although, initially, they
are always directive and if necessary autocratic. They are, however,
aware of the need for culture change. Thus at Riva Plc, a software
company where Peter Giles is chairman, he personally developed and
facilitated workshops with teams from different countries in order to
rethink products and processes. He believes that teamwork was an
important foundation stone to achieve behaviour change and hence
culture change in the organisation. Although the consultative process
was very hard and painful in the beginning, participation and interac-
tion clearly helped employees to implement change more effectively.
Successful transition to sustainable recovery requires wide delegation
and empowerment. Until “ownership” is transferred to a wide body
of employees sustainable recovery cannot be achieved. This is true
leadership, and is well illustrated by the transformation at Zurich
Financial Services (UK) – see Box 9.2
For delegation and empowerment to be successful, however, the
turnaround leader has to be “hands-on” in making it happen. John
Ball at Libertys department store believes that the key to change is for
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190 LEADING CORPORATE TURNAROUND
him not to take on any of the decision-making. However, he attends
all staff meetings to ensure that employees are empowered to develop
their ideas:
“If an issue is raised at a meeting I push the issue back to the staff and
ask them to come up with a solution. I force the staff to set and control
the agenda and priorities for their own areas. By doing this I push
ownership and responsibility back to the staff who can do something
about the issue. I am only interested in ensuring that the decisions ?t
into the overall recovery plan.”
As the company moves out of turnaround, the steely determination
of the company doctor remains. He continues to have clear goals and
believes in what he is trying to achieve. Thus at software company
Riva, Peter Giles has no hesitation in ?ring people if they are unwilling
to share their knowledge or are too bureaucratic in their approach.
He knows the type of culture he is trying to build for the long term
and will not be pushed off course.
One of the best examples of where a leader radically changed his
leadership style was shown at the Clares Group (see Box 9.3). As
the organisation progressed out of crisis and a new strategy was put
in place, John Ensall, the CEO, increasingly relaxed control. He set
levels for capital expenditure, employment, pay reviews and stock
purchasing but gave the ?ve divisional directors progressively more
leeway to run their business units. Over the next 18 months as the
directors continued to meet their business plan objectives, they were
given more and more ?exibility and power. During this time John
changed from an autocratic leadership style to a much more collab-
orative style, where he saw himself as “more of a facilitator, encourager,
supporter and counsellor than a chief executive”. This is well summed
up in a quotation from one of his employees:
“When he (John) ?rst came into the business we were very scared
of him. . . . (We) thought he was a dictator who thought he was
God’s gift. However we appreciated that he had knowledge and intel-
lect . . . he knewwhat he wanted to do. Nowwe see himas a colleague,
a good friend, a CEO who gives us power and real responsibility but
who is very supportive and able to discuss things with us.”
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LEADING ORGANISATIONAL CHANGE 191
Box 9.3 The Growth Phase At Clares Group
(See also Box 7.5 )
The turnaround process at Clares Group lasted for almost two
years. By the end of Year 3, sales had doubled as a result of
organic growth and acquisition and return on capital employed
was over 40%.
During the growth phase of the organisation, John’s leadership
style changed dramatically. While he continued to have very
close relationships and a lot of communication with his direc-
tors, the relationship was different from that during the early
days of the turnaround. John began to play more of a consul-
tancy role, acting more like a coach than a direct manager of
his ?ve directors. The managers saw him as someone who was
involved with the overall direction of the company rather than
with the day-to-day operations. Managers seemed to appreciate
their power and preferred to be left to do their daily work.
Contrary to his early days in the business, John rarely met with
his staff and employees in a formal way, leaving this responsi-
bility with the ?ve directors. Instead, John walked around the
organisation in a very informal, even social manner, “chatting”
to his employees as he passed by. Communication from John
also changed considerably. Since John was less involved with
the company’s processes, he rarely held one-sided lecture-type
meetings or posted memos on SEC’s notice-boards. Instead
John spent his time on Clares long-term strategy, acquisitions
and shareholder communications.
An example of a dramatic transformation in a relatively short period
of time is provided by the South African diamond mining company
Trans Hex, to which we have already referred in earlier chapters.
Calvyn Gardner involved all the workforce in the change process
that led to a signi?cant culture change – and although this was so
important it is often dif?cult to achieve in a geographically dispersed
organisation (see Box 9.4).
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192 LEADING CORPORATE TURNAROUND
Box 9.4 Culture Change At Trans Hex
(See also Boxes 4.2 and 6.2 )
By the time Calvyn Gardner left Trans Hex in March 2004,
the company had not only been turned around ?nancially but
had embarked on an ambitious growth strategy involving new
mine investments in Angola (“world class assets – better by miles
than the rest of our mines”) and investment in off-shore mining.
However, his lasting achievement is the culture change he in-
stilled into the organisation. There is now a clear emphasis on
teamwork, mutual respect and racial tolerance. This is most no-
ticeable at the mines where a combination of a changed leader-
ship style and Gardner’s actions in promoting employee welfare
have contributed to almost a family atmosphere. Gardner be-
lieves that the family atmosphere makes possible the corporate
discipline he requires: “Everyone here believes in what we are try-
ing to do. There is the belief that if you pull your weight and you work
hard, you will grow with this company.” Corporate discipline dic-
tates that individual performance is measured on a “per head”
productivity basis. But at the same time, employees are encour-
aged to grow and improve their communal as well as individual
opportunities through various training programmes offered by
the company.
Gardner has involved all the workforce in the change process
giving them opportunities to take the initiative and explore im-
provement possibilities as they identify them. Gardner describes
his approach:
“Some of the guys (at the mines) had some good ideas. Maybe
they weren’t ‘perfect’, but they were ‘good’. And once you start
letting guys put good ideas in, you’re one step better than where
you were before. That is truly the philosophy here. Never let the
perfect be the enemy of the good. If it’s better, even if it’s just 1%
better, do it. Okay? Just do it. Because what does it do? It builds
con?dence. The guy gets success. And next time, it’s not going to
be a 1% improvement he brings you, it’s going to be 15%. But
if you say no, don’t do it, and it was a good idea, then the next
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LEADING ORGANISATIONAL CHANGE 193
time, I’m afraid, you might not get your 15% improvement the
day you try to get it.”
This philosophy promotes a culture that works well with the
geographical and operational realities with which Gardner
must contend. He simply cannot be everywhere executing his
turnaround strategy. He has to be able to rely on his teams at
each mine to do that for him.
“One must understand where we are: our mines are remote,
they’re all over the country. And in different countries. We oper-
ate in Namibia in addition to South Africa. We’re in Botswana,
and we’re in Angola. So in my opinion, you have to get a core
team of people around you that actually believe in what you are
doing as much as you do. You have to know that these guys that
you are putting in these remote places will do the job as if you
were there yourself. If we were all in one building I can image
that might be a bit easier. But when you are in all these remote
areas – even on vessels at sea, operating 250 km off-shore – I
need to know that what we are trying to do is in fact being done
in those remote areas, where I may only see these guys once every
couple of months.”
Of necessity, Gardner has installed a culture at Trans Hex that
breeds its own continuing success.
Critical to changing the attitude of employees have been ex-
tensive communication exercises and tangible improvements to
employee welfare. Since taking the helm, Gardner has estab-
lished a centralised health and safety department and improved
employee health and safety at all mines, with disabling injury
frequency down by over 50%. An AIDS awareness campaign
and employee assistance programme was introduced, and every
employee now receives training as regards racial tolerance and
black empowerment. Trans Hex is ahead of its peers in pro-
moting black and coloured employee advancement within the
company – at every level – well beyond government established
quotas and ahead of government timetables set for achieving
more integrated ?rms.
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194 LEADING CORPORATE TURNAROUND
Exiting Gracefully
Knowing when to leave is a crucial leadership skill for the turnaround
professional. Sometimes this is not the professional’s decision as the
investors may sell the company, or the exit parameters may be estab-
lished in advance as part of the turnaround leader’s contract. Where
there is a choice, much will depend on the skills of the turnaround
leader. As should be obvious from the previous chapters in this book,
there is a spectrum of turnaround leaders from those who are essen-
tially chief restructuring of?cers with a largely ?nancial focus or have
a short-term contract to lead the crisis stabilisation phase, to those
who see themselves as the chief executives or chairmen who can lead
a long-term transformation of the business.
Most turnaround practitioners have neither the interest nor the skills
to run a business long term. They enjoy the hands-on style nece-
ssary in a crisis and are quickly bored when routine sets in. Many
turnaround professionals are also aware that their skills are con-
?ned to the stabilisation phase. This is re?ected in the following
comments:
“Most turnaround guys are bad long-term managers.”
“I am not very good at the nurturing of ideas and bringing them to
fruition. . . . My job is to ensure there is a self-suf?cient management
team in place by the end of the ?rst year, at which point my role
becomes advisory.”
“My management style is not suited to ongoing management.”
It would seem that most turnaround leaders know when it is time
to leave and do not overstay their welcome, as the following quotes
illustrate :
“You know when it’s time to leave. The business or the situation stops
changing dramatically, indicating that you are in a steady state.”
“By the time it comes for you to leave you should really be irrelevant.
The role is a bit strange; it’s based on you working yourself out of a
job. By the time I leave no one should notice the difference . . . that is
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LEADING ORGANISATIONAL CHANGE 195
the perfect turnaround. You are not there to run the business for ever,
you are there to provide some options for the stakeholders.”
“The management teamthat is left behind should be capable of taking
the organisation where I could not have.”
When the turnaround leader moves on, it is critically important that
there is a solid foundation of good processes in place and that a new
organisational culture has at least started “to take root”. There are
too many examples of where companies have slipped back to their
old ways of operating as soon as the turnaround executive moves on.
If this is the case, he or she has failed.
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10
Financial Restructuring
I
1 is cLcan 1na1 cvcN ir 1nc 1cnNanocNb Lcabcn caN nLcNb
all the other key ingredients of a successful turnaround but the
business is left unable to service its capital structure, all that effort
will have been for nothing since covenant and other loan document
breaches will soon recur. The ?nancial structure of the company
must invariably be renegotiated to align it to the needs and capac-
ity of the new business that arises from implementation of the other
key ingredients. A ?nancial restructuring normally becomes neces-
sary in companies where, consequential to many factors, the ?nancial
stakeholders’ risk/reward balance has been distorted or broken. We
say normally because in the case where investors acquire discounted
debt with the intention of bene?ting from an upcoming restructur-
ing, they may actively precipitate a restructuring in order to maximize
their returns.
The objectives of a ?nancial restructuring are threefold:
1 To establish a stable capital structure, commensurate with the
enterprise value and cash-generating capacity of the revitalised
business
2 To ensure that the new capital structure re?ects correctly the
economic interests of those stakeholders who will support the
company through its turnaround and does so on the basis of a
balance that is satisfactory to themselves, other stakeholders and
the company. The newstructure will rarely be the same as existed
at the time of the initial participationor investment, but will re?ect
the additional perceived and sometimes actual risk that exists in
the relationship.
3 To restore the risk pro?le (particularly in relation to credit ex-
tended to the company) to that accepted at the time of making the
197
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198 LEADING CORPORATE TURNAROUND
original credit available, subject to the requirements of the ?rst
two objectives. This is normally measured in terms of leverage
and other ?nancial ratios, asset coverage and other covenanted
performance criteria.
In small and medium-sized companies, the capital structure is usu-
ally quite straightforward and depends on a key relationship with one
or two domestic lenders. In such cases, the restructuring will often be
negotiated directly between the company and its stakeholders, based
onthe business planthat has beendevelopedas part of the turnaround
process. The business plan shows the way to recovery and underlying
?nancial models will indicate what the company can afford by way
of debt service and amortisation. The restructuring process becomes
considerably more complicated as companies grow and more ?nan-
cial stakeholders become involved in multi-level capital structures. In
this chapter we have focused on the role of the restructuring leader
in these more complex situations.
As in the other critical phases of the turnaround process, the
turnaround or restructuring practitioner has to have the ability to
“morph” between leadership and management during the ?nancial
restructuring process. He or she has to be both a detailed project
manager, able to navigate through the ?ne print of detailed legal and
commercial negotiations, and a visionary leader who can clearly ar-
ticulate a ?nancially viable “desired end state” that preserves greater
value for stakeholders than the alternative of insolvency.
The leader’s task is both to establish an end game for the process
as well as aligning the multiple parties involved, to achieve a suc-
cessful outcome to the negotiations. Within the ?rmament of broken
promises, lack of initial understanding, and corporate and personal
agendas typical of most turnaround situations, even a modest restruc-
turing can quickly involve 50 to a 100 people. If the leader is to be
successful, he or she has to bring order, create calm, maintain fo-
cus and ?nd a way forward that offends the least number of parties.
The law provides for remedies where parties fail to agree, but it is
usually the case that the application of insolvency procedures further
reduces the value of the enterprise. The alternative, liquidation value
is the ultimate yardstick against which the value preserved through a
consensual restructuring is measured.
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FINANCIAL RESTRUCTURING 199
The Restructuring Leader
As discussed in Chapter 6, leading ?nancial restructuring is increas-
ingly becoming a specialist role within the overall turnaround process.
Our research revealed that very fewof the generalist turnaround prac-
titioners or company doctors we interviewed were habitually involved
in this stage of the restoration of a sick company. The engagement of
a specialist restructuring practitioner to lead the ?nancial restructur-
ing process is a relatively newtrend brought about by the evolution of
the capital markets, the increased complexities of corporate ?nancial
structures and the appreciation of ?nancial stakeholders that consen-
sual restructuring preserves value and therefore insolvency measures
should be the very last resort – not the ?rst.
Prior to the late 1980s, most enterprises were funded through bilat-
eral lending, often by a single lender, with a heavy domestic focus
as the lender and the enterprise were usually from the same coun-
try. Fromthe mid-1990s onwards, multi-banked, syndicated facilities
provided from lenders and investors of many different domiciles be-
came common, together with signi?cant increases in publicly traded
debt, both investment grade and high-yield or “junk” bonds, and pri-
vately placed mezzanine debt and other instruments. For example,
in a company (advised recently by one the authors) that has revenues
approaching €200 million, the capital structure included funding
from ?nancial institutions in Italy, France, the UK and the USA. Bi-
lateral and syndicated facilities were held in three tranches of senior
and mezzanine debt plus subordinated shareholder loans. Such com-
plexity is not uncommon today, fuelled in part by the rise in leveraged
buy-outs and in part by the over-supply of liquidity, which has trick-
led down to smaller companies, enabling them to fund growth at a
lower cost of capital.
In the early 1990s lenders operating in multi-bank situations or syn-
dicates within the UK were subject to a voluntary protocol for dis-
tressed companies, policed by the Bank of England and known rather
quaintly as “The London Approach”. The Bank of England expected
banks that held a licence to operate in the UKto “act like gentlemen”
in supporting a company through its dif?culties, regardless of their
contractual rights as set out in the loan documentation. Inter-creditor
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200 LEADING CORPORATE TURNAROUND
disputes were settled behind closed doors with the in?uence of the
Bank of England brought to bear when necessary. There was very lit-
tle secondary debt trading and the same ?nancial stakeholders were
typically involved from the initial loan through to completion of a
restructuring.
Today we have multiple creditor classes, ?nancial stakeholders based
in numerous jurisdictions, and extensive secondary debt trading
across all classes of ?nancial instruments. The newer entrants to the
market were not familiar or enamoured of an approach that sug-
gested they should not act in accordance with the rights enshrined in
their loan documentation, and it did not take long for “The London
Approach” to wither on the vine.
At the same time as capital structures have become more complicated,
private equity has become a major in?uence in the capital markets.
Today equity stakeholders more effectively resist the pressure of se-
nior debtholders to ‘give up and go away’, leaving the enterprise value
to be carved up among the creditors. In addition, a rescue culture has
developed in the UK, with the leading commercial banks becoming
increasingly reluctant to use insolvency legislation – preferring where
possible to achieve a “consensual” restructuring without recourse to
a formal insolvency process.
It is within this changed framework that we see the emergence of a
new breed of restructuring leader – often referred to as the Chief
Restructuring Of?cer or “CRO”. There is a growing appreciation of
the need for a central person or of?ce to take overall responsibility
for ?nding and implementing a restructuring solution acceptable to
all parties.
“Time is short; strengthening management is always needed, but are
the Board gutsy enough to make the appointment of a CRO team?”
That, says Lachlan Edwards, European head of Restructuring at
N.M. Rothschild & Sons, the investment bank, is the key manage-
ment question.
The Chief Restructuring Of?cer (CRO) role originated in “Chap-
ter 11” restructurings in the USA. Complex capital structures and
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FINANCIAL RESTRUCTURING 201
the consequent requirement for specialist ?nancial restructuring ex-
pertise have been a feature of the US market since the 1990s. As
capital ?ows from the USA to Europe have increased, demand for
similar expertise from both creditors and debtors has brought the
CRO role to Europe.
The Chief Restructuring Of?cer works for the company, can be a spe-
cial adviser to the chairman, the CEO or the Board and often joins
the Board during the restructuring and turnaround process. He or
she is often appointed at an early stage of the process at the insistence
of the principal creditors, who may even make the appointment of a
CRO a condition of support, for example, when a waiver of a breach
of covenant is required. The CRO’s objective is to assist the com-
pany to reach an agreement between all stakeholders on the future
capital structure of the business. Box 10.1 provides a comprehensive
description of the duties of a CRO.
Box 10.1 The Role of the Chief Restructuring Of?cer
r
Manage the “working group” professionals who are assist-
ing the company in the reorganisation process, or who are
working for the company’s various stakeholders, to improve
co-ordination of their effort and individual work product
to be consistent with the company’s overall restructuring
goals.
r
Assist the company in implementing a rolling 13-week cash
?ow forecasting and monitoring process to provide on-time
information related to the company’s liquidity and assist the
company with other treasury-related support as requested.
r
Assist the company in the ongoing development of overall
strategic and business plans, including analysing alternative
strategic plans and exit strategies.
r
Assist the company’s management and its professionals specif-
ically assigned to sourcing, negotiating and implementing any
?nancing, in conjunction with the Plan of Reorganisation and
the overall restructuring.
r
Analyse performance improvement and cash-enhancement
opportunities, including assisting with cost reduction
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202 LEADING CORPORATE TURNAROUND
improvement initiatives, operational improvement initiatives,
accounts receivable management and accounts payable pro-
cess improvement opportunities.
r
Assist the company and its professionals with the analysis and
negotiation of the divestiture of any non-core assets or busi-
ness lines in conjunction with considering other strategic al-
ternatives.
r
Assist management with assessing organisational and opera-
tional structure of the company and work with the company
regarding potential changes and ef?ciencies.
r
Oversee the communications and/or negotiations with outside
constituents, stakeholders and their representatives.
r
Review the company’s information systems capabilities and
make recommendations regarding cost savings and/or down-
sizing initiatives as requested.
In the remainder of this chapter we are going to focus on the role of
the restructuring leader in the following critical activities:
r
Achieving a standstill agreement
r
Understanding stakeholders’ agendas
r
Understanding the corporate’s needs
r
Co-ordinating advisers
r
Leading restructuring negotiations.
Achieving a Standstill Agreement
Often a ?nancial restructuring will commence with a “standstill
agreement”, which provides a stable platform from which the
turnaround can be implemented. A standstill agreement is an agree-
ment (not always legally binding) between the company and all its
?nancial stakeholders whereby the ?nancial stakeholders agree not
to enforce their contractual rights against the company (for exam-
ple, the right to demand repayment or enforce security over assets)
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FINANCIAL RESTRUCTURING 203
subject to certain conditions. Stakeholders usually will not give up
the rights to trade their interest during the standstill period; indeed,
the company is likely to have to give up any rights it previously had to
prevent such transfers of interest, as a condition of a standstill. The
conditions to be complied with will normally include the company
agreeing to:
r
share speci?c information with its lenders on a regular basis;
r
produce an achievable business plan by a given date which sets
out details of the turnaround and how it will be implemented;
r
the appointment of advisers with appropriate experience and
competence to assist the company in meeting the conditions of
the standstill;
r
the appointment of advisers or reporting acountants (at the com-
pany’s cost) to review the business plan and related information
on behalf of the lenders;
r
the creditors having certain additional rights in the event of a
default of the standstill terms.
For a standstill to be achieved it is normally a prerequisite that the
company has stabilised any immediate cash crisis and has suf?cient
funding available (based on a credible short-term cash ?ow fore-
cast) to trade through the anticipated standstill period or has at least
provided evidence that it has credible plans and actions in place to
achieve this. It is also necessary to have established who the ?nancial
stakeholders are and have a good understanding as to their rights and
exposures in the current circumstances. This was discussed in detail
in Chapter 6, Stakeholder Management.
Many standstill agreements are entered into in the expectation that
during the period of the standstill a viable plan will emerge. Obtain-
ing this “breathing space” is extremely helpful to the turnaround pro-
cess and is most commonly achieved where the company has agreed
to engage experienced advisers and/or interim executives and the
stakeholders have additional con?dence in the process due to the
credibility and experience of the individual or team. As discussed
in Chapter 3, some practitioners may use the leverage afforded by
their appointment to make a standstill or other explicit statement of
stakeholder support a prerequisite to accepting an appointment. This
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204 LEADING CORPORATE TURNAROUND
may be feasible in bilateral relationships but is likely to be extremely
dif?cult to achieve in a multi-creditor restructuring.
Achieving a standstill is not as straightforward as it may appear.
As previously indicated, there is a well-established secondary mar-
ket in stressed and distressed corporate debt and the creditors who
made the original loans may no longer be involved when problems
arise or may sell down their position during the course of restructur-
ing negotiations, so the negotiating counter-party can change dur-
ing the process. Different creditors will have different entry level
exposure since those who have lent at par at the outset may well
have sold down at a discount. These discounts are not disclosed (al-
though trading prices are readily available) but the attitude of in-
dividual creditors to standstill requests will vary according to their
actual exposure and their longer-term objectives; they may be un-
willing to suspend any rights at all until a ?nal restructuring has
been achieved. As a consequence many restructurings take place
without the bene?t of a standstill agreement. These circumstances
are particularly stressful for the company’s management, who face
the continuous threat of enforcement throughout the restructuring
negotiations.
The negotiation of the standstill agreement is a critical stage in the
rescue of the company since there will be no discussion about ?-
nancial restructuring unless the creditors have formed an initial view
that there is at least a chance of improving their position through a
turnaround process. Creditors are being asked in a standstill to give
up certain rights in exchange for the prospect of a better outcome; in
order to do so, they have to be convinced that it is in their interest to
do so and that the jam promised for tomorrow is worth signi?cantly
more than bread today. It is the role of the turnaround leader and/or
specialist advisers that have been hired to help the company to per-
suade the creditors to sign up to the process, and this will depend as
much on their personal credibility as on the terms on offer. As one
senior banker said to us: “It’s not just a question of seeing numbers that
show an improvement but that we have con?dence in those who are going
to implement the changes.”
Box 10.2 provides an example of a how AlixPartners negotiated a
standstill agreement and subsequent restructuring agreement with
the creditors of the JAL Group, a mid-sized corporate.
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FINANCIAL RESTRUCTURING 205
Box 10.2 Financial Restructuring of JAL Group
JAL Group is the European market leader in safety shoe manu-
facturing and distribution, with annual revenues of €180 million
on annual volumes of 11 million pairs of shoes and boots. Reg-
istered in Luxembourg, it has manufacturing plants in Tunisia
and France and is headquartered in Italy.
€(millions)
Annual revenues 180
Annual EBITDA (2003) 25
Senior debt 119
Mezzanine debt 43
Shareholder loans 100
Total employees 4000
In April 2004, AlixPartners met with the lead agents for the
senior debt, following the transfer of the loan from the relation-
ship team into the workout department. The company was in
breach of covenants and the agent wished to introduce advisers
to the company, with a view to helping the company through
the dif?culties it faced.
Soon after, AlixPartners met with the majority shareholder, a
major private equity group based in Paris. Although the share-
holders agreed with the banks’ assessment that management
and working capital control should be improved, they disagreed
with the agent bank on other issues and wished to retain control
of the situation.
AlixPartners was subsequently retained by JAL as its ?nancial
and turnaround adviser. The ?rst steps involved establishing
control, improving reliability of reported information and sta-
bilising the ?nancial position of the group. Meanwhile initiatives
to improve operational performance were developed and imple-
mented. It was clear that the group needed new capital and yet
the stakeholders were not prepared to work together. For the
sake of the company, the stakeholder dispute had to be brought
to a head.
It was apparent to both major equity holders that they had no
economic interest in the group, but with new investment that
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206 LEADING CORPORATE TURNAROUND
position might be restored. Whereas the private equity group
held 56% of the equity as against the CEO’s holding of 36%,
these positions were reversed at the shareholders’ loans level.
These subordinated debts were held 35% by private equity
and 65% by the CEO. The parties did not agree that the le-
gal documentation re?ected the commercial agreement between
them and whereas one party wished to rely on the sharehold-
ers’ agreement the other did not. AlixPartners needed to ?nd a
way through this unsatisfactory state of affairs in order to move
forward.
With AlixPartners’ support, the group achieved a standstill
agreement with all its ?nancial creditors for a period of four
months, during which time the company agreed to produce an
achievable business plan and develop a restructuring proposal
that was acceptable to all the ?nancial stakeholders. The busi-
ness plan indicated that there was a good prospect of reversing
the impairment in values for all classes of ?nancial stakeholder
over the next four years.
To obtain the standstill AlixPartners needed to obtain the sup-
port of all the warring stakeholders andconvince themthat while
a resolution of their differences was critical, it would be of little
value if the company failed in the meantime. For JAL Group to
survive it needed a period of ?nancial stability, and to achieve
that it needed a standstill. A key condition of the standstill was
that equity agreed to inject new money.
The equity holders were both asked to submit proposals of
shareholder support to the company. The restructuring advis-
ers were able to trade each party against the other for the com-
pany’s bene?t; however, it became obvious over time that the
CEO’s proposals were more favourable to the company. The
process of selecting a supporting shareholder took far longer
than timetabled and the standstill period was extended through-
out 2004 by the lenders.
The process led to the development of a plan that incorporated
the investment of new money by one of the equity stakeholders.
Without the standstill the company would not have been able
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FINANCIAL RESTRUCTURING 207
to continue to trade since it was continuously in breach of its
covenants and other loan obligations.
In the end, these agreements were not completed, the senior
and mezzanine stakeholders sold their debt into the secondary
market and the group, with the help of AlixPartners, is now
developing a solution with a new investor group. The equity
stakeholders have exited as part of the new solution.
Box 10.3 describes how Rothschilds and AlixPartners deployed dif-
ferent skills to provide a breathing space for Royal Ahold while man-
agement focused on ?xing the underlying operations.
Box 10.3 Advisers’ Role in Crisis Stabilisation at
Royal Ahold
N.M. Rothschild (“Rothschilds”) were the lead ?nancial advis-
ers to Royal Ahold, the third largest supermarket retailer in the
world, whose balance sheet was ravaged following accounting
irregularities and a possible fraud, mainly in its US operations.
The key task was to stabilise the balance sheet and create a
breathing space for management to implement a disposal pro-
gramme and ?x the operations.
At the start of February 2003, Ahold was an investment grade,
blue chip company, based in Amsterdam but with more than
50% of its revenues and earnings in the USA. On 24 February
2003, Ahold made its key announcement about the irregular-
ities. The consequence of this and other related events was a
downgrade in the company’s credit rating to sub-investment
grade. As an immediate consequence of the rating decline, un-
committed bilateral lines fell away and facilities with ratings
triggers were no longer available. The CEO and CFO both re-
signed, effective 10 March, and urgent re?nancing was nec-
essary to meet funding needs. In these situations not only is
urgent advice and leadership required from investment bankers
but management often needs strengthening to see it through the
turbulent period. Companies in these circumstances also need
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208 LEADING CORPORATE TURNAROUND
different information and this can often prove dif?cult to obtain,
analyse and understand
Rothschilds worked quickly to repair the funding gap, negotiat-
ing with lenders an emergency liquidity facility of $2.75 billion
on 3 March and a back-up securitisation facility. At the same
time, AlixPartners provided interim management and advisory
support to maximise cash generation fromthe operations. Crisis
stabilisation on a major scale produced a breathing space and
enabled a clean working capital opinion critical for a clean audit
report.
Understanding Stakeholders’ Agendas
Whether or not a standstill is achieved, the ?rst step in leading a
?nancial restructuring is to know the parties, understand how they
became involved, and determine whether and to what extent they
wish to remain involved. The turnaround leader – be it the Chairman,
Chief Executive or CRO – needs to have an in-depth understanding
of the players in the process.
Financial stakeholders normally become involved in a company
through a logical decision-making process in which they decide to
make a commitment and advance credit for acceptable business re-
turns. The atmosphere at that time is normally a positive since both
parties have contributed to achieving their objectives by entering into
a business relationship. Fromthe ?nancial stakeholders’ point of view
there will have been a ?nancial assessment and the credit committee
or other sanctioning body within the ?nancial institution will have
concluded that the risk–reward trade-off is acceptable.
A successful ?nancial restructuring is helped if the leader develops a
good understanding of how the parties ?rst came together and what
their expectations were at that time. Situations arise where a lead
?nancial institution enters into an arrangement with a company but
then syndicates its exposure or sub-participates with other ?nancial
institutions. This adds complexity and scope for misunderstanding
and ill-will once the company hits troubled waters, since the syndicate
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FINANCIAL RESTRUCTURING 209
members will tend to rely not only on the information memorandum
provided at the time, but also on the representations and reputation
of the syndicating institution and may have limited knowledge or
understanding of the borrower. The restructuring leader will need to
understand the position and expectations of these sub-participants
and start to address the gaps in their knowledge as a precursor to any
negotiations.
Over recent years the “going in position”, which is how we describe
the above, has become yet more complicated by the development of
a secondary debt market. Now it is quite common, particularly in
international ?nancings, to ?nd that the ?nancial stakeholders are
those who have acquired the interest of another, normally at a dis-
count, at some time after the initial stakeholder became invested. This
is particularly true for companies in ?nancial distress. Indeed some
stakeholders, such as so-called “hedge funds” or “vulture funds”, will
have acquired debt in a company with the sole purpose of acquir-
ing a substantial equity interest on favourable terms through a sub-
sequent restructuring, the so-called “loan-to-own” approach. Such
stakeholders will have assessed the ?rm’s potential based on infor-
mation available in the market, as well as information received from
the vendor ?nancial stakeholder, who will have often only provided
it on a “buyer beware” basis.
This “getting to know you” process will be repeated for each class
of ?nancial stakeholder, many of whom will have become involved
at different price points, resulting in different agendas and objectives
within the various classes as well as between classes of stakeholders. It
is also very important to understand the ?nancial institutions them-
selves: how they behave under stress and what may be acceptable to
them as institutions as well as the style and agenda of the individuals
who are negotiating on behalf of each institution.
Different ?nancial institutions take different approaches. Less tradi-
tional creditors such as US bond holders or hedge funds are some-
times castigated by more traditional institutions for their approach
to rescue situations, particularly as they take an increasingly active
role in forcing corporate restructurings. However, others ?nd their
approach refreshingly clear since they are concerned with value and
value alone and approach the restructuring process with the clear
aim of leveraging whatever power they have to maximise value, for
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210 LEADING CORPORATE TURNAROUND
example, through exploiting opportunities or loopholes in contrac-
tual documentation, regardless of wider relationship or policy type
biases. This contrasts with other, more traditional lenders who may
be constrained by organisational policies or reputational considera-
tions as to their position within the markets they serve. Stakeholders
whose institutions rely on relationship banking are often concerned
with the effects that an approach adopted in one restructuring may
have on their business relationships elsewhere. This can lead to what
can appear to be economically irrational behaviour in the particular
circumstances.
The CRO or restructuring leader, who will normally be familiar
with many if not all of the ?nancial stakeholders, needs to clearly
understand their corporate and personal positions in the particular
circumstance. He or she needs to ensure that, in so far as is possi-
ble, the business plan and restructuring proposal addresses the issues
and concerns of individual stakeholders and therefore is one that the
stakeholders will be able to support. There are many points that are
not materially signi?cant to a company but are of value to particular
stakeholders. The CRO needs to be aware of these and he or she
needs to know when to “trade” them.
Some stakeholders may try to overplay their hand and the CROneeds
to clearly understand the actual in?uence and power they have. He or
she would do well to assume that the stakeholders will exercise their
power to its utmost but also to understand the boundaries of their
powers and keep all stakeholders within them. He or she needs to
understand the relationship between institutions and can help bro-
ker deals, to enable the supportive creditors to remain in the process
while others exit on acceptable terms. Inter-creditor arrangements
may exist, that govern priorities and processes within a creditor class
or between classes. Working closely with the company’s legal ad-
visers, the CRO needs to be intimately familiar with the detail of
such arrangements so that he or she understands where deal block-
ers may exist and the levers that can be pulled to move the process
along.
The key ?nancial stakeholders are usually senior lenders, bondhold-
ers and, increasingly, mezzanine funders and guarantee providers.
There are, however, other key ?nancial stakeholders who must also
be included in the process, with a similar investment of effort to
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FINANCIAL RESTRUCTURING 211
understand their agendas and secure their support. These may
include:
r
Trade insurance companies. Through their penetration into
the vendor community, trade insurers effectively consolidate what
is otherwise a diverse class of creditors to a focused representa-
tion, with an increasingly important voice at the restructuring
table.
r
Pension fund trustees. Under the Pensions Act 2004, the pow-
ers of the Pensions Regulator have greatly increased and this has
in turn increased signi?cantly the negotiating leverage of pen-
sion fund trustees in any company with a signi?cant ?nal salary
scheme de?cit. It is likely that, in future, the trustees (and the
Regulator) will be a signi?cant stakeholder in most major UK
restructuring negotiations and the restructuring leader and his or
her advisers will have to address this added complexity through
extensive consultation and negotiation. This will present particu-
lar challenges as most trustees are ill-equipped to deal with such
negotiations, yet the Regulator has extensive powers that could
lead to unreasonable positions being adopted.
r
Government departments. With the growth of public–
private initiative schemes and other gain share arrangements,
government departments are having an increasing in?uence on
the way in which the cake is shared when participant companies
or government suppliers are restructured.
r
Equity. Historically, once a company’s senior debt was impaired,
junior debt and equity holders were deemed to have lost all their
economic interest and were not active participants in the re-
structuring process, other than where a single shareholder (such
as a parent company) provided additional ?nancial support in
order to “stay in the game”. Increasingly, equity providers are
building protection into their investments, for example through
shareholder agreements in private equity investments, which
can provide signi?cant negotiating leverage, irrespective of the
pure economics of their position. The restructuring leader must
achieve a balance between the demands of those with a true eco-
nomic interest and the rights of other stakeholders, who may have
little to lose but much to gain by using their leverage to take a
piece of the cake. These “side show” negotiations can threaten to
take over the restructuring process; it is the CRO’s task to keep
the restructuring “on track” through his or her judicious handling
of the stakeholders.
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212 LEADING CORPORATE TURNAROUND
The case of Stolt Offshore SA illustrates the role of the CRO in managing
and aligning stakeholder agendas to achieve a successful restructuring (see
Box 10.4).
Box 10.4 Stakeholder Management and Restructuring at
Stolt Offshore
(The background to the Stolt Offshore restructuring was described in
Box 8.4)
In the spring of 2003, Tom Ehret, a highly–respected industry
executive, was appointed as CEOand was joined by a newCFO,
Stuart Jackson. It quickly became apparent to Tom and Stuart
that the situation at SOSA was far worse than they had been
led to believe before joining the company. The “legacy” con-
tracts were continuing to haemorrhage money, the business was
under-capitalised, there were covenant breaches and a real risk
of insolvency. SNSA, the parent company, had its own problems
to contend with, including a US Department of Justice investi-
gation into another of its subsidiaries and, under pressure from
its own creditors, had publicly announced that it would not pro-
vide further funding to SOSA. As a contracting business, SOSA
was heavily dependent on providing performance guarantees to
its customers to secure new business, but its bank guarantee
facilities were either fully utilised or had been withdrawn.
Tom and Stuart had made substantial progress in setting strat-
egy and improving the operations but the state of the balance
sheet was hindering further progress. The company’s debt had
soared to over $400 million, its gearing was over 300%, it was
running short of liquidity and performance bonding facilities,
and was in breach of its banking covenants. As there were 27 ?-
nancial institutions with exposure to the company, concern was
high, con?dence was low and the debt was starting to trade.
Many of the banks had lent to SOSA on the back of their re-
lationships with the parent company, and felt badly let down
when SNSA announced that it would not provide further sup-
port. Perhaps not surprisingly in the post-Enron era, corporate
governance became the hottest issue, with huge pressure for
Boardroom change.
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FINANCIAL RESTRUCTURING 213
A ?nancial restructuring was inevitable but ?rst the company
needed to ?nd someone to lead the process and leave manage-
ment to focus on the critical operational turnaround. David
Lovett and Laura Barlow of AlixPartners were appointed as
Chief Restructuring Of?cers in November 2003. Their key task
was to gain the support of a sceptical banking group by showing
that the business had a viable future and that the right manage-
ment was in place with the appropriate plans for recovery. Many
of the banks had had no direct contact with the company hith-
erto. Communication was the key and a series of one-to-one
meetings was held with each of the lenders, to listen to their
concerns and start to develop a solution that would meet their
objectives.
The meetings revealed that there was not only considerable
scepticismamong the banks towards the company, but also mis-
trust between the banks themselves. There was no standstill and
banks with bilateral arrangements sought to achieve settlement
ahead of other, syndicated facilities. The company was surviving
from one covenant breach waiver to the next, with each waiver
involving over 100 parties, and consuming enormous time, ef-
fort and expense. It was critical that the business move rapidly
towards a permanent solution to provide a stable platform for
its operational turnaround.
Finding a solution depended on responding to the stakeholders’
concerns. The support of the lenders was critical to the com-
pany; in return, the creditors required changes in governance,
such that the parent company’s in?uence over SOSA was re-
stricted and an independent Board was in place. Putting new
performance guarantee facilities in place was also fundamen-
tal to the future viability of the business. The only facilities on
offer were extremely expensive, but experienced CROs know
that survival today is critical in order to live on and ?ght again
tomorrow.
The senior creditors had commissioned a liquidation analy-
sis, which appeared to support their instinct to seek recov-
ery through a workout. The CROs concurred with the com-
pany’s view that the best prospect of recovery was through a
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214 LEADING CORPORATE TURNAROUND
turnaround, to be supported by the introduction of new equity.
The company then pursued an equity placement and subse-
quent rights issue that brought new money into the company
and diluted the former parent’s interests, thereby addressing the
governance concerns of the creditors.
Within six months of the CROs’ appointment, SOSAcompleted
an $844 million ?nancial restructuring, including raising $165
million of new equity, debt conversion, amendments to its ex-
isting facilities and securing $100 million of additional perfor-
mance bonding capacity – critical to its future viability. Gov-
ernance was also addressed; SOSA was de-consolidated from
its former parent and an independent Board was constituted.
Throughout the process, the CROs maintained a clear agenda
to support the company and restore it to viability, seeking to
build and retain stakeholder support without acceding to the
agenda of any one class or institution.
In November 2004, SOSA’s recovery was completed through
a $350 million re?nancing, repaying all its existing lenders at
par. From the brink of failure in 2003, with its debt trading at
a substantial discount, SOSA’s turnaround was re?ected in a
six-fold increase in market capitalisation, to over $1 billion.
Understanding the Corporate’s Needs
The company itself is, of course, central to the restructuring; with-
out a viable business going forward, there is no point in attempting
a restructuring. This seems obvious, yet once the restructuring ne-
gotiations are underway, the needs of the company can seem to be
forgotten as the other stakeholders each focus on securing the best
possible outcome for themselves. An assessment of the company’s
liquidity needs, which is often carried out by reporting accountants
or other specialist turnaround advisers, is the starting point for un-
derstanding the needs of the business – but not enough by itself. The
restructuring leader needs to ensure that the longer-term require-
ments of the business are addressed. The number one objective of
the restructuring should always be to establish a stable capital struc-
ture, commensurate with the enterprise value and cash-generating
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FINANCIAL RESTRUCTURING 215
capacity of the revitalised business. These requirements should be
re?ected in the business plan for the company, which will document
where the company is, where it plans to go and how it plans to get
there. The plan must be credible with regard to its circumstances
and the market it serves, and the restructuring leader or CRO will be
closely involved in developing the plan and articulating it to the stake-
holders. The plan must be credible and achievable, not aspirational –
whether or not this meets the value requirements of the stakeholder
audience. Managing the expectations of the stakeholders as regards
the corporate’s needs and capabilities is a critical part of the restruc-
turing leader’s role, as exempli?ed in the case study on Boxclever (see
Box 10.5).
Box 10.5 Understanding Corporate Needs at Boxclever Ltd
AlixPartners was appointed by the Board as lead ?nancial and
turnaround adviser to Boxclever Ltd, a UK TV rental business.
The company operated a very cash-generative business model
but the customer base was in steady decline due to the gradual
shift from TV rental to outright ownership in the UK market.
Boxclever had approximately £800 million of debt, which had
been placed two years earlier, through a complex securitisation
arrangement, with three ?nancial institutions – one German,
one Canadian and one French. At the time of AlixPartners’
appointment, it was becoming clear that the ?nancial model
that had been the base for the securitisation was ?awed and
that the company could not generate the cash?ows required to
service the securitisation structure.
The key task was to determine the company’s true debt capacity,
based on a realistic and achievable business plan. The ?rst pass
of the plan was produced in a very short period and indicated
that the company was unable to fund the debt burden. Indeed,
it was only able to fund approximately 25% of the securitisation
debt.
This was a dif?cult pill for the lenders to swallow and they
granted a standstill agreement while reporting accountants
checked the plan, and management were charged with “sharp-
ening their pencil” since what was an offer was “not good
enough”! Despite considerable spend on further professional
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216 LEADING CORPORATE TURNAROUND
fees and the examination of many alternative scenarios, the
funding level that could be serviced changed little.
As is often the case, it was the task of AlixPartners as restruc-
turing advisers to communicate the bad news to the ?nancial
institutions and start to close the reality gap. It was clear that a
solution was needed that would re?ect the reality of Boxclever’s
debt capacity and business potential. Eventually, the lenders
exited by selling down their positions to two US-based hedge
funds.
Co-ordinating Advisers
Loan documentation is normally drawn up to enable the ?nancial
stakeholders to take advice with regard to their loans or exposures at
the expense of the company. Even where this is not the case, it will
become a condition of support as soon as covenant waivers or addi-
tional funding are required. Enormous fees are incurred by advisers
on behalf of their clients but these are all paid from the capital of the
distressed company. The company management will typically have
little experience of what is involved or what is required and there is
the risk of considerable duplication of work or unneccessary activ-
ity as each group of stakeholders engages its own team of advisers.
The restructuring leader will be familiar with these situations and
it is part of his or her role to co-ordinate the advisers, to minimise
disruption to the company from multiple demands for information
and to reduce the cost involved by avoiding duplication of effort.
Each of the principal stakeholder groups will normally engage advis-
ers who are typically lawyers and ?nancial advisers, such as reporting
accountants or specialist investment bankers. Each of these advisers
has an important role to play in the restructuring process and may
take a leadership role in certain activities.
Reporting Accountants
These advisers play an important role in determining the current
?nancial position and helping to review and interpret the proposed
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FINANCIAL RESTRUCTURING 217
business plan. This ?nancial due diligence is critical to enable all
stakeholders to receive an objective view of the business value and
potential options, as the starting point for restructuring negotiations.
Historically, some reporting accountants also played a leading role
in negotiations, usually on behalf of the senior lenders, but recent
changes in the regulatory environment post-Enron, and the rise of
the CRO, have made this less common.
It would be unusual for each creditor class to engage its own re-
porting accountant, although it may occur where there is signi?cant
inter-class con?ict and a reluctance to share the analysis, or where
?nancial interpretation is critical to determining the future structure
of the company. The reporting accountant is normally retained by the
company at the instigation of the senior lenders and makes their work
available to each other class of ?nancial stakeholder. The exception is
the liquidation analysis, which will normally only be made available
to one class of stakeholder as this has considerable in?uence on their
negotiating position. The restructuring leader usually works closely
with the reporting accountants to ensure that their work is factually
correct, does not misrepresent the company and objectively re?ects
the value potential of a consensual restructuring.
Lawyers
Lawyers are normally engaged by each class of stakeholder and play
a critical role since they advise on the architecture of the battle?eld,
tease out the weaknesses in the other players’ positions and advise
on how their clients can camou?age or repair the weaknesses in their
own positions. Restructuring is a specialist area of law and some
?rms act predominantly for one particular creditor class, such as US
bondholders or senior lenders, while others “cross the table” and act
for different sides in different transactions.
The lawyers play a critical role in preparing for the restructuring
negotiations and in documenting agreements as they emerge. Some
also play a key role in negotiating on behalf of their clients. During
the documentation stage, we observe many drafting techniques and
ploys to make the most out of what has been achieved during the
negotiations. The lawyer to the company will work closely with the
restructuring leader throughout the restructuring process.
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218 LEADING CORPORATE TURNAROUND
Financial Advisers
Financial advisers, who are drawn fromspecialist departments within
certain investment banks or turnaround and corporate ?nance bou-
tiques, complete the team. If a ?nancial restructuring involves a listed
company, the raising or swapping of complex ?nancial instruments
or access to the capital markets, for example through a rescue rights
issue, it is usual for the company to retain its own specialist invest-
ment bank. The investment banks will also operate in an advisory
capacity for a particular stakeholder class, often leading negotiations
on behalf of a bondholder or creditor committee. The leadership role
of these specialised investment banking departments is discussed in
more detail in the case studies on Marconi and British Energy. (see
Boxes 10.6 and 10.7)
Box 10.6 Financial Restructuring of Marconi Plc
The background to the Marconi restructuring was set out in
Chapter 4. It was one of the most complicated ?nancial re-
structurings ever seen in the UK, requiring two court-approved
schemes of arrangement and fundamental changes to the Board,
management, operations and capital structure.
Lazard acted as lead ?nancial advisers to the Board throughout
the restructuring. At its peak, Marconi was valued at over £30
billion and had over £4 billion of ?nancial debt. On completion
of the restructuring and debt-for-equity swap, £5.6 billion of
claims had been cancelled, including £3.4 billion of bank and
bond debt and the equity in the new company was valued at
£300 million.
Richard Stables of Lazard says that agreeing a valuation and a
realistic level of part restructuring indebtedness were the key to
achieving a consensual restructuring. Against such a fundamen-
tal change in value, he saw Lazard’s role as being “a consensus
builder arounda valuationwhichrequiredbothart andscience”.
The restructuring was implemented via two Creditor Schemes
of Arrangement (at the corporate and Plc levels). A key credi-
tor demand was that the ?nancial restructuring should not be
conditional on a Plc shareholder vote. In return, the Board was
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FINANCIAL RESTRUCTURING 219
insistent that the shareholders should retain some residual part
of the new equity plus some upside potential. The restructuring
was effected by a debt-for-equity swap leading to a substan-
tial debt reduction. Following the restructuring, bondholders,
banks and other credtiors received 99.5% of the equity of the
newly formed Marconi Corporation. Original shareholders re-
ceived 0.5%, plus “out-of-the-money” warrants over a further
5% of new equity.
Pre-Restructuring Structure Post-Restructuring Structure
Marconi Corporation
Operating Companies (opcos)
Various
claims*
ESOP
derivative
providers
Shareholders
Claims by Marconi Plc or its
subsidiaries £0.8bn
Marconi Corporation
US Assets
Bondholders, Banks & Other Creditors 99.5%
Existing Shareholders 0.5% (+ Warrants)
Other Opcos
Marconi Plc Marconi Plc
Junior Notes
$300m +
£117m
Senior Notes
£450m
US$ / Bonds
£1.8bn
Other
Claims** not
less than
£1.4bn
Syndicate Bank
Debt £2.1bn
*
Including guarantees of bank and bond debt.
Over 18 months elapsed frominitial negotiations with the banks
to ?nal completion of the restructuring. The roles of the re-
structuring adviser (Lazard and CRO John Talbot of Talbot
Hughes) were critical in building consensus and maintaining
support for the company. Their tasks included: persuading the
Board to recognise the reality of the situation and the conse-
quent and dramatic shift in economic interest in the business;
managing communications and negotiations with the key stake-
holder groups; determining an appropriate structure that max-
imised stakeholders recoveries while leaving suf?cient liquidity
in the business to meet its future needs; and project manag-
ing an immensely complex process – as re?ected in a scheme
document that ran to over 1,000 pages.
The debt was trading actively throughout the negotiations and
numerous issues – fromsettlement of claims on a complex swap
contract on the employee share ownership scheme to dealing
with the requirements of the US pensions regulator – threat-
ened, at times, to de-rail the process and force the company into
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220 LEADING CORPORATE TURNAROUND
insolvency proceedings. Without the leadership of its key advis-
ers and the credibility and expertise they brought to a deeply
discredited company, it is unlikely that Marconi would have
survived.
Box 10.7 Advising Bondholders at British Energy
In December 2002, Close Brothers was retained as restruc-
turing adviser to the bondholders of British Energy (BE) fol-
lowing the announcement of its restructuring proposals on 28
November 2002. British Energy is the largest electricity genera-
tor in the UK. It owns and operates eight nuclear power stations
with approximately 20% of the UK’s generating capacity.
r
The Government-backed restructuring proposal included the
following key points
– The Government (HMG) agreed to underwrite a new
Nuclear Liability Fund (NLF), which will be part-funded
by BE, with the NLF receiving 65% of cash ?ow generated
by British Energy going forward. The NLF will assume all
existing and future nuclear liabilities in respect of the nuclear
?eet.
– British Nuclear Fuels Plc (BNFL) entered into heads of
terms for revised contracts with respect to front and back-
end fuel-related services to British Energy.
– Overseas investments in North America nuclear power
plants to be sold.
– £700m of new bonds plus new equity to be shared among
creditors (including bondholders).
r
Creditors entered into standstill arrangements and heads of
terms for the restructuring on 14 February 2003 to work to-
wards a formal binding agreement on the restructuring be-
tween the company and its creditors by 30 September 2003
in accordance with the agreed heads of terms.
r
On 1 October 2003, the company announced that its creditors
had reached binding agreement, subject to EU Commission
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FINANCIAL RESTRUCTURING 221
approval of the State Aid being provided by the UK Govern-
ment as part of the deal, and subject to obtaining suf?cient
creditor support, including 75% agreement of bondholders
by value.
r
Under the terms of the restructuring, bondholders will receive
£154.1 million of newbonds at par and 51%of the newequity
in British Energy following implementation of the restructur-
ing.
Close Brothers worked exclusively for the bondholders. Their
role included:
r
Quickly bringing together a cohesive bondholder group.
r
Bringing other creditors together to agree a response to British
Energy’s restructuring proposal.
r
Negotiating heads of terms on behalf of the bondholders.
Close Brothers worked with British Energy and other creditors
to achieve a formal binding agreement of the restructuring.
Peter Collini, Managing Director of Riverhill Partners, a boutique
corporate advisory ?rm, identi?es the following key attributes for
success, based on his experience of advising clients on restructuring
coding.
r
The ability to gain the trust of and in?uence the Board in highly
stressful circumstances.
r
A frank and open approach with lenders and the Board and a
highly re?ned sense of timing/presentation to achieve a rational
response to a given set of circumstances.
r
Flexible approach and creative solutions to deal with constantly
changing situations.
r
Helping management to retain a sense of proportion in highly
unstable situations and trying to buy time to consider matters
properly.
r
Early recognition of the need to bring on board other resource
input as required (for example, executive change, a CRO, oper-
ational support, enhanced ?nancial reporting).
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222 LEADING CORPORATE TURNAROUND
Martin Gudgeon of Close Brothers, who advises both debtor and
creditor groups on restructuring, summarises the key attributes that
specialist investment banks bring to the restructuring process as
follows:
r
Understanding the secondary market.
r
Understanding the market view of the creditors.
r
Assessing whether the company has the right management team
(do they need to be helped by the appointment of a CRO?).
r
Understanding the exit plan.
r
Always having a “Plan B” in any negotiation.
Leading Restructuring Negotiations
Having agreed a standstill (where possible), developed a detailed un-
derstanding of the stakeholder positions and corporate needs, and
corralled the advisers, the restructuring leader nowtakes centre stage
to lead the restructuring negotiations and develop a permanent solu-
tion for the company. It is logical for the CRO, as the representative
of the company, to lead all negotiations between the company and
the various stakeholders, since the company is the ?nal counter-party
to all arrangements (and is the only party that cannot therefore be
con?icted). There is inevitably considerable tension and a lack of
trust between the parties, given the likely background of unful?lled
promises, blame and counter-blame. The restructuring leader has no
such baggage and brings independence and objectivity to the process.
As “honest broker”, the leader will use his or her experience and ne-
gotiating skills to the maximum, knowing when to be hard-nosed and
when to accommodate demands, but always remaining focused on
the ultimate goal of achieving a lasting agreement.
In Chapter 6 we described the parties typically participating in the
negotiations, and we can use the analogy of a dinner table (Figure
10.1) to illustrate the key participants. Inevitably, all those involved
at the ?nancial restructuring table seek to obtain as large a slice of
the cake as they can, seeking to show that their investment is not
impaired or that the impairment is as small as possible (in the case
of par lenders) or to maximise their return if they have acquired debt
at a discount.
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FINANCIAL RESTRUCTURING 223
Agent Bank
Co-ordinating
Committee
Instructing Group
Co-ordinating
Committee
Brokers
Boar d
CEO
CFO
Lawyers
Account ants
Financial Advisors
Reporting Accountants
Lawyers
Fi nanci al Advisors
Reporti ng Accountants
Lawyers
Financial
Advisors
Lawyers
Auditors
©
CRO
Banks
Bond Holders
Company Equity
Figure 10.1 The Financial Restructuring Dinner Party.
The restructuring must be based on a realistic business plan and
assessment of future debt capacity and a balance sheet that properly
re?ects the values of the assets available to the company.
In Corporate Turnaround, a feature that we observed in troubled
companies was described as the “Reality Gap” – that is, the gap be-
tween the perception of (or desire for) value in the company and
its true value, based on the varying levels of knowledge of the facts
between the company and its creditors. Managing that gap is a criti-
cal part of stakeholder management, particularly as the gap also ex-
ists between different ?nancial institutions both within and between
classes. The leader needs to be aware of these gaps and allow suf-
?cient time for the various participants to “get up to speed” and
manage their internal communication of the new reality. Like a good
dinner party host, the restructuring leader must manage the tempo
of the discussion and ensure that no participant feels ignored or left
behind. Without this, there is less chance of a restructuring proposal
being received favourably by all those affected by it; while the real-
ity gap persists it may fall considerably short of their expectations
of its value. Facing reality and the consequent impairment of invest-
ments can be a bitter pill to swallow for many institutions, and the
restructuring leader may seek to mitigate this by building upside op-
portunities (such as warrants) into the restructuring proposal to help
institutions to manage their positions.
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224 LEADING CORPORATE TURNAROUND
Each class of stakeholder is normally represented by a formal or
informal co-ordinating committee, appointed by the other mem-
bers of their class to negotiate on its behalf. The restructuring
leader will deal predominantly with the leaders who emerge in each
of the co-ordinating committees. The committee chairs will have
their own leadership challenges since they need to carry all the
banks/bondholders (or a predetermined majority, depending on the
original loan documentation) with their proposed position. Within
each class, some creditors will have bought in below par and there-
fore have a different view of value and acceptability, some will be
represented by the relationship bankers who made the original loans,
whereas others will have passed the account to their workout depart-
ments, who will have different incentives and agendas. There will be
a differing degree of knowledge and understanding within the classes
and the restructuring leader needs to understand the dynamics within
each group and support the co-ordinating committee as well as he
or she can, since negotiations may collapse if the co-ordinating com-
mittee fails to carry its constituent members.
If a syndicate of banks is involved, the agent bank usually plays a piv-
otal role and sits on or leads the co-ordinating committee, together
with representatives fromthe lenders with the biggest exposure. How-
ever, as debt is traded, the landscape changes. Not many debt traders
are interested in taking on – or have the back-of?ce facilities to take
on – the onerous task of agent. Thus the situation can arise – as at
Eurotunnel – in which the agent bank has sold down all its debt and
has no economic exposure, but no one else will take over the agent’s
role. In such circumstances, the agent’s ability to in?uence a partic-
ular course of action is diminished by its lack of economic interest in
the outcome, increasing the pressure on the restructuring leader to
keep the other lenders “in line”.
As this “caravan” of principals and advisers proceeds, with all costs
being borne by the distressed company, the restructuring leader
needs to:
r
Propose and achieve buy-in from the parties to a timetable that
balances the company’s desire for an early resolution with the
stakeholders’ requirements to get up to speed and manage inter-
nal communications and approvals processes.
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FINANCIAL RESTRUCTURING 225
r
Manage the parties’ progress through the timetable, remember-
ing that every deal has its own tempo; to move too fast can frus-
trate progress but to move too slowly often incurs more cost and
more frustration.
r
Propose an outline restructuring plan. This is normally docu-
mented in a “draft participation agreement”. The document ex-
pands during the negotiation period and will include the “gives
and gets” of all participants. When eventually agreed, it will be-
come the framework agreement from which the de?nitive legal
documentation is drafted. The document needs to focus on ad-
dressing the commercial issues and requirements but must also
address any critical legal points that may otherwise de-rail the
?nal legal documentation.
Development of the draft participation agreement requires a lot of
listening and understanding by the leader, who often acts here as an
honest broker. His or her knowledge of each party’s position, rights
and options is critical to a successful outcome. Some stakeholders will
“hold out” at different stages and the leader needs to be balanced in
his or her response to such positions. Sometimes others have to give
in, and at other times their bluff has to be called. At times the leader
might seek the support of other stakeholders, who may have other
institutional relationships with an errant party, to bring pressure to
bear through those relationships and thus ?nd a solution to seemingly
intractable problems.
It is usually not sensible to concede to “hold out” creditors (those
holding out for better terms) since this can result in a “domino effect”
with others following suit. The restructuring leader’s knowledge of
the ?nancial institutions and the individuals concerned is critical in
unlocking a deadlocked situation. The leader must also be prepared
to use every means at his disposal to move towards a solution. For
example, he might instruct the lawyers acting for the company to
investigate potential action against and remedy from such creditors,
in the event that their behaviour results in collapse of the restructuring
and loss of value to others. The leader will use such information
judiciously to achieve his or her negotiating goals.
In theory, once a participation agreement is reached, the restructur-
ing leader has largely completed his or her task and the lawyers can
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226 LEADING CORPORATE TURNAROUND
take over and draft the substantive agreements. Unfortunately, this
often proves to be too optimistic and the parties continue to spar right
up to signing, hence the need for the leader to continue to drive the
process to a tight timetable until the close.
Although consensual out-of-court restructurings normally mitigate
loss substantially (certainly compared to the alternative of liquida-
tion) and provide a platform for value restoration through imple-
mentation of a turnaround, the completion meetings are often som-
bre affairs. Most stakeholders will feel as if they have been beaten
into submission by other classes of creditor, their own class and the
company, yet all will be relieved that there remains an opportunity
to rebuild economic interest. Success, to some extent, is de?ned as
“each stakeholder feeling he or she conceded a little more than ex-
pected in order to reach a conclusion”.
Against this background the leader must not, to use Calvyn Gardner’s
expression, be one who lets excellence be the enemy of the good. The
solution will have been the result of many trade-offs and side deals,
and although something better could nearly always have been done
on a particular item, there will usually not be a better solution to the
whole. The leader needs to have the experience and courage to know
when to stop the discussions and move forward.
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Appendix
Society of Turnaround
Professionals
T
nc socic1v or 1cnNanocNb inorcssioNaLs (s1i) is 1nc
only UK-based professional body accrediting the highest quality
turnaround professionals, increasingly recognised and required by
the stakeholder community, including the major UK clearing banks.
It is an independent non-pro?t making body governed by a board of
nine non-executive directors, and run by a full-time chief executive.
STP’s principal services are:
r
Accreditation of independent executives, together with advisers
and stakeholder representatives, who demonstrate high-quality
experience in a turnaround.
r
Increasing the knowledge and success of a turnaround by provid-
ing education, training and the provision of practical information
notes for those engaged in turnaround work.
r
Free one-day consultancy service by STPaccredited independent
executives for company directors wishing to discuss potential dif-
?culties in the strictest con?dence.
r
Regulation of STP accredited turnaround professionals.
r
Networking and education opportunities for members via regular
meetings in London and key centres around the UK, including
Birmingham, Bristol, Edinburgh, Leeds and Manchester.
r
Free Turnaround Executive Introduction Service to enable com-
panies and stakeholders to identify accredited independent exec-
utives for particular assignments.
227
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228 LEADING CORPORATE TURNAROUND
r
Lobbying Government and others on matters affecting the suc-
cess of corporate recovery, such as the recent Pensions Act and
its “Moral Hazard” clauses.
r
Annual Turnaround Awards Dinner to recognise excellence in
the ?eld of turnaround.
r
Annual Turnaround Conference to contribute to the future de-
velopment of turnaround.
STP is widely supported by leading UK institutions dedicated to the
successful restoration of corporate success, including the major clear-
ing banks (Barclays, HBoS, HSBC and Royal Bank of Scotland);
the large accounting practices (Deloittes, Ernst & Young, KPMG,
PWC, Kroll and Numerica); principal legal ?rms (Ashurst, Berwin
Leighton Paisner, Fresh?elds Bruckhaus Deringer and Travers
Smith); turnaround ?nanciers and service providers (Alchemy,
Burdale, Eurofactor, Gordon Bros, Hilco, Independent Trustee Ser-
vices, Kelso, Rutland, Venture Finance); and a turnaround boutique
(AlixPartners).
Further information is available from STP on +44 (0) 20 7566 4222
or at www.stp-uk.org.
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Index
accountability 42, 148, 186–7
performance management and 32–3
acquisition vs growth 28–9
added-value analysis 151
Adkins, John 167–9
advisers 3
as leaders 173–5
Alchemy Partners 14, 51
AlixPartners 56, 79, 162, 164, 204,
205–7, 213, 215, 216
Allen, Pelham 129
ambiguity, toleration of 7
Andersens 50
Anglo American Group 83
appearance 75
Arkle, George 67
Asda 89, 109
asset reduction 14
AT&T (Concert) 138
authority 7
autocratic leadership 10, 12, 13, 14, 16,
104, 115, 150, 178, 181, 182
B2B Courier 160–1
B2B technology 17
background of turnaround leaders 15
balance sheet insolvency 34
Ball, John 59, 189
Bank of England 199–200
banks 3, 119–21
multi-banking 119
syndicates 224
UK clearing 53, 54
Barclays 53
Barlow, Laura 213
benign dictatorship 112
BHAGs (big hairy audacious goals) 109
bias 115
Birkett, Aidan 57, 77
blame 78
Bland, Sir Christopher 101, 137–8
Board of Directors 130–1
body language 81–2
bonds 199
Bon?eld, Sir Peter 138
Boxclever Ltd 215–16
brainstorming phase 149
Branson, Richard 68
Brent Walker 40
Bridgepoint 142
British Aerospace 72
British Energy 218, 220–1
British Library 129–30
British Nuclear Fuels Plc (BNFL) 220
British Telecom 101, 122, 137–8
business assessment 37–43, 49, 55–62
business plan see turnaround plan
business process engineering (BPR) 30
Cable & Wireless 123
Caio, Francisco 123
Capellas, Michael 17, 123, 153
capital restructuring 34–5
Carter, Jim 110–11
cash crisis leaders 16
cash ?ow problems 34
cash generation 22, 23, 44, 98
cash management 2, 43
Cedar 160
Cegetel 138
Cellnet 137
cellular manufacturing 31
229
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230 INDEX
change management 173
change, toleration of 7
changing management 12
charisma 7
Chief Executive Of?cer (CEO) 23–4
Chief Restructuring Of?cer (CRO) 2,
3–4, 40, 116, 200–1, 210
role of 201–2
Civil Aviation Authority 130
Clares Group 150–3, 190, 191
Close Brothers 220, 221, 222
coercion 10
Collini, Peter 221
commitment to change 180–6
communication 132–3, 187–9
improved 33–4
straight talking 53–4
with the workforce 91–4
communications technology 188
company doctors see turnaround
executives
competitive strategy analysis 6
con?dence 7
consensus leadership style 13
consistency 7
contracts of employment 33
control 1, 98–104, 112
establishing 99
taking 76–80
target setting 100–1
co-ordinating advisers 216–22
co-ordinating committee (co-com) 118,
119, 224
corporate recovery departments 3
corporate renewal 46
corporate restructuring 136
cost improvements 30
cost reduction 14
cost-saving initiatives 98
courage in decision-making 55, 125
Courtaulds 162
credibility 34, 60, 118
credibility, clarity and courage (3Cs)
17, 132
creditor-led turnarounds 53–5
creditors
relationships with 121–2
stretching 103–4
crisis management 35, 36, 39
crisis stabilisation phase 45, 58, 67,
142, 194
crisis stabilisation 12, 20, 21–3, 58, 63,
78, 98, 97–112
crisis stabilisation specialist 5
critical process improvements 30–2
customers, relationships with 122–4
cynicism 33
Darlington, John 62
DeBeers 83
debt structure, inappropriate 34
debtor collections 39
debtor-led turnarounds 50–2
decision making 6, 104–6
delegation 15, 169–70, 183
Deloittes 57, 77
demand ful?lment 31
demand generation 31
denial 9
diagnostic analysis phase 36–7, 43, 116,
159–60
diagnostic review (strategic review;
business assessment) 37–43, 49,
55–62
dictatorial leadership 104
disclosure 119
disintermediation 111
disputes 120
dissent, dealing with 110–12
divestment 28, 136–41
domino effect 225
Donahue, Lisa 164, 165
Donovan, Mike 103
‘doorman/receptionist test’ 144
downsizing 1
draft participation agreement 225
Driscoll, Tom 60, 62
Dunlap, Al 14
Eagle Star 109
Eatwell, Load 130
Edwards, Lachlan 200
Ehret, Tom 170–2, 212
Eliasch, Johan 153–5
emergency phase 44–5
empathy 7
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INDEX 231
employees see staff
empowerment 166–73, 183
Energis 89–90
Enron 52, 129
Ensall, John 150–3, 190, 191
entrance, making an 75–6
EPTM 170, 171
equity 211
Eurotunnel 224
Exide Batteries 164–5
exiting 194–5
expectations gap 113–16
fear 59
?nancial advisers 218–22
?nancial analysts 131
?nancial plan, preparation and
negotiation 36, 42
?nancial restructuring 3, 13, 21, 34–5,
36, 136, 197–226
objectives 197–8
?nancial stakeholders 2–3, 116–18
?ve forces analysis 151
?exibility 7
focused training 33
forecasting 23
Freeserve 90
Gantt charts 42
Gardner, Calvyn 83, 125, 126, 128,
191, 192–3, 226
GE Work Out method 109, 184
gearing, excessive 34
GEC 72, 163
generic turnaround strategies 21, 22,
31
Gerstner, Lou 123, 187
Ghosn, Carlos 14, 156–7
Giles, Peter 68, 189, 190
Gillette 12
goals, audacious 100
government 129–32, 211
ground rules 94–5
growth 28–9
phase 46
vs acquisition 28–9
guarantee providers 210
Gudgeon, Martin 222
Hanson Trust 51
head of?ce functions 32
Head Tyrolia Mares (HTM) 153–5
hedge funds 209
Hick, Paul 57, 143–5, 155–6, 172,
183
Hoare, David 58, 68, 100, 145, 159
HSBC 53, 119
Hughes, Raoul 142, 145
Hughes, Talbot 219
humour 93
IBM 89, 123, 187
implementation framework 35–43
incentive schemes 179
indenture documentation 118
initiation of turnaround 49, 50–55
innovation 153–6
insolvency 118, 198, 199
integrity 117
inter-creditor agreement 118
interim managers 4
inter-stakeholder relationships 118–24
intuition 105
investment 156–7
involvement 183
Iverson, Ann 157
Jackson, Stuart 170, 212
Jaguar 169
JAL Group 204, 205–7
James, David 62, 139, 141
JIT 31
judgement, forming 105
junk bonds 199
Kaizen 164
Kanban principles 31
Keating, Stephen 52, 64–6
Kendall Taylor 54
Kilts, Jim 12
Kotter, John 8
Kovacevich, Richard 9
Kraft Foods 12
Krieger, Altie 84, 86
Laura Ashley 157
lawyers 217
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232 INDEX
Lazards 218–20
leadership
de?nition 8
vs management 8, 11–13, 162–6
strength of 8–9
visible 106–8
leadership style 10, 15
decision making and 104–5
Lee Cooper 57, 143–5, 155–6, 172, 183
Leighton, Allan 75
Liberty’s Department Store 59, 189
liquidation analysis 114, 217
liquidation value 198
listening skills 114
Lloyds TSB 53
loan documentation 118, 216
loan-to-own approach 209
London Approach, The 199, 200
Lovett, David 213
loyalty 82, 107
management
de?nition 8
vs leadership 8, 11–13
strengths of 8–9
management information system (MIS)
30, 161–2
Mandela, Nelson 125
Marconi Plc 51, 72–4, 102–4, 123,
180, 187, 218–20
Marks & Spencer 131, 166
McCann, Tony 146, 160–1
MCI (Worldcom) 52, 123, 136, 153
McIsaac, Ian 56–7
measurement of results 101
meetings 80–2
initial 76–7, 79
mezzanine debt 199
mezzanine ?nance 118
mezzanine funders 3, 210
mission critical 26
mm02 137, 138
Moore, George 148, 161
morale, staff 32, 33, 94, 107, 178
Moulton, Jon 14, 57, 160
Mvelaphanda Diamonds 126
My Travel 130
needs, corporate, understanding
214–16
new leadership 20, 23–5
Nissan 14, 156–7
‘no surprise’ approach 120
non-core assets 139, 140
Norman, Archie 17, 89–90
Of?ce of Fair Trading 140
openness 117
organisation development leadership 12
organisation structure
changing 32
simpli?cation of 179–80
organisational change process 32–4,
177–95
O’Sullivan, Patrick 79, 91, 109, 111,
184–6
outsourcing 29–30
Pareto (80:20) analysis 29
Parmalat 52, 129
Parton, Mike 17, 72–4, 102, 123, 180,
187
patience 14, 114
pension fund trustees 211
Pensions Act 2004 211
performance management,
accountability and 186–7
performance reviews 148
physical infrastructure 30
physical presence of new leader 75
Pluthero, John 90
power struggles 51
predictability 7, 11, 26
press 131–2
Price, Bill 181
PricewaterhouseCoopers (PWC) 62
private equity houses 3, 51–2
process improvements 6
product market refocusing 29, 145–53
progress reports 42
project management 36, 42–3
quality improvements 31
‘quick and dirty’ approach 30, 38, 58,
71
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INDEX 233
quick ?x 136, 172
quick wins 30, 108–10
Railtrack 129
Reality Gap 223
rede?nition of business 28
relationship building 55, 64–6
remuneration, negotiation of 69–70
Renault 14, 156
reporting accountants 216–17
resignation
director 51
public 51
resistance
to change 32
timing and 149
respect for employees 128, 139
responsibility 7
restructuring 217
negotiations, leading 222–6
retraining 129
return on capital employed 45
reward system 33, 187
rhetoric 93
Richardson, Charles 69
Riva Plc 189, 190
Riverhill Partners 221
Rolls Royce Motors 124
Rose, Stuart 166
Rothschild, N.M., & Sons 200, 207–8
Rover 129
Royal Ahold 207–8
Royal Bank of Scotland 53
Royal Mail 75
Royal Opera House 129
Sainsburys 131, 166
scepticism 16
secondary debt trading 120, 200
self-suf?ciency 7
senior management changes 24–5
Sexwale, Tokyo 125
shock therapy 24
silo thinking 32
Simpson, George 72
Six Sigma 164
socialisation in work 6, 7
Southgate, Sir Colin 129
specialist recovery funds 3
stability 7
Stables, Richard 218
staff
dysfunctional behaviour 32
morale 32, 33, 94, 107, 178
relationship with 124–9
turnover 32
stakeholder agendas 208–14
stakeholder con?dence, building 25, 26
stakeholder management 12, 20–1,
25–6, 35, 36, 40, 66, 113–33
stakeholder positioning analysis 114,
115
stamina 7
standstill agreement 202–8
Stolt Offshore SA (SOSA) 170–2,
212–14
Stormgard Plc 161
straight talking communication skills
53–4
strategic analysis 28
strategic change phase 45
strategic focus 26–30, 135–57
strategic review 37–43, 49, 55–62
strategic vision 141–5
structural change 32
successful recovery 46–7
support for turnaround 49, 63–70
support systems 31–2
SWOT analysis 151
Target Express 52, 63–6, 68, 160
target setting 100–1, 112
Taylor, Kendall 55
Tea Huts Story 110–11
team
building 1, 82–91
meeting 80–2
terms and conditions of employment
33
Thompson, Paul 119
‘3Cs’ 17, 132
3i 52, 63–4, 66, 68
‘Timberland test’ 144–5
time improvements 30
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234 INDEX
timing 43–6, 149
trade insurance companies 211
Train 18 167–9
Trans Hex Group (THG) 83–6, 125–8,
191, 192–3
transformation, transition to 189–93
transition phase 14
transparency 117
trust
building 59, 60, 75, 118, 119
customers 123
in employees 91, 139
of management 14
of stakeholders 70
turnaround executive 1, 2
complete 5
crisis stabilisation specialists 5
psychological characteristics of 6–7
role of 4–6
turnaround leadership, de?nition 8–11
turnaround plans 19–20, 26, 27, 198
development 35, 37, 40–1
implementation 35, 42
turnaround practitioners 2–4
turnaround team, selection of 35, 40
Tyco 52
Index compiled by Annette Musker
unions 33, 124–9
US bond holders 209
vigilance, continuous 102–4
Virgin Express 59, 68, 145
visible leadership 106–8
vision 1, 10, 100
strategic 141–5
vulture funds 35, 209
Ward, Nicholas 148
Wardale, George 150–1
Weinstock, Lord 72
Welch, Jack 111
Wells Fargo Bank 9
Wicks, Pippa 79, 162
Williams Holdings 51
wins, quick 108–10
Woolworths 89
working capital management 97
workstreams 35–43
Worldcom 136
Zenith 146
Zurich Financial Services 79, 109, 111,
184–6, 189

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