September 1997
Troubled Companies - Causes & Cures
By Paul Erickson
Erickson Strategic Consulting Services
Erickson Strategic Consulting Services
Three Kinds of Companies
Executives, lenders and investors all know from experience that operating companies tend to gravitate towards one of three defining profiles:
- Winning companies flourish, listen closely to their markets, acquire, generate positive earnings and cash flows, attract capital and talented people. They become a model for others.
- Losing companies have ideas but then lose accounts, release non-competitive products, suffer a fire or other asset loss, drain critical talent and fail to generate vital cash flows. These companies disappear through sale, takeover or liquidation.
- Troubled companies have periods of success but develop a pattern of little or no growth, inadequate cash flow, stale product/service development and sagging morale. These companies manage to survive but only with the forbearance of their customers, vendors, lenders and employees.
Origins of Trouble
While specifics vary, troubled companies share a number of common characteristics:
- Problematic owners/board of directors. It all starts at the top. An otherwise capable management may be unable to overcome the limitations of contentious owners or a conflicted/neglecting board. Many small, privately owned companies operate without the benefit of a well functioning board.
- Lack of vision. Troubled companies often lack strategic vision and clarity on market positioning. Planning is limited to the annual budget which may only be an update of last year's results without focusing on underlying market and operating issues. Crystal clear owners/corporate objectives are essential.
- Product myopia. There tends to be strong dedication to the existing product line and a resistance to change. Managers describe their companies in terms of products/services provided and operational procedures rather than market position, technology trends, user benefits, etc.
- Ineffective "intelligence". Troubled companies often suffer from a lack of current, analyzed information about the external environment, insights the military refers to as "intelligence". There is usually a strong inward bias and a corresponding inattention to the marketplace, customers, competitors, distributors, end users, trade associations, etc.
- Weak financial management. Strong internal controls and financial planning are often seen as unnecessary. Cash flow reporting, analysis, forecasting and management is inadequate. There may be a lack of focus on maintaining strong gross margins, one of the drive wheels of every business. Capital structure planning is rare.
- Inadequate management information. Limited operating information is the rule. Sales and market segment analysis may be missing. Financial reporting is driven by a financial statement rather than an operating mentality. Years of low computer investment results in limited capability. Incomplete control procedures for source data input render subsequent analyses of only limited value.
- Compromised staffing. The organization structure may be inappropriate to the situation. In larger companies, a line-of-business rather than a functional structure may be needed. Required talents may be missing. Confused or overlapping responsibilities are often present. The CFO position is frequently ineffective; the position may be vacant, held in name only by a long-service "accountant" or occupied by a trusted but inexperienced relative.
Addressing th Trouble
Turning around a troubled company requires experience, perspective and strong measures.
- Emotional commitment. Many troubled companies have developed a significant resistance to change. A substantial emotional commitment is required at the top if needed operating changes are to become reality. New goals must be set and a "go-get-em" type of leadership will be needed. A successful turnaround cannot be accomplished in a business-as-usual environment.
- Restructure Board of Directors. Changes at the Board level will be needed if strategic or policy differences are blocking important decisions or if financial conflicts of interest exist. A troubled company without a board can be substantially strengthened with the addition of seasoned, objective advisors.
- Management changes. Sometimes "thinking outside the box" requires the addition of new people on the team. One or more senior people may need to be reassigned in order to address critical issues and to develop necessary new directions and policies for the company.
- Re-assess product/market priorities. Existing products/services may be attractive with the trouble resulting from poor internal execution or it may be that the product/service mix is no longer viable. The concurrence of selected products and markets, and the underlying strategies, are at the core of every company's success.
- "Feed the winners, starve the losers." Proper allocation of resources is fundamental to sustained success. Slow growth, highly competitive, weakly distributed, high investment, low margin lines sap a company's financial and eventually emotional strength. "Losers" need to be "starved" for people and capital so that "feeding the winners" becomes financially feasible.
- Look for a P & L break through. All past policies and decisions are reflected in a company's financial statements. To increase gross margins, changes may be needed in the product mix, vendor policies, distribution, pricing, etc. Overhead reduction usually requires a restructuring rather than a cost reduction approach. Asset and debt realignment may also be needed.
- Incentivize. Reviving a troubled company requires talent, dedication and extra energy. For those that are willing to go the extra mile meaningful incentives will be important. Be careful! Incentives must be structured so that only clearly superior results are rewarded.
* Source: Donald Bibeault, Boardroom Reports, August 1, 1985
WHAT TO DO?
Reviving a troubled company is not a sure thing. A high-energy, experienced pair of "fresh eyes" is usually needed to evaluate the situation and then to map out and direct a successful turnaround. Some elements of the prescribed program may be unpleasant. Remaining in a troubled mode is unpleasant as well. Owners and managers of troubled companies DO have a choice.
