Early Warning Signs Pinpoint Business Troubles — Changing Leadership Style to Accomplish a Turnaround

By John M. Collard

Whether you are an investor, serve on a board of directors, own or manage a company, you face business risks. All of the stakeholders accept additional risk when the company is heading for trouble. Balancing these risks can cause a predicament. By recognizing some early warning signs that indicate business trouble on the horizon, you can eliminate, overcome, or, at the very least, side step many of those risks.

Business trouble means different things to each of us at different times. The perception differs depending on the stakeholder, but the fear is always the same — loss of their investment (money, time, energy, good will, reputation). The anticipation of loss is unacceptable. No one likes to lose — anything.

Lenders, creditors, and shareholders may lose their investment. Owners can face financial ruin, disgrace, or humiliation. But worst of all, the employees have the most to lose. They can lose a life force, their income, and have little to say over the decisions that impacted that loss. In these times of miserable job climate, stubborn economic recovery, and uncertain accounting practices, this loss can be the most devastating.

Top management is often aware that problems exist. The ‘trouble’ is, they wait too long to do anything about them. Why? Perhaps it’s hope. ‘Things will get better soon.’ Perchance it’s naiveté: ‘Management doesn’t know how to manage in this situation.’ Maybe it’s guilt: ‘If I’d been a better manager, I wouldn’t be facing failure in the first place.’ Perhaps it’s Founders Syndrome: The owner believes that only they, can run the company. But what is the most dangerous trouble of all? Denial [not the river in Egypt]. Denial makes owners or managers unwilling to admit that problems even exist. Or worse . . . it can blind them to the very problems that are heading their companies toward sure demise. Here’s the bottom line: The longer it takes to get necessary help, the harder it will be to relieve the trouble and the more risk you assume.

When a company is in trouble, the rules change. Management is often ‘out of its element;’ it is entering untrodden ground. People haven’t had to manage in this environment before. Why will they succeed now? The odds are that they will, at the very least, have difficulty.

Time and again, the obvious signs of business trouble are rarely its root causes. Losing money, for example, isn’t the problem. Rather, losing money is the result of other problems. Diminishing sales, declining profits, mass employee exit, creditor suits, the threat of bank foreclosure, and no cash are only part of the equation. These problems can be repaired. The true dilemma becomes, who can handle the crisis management role?

All Leaders Are Not Created Equal

To save the company you must change the style of leadership to affect change. Clear thinking must prevail and a special set of skills must be applied.

If there is a qualified leader within the company, then delegate the job of turnaround to them, and provide proper support. If there is not a qualified leader in the company, and there usually isn’t, don’t hesitate to locate a professional at this type of work.

Contrasting Leadership Styles

Let’s put this leadership role into proper perspective. Leadership requirements differ between those for healthy, growing companies and for those in a troubled situation. The CEO that managed the company into trouble clearly is lacking the skills to doctor it back to health. More @ www.StrategicMgtPartners.com/jpe-ews.pdf

Differences in style are a key to success, in either situation. In the growth scenario, team building and coaching are buzzwords. But in the initial crisis and subsequent turnaround situation, time is an enemy. Decisive action is required.

Skill	Stable, Healthy or Growth Scenario	Troubled or Turnaround Situation
Focus	On Objectives	Survival, action, problem-solving
Decision making	Deliberate	Decisive, Immediate
Authority	Delegate	Direct Involvement
People	Develop	Recruit talent Communications
Respected for:	Management reputation	Financial credibility
Known for:	Consistency	Ability to shift gears

The focus is dramatically different. This is one reason why the troubled environment is so foreign to many managers, and hence, the difficulty finding qualified talent from within the company. The stable environment allows for mistakes and longer lead cycles to achieve goals. Troubled companies have one goal — to survive and get well. If the symptoms persist with no cure, the patient can die.

If the leaders who were in power while the company’s position was allowed to deteriorate are still there, why should the lender believe that they would now be instrumental in correcting the situation?

To make matters worse, in the eyes of management, the lender is often viewed as an enemy instead of a key part of the turnaround equation. With all the suspicion that can surround a troubled company, it is important that trust be re-established with the bank. Credibility with the lenders is mandatory to success — and to keeping that cash flow at the bank. Since the bank holds the trump card, the institution must feel comfortable working with the turnaround leader. It means laying everything out on the table to keep the situation honest — and honoring commitments made to the lender.

The ability to deal with change at a rapid pace is essential. This is why a seasoned practitioner can be the answer to a successful turnaround plan, they’ve “been there, done that.”

 “When it rains, it pours” may be clichéd, but when applied to a troubled company, one can be sure that “Murphy is shaking the clouds.”

The Process

Along with specific skills and an understanding of troubled situations, the specialist offers a new perspective from which to independently evaluate the company’s circumstances. The process will focus on several issues:

• Is the business viable?
• What is the purpose of the business?
• Should it be saved? Why? Are those reasons valid?
• Is there a core business that can be the source for the emerging business?
• Are there sufficient cash resources to fuel the recovery?
• Which existing managers are capable of leading parts of the company?

Remember, not all companies are salvageable.

The fact-finding must proceed as quickly as possible so that a realistic assessment of the current state of the company can be prepared. The specialist’s first priority will be to manage cash flow — to stop the hemorrhage. Analysis of sales and profit centers, and asset utilization should indicate where the real problems — not the symptoms — are located. Next, a business plan outlining and suggesting possible courses of action — or cures — will be prepared.

Following this diagnostic stage, the transition can begin towards a turnaround. Most importantly, the leader needs to get things moving again. Once the course of action is chosen, implementation and monitoring can occur. The specialist should remain involved at least until the business is stabilized, and preferably until the transformation is complete and a new “Marquis” leader is found.

Who can help these besieged businesses?

Turnaround specialists generally are either interim managers or consultants. These leaders didn’t start out as such — they were often managers that worked their way up the corporate ladder through hard work and (hopefully) fair play to build a solid management reputation. They have developed a set of skills to handle problem solving, getting results with minimal resources, (tight) cash flow management, negotiating and dealing with bankers, investors and creditors. The stakeholders will usually work with a turnaround leader — if he/ she is credible.

Consultants are often a choice of the management team. Why? Because they are an advisor, they offer recommendations to management. Often the same management that guided the company into trouble in the first place. Why will they make those decisions now? Why risk allowing the same person to try again? Whether a consultant is effective depends upon management’s willingness to listen and implement the specialist’s recommendations.

Practitioners, by contrast, are hands-on decision makers who actually take control—often as CEO—for a period of time. They are in control of the company’s destiny, take decision-making reins, plot the course, and Steer the company through troubled waters, hopefully to safety. They must have an active line manager orientation, be decisive, isolate problems and find solutions quickly.

Be assured there are countless cases where existing management agreed to work with a turnaround consultant only to placate the board or the lender. There is no substitute for qualified leaders with decision-making authority.

When hiring a turnaround specialist:

• Check references.
• Review proposals versus what can realistically be accomplished.
• Require engagement agreements.
• Hire an individual, not the firm – personal chemistry with the managers is critical.

A good practitioner has three goals; 1) get control, stabilize the situation, jump-start the turnaround, 2) develop and implement a sound plan, and 3) hire their permanent replacement, while working themselves out of a job.

Early Warning Signs

Too often, companies die unnecessarily. Why? Because, most leaders haven’t learned to recognize the symptoms of oncoming illness in their business.

When you wait too long to recognize deteriorating characteristics the company seeks bankruptcy protection . . . only attorneys and accountants benefit from this process. It’s the astute lender or manager that recognizes infallibility, and has the foresight to ask for help . . . before serious trouble sets in.

Here are ten common signs that a company is heading for trouble. Carefully consider whether or not they apply. If you can answer “yes” to some of these questions, it is time to take decisive action. See a more detailed version @ www.StrategicMgtPartners.com/jpe-ews.pdf

Is the owner or top management over extended?   Whose work are they doing? When they continue to perform functions that should be done by others (once the business has grown to a more complex level), they’re over extended. They should do the work for which no one else is qualified.

Is the turnover rate excessive?  A sure sign of underlying problems is rapid employee turnover. Employees know when problems exist, the good ones will leave early. This condition can be the result of a faulty hiring process, inadequate training, poor management . . . the list goes on. The price for ignoring this problem is high: low morale, lost wages, recruiting costs, lack of productivity, and ultimately, forfeited business.

Are communications ineffective?  Ineffective meetings, management information, or inter departmental coordination can destroy a business from the inside out — even as it is growing.

Are goals unclear?  Chronic failure to achieve stated business goals suggests a problem far more serious than a lack of performance. Often, it implies a lack of clarity regarding the owner’s goals, and usually indicates a failure to secure management team ‘buy in’.

Take a long, hard look at the goal setting process. Set goals and hold managers accountable for success.

Are compensation and incentive programs yielding unsatisfactory results?  While it seems obvious that programs should clearly and directly reward for successful job performance, it’s remarkable that many companies unwittingly set up compensation structures that reward performance altogether different from that outlined in the job description; and from what is expected by the board of directors. A word of warning if this is your practice: Be careful what you pay for — you might just get it.

Is new business waning?  If so, you are out of touch with the marketplace. High prices, unresponsive proposals, and giving more than is required of you are the typical reason companies lose bids.

Commitment to winning new business is essential to success; so identify targets early on — always keeping a close eye on the customer’s special needs. Bid to win, and then manage for profit and growth.

Are any key client relationships deteriorating?  Determine if a decrease in business from long time customers is due to poor market conditions in their industry — or poor service from your company. If it’s you, you’re probably no longer meeting the customer’s needs. Worse — you may not know.

Does the company create ‘products in search of markets?’  Products developed before market needs are assessed can waste resources and be difficult to sell. It is less expensive to create awareness of a product or service that meets an existing demand, than to develop a new market for existing products or services that doesn’t exist.

Identify how your key competencies satisfy customer need and produce benefits.

Do financial and management reports cover the wrong information at the wrong level?  Financial and operational reports must be accurate, timely, and pertinent. Too often, management receives only traditional accounting measures of company value, instead of cash flow or new business generated.

Cash flow is the best indicator of business health. Prepare forecasts, and then manage to them. Management should determine performance at each level of the business (i.e. profit center, cost center, cash center), and update often.

Does the operation have a track record of failed expansion plans?  Setbacks drain businesses of cash, time, and morale. When companies fail in one effort, management tends to ‘pull in its horns’ the next time out. The result? Suppressed hopes for growth or expansion. Efforts fail because of inadequate cash, poor management, lack of market analysis, or improper control systems.

What Have We Learned?

Affecting a turnaround takes an array of skills. When in crisis there is no time for a warm up. To affect rehabilitation, the right leader will know how to make the quick and proper decisions, put a plan into action, and keep a talented team moving towards a healthy and more valuable end. Specialists and Outside Independent Directors are hired for their management ability, the ability to bring order out of chaos, the ability to marshal resources and maximize value from those diverse resources.

Recognizing trouble requires no hocus-pocus. Likewise, solving trouble’s accompanying problems takes no smoke and mirrors. If misery likes company, then trouble loves it; problems can multiply at a frightening speed. Seldom is there only one reason for business troubles; more than likely, you’ll discover two or three. The balancing act becomes weighing the risk(s) and taking action versus letting the status quo dictate a troubled course.

One thing’s sure: the longer you wait to admit that the company is heading for trouble, the more difficult the resulting problems will be to solve. Getting to the real issues is the catalyst toward change — and recovery.

And that’s a much more acceptable risk.

John M. Collard

John is a Certified Turnaround Professional (CTP), and a Certified International Turnaround Manager (CITM), who brings over 35 years senior operating leadership, $85M+ asset and investment recovery, 45+ transactions worth $1.2B, and $80M fund management expertise to run troubled companies, serve on boards, advise company boards, litigators, institutional and private equity investors, and raise capital. John has parachuted in as the Interim CEO, CRO or senior executive to turn around troubled entities, and serves as an outside director. John is Chairman of Strategic Management Partners, Inc. in Annapolis, Maryland. John is inducted into the Turnaround Management, Restructuring, and Distressed Investing Industry Hall Of Fame. John is Past Chairman of the Turnaround Management Association (TMA), Chairman of the Association of Interim Executives (AIE), and a Senior Fellow of the Turnaround Management Society. John is a Founder of TMA. John was honored as Prince Georges Business Leader of the Year. John is honored with the Interim Management Lifetime Achievement Award from the Association of Interim Executives.

Strategic Management Partners, Inc.

SMP (www.StrategicMgtPartners.com 410-263-9100) is a turnaround management firm specializing in interim management and executive CEO leadership, asset and investment recovery, board and private equity advisory, raising money, and investing in and rebuilding distressed underperforming troubled companies. The firm has been advisor to Presidents Bush (41 & 43), Clinton, Reagan, and Yeltsin, World Bank, EBRD, Company Boards, and Equity Capital Investors on leadership, rebuilding troubled companies, investment recovery, turnaround management and equity investing. SMP is celebrating 25 years of service to its clients. SMP was named Maryland’s Small Business of the Year, and received the Governor’s Citation, State of Maryland as a special tribute to honor work in the areas of turning around troubled companies and saving jobs in Maryland. Turnarounds & Workouts Magazine twice named SMP among the Top Outstanding Turnaround Management Firms. American Business Journals named SMP among the Most Active Turnaround Management and Consulting Firms in Baltimore, Washington, and the Mid-Atlantic Region. Global M&A Network Turnaround Atlas Awards named SMP as Boutique Turnaround Consulting Firm of the Year.  SMP is winner of Corporate Intl Magazine Global Award for Interim Management Specialist Firm of the Year. SMP is recipient of the Turnaround Management Firm of the Year Award by Acquisition Intl Magazine.