Turnaround management: the mission, the methods.

"The trend is for creditors to bring turnaround experts into a company during its early-to-mid decline, rather than in its final liquidity crisis."

Helping troubled companies survive the present economy has recently brought forth a new management specialty, the "turnaround expert."

The turnaround job is not for everyone. Negotiations with creditors must be handled while attempts are made to remedy the inefficiencies of the declining company. Morale of a shaken work force must be maintained.

The trend is for creditors to bring turnaround experts into a company during its early-to-mid decline, rather than in its final liquidity crisis.

There are two types of turnaround experts hired to salvage declining companies. One is the "slash-and-burn" kind who concentrates on short-term tactics and is indifferent to a corporation's long-term future. The other is the strategic thinker who is concerned with enhancing the value of current assets and preserving the firm's long-term viability.

Before deciding on whom to retain, the creditors' committee or bank workout department hiring the turnaround experts should consider the desired results--a quick liquidation of existing assets or a rebuilding process to preserve and enhance current values.

Different Strategies

When the slash-and-burn experts appear, they frequently concentrate on three short-term tactics: immediate head-chopping to reduce expenses; juggling short-term financial matters to boost cash flow; and negotiating with creditors and banks to prevent a liquidity crisis and perhaps a visit to bankruptcy court. The latter two tactics are necessary expediencies but the first, head-chopping, often tends to produce three general results.

First, indiscriminant dismissals often result in age discrimination and wrongful termination suits brought by fired managers and white collar workers. Unionized workers frequently engage in slowdowns or strikes at a time when the company can ill afford such actions.

A second result of short-term tactics is that the survivors of the Black Friday dismissals fear for their job security and often lose initiative. Surviving managers are overwhelmed by the new, unexplained responsibilities generated by handling their jobs as well as the assignments of those managers who were let go. The better middle managers seek our other more stable jobs.

Most importantly, the third result of slash-and-burn tactics is that productivity and product quality fall. Faced with the short-term need to cut, personnel expenses are the easiest to slash. The ensuring head-chopping done to save cash is often executed before identifying and remedying the organization's inefficiencies.

Perhaps one reason turnaround experts adopt these short-term tactics is their background. Most have broad financial experience and can steer their way through a balance sheet or P & L statement far more readily than they can navigate around a factory floor. These turnaround experts are more apt to try some type of financial legerdemain to improve a sickly P & L statement rather than seek new ways to increase the efficiency of manufacturing, restructure the distribution system to speed deliveries to customers, or develop new products.

The second type of turnaround expert is a strategic thinker interested in obtaining employee cooperation and knowledge to bring about long-term resolution to the problems facing a distressed company.

Almost invariably, these turnaround managers take a quick look at the financial statements to see when or if the company will run out of working capital. They then attempt to negotiate a stand-still agreement with the company's creditors and obtain some additional short-term cash and time.

Five Key Goals

Having negotiated the time to start the revival, my experience indicates that strategic turnaround executives have five key goals: (1) stemming the cash drain by cutting expenses; (2) identifying the underlying problems that have caused the company's decline; (3) gaining cooperation of employees in solving the internal problems; (4) training and motivating employees to improve their effectiveness; and, (5) creating the multi-discipline teams of managers needed to develop new solutions to the old inefficiencies.

Cutting Expenses

Having gained some breathing space, the turnaround executive will cut some of the extravagances and glaring examples of waste. Executive perks, including cars, special dining rooms, and country club dues are quickly eliminated. Obsolete or out-of-fashion finished inventory is quickly sold, often at reduced prices. Accounts receivable are policed, and discounts start to be taken on payables. Only then, if necessary, are personnel reduced, starting in the staff functions. Frequently, significant short-term savings can be achieved by these steps.

Identifying Problems

An important step in this process is for the turnaround expert to establish his or her credibility and let employees know what the state of the company is--honestly and forthrightly. In this process, the turnaround executive can start building a company-wide team by telling employees that he or she intends to tap their wealth of product and technical knowledge to identify and solve the company's problems. An able turnaround expert moves immediately to make the entire workforce part of a team motivated to save the company.

"If the vice presidents cannot tell me why a certain situation exists, or a certain practice is used, then the managers often can," says Gilbert C. Osnos, Osnos & Glass Associates, Inc., New York, N.Y., one of the nation's leading turnaround experts. "And if the managers can't tell me, first-time supervisors or their employees often have the answers, and then I compare notes," he says.

Gaining Cooperation

Busy turnaround executives have found that the most effective method of seeking ways to streamline operations is to use outside experts to start a company-wide "Employee Participation Program" and then train the company's staff to continue it. An employee participation program is a broad-gauged systematic effort to seek out employee suggestions for ways to eliminate waste and improve productivity, using specially structured interview conferences led by skilled professionals.

In most cases, turnaround executives are far too busy to undertake this broad effort themselves. Moreover, the experts succeed because employees are eager to voice their ideas, especially to outsiders who have nothing to defend and from whom employees need fear no reprisals. This is as true for managers as it is for support staff.

Employees respond because they quickly realize the "participation program" is not a subterfuge aimed at reducing payroll costs or a device designed to prepare unions for concessions. Rather, it is truly an overall effort to seek employee cooperation in identifying and eliminating inefficiency and waste, wherever it occurs.

Typically, employees in declining companies have been frustrated by the indifference and inefficient methods of the former management which often flew in the face of operating realities as seen by the workers. Thus, when new ideas to improve productivity are sought by a turnaround executive through an employee participation program, a host of good suggestions is almost invariably forthcoming. The increased productivity improves profitability, thus lessening the need to reduce personnel or cut salaries and benefits.

Educate Management

Part of the process of receiving a company is to make middle managers aware of the basic business problems facing the organization and use their expertise to seek solutions to them. Turnaround experts often approach this task by assembling middle managers at a weekend retreat. The managers are asked what the company does best and what the company does the worst. This approach is successful when a turnaround executive wishes to return a company to its core profitable businesses and eliminate the money-losing peripheral operations.

Turnaround executives often ask skilled facilitators to handle the meetings, while they observe from the sidelines. The insights gained by the turnaround executive are valuable in assessing the ability of individual managers to function as continuing members of the team.

Training Management

As the problems of the organization are defined and their solutions begin to come into focus at the retreat, astute turnaround executives often provide additional management training to help the surviving managers excel in their new responsibilities--training that emphasizes teamwork, delegation, cross-functioned task forces, and vague lines of authority. Accompanying the training must be feedback systems for goal attainment and recognition.

Multi-Disciplined Teams

The employee participation programs frequently indicate how the operating problems within a failing company are due to senior managers whose individual efforts have not been coordinated, rather than to lazy workers or stifling union contracts.

The participation programs also indicate which company problems can best be tackled by multi-disciplinary task forces. With representatives from each area, task forces can identify the sources of overall company problems and commit the resources of their own disciplines to solutions that boost overall company profitability, rather than serve the sometimes parochial plans of individual area managers.

Results at a Garment Maker

For example, one large maker of children's wear was in deep trouble. Costs were mounting, as was unsalable inventory. Only 56 percent of customer orders were shipped on time, and quality was poor. The company's creditors instead on new management, and a turnaround expert was installed as president. He learned that few of the designers at the company's northern headquarters ever visited the manufacturing plants in the south and had no idea of the havoc their complicated high fashion designs were causing on the production lines.

The plant managers wanted to concentrate on simple, basic garments that were easily sewn. That pleased the sewing operators, who received piece-work incentive rates. The design staff, on the other hand, wanted to use their creativity to design high-fashion garments. Unfortunately, these garments were difficult to sew and had a relatively small market, which meant short production runs in the cut-and-sew factories, and frequent (and painful) production-line change-overs.

The turnaround executive asked most of the middle management ranks from all the company's disciplines--sales, design, engineering, and manufacturing--to attend a weekend retreat.

At the retreat, the executive stated the company's current problems, announced his plans for a change in the product mix, and explained how these changes would help the company. The changes would lower the garments' price points in the stores, cut manufacturing costs, reduce inventories, and ultimately boost sales volume by appealing to a broader market. The meeting was then turned over to a facilitator, who asked how each department could help change the company's direction. It was not until this meeting that the design staff was aware of the problems manufacturing was having, nor did manufacturing understand why the designs were so complicated.

Multi-discipline launch teams were then created, one for each line of garments. Each launch team received training emphasizing team building, communications that encouraged innovation, and collaborative styles of management. The function of each team was to shepherd a product line through the design and engineering phases so that easily sewn designs could be released to manufacturing on schedule and sample garments would be available to buyers on time.

Color hues were reduced from 544 shades to 110; and labor costs per dozen of the more simply designed garments were reduced 22 percent on average. Finally, late shipments were cut as a result of these efforts, so on-time deliveries were averaging nearly 90 percent, up from the lamentable 56 percent.

Different Problems--Different Solutions

Companies find themselves in financial difficulties for many different reasons. Some companies, like USG, Inc., Carter Hawley Hale Stores, Inc., and Interco, Inc., had taken on enormous debts in an effort to thwart takeovers, and choked on their debt. Interco filed for Chapter 11 in 1991 and is suing its former investment bankers for negligence.

Others, like Greyhound and Eastern Airlines, can point to years of labor and violent strikes as the reasons for their demise. Still other companies, like G. Heileman Brewing Company and Harcourt Brace Jovanovich, found themselves in hot water when they overleveraged themselves, despite healthy sales. Declining sales in a retail market doomed overleveraged Campeau Corporation and its Federated Department Stores and Allied Stores' subsidiaries.

There is little a turnaround executive can do about over-leveraged companies except to negotiate debt restructuring with the creditors at the expense of equity, while struggling to keep employees and managerial moral high and operation on an even keel.

What to Do

Turnaround executives have dealt quite successfully with inefficient operations. Harley Davidson reinvented itself in the 80s and once again dominated the motorcycle market at the expense of the Japanese. Fluor Corporation recovered with new management, as did Storage Technology Corporation, Bethlehem Steel Corporation, the Wickes Companies, Inc., and International Harvester (now Navistar International Corporation). Wheeling-Pittsburgh Steel Company also survived, although it required a five-year stay in Chapter 11 to do so. Turnaround executives also have revived many smaller companies, including Health-Tex, Inc., Giddings & Lewis, Inc., Koss Corporation, and Carpenter Body Works, Inc.

In many cases, the turnaround executive can use his or her managerial skills and the information derived from special employee participation programs to gain employee cooperation and suggestions to identify and solve the company's internal inefficiencies, without massive layoffs or indiscriminant cost cutting. That's harder to do than slash-and-burn tactics, but it preserves jobs, equity, and the company's on-going value for all stakeholders. It might be easy, but afterall, that is what the turnaround expert is paid to do. Woodruff Imberman, PhD is president of Imberman and DeForest, a consultants to management company, Chicago, Ill.