Act Like A Startup to Activate a Turnaround
Co-authored by Tracy Streckenbach and Tom S. O’Donoghue, Jr.
Originally published in the American Bankruptcy Institute Labor & Employment Committee June 2017 Newsletter
Revenue and EBITDA are down, the cash runway is short, and time is of the essence. So in a turnaround, set your sights on becoming a start-up.
As turnaround professionals, we often see a pattern that most will see only once. Like the five stages of grief (denial, anger, bargaining, depression and acceptance), turnarounds unfold, sometimes obvious to observers but not entirely clear to those in the middle of the vortex. During a turnaround, most senior leaders go through five stages, too (denial, bargaining, anger, decomposition and acceleration). Like the stages of grief, the process begins with senior leaders being in denial.
Denial: “I Know It Looks Bad, but It Won’t Last”
Denial shows up in unrealistic sales forecasts (hockey stick or simply not grounded in past performance), lack of willingness to make cost reductions even in the face of declining revenues (“It won’t last.”), and an unwillingness to address poor employee performance (“It’s not their fault.”). We recently worked with a client who had such optimism in his business that he described it as being stronger than at any time in the previous eight years. Cash-flow analysis, however, showed the company running out of cash in a few short months with no access in place for additional funding.
Bargaining: “I’ll Do Anything if You Just Get These Guys Out of Here”
Bargaining usually kicks off when sponsors bring in advisors to look more carefully at the business. Faced with impartial observation, pointed questioning, targeted analysis and advisors who know a turnaround when they see one, senior leaders push back. At this stage, in a bid to regain control, leaders often begin to acknowledge shortcomings and express confidence in their team’s ability to resurrect the company’s performance. It is important to remember during this stage that the team that dug you in may not be the one needed to climb out. Augment the team to cover blind spots. If the CEO has a heavy engineering and operations mindset, balance may be required by elevating an existing or interim leader with a sales and marketing perspective to ensure that the revenue side of the turnaround gets the appropriate focus.
Anger: “I Was Going to Do That; I Didn’t Need Your Help at $20k per Week”
As the advisors crystalize the situation and present options, the path forward becomes clear. Integrated modeling (cash flow, income statement, balance sheet) grounds the plan, and financial and operational key performance indicators (KPIs) are identified to track progress against the plan at weekly intervals. Company leaders realize a loss of leadership capital. Anger comes into focus. This either takes the form of stonewalling and pushback, or a re-writing of history, sometimes based in fee frustration (“I was going to do that; I didn’t need your help at $20k per week.”). At this stage, stay the course. Once the plan is in place, implementation begins.
Decomposition: “This Place Will Never Survive Without Joe”
As teams progress through the plan, deep cost-cutting may be required, often touching a third rail: killing a pet project or terminating a protected employee. To successfully complete a turnaround requires ruthless elimination of underperforming employees while simultaneously protecting the best teams and projects. During this phase, some will predict immediate demise (“This place will never survive without Joe.”).
It has become commonplace at this stage to enact across-the-board pay cuts under the theory that it is the fairest path forward. While this plan is swift and most easily defensible, it is wholly ineffective and results in defection of the best employees (those with options) and retention of low performers (those lacking career mobility). If you don’t have performance reviews to substantiate your decisions, create a simple model with a five-point rating and have managers rank all employees on four to five qualities that are key to your short- and mid-term success. Compile the results, and use this to support your decisions. Eliminate underperformers quickly, and do yourself a favor: Eliminate vocal dissenters working to convince peers that the company will fail. Work hard to retain top performers and those who rise to a challenge. Implement incentive bonuses for those who will most influence the company’s success. In a turnaround situation, you need a strike force, not a battalion with large numbers wounded.
Acceleration: “Remember When We Were a Start-Up?”
Eliminating management layers is scary. But flattening reporting structures and streamlining decision-making will energize your strike force. Even stripping out some comforts employees had taken for granted can have a boot-strap feeling. Teams will learn to rely on one another, and as employees begin to see their impact on the company’s progress against plan, action will accelerate. The urgency in a turnaround generally means decisions are being made more quickly, progress is evaluated more frequently, and pivoting can happen with urgency. As you turn the corner, the company vibe will take on a start-up quality. This is when you know you’re almost out of the woods.
While every situation is unique, there are recognizable stages, a cadence, in a turnaround. Knowing what to expect is helpful, and having the right guide and a motivated and thoughtfully balanced team is critical to your success. If you are entering a turnaround situation, put your strike force in place and work the plan. Your goal is to become a start-up again: motivated, scrappy and looking for growth.