Consulting in company transformation

Methods of transformation

Many different methods are used by companies and consultants to develop and implement transformation strategies. The most widely used methods are reviewed below. These methods are not “pure” and mutually exclusive patterns – managers and consultants often combine or switch methods or use hybrid methods reflecting their own experience and their particular approaches to transformation.

22.4 Company turnarounds

A management consultant may be asked to assist with a turnaround of a company that is in trouble. A turnaround strategy often involves total restructuring and reorganization, or constitutes a prelude to major restructuring, and usually affects all the functions and activities of a company. This is a particularly difficult strategic assignment. The consultant will probably be brought in at a very late stage, when bankruptcy may be imminent. He or she may be regarded as a potential saviour or the last hope. The management of the company is often paralysed and in panic, under extreme pressure from creditors, banks, trade unions, tax collectors and others.

Before accepting such an assignment, you should consider whether your experience is adequate for a task that carries so much risk and responsibility, and what the cost of failure will be. If you accept the assignment, you should make sure that your and the management’s roles are clearly defined and understood, since there will be no time for lengthy discussions and negotiations, and some measures will need to be approved and executed immediately. If you feel that senior management itself is the cause of the trouble, or one of the major causes, you should make it clear that personnel changes may be necessary before committing yourself to the assignment.

Aquick preliminary diagnosis will help to evaluate the overall situation. In particular, it is necessary to assess whether the company can still be rescued, and if so, how much this is likely to cost and whether the task is beyond the management’s capabilities. If it is too late, or the cost of a turnaround operation would be prohibitive, there may be no other solution than to sell or liquidate the company.

Following the preliminary assessment, it is not advisable, and often not possible, to carry out lengthy in-depth diagnostic studies. There is a crisis situation; some creditors have to be paid today, others tomorrow, and the most competent staff may be thinking of leaving the sinking ship. Emergency measures have to be taken: a dialogue with the creditors is essential, and resources have to be found to make the payments that cannot be postponed.

The emergency measures will involve decisions that produce immediate savings, or that stop further deterioration in the company’s financial condition (e.g. a recruitment freeze, restrictions on foreign travel, termination of temporary help, increased emphasis on timekeeping and work discipline, cuts in entertainment costs). Some of these measures will not produce major savings, but

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will rather help to create a new atmosphere in which people start to realize how serious the situation is. At this point the consultant should make sure that employees are invited to contribute to the turnaround in every possible way. This may involve establishing various means of making such participation possible, without, however, divulging information that has to be kept confidential.

Stock should be taken as quickly as possible of existing resources and of financial and other commitments, since the company will have to avoid further crises, pay interest and settle certain liabilities, while progressing with the turnaround. Step by step, the consultant will be able to complete the picture of the client company’s condition. It is essential to identify the real causes of trouble. They may be external (depression in the whole sector, prices of raw materials too high, important markets lost for political reasons) or internal (incompetent management, conflict between management and trade unions). In many cases, external and internal causes are combined (external factors cause serious trouble because management did not spot them early enough, or management gradually became paralysed under the influence of adverse external conditions). Financial and other controls have to be tightened in all departments.

The external partners, in particular the creditors, must be shown that a serious turnaround exercise has started and is producing results. In some countries (e.g. in the United States under Chapter 11 of the Bankruptcy Code), a company can obtain temporary protection from creditors’ claims while it is restructuring its finances and reorganizing operations in order to become solvent again.

Following the inevitable emergency measures, the turnaround programme should move to the strategic measures needed to restore financial health and viability in the long term. Time continues to be short, and every change has to be carefully programmed and the timetable controlled. The responsibilities of all managers and departments must be clearly defined, and their contribution to the total programme specified to permit evaluation and rewards corresponding to real results.

It sometimes happens that, when helping with a turnaround, the management consultant, with the client’s formal or tacit agreement, steps out of his or her strictly advisory position to tell the client what to do, or even to give direct instructions to the client’s employees. There is no general rule governing how far such behaviour can go, in particular if it helps avoid a crisis. There have also been cases of consultants recruited to assist in a major turnaround who have accepted managerial positions in the client company in order to bring the whole programme to a successful completion.

Turnaround or rescue consulting is one of the fastest-growing specialities within the broader field of management and business consulting. Many turnaround consultants handle only one or two stages of turnaround, mostly to stabilize the business. Once stabilized, the business is turned over to other consultants, who continue rehabilitation by tackling the debts and taking measures to make the company profitable again.

There is no single formula for success in rescue consulting but there are some common features. First, the consultant should look for the aspects of the

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Consulting in company transformation

business with real potential. Poorly performing companies are often a hotchpotch of ill-assorted businesses, the result of previous acquisitions, and what is needed is more clarity of focus and a return to core strengths. This suggests that flagging companies need an outsider’s perspective, be it from nonexecutive directors, consultants, or company “doctors”. Experienced managers who will actually run the business are of course still necessary and consultants should be prepared to recommend them. Box 22.2 suggests a sequence of useful actions in implementing a turnaround plan.

Box 22.2 Implementing a turnaround plan

1.Visualize where your company should be: set turnaround objectives:

●Double sales?

●Finance growth only from profits?

●Increase plant utilization from 70 to 90 per cent?

●Reduce payroll from 12 to 9 per cent of sales?

●Go from break-even this year to 6 per cent profit next year and 8 per cent in three years?

2.Plan the right strategies, answering these or similar questions:

●Terminate losing activities?

●Cut costly programmes?

●Undertake new marketing?

●Develop new procedures?

●Merge with another company?

●Grow by acquiring new companies?

●Shrink operations?

3.Implement change, keeping in mind four points:

●What will be done?

●Who will do it?

●How will it be accomplished?

●When will it be completed?

4.Focus first on what most affects cash flow, then move on:

●Identify the turnaround task you must implement.

●Determine the relative importance of the task.

●Develop workable action plans for each task.

●Commit everyone to completion dates on specific assignments.

5.Monitor the plan:

●Set realistic benchmarks.

●Track your recovery against crude but predetermined goals.

●Make adjustments when your plan goes astray.

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