Nov 232008

Dr. Earl R. Smith II

Many of the CEOs that I work with have never been through a significant downturn. Recent events are something new and threatening for them. Many businesses have been growing quickly – generating good profits without much effort. As a result, they have coasted when it comes to understanding the business of business. Downturns test how well a CEO understands of the importance of effective management – and how well their company can implement its principles.

During the easy times, management can take their eye off the ball and allow systems and processes to develop in a way that may not be sustainable as cost structures come under pressure – business development becomes harder – and corporate efficiency is tested.

The other day I counted the downturns that I had experienced. Including the minor ‘readjustments’, there were close to a dozen. I learned something from the accumulated experience. No company will always find green pastures and the ones that survive and thrive are as good at the business of business as they are in the business of the business. The ones that cannot meet this challenge go from being highflyers to liquidation with a speed that was frightening. There are many ‘dead bodies around’ – the test is well under way.

The first rule of downturns is that ‘survival is optional’. Tight money and increased competition for a shrinking demand is a test of any management team and there will always be businesses that do not measure up. Many of these businesses are savable but they end up in liquidation because management either does not or cannot adapt to the changing times. Sometimes this is because management does not have the required skills and flexibility to adjust to the new imperatives of a tight market. Others fail because management simply cannot bring themselves to respond appropriately. In both cases, failure is failure.

I regularly receive e-mails and phone calls from CEOs whose company has fallen on hard times – more so lately. The early indications of difficulties have shown up in the company’s financial statements – particularly the cash flow projections and calculations of operating reserves. In many cases, things have progressed so far that liquidation seems the only option. Sometimes it is, but often there are ways out of the box. I specialize in helping CEOs and their teams find those ways out.

None of the solutions involves rearranging the figures on an overly complicated spreadsheet. It is a matter of first re-examining the value proposition and the entire managerial process. I call the first stage of this process triage. We conduct a quick survey of the landscape and identify those immediate threats to the company’s continued viability. This results in an immediate action plan which can involve such things as trimming overhead, closing down unprofitable lines, reorganizing management, renegotiating agreements with suppliers, restructuring payables and much more. It involves a process of open dialogue throughout the network and a digging down deeply into the operations of the business. Often options appear that do not involve bankruptcy, but triage is only the first step – one designed to clear some space and time to address the deeper underlying problems. The end game involves ensuring that, when the business comes out the other end of the process, it is stronger, healthier and more competitive than it ever was.

Once the triage is completed, a tactical plan is developed. This is where the first major test of the CEO and management comes in. First, they have to think outside of the box and come up with creative ways to rebuild the company’s future. Second, they have to communicate that plan to the various stakeholders. Many CEOs have great difficulty in doing this because it seems to them an admission of prior failures. Defensiveness is a real impediment to this process and many CEOs would rather see their company go down than give up their aura of invincibility. There is no way forward which does not involve this – a CEO must come down from ‘Mount Olympus’ and join the rest of humanity.

A second challenge to CEOs is the need to get more familiar with the internal operations of their business. I have worked with some who seemed to think that this is beneath them. The result has been a corporate culture that separates the senior team from the business of the business. In these cases, the employees generally know more about how to fix the problems than the management team. The cultural divide needs to be removed and all stakeholders need to concentrate on reviving the fortunes of the company.

One of the most important steps at this stage is to involve the customer base more intimately in the planning process. Customers have a real stake in the future of the company and relationships with them need to be seen to. They are probably picking up indications that the company is in trouble. Simply telling them that those rumors are untrue will not solve anything – particularly when the assurances are untrue.

Management also needs to talk less and listen more. Many of the problems that I deal with have built up because a management team has seen communication as a one-way street – we tell them. Customers, suppliers, creditors, employees and investors all have important things to contribute to the process of navigating the rough times. Companies that work this two-way street strategy have a far better change of surviving. Involving them in the dialogues will also result in their buy-in to any survival strategy agreed on. Changes are more likely to be owned and embraced.

One the tendencies that gets many companies into trouble is an overestimation of what can be accomplished given the resources at hand. Many companies have avoided careful consideration of this issue based upon an expectation of the ‘next round’ of funding. I have often observed that plentiful, cheap investment money is an invitation for some companies to fail even more spectacularly. A good recover plan is based on the resources at hand.

When the economy turns down, businesses tend to ‘downsize’. First, they cut what they see as fat but eventually they get down to cutting muscle. Often they end up cutting the very resources needed to turn the business around. I have seen companies cut employee numbers and compensation while keeping the senior team and its compensation intact. A good plan conserves the resources necessary to manage a turnaround and reduces the costs of those which have exacerbated the problems.

Many times, during the good times the owners have received handsome rewards while the building of an operating reserve has been ignored. I worked with one company that had routinely distributed all ‘excess cash’ at the end of each calendar quarter. You can imagine what happened when things turned south.

Companies get into trouble when they overestimate the value of their value proposition – and overestimate the value of the results they can achieve. Every resource has its potential to generate benefits. Beyond that, it is not possible to generate more than its potential. Daydreaming about ‘home runs’ is counterproductive. For example, there is no point in suggesting an expansion of the business to new territories and new markets if the figures don’t add up.

The key to any effective turnaround is the development and implementation of a sensible and doable plan. Once that plan is in place, it is going to take contributions by all of the stakeholders to make is succeed.

One final observation – the people who got you here are probably not the people who are going to get you out of here. Misaligned management teams, poorly designed value propositions, ineffective business models, poor financial management, ineffective boards of directors and more contribute to the evolution of the crisis. It is going to take fresh eyes and new ways of thinking to unlock the value in the company.

If you are involved in a company that is facing challenges and want to talk about possible solutions, send me an e-mail and we will arrange a time to talk.

© Dr. Earl R. Smith II



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