4 Common Mistakes to Avoid in Corporate Recovery
4 Common Mistakes to Avoid in Corporate Recovery – Not making avoidable common mistakes can save you a fortune in wasted effort and cash. Often ‘what not to do’ wisdom is as valuable as knowing what to do.
All corporate recoveries are based on assumptions. Make the correct assumptions and the turnaround stands a chance of success. Make the wrong assumptions and disaster is certain. What common mistakes in corporate recovery are based on which incorrect assumptions?
1. Cost cutting comes first.
Speak to any novice turnaround leader and s/he will tell you about their cost cutting campaign. Speak to any seasoned corporate recovery leader and s/he will tell you about their value added campaign. Why the difference? What is the difference? The difference, based on experience, comes from the assumptions made.
The novice turnaround “leader” assumes that the cash flow problem comes from excess costs.
The seasoned leader assumes that the cash flow problems come from lack of added value.
A novice argues as follows: “The company/division is losing money because costs are too high. Cut costs and profitability will be resumed.”
The seasoned leader reasons as follows: “Losses come from failure to secure enough orders. Reduced orders come from failure to provide enough value in the market place. Add more value and profitability will be resumed. Let’s come up with vast numbers of ideas to add value to our customers.”
2. Restructuring comes next
Ask the novice in charge of a turnaround and you will be told that a more streamlined, lower cost structure is required to save the division or company.
Ask the expert and you will learn that a structure that better serves the customer is what is required, and that any new structure is only required AFTER senior management has figured out how to add massively more value, and how to get closer to, and better understand the customer.
Let me share with you a case history to illustrate the difference. Twenty years ago I was appointed as Director of a national scale organisation. At my first board meeting it was announced that a restructuring was in progress. I asked about the purpose of the restructuring. It was to modernise; to get more up to date. As anyone who understood turnarounds would, I asked: What was the desired end point of modernisation, the updating? The answer? A full restructuring.
Charitably assuming that my question hadn’t been heard I asked again: what was the purpose of the restructuring? Again: modernisation. What was the intent of modernisation? Restructuring… ehm… Like you, I thought I had just walked through the looking glass.
Alas, no, the mad hatters were not cartoon characters. What you and I have just witnessed is the all too typically woolly thinking when it comes to turnarounds.
What the competent turnaround leader reasons is thus: “Once we get closer to the customer, once we know what massive value the customer wants, once we know how we can deliver that in a viable way, once we know how equip staff with processes and systems to deliver massive value, then, and only then will we think about what structure will best deliver that.”
3. Raise money for re-organisation
The novice turnaround “leader,” upon finding the cupboard bare, typically seeks to raise cash to “reorganise.” For reorganise, read the same kind of woolly “restructuring” thinking already covered.
“Only,” the flawed thinking goes, “if we can raise cash can we turn this around.” The list of companies that have tried the above doomed approaches is long. MFI, Woolworths, Comet (let’s stop there, it gets too depressing to continue). I know of at least five such national scale organisations playing out exactly this approach at time of writing.
One bizarre feature of an already bizarre approach is that in many cases the amount raised to “reorganise” could have and should have been invested to set up the successor business, into which assets could be migrated once working. Instead, good money is thrown after bad. Vast amounts are wasted on “restructuring and reorganisation.” A new organisation/structure to deliver a losing proposition remains a losing proposition, now with even more losses piled in.
Imploration to financiers: Please, please, please do not waste your investors’ money in “reorganisation and restructuring” unless there is a viable proposition to add massive value to customers. Your own analysis will probably reveal that less capital is at risk if you use a similar amount to set up a new proposition from scratch.
4. Financiers putting hope in a new management team.
Often it is a condition of raising finance that those whose failures took the company to the point of needing further “investment,” are not those who run the company after investment.
Here, too, we see the most bizarre “reasoning.” The CEO (and board) has been in place for three years. S/he has presided over a less and less compelling value proposition Cash flow has become increasingly tight. Would you trust such a person to put right that which their lack of clear leadership has caused to go wrong? I hope not.
A new management team would be required, and would be able to put right the problems. The investors place their hope in the new team. You’ve seen that too, yes? In which case you will also have seen this many times: the new management team immediately blames the poor leadership of the previous one, while also pointing their collective fingers at the structure, the shape of the organisation. The financiers now find themselves financing exactly the same restructuring and reorganisation that the previous group would have or did actually recommend, with exactly the same predictable outcomes. With one very big and expensive addition: the severance terms of the previous executives.
Successful and unsuccessful turnarounds: the causal chain
Novice turnaround leaders assume this causal chain.
“We have cash-flow problems because costs are too high. Costs are too high because the structure is wrong and there are insufficient cost controls in place. Restructure and put cost controls in place and normal service will be resummed.”
Expert turnaround leaders assume this causal chain.
“We have a cash-flow problem because insufficient customers are buying. Fewer orders are being placed because we are no longer competitive in the market place, we no longer add enough value. We add insufficient value because we have not kept place with changes in the market place. We have failed to keep up because we were not close enough to our customers. Because we were not close to our customers, we were unable to innovate. Because we failed to innovate orders declined. Because orders declined, we now have a cash flow problem.”
We have explored the 4 Common Mistakes to Avoid in Corporate Recovery. To address them all, there is one prime rule. To make any turnaround successful: add massive value to customers. Everything stems from that. Hardly surprising, since everything that caused the decline was caused by lack of adding value to the customer.
PsyPerform has developed a reliable system to maximise turnaround success rates. If you want to effect a successful turnaround contact PsyPerform.
Here are just some of the resources that PsyPerform has developed to maximise turnaround success, most of which are only available to PsyPerform clients.
Prof Nigel MacLennan
Copyright 2016 PsyPerform