Steps of a Turnaround

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How to Have a Successful Failure

This is the first in a two-part series on how your business can not only survive but also thrive after a major setback by embracing failure as an opportunity. This blog discusses successful businessmen who persevered after failures and ultimately became successful. Part 2 will contain specific tips on how you can achieve a successful failure for your business.

After two failed attempts to design an economical and reliable car, Henry Ford lost his financial backing and the confidence of people in the car business.

Undeterred and tired of those who knew nothing about design injecting their opinions, he found a more appropriate business partner from Scotland, Alexander Malcomson, who promised to not interfere in the design process.

With Malcolmson’s backing, Ford designed the Model T, which debuted in 1908 for $825. In the first year, 10,000 were sold. When the price dropped to $525 four years later, sales zoomed and Ford had a 48 percent share of the automobile market.

Henry Ford used what he learned from his failures to make a better product. “Failure is simply the opportunity to begin again, this time more intelligently,” he said.

Get Past Feeling Like a Failure

As a Turnaround Authority, I practice this philosophy when I work with companies that are failing. When I meet with senior management, they are often feeling pretty bad that the company is having difficulties. They may be feeling like failures on several levels.

One of the first things I try to do is to help them focus not just on past failures, but the opportunities the company now has in its current situation. These can often be difficult to see when your business is not doing well.

Great examples can be found in companies that not only survived the Great Recession but also actually came out stronger. An article in the Wall Street Journal in 2012, “For Big Companies, Life is Good,” referred to an analysis done by the Wall Street Journal of corporate financial reports. It found that “cumulative sales, profits and employment last year among members of the Standard & Poor’s 500-stock index exceeded the totals of 2007, before the recession and financial crisis.”

These companies turned to deep cost cutting and cautious investing to outperform their competitors. “U.S. companies became leaner, meaner and hungrier,” said Sung Won Sohn, a former chief economist at Wells Fargo & Co.

What is a Successful Failure?

Once you’ve acknowledged that your company is failing and that this situation can be overcome, that presents you with an opportunity to emerge leaner and meaner, what is termed a “successful failure.”

Let’s say your company does totally fail. Look at that as an opportunity to try again. Here’s just one example of a guy whose business failed and he came back even stronger.

Gary Heavin dropped out of college in 1976 and started a gym, becoming a millionaire by age 25. But his rapid expansion and high overhead costs led to financial difficulties and by age 30 the company went bankrupt.

Taking the lessons he learned from that business failure, Gary started Curves, a women-only gym. Again, he met with rapid success. He then franchised the business, which now has 10,000 locations around the world, and he is a billionaire.

Failures can be turned around into success stories if you perceive them as opportunities. After all, that’s what I do as the Turnaround Authority. It can happen for your company, too. Come back for part two for my tips on how to get started.

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Short-Term Pain, Long-Term Gain

For almost 40 years, I’ve been working with distressed businesses to create value for stakeholders. Unfortunately, the one common theme is that at some point during its life cycle all companies will experience financial difficulties caused by our economy or by management making the wrong decisions. Some companies will experience these difficulties more than once.

It’s how the companies deal with these issues that determine whether they survive or become a statistic of another failed business. The same could be said for individuals — how we deal with adversity can determine our survival or success.

I come from a humble, poor background. We were so strapped for cash that we had to borrow money to bury my WWII veteran father in 1964. Thanks to Social Security, my sister and I received death benefits until we were 21. To make additional money, I mowed lawns at age 12, sold peanuts at football games and had a paper route. The entire family chipped in to help with finances.

Many families also implement survival strategies for the greater good of its members. Some cut out dinners in restaurants so their daughter can go to cheerleading camp. Others drive their cars for 200,000 miles so the family can live in a nicer home. One parent works a day shift while another works at night so they can always have one parent with the children and save on daycare.

We deal with short-term pain for long-term gain.

The same concept goes for the companies I work with. My job is to educate people at these failing companies and implement survival strategy. It’s a tough, stressful job because it does involve people’s lives. I know what it’s like to struggle financially and I don’t wish to take anybody’s job away.

However, generally a turnaround does involve cutting jobs, reducing pay, closing plants, changing products or product lines, and sometime firing senior management that made the wrong decisions. Companies must change direction to survive.

Just look at all of the companies throughout the years that have changed for survival — Coca Cola, GE, Home Depot, General Motors, Chrysler, banks, insurance companies, probably even your company. All of these businesses have made tough decisions for survival. Unfortunately, some don’t. What ever happened to the buggy whip and wooden wheel businesses?

Yes, it’s always tough when people lose their jobs. But I learned to view those necessary job cuts in a different way. Years ago I was driving my son Sam to school. He asked me what I was doing that day. I told him that I had a rough day ahead of me because I was going to Philadelphia to lay off 200 people and close a division of a company. He looked at me like I was an ogre and asked how the kids of those laid-off parents would be able to afford camp, get baseball gloves and enjoy candy (now with kids of his own his concerns still lie in these three areas).

I told him that by laying off 200 people and closing one plant, I was saving 600 jobs and keeping the company alive. Certainly what I had to do was terrible for some people, but it was for the greater good. If I didn’t let 200 people go today then I’d have to let 800 go next month.

The strategy worked. Less than a year later, the chain was merged into a national retail chain and jobs were restored as the footprint expanded. It was another case of short-term pain for long-term gain

Another analogy of a turnaround is that of being in an accident and going to the emergency room. The dedicated doctors and nurses sole goal is for you to survive. Hours of surgery, many stitches, amputation of extremities may be in order. Later, the patient goes to the plastic surgeon, buys a wig or obtains a prosthetic. But, we survive thanks to these dedicated folks. Short-term pain for long-term gain.

All of us individually have made decisions that involved short-term pain for long-term gain. And companies have to do the same.

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How to Search for Superstars

In a previous column in this series on the initial steps of a turnaround, I wrote about the need to hire superstars. Of course, we’d all like to run a company made up only of the A-team, but never is it more critical than when we are trying to get a company turned around.

Look at it this way. If your car fell into a small ditch, your neighbors could probably give you a hand and push you back on the road. But if your car takes a dive into a deep ditch? You need a strong team of professionals to get you going again.

The companies I work with as a Turnaround Authority are in a deep, deep ditch. So I need the best possible team to get us out.

Often the superstars saw the company beginning to fail and have long ago jumped ship, further accelerating the downward spiral.

When I’m brought in, generally I’ve got a team full of B and C players and that isn’t going to get the job done. If we don’t have A+ people in key positions, we are doomed for failure.

I have to go out and find those superstars. I want to hire people smarter than me. I need people who can think outside the box and help come up with and implement creative solutions. I need people who are proactive and can get things done.

It can be a particular challenge to recruit superstars to a company that is in a turnaround situation. They often don’t want to come, or if they do, want a lot of money to do so. I like to find the ones who accept the position because they are up for the challenge because I know they are highly motivated to help us meet our goals.

So how do I find these superstars? First, I think about whether I want to use a search firm or not. That generally depends on the level of the position I need to fill. If I’m trying to hire for a $250,000 annual salary slot I will generally use a search firm, but for a $50,000 job I may not.

I’ve worked with people that balk at spending the money it costs to use a search firm. They are stressed out beyond belief, need someone ASAP to help run their business, but yet don’t want to invest the money to get someone in quickly to relieve that stress and get the company going again.

These people are not seeing clearly. They are not valuing their own sanity or the time they will have to spend during the hiring process. Headhunters are expensive but using one can be the best way to recruit the people you need.

Search firms allow you to cast a wider net, save you the time of interviewing, have expertise and connections in your industry and can help bring someone in quickly to relieve the burden on the other employees.

With these folks who insist on trying to hire a high-level position on their own using, I get them to agree to a timeframe during which they can try to find someone. If they don’t fill the position by a certain date, they agree to hire a search firm.

A lot of firms have turned to social media for hiring and it’s changing the world of recruiting. They use LinkedIn to ask for referrals, search for candidates by using keywords and for a fee, can post jobs on LinkedIn.

In a clever twist, Pizza Hut recently conducted 140-second interviews to fill its Social Media Manager of Greatness, going after candidates who can think at the fast-paced speed of social media.

Social media can also be used to find qualified “passive candidates,” those people who are employed but may be open to changing positions.

There are many ways to hire those superstars you need. The main thing to remember is that in a turnaround situation, you need them on your team as soon as possible.

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Who Will Stay and Who Will Go?

In this second of a series on the initial steps of a turnaround, the topic is how we decide who stays with the company and who will be let go.

In last week’s column, “The Initial Steps of a Turnaround: Nothing is Sacred,” I wrote that even if Grandpa Joe invented the rocking widget that started the company, if it’s no longer profitable that product line will be shut down. And if Grandpa Joe is still around and collecting a hefty salary while he spends the day perfecting his fly-fishing technique, he has to go as well.

In previous columns I’ve written about how I’ve had to fire business owners’ relatives and favorite long-time employees. It’s never an easy or enjoyable task but often has to be done to salvage the company.

300px-Blank_org_chart2So how do I decide who continues to collect a paycheck and attend the annual company picnic and who needs to pack up their things and go?

In an ideal situation, we will have time to assess the company’s situation, create a realistic budget, and then turn to the issue of downsizing staff if necessary.

I ask for the organizational chart and then take all the names off of the chart. I take the name of every person on that chart and put it on a separate piece of paper. Then I ask the senior management, “If you could start over again, how would you arrange the company? What positions are needed today to run the company?”

In good times companies tend to get fat. They add assistants, cars, desks, sometimes even buildings. Then as times get tough these positions and assets often remain even as the company’s financial situation begins to deteriorate. It’s a vital step to review the company’s organization in a fresh way.

That process may involve eliminating some positions, consolidating three jobs into two, or having people report in a different manner. Once we rearrange the organizational chart, we go through the names of the people on the pieces of paper and place them in the positions on the chart according to which person is the best one to handle that job, keeping in mind that we need the company’s best performers, its superstars, in the most challenging positions.

When that exercise is completed there will be names left that are not on the chart. And these are the ones we have to get rid of. They no longer have a role in the restructured company.

As for those superstars. In a number of situations the best employees have already left and those superstar performers are not available within the current pool of employees. So once we have stabilized the personnel that are remaining, provided new opportunities for some of the current people and gotten the company on the correct financial path, we need to conduct a search to find those key people.

We can’t run a company with all average people. We need to create a “Lake Wobegone” situation, where like the children there, all the workers are above average.

In the next post I’ll discuss how to search for superstars.

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Initial Steps of a Turnaround: Nothing is Sacred

Sometimes people ask me what prompts a business to hire me as a Turnaround Authority. At what point does a business decide it needs some outside person to come in and tell them how to run their own company?

Sometimes I am hired by a bank to assess a company’s viability prior to it making a loan. However, the primary way I am hired is at a bank’s request when a company is in default. Generally there are provisions in the loan documents from banks or bondholders that upon a default, a financial advisor will be retained by the borrower.

In the absence of such provisions in the loan documents, the bank can still “strongly suggest” that the borrower hire someone either in the case of default or because the bankers have become concerned that the company has lost money over the past few years. They are worried about its long-term survivability.

The Board of Directors may also be concerned about whether management has been evolving and changing in response to its customers and market trends. Senior management may be starting to worry whether their jobs are secure.

As the situation becomes more unstable, all this negativism starts to infect the entire company and flows through other key employees. They in turn then become less efficient and the downward spiral starts.

Everyone is feeling under pressure and often the CEO or business owner has become so overwhelmed he or she doesn’t know where to start and sometimes has pretty much given up on making any decisions at all.

That’s often when I am called in and am hired as a consultant or interim CEO. Now their problems become my problems. So how I do I get started to turn this business around?

For the next few posts, I’ll discuss the initial steps I take when I am hired to turnaround a company. Let’s start with what I look at.

Everything.

I want to look at everything that happens in that company, between the front door and the back. I want to look at all their vendor relationships. I was to see an organization chart of all the people at the top. I want to see all contracts, personal guarantees of senior personnel and loan docs.

I want to know about all the assets the company owns, information about all its products lines or services, what distribution channels are set up and how much is spent on shipping and freight. If the business generates scrap, where does that scrap go?

I always ask to see the current business plan. I’ve long since given up being surprised when I find out that when the “current” business plan was last reviewed, we were all listening to “Thriller” on cassette tapes, talking about Reaganomics and trying to solve Rubik’s Cubes. (I’ll write more on the necessity of having an updated business plan later.)

I tell the senior management that nothing that is in place is sacred. Nothing is untouchable, not even the idiot son with the big corner office whose interest in the company doesn’t extend past the big numbers on his paycheck. I will be looking at every aspect of the company.

We may need to shut down product lines. I don’t care if Grandpa Joe invented that rocking widget when he was down to his last dime and there’s a bronze cast of it proudly displayed in the lobby. It hasn’t made money since the Carter administration. It’s going to be retired.

We may need to change facilities, order inventory differently and collect receivables faster.

The point is to throw away all the old assumptions so we can begin to look at operations in a new, fresh way that may generate ideas to cut out the fat to operate more efficiently and discover ways to become profitable.

Next week I’ll write about how I determine which key personnel will stay in the new company, and which ones will go.