Is it all going pear-shaped?

BUSINESS TURNAROUNDS:Corporate failure is on the increase, but for many businesses salvation is possible with the right approach. Turnaround specialists are doing a roaring trade, so what advice do they have and what can companies do when they get into trouble?

THE OXFORD English Dictionary defines a turnaround as "an abrupt or unexpected change, especially one that results in a more favourable situation". In the corporate world, however, turnarounds are rarely abrupt and seldom easy. Changing the fortunes of a corporate entity is more typically a slow and painful process and one that does not always have long-lasting results. Indeed, management books and articles that chart the success of corporate turnarounds can prove embarrassing for their authors, given enough time.

As recession bites, managers of struggling enterprises could no doubt seek inspiration or solace from some of the more enduring turnarounds stories of our time.

Ireland has added a few to the collection. Take engineering contractors Kentz Corporation for example. Following a management buy-out of MF Kent, a family owned firm established in Clonmel in 1919, the newly styled Kentz Corporation went on a rapid international expansion path in the late 1980s.

Turnover grew from IR£65 million in 1988 to IR£326 million in 1992 as it won large prestigious contracts, such as one for the Hotel des Arts in Barcelona.

Kentz Corporation was heavily undercapitalised, however, and poor cost control systems led to losses on major fixed-price contracts. Cashflow crises ensued which culminated in the appointment of an examiner, Hugh Cooney, in 1994. Cooney managed to put together a rescue plan that involved a Malaysian investor, Peremba, injecting IR£6.5 million and convinced creditors to write down around IR£20 million in debts.

The story has a happy ending. Earlier this year, Kentz Corporation was successfully floated on the AIM market in London with a valuation of over €200 million.

Then there's Goodman International. When Larry Goodman's meat processing empire when into examinership in 1990 with debts totalling €600 million, few would have given it much chance of survival.

Yet within five years Goodman regained control of the firm from its bank creditors and other investors and rebuilt it into its current position as one of the largest meat processing operations in Europe with some 3,000 employees.

Perhaps the best-known example of an Irish turnaround is Ryanair. When he first assumed the role of chief executive office in the early 1990s, Michael O'Leary's first instinct was to shut down the loss-making airline. The rest, of course, is history.

One common denominator in these three turnarounds was that they happened in the early 1990s during the last deep recession - sufficiently long ago that there is an entire generation of management who have never had the experience of a sustained downturn. Many are learning quickly, however.

The UK-based Turnaround Management Association (TMA), a broad-church association with members in all relevant disciplines including accountancy, banking, the legal profession and insolvency practice, says demand for its member services has increased dramatically since December 2007 and expects this to increase further in the months ahead.

The association predicts that corporate debt defaults will climb above 10 per cent in 2009 as capital remains difficult to attain.

In Ireland, the number of creditor meetings and insolvencies are rising alarmingly. Declan Taite, corporate restructuring and insolvency partner of Farrell Grant Sparks is spending an increasing amount of his time at creditor meetings and expects the number of insolvency cases to rise to around 600 for the year.

The figures for the first half of 2008 already show a 76 per cent increase on the corresponding figures for last year and the latest indications are that it's getting worse, he says.

There are two recurring themes at the moment, Taite says.

The first is an inability to balance working capital and to convert stock or debtors into cash.

The second is simply poor management that has been in denial of its shortcomings but is now being exposed in the harsher financial environment. As Warren Buffett has put it: "When the tide goes out, you can see who has been swimming naked".

So what can companies do when they hit the rails? The first is to face up to the problems before they become insurmountable.

Tom Kavanagh of Kavanagh Farrell, who specializes in corporate recovery, likens his job to that of a doctor treating a patient with a life threatening condition.

"If management seeks help early enough things can be done but sometimes we've had companies coming to us who have three weeks cash left to run the business. You can't work miracles in that timeframe," says Kavanagh.

An increasing number of patients are coming from the construction industry, having fallen victim to the collapse of liquidity and the fall in house prices. Kavanagh says the situation is worse than that of the 1980s Irish recession as the global nature of the current financial crises means that there are no foreign buyers to fall back on.

However, even the construction industry is finding its own solutions. Typically, this involves a promoter accessing some cash - often borrowed from relatives - to get a housing development moving and generating some liquidity. In tandem with this, a financial advisor will work with creditors to see if they will share some of the pain in the hope of recouping some of their money.

"You have work-out schemes where you try to get creditors to park the aged debt and pay cash on delivery for supplies," he says. Creditors may not be happy but the alternative of liquidation may result in them getting nothing once preferential creditors such as the Revenue Commissioners and employees have been satisfied.

Neil Hughes of Hughes-Blake detects a different environment now to the last recession. One consequence of the boom is that many business promoters have become wealthy and can sometimes afford to adopt a more benign attitude to companies that have run into difficulties.

"In the last recession, people couldn't afford to be pragmatic as they didn't have the resources themselves to take a hit," he notes.

He cites an example where a client of his has stuck an agreement with creditors to write off 75 per cent of debts as an alternative to the troubled firm going into liquidation. This has come about because of the speed and frankness of disclosure of the client and because the creditors believe in the long-term viability of his business.

In this case, the prognosis for the company looks promising. Indeed, Hughes says that in around 90 per cent of cases of examinership in Ireland in recent years, a successful turnaround has been achieved.

The problems of Ireland's cash strapped SMEs are one aspect of the turnaround issue and can often by solved by cash injections and the appliance of better accounting systems. However, achieving turnarounds in larger, more complex organisations is a different matter.

One of the key management thinkers in this area is Harvard professor and author Rosabeth Moss Kanter.

In a seminal article in on turnarounds, entitle Leadership and the psychology of turnaroundsMoss Kanter drew on her personal experience of a couple of dozen turnarounds.

She notes that leading a corporate turnaround isn't a one-size-fits-all process. It requires that excutives pay attention to the specifics of a company's problems and that the leaders bring their own preferred approaches to the task. Moreover, they need to inspire their managers at a time when morale may be at an all time low.

"To pull a company out of a death spiral, the chief executive officer needs to encourage people to take the initiative and feel that they can make a difference. This is hard to achieve when an organisation is in slash and burn mode.

"Effective turnaround leaders consider the kind of cuts they are making as well as the number, emphasising reductions in bureaucracy that stifles initiative, thus creating conditions for change," she says.

She cites the example of how former BBC boss Greg Dyke embarked on a campaign to reduce overhead over a five-year period from 24 per cent to 15 per cent of revenues.

This was achieved by removing a level of management, cutting spending on consultants from £20 million (¤25.3 million) to £500,000 (¤632,000) a year and consolidating support functions making it clear that such functions served the business units, not the other way around. The goal wasn't simply one of reducing cost but focusing resources on channels and programme-making.

""Unlike previous rounds of cost cutting, this approach was not demoralising; people at the BBC generally considered it empowering," notes Moss Kanter.

Speaking to Innovation, Prof Yves Doz of Insead agrees that turnarounds often provide opportunities for organisations to remove unnecessary layers of bureaucracy that have built-up over time.

A turnaround can thus be used as a corporate enema to cleanse a fundamentally sick organisation. In his experience, it is easier to achieve this with the appointment of a new leader, ideally someone promoted from the periphery of the organisation.

"The first issue they need to address is who's in and who's out in the top management team. That removes uncertainty and galvanises the new team into action," he says.

The big strategic idea in a turnaround often boils down to a very simple principle - get back to basics. Doz cites Lou Gerster's turnaround of IBM that involved the company getting back to its roots, a principle that resonated very positively thoughout the organisation.

UK management consultant and author of Driving down costs, Andrew Wileman, says that turnaround initiatives work best if any cost cutting pain is delivered in one quick burst.

"Cut fast and deeper than you think necessary. Contrary to belief, it is not bad for morale. Dragging things out is," he says.

This "tough-love" approach needs to be counter-balanced with providing a vision of a better future.

"In Europe, we are slower than the US to engage with our staff when we have problems but buy-in comes quickly in difficult environments," he says.

The priority in corporate recovery, he adds, is to focus on the productive and cash-generative sides of the business, applying the 80:20 rule where 80 per cent of your revenues comes from 20 per cent of your business.

More big companies survive in a turnaround situation than do smaller ones, notes US management and author John Reddish.

"There are usually more assets to leverage, divisions to shed or even shut down and more jobs to cut. Also they can afford to pay the fees charged by the high visibility, high priced firms. Many turnaround experts look solely at asset leverage in considering their strategy," he points out.

"A minority of financial restructuring advisors look to leverage the market strengths of the company and buy time while the company recovers. Depending upon the company's financial position, and the timing of the intervention, this approach may or may not work," says Reddish.

Donald Bibeault, author of Corporate Turnaround says that the secret of managing a successful turnaround is to break the business down into its component parts, make value judgement on those segments and divest the company of those segments that are not contributing to cash flow and profitability.

The aim should be to strip the business back to a viable core to stabilise its position and finance the turnaround, he says. While stabilising the business is a priority, leaders need to think beyond the short-term fix.

Tim Wray, specialist at the Irish Management Institute, says that organisations need to distinguish between "realigning" and "transforming" their businesses. He cites the example of Aer Lingus, which overcame a crisis with a successful realignment under the stewardship of Willie Walsh in the post 9/11 period. However this may not be sufficient in itself to achieve long-term success.

"It didn't change the DNA of the business which is what was needed in the longer term," says Wray.

Insead's Doz agrees. "In many cases, a turnaround is simply a transformation delayed".