- 1.an abrupt or unexpected change, especially one that results in a more favourable situation."it was a remarkable turnaround in his fortunes"
- 2.the process of completing or the time needed to complete a task, especially one involving receiving something, processing it, and sending it out again."a seven-day turnaround"
Business Turnaround Definition
There have been many attempts to place a definition on ‘Business Turnaround‘. However, these are quickly becoming ‘out-of-date’ as the restructuring and turnaround profession advances in our modern disruptive world.
At TurnAbout AU, we have thought long and hard on the topic. The most accurate Business Turnaround definition we have arrived at is:
The immediate intervention and implementation of short timeframe strategies for the purpose of achieving the sustainable recovery of an underperforming, yet potentially viable, business model.
It wouldn’t be right for us not to try and incorporate ‘restructuring’ when attempting a business turnaround definition. The restructuring process is where a business converts a period of loss into one of profitability and success whilst stabilising its future. Therefore, when providing a definition for ‘business restructuring and turnaround’, we believe it is important to include the following:
Whether scenario planning or instigating measurable changes, the overarching principle with restructuring is to preserve, to the greatest extent possible, a company’s enterprise value whilst attempting to maximise returns to key creditors and minimise risks to all other stakeholders over a predetermined period of time.
The above takes into account ‘going concern’ value, protection of intellectual property and employee skillsets (talent) as they might be linked to other tangible or intangible assets – such that the viable business model is saved holistically. The concept being that the ‘whole’ is greater in value than the sum of it’s various parts and components.
Obviously, when utilising ‘restructuring and turnaround’ practices, we need to avoid rescuing business models that are not viable (for example, lacking in technological innovation for longer term survival). Such businesses are often described as ‘zombie’ companies and do not contribute to the economy. With the recent crises that have drastically impacted human behaviour and our economy (COVID-19, fires, floods, drought…), it is logical that this urgent need for businesses to be adaptive and agile will result in turnaround and restructuring becoming the new norm. Disruption has been suddenly and forcibly thrust upon the business community.
Corporate Turnaround has been defined as:
‘The implementation of a set of actions required to save an organisation from business failure and return it to operational normality and financial solvency. Turnaround requires leadership and can include corporate restructuring and redundancies, an investigation of the root causes of failure, and long term plans to revitalise the organisation.’
However, we much prefer our modernised definitions as they can be applied to sole traderships, as well as small and family businesses. Our definitions also fit closely with the fundamental concept and intended purpose of the ‘insolvency safe harbour‘ protection for directors from insolvent trading personal liability (s588GA – see our ‘safe harbour definition‘) – which provides breathing space for leaders (debtor in possession style) to take charge of the restructuring and turnaround strategies provided it results in a ‘better outcome’ for the company (creditors and/or shareholders).
Get in touch to learn more or discuss in further detail. Our objective is to rescue the value in small and family businesses.
Eddie Griffith https://tinyurl.com/3dctfnt8
Why Turnaround?
If your company or business unit is underperforming consistently and losing money, you likely need a turnaround project. That situation erodes cash flow and damage return on capital importantly. If this bad situation continues during the time, the company moves to insolvency. So urgent action must be taken. Turnaround project must be launched.
Corporate life cycle
Time for Turnaround
In economy we can talk about recession when continued decline in economic activity for two or more consecutive quarters. In the micro-economy world, I mean in the companies’ world the timing used to be different. Usually the review process in companies is yearly, and because management teams used to have a second opportunity, two years with losses could be considered a decline that needs a turnaround. Obviously if the losses are important, time is reducing.
Ideally, the turnaround process must start not too late in the decline phase in order not to allow deteriorating too much the situation. Although in many cases that decision is delayed until many quarters of losses, what will likely erode importantly the cash situation of the firm.
Someone could ask how we know that we are not to late in the decline phase. Well, this question does not have an easy answer. In reality the committee in charge of the turnaround decision must use their experience and intuition to realize soon that the firm needs a crisis management, and that those problems are not going to be solved for the current management team at least without the support of a turnaround team.
It is important to highlight that a turnaround project could take between one and two years. So we must not delay too much the turnaround decision, or it could be too late to recover the situation.
Many times CEOs used to protect their management responsibility delaying turnaround with different “strategies”:
Arguing that is a conjectural stage
Arguing that is a marketplace situation
Using “accounting engineering” to cover the problem during some while
Recognizing that a company has important problems is complex because that means that we have to realize that we are doing business in the wrong marketplace and/or time, or we have the wrong people managing that market. So there is a responsible, that took the decision to entry in that market or that choose the current management team. Many decision makers do not want to recognize the problem because means recognizing the responsibility. So they used to wait some time with the hope that “something” is going to happen that change the current bad performance. We have mention that “something is going to happen” because people that create problems do not use to know how to solve those problems.
In many companies bad performance in some quarters is not so “significant”, and they wait until the end of the year in order to review the situation. Be aware that in many cases companies offer a second opportunity to the current management team. This means that because the review process is a yearly basis rather than a semester or quarterly basis that situation could be deteriorated even more, if the current managing team is not able to recover the situation.
Where Should We Start in Turnaround? The “Bunker” Concept
We could simplify the causes of decline to three: poor management, inadequate financial control, and incorrect sales approach. If the decline cause is clearly restricted to finance or sales, we must start in turnaround for that area. Although we must be aware that sometimes the initial decline cause identified is incorrect, because we would realize that there are more than one cause of decline (many times turnaround situations are much worse than expected initially). However, the commonest cause of decline is poor management, in that situation is more complex to decide where we should start.
Turnaround in poor management situations could be approached trying to solve problems in many areas of the firm at the same time, or we could much more focus on one main area creating a “bunker department” as Keith Wiedersheim called. A “bunker department” is a company department that we are restructuring faster because we are allocating more turnaround resources (oversizing) than in other areas of the company to prioritize turnaround speed of that area. The idea of creating a “bunker department” is eliminating the poor management practices in that department, and this one must influence positively to the rest of the organization. That area would act as a change management catalyst into the firm.
One of the first things to do with the chosen “bunker department” facing poor management practices must be to review processes. Because processes are cross functional, the “bunker department” processes are connecting with other areas of the firm which are going to be reviewed indirectly. So the concept is starting the turnaround from one main department and using the connections of processes with other areas to expand turnaround activities to the rest of the company.
Turnaround "Bunker Department" Approach
A Framework to Asses and Monitor Turnaround Processes
There are two frameworks focus on the theory that a company to perform properly need to be aligned in some important hard and soft elements.
The “Star Model” was created by Jay Galbraith in the 1960s. This framework remains important to create the foundation for companies design choices. Thus, this model identified five main design choices: strategy, structure, process, reward and people. The model is based on that design will affect employees’ behavior that will finally influence in the company culture and performance.
The “Mckinsey 7S Framework” was developed by Robert H. Waterman and Tom Perters in the 1970s. This quite similar and still actual framework has 3 hard elements (strategy, structure, and systems) and 4 soft elements (shared values, skills, style, and staff).
The utility of “Star Model” and “7S Framework” for turnaround
Those frameworks help us not to forget any important element in the firm.
In restructuring any time we are conscientious affecting some of those elements, and the model is going to remember us that any change in one of the elements must be aligned with the rest of the elements.
Turnaround process use change management initiatives continuously and these models consider soft factor too.
So our recommendation is using the best of both models, we mean using all the factors suggested for both models. So “Star Model” compared with the “7S Framework” incorporates the reward factor and performance. On the other hand, “7S Framework” incorporates shared values, separate people in two factors (staff and skills), and shows systems (culture) like a new factor rather than a consequence of the factors.
The turnaround framework
Adapted from "Star Model" (Jay Galbraith) and "7S Framework" (Robert H. Waterman and Tom Perters)
- Strategy: What is the formula for success? How do we differentiate ourselves from our competitors? What are the organizational drivers?
- Structure: How are we organized? What are the key roles? How is the work managed? Who has power and authority?
- System/Processes: How are decisions made? How does work flow between roles? What are the mechanisms for collaboration?
- Performance: How are we doing? Why?
- Rewards: How is behavior shaped by the goals? How do we assess progress?
- Share values: What types of issues do the receive the least and most of the management attention?
- Style/Culture: How does top management make decisions? How do managers spend their time?
- Staff: How do we recruit and develop our talent?
- Skills: What is the company or team known for doing well?
Prerequisites for Change and Success
Source: HP way, Barry Newland “The four prerequisites for change”
There is a classification about the improvement phases in a firm according to the degree of development of internal and external processes.
The Improvements Phases in a Firm
This classification has been widely used (Gartner, PRTM, SCOR, APICS, and so on) but most of the time the improvements have been related to the IT status of the organization, and now we are trying to briefly analyze that classification from turnaround, supply chain, and change management perspective using meetings tool to optimize communication, planning, synchronization, and execution.
Turnaround: The commonest cause of turnaround is poor management, so in this post we are focusing just in that particular cause. Multiple dysfunctions phase shows the poor management situation in which the company uses a very optimistic forecast; it has a huge overstock “just in case”; processes are not properly supported by IT systems and many activities are performed manually; staff is poorly trained and supported by managers/directors; purchases do not always follow the approval process; nobody (no sales neither finance department) is in charge of receivables accounts; etc. Therefore, we have mentioned many problems that turnaround teams can approach in the Weekly Improvement Functional Meetings.
Supply Chain integration: When we are talking about integration, we are talking about creating high performance teams. For that integration we suggest to build an ecosystem of teams (for example one team for each business unit) with cross-functional members that have weekly meetings to share integrated goals, responsibilities, and philosophy (lean approach, make-to-order, and so on) in order to get a successful and modern supply chain (lean, responsive, profitable and high quality). Moreover, we should not forget that nowadays “no business is an island” so the extended enterprise concept is the external integration priority.
Change Management: We are accelerating the improvements of the four phases almost simultaneously, creating four levels of meetings that work in parallel to identify improvement initiatives. Meetings are helping to share objectives and information, synchronize activities, and generate common action plan. It is important to highlight a couple of things regarding meetings. First, we are talking about productive meetings. I mean those meetings must be as short as possible (aprox. 30 minutes), with a well-defined agenda, and results must be monitored. Second, in order to produce turnaround results quickly, the periodicity of meetings must be weekly in most cases. Otherwise, we are losing several months just to align the teams or to execute the initiatives. Those meetings used to have the following results: staff ideas are listen by the company; communication and synchronization issues are managed; people proud of his job raise; people commitment with the organization rise too; and so on.
https://strategok.com/
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