Turnaround in business. Part 2

 

Mission: Business Strategy Focus On Turnaround Processes

When we are talking about business strategy many times we use the following strategic concepts: values, mission, vision, strategic objectives, strategy, and business policies. Those strategic concepts can be sorted into present and future focus on. Thus, values, mission and policies are very much focus on the present/today (the current situation), and vision and strategy build the company future. In the case of objectives, there are short-term and long-term (more than one year).

From the turnaround prospect, it is more important present than future because if we do not quickly solve the current problems, there will not be any future. Therefore, business strategy in turnaround should be prioritized short-term strategic concepts. This is going to offer us the actual strategic status of the company.

The main strategic concept related to the present is mission that is going to answer questions like: What do we do? or What is our business?

Mission Definition: Adapted from Derek F. Abell; and Nigel F. Piercy and Neil A. Morgan

Mission: If we ask the Managing Committee the six basic questions for Mission Definition (and the answers match with the reality), we would probably discover any of the following problems:

• Market: Selling to companies of many different industries, sizes, and so on. So there is not any customer segmentation strategy, or it is not properly implemented and controlled it. In those situations, firms used to be more focus on sales than profitability. Perhaps we have some unprofitable customers that erode the profit generated for the rest of the customers.
• Product: Selling with important price discounts even if the company does not enjoy an important cost advantage compared with his competitors. That discount affect importantly to bottom line. Usually those situations come when we do not understand our own value proposition for customers, and obviously we are not able to sell value. We have to highlight that failing to define our market segmentation, or using a passive sell strategy (waiting for customers calls rather than “hunting” customers) in industrial markets push organizations to reduce prices to close sales.
• Capabilities: When we do not understand how to create value for customers, we invest in the wrong capabilities in the medium and long-term and that could jeopardize our competitive advantage. Without a competitive advantage, firms used to reduce prices/margins to maintain sales.

Finding the leverage points is the key for quick and substantial improvements

System thinking teaches us that focusing on a few leverages points, we are able to create a big impact in our organization faster. The different between leverage points and other improvement initiatives is that leverage points attack problem root causes rather than problem symptoms.

Turnaround need to attack urgently the main problems and that means finding the leverage points quickly. But many managers fail to identify the right leverage points because they use a silo functional view (sales, manufacturing, etc.,) of the problems rather than a system/company view. For example, it is very common finding companies in which the sales department is focusing on maintain some overstock to satisfy “unpredictable” sales demand; manufacturing is creating overproduction in order to optimize production resources; and so on when other system solutions like lean manufacturing could improve much more the company results without overusing stock strategy.

Accounting Roadmap for Turnaround

Accounting discipline offers us a roadmap for turnaround. I mean accounting provisions offers us a checklist about company risks. When we are talking about turnaround one of the first things to do is checking the status of the provisions and be sure that all the risks are really contemplated, provisioned and updated.

In order to turnaround a company first it is to recognize the problems and make the provisions needed to create a realistic baseline. Then we will be able to design a company recovery path. Sometimes this important turnaround stage is not well performed and the result is a false turnaround starting phase because of every few weeks any unexpected risk is discovered and appeared.

Now we are going to review some of the main provisions to be reviewed in turnaround:

• Provisions for long-term employee benefits: For instance holidays not enjoyed previous years that must be paid in case that the relationship with those employees finished. Moreover in turnaround is quite common to change some people to get out of the crisis, I mean to “get out of the bus” staff that sabotages the turnaround process, or they are not able to adapt to the new management needs, or they do not have really interested to continue in the company, or they do not have the skills or productivity needed.
• Provisions for taxes: Because the company is in financial troubles, it is not going to paid taxes for profits. However, we could have other taxes like VAT that could be delayed the payment. So those taxes delayed must be provisioned.
• Provisions for other liabilities: One of the core turnaround disciplines is legal issues. It is quite common having legal issues opened for firing people, stopping or renegotiate  suppliers’ contracts, customers’ complaints for delays, and so on.
• Provisions for dismantlement, removal or restoration of fixed assets: I have personally seen a situation in which the factory floor status prevents that forklift can do their job properly, or roof that allows raining goes inside the warehouse.
• Provisions for environmental actions: Firms in financial troubles use to neglect environmental issues.
• Provisions for impairment of inventories (merchandise, raw materials, work in progress, finished goods, waste and revered materials): It is usually to find in turnaround companies’ problems with the stock. So problems with: expired stock; obsolete stock; wrong purchases that was never returned and with very limited chance to sell someday; revered materials bad stocked that affect to material quality.
• Provisions for impairment of trade receivables: Sales process is not finished until we receive the customer payment. However sometimes sales and financial departments do not coordinate properly in monthly basis to optimize trade receivables. So you can find situations with trade receivables that were created several years ago and the documentation that supports the sale has been lost…
• Provisions for onerous contracts: The costs associated to accomplish a contract that exceeds the economic benefits of the contract. I mean problems with sales pricing or/and executing the contract.
• Provisions for other trade operations: Costs related to sales returns, product/service guarantees, or revisions. Those costs represent an important risk and you can find companies that do not provision them.

Should We Push Sales Importantly in the Middle of Turnaround Processes?

Many times we have listened that increasing sales have a positive effect in profits because fixed costs are sharing with more sales units (CVP Cost-Volume-Profit Analysis). What it is not many times remembered is that this is true under a few hypotheses (we are going to review some of them):

• Selling price is constant for any volume: Although, it is quite common using discounts’ prices in order to increase or even maintain sales volume. Be aware that low margins are a cause of turnaround need.
• Costs are linear: Sometimes firms have operational and managerial problems. This situation is quite common in turnaround (e.g. special projects with a wrong risk management process can be turned a planned positive margin into big losses). Those problems are showing an erratic negative behavior of costs. In this case more sales could mean much higher costs, and additional losses.
• Costs are accurately classified in fixed and variable: Make this classification is  accurately not an easy task. When we are talking about companies in troubles, this assumption use to be wrong. Unfortunately, in turnaround many times that classification is wrong, so it is one of the causes of wrong decisions.
• All units produced are sold, there is no significant change in the size of inventory: When we are pushing sales, sometimes large accounts (with important negotiation power) initial selling conditions are changed at the shipping or invoicing time affecting negative to stock. Again in turnaround situations are quite often to find some over optimistic people in the sales department, and the consequence is overstock.

CVP Cost-Volume-Profit Analysis

Moreover, we have to highlight that growth need an additional investment/capital. Thus, for increasing sales importantly we need an additional capital needs to create stock, more production capacity, finance customer days of payment, and so on. Usually in turnaround project we do not have the extra capital for investments, we need capital to sustain the current business.

So in turnaround we should work to improve sales process. But until the firm is not stabilized, we should likely focus on profitability (eliminating unprofitable products and customers) rather than on growing sales. Although, that decision must be studied case by case.

Time for Turnaround: Why does the turnaround decision use to be delayed?

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.

Using Digital Transformation as a Turnaround Tool

The rate of technology innovation is part of the digital disruption challenge facing companies, department, teams and employees. That disruption is threaten many traditional businesses like banking or my last turnaround assignment that is a traditional software reseller threaten by cloud services. In my last turnaround, I decided to use the digital transformation as a business turnaround tool at the same time that the whole organization would understand better the cloud advantages and how to adapt the business model for the new cloud services.

First at all, let’s define what is a company-wide digital transformation.

What is a company-wide digital transformation?

We have to say that there are many definitions, for instance large traditional software firms that has been focused on offering many features and customization options to customers for long time would probably define digital transformation as access to new important business “features” like new customer engagement features, etc. However, I think that a transformation is something deeper than just adding a new business functionality to our systems.

I would say that a company-wide digital transformation should create a disruptive change in the organization that take full advantage of the new cloud systems to make what use to be complicated simple, and the processes and systems that used to be expensive affordable. Thus, a digital transformation should create a competitive advantage or at least neutralize the digital competitive advantage of our largest competitors.

That disruptive change would be produced, if we were able to create a better, faster and more cost-competitive organization. If our digital transformation does not achieve any of those three objectives, we shouldn’t talk about digital transformation and we should talk about just a digital upgrade.

What is involving a company-wide digital transformation?

A company-wide digital transformation should rethink the firm IT strategy and must affect several key areas of the firm by changing processes that enhance the customer experience and boost employees productivity:

• Feature-rich software versus software based on simplicity: For instance, 80% of Microsoft Office users only use 20% of Office’s features. So, why should we pay more for features that many users won’t use and will make their work more complex? Another common example for SMB (Small and Medium Business) is: should we buy a feature-rich and complex ERP as SAP, if our SMB firm doesn’t have the resources to invest heavily in the long-term on consulting, training, licenses, etc? Using a lean approach to process and software could be a source of competitive advantage rather than a disadvantage. Investing in pre-internet and pre-cloud software without a large budget used to bring a poor ROI investment. Even if you are a large corporation with a huge budget, you should rethink your feature-rich approach versus lean. Moreover, those software were focused to “lock the system,” I mean to push customers to buy new license from the same software firm rather than ready to connect with new applications.
• Software best of the breed versus integrated ERPs: In the pre-internet and pre-cloud era, connecting applications used to be complex and expensive. Nowadays many software firms are offering pre-built connections easy and cheap to implement. One of the major advantage of integrated ERPs used to be “the unique data” that users have to enter just once and it is shared for all the ERP modules. However, in order to take advantage of “the unique data”, anytime that you make an ERP customization this is likely affecting many others areas of the company which means that the customization process is slow and costly. It looks that the traditional ERPs are the new legacy system, and nowadays organizations need agility, flexibility and cost competitiveness. The new cloud ERPs are offering “strength functionalities” with less complexity, faster and simpler implementation, and much lower cost.
• IT “make versus outsource” SaaS (Software As A Service): In the past organizations has to build big IT department to buy hardware and software, setup, maintain and upgrade systems, and so on. Right now, we are reducing the complexity of our IT department moving to the cloud as many as possible of our Information Systems. At the same time that we created a lean company, we improve our IT cost structure because of large data center transfer to us the benefits of economies of scale.
• Processes change: A properly implementation of any new software should bring processes review in order to improve processes and reduce business complexity.
• People change management: People need to understand and accept the benefits of the new processes and systems.
• Enhance the customer experience: At the center of any business transformation and turnaround should be the customer. We shouldn’t forget that most customers expect agile services with no errors and at competitive price. So, the design of our information systems, processes and team should be aligned with the customer experience expectation.

What is the connection between a firm-wide digital transformation and turnaround?

A turnaround is a deep company transformation in which we need to improve drastically and quickly the operational and financial performance of the firm to “guarantee” the survival of the company. Many times, improving the operational performance will require important changes in the company processes and in the mindset of the people to be able to improve productivity and the cost structure of the firm. So a digital transformation could bring those benefits to a turnaround.

Nevertheless, someone could say “but a company-wide digital transformation can be an expensive and a long-term project no suitable for a turnaround”. Well, today innovation is happening at a faster rate than ever before. That innovation is not just happening in the technology field, it is happening as well in many business fields. So, nowadays you can find “new generation” software firms that are able to deliver excellent state of the art software solutions easy a fast to be implemented and with very affordable prices. Therefore, find those solutions is part of the successful digital transformation planning process.

Our experience using digital transformation to turnaround a firm

As I have mentioned before my definition of digital transformation is a transformation that must produce an important organization impact allowing the company to be better, faster and more cost competitive. So, in my last turnaround assignment I decided to implement the following digital and turnaround initiatives:

1. ERP Financial software in cloud: The new financial software supported us to redesign the so critical turnaround process of controlling the cash flow. The invoicing process that wasn’t been reviewed in the last ten years was optimized, improving the productivity of that area. Additionally, we started using a fintech firm to make our receiving process faster and cheaper. Finally, our software was connected with our outsourced accounting services, getting a reduced service price based on our fast, easy and reliable way to share and transfer information with the accounting firm.
2. The traditional telephone was migrated to cloud PBX system: Our communication costs dropped more than 50% and we enhance the communication flexibility of our team.
3. Productivity/Office suite in the cloud: Local files servers, e-mails servers and backup systems were no longer to need it. Maintenance and support tasks provide for those servers by the IT area was no longer to need it either. The most important achievement was that people was able to collaborate better and with higher productivity.
4. The 10-years-old CRM was changed for a new state of the art cloud based CRM: We took advantage of the CRM migration to clean and update the CRM database. Moreover, before migrating the database, we review the sales definitions (customer types, active customers, pipeline stages, deal types, etc.) and reports (dormant accounts campaign, cross-selling campaign, sales campaigns by products, customers and deals profitability, etc.) Right now the sales team has better and faster information. Last but no less important, the new CRM is focused on improving sales reps productivity rather than on sales management.
5. Formalize the use of applications that improve productivity and reduce the traditional costs in areas as sales (Linkedin), advertising (Google Adwords), communication (Skype), project management (Trello), travels (Uber, Waze, Kayak, booking), and so on.

We would like to clarify that we are not suggesting that a digital transformation must be part of the turnaround toolbox but it could work very well in some situations as it was in our case.

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