8 keys for managing the turnaround of a company in difficulty
To successfully turn around a company in difficulty, we need to take André Gide’s maxim “To choose is to give up” to heart. This expression is particularly relevant in the context of companies in difficulty, where the scarcity of financial resources exposes them to a continuous risk of failure but where it is nonetheless necessary to release sufficient resources to implement the recovery actions required.
How to successfully turn around a company in difficulty
Managing the turnaround of a company in difficulty is a balancing act. Managers must refocus on their core expertise: allocating human and financial resources in order to implement a transformation project.
The dilemmas are as numerous as they are complex to solve
How can budgets be released to undertake the transformations and, in particular, the investment projects that are essential to the company’s turnaround?
Should we slow down the pace of transformation to reduce cash consumption and attempt to “hold out” over the long term, or on the contrary, accelerate, assuming greater risks?
Is it better to keep certain “low performers” who weigh on the cost structure or, on the contrary, to get rid of them – releasing financial resources that could help the company prepare for the future?
To clarify the choice for managers facing these contradictions, our teams at iQo have developed a set of convictions, learned from our experience on assignments in:
- restructuring
- designing and implementing turnaround plans for companies in difficulty
- transitional executive management
The objective here is not so much to provide a binary answer capable of resolving these paradoxes, independently of the context of each company, but rather to give the reader a number of keys to overcome these contradictions and to learn how to deal with the turnaround of a company in difficulty.
1. Conduct a systemic diagnosis as quickly as possible
In a context of economic difficulties, the time factor is quite simply vital. The time needed to understand the issues and specificities of the company and to diagnose its situation cannot last longer than a few weeks, which rules out sequential, siloed, ultra-detailed approaches.
The ability to grasp the overall issues, to understand the origin of the difficulties, the links between the causes and, very often, the systemic character of the actual situation takes precedence over the completeness of the diagnosis.
Pragmatism is the order of the day: the time spent on diagnosis must not hold up the transformation. Adjusting the depth of the analysis or accepting certain blind spots to the detriment of methodological purity are acceptable positions as long as they do not compromise the assessment of financial impacts (in particular the transmission mechanism between operational difficulties and financial performance).
2. Mobilize internal resources for the turnaround
Mobilizing teams for a turnaround approach requires making them understand the urgency of the situation, including the people who may be responsible for the situation (whether they admit it or not).
The following elements are critical to a successful turnaround:
- Name the root causes
- Explain the chain of events
- Convey a vision
- Show that you are able to make a difference in the face of challenges
- Take the time to provide explanations at all levels within the company in order to build consensus (without slowing down the action)
Nevertheless, even when a company’s problems are plain to see, we often observe a lack of lucidity, and sometimes even denial, especially if the company has previously experienced (wrongly glorified) “good years”, with managers convinced that they simply need to reproduce this fondly remembered past, as if the market had not evolved in the meantime.
Looking ahead to the future ultimately requires a genuinely personal choice, enlightened by clear-headedness – a value not consistently found within companies (large and small alike).
Toning down statements, euphemizing, being afraid to state the root causes (or misnaming them), or suggesting that the turnaround is not the company’s last chance are the main pitfalls to be avoided, as they, paradoxically and often unconsciously, risk exacerbating the difficulties.
3. Move beyond a “cost-cutting” logic
Financial difficulties are very often not recent, and difficult decisions may have been delayed for a long time. Financial difficulties can become structural and can lead to a certain fatalism within teams, who become used to lacking the necessary means, giving rise to a widespread “lowest cost” culture and a “necessity knows no law” approach.
Clearly, every effort must be made to optimize, but managers need to go beyond the purely managerial logic of “doing the same with less”. Managers are not naturally designed to be transformers, but the turnaround cannot simply focus on a set of sound management measures, it also needs to address the strategic issues of market, positioning, value proposition (differentiation and pricing strategy), investment policy, etc.
So, in the context of a turnaround, top-line optimization initiatives (improving the product mix, optimizing pricing, passing on more of the costs relating to performance constraints and changes in initial assumptions to the client/supplier, etc.) are more promising levers than simply temporarily postponing an expense.
The challenge is to create this virtuous circle, which is the only way to achieve a successful turnaround: to free up the financial resources needed to finance transformation projects, which in turn will improve margins and enable the company to reach a new and sustainable level of performance.
4. Avoid a short-term horizon
Companies in difficulty must continually reconcile short-term imperatives and cash flow issues that can shorten their horizon to the half year, quarter, or even month.
But everyone intuitively understands that a turnaround can only be achieved over time, that it requires continuous effort, and that there is a time lag between incurring the investment expenditure and obtaining the expected gains (productivity, etc.).
It is therefore essential to take a long-term view and to continue to devote sufficient investment resources to avoid jeopardizing industrial performance, which is crucial for sustainable economic performance, by using all available financing levers (leasing, investment subsidies, rental, etc.), if necessary, in addition to cost optimization actions.
5. Bypass, as far as possible, the difficulties linked to the lack of bank support
Companies in difficulty live, more than others, in a “chaotic” environment, with credit-scoring companies sounding the alarm via downgraded ratings and financial establishments refusing to set up the guarantees that are necessary for the company to win orders or renegotiating credit lines.
However, different mechanisms can be envisaged to safeguard customers in terms of contract performance, as a substitute for the bank guarantees that are no longer available. Examples include transferring the ownership of raw materials or adapting invoicing milestones to the reality of work progress, etc., which make it possible to avoid taking out guarantees or tying up cash in a context of deteriorating cash flow.
6. Communicate with customers on the scope of the transformations underway
In times of economic difficulty, customer confidence is put to the test: reluctant to place orders (at the risk of them not being honored), customers are also more vigilant regarding the coherence of payment milestones, and are particularly sensitive to all rumors (sometimes spread by ill-intentioned competitors) concerning the company’s financial situation.
More than ever, open, genuine, transparent, and regular communication is the only way to avoid the risk – not so much of a sudden suspension of orders (customers remain cautious about the impact of their decisions and the legal risks of a sudden break in commercial relations) – but the more insidious risk of an unannounced, gradual drop in the order book, which is sometimes not overtly acknowledged by customers.
7. Reassure suppliers in order to control the company’s WCR and supply chain risk
Suppliers constitute an ecosystem that is often particularly well-informed about companies’ difficulties, and their problems with payment deadlines, which creates significant reputational risk.
In addition, they sometimes adopt imitative behaviors that are likely to exacerbate the difficulties encountered. This may include payment-on-order requests or requiring payments on pro forma invoices, which, in a tight cash situation, can further increase working capital requirements.
Finally, companies in difficulty are faced with a reduced supplier base, and must sometimes arbitrate between purchasing costs and payment terms. Moreover, they often have to give preference not to the best suppliers, but simply to those who still have confidence in them, further reducing the range of sourcing choices.
In this context, the quality of the relationship with suppliers, the relationship of trust that has been established, and the fulfillment of commitments made (particularly when payment deadlines are extended) are imperative to avoid the risk of supply delays that could disrupt the supply chain.
8. Mobilize financial resources and the team’s full energies to ensure the success of the operation
There is no worse failure than not having given it your all to succeed.
In the end, this is the essential lesson we have learned from these turnaround processes: successful turnaround processes are those that are conducted with energy, conviction, and without fear of failure.
In a company turnaround, all energies must be mobilized to make the operation a success, without ulterior motives or a “plan B” in the event the turnaround fails. This is ultimately the best guarantee of success!