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Long-term strategy required

Turnaround is often an over-used word and shouldn’t be confused with crisis
stabilisation or cash management projects, although these can form key
components of a turnaround process, says Warwick Ley, investment director of
Endless LLP, an investment vehicle that backs turnarounds and buyouts.

Turnaround is not something that is achieved in a matter of months or when a
cash crisis is resolved. It’s about developing and implementing a long-term plan
which creates value for the key stakeholders.

Fundamentally, it’s important to draw the distinction between managing a
crisis and implementing a long-term strategic plan. A common pitfall is that
management get over the first hurdle, but don’t think clearly enough about the
longer term, Ley says. All that happens then is that the crisis comes back at
some future point and you enter a downward spiral.

Focused and incentivised
First and foremost, turnaround companies need to have a focused and hungry
management team whose end goal is to drive value. A turnaround is tough and
subject to setbacks and high failure rates; management commitment is, therefore,
essential. To drive this, key members of management need to be appropriately
incentivised and ensure their interest and goals are aligned with the investor.
Equity participation is a key motivator.

Ley says that a good example of this is his firm’s investment in Neville
Johnson Offices. The company held a market leading brand, but had suffered from
an inappropriate financial structure which had a spiralling effect on the
company’s performance.

Management shareholders were severely disenfranchised as their equity stood
behind a mountain of debt. Change in the financial structure and a
re-incentivisation of management shareholders were required to drive the
turnaround. This was the impetus, Ley says, for an impressive first year
performance, in which management’s achievements are nothing short of remarka

Manage your stakeholders
• In a turnaround, stakeholders with an acute interest in outcome go well beyond
the debt and equity funders. Management must be sure to recognise and understand
the position of such parties as the pension fund, employees, suppliers and
customers, to name a few. Communication is key and, Ley says, you should be
realistic with the messages you send. Turnaround doesn’t happen overnight and
the last thing stakeholders like are unexpected shocks. Credibility of the
management is critical.
• Managing by committee and indecision are not attributes of a successful
turnaround. It’s important to consult with the right people, but turnaround
requires strong and bold leaders, particularly where distress is acute.
• Microproject-manage, but keep your eye on the big picture. Turnaround requires
that no stone is left unturned so the ability to prioritise, ask the right
questions and project manage are all critical leadership qualities. In this
respect, identifying the right KPIs, keeping them simple and monitoring them
carefully is essential. A culture of accountability needs to be established.

• Turnaround can often mean fundamental change in an organisation. The strength
of a company’s culture can be the cornerstone of this, and its importance is
often under-estimated by management. This starts at the board level, though
successful turnarounds are characterised by a bottom-up change in behaviour.

• Define responsibilities. If you’re going to drive change through an
organisation effectively, you can’t be fighting fires all day long. If there is
a crisis to deal with either at the start or during the turnaround process,
ensure there is a clear demarcation of roles between managers who are focused on
short-term issues and those who are prioritising long-term strategy and driving
it. Avoid blurring the lines here.
• It’s critical that the right capital structure is in place. For example, a b
usiness will struggle to continually fight cashflow fires while also trying to
implement strategic change and an investment program. This will need your
investor to inject funding and address prohibitive balance sheet issues.
• Get on with it as early as possible. Too many people are not prepared to face
up to reality and soon enough it becomes too late.

Know your end game
To secure investor support, the turnaround plan needs to be more than
speculative. Stakeholders in these situations crave clarity and visibility.
Management should also be prepared to flex execution of the plan.

An example of this is Decorpart, a Northwest-based manufacturing company. The
business had suffered from a rising UK cost base while trying to compete on a
global stage. Fundamental change was required. The management team delivered a
clear plan that was highly visible and credible, Ley says. It is predicated on
the launch of a wholly-owned Chinese factory near Shanghai.

The plan has meaningful and significant support from the customer base, will
drive cost reduction (complementing its UK base which will also remain open)
and, most importantly, open significant Far Eastern markets, which will be
unique in the sector.

If successful, this will deliver significant strategic equity value. It’s a
bold plan and requires great commitment from the management team. However, they
know their end game, Ley says.

Endless LLP has offices in Leeds and Manchester. Click
for information on the company and some of its investments.

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