AdSlot 1 (Leaderboard)

Turnarounds – A turn for the better

One needs to look no further than the retail sector to see how difficult corporate turnarounds are to pull off. Numerous initiatives by chief executives specially picked to lead upturns in their fortunes seem to have done little to improve the situation at either J Sainsbury or Marks & Spencer.

Indeed, the plight of both companies seems so serious it is hard to believe that Sainsbury not long ago enjoyed a pre-eminent place in UK supermarket retailing, like Tesco does now, and that M&S was once the toast of the City and could do no wrong.

To be fair, when matters have got so bad in organisations that are as large as Sainsbury and M&S, stopping the rot can be like slowing down a supertanker. And with their every move as CEOs closely scrutinised, neither Justin King at Sainsbury nor Stuart Rose at M&S have much time or room for manoeuvre.

This is all familiar territory for a certain breed of businessperson. Once known as ‘company doctor’ or ‘troubleshooter’, these people – unlike King and Rose – operate out of the limelight, sorting out the ailing subsidiaries of quoted companies or helping private equity companies obtain a better return on their investments by improving the performance of businesses they have bought. Also unlike King and Rose, these people tend to work across different industries rather than a single sector, hence the name they usually go by these days – corporate turnaround specialists.

Until recently, there were only a handful of corporate turnaround specialists around. Perhaps the best known was David James, who preferred being known as an independent crisis manager and whose assignments included airline Dan-Air, Lloyd’s insurance company, Eagle Trust, where he uncovered what became known as the Iraqi supergun affair, and the Millennium Dome. Famously thorough and analytical, James was sensitive to the idea that he and his colleagues were, in essence, cost-cutters and corporate undertakers. He once said: “I start from the position of trying to keep a business going rather than winding it up too quickly.”

Rather more flamboyant was Sir John Harvey-Jones, the loud tie-wearing ex-head of ICI, who later fronted a TV series simply called Troubleshooter, in which he told various businesses where they were going wrong.

Now this field is big business. Large accounting firms have moved beyond offering pure administration and receivership expertise to providing corporate turnaround services, and specialist firms have sprouted in great numbers as a result.

But playing a fundamental role are the firms providing temporary or interim managers to companies. Sometimes a company will need an interim executive if it has a particular project it wants carried out, or if an executive is, say, ill for some time. But a sizeable number want one because they have an urgent problem to sort out.

At BIE, for example, one of the leading firms in this area, managing director Martin Wood says that providing turnaround specialists accounts for 10-15% of the business.

Often brought in by investors to deal with a problem situation, turnaround specialists have to be credible to the companies’ existing management as well as investors. As such, says Wood, they must understand cash and reporting lines. They must also be able to focus quickly on what needs to be done. They will not necessarily be a cost-cutter. Looking at sales and marketing with a view to increasing turnover (as King is seeking to do at Sainsbury with a sales-led recovery) can also be crucial to a company’s success. “Time is of the essence,” he adds, pointing out that picking the right leadership team and refocusing the business are also priorities. He says they have got to make quick decisions about such things as which part of the business to close and which to invest in further.

This was certainly the experience of Lou Gerstner, who is celebrated for his role in turning around US computer company IBM in the 1990s. Though not really a turnaround specialist, Gerstner – like many of those on Wood’s books at BIE – had acquired a reputation as a man able to handle tricky situations. In his previous job at RJR Nabisco he had to deal with the effects of the collapse of the 1980s leveraged buyout bubble. Having been acquired by private equity firm Kohlberg Kravis Roberts through such a buyout, Nabisco soon found itself burdened by so much debt that Gerstner and his colleagues had to sell $11bn of assets in the first 12 months.

Having come away with a clear understanding of the importance of cash in corporate performance, Gerstner – once he was persuaded to take on the task of halting the decline at IBM – quickly set about deciding what had to be done first.

In his book about this time in his career, Who Says Elephants Can’t Dance, Gerstner describes five 90-day priorities:

1) Stop haemorrhaging cash.

2) Make sure the company is profitable the following year to send a message to the world and the workforce that it has been stabilised.

3) Develop and implement a key customer strategy that would convince them the company is back serving their interests rather than just pushing products.

4) Finish redundancies swiftly.

5) Develop an intermediate business strategy.

Obviously, not all the work was done immediately; restoring the fortunes of IBM took most of the 1990s. But the groundwork was, as Gerstner says, “nearly all there in that 45-minute meeting four days before I started my IBM career.”

This need for swift action accords with the views of George Moore, an experienced, independent corporate turnaround specialist who is convinced that most attempted corporate turnarounds fail for a few reasons, most of which relate to decisions made by senior managers. “Most people underestimate what’s involved,” says Moore. “It usually starts with management not realising that the changes they are looking at are more complex than they thought.”

As a man who has specialised in turnarounds for much of his business career, Moore might be expected to criticise executives for thinking they can perform turnarounds themselves. But he backs up this claim by pointing out that certain techniques used when a company is in distress are “different from what you use if everything is going swimmingly”. For example, he says, there are “ways of dealing with” the specialist lending departments of banks. And someone who has been in the situation many times before will be able to work out how they will react to certain proposals, he adds.

Moore explains that having a command of the basic principles of turnarounds is a greater advantage than industry knowledge. Moreover, being an outsider makes it easier to ask basic questions about why or how things are done. This has also enabled him to find the company’s “pockets of value” and decide what to do with them, he explains.

“One of the benefits of not being bound up in the industry is that you can think outside the box and come up with ideas,” says Moore. For example, an engineering business had a high overhead associated with servicing customers’ equipment in a central location. The system was changed so that the engineers travelled to the premises in their own vehicles with parts delivered by DHL, thus taking £20m of cost out of an £80m business.

But this does not mean that the turnaround specialist also has to bring in numerous outsiders to help. “There’s always talent within a company. It’s just a question of finding it.”

Gerstner shares this view, having said at the outset that he would bring in fresh faces if he had to, but would rather give those already there a chance to prove themselves. He dedicated his book to the “thousands of IBMers who answered the call”.

Both King and Rose have certainly made some progress, judging by recent trading statements, but they each have a long way to go before they can hope to do for their companies what Gerstner did for IBM.

Among those who are doubtful about whether they can achieve it is Tony Grundy, senior lecturer of strategic management at Cranfield School of Management. Grundy, who has carried out case studies of M&S, is concerned about the apparent lack of urgency. “You’ve got to manage expectations and deliver against certain milestones,” he says of the turnaround task.

Pointing out that obtaining input from staff and customers could provide free, valuable management consultancy, he says that turnaround specialists needed to “release a lot of energy”. “The turnaround manager has to have some imagination rather than just go for cost-cutting,” he says.

But, above all, it is about analysis. Often, companies get into trouble because they stray from their original business and become too complex. An outsider can look at this with an unprejudiced eye and decide which area should receive attention and which should be abandoned. Existing executives tend not to go through such processes because they enjoy carrying out acquisitions more than managing businesses. “All the sex is in the deal,” says Moore. “When you go into a turnaround, you’re looking for where the money comes from. You want to know what the company’s key levers are and you need to have that clearly articulated. If you can’t do that you haven’t thought it through.”

Related reading