Turnaround Management

Rescuing a Struggling Organization

Turnaround Management - Rescuing a Struggling Organization

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Turn your organization around.

Sales at Amelia's organization have been declining for several quarters, and the company is losing significant market share. As a result, she's worried about her organization running out of cash.

She knows that dramatic changes are needed to save the company, but she's not sure where to start.

As the new CEO, not only does she have to come up with an effective plan to reverse the organization's decline, but she also has to get everyone on board. She also needs to act quickly, before the organization runs out of funds to pay for wages, rent, and utilities.

This scenario will be familiar to thousands of organizations, large and small, particularly in the current climate; and if your organization is in this type of situation, then it may need to be turned around. But what, exactly, is "a turnaround"? And how do you tackle such a massive project?

In this article, we'll look at the basics of turnaround management: what it is, why it's needed, and how to implement a successful turnaround.

What Is Turnaround Management?

Turnaround management is the process of transforming a declining organization into a profitable firm by reorganizing its leadership, processes, and finances.

This process is markedly different from other management approaches that focus on boosting sales, cutting costs, or managing during a crisis. Turnaround management is a rapid, disciplined response to a situation that, if left alone, could lead to insolvency.

While turnaround management involves cutting costs and other financial actions, it also addresses existing problems, such as stagnation, or deficiencies in an organization's management hierarchy, business model, or culture. Once the initial problem or situation has been corrected, leaders can establish a new strategy or set of processes to prevent the organization from slipping back into difficulties.

Uses

An organization doesn't have to be in steep decline – or experiencing a cash crisis – for turnaround strategies to be useful and effective.

Organizations that are under-performing or "treading water" can benefit from turnaround management. These strategies can also help organizations that need to make changes because their current operating model isn't working, or because it's out of date.

Additionally, organizations that have grown too fast – such as a successful startup – may still need a turnaround approach because they're experiencing a cash-flow crisis. Or an otherwise healthy organization might need to deal with a costly, unforeseen financial loss; this loss could jeopardize the firm, so some turnaround action may be essential.

Often, CEOs and consultants are the most visible faces in an organization's turnaround. However, anyone in a leadership role can use these strategies to transform a team, a department, or an organization.

Note:

Although a company may need to undertake a turnaround at any stage in its lifecycle, it's most often necessary as an organization ages. Our article on Adize's Corporate Lifecycle will help you gain a better understanding of the typical stages of organizational growth and decline.

You can also use the Pyramid of Organizational Development to ensure that you manage each stage of your organization's growth successfully.

The Turnaround Framework

Stuart Slatter and David Lovett developed their approach to corporate turnarounds in the late 1990s. In 2006, working with Laura Barlow, they published a seven-step framework for turnaround management in their book, "Leading Corporate Turnaround: How Leaders Fix Troubled Companies."

The seven steps are:

  1. Crisis Stabilization.
  2. New Leadership.
  3. Stakeholder Management.
  4. Strategic Focus.
  5. Critical Process Improvement.
  6. Organizational Change.
  7. Financial Restructuring.

From Slatter, S., Lovett, D., and Barlow, L. (2006) 'Leading Corporate Turnaround: How Leaders Fix Troubled Companies.' First Edition. © 2006. Reproduced with permission from John Wiley and Sons, Inc.

According to the authors, each step is an essential part of the turnaround process, so failing to address even one of these can undermine your efforts. Let's look at each step and discuss how you can implement it.

1. Crisis Stabilization

Many organizations need to go through a turnaround because of a specific crisis; and this crisis often, but not always, relates to cash flow. Your first step is to stabilize the situation, so that you have the opportunity to move on to later steps.

All companies move into crisis if they're in danger of running out of funds to pay wages, rent, and other bills. (In fact, companies can fail if there's even a hint that they may run out of funds – for example, if nervous suppliers withdraw credit lines and demand cash up-front.) If this is the case in your organization, your first, urgent priority is to stabilize finances.

Where cash is a problem, start by ensuring that all purchases and payments are authorized by your turnaround team – and reinforce this by taking control of all means of making payment. Stop all discretionary projects; and make sure that you know about and approve of all payments going out of the organization.

Then, analyze your department or organization's cash flow. Your primary goal is to save cash and to generate short-term revenue, so that you have the resources you need to keep moving forward. Brainstorm ways you that can do both, quickly.

Next, identify any other immediate threats to the organization. Although several issues might need attention right now, focus solely on issues that threaten the organization's survival.

2. New Leadership

Poor leadership is often the main reason that an organization or department declines. By making changes to the leadership, you will send a strong message to everyone on your team that you're taking steps to address the situation.

Review the current leadership team. Who are your star performers? Who are you willing to change? Who is likely to give you the most problems?

Think about who is most likely to support your efforts, and make a list of these allies. Meet with these people to communicate goals and priorities, and make sure that everyone is on the same page. Encourage questions, and be open and honest about the situation that you're facing.

And, if people resist your efforts – out of inertia, out of loyalty to the status quo, or because they are championing expensive and not yet revenue-generating projects – then consider removing them from positions of influence.

At this time, you and the rest of the team need to build confidence within the organization, and with key stakeholders. Do what you can to achieve some early quick wins .

3. Stakeholder Management

You now need to look at the relationships that you have with key stakeholders.

First, conduct a Stakeholder Analysis to determine who your key stakeholders are, and to identify their level of investment in the organization. Talk to them to get their input, and structure your message and approach to appeal to them; this will help you win support for your change initiatives.

Employees are important stakeholders, so make sure that you inform them appropriately of the risks and challenges facing the organization. A lack of clear information and transparency will result in fear, gossip, and a loss of morale. Our article on Communicating in a Crisis shows you how to keep communication lines open during tense situations.

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Do what you can to get everyone involved in the turnaround effort. Employees might have valuable suggestions for increasing revenue and cutting costs; and you can build trust and unity by demonstrating that you value their input and by listening to their suggestions.

4. Strategic Focus

Next, analyze your organization's strategy and identify where things went wrong.

You may need to change your strategic focus, and make changes to your business plan. This can be a complex and lengthy process, but there are many resources and approaches that you can use to help.

There are several reasons why you might need to rethink strategy: perhaps technology or trading conditions have changed, and you might have to cut product lines, departments, or even subsidiaries; maybe you have to contend with a recent acquisition; or perhaps consumer needs have changed in your market.

In normal conditions, strategy development can be painfully slow – you can't afford this during a turnaround. Be bold, keep your new strategy simple, and be prepared to make big changes, even if this upsets non-key people in the business. After all, organizational survival is at stake.

5. Critical Process Improvement

Once you know what you want to do, it's time to consider how you can improve your organization's core processes. Chances are, several important processes may be fundamentally flawed, or even broken. For example, your organization might have a slow response time when dealing with customers, it might have problems with quality control, or perhaps it uses outdated or inefficient equipment.

When reviewing processes, make sure that you fully understand the principles of Lean Manufacturing (even if you're in a service business), the Theory of Constraints, Six Sigma, and Total Quality Management. These will help you ensure that your processes are efficient and effective.

6. Organizational Change

Unless you prepare carefully, you may run into problems changing your organization's structure, teams, and culture. There can be several reasons for this: some managers or team members might resist change efforts; perhaps there has been a high turnover of staff and you're left with people who lack important knowledge or skills; or perhaps team members have become demoralized or apathetic about new initiatives.

First of all, make sure that you fully understand the principles of change management, and that you put an appropriate change program into place. Then make sure that everyone understands the new strategy.

Because of your organization's new strategy and goals, quick retraining might be necessary. Give team members a training needs assessment to determine their strengths and weaknesses, and use train the trainer or webinar-based approaches to train large numbers of people quickly and cost-effectively.

Establish a performance management plan. Set clear performance goals for everyone, and explain the results that they're being held accountable for. Align rewards with the organization's new strategy and performance metrics.

Our article on Management by Objectives shows you how to motivate people by aligning their objectives with the organization's goals, and our article on strategic compensation helps you align incentives with your strategy. Measure performance every week during the early months of the turnaround process; this will confirm that everyone is on track and is moving in the right direction.

7. Financial Restructuring

As part of the turnaround process, you probably need to reorganize your company's financial situation.

You've likely already addressed your short-term cash flow in step one; however, you now need to reexamine your organization's long-term cash flow and balance sheet to ensure that you have the right finance in place to implement the rest of your turnaround plan. This could mean raising new funding, restructuring existing debt to allow more flexibility, or increasing capital, so that you can operate successfully.

Key Points

Turnaround management is the process of taking a struggling organization and transforming it for the better. Although many turnaround efforts involve organizations in decline or those that are financially at risk, this process can be useful in other situations.

In their 2006 book, "Leading Corporate Turnaround," Slatter, Lovett, and Barlow offer a seven-step approach for a successful turnaround. These seven steps are:

  1. Crisis Stabilization.
  2. New Leadership.
  3. Stakeholder Management.
  4. Strategic Focus.
  5. Critical Process Improvement.
  6. Organizational Change.
  7. Financial Restructuring.

As you begin the turnaround process, inform everyone of the risks and challenges that the organization is facing. Employees are an important – yet often underutilized – resource; ask for their help and input during this process.