The first phase is to understand that there is a problem – in other words, that you have chosen a wrong path. According to Doug Yakola, senior partner at McKinsey’s Recovery & Transformation Services, many managers fail to recognise such a situation. If you are an exceptional executive, you will recognise it. Then you can take the following steps in order to turn around a poor-performing company.
1. Don’t stick to one and only one definition of a distressed company
Usually when a company is in distress, it is the result of multiple reasons combined with other factors from outside the company. There are numerous distress signs: declining/negative free cash flow, declining stock price, shrinking EBITDA margin or significant reductions in the work force, to name just a few.
2. You have to be able to review your own intentions and projects
Sometimes a simple reminder helps: if we don’t see results by a certain date, we will review if we are heading in the right direction. Such reminders, encouraging critical review of decisions taken in the past and aimed not only at operational and market performance but at financial metrics as well, can be enough to alert you in case performance is not as good as anticipated.
3. Take advantage of your board’s feedback
A board has more distance from your business and therefore it may notice some signs of distress earlier than you. The board can thus function as an early-warning system. If board members are truly independent and willing to reflect critically on important issues, they can save you much trouble.
4. A question of cash
Which investments in your business are generating cash? And which ones are burning it? The answers must be as specific as possible. A successful turnaround needs to focus on basic elements. In order to keep a longer view and bigger picture, it is also important properly to monitor and predict cash flow and capital investment.
5. Announce a "big transformation" effort
Use a simple message, say it in no more than a few paragraphs and do not focus on fancy metrics. Make it concise, comprehensible and stress the sense of urgency. Then your employees will want to stay with your company.
There are other important steps that may help your company to recover. During a turnaround you need a crisis mindset: without this, change is difficult because the associated risks are not particularly appealing. Only a crisis forces people to act and to consider all options.
Another possible leverage is your company’s incentive scheme: rethink how management is being paid, in order to reward those whose results exceed expectations. Get rid of managers who are unable to adjust their mindset and thus may impede the necessary fundamental changes. A fundamental change, the turnaround, is also a great opportunity to recognise special talents, investigate their individual needs and then to get them involved.
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