Steve Tobak from CBS MoneyWatch identifies three phases for a turnaround, in a situation of rapid change. The most important initial starting point of claiming control over the turnaround process is forgotten. When on-boarded, stopping the firm’s downward trend is critical and the core objective of the turnaround CEO. This aims for multiple stakeholders, including investors, employees, customers, and suppliers; it is for the top executive of the firm, to perform. This cannot be handed over to consultants or other executives (CRO, Strategy, etc.).

1.) 4 weeks – stopping the downward spiral.

Initially, the core objective of a turnaround executive is, to stop the downward spiral, the company may be in. This falls into two areas:

Creating financial stability

Financial stability, to support day-to-day operations is the core, to operate the firm. Solutions can include:

• Access to additional funding: In terms of loans or equity investments of the shareholders, to fund the turnaround.
• Reduction of existing and future liabilities (accounts payable/short term OPEX): Applying for subsidies, switching to short-time work, deploying cost-saving programs (with immediate impact), negotiating, and settlement of liabilities with debt owners.
• Extension of due dates: Through negotiations reaching extensions of due dates, agreements of down payment, moratorium, etc., simply anything, which helps to preserve the cash on account, and prolongs the payments to third parties. Widely known is Chapter 11 as the protection through a court decision. Chapter 11 offers a save harbor for distress companies. However, applying Chapter 11 is publicizing the distress situation to a wide community. The protection from the cash drain and the risk of immediate legal actions of debt owners (with potentially fatal outcomes for the company), comes at the price of further doubtful impact for the reputation. This is reflecting directly to the second area of concern:

Creating financial stability is to a degree a technical task for a CFO / turnaround executive: Negotiating with a limited number of individuals, acting rational and providing feedback before acting. Decision metrics are transparent. The situation is controllable. This is only on of the four sectors; a turnaround executive is initially focussing on.

Building trust

Building trust with core stakeholders is more difficult and will provide less feedback and tangible elements of negotiations. To convey a positive outlook on the future is the core, in order to find support and trust to compensate for the inevitable setbacks over the course of the turnaround. Addressed are shareholders, (potential) investors, debt owners, the non-executive board, customers, suppliers, and employees.

• A growth perspective (beyond the turnaround) is relevant for investors not to look for alternative investment opportunities and execute a divestment; for suppliers, to perceive even a distress company as relevant account and invest also in the business relationship.
• Future-oriented with drive for innovation, is relevant (also) for customers and employees, to find themselves being serviced with / being part of a dynamic and further evolving product offering, where going concern is not at stake.

No guarantees are given

None of these elements can be guaranteed but will be the result of the vision and persuasive power of the turnaround executive. Specifically, in harsh turnaround situations, personal credibility is an important lever, to foster trust, but also put at stake. The fear from financial losses of the stakeholders in case of bankruptcy can support the trust-building process:

• Often, the divestment from a distress company comes with heavy losses for the investors. To avoid sunk costs, investors are likely to stay on-board.
• Depending on employment market situations, employees are likely to stay on-board, to void immediate unemployment. However, here an adverse selection applies. Those talents, being in a liquid employment situation are likely to step out of the company, if risk and opportunity costs are perceived to be too high. The turnaround executive has to be sensitive not to find herself surrounded by residual, low(er) performing employees. In addition, the process, prior to the turnaround, is for the employees very often energy-draining and contaminated with negative energy. To revitalize the workforce is critical.
• The evaluation of alternative suppliers is imperative for customers, in order to perform risk mitigation. Long-term contracts, a strong value proposition, very close communication, individual services, and developments, etc. are elements, which help to manifest customer relationships. Decreasing the price is also a way to increase the value proposition of a service or product. Decreasing margins in a turnaround situation is a specifically unpopular decision, whereas retaining customers at the same time is core.

2.) 1 -2 quarters – kick-off, of the turnaround plan

“No plan survives first market contact!”

No experienced turnaround executive will start a new engagement, without actually having already his turnaround plan at hand, before he enters her new office for the first time. Very often, the board and/or investors prior to the nomination of the turnaround CEO approve this “master plan”. Remunerations may be tied to the plan and the achievement of the respective milestones. Yet, all stakeholders are to understand, reality may differ from the plan, volatility may shape the numbers, whereas the plan refers to smooth and stable trends. The turnaround process will test the skills of the management on multiple occasions. Pivoting on the implementation of the strategy might be a good, if not the only way, to adjust the turnaround plan to the ever-changing economic and market environment.

“Culture eats strategy for breakfast.” 

Putting a strategy to paper differs significantly from putting it to action and reaching its milestones. Peter Drucker’s famous wisdom highlights the importance of “building trust” with stakeholders. This includes understanding their specific business culture and objectives. As a turnaround includes situations of rapid change and the management of numerous uncertainties, trust, and support among the opinion leaders of the relevant stakeholders is critical, to also balance out for inevitable setbacks. Executing, it may take one to two quarters until the turnaround plan becomes effective and visible in the organization and transparent to all stakeholders.

“Walk as you talk.”

The combined efforts and contributions of all stakeholders lead to the success of the turnaround. Hence, it is critical; the turnaround plan is in-line with explicit and implicit agreements, of the “building trust” phases. Without hard evidence of the achievements, transparency in the good, the bad and the ugly is important, to maintain the trust to the turnaround plan aka the management. Keeping a short distance and rather “over-communicating” to stakeholders is important during the initial phases of the turnaround.

3.) 2 – 3 quarters – getting traction

Reinsuring stakeholders, the turnaround being on track is core to justify their prior investments, as well as upholding their continuous support for the firm. Within two to three quarters, behavior and operating change should be evident to employees, customers, and shareholders, fostering morale, and confidence. Relevant approval of the turnaround strategy can come from the investor’s market as well as from the client-side. With regard to investors, approval has to be independent of follow-up financing, with considerations to asset protection. Hence, typically new investors without investment legacy can approve a turnaround strategy. Depending on sales cycles, customers are the second (and in reality most common) source of approval. While eyes are on cash, revenue can be recognized before accounts receivable (AR)  reflect the course of the business. Under IFRS, only delivered and invoiced services can be recognized as a source of revenue.Additional KPIs can help, to create trust for stakeholders at an earlier state:

• Order entry, as the earliest point of time, where a legal binding agreement is in place
• Work in progress (WiP), signals the value of orders, before recognizing those as revenue

These are “hard-wired” KPIs. Order entry is not reflected in the balance sheet, Work in Progress is considered as current assets. Whereas the balance sheet provides the ultimate truth, the wish for more prognosis leads to KPIs, beyond the standards of IFRS and GAAP. During the turnaround process, it is critical to keep the balance between sound accounting practice and forward-looking reporting. It is popular, to use the sales pipeline (cumulative of offers, etc.) as an indicator of the progress of a turnaround. This is only of value, if reliable and sustain historic data (conversion quote, order entry projections) are available. Falling behind projections is specifically in turnaround phases critical, as trust erodes quickly and cash reserves, to balance to for planning errors are scarce. Restricting investor information to legally solid numbers is of value for the investors and also the credibility of the management. This translates into the communication of signed contracts only and audited accounting.

4.) 3 – 4 quarters – heading north 

Within three to four quarters, operating fundamentals should show marked improvement. Market traction, in terms of proceeds from revenues, is the one critical number; investors and other stakeholders will have their focus on. Nevertheless, the critical monitoring of the turnaround includes stabile and integer business processes. Observable evidence can focus on: Increased operational performance, higher efficiency of the firm as well as increasing sales results. Hence, the company is either on a clear course for operational break-even or on the verge to scale. The scalability of the business model includes start-up and growth firms a situation, where an increase of resources will improve business results in a reliable and predictable way. EBIT correlates to resources, available, hence invested capital. ROIC will remain stable with the increased investments, respectively is very likely to improve, benefitting from economies of scale.