A number of companies are in the process of doing a turnaround and most are doing it poorly, largely because the process for doing one of these things isn’t taught. Over the years, I’ve been involved in either helping execute turnarounds or documenting them, and a set of best practices has emerged from which I think folks could learn. They also tell you early whether a new CEO attempting one of these things is likely to be successful. I’ll cover all this in two parts.
Turnarounds: Defining the Big Problem
The most critical part to a turnaround is defining the problems that are keeping the company from being successful. At the very least, you have to know if the primary problem is more related to market conditions or execution, as that will dictate the kind of skillset needed in a CEO. If it is a market problem and you need to reform the company to fit into a new or adjacent market, then the CEO will need startup experience in the target market and you are likely looking for a young CEO. You will need to couple that person with an experienced CFO to get the initial optimal team. If it is an execution problem, you need someone with a different set of skills.
The first problem is nearly impossible to execute without massive cuts and restructuring, suggesting a company sale would be far surer to maximize return. This was Novell a few years back. The market moved and Novell was out of position and never could recover. It simply wasn’t diverse enough and no amount of restructuring could make up for the fact that network operating systems, which was what Novell made, were obsolete. The assets were eventually sold but not until after they’d lost much of their value.
Picking a CEO
On execution, the skills you need, in order, are turnaround, CEO and industry. The hardest person to find is someone who has done this kind of thing before and thus it is the most valuable skill set. I’m talking about actually driving a turnaround from the top, not just having been through one as a COO or CFO. Those folks, if they’ve been through a turnaround, will likely perform better as a CEO doing a turnaround than a CEO who hasn’t. But if they haven’t been a CEO, they’ll have to learn that job, too. And that’s more expensive than learning an industry, because the firm will have industry experts at all staff levels and an experienced, successful CEO knows how to delegate. You’d think I wouldn’t have to mention that the candidate should be successful, but having watched HP make that mistake with Leo Apotheker, I’m not so sure.
One of the key demonstrable skills a turnaround CEO needs in abundance is the ability to build loyalty and lead. A lot of CEO become CEOs through a process that seems to reward tenure more than leadership. Where that is extreme, you’ll get a candidate who should have never been CEO regardless of his or her success. Particularly when they come out of complex companies that seem successful, the success may be because of a team they inherited, not one they built.
A good test is to look back at how many people follow them from firm to firm. If you can’t hold and focus your people on the problem and get them to stay with you through the pain, you’ll fail. Picking someone who can’t lead like this is a sure way to assure that failure. This is a skill more often found in startup executives than those that work for large companies, largely because large companies appear to focus more on individual accomplishment when they promote over team players.
The Right CFO
It is amazing to me, given the earlier Chrysler turnaround (not the current one) and the IBM turnaround, how many people don’t realize that the CFO choice is often more important than the CEO choice. For a turnaround, you need a CFO who not only is incredibly competent but is the human equivalent of a pit bull. On any turnaround, the CFO actually does most of the heavy lifting in terms of getting the financials in order and in both determining what needs to be immediately patched to keep the company afloat and in identifying the executives who are more full of BS than core skills. This doesn’t mean you have to replace the CFO. But you do have to assure he or she can fight a bit above their weight class because the CFO in a turnaround will need to regularly go to war with line executives and bring them into the game or eliminate them. This isn’t a job for the shy accountant. It was no accident that the CFO who helped turn around Chrysler also was instrumental with IBM and was on Apple’s board as well. Jerry York was the unsung hero of all three efforts.
Wrapping Up: Looking to Turnarounds Part Two
We’ve looked at identifying the primary problem to be addressed and the selection of the two key figures. In part two, we’ll talk about the creation of a diagnostic team, which is needed to determine what needs to be done, how to prioritize the activities, and for the part that folks often forget — setting internal metrics.