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.
Now let’s go further and look at the diagnostic or evaluation team and the metrics needed to get the job done.
What seems to generally happen during a turnaround is a CEO is selected, rolls up his or her sleeves, and then gets to work. This is likely why most of them fail. This would be like walking into a doctor, saying you’re sick, and being tossed on the operating table. Until you know in detail what the problem is, any large move you make may do more long-term damage than good. You have to diagnose the patient and then determine what unique steps are needed to fix the problem, and you need detailed information.
Now the CEO and CFO won’t have the time for this as both will initially be engaged in keeping the company afloat. Much of their initial time will be spent on plugging obvious holes in order to have the time needed to do a turnaround (the rule of thumb is three to seven years, with few CEOs surviving that long). This is why Steve Jobs focused so tightly on getting money from Bill Gates and in ending litigation; he needed to massively reduce bleeding before he could actually focus on anything else. Think of it as corporate triage.
Building an Evaluation Team
Much like you would bring in a team of specialists to diagnose a complex medical problem, you’ll need to bring in a team of experts to analyze what is wrong with the company. Often, analyst firms are used, but the problem with that is that the analysts generally haven’t been recent practitioners. That lack of experience can result in recommendations based on past experience with other companies that are both out of date and not applicable.
Better to bring on board subject matter experts who have relatively recent executive and operational experience. Fortunately, with tools like LinkedIn, these folks are reasonably easy to define. You’ll need at least three but I’d recommend five for this task. The necessary three are finance, sales and manufacturing or software development, depending on the firm’s product. The other two are human resources and operations. The task of this team is to go into each of these company divisions and determine what is broken and then individually select the things that need to be fixed, prioritizing them based on impact and cost.
They will then be asked to work together to set up a master list. This last effort works best if initially supervised by the CFO because CFOs by nature are both detail- and numbers-oriented. The CEO then is brought in and pitched on the result with the entire team present so that egos don’t overcome good judgment. We used to call these Tiger Teams. I ran one years ago in IBM. You do have to be careful because the folks who do this tend to be strong type-A personalities and this can skew the result toward the person with the strongest personality, which is something both the CEO and CFO must be aware of to correct.
This process should identify the priorities and organize them into a plan that can be executed. It also gives you a team of people who can then be deployed as aides, with loyalty to the CEO. These aides can then be regularly queried to make sure the reported progress is in line with what is actually going on. Many companies die unnecessarily because the progress that is reported isn’t real.
Putting in Place Metrics
Before moving on, the team, along with the CFO, should put in place a set of measurable metrics the CFO will use to gauge progress. Good CFOs, when given a tool like this, can become incredibly effective in pointing out what (and who) is working and who isn’t. Jerry York was famous for his no-BS meetings, where line managers went in dry and came out dripping with sweat. He often knew more about their business area than they did, largely because he drove a process like I’ve described to fully understand what was actually going on and set metrics so he could tell when executives were misrepresenting the truth.
David Campbell, Ph.D., actually wrote a book, “If You Don’t Know Where You’re Going, You’ll Probably End Up Somewhere Else,” which speaks to the problem of not having metrics and why they are so incredibly important. His book is on life but the concept works as well for companies.
A Turnaround Is Like Medicine
The keys that seem so often forgotten in a turnaround are that you first need a general diagnosis to get the specialist you need to fix the company, you need qualified specialists, and they need the detailed accurate diagnosis to come up with a plan to cure the patient. And they need to monitor progress so they can assure the patient is actually getting better so they can correct any mistakes before the patient/company dies. It really isn’t very helpful to have a book come out after a company failed on what should have been done, particularly if you could have determined that beforehand.
Turnarounds are hard but they don’t have to be impossible. And if they are, you can still maximize the return if you play heads-up ball.
