Corporate Turnaround

Many companies often let their success and euphoria gloat over their heads and forget to do their homework. Expansion is done without proper evaluation or support from adequate market research and survey.

Decisions are often overridden by the desire to accomplish business expansion as part of the company’s objectives and the risk factors are ignored. If the companies have done rational thinking, simple homework and some reflection, they would have been spared massive headaches and avoided some of these projects. Rational thinking is going back to the basic and not allowing emotions, egos and euphoria to get the better of you when making decisions.

There are many instances of poor rational thinking in business failures. For instance, many pioneering investors in China have lost money because their investments were based upon ‘China statistics’. This is based on the assumption that China has a population of 1.0 billion people then. If we are able to capture one percent of the market, which though minuscule, translates into 10 million of captured customers. This is indeed an impressive captive market. Unfortunately, these investors learned to their dismay that China was still a third world country. The bulk of the population was unable to pay for their products and services. The immutable law in marketing that “You cannot make money from people who do not have money” is applicable here.

History reminds us that there are many companies that embarked upon major mergers and acquisitions but failed miserably. Sometimes, proper homework, reflection as well as rational thinking will reveal that it is better to buy over the key people and grow the business than buy another company lock, stock and barrel. Apart from the strategic synergies of a merger and acquisition (M&A), one also has to be mindful of the cultural fit. An example was the teething problems encountered by both the Chinese and Singaporean partners in the Singapore-China Suzhou Industrial Park project in China in the mid 1990s.

Though the project had the support and endorsement of both the Chinese and Singaporean governments, there were many events of misunderstanding and conflict. These arise because of cultural differences even though both parties involved were of ethnic Chinese origin. The Singapore government eventually ceded the management of the industrial park in September 1999.

If both the parties could have tried on a smaller scale project to understand each other first, many headaches might have been averted. Instead, the whole project went full scale without testing the waters first.

In Singapore, many contractors in the construction industry landed up with projects’ cost overrun because they did not estimate the projects’ costs properly before the tendering stage. It is very critical to estimate the contract price correctly as during the project execution stage there is very little margin for error. Some contractors did not cater for contingencies in raw material price escalation such as the stainless steel, foreign exchange fluctuations, country risks and interest rates etc.

The Sydney Opera House may be one the landmark buildings in Australia. However, it was apparent that the project cost was over run by 15 times to over 100 million Australian dollars in the 1950s when it was built.. The building was designed by an Danish architect, Joern Utzon, beating 200 other international competitors. Its design was not backed by realism and practicality in the actual construction. If the judges had thought rationally and logically that it would be an uphill task translating the dreamed design into reality, it would have saved them millions of dollars.

Another project that blew the budget was the Euro tunnel. It was constructed amidst much fanfare. It expected to capture a third of the commuters’ market. However, when the tunnel was completed after much delays and cost overrun. It ran into the snag of its other competitors - the ferry and air transportation services lower their prices. By then, billions of dollars were already sunk into the project.

The rational thinking should be coupled with detailed planning, market feasibility studies and survey as well studying the mistakes made by competitors. All these efforts expended up front will pay great dividends in the long run. You avoid making many mistakes and tons of headaches and nightmares. It will help you to sleep well.

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Many businesses are still focusing on yesterday’s problems at the expense of forgoing future opportunities. The best chess players always have a strategy in place. But in businesses, future planning seems to play second fiddle to analyzing of past performance. Architects would not build a house without the architectural plans because selecting the wrong layout or laying the wrong foundation or using the wrong building materials could result in disaster. The house can collapse on you after you move in. A strategic plan is the architectural blueprint for your business.

Executives always have the excuse for not doing strategic planning. They reckon that things are changing so rapidly. It does not make sense to do ten or even five year planning as events will change and it is not possible to preempt changes any more. It is true that nowadays environment changes are very rapid and that makes long-term planning even more difficult. Non-strategic planning companies give the excuse that planning results in paralysis through too much analysis. It is also true that some companies cover their backs with expensive market research and spreadsheet analyses.

However, one should not throw out the baby with the bath water. As a matter of fact, it is even more critical to have strategic planning during turbulent and rapidly changing environment. It is like the Titanic, which had the most modern technology in her times but did not plan for eventuality and disaster when it hit the iceberg. We are living in difficult times today and tomorrow things may be worse. With the possible threats such as terrorist attacks, infectious diseases like SARS, bird flu, mad-cow diseases etc, it will be naive for any CEOs to think that they are immune or protected.

One must not be fooled into thinking that a company is successful because it has a good strategic planning system in place. Your success may be coincidentally due to a buoyant market or weak competition. Also, one must not be mistaken that the use of processes such as the annual budget is tantamount to application of strategic planning. If the data is purely internal that is sales figures and product costs, it is not strategic planning. You need to factor in the external factors such as customer data, competition, economic trends, etc.

Also, studies of successful companies such as IBM, Procter and Gamble, 3M found that new innovations and great ideas do not originate from the centralized strategic planning department at the headquarters. Most of the good ideas and innovations were generated from outside the industry or the people who regularly interact with the customers. Strategic planning must not remain in its ivory tower but should incorporate the realities of the ground.

The former chairman of General Electric (US), Jack Welch drew on the strategies of the Prussian general and military writer Clausewitz, Karl von (1780 -1831). One of Clausewitz’s theories included an explanation of why a military leader could not devise a complete battle plan and then stick blindly to it: “Man could not reduce strategy to a formula. Detailed planning necessarily failed, due to the inevitable frictions encountered. Strategy was not a lengthy action plan. It was the evolution of a central idea through continually changing circumstances.”

His own strategic thinking matched that of the general. He constantly reinvented GE over the years as circumstances and the competitive environment shifted. There was an evolution to Welch’s strategic thinking and each major initiative built on the one that preceded it. He would wage one ‘battle’ and then wait to see how the results panned out. In tracing the evolution of GE during his tenure, Welch has drawn a stair-step-like chart that depicts the stages of GE’s culture change. Work-Out laid the foundation for Best Practices, which created a platform for Process Improvement such as Six Sigma, etc. Preparation of a strategic plan may not guarantee success but failure to do so is certainly a recipe for disaster.

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Over-eating or bingeing is detrimental to one’s health. Similarly, over-acquisition can cause corporate indigestion such as over-leveraging, integration difficulties, cultural misfits etc. You are what you eat.

While fast growth through acquisition is a thrilling experience in running businesses, it also holds much more risks than meets the eye. When the company is in trouble, some CEOs also go on a shopping spree’s acquisition. It is more glamorous and exciting than trying to fix mundane turnaround issues back in the office. It takes shareholders’ attention away from the domestic problems and impressed them with expansionary programs. Rapid acquisition done in haste with inadequate homework, wrong timing, egoistic reasons and impatience for success can result in calamity.

Harvard don, Michael Porter studied the success rate of 33 highly regarded companies over a 36-year period of acquisition. His data revealed that over half of the unrelated acquisitions were later divested.

Research by McKinsey & Company found a failure rate of 61% in acquisition programmes, with failure defined as not earning a sufficient return on the funds invested. Sometimes these failures are due to the fact that the acquisition was a mismatch in the first place, with small odds for success.

A high percentage of merger difficulties and failures are the result of defective management. Target companies are strategically sought and stalked, but then the follow-up acts are poorly orchestrated. Often people in both firms will be seriously troubled about how the acquisition may affect their personal careers. A good part of the merger/acquisition planning should be aimed at deciding how these concerns will be addressed. For instance, Novell’s merger with WordPerfect caused people in both organizations to experience dismay and the combined company teetered subsequently on the brink of disaster.

After buying WordPerfect for US$855 million, Novell sold it to Corel less than two years later for only US$115 million. Media companies faced similar problems of acquisition binge. The conventional wisdom in the industry that spur such manoeuvre was to grow the business by acquisition. Sony Corporation (Japan) was a case in point of being one of the first to venture aggressively into music and films. The same course of action was adopted by Vivendi Universal (French), Bertelsmann (German) and AOL Time Warner (US). It was believed that a product could be developed, then marketed through a wide range of in-house channels, from compact disks, DVDs, Web sites and even theme parks. This led to a proliferation of businesses requiring different skills and expertise, resulting in the failures of these acquisition ventures.

In their haste to capitalize on the boom years, many companies reckoned that the fastest way to beat the competition was to join in. After all, if you cannot beat it, join it. Thus goes the acquisition spiral. With each new acquisition, it is assumed that revenues automatically jumped up, while margins presumably stayed within acceptable ranges, especially if the deal is accomplished through stock swaps. The growing company acquires not just the market share but the expertise as well. Everything seems to augur well especially from the stock market as long as the company grows and numbers are good. However, therein lies the fundamental flaw with the growth-by-acquisition strategy.

This is what Herb Greenberg of Fortune magazine commented of the US corporate scene: “As with any addiction, the growth-by-bulk acquisition approach necessitates increasing doses of the drug to preserve the high. The only way to keep revenues growing fast enough for Wall Street is to buy ever more companies.” Once the growth curve halts and the stock price plummets to an extent that initiates a vicious downward spiral. The company loses its leveraging ability when capitalization decreases and interest expense increases to service the loan financing for acquisition. In the bid to reduce costs, the company starts trimming corners at the expense of quality, customers, and employees.

Therefore, the adage still holds true, ‘Do not bite more than you can chew’. It can become toxic for the company if they go into acquisition binge.

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There is an old saying in Spain: “To be a bullfighter, you must first learn to be like a bull.” You want to be a good fisherman, think like the fish. Then you will understand where the fishes normally like to hide so that you can cast your line or net at the right spot. In the medical context, the best way to learn about the disease is to learn to be the patient. Usually, the patient knows very well about the disease that is afflicting him. Besides researching about the disease, he will also strive to find a cure for the ailment as he is suffering from the pain of the disease.

In business, a manager needs to be on the ground - talk and interact with the various people: staff, suppliers, customers, business partners and even competitors. Through these various channels, the manager is able to acquire more knowledge of the industry and have better feel of the market. The manager does not operate in a vacuum and is better equipped to make sound decisions and take timely action. All these will curtail declining trends and may even result in future improvements. This is why the worst place for a manager is his air-conditioned room, where he is cut off from the realities and dynamics of the marketplace.

During his tenure, Lou Gertsner, the turnaround CEO of IBM became IBM’s most hardworking salesperson -logging thousands of miles to visit key customers and prospects. His approach sent an unmistakable signal to every employee to be hands-on and created a new image for IBM. By staying in contact with the market, Gertsner was able to make the right decision to turn troubled IBM around. Sun Tzu, in the art of war also advocated ’staying on the ground’ policy. “Generally, in the case of armies you wish to strike, cities you wish to attack, and people you wish to assassinate, you must know the names of the garrison commander, the staff officers, the ushers, gatekeepers and the bodyguards. You must instruct your agents to inquire into these matters in minute detail.”

A design engineer who never goes out to see the machines and work with the technicians, the banker who never uses the online services or queue up at the banks, the taxi owner who has not driven the taxi but takes his own car, the restaurant owner who has not been to the kitchen - these people will not understand and make good decisions about the customers’ needs and the issues encountered by the staff.

Many managers do not know the actual situation on the ground and only blame and fire their staff whenever the company encounters financial difficulty. This does not solve the problem as they do not know the actual cause and make the situation worse by making hasty decisions. Taking impulsive actions taken without full understanding of the events on the ground is like dispensing the wrong medication to the patient. It may cause more harm as the disease spreads unabatedly.

Good decision can only be made when you possess first-hand knowledge on the ground. Many senior managers particularly those in the staff functions such as the financial, accounting, human resource and legal departments do not meet with the customers. By exposing these support staff to the problems on the ground, it will help them immensely in understanding the problem faced by the line personnel such as the sales and operations staff. This will in turn foster better rapport and co-operation among the line and support staff.

Therefore, get your feet wet by going to the grounds.

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As the adage goes: Prevention is better than cure. In medical practice, prevention of the disease before its onset is better than giving medication when it is already malignant or full-blown. Getting it right early is much better than subsequent expensive treatments. Furthermore, when you lose your health, the road to recovery gets longer and rougher. Prevention is the name of the game for individuals and companies.

Just like people, most companies get into trouble simply through sheer neglect. Through the lack of monitoring, the accumulation of toxins or disease causing pathogens are allowed to perpetuate till the full manifestation of the ailment before any action is taken to contain it. At the outset, a company should adopt prudent practices to prevent the onset of corporate ills or financial problems. The preliminary issue such as prevention requires the direction to be clear as well as good planning. Next, the hard issues need to be implemented which include diligent financial and other controls. Also, soft issues such as taking good care of your people and the wise management of the talent pool are also crucial.

Diagnosis is the identification of the disease based on its symptoms. However, the symptoms can sometimes mask the real disease. Also, many diseases share similar symptoms. Thus further probing is required in order to ensure that the disease is not misdiagnosed.

Just as a sick person may manifest early symptoms of the ailment, such as cough, running nose, fever and body aches, likewise, there are usually ample warning signs for a company. High staff attrition rate and the loss of brand equity are perhaps some of the symptoms that all is not well with the company. However, they are merely the symptoms rather than the real disease or root cause. Treating the symptoms is tantamount to upgrading a cancer-stricken patient to another ward in the hospital, the condition of the patient does not improve. Prescription without diagnosis is malpractice, and implementing the corporate restructuring without knowing the root cause of the problems can be disastrous.

The key is early diagnosis as it increases the chances of curing most diseases. Therefore, a company should put in place a detection system to facilitate this early diagnosis. How does a company get out of its trouble? A good way is to diagnose how it gets into trouble in the first place.

Diagnosis starts with acknowledgement of the problem, good detection system and identifying the root causes from the symptoms. Then one needs a comprehensive
diagnosis of the ‘hard issues’ such as its pricing, process and communication. The company also needs to review the ’soft issues’ such as communication and leadership functions which may have got the company into trouble.

There are panaceas that can turn a critically ill organisation around into a healthy one and proper treatment is necessary as the remedies can sometimes be worse than the disease. For instance, some cancer patients are killed by the chemotherapy rather than the disease itself. As they say, a stitch in time saves nine. Usually an ailing company needs critical attention probably in the form of A ’surgery’ with the primary focus of restructuring the organisation and improving its cash flow. Most troubled companies need to engage outside help and change to come in and take drastic action to steer them out of the woods. Efforts are also needed to restore the company’s top line and profits.

Treatment starts with the execution in appointing the appropriate corporate doctor or turnaround manager and a team. Next, the distressed company needs to focus and understand some of the techniques to remedy its ailment. Hard issues take precedence during this stage with restructuring, right sizing and cost cutting. In some cases, the rescue endeavour may come in too late then the exit strategy may be necessary. After dealing with the hard issues, the company needs to deal with the soft issues of dysfunctional personnel and bureaucracy.

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Within the corporate world, there are the ‘living dead’, which are the sick companies that go on a wretched existence, without any hope of turnaround. These companies need a miracle such as a resurrection from the dead. Many of these companies need a change of DNA or business models. They are technically commercially insolvent and the owners will face the fate of bankruptcy if they close down the operations. Therefore, these ‘living dead’ just hang around, waiting for the death sentence. For some, the death sentence may take years before the owners decided not to throw in good money anymore to chase after bad money. For others, the bubble keeps getting bigger such as the construction companies in Singapore that continue to clinch loss-making projects to cover up for the earlier losses.

Some of these ‘living dead’ are large companies with huge amounts of bank debts. However, the banks are unwilling to wind up these companies, as some one said: When you owe the bank lots of money, you owe the bank. These banks may go under together with these ‘living dead’. Therefore, these ‘living dead’ are allowed to survive in the short term. An example is Donald Trump’s corporate empire that went into massive financial difficulties in the 1980s. He owed the banks a lot of money then and the banks were unable to press the trigger to stop the flow of credit as they would be dragged down with him

If companies are caught in such situations, the owners have to take some tough decisions to get out of this quandary. It is important to know when to exit. An optimised exit is one of getting out of non-core or under performing businesses, where there is a loss of confidence in the management and further losses and declining profitability are expected. Removing such under-performing assets can free up capital for investments in the core businesses

If you are able to optimise your exit, then it is no longer perceived as organisational failure but rather unlocking of your values. Optimised exits should be made strategically rather than be done out of desperation. This is because when it is done out of desperation and panic, quite often the value of the company is diminished. Successful exits require a lot of planning and can maximise shareholder’s value, minimise cost, liability and disruption as well as enhance the value of the enterprise.

Optimised exit is necessary for many ‘living dead’. For some it may mean cleaning the ‘deck’ prior to an acquisition or integrating a large acquisition that included non-core or unprofitable assets. For others, the business model needs to be revamped with the market changes. The management needs to be able to bail the company out of the dire situation and scarce resources need to be re-deployed elsewhere for better returns. For some others, it may be a case of the shareholders and owners getting tired of the business and deciding to move on to do something else.

There are various channels to bail the company out. One way is to sell the business as an ongoing concern. Another way is to attempt to turn around the company from financial losses before disposal. If the company has a grim chance of turning around, it is better to close the company immediately, cut losses and move on. There is nothing to be ashamed about with your company going bust. Many successful entrepreneurs suffered failures in their earlier ventures. They are able to make subsequent comebacks. It is better to bite the bullet, avoid bankruptcy and recoup the losses and to fight another day than to be totally dragged down to the bottom because of trying to save a hapless situation.

Usually, it is difficult to get a good price or premium when selling a troubled company. Many acquirers try to avoid buying a loss-making enterprise like a plague. They will find it extremely difficult to convince their shareholders to undertake the risks of acquiring a loss-making enterprise. For instance in China, some loss-making and state-owned enterprises are offered for sale at one dollar without acquiring the past liabilities. Yet, there are few takers. You never know the full liabilities that you can be buying into. In Singapore, some businesses are conducted at a loss. The high rental overheads, expensive manpower staffing, etc, have eroded all the profits. However, many entrepreneurs felt trapped and reluctant to shut down their business as they will have to proceed with bankruptcy procedures immediately. However, any delay in closing down such businesses can dash any hope of recouping the losses.

There are some points to consider before you embark on saving the company. Is it worth the pain and effort? Do you want to keep it going by throwing good money to chase after bad money? Therefore one needs to ask whether one’s company is worth more dead than alive? If it is much like a vampire, neither dead nor alive but living on the nutrients and sustenance of the living blood, then it is time to drive a stake through the heart and relieve the misery of the ‘living dead’. It is worth more to be dead than alive.

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Companies do fall sick and die; However, there are panaceas that can turn a critically ill organisation around into a healthy one. Proper treatment is necessary as the remedies can sometimes be worse than the disease.

PRINCIPLE 1: TO TREAT THE SYMPTOMS, KNOW YOUR COMPETITORS AND CUSTOMERS. TO ELIMINATE THE ROOT CAUSE, KNOW THE MARKET

Sun Tzu, the strategist in The Art of War said: “If you know yourself and the enemy, you need not fear the result of a hundred battles.” Though it is important to know your competition, one should not do so at the expense of neglecting one’s customers. Merely knowing the competitor is equivalent to a person driving a car and constantly looking out for the competitor’s car at his side. He is so pre-occupied with the competitor that he fails to look at the road ahead and may run into hazards.

Knowing only the customer’s present needs is also merely treating the symptom and not the ailment. Today’s customers are more demanding - they want more of those things they value. If they value cheaper prices, they want even lower ones. If they value convenience or speed at the time of purchase, they want it even easier or faster. Hence, companies’ efforts may yield temporary results if they only deliver what the customers want now. These attempts may not sustain the company’s long-term growth, as they are unable to optimise on profitability, resource allocation and opportunities.

To ensure vibrant business and continued long-term growth, companies must strive to drive the market. They need to pre-empt both the customers’ and competitors’ present and future developments. 3M’s Post It notes, which nobody had asked for previously, are now one of the most commonly used office products. Microsoft’s operating software Windows came not from responding to customers’demands or competitors’ threat, but from anticipating them. The 1980 launch of CNN by Ted Turner was ridiculed by TV veterans CBS, NEC and ABC. They failed to tap a niche that no one had yet asked for: a 24-hour news service. Other great innovations of our time including the personal computer, jetliner and Internet were created without any customers or competitors in sight. Therefore, one has to understand the market, otherwise it may destroy you.

PRINCIPLE 2: A SICK COMPANY NEEDS TO UNDERGO SURGERY, RESUSCITATION AND NURSING

There are many companies falling sick due to corporate diseases such as global economic recession, rapid changes brought about by globalisation, terror attacks and incompetent management. When a company falls sick, it needs to undergo the three phases of corporate turnaround, namely: Phase 1: Surgery: To restructure the troubled organisation to face the harsh new reality and quickly improve its cash flow. Phase 2: Resuscitation: To revitalise the business so as to increase its sales revenue and profits. Phase 3: Nursing: To rehabilitate a strong and healthy corporate immune system or culture in order to sustain long-term growth.

For complete corporate recovery, it is important to finish the full course of antibiotics prescribed in all the three phases. Restructuring alone is not good enough. As a doctor once said: “The surgery was good, but the patient died.” Without the resuscitation and nursing phases, it is like merely upgrading a cancer-stricken patient to another ward in the hospital - it does not cure the disease. Building a strong and healthy company takes a long time - it is not a one-time inoculation. It is like taking vitamin pills every day for the rest of your life in order to build a strong corporate culture which can manage changes.

PRINCIPLE 3: RESTRUCTURING EXERCISE REQUIRES THE SURGEON’S SKILLS AND CALLS FOR THE 4Cs: COMMUNICATION, CONCENTRATION, COST CONTROL AND CASH FLOW IMPROVEMENT

Restructuring is not a slash-and-burn exercise, but one that calls for the surgeon’s skills. It does not require the use of a parang or long sword but the surgeon’s knife. During a restructuring exercise, remember the 4Cs. Communication: The manager needs to personally communicate with the staff. Just as a doctor does not delegate to a nurse the task of briefing the patient about his ailment and treatment. You need to communicate the restructuring plans truthfully. People are not against bad news per se but they want to see quick results.

Concentration: The surgeon operates on only one patient at a time. Similarly, the sick company needs to concentrate on its core competence. In bad times, you need to concentrate even more as resources are scarce. If possible, sell away all non-core businesses.

Cost control: Cut costs to the bone without injuring the muscles and organs. If circumstances permit, amputate non-profitable businesses rather than try to bandage and apply stitches. Cash flow improvement: Cash flow is your life blood. Slipping into losses may give you a headache, but a sudden shortfall in cash flow will cause an immediate massive migraine. Try to cut your inventory, purchases, perks, credit to customers, outstanding debts and related items without hurting the company further.

PRINCIPLE 4: JUST AS THE SURGEON OPERATES ON ONLY ONE PATIENT AT A TIME, SO A SICK COMPANY NEEDS TO CONCENTRATE ON ITS CORE COMPETENCE

During the turnaround phase when the company is on the brink of bankruptcy, there are time and resource constraints. The company needs to concentrate all its resources on doing a few major things right. You should have a laser-sharp focus just as a surgeon focuses on only one operative field during surgery. If you are a patient, you will be worried if your surgeon operates on you and another patient simultaneously.

Similarly, an ailing company needs to concentrate only on its core competence and try to rid itself of businesses that do not help the bottom line or immediately improve its cash flow. In such a critical situation, you often can succeed at a far lower cost by ensuring that you do a better job with the businesses and skills you already have.

In order to release resources for its core business, die ailing company has to divest any unprofitable or non-related businesses. Quite often, in their bid to bolster sales performance, troubled companies clinch lots of sales contracts that have poor profit margins. This is tantamount to buying sales which often turn into subsequent financial losses. Such a scenario is equivalent to having a lot of sizzle but no steak.

It is better to amputate all loss-making ventures and unprofitable sales whenever possible. According to the standard surgical procedure, if there is pus, get it out. In fact, the famous Chinese military strategist Sun Tzu believed in the principle of concentration to fight a war. He said: “The strength of an army does not depend on large forces. Do not advance relying on sheer numbers. Rather, one must concentrate one’s forces and anticipate correctly the movement of the enemy in order to capture him.”

PRINCIPLE 5: COST CONTROL IS AN IMPORTANT ANTIDOTE OR EFFECTIVE REMEDY TO ADMINISTER IN DESPERATE TURNAROUND SITUATIONS

Unnecessary cost is always your number one enemy. You must attack it, and justify and challenge every expense that you incur. Whether your company is in trouble or not, cost will kill you even if you come up with better products. If your cost to make something is your competitor’s selling price, you cannot stay in business for long.

Any first-year business student will know how to cut costs. The key here is how the costs can be cut to restore financial health in the short term without hurting the ailing company in the long term. The turnaround manager should discuss the relevant details with the respective department managers, soliciting their advice as this can improve remarkably the chances for full co-operation and success. Sometimes, staff can offer valuable suggestions to save time or money or both for the company. Remember, this is not the time to create unnecessary stress by finger pointing. The key is to foster a conducive environment for problem-solving, establish solidarity and put everybody’s self-interest to work for future gains.

Sometimes, cost reduction can be achieved through streamlining procedures and operations. Through this, duplication and inefficient methodologies can be pared down to a minimum. In some instances, similar or more superior results are achieved through outsourcing. Outsourcing provides you with the advantage of being able to focus on those areas that are vital to the company’s operations, instead of being distracted by things that have little impact on the company’s success. People-related expenses can be reduced remarkably through cross-fertilisation of multi-disciplinary skills. Productivity can be improved by deploying staff to perform high value-added duties. Remember, every cent of cost saved ot cut goes right into the bottom line.

PRINCIPLE 6: DOWNSIZING IS LIKE AMPUTATING A PART OF ONE’S BODY, CREATING SIDE EFFECTS

Downsizing is like an amputation which removes part of one’s body but creates side effects such as low staff morale and bad reputation. It is not the only remedy available to managers to improve a company’s performance. Other remedies include increasing sales revenue and other cost control measures.

There is no problem in removing the corporate fats, dysfunctional personnel or cancerous tumours in the company. The problem with one-size-fits-all downsizing is that good people also get fired in the process. In some instances, ‘corporate genocide’ or the deliberate extermination of a healthy business is often committed in the name of maximising shareholders’ returns. However, in some instances, downsizing is inevitable. But one has to carefully manage the aftermath of the downsizing exercise. As the saying goes: “Even rats will desert a sinking ship.” Haemorrhage or the exodus of good calibre staff may take place and deal quick and severe blows to the company’s vital organs. The ailing company is unable to attract good calibre staff to replace those who have left since its reputation in the marketplace is tarnished.

You must try to win over the trust of the existing staff after a downsizing exercise. Silence is not golden. Communicate to the staff the reasons for this exercise and the plans to resuscitate and turn the company around. Be humane in treating the people to be fired. The golden rule in a downsizing exercise is: ‘Do not do unto others what you do not want done to yourself’. For one day, you may be the person to be fired too.

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A sick person down with flu may manifest early symptoms of cough, runny nose, fever and body aches. Likewise, there are usually ample warning signs for a company. Prescription without diagnosis is malpractice, and thus carrying out corporate restructuring without knowing the ailments is disastrous. The key is early diagnosis as it increases the chances of curing most diseases.

Principle 1: An annual health check is fundamental

Many companies have annual medical examinations and health screening for their employees, but are negligent when it comes to their own check-ups. Poor management and financial information systems typically get blamed for management’s inability to ’see it coming’. Usually, there are ample warning signs or symptoms of impending trouble. However, these warning signals are often ignored or suppressed; hence the onset of a crisis comes as a surprise.

It is also tragic that many companies fail, not solely due to the irrevocable downward spiral of their financial health, but because of management’s inability or unwillingness to face those serious problems squarely and take appropriate timely action. Sometimes, top executives fall into the denial trap as acknowledging a problem is tantamount to an admission of failure, exposing them to criticism by the company’s shareholders.

It is important to pre-empt any problems from arising by looking out for warning signals. Therefore, a proverb that says: “The superior doctor prevents sickness. The mediocre doctor attends to impending sickness. The inferior doctor treats the actual sickness.”

Principle 2: To understand the disease, learn to be the patient

There is an old Spanish saying: “To be a bullfighter, you must first learn to be like a bull.” In business, a manager needs to be on the ground to talk and interact with the various people: staff, suppliers, customers, business partners and even competitors. Through these channels, the manager is able to acquire a better knowledge of the industry and feel of the market, and be better equipped to make sound decisions and take timely action as he does not operate in a vacuum. This will not only check or halt declining trends, but also hopefully improve them in the near future. This is why the worst place for a manager to be in is his air-conditioned room, where he is cut off from the marketplace.

Lou Gertsner, the turnaround CEO of IBM, became IBM’s most hardworking salesperson - logging thousands of miles to visit key customers and prospects. His approach sent an unmistakable message to every employee to be hands-on and gave IBM a new image. By staying in contact with the market, Gertsner was able to make the right decision to turn troubled IBM around. Sun Tzu, in the art of war also advocated ’staying on the ground’ policy. “Generally, in the case of armies you wish to strike, cities you wish to attack, and people you wish to assassinate, you must know the names of the garrison commander, staff officers, ushers, gatekeepers and bodyguards. You must instruct your agents to inquire into these matters in minute detail.”

Principle 3: Do not block the flow of internal energy

In traditional Chinese medicine, ill health is often associated with the blockage of one’s internal energy, qi. If one is ill, such clearance will result in the normalisation and re-establishment of the optimal functioning of one’s body and most diseases should disappear, if one is not ill, the free flow of qi will further enhance the existing sense of wellness and well-being.

In the corporate context, qi is the human spirit, drive, passion and energy. It is the same qi that keeps you awake when you are watching the world Cup matches or your favourite television programme. It is also the same qi that impelled wait Disney to risk his reputation by creating Disneyland and Epcot Centre without any market data on their viability, it is the same passion and drive that saw Bill Gates give up his Harvard university studies in pursuit of his dream of establishing Microsoft.

You do not create Disneyland or build personal computers because the outside environment demands it. These things arose out of an inner urge for progress: the drive to go further, to do better, to create new possibilities without any external justification. Jack Welch, the former chairman of General Electric US recognised the power of energy in his later years, in early 1980, when he first took over the helm, his emphasis was on maximising market share, a directive for all GE’s affiliates to be Number 1 or 2. Subsequently, it was a case of maximising market-value through productivity programmes such as ‘workout’, ‘6 sigma’. in the later years, Welch indicated that he would hire people with the two energies: those with energy and the ability to energise others.

To compete effectively in the future, companies need to maximise the energy of their staff, as well as exploit and tap the energy of their customers.

Principle 4: Knowing the type of viruses is half the cure

The troubled company usually gets attacked by two types of problems - internal and external viruses. Many of the internal viruses are generated by the company and are actually within the company’s control. They are usually associated with weak management and a poor financial system. The onslaught of this form of viral attack can lead to bad or untimely business decisions, poor financial control and other related problems. The medical analogy for eliminating internal viruses may merit the use of surgery such as downsizing, restructuring or change of management. External viruses being macro in nature are often beyond the company’s control.

The entire industry or marketplace or even the whole country may be stricken by the same type of external viruses. The attacks can be silent, swift and often appear non-threatening at the beginning. Examples of external viruses can include economic recession, changes in consumer behaviour, natural disasters, political turmoil and terrorist attacks. Such external viruses are harder to eliminate and predict. Sometimes, even having a strong management team is inadequate to cope with external viruses because the corporate culture is not able to manage change.

The remedy is to foster a strong and healthy corporate culture, which is the immune system of the company. The immune system produces antibodies to get rid of viruses, which is even better than taking drugs, as drugs sometimes create negative side effects. Similarly, a strong and healthy corporate culture can help to respond quickly to changes and shocks in the marketplace. The best prescription is to know the viruses, predict and eradicate them before they attack your system.

Principle 5: Just as heart ailment is a major killer, competition is the major cause of corporate failures

The management mantra in the 1970s and 1980s was product quality, and activities involving Quality control (QC circles, Total Quality Management (TQM and ISO 9000 were the order of the day. Back then, consumers were willing to spend enormous sums for quality products. However, product quality has improved and today, having a good quality product is a mandatory requirement for any company to participate effectively and survive in the marketplace. Subsequently, the management slogan in the 1980s and 1990s embraced technology as the cure-all, companies then tried to distinguish themselves from their competitors through the use of technology to offer better and more sophisticated features, and the use of the internet and other communication systems. Huge sums were channeled into technology to build a better mousetrap with more superior state-of-the-art features.

Today, the world does not beat down the door of the better mousetrap developer. The collapse of the high-tech stocks on Nasdaq in the early part of 2001 shows that technology is not foolproof. The thrust in the new millennium is competition, competition intensifies with the emergence of a better range of products that are often of more superior quality with even more attractive pricing. in such a scenario, many products become marginalised, and like commodities, pricing becomes a key determinant in a shrinking market.

Competition is a silent and sudden killer like a heart attack which creeps up on you. It is however also a highly preventable disease for the individual through a healthy lifestyle, and for the company, to be always alert and have strategies to combat competition. When you are faced with increasing competition, you may still survive, prosper and succeed, but it cannot be business as usual.

Principle 6: Past business assumptions may be the anaesthetic that dulls business sense

For a troubled company, it is prudent to challenge all ’sacred cows’ or sacrosanct and old business assumptions, it is probable that some of these old ’sacred cows’,which were based on some erroneous perceptions and assumptions, got the company into trouble. Traditions and past business assumptions underlying the old ways of doing business, especially those that have become irrelevant and obsolete, may be the root cause of the disease afflicting the ailing company.

In times of rapid change, a strategic failure is often caused by an incorrect or false perception, we console ourselves by telling ourselves that we have gone through the present problem before, or falsely assuming that this change is temporary, or the impact would be limited and hence could be ignored.

Many of these old and obsolete assumptions happen in large and well-known companies whose traditional cash cow businesses have become sacred cows that end up as sacrificial cows or mad cows when market forces overwhelm them.

Time and again, some wrong business assumptions and perceptions by experts have led many companies astray. For example, Ken Olson, president of Digital Equipment, said in 1977: “There is no reason anyone would want a computer in his or her home.” Because of these erroneous assumptions and perceptions, it is no wonder Digital Equipment was late in entering the personal computer market.

To ensure the effective and successful implementation of its business assumptions, a troubled company must critically re-examine and re-visit every single one.

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Contrary to common belief, a company is not an inanimate object. In fact, there are many similarities between companies and people, companies are living organisms that comprise communities of people that contribute to their distinctive personalities and attitudes. Like us, companies fall sick, due to various reasons such as economic slowdown, competition and incompetent management.

However, there are workable, preventive, diagnostic and therapeutic steps to treat and restore the health of sick companies. Similar to how we manage our health, acompany needs to follow three key steps to ensure and sustain its long-term health, namely prevention, early diagnosis and proper treatment. There are 18 medical principles in corporate health associated with these three steps which will be presented in three parts. The first part is on the first six principles guiding the step on Prevention:

Akin to people, most companies get into trouble simply by neglecting their health. However, the old saying of ‘prevention is better than cure’ applies also to companies.

Principle 1: Laughter and fun are the best medicine
Laughter and fun have been recognised for centuries to be the best medicine. The correct use of laughter and fun in the workplace facilitates learning, and changes people’s behaviour as it helps them feel less threatened by the prospect of change. Laughter and fun have been found to be the best tools for giving the corporate identity a human face.

Disney world is one of the best success stories on the use of this tool. Reputed as a fun place for kids and the ‘kids’in all adults, Disney World has attracted millions of visitors every year. Many visitors also patronise the playground several times in their lifetime. The fact is, people do like doing business with people who are fun.

A fun working environment is also more productive than a routine one. People who enjoy their work do create more and better ideas. Fun is contagious. Therefore, to have a really happy workforce, you got to do more than pass out bonuses and angpows. You need to make work fun. Science opens to us the book of nature, while laughter and fun open the fountain of human creativity.

Principle 2: Rest in order to rejuvenate
One of the most effective ways to improve mental and physical health is rest, in the corporate context, this means stability. Here, we are faced with a paradox whereby management needs to change and evolve in order to cope with rapid developments in a fast-changing business landscape. Yet, in the quest for growth-inducing changes, companies need rest and stability. Like a human body, a company needs rest for it to re-charge and repair itself. At the same time, it also needs to remain active in order to achieve optimal body functions and good health. Thus turnaround managers have to be masters in the art of preserving stability amid changes, and spurring changes in times of stability.

It is therefore abhorrent for companies to embrace a ‘hire-and-fire’ approach in their human resource policy. This is equivalent to bulimia, an illness in which there is a great and uncontrollable desire to eat, usually followed by induced vomiting in order not to gain weight. Such ‘corporate bulimia’ rips the fabric of corporate cohesion, self-interest replaces corporate interest as suspicions among staff increase and loyalty towards the company wanes.

Principle 3: Endorphins give a sense of well-being
Endorphins, substances produced by the brain, give a sense of well-being, and help bodies cope with stress and other ailments. In a company, training and development generate endorphins which are released when an employee with untapped potential is nurtured within the right environment. Employees are thus motivated to contribute more effectively in their respective roles that transcend their job descriptions.

Some managers view training and development as heavy expenditures as trained staff may eventually resign. However, there is a fallacy in such an argument as investing in people does pay dividends, companies that emphasise training and development are placing their best bets on the future because they bet on their people’s potential for further growth. Companies really cannot afford not to train their staff, as it may lead to ignorance, which is a higher cost to any company.

Principle 4: Change mental attitudes to build financial health
It is often said: “The difference between heaven and hell is not the altitude but the attitude.” Medical science has generally found that in psychosomatic ailments, a person’s mental attitude, mindset and psyche can have a tremendous impact on his physical health. When your mental attitude is negative, you may feel chronically depressed and hopeless, which will drive the immune system into a self-destructive mode where viruses can easily establish a foothold. In sick companies, employees tend to wallow in self-pity, lick their own wounds or play the game of shame and blame.

They may place blame on everything conceivable: intense competition, demanding customers, incompetent bosses and so on. Perhaps an apt description for themselves is: “We have met our greatest enemies - us.” In times of negative mental attitudes, it is always best to keep busy, to plough your staff’s energy into something positive. Small changes in the staff’s mindset can go a long way in building a healthy corporate culture. You should recognise, commend and celebrate every little success. Once people start to achieve success, it spurs them on to greater efforts. Mental attitudes are contagious.

Principle 5: Vision, feedback and action - three meals a day keep the corporate doctor away
Someone said that feedback is the breakfast of a champion. However, in today’s turbulent marketplace, breakfast alone is not enough. you need three meals to keep the doctor away. in the corporate dietary system, you need vision for breakfast, feedback for lunch and action for dinner. Vision and feedback without action is dreaming. Action without vision and feedback is wasting time. But vision, feedback and action - the three meals a day will serve to keep the corporate doctor away.

Some people believe that information is power. But information is useless if no one acts on it. It is similar to the treatment of a sick patient. The doctor can have ail the right information on how to cure the patient. However, if he does not take appropriate and timely action to treat the patient, the outcome for the patient remains unchanged. Conversely, action must be complemented with the correct information. Acting on the wrong information may kill the patient as the remedies may be worse than the disease. This is why all three ‘vision, feedback and action’ are necessary,

It is the application of the correct information that unleashes power in the context of management theory it is useful to apply the best blend of Eastern and western practices. Developing Asia can learn much from the more established and intellectual western managerial professionalism in the area of clear vision, proper research and feedback. On the other hand, the west can learn from Asia’s entrepreneurs with their acumen and instincts to quickly act on the information available. Therefore to compete effectively in today’s global marketplace, it is vital to integrate the vision and feedback management system of the West with the entrepreneurial action of the East.

Principle 6: Manage self with the head, manage others with the heart
It is the head that helps to analyse and strategise, but it is the heart that fosters understanding and commitment so critical for long-term corporate success. to increase the corporate life-span and longevity, you need to manage both the ‘head’ or ‘hard’issues, as well as the ‘heart’ or ’soft’ issues. Strategies and hardware will come to naught if the people’s hearts are not with the company. The implementation will go wrong if your people’s support and commitment are not there, in turbulent times, one needs also to deal with the ’soft’or ‘heart’ issues especially those relating to people. you should be hard on performance, but soft on people.

Corporations have for centuries searched for that elusive fountain of corporate youth through all kinds of different management theories, technologies and programmes. We invest millions of dollars in the quest for corporate excellence, but we forget the basics. It is the people who make the products and the people who buy them that ultimately determine corporate longevity. Just like a human being, the corporate body needs strong cells to fight corporate ailments. Often, it is the people that fail and not the business. At the end of the day, you have to remember that all the work is done by your people. This is why an old proverb says: “If you are planning for one year, plant rice. If you are planning for 10 years, plant trees, if you are planning for 100 years, cultivate people.”

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In the movie, ‘Ghost Buster’, the theme song starts off, “If there is something strange in the neighbourhood, who do you call: Ghost buster”. Similarly, a sick company needs to call on the Corporate Turnaround Expert if you find something awfully unwell in your company.

Sick companies have waited, hoping that their nightmare would be over soon. But things often get worse before they get better.

It is normal that when a person falls sick, the first thing you do is to see a doctor. But why allow this situation to explode into a financial crisis? The company needs to go into intensive care, otherwise, it will go under and the owners will become a bankrupt or lawsuits could be filed against them.

What has just described happens to thousand of companies every day in Asia. Many of us just do not seek help early enough for our corporate woes due to unfounded fears and reasons - what if the bank learns about it and pulls the credit facilities? What if the employees learn about the poor state of health and jump ship? With the face-saving culture in Asia, what if my friends, customers and business associates learn that I am not doing well, would they reject me? Why should I call on the Corporate Turnaround Expert in Asia?

When you need a heart by-pass, you naturally call in a cardiologist rather than any general practitioner. When you have tax problems, you call in a tax consultant and not any accountant. Yet, many troubled companies make the fatal mistake of not approaching the right professional for help. Many continue to use their own internal management who are already like a deer caught in the floodlights, petrified and totally clueless on how to move forward.

Many of us would not use self-medication if we were seriously sick. Yet, we make this mistake when managing our troubled businesses. Most of the time, a troubled company cannot be fixed solely from the within. The management may harbour too much prejudices, vested interests and baggage. If the medicine is too bitter, the management may not have the guts to swallow it. The company needs somebody from the outside who is able to say “no” firmly when necessary. If the internal management is the cause of the problems, then the use of the internal management is like using leeches to cure leukemia.

Managers from successful companies will not cut it as they have not had to work with low-morale employees, creditors screaming for payments and diminishing market share as clients switch to competitors.

The sick company needs to hire a Corporate Turnaround Expert with many years of turnaround experience grounded with proven turnaround techniques. As an outsider, the corporate turnaround expert brings unfair advantages to the turnaround process. The Corporate Turnaround Expert has no emotional baggage tied to a new dream or historically interesting but economically irrelevant service. Nor is the Corporate Turnaround Expert beholden to the present management. He or she can ask dump questions without looking dump. One or two dump questions will turn out to be brilliant ones.

Contrary to expectation, employees will accord the Corporate Turnaround Expert the co-operation. These employees understand that the Corporate Turnaround Expert represents their last chance and that he or she did not create the problems. They will be open to the Corporate Turnaround Expert as they know that he or she is there to help the company succeed. With the right demeanour and without any rudeness, the employees will guide the Corporate Turnaround immediately towards the major problems.

Care has to be taken in the selection of a company doctor or turnaround specialist or Corporate Turnaround Expert in Asia. There are many professionals in Asia who profess to be turnaround specialists but are actually only financial people who are preoccupied with cost-cutting measures.is important.

Certainly such skills are important but it is only part of the answer. The specialist also needs to have gone through adversity and has track record of successfully turning around troubled companies. Why spend another sleepless night worrying what to do next? Similar to taking care of your physical health, early diagnosis and proper treatment are keys to your corporate recovery. Sick companies just cannot afford another day to procrastinate.

When you are afflicted by cancer, immediately see an oncologist and do not rely on your family doctor. There is a cure for your corporate cancer if proper treatment is administered early enough. The selection of the right turnaround specialist to help the company quickly is crucial.Ifit is done too late, even the turnaround specialist may not be able to help you.

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