About the Author:

Tim Shea is a business executive with over 30 years’ experience leading the turnaround of failing or significantly under-performing companies ranging in size from under $10M to about $1B. In this article he shares key findings from his experience.

 

 

There are multiple steps in turning an under-performing company into a winner. Today, I will focus on some of the key steps to be taken in year one and share some actual examples. Let’s start with day 1; you have just taken over the leadership of a company that is losing money. It has some good people who want the company to succeed. Yet the company languishes, owners are not happy and it’s not a fun place to work.

Your job as the new President is to inject energy into the company and set the  initial direction to  get short term ‘wins’ to build the confidence of customers, employees and shareholders, make a profit and finally, to build a sustainable business plan to become an industry leader in 3 to 5 years.

Step One: Make Money in Year One

While making money in the first year may seem obvious, I can tell you that I have had multiple experiences where the internal direction was to make investment first, accept further losses, and then worry about profit making in the future. My rule of thumb is simple: if you make money in the first year, then you can have a great company in three years. If you lose money in the first year, then it will take five years to create a great company.

My philosophy in year one is to create a culture where change, profit and fun all act together to create a ‘winning,’ ‘can do’ organization. To do these things simultaneously means fixing the airplane while we are flying it!

First things first: Get a panoramic view of the business

Get out of your office and feel the pulse of the business:

  • Visit your top five customers. Ask “how we are doing?” “What would you like to see us do better?” Then, LISTEN carefully!
  • Visit the five most important vendors and ask “can we be better partners?”
  • Visit with key employees and ask them “what are the top three things we can do to improve the company in the short term and the three most important to improve the company in the long term?”

Your objective here is to gain a 360 degree view of your company, make yourself visible to the organization and begin to formulate quick ‘wins’ which can be done early on as a catalyst to  create a new business environment while you begin to construct a mental framework of what the  company will look like in the future.

Let’s look at a real example:

When I took over the leadership role of a custom elevator fixture company, I did my pulse evaluation and identified three key pieces of data that would become a starting point for our turn around.

  • An elevator customer told me that the quality and workmanship of our products were the best in the industry. I kept asking what we could do to make his job easier or more successful. He replied that our product was only 2% of the contract price he was charging the general contractor. Since our work was customized by an architect, and the last product to be designed, approved and built, we frequently were 80% of the reason that he was not able to get his labor off the job on schedule to make a decent profit. He went on to explain that our product had to be installed before he could take his labor off the job site. He told me all the custom manufacturers had the same long lead time so he knew this problem was his to manage and not mine to solve.
  • A vendor who did specialized computerized engraving was devoting 90% of his capacity to us and had long lead times which would never improve without something changing.
  • Employees told endless stories of customers needing their finished product more quickly and because of the custom nature of the work, if we experienced a delay, the customer changed from pleading to getting just plain angry.

The conclusion was fairly obvious: given the right approach, a customer would pay a premium for significantly reduced lead-times, which would differentiate us from our competitors and it would make a significant impact on customer perception and employee morale.

Starting the turnaround plan: inject energy to the organization

Your job as the new President is to inject energy into the company and set the  initial direction to  get short term ‘wins’ to build the confidence of customers, employees and shareholders, make a profit and finally, to build a sustainable business plan to become an industry leader in 3 to 5 years.

Begin injecting energy into the organization by creating a ‘burning platform.’ Here are two examples:

  • To change an overhead intensive headquarters function from making “headquarters’ demands” to servicing the local offices they supported, we initiated a fee schedule where headquarters would sell their various engineering services to local offices. The local office was not forced to buy the headquarters services. At the end of one year, the headquarters team would be right sized; the fees collected would equal the cost of supporting the headquarters operation. The final team configuration and size would be self-funded by providing services local operations felt were valuable enough to purchase.
  • In another company which had lost money for the past three years, I announced at our first all management meeting that salary increases for the year would be frozen until we confirmed that we would make money that year. As soon as we demonstrated we could make a profit, we would reinstate the salary increase plan. But this year, if we did not have money to pay our shareholders, then we would not be giving pay increases to anyone; myself included.

The objective of a ‘burning platform’ is to encourage employees to take action to achieve specific goals that will begin to change the direction and culture of the company

Evaluate where you stand in comparison to your major competitors

Run a competitive analysis to determine why you lose to the competition. Use an independent thinker who comes with no preconceived notions to conduct the analysis. Find out what your competitors do better. What is your competitive position and what has changed in the last few years? By understanding the significant issues with your competitive position, it will influence decisions on the growth strategy for both short and long term.  Some examples are:

  • The custom elevator fixture market, making up the majority of our business was flooded with lower prices from a sister company which wanted to see our business closed and merge with theirs.
  • Finding owner’s consultants would qualify us to bid on their modernization jobs with the sole intent of using our quote package to leverage a lower price from one of the big four elevator suppliers. Bidding this type of work uses lots of expensive overhead resources and we simply had to stop working with consultant’s who would never award us work.
  • We discovered our competition had moved all its production to low cost manufacturing countries three years prior; their market sell price was lower than our cost in the biggest global markets, while they made ~16% EBIT and we lost money.

The competitive analysis resulted in the need for immediate actions; we hit back with low prices attacking the most profitable product line of sister company and declined to bid work from consultants who never awarded us work. In the last example, a quiet and longer-term action had to be taken which I intend to address separately in a future blog.

Set the rest of the organization in motion for highly visible quick ‘wins’

Your job as the new President is to inject energy into the company and set the  initial direction to  get short term ‘wins’ to build the confidence of customers, employees and shareholders, make a profit and finally, to build a sustainable business plan to become an industry leader in 3 to 5 years.

Short term ‘wins’ need to be executed in multiple departments simultaneously.  Here are a few tips:

R&D: what can we do in the short term that will get customer attention and build confidence and buzz in the organization? Some examples:

  • Reduced approval drawing cycle time by 66%.This is for the elevator customer who is time sensitive; while we could not reduce the production cycle overnight, we could change perception of lead-time by turning around drawings used for approval much faster.
  • Changed the image and culture of Service Engineering Headquarters support. These are the top troubleshooters to help local people solve a problem when an elevator will not function. We adopted the philosophy of ‘fix the problem on the phone today or be on the jobsite tomorrow’; the impact was felt by customers, the local office and our Service Engineering group right away.
  • Changed the appearance of the product to give a fresh new innovative look, from braille plates pasted next to elevator buttons(something which looks like the braille was an afterthought) to elevator buttons which are integrated in the braille. A simple change with minimal R&D effort that the customers and architects loved and the product was an instant success.

  • Changed electronic hotel door lock from a “brick on the door” surrounding the knob to an integral reader module with electronics hidden inside the door; no changes to the electronics or mechanical mechanisms made this simple to implement and high end properties embraced the new glamorous design resulting in significant increase demand for the product.

Supply Chain: if we had to start our business over, what would our supply chain look like? Some examples:

  • Isolate top 10 purchase categories; reduce the number of suppliers to 2 per category; establish a business process where suppliers get much higher volume in exchange for lower cost, performance guarantees and annual rebates based on volume (rebates used to offset the cost of centralized purchasing).
    • Identify the easiest items to move to a low cost country (LCC) manufacturing within the year. Establish LCC plan to outsource all the high capital cost manufacturing products to two vendors.

Sales and Distribution: there are always opportunities with key accounts and underserved markets. Sometimes you just have to change the mindset of the sales people or manage the bid pipeline more closely. This can bring results in 6 months or less. Some examples:

  • Visit all Key Accounts within 90 days to show them your newest products (see R&D examples)
  • In one market for electronic locks, sales people complained they worked hard with customers on system designs only to lose the work to a lower price competitor. We established factory rebates to match competitor’s price which resulted in a few rebates, but much better close rate (the cost benefit of removing excuses for failure is often better than you expect!)
  • Establishing benchmarks for quote level and hit rate makes an immediate impact on sales
    1. Set specific metrics to increase sales hit rate and review frequently (e.g. weekly)
    2. Simplify quoting process to be able to generate a budget quote in less than 5 minutes
  • Open direct sales channels in markets where you are not represented or are seriously underperforming; open distributor sales in emerging markets

Make a profit in Year one and build a Sustainable Business Model Going Forward

Your job as the new President is to inject energy into the company and set the  initial direction to  get short term ‘wins’ to build the confidence of customers, employees and shareholders, make a profit and finally, to build a sustainable business plan to become an industry leader in 3 to 5 years.

Let me conclude by pointing out that this blog did not address the role of the CFO and the actions that need to be considered as part of the plan to make a profit in year one. The topic has many possibilities and may be part of a future blog.

I end with us still fixing the plane while it’s flying! Except, we are now flying ‘better’ but not ready to throttle the engines up to supersonic flight. And while our current direction is probably ok, it’s not clear what our final destination should be. This will be discussed in my next blog when I cover the steps to creating a long term business strategy that will be managed with a team approach to create an industry leading business.