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Archive by topic: Management control system

What is a turnaround?

November 6th, 2011

During the annual conference of the Turnaround Management Association (TMA) which was held the last week in October, I attended two sessions about “turnarounds” and was truly taken aback by what I heard.

An underlying theme, articulated by panelists in both sessions was, “We’ve been focusing on fixing the balance sheet.  Now we need to learn how to fix the income statement.”  Really?  What have these people been doing?  And does this explain why TMA sessions and publications in recent years have focused on “restructuring” instead of “turnarounds?”  (My article which was attached to my last blog post explores this topic.)

Fixing the balance sheet is relatively easy:  collecting receivables, reducing inventory, selling unneeded assets, renegotiating debt.  Fixing operations is generally more difficult and, in many respects, requires a different skill set.  For companies to survive over the longer term,  they need to have carefully conceived plans, the right people in place, and effective management control systems.  In addition, they must deliver their products and services in ways that are both cost-effective and customer-centric.   To me, ensuring that those pieces are in place is a vital role of the turnaround expert.  Evidently, not everyone agrees with my view.

To me, the word “turnaround” means fixing the balance sheet AND fixing operations.  What does it mean to you?

 



What does a turnaround expert DO?

February 21st, 2011

I have recently been asked by reporters, “What would you do at Harry and David?”

I responded with a description of the turnaround steps described below.  Those steps are always the same, but the specifics vary from project to project.  (When I spoke with reporters, I also discussed some of the situation-specific actions I would initiate.)

My S.O.P. (Standard operating procedure)

  1. Get total control of cash
  2. Prepare short-term cash forecast
  3. Select Turnaround Team from key, existing management team members
  4. Convene the team; go through financial statements line by line–first, looking for ways to improve short-term cash situation, second, identifying ways to increase revenues (and/or margins) and decrease costs — (note: understanding the financial statements inside and out is critical!)
  5. The result is a written plan that includes a list of who is responsible for achieving what results by which dates and financial projections, which are the numeric representation of the plan.
  6. Then, it’s time for the team to implement!
  7. Design and begin  implementation of a sound management control system if one does not exist
  8. In the meantime, there are generally crises to contend with and negotiations with a wide range of stakeholders.

In addition to the above, I also send a web-based confidential survey to all employees.  The employees know what’s wrong, what needs to be fixed, and often see things that people at “corporate” miss.  Surveys to vendors and customers can be equally enlightening.

The above steps make it sound like the turnaround process is an orderly one, but it’s not.  Leading a turnaround is like being a general on the battlefield.  It’s messy and fraught with peril.   You have a plan, but unexpected crises are constantly arising.  I always tell prospective clients that it will feel like the opening scene from Saving Private Ryan.  One of my favorite owner/clients used to stop by my office occasionally and say, “I’m having a ‘Saving Private Ryan’ day.”



Renee’s Rule™: You can’t have two captains on the same ship.

June 6th, 2010

One of the headlines today in the New York Times reads, “In Gulf, It Was Unclear Who Was in Charge of Oil Rig.”

If “who was in charge” was, in fact, unclear, it is scary, but, in my experience, too often the case.

Example one: Several years ago, in the process of considering whether to accept a family-owned business client, I interviewed 7 family members, most of whom were in the upper echelons of the business.  Because the company had no organization chart, I asked each person to draw one for me.  No two charts were the same.  The mother-in-law thought the son-in-law was running the company; the son-in-law thought the mother-in-law was running the company.  No wonder the company was on the brink of bankruptcy.

Example two: A 25-year-old, FDA-regulated company with operations in both the US and Canada had been cited for FDA infractions before my arrival.  Unlike the company in example one, this company had a detailed organization chart and job descriptions for every position, so when I met with the Director of Government Compliance and the Director of Quality Assurance,  I asked which one was in charge of ensuring FDA compliance.  The two looked at each other. Neither could answer.

You will not be surprised to learn that I solved the non-compliance problem by simply designating one person who had both the responsibility and authority for compliance. As a result, during the first FDA inspection following my departure, the company received  its first-ever absolutely “clean” bill of health.

The lesson: Imagine a ship with two captains, each issuing different orders—a symphony, in which the conductor is “conducting,” while the concertmaster is directing the strings.  No one would ever consider creating either of those scenarios.  That’s  Management 101.  Why, then, do companies, from small to gigantic, allow that to happen?

Renee’s Rule:  You can’t have two captains on the same ship.



Renee’s Rule™: Two sick companies don’t make a healthy one.

August 4th, 2009

When revenues decline, and profits are non-existent, companies often believe that if they buy or merge with another company, the increased revenues will solve their profitability problems.  In my experience, however, these “solutions” often exacerbate the problems.

To be successful, all companies need the essentials:

  • A capable leader
  • A carefully conceived plan
  • A system for ensuring accountability

When these pieces are missing, a joining of two financially and operationally troubled companies is destined to fail.

An example from one of my clients:

  • Company A was in an FDA-regulated industry
  • The industry was experiencing both intense pricing pressure and consolidation.
  • Company A, with multiple manufacturing and distribution facilities, was not only losing money but was also experiencing both product contamination and delivery problems.
  • Company A, which was bleeding cash, bought Company B, which was also bleeding cash.
  • Neither company had any of the three essentials listed above.
  • After the acquisition, the expected “economies of scale” did not materialize; costs for the combined entity actually increased as a percent of revenues.
  • The already stressed delivery system was now even more stressed.
  • Expected  revenues did not materialize because frustrated customers switched to other suppliers.
  • Chaos ensued.

We were able to save the company, but it was a close call…..a very close call…..

Two wrongs don’t make a right, and two sick companies do not make a healthy one.



Renee’s Rule™: What gets measured matters.

June 28th, 2009

Every manager knows the axiom “What gets measured is what gets done,” but too often managers overlook key measurements.

An example: When cash is tight, and profits are lagging, managers, boards of directors and lenders often focus on reducing inventories.  Measuring dollar value of inventory and inventory turns can certainly be useful; however, if  there is no report that shows the AGE of the inventory (how old the inventory is and whether or not it is obsolete) and no report that measures stockouts, inventory reductions may produce undesirable, unintended consequences.

When a company holds old or obsolete items and reduces the size of its inventory, the dollars tied up in inventory do decline, but the % of  “bad”  inventory  increases, and the entity may find itself without  materials needed to deliver orders on time and/ or to stock its shelves with the products that customers want.

In addition, if a company does not write down old or write off obsolete inventory (and, yes, this still happens!), the company is inflating its bottom line.  Since financial statements are the scorecard of the business, if financial statements are not accurate, then management’s decisions are based upon misleading information.

Renee’s Rule™: What gets measured matters.



Renee’s Rule™: If you can’t understand what someone is saying, he may not be saying anything.

May 27th, 2009

I’ve seen some pretty scary hiring mistakes.  Here is an example in which “The Emperor Had No Clothes.”

In the 1990’s, I became  Interim CEO of a  company that was experiencing the worst production problems I had ever seen.  The company had hired a new Director of Materials Management.  He had been referred by a management team member who had worked with him elsewhere, and his references from former employers were excellent.  Everyone told me–and seemed to believe–that this guy was a genius.  During meetings, he typed on his own notebook computer (fairly unusual at that time), looked impressive,  and made “pronouncements.”

I, however, couldn’t understand a thing the guy was saying (plus, of course, materials management  was still totally out-of-control.).  I said to myself, “I have an MBA, am pretty darned bright, and  have run more than 10  companies.  If I can’t understand him, maybe he isn’t saying anything.  Something is wrong.”

HR had checked his references, but I asked them to contact the universities listed on his resume to verify his degrees.  Surprise, surprise:  this fellow had lied on his resume and had no college degree.   Needless to say, that was the end of his employment with the company.  (The company, by the way, was successfully turned around.)

The question in my mind remains:  Why in the world hadn’t someone else called his bluff?  (A question to be explored in a future blog..)

At least three of Renee’s Rules™ apply:

  • If you can’t understand what someone is saying, he may not be saying anything.
  • Too often, people are afraid to speak out when they think something is wrong.
  • Check references thoroughly.



Renee’s Rule™: “Bigger” may not be “safer.”

May 17th, 2009

When is it “safer” to hire a “big” professional firm rather than a smaller one?  This is a topic I’ll be exploring in several different posts.  For the moment, here is an instructional story. (The names and some details have been withheld to protect the guilty.)

Some time ago, a principal from PE (private equity) Firm A, with investments across the country, called me to take the place of the CFO they had hired because he was a consultant with a national (“big”) consulting firm.  Why was the PE firm replacing him?  When the portfolio company’s lender conducted its audit, guess what they found?  The “F” word: Fraud.  (I did not accept this engagement for a variety of reasons I’ll discuss in a later post.)

Several months later, PE Firm B interviewed me for a turnaround in an industry in which I had successfully turned around more than one company.  Did they hire me? No.  Why did they pick someone else?

  • He’s from a national firm, so that’s “safer.”
  • He has industry “experience.”
  • We know him.

Here is what I know about this person:

  • He IS a consultant with a national firm.
  • He was involved with a company but definitely did not lead a successful turnaround in the “industry.”
  • He was the person who was removed by PE Firm A because bank fraud occurred while he was CFO.  (Evidently, PE Firm B didn’t really “know” him.)

I also know that the company was not, in fact, successfully turned around.

Let me be clear:  There are some times that a bigger firm really IS safer; nonetheless, there are many lessons to be drawn from the above story.  Stay tuned for further posts.

In the meantime, remember these Renee’s Rules™:

  • When hiring, RESULTS are more important than “experience.”
  • Always check references.
  • There is no substitute for common sense.


Renee’s Rule™: Don’t sell to customers who won’t pay.

May 10th, 2009

I have been shocked by the number of companies I’ve met recently that have been placed on COD or credit hold by their vendors but have not put any of their own, troubled customers on COD or credit hold.

Whether you are the CEO of a company, a law firm, or an accounting firm: Stop selling to customers who can’t or won’t be able to pay.  There is no way to overemphasize this point.  When a company is faced with declining revenues and profits, uncollectible accounts receivable make the situation worse and—in extreme cases—can be the tipping point that causes the company’s demise.

Today, it is absolutely not safe to assume that customers who have always paid on time will be able to pay on time—or, for that matter, at all, so review your credit policies and procedures and define carefully

  1. Who can have credit?
  2. Who can authorize credit, and what are the guidelines?
  3. How does the company verify current credit worthiness of customers?
  4. Who is responsible for monitoring timeliness of accounts receivable collections?
  5. What are the company’s collections policies; e.g.,
    • What steps does the company take when payments are late?
    • At what point is a customer put on COD or credit hold?

I will provide additional information about sound credit policies in a future blog post.  In the meantime, another Renee’s Rule™ applies: “The sooner, the better.”



Lean manufacturing: not a panacea

March 22nd, 2009

Not long ago, I attended a meeting of the local APICS chapter at which managers from a manufacturer of dental equipment described the process they used to obtain outstanding cost savings by  implementing  “lean manufacturing” techniques.

Shortly thereafter, during a visit to my dentist–who had recently purchased new equipment from that company–I discovered that there was a major flaw in their new dental chair– absolutely no ability to adjust part of the chair for people of varying heights–a rather major oversight, the hygienist observed.

So….implementing “lean” techniques may have reduced production cost, but it failed to meet the needs of the customer.

Clearly, my dentist purchased the piece of equipment anyway, but, surely, the next time, he will be more careful to check to see that basic necessary features are in place.  In the meantime, he may tell his colleagues who may be contemplating equipment purchases about the design defect…

So..”lean” is not a panacea.  There is still no substitute for common sense.



Renee’s Rule™- There is no subsitute for common sense

March 4th, 2009

It seems like every minute a new book with the “latest” business “secrets” hits the market.  In reality, however, running a business profitably and well boils down to taking care of the basics; i.e., having a well-conceived plan, having a capable leader, and implementing a carefully crafted management control system.  It is astounding to me that so many companies lack these basics—not just family-owned, but also publicly and private equity-owned (You know some of their names.)

Much of the information in this blog may sometimes sound like nothing more than common sense, but common sense and an attention to the basics are too often missing-in-action.

An example from my personal experience: In 2007, a private equity firm interviewed me for a turnaround project.  The company had been losing money for three years; there was no business plan; the president was clearly not qualified; and there was no effective management control system in place.  After I mentioned that the company needed these basics, the managing director said, “We know that.” (As in, “do you think we are idiots?”)  So…if they knew all of that, then where had they been, and what had they been doing for the past three years?  And these were people with MBA’s from prestigious institutions, who, presumably, have a fiduciary duty to their investors and definitely know better.

Find a way to step back from your business, to take a cold, hard look at where you are and what your real prospects are…Are you making money or losing money?