Remember the old Commercial Union advertising slogan? “We won’t make a drama out of a crisis.” The state of turnaround business at the moment makes me think that someone (why not me?) should reinvent the slogan: “We won’t make a crisis out of a drama.”
The turnaround market is a reflection of the state of the economy. And the economy at the moment is …. well, you tell me. The answer in the official statistics is that it’s doing OK. But many companies are still struggling. So there seem to be two turnaround industries working side by side.
The first is the traditional type. The trade association for licensed insolvency practitioners is called R3 – Rescue, Recover and Renewal. R3’s classic turnaround story goes like this: the company has hit the wall and a team of specialists go in to sort out the mess. Their aims? To stop the company disappearing,recover what is viable for the long term and reinvigorate what remains after the sell offs and redundancies. Then they hand back the business to management.
(There is a case for adding a fourth R: reorganisation. Invariably the management team at the end of the project is not the same as the one whose hands were prised off the reins at the beginning.)
But the market for this swashbuckling, knuckle–whitening turnaround project is quiet at the moment. Relatively benign economic conditions after a three year period of downturn means that companies that were badly run – or were just not viable – gave up the struggle long ago. The rest are now doing OK.
Such circumstances may amount to dramatic times for the business and its directors but it doesn’t constitute a crisis. This different type of turnaround is more suited to the business environment of the moment. It’s not so much “do or die”as “get back on track”.
A word of warning: don’t think the classic turnaround is dead. “Every market becomes more sophisticated as it matures – the recovery market is no exception,” says Richard Farr, a director of business recovery at PricewaterhouseCoopers. “Banks are leading the way in attempting to get into client ‘situations’ earlier. But R3 has also sponsored a society of turnaround professionals. The finance bubble of the nineties has finally run its course and the recovery market is older and wiser. Look out, now, for more supply chain-related issues causing financial crisis, for example.”
Whether Farr is right remains to be seen but the overriding lesson from every type of turnaround is that business still isn’t easy. Management teams make mistakes and situations outside their control will hurt their business. However, it would be good to think that if you act sensibly you can, indeed, avoid making a crisis out of a drama.
At the same time, the effect of the Enterprise Act 2002 – the end to Crown Preference and the new rules over legal charges – means troubled companies and their creditors are more likely to seek the second type of “turnaround”, informal ways out of financial difficulties.
That brings us to the role of the banks, so often the largest creditor and certainly the one with the most intimate knowledge of how a company is faring. We all love a stereotype and the heartless, faceless bank pulling the plug on sound businesses over a minor blip sits deep in the business consciousness. But banks these days don’t fit that caricature.*
“We want to work with management of business facing difficulties to help identify the issues and provide solutions to get them back on tract,” says Fiona McDonald, a senior manager with Barclays Business Support. “We can make the most impact when the problems are identified early. We are keen for management to be open with us.”
It’s true that every management team has different strengths and weaknesses. One that’s good at growing (close gap)a business may not be as strong at knowing what to do when there’s a down-turn in sales or pressure on margins. They may not even have the experience to see the problem coming. Outside help and a sympathetic bank can make a difference in those situations.
But let’s not pretend the banks are charities. They know the theories about the lifetime value of the customer and they understand the reputational risk to themselves of the slash and burn exercises they were accused of in the recession of the late eighties and early nineties. Most solutions to business difficulties involve access to more funds and/or different products (hedging, leasing, factoring) and that all adds up to continued – and profitable – involvement for the bank. You never know, the customer may even be grateful.
This “repositioning” turnaround may mean divestment of a troublesome subsidiary.
It could mean embarking on (yet another) cost-cutting exercise, including turning
away revenue opportunities if they are not considered to be of a sufficiently
high margin. It could involve hiring a turnaround professional to fulfil a
short-term skill or resource gap (all enquiries to the e-mail address below
guaranteed a reply!)