Mike Bailey is sitting in a meeting room at Spaceage Plastics, the components division of ROK Property Solutions. There was a time when he might have been meeting a divisional finance or accounts manager at the firm. As Group FD, keeping tabs on the finance guys at his subsidiaries ought to be pretty routine.

But that's not why he's here. Spaceage, like most of ROK's divisions, no longer has a finance team in situ. For the past year, the company has been restructuring, a process which has turned a stagnant, unloved and unmotivated regional property company into a dynamic and energetic business. Part of that process has been getting rid of the decentralised finance function. Meanwhile, its share price has risen 65 per cent. "We were spending £750,000 a year running several accounts departments with 33 staff," says Bailey. "But we've managed to centralise it all, and now we run the finance function at ROK with 13 people - costs are down to £300,000 a year"

The changes to the finance function are just the tip of the iceberg. Across ROK - which was known as EBC, the Exeter Building Company, until it rebounded as part of the turnaround - 90 jobs were lost when new chief executive Gravis Snoike rolled out his vision for the group.

Any of you who are about to stop reading because you think this must have been a basket case rescued from bankruptcy, and your business is nowhere near that bad, should hang on. EBC wasn't a basket case either. But as Bailey explains, it's often the companies that aren't about to go belly up, which are in a comfortable position, that are most in need of a shake up.

"The group had become risk-averse," the FD says. EBC had come close to going under between 1992 and 1994. "The company was following a strategy to manage in a recession. That resulted in it finding it hard to make decisions - it was always standing back from the final leap. I'm not saying we're now a team of gamblers but you have to grow, or you slowly and surely wither away as a company."

On the growth front alone, the new strategy highlights the stagnation that had set in. "We've made three acquisitions in a year," Bailey says. "In the previous six years, we only made two - one went disastrously wrong, the other was this firm, Spaceage Plastics. We spent a lot of time looking at opportunities - but we always found a reason not to do something." This indecision was slowly killing the business. Indeed, at one stage in the mid-nineties, Bailey was considering an MBO because the situation had got so bad. "At the time, EBC would have been the classic asset break-up," he says. "It had a market cap of £6m. It had £5m or £6m in the bank and fixed tangible assets of £10m. So I could have bought the company with its own money, I wouldn't have needed VC funding - I'd have ended up with the business for nothing.”

The problem was that things weren't going badly enough to merit a classic "turnaround" job. In accountancy circles, that word almost always applies to businesses on the brink that have already called in the receivers or are about to. And that's a fundamental problem, according to turnaround specialist Peter Charles. He describes himself as a trouble-shooter finance man (it's almost always the FD who brings him in) and works on turning round companies, specific projects and finance functions.

"I make a distinction between rescue and turnaround," he says. "Once the organisation has accepted that it has a problem, you're either in a rescue , which has to show cash now , or a turnaround, which has to show a profit in the end. Rescue takes a minimum of three months up to, maybe, a year. Once the rescue is done, and the company is no longer going to go out of business, the turnaround can take another two to three years. In both cases, the FD is centre-stage."

But it's not just a question of time. "What's important in rescue is control, controlling everything," Charles continues. It's also about being able to see the big picture - a terrible management cliché, but for FDs it's one worth repeating. "You can't focus on all the details in a turnaround," says Charles. "Because FDs are detail conscious, sometimes every fact is as important to them as every other one. However, the role of the modern finance guy isn't to bash out the numbers, it is actually to have the ability to say that one detail matters and you can leave another one until tomorrow." If some of the numbers look OK, you can convince yourself there isn't a problem. It’s a kind of blindness that Bailey knows only too well.

"We weren't growing and we weren't making acquisitions," he says. "But it didn't stop us pretending what dynamic, jolly good chaps we were, going off to look at this and that deal. We did an awful lot of looking outside rather than inside." The trouble is that even in stormy economic seas, too many companies will think they're doing fine until it's too late. John Kelly, partner at turnaround consultancy Kroll Buchler Phillips, thinks this might have something to do with structural changes in the financing of companies. "There's a wider variety of finance available these days," he says. "In the last recession, you probably had one bank which would take you up to 50 per cent debtor cover - rarely any more than that. Now, there are more banks and they're more likely to go as high as 95 per cent debtor cover. That means your situation can stay hidden for longer. The management can have an 'ain't broke, don't fix it' attitude to their business and the problems are not apparent until it's too late to do anything."

While Bailey at ROK realised this, too many directors choose to ignore the problem. "The businesses that ought to be sitting up at the moment are the non-performing ones, the ones which aren't necessarily in trouble yet could easily drift into that sort of situation," says Kelly.

"WE ASSUMED OUR TEAMS WERE RUNNING EFFECTIVELY UNDERNEATH THE TOP LEVEL STRUCTURE BUT THE WHOLE THING HAD BECOME OVERWEIGHT"

So what's the solution? Let's go back to the ROK story. When former CEO Peter Evans announced his retirement, Chairman Bob Carlton-Porter had a choice. Go for a safe pair of hands or look for someone to shake things up. Bailey - his MBO plan developing out of dismay at the firm's sluggishness - was lucky that Garvis Snook was the man his chairman hired. "When Garvis came in he said, 'this is all very well, chaps, but what's actually going on in your business? What do all these people do?" says Bailey. “We assumed our teams were running effectively underneath the top-level structure but the whole thing had become overweight."

One thing the experts all agree on, when it comes to turnarounds, is: you've got to move fast. EBC (ROK) was no exception.

"Garvis has a low boredom threshold so it didn't take him long," Bailey says. "He spent three weeks going round the office and on June 1 last year he took firm control. Within ten days, we'd formalised what we were going to do and the announcement was made in early July that there was going to be restructuring.”

This might be the cue for much gnashing of teeth but Bailey was pleasantly surprised by the reaction within the company. "I think 95 per cent of the group, including the 90 people that left us, recognised that at last there was a catalyst that was going to focus attention on what the group was doing and where it was going," he says. "And it was amazing. There was little rancour from the people who left us. My secretary was one of them, and I was very sad about that. But they recognised it was necessary and long overdue."

Peter Charles agrees that this change process is critical. "I've found that getting staff buy-in, particularly if the company has been stagnant for some time, is about getting people to follow, not trying to shepherd them," he says. "If the new person arrives and wants to 'get buy-in' and asks how people feel about cuts- the big communications exercise - well, you just haven't got time for that."

The speed of Garvis Snook's action at ROK bears this out. Leadership is about making the big decisions in these situations (a sentiment shared by venture capitalist Jon Moulton - see box, over). "We got all the company managers and senior staff together and Garvis hit them where it hurt," says Bailey "I did a presentation as well, telling them where we were going to change things. It was fairly shocking. No punches were pulled - the axe could have fallen on anyone in the room. They were all looking at each other, wondering 'what next?' But the business wouldn't be here today if we hadn't done it.”
" It was still shocking for those that stayed," Bailey continues. "It was a sleepy, almost family, business beforehand. That old command-and-control culture resulted in everybody passing things up the line to the CEO for a decision. You might be lucky and have a decision back but if you didn't, it wasn't your fault, it was your manager's." In other words, blame was being shifted around. "But they are now accountable and responsible for their units."

Communication is critical to the success of a turnaround. It's as much about morale as it is about speed of action. "The difference between success and failure can be just a question of how high peoples’ heads are," says KBP's Kelly.

"Constant cuts are demoralising, so if you need to cut back, do it in one go. Then everyone understands there's a plan going forward in which they can have confidence,” he adds.

"Morale was important," Bailey says. "There was a lot of suspicion which we had to fight. Were the cuts the first bite of the cherry? Who was going to be next? Did we mean what we were saying? It is difficult to convince people you mean it." The fact that the finance function at ROK slimmed down so considerably, helped the communication process. "We pulled finance back to an accounts processing centre," says the FD. "A lot of what we used to do is now done in the businesses - they do their own budgeting and update their forecasts monthly. They also provide information into contract evaluations that the finance function needs in order to prepare the monthly management accounts. But the numbers are theirs, we just process them for the managers." KBP's Kelly stresses that the FD's role in a turnaround shouldn't be underestimated. "The accounting profession is seen as a bunch of number-crunchers, always the purveyors of bad news," he says. "This is especially true of MBO's where the main directors are sales-driven. To help those companies through hard times means raising the profile of the FD so that the other directors realise the significance of the figures." ROK's Mike Bailey would probably agree with these sentiments. "You've got to get that information through to the management and the people below them," Kelly says. "When everyone knows exactly what's happening, everyone is then empowered to pitch in and help in the situation.”

One of the problems we see with FDs is that they produce too much information. They need to identify the key drivers in the business and communicate them properly.

Peter Charles also makes a case for the finance director getting through to other managers - and having been through a number of turnaround situations, he's all too familiar with the problem. "In one case, I had to resort to taking all the assets off the balance sheet," he says.

"I presented a liabilities-only schedule, because every time we presented the assets and liabilities together, the other directors looked at the net assets and said, 'we're fine.' The trouble is that all the assets were redundant stock, or rather stock the board didn't believe was redundant. So I published the liability schedule at the board meeting and the whole board sat up."

In other words, you have to change the psychology within the company - you have to use your command of the numbers to explain why change is required and then help the company through its decision-making to affect a lasting turnaround. Charles says that process starts in your own office. "FDs have to avoid tricking themselves," he says. "Even if you think it's right to produce a rosy picture for the outside world, you must understand the real one yourself." Unless the finance function is clear in the objective, problems can arise elsewhere. "The prima donnas who want to go off and do their thing without considering the financial consequences are just bad managers," Kelly says. "They are actually the ones who have no regard for team spirit."

You must also watch out for recidivism. It's no good making that one big cut - lots of small ones are more damaging in the long term - only to find that managers are allowing cost to creep back in. Bailey explains that his own finance function cuts were in jeopardy when local managers started asking for staff to help manage invoices. He resisted: half a person in this or that office would soon see the gains wiped out.

Charles has had similar experiences. "One company I know told all its contractors that they'd have to take a pay cut of ten per cent," he says. "But they haven't controlled the overtime. The finance people and the purchasing people weren't working together, so there was no cost saving at all. The core to a rescue is control and speed - if you can't see how something is going to benefit you tomorrow, don't do it. However, the core to the turnaround has to be that the management teams create a common goal and then co-ordinate their efforts."

And, of course, sheer determination is a key part of handling a turnaround. As Bailey says, "I don't give up on many things which is maybe why I have survived over the years - and why I would like to realise the potential in the group."

TURNAROUND TIPS FOR THE MASTER

Jon Moulton knows what he's talking about when it comes to turning around flagging companies. Like all venture capitalists, he's looking for a step change in performance to exit as profitably as possible within a reasonable time. Here he gives a quick guide for FDs who have to manage a drastic improvement in their company's fortunes.

"First of all, make sure you're paid for the risk because the FD is probably the man who's most exposed to getting shot in the process. He's always a convenient guy to nail when the bank facilities run out, or the creditors are screaming, or you've got a problem with the cash flow forecast. It may not actually be his fault that sales have ceased or people keep returning the goods. But he's still likely to bear the brunt for the failure.

"In a turnaround, you have to act decisively, act quickly and accept that you'll get ten or 15 per cent of your decisions wrong. But you stand a far better chance of surviving if you've taken action than if you dither around going, 'let's have a study and think about it' and defer the issue.

"Your first instincts will probably be right - they'll sometimes be wrong. But the guys who are successful in turnarounds are decisive, they're usually fairly bright, often they aren't actually good team players - and they may well be inappropriate for the company that has been turned around.

It's not common for the existing team to do a turnaround. It's going to get turned around by a bunch whose attributes are violence, decisiveness and vigour. They may be grossly unsuited to managing a stable, well-run business. I've got one bloke who I use regularly in turnarounds who won’t sign a contract for more than six months because he knows the damage he can do to a good company."

TURNAROUND SIGNPOSTS

If your business is in trouble, the signs are pretty obvious: falling sales, repeatedly breaching your overdraft limits, getting non stop credit with suppliers and losing credit - that's often because suppliers' credit insurance leads them to take a sterner view of overdue payments. Companies reliant on exports are particularly vulnerable at the moment. Margins drifting lower, little or no sales force to win new business, reliance on a small number of customers, lack of quality initiatives and staid management are also problems. If you're seeing these things in your own company, you might need to be thinking about a turnaround of some sort. The MBO and MBI markets are feeling the downturn particularly badly because a lot of them are highly geared.

Is there an inability to see the big thing that is causing the business to stall? Call it a 'white elephant.' It's huge, it's consuming all your resources and usually nobody in the organisation can see it. Does the finance team make information available in a way that lends itself to decision-making? Even if you're not a commercial FD, you have to be commercial enough to present the rest of the board with clear information that describes the problem.

Be prepared to cut turnover. Many managers think that building it is a good change but you can easily end up being a busy fool. Drive out the products where you're losing money. Timing is everything. If you're on top of the game, it's far easier to survive, and that means you're constantly looking at what to do next and how to change things.

Staid management can also have a negative impact on communication with staff. That's where things can go badly wrong. A fresh set of eyes is always good.
Put up the prices on loss-making lines. Changing suppliers can be a major headache for the customer and if they value the quality you're providing, they'll pay the increase.
Sell off your poorer businesses. There is still money around: VCs look for poorly performing businesses because they'll show a better return than a business that's already highly profitable.
Look at other markets around your core offering. What else could you be offering your best customers?
Look at your incentive package. Talk to your employees about the performance of the company in some detail and get them to agree to a reward system that is related to that performance.
There are a lot of debt consultants out there. You should beware. Some will make a high valuation on plant or property to get you excessive finance - they're just after a higher fee.
Don't be afraid to tell your bank bad news:they can often contribute a lot to a turnaround situation.
We usually work out A, B and C suppliers. 'A' suppliers could kill the business that day. 'B' suppliers could kill you over a month. And 'C' suppliers couldn't kill you at all, so you ignore them. The 'C' suppliers will understand they'll never get anything if you go bust.