As the economy continues to sputter and put pressure on a wide range of businesses, the rewards will go to the management teams who can effectively navigate through this period. In this issue, Kevin Willis of AEG focuses on the management mindset necessary to successfully turn around a business. Based on AEG’s experience in dozens of similar situations, success in a stressed environment is far less about a specific industry issue,
and more about the leadership approach management takes to address the challenges.

We also highlight a few recent AEG engagements working with stressed companies as well as some recent quotes in the press.

Best regards.

The AEG Partners Team

Companies in trouble face very real obstacles to finding success in returning to profitability; among them are difficult market conditions, escalating input costs and overwhelming debt service. But perhaps the biggest challenge for any management team is overcoming the emotional hurdle required to own up to the situation and respond accordingly. A real turnaround effort often demands a 180 degree change in leadership mindset and orientation.

So, to those leadership teams that are currently experiencing distress in their business, we offer the following:

Embrace the truth: your business is in trouble. It needs fixing, and don’t try to tell yourself that the market is to blame, or that it will be okay if you can just close all the great new business in the pipeline. And worst of all, don’t believe that the answer is ‘just a few million dollars’ of new financing. The fundamentals of the business are broken; you need a new path forward.

Half solutions won’t work—take big enough action. We know that your business is your baby; you’ve painstaking built an organization over the years, and you have aspirations to achieve great things. But right now you’re bleeding cash, and there are areas in your business that don’t provide the kind of return that they should. If you really believe in the future potential of the business, then you need a big enough improvement to get you all the way there.

This is your last chance—make sure the job gets all the way done. Creating a ‘turnaround plan’ isn’t just an exercise to make your lenders and investors feel good about the business again, and it’s not good enough to make some progress but miss the overall target. You absolutely have to execute this time, and you don’t have the luxury anymore of coming up short. You’ve run out of second chances.

The bottom line is: what you have been doing isn’t working anymore, and you need to adopt a legitimate turnaround strategy. Through it, you can refocus the business, scale back costs and reverse the net burn of dollars. And there is no time to just wait and hope for improvement to the bottom line; you’ve got to get started immediately. Aggressive action now can help your company weather this crisis so that you can live to fight another day…

Okay, once you’ve taken on a commitment to a real change agenda, here are a few of the most critical things to keep in mind in order to have the best chance for success:

1. Don’t expect any turnaround strategy to work without first stabilizing the business Although this may seem obvious, it is important to recognize that the company will struggle to gain traction against any plan if your daily focus is managing liquidity crises, addressing supply chain disruptions or putting out fires. It is critically important to create sufficient operating runway in order to realize and demonstrate real business improvement, and stabilizing the business generally means getting to at least cash flow neutral for some period of time. The idea is to create some room to work.

2. Clearly articulate a new vision and direction A turnaround strategy requires focus on the part of the organization; it also requires that all parts of the organization are pulling in the same direction—there is no use in having different groups working against each other. It is likely that you will have to create a vision around rooting out all of the areas of inefficiency and cost, emphasizing only those areas which are proven profit generators. Product line extensions, expansion into growth markets and investment into underperforming business units are rarely appropriate components of this kind of change agenda. And don’t try to hide this change in direction from the organization. People are often more aware of what’s going on than you think; transparency, not secrecy, is usually a much better way to get them motivated.

3. ‘Overshoot’ the operating improvement that you think you need Execution always entails risk, and in turnaround situations there will invariably be certain performance improvement initiatives that fall short of the targeted benefits. Some opportunities will never materialize; others are real but the benefits will fall short of the initial projection; some good profit improvement actions will have inadvertent negative impacts on the business; and sometimes unseen or uncontrollable factors will continue to drive unanticipated further negative impact to performance. That is why it is important to aim for more benefit than you think is required to make the turnaround plan work.

4. ‘Over manage’ the execution plan Like any good execution plan, you have to identify and prioritize initiatives that are in line with the vision for change, create timelines and milestones, and establish appropriate accountability for execution. In this time of crisis, though, plan to devote more time than you typically would to actively manage the plan and ensure execution. A lot of the activities and action items will not be the most enjoyable (e.g. reducing headcount, various other cost cutting, etc.), and you will have to continually push the organization to get the job done. Involve all of your key managers, establish meetings, publish project plan and status, and hold people accountable for tasks and timelines. It can actually be helpful to change normal routines in order to demonstrate the importance of execution to the organization.

5. Identify in real time what is working and throw out anything that isn’t Understanding your progress against the plan is useful not just for communicating to highly interested external constituents (read, investors), but it is incredibly useful to know in real time what impact you’re having, rather than having to wait to see the results in the financial statements. The reality is that turnarounds are never predictable; they require adaptability and constant tweaking. Don’t let unexpected vendor actions, the loss of a key customer, or organizational resistance throw your plan into chaos.

6. Take advantage of your external constituencies We know that it’s tempting to view all of your external stakeholders (such as owners, lenders and advisors) as simply an intrusion upon your business, but don’t fall into that trap. Your ownership has the valuable perspective of not only your business but others, and has the ability to step back from the detail of the day-to-day operation. Your various advisors (legal, financial, operational) bring an objective viewpoint and often a cross-industry perspective in addition to their various expertise. They are there to help you through this process, and savvy managers use crisis managers to affectively address issues long before a true crisis ever occurs. Finally, listen to your lenders. They have probably seen this before, and their knowledge and perspective can help to reveal blind spots as well as validate your intended direction. Utilize all of these resources, and remember that it’s also in all of their best interests to ensure that your plan actually works.

Larry Adelman, Principal, addressed the more difficult environment for negotiating restructurings in: Debtholders Reject Consent Solicitations, High Yield Report, June 23, 2008:

…With maturities coming up and companies suffering through difficult times, the need for flexibility in capital structure will be an essential part of their refinancing and reorganizing.

Larry Adelman…said that with so many companies doing large restructurings debtholders will find themselves with new power, as tender offers and consent solicitations will be a necessary piece of the puzzle. “We’re in a very tough economy right now. Options for companies that need to restructure are severely limited compared to what they were last year,” said Adelman.

Economic problems that have become more manifest over the past quarter, like higher oil and commodity prices, will make themselves felt again in the next wave of corporate returns. This means the credit markets have fresh rounds of pain coming their way.

The second quarter seemed to begin with the credit crisis at its worst. The promise of recovery followed, only to have more dark clouds blot the horizon before the quarter was over. “I am pretty bearish on the credit markets and where they are,” said Craig Dean…”We’re in for a pretty tough run, certainly for the next quarter, and I think until next year.”