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  • Shalabh Capoor

TURN-AROUND MANAGEMENT

Updated: Aug 3, 2020

(A) What is?

A process, that focuses on corporate renewal and restructuring of an organisation and is used to evaluate an underperforming business to find out the reasons for its fallout.

In the present business scenario where only constant is change, there is an absolute necessity to continuously monitor and improve systems and operations lest they become ineffective and result in loss of profit and net worth. Turn-Around Management uses extensive planning in developing solutions for potential problems which are identified by deploying organisational diagnostic interventions and then using different analytical tools such as SWOT Analysis, Internal Environment surveys and Root Cause analysis to help the corporate return to solvency.

(B) Why Companies Become Sick / Unviable

Increasing international competition and rapid technological changes coupled with deregulation and opening of economic barriers have made many companies struggle for survival. The threat is present in different forms in almost every industry. What were till recently very profitable ventures have become unprofitable because of shrinking margins and unchecked and rapid incursion by dominant global players. Some of the most common reasons due to which companies are becoming sick and often insolvent are:

· Revenue downturn

Having no proper control on cash inflow or outflow and not knowing which market to operate in is one of the most common reasons for financial downturn. With limited knowledge of customer preferences and insignificant investment on R & D the companies are stuck with their traditional and obsolete products which gradually are being phased out of the market resulting in revenue loss for the companies.

· Ineffective Management

Centralised decision making is one of the major reasons for companies losing out to competition. In a situation where the decision making is centralised, in the hands of the top person, effective process execution is often a casualty. This result in gradual decline in performance of the company as its people are stifled by ill thought decisions and biased appraisals and are no match for professionally managed global organisations where merit and performance are the only criteria for advancement.

· High Costs

Remaining Cost competitive is a vital necessity for any organisation to be able to fight price pressures in a buyer’s market. Higher costs shall gradually erode the organisations’ bottom line as it shall not be able to match the aggressive pricing policies adopted by its competition and may either abandon the product line or market or suffer losses.

· Acquisition

Acquiring a new business for controlling market share or for diversifying into an uncharted product line also results in crisis situation if the resources in terms of manpower or machines are not adequate. Also if there is lack of expertise in the newly acquired different product line the organisation is likely to suffer losses which shall lead to a crisis situation needing a turn-around.

· Change in Customer Preferences

In a fast changing technological scenario there is always a risk of a product or line of products being redundant which may put the company in a precarious position if it is not in a position to cope up with the pace of change. Major investments in infrastructure may not get recovered if there is a shift in market preferences very quickly and this may be a major reason for the company to turn sick as it will not be able to pay its lenders.

· The Precarious Customer Base

Companies dependent on only a small number of major customers are very vulnerable to loss of a single customer since it shall take away a substantial chunk of their sales. Many a times a company enjoys the status of being the sole supplier of a product to its customer but any downturn of its customer’s business results put the company in grave danger of losing its total sale. This may make the company insolvent as it may not be able to develop a different product line in a short time resulting into huge financial loss and even bankruptcy.

· Scaling up Operations

A successful company wanting to scale up its operation may actually turn sick at a bigger scale of operations. The type of controls, systems, work-practices, decision making processes and cultural elements required for a bigger organisation are quite different than managing a company half its size. So being successful at a smaller scale of operations is no guarantee that the company shall be very efficient and successful at a larger scale as even the customers & stakeholders expectations become different.

Operating at a bigger scale needs a radical shift in all the aspects of managing business and unless the company undergoes a complete transition in all its business elements upgrading its infrastructure, hard & soft skills, management policies and cultural dimensions

· Poor Lender Relationships

Having a fractious relationship with their financial lending institution may be another reason for the companies’ downturn as the lenders shall not be supportive in crisis situations affecting Cash Flow and Working Capital which may gradually lead to the company becoming sick.

(C) Goals of Turn-Around Management

Some of the goals a Turn Around management attempts to achieve are:

· To check and see whether business is still viable or if not then what is required to take business to profitable level

· To Develop and implement a turnaround management plan

· To Rebuild lenders support instilling confidence in them that the biz is still viable

· To Restore shareholder value and confidence

· To provide sustenance to its employees and value chain partners.

· To salvage its pride and reputation

(D) What are the Key Turn-Around Elements?

Although each turn-around situation is unique and the types of turn-around are classified into many categories but in each of them some common elements are prevalent. These elements are:

· Changes at the Top

· Change of Product Mix

· Restructuring

· Use of Motivators such as Incentives, Compensation Structures, Participation of Lower Management in Decision Making etc.

· Garnering the support of Stakeholders

· Market Related Actions

· Cost Reduction Measures

· Plant Modernisation / Service Set-up Revamp for better Efficiency, Productivity, Quality & Effectiveness

(E) Stages of Turn-Around Management

Turn-Around progresses through different steps as the success of each step is crucial to initiate the next one. Although these steps are not necessarily followed in a distinct sequence but only after a reasonable progress has happened in the preceding step the next step is taken. These crucial steps are:

· Change at the Top

It is widely accepted that change of the top person is the most important and crucial first action that must be taken. It acts as a signal to all the employees that responsibility cannot be delegated and the first person who is responsible for the existing state of affairs, the top person, has to go. It also ensures that any decisions taken in coming days shall not be influenced by the presence of previous management and can be enforced without any problem. It also provides an opportunity for objective and unbiased analysis of the situation.

· Situation Analysis or Evaluation

This stage involves analysing the situation of the company from all angles. It involves financial analysis of the company, evaluation of internal efficiencies and losses, gauging the customers’ satisfaction level with the company performance and competitive positioning of the company, analysis of material inflows as well as the diagnostic study of internal environment.

Many diagnostic methods such as ratio analysis, Organisation Diagnosis, Customer satisfaction Survey, SWOT analysis etc. may be used for assessing the current situation as accurately as possible.

· Emergency Action Plans

After the diagnostic assessment Action Plans are drawn. Some of these are short term or even extremely short term (Emergency), some are relatively middle term and some are long term plans.

While the short term plans are Cost Cutting Measures such as Rationalising man power, Postponing long term expenditure, wage freeze as well as downsizing, cutting down on no. of production shifts etc. middle term plans such as debt restructuring, short term borrowing etc. may be implemented to tide over the immediate crisis.

· Stabilisation & Business Restructuring

Once the company is able to stop bleeding and comes to a nominal level of revenue generation then the Stabilisation phase begins. Company may undergo Restructuring, both financial as well as organisational structure gets revised, roles and responsibilities are redefined, product mix may get reorganised and the marketing actions are redefined.

A core group monitors all the developments and takes course correction measures to ensure all the desired actions are taken and in case some of them do not give expected results then they are re-examined and corrective measures are taken. All round communication and participation during the emergency action plan stage and throughout the stabilisation phase is most important since it is crucial to ensure realisation of desired results.

· Reposturing or Returning to normalcy

After a reasonable level of Stabilisation has taken place the company then initiates plans to exit from Non-profit making line of biz and focuses on growth and development. With its newly found confidence, better work practices and cost efficient functioning it seeks to recapture its position in the eyes of the customers, stakeholders and most importantly its employees who have been with the company thru’ thick and thin.

(F) Challenges faced during Turn-Around Management

Any change attempt, which threatens to destabilise the existing scenario is a challenging task as it can’t be carried out without facing stiff resistance. Although the Turn-Around tasks are undertaken only when the situation has reached a breaking point they still meet a lot of hurdles at every stage. Some of the common hurdles that the Turn-Around managers face are:

· Silent Rebellion by the Senior Management

Since in almost every situation the first action is the change of top management, the loyalists try to stall progress by silently following a policy of non-cooperation. It is only through persistent efforts that this resistance is gradually broken down.

· Agreement on Design of Turn-around Initiative

Another challenge which is very predominant in most of the turn-around situations is a common agreed plan of action for reviving the company. Since there is a need for multi-directional approach for stemming the rot there are diverse opinions about which route to take. Only thru’ a number of prolonged discussions a common line of action is agreed on but the same needs to be monitored closely to ensure there are no deviations in implementation.

· Execution

Having agreement on the line of action is only a partial battle won since the main challenge lies in implementation of the actions. To communicate accurately, to ensure buy-in by the employees, to get acceptance by the labour union, to maintain the morale and confidence of the team and to ensure participation of relevant persons in decision making are some of the vital challenges that the management confronts during execution stage.

Part of execution may also necessitate restructuring and redefinition of roles and responsibilities. To get people to accept their new roles and to provide them necessary help and training for efficient execution are important to realise the fruits of the efforts. These actions unless taken at the right time and in the right proportion may result in disastrous consequences and even may undo the entire effort that has gone in for turning the situation around.

· External Environment

As much important is the task of managing and rejuvenating the internal environment managing the external environment is an equally difficult task. How should the entire initiative be sold to the investors, how the restructuring needs to be justified and how is the conviction to be generated in the minds of the stakeholders about creation of value are very daunting tasks faced by the turn-around managers. There is a need to convince the bankers that their returns on their investments may be delayed but are definitely assured. All these requirements need deft handling as any slip up may result in delayed financial support which could derail the whole effort.

The challenges are numerous but a determined team can definitely overcome all these hurdles by systematic planning and execution carried out with lot of tenacity, perseverance and sense of purpose.

(G) Some Examples for Turn Around Management

· Steel Authority of India Limited (SAIL)

One of the biggest turn-Around example is of Govt. Owned Steel Authority of India Ltd. Established right from early 60s onwards its different plants produced various grades of Steel and Intermediate Steel products for a wide variety of industrial applications. During 80s it was the dominating Steel Organisation in the whole country.

Gradually the companies technology became obsolete and controlled thru’ politically motivated govt. Controls the company ran into huge losses creating a big drain of public money.

Then the turn-around effort started. Thru’ a freshly appointed Chairman the company assessed its market position, its strong and weak areas and then the lien of action was finalised. It was decided that there would be no retrenchments and the focus would be on reviving the company thru’ improved monitoring and supervision.

Decision making was decentralised at Plant level, more financial autonomy was provided at plant level to speed up decision making and major expenditures were deferred. By putting these measures in place the company gradually stopped incurring losses and improved capacity utilisation. Some technical upgradation activities of specific sections were carried out to improve product quality.

By creating empowered teams at Plant level gradually the company started improving its efficiencies also expanding its product range and even became customer responsive. By late 90s the all the units of the company had started generating Cash Profits and now the average capacity utilisation is above 90% in all the plants with some of the plants even achieving close to 100% capacity utilisation and its Steel products enjoy high customer acceptance meeting most stringent levels of quality specifications.


· Hindustan Machine Tools

HMT was formed to manufacture machine tools with a foreign collaborator. After nearly a decade of operation, it decided to diversify into Watch industry to expand its operations.

The main business of HMT crashed due to entry of many foreign players with their latest technology and superior workmanship and the company started incurring losses. The earlier smaller business of Watches became the mainstay of the company and with careful planning and controlled expansion kept on generating good profits to make the whole company remain viable.

· Bharat Heavy Electricals Limited

The company was started with the objective of producing power generating equipments for State owned Power Plants. Although the equipment produced was of very high quality the company suffered huge losses as the State Electricity Boards and private sector could not set up Power Plants as per schedule and BHEL’s capacity utilisation fell down tremendously.

Since retrenchment and downsizing were not easy options the company ventured into manufacturing of equipment for Telecommunication, Metropolitan Transportation and Defence applications successfully turning around and is today one of the most sought after PSU.

(H) Conclusion

As seen Turn-Around management is deployed in emergency situations when the company is seeing a threat of extinction. Although the task is very difficult and there are no standard solutions that apply universally the objective can be achieved by careful examination of the current situation and then finalising and executing the actions agreed to overcome the situation.

It is also true that each stage is very crucial as mistake at any point of time can create adverse effects and derail the whole effort. But examples prove that however big is the crisis it can be resolved through careful and diligent efforts.

As someone said ‘IMPOSSIBLE ALSO SAYS I M POSSIBLE.

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