Turnaround Management Thesis

Startup Compensation

2010-08-02T01:58:00.000-07:00

The second problem common with start ups is the seriously high pay the directors and senior managers get. One CEO (if you can call a guy in charge of 30 people a CEO) was getting paid £250 per annum. Apparently he was very good at what he did. Unfortunately it wasn’t running start-ups or small companies. Likewise the CFO and COO (who were part of those 30 people) were also on fantastic salaries.

After I had turned it around I commented to the main investor that they got paid way more than me – AND I MADE HIM MONEY!!

How was I meant to interpret this? I got a dirty look, not because I was wrong, but because I was right.

The point is, paying big money does not guarantee you a good senior manager, nor does it get you a good person; and even if you do get good people – they may not have small business skills. Remember this place only had 30 people, so a £150K CEO would probably have even been over the top; and even if it wasn’t, I am sure a £100k CEO would have done just fine.

Think of it this way.

You pay a CEO £250K per year for 4 years – that’s £1million out of your investment gone. And what have you got in return? NOTHING!

Worse, if you had spent £100K for a CEO then rather than getting 4 years of work, you would have gotten 10. Naturally if you were paying £250K for a CEO you would probably be looking at a successful company with good profits, with more than a few staff (depending on the industry) and revenues in the tens of millions.

If that point isn’t painful enough also remember to include the CFO and COO as well. After their 4 years of delivering no profits, I worked out that the firm could have cut 10-15% of their staff costs, just by getting rid of them. As a result of these large salaries, the primary investors have lost allot of money at the very time when it is most precious – at the start.

Naturally the investor wasn't happy and neither was I; my pay was less than half of the CFO. And if that didn't leave a bad taste in my mouth, they all went on to bigger and better positions; all very disillusioning.

The only good points of this sad tale is that if you want to sort out your compensation issues here are a few tips.

Change to a bonus system where the bonus paid reflects your risk as an investor. That is the companies start up risk. This bonus should be as big as possible - I try and push for 40-60% - but go higher if you can. Remember most firms make little attempt to use their compensation systems to over come the temptation of senior managers to shirk. After all, who cares of you lose 5% when you're pulling in £2000+ per week. But you will care when 40-60% is on the line.
Conversely make the salary part as small as possible. At this point, your senior managers will begin to jump ship – because they know gravy train is now over, and you are demanding results
Hire new senior managers – if they accept the large bonus and small salary – then those are people who in all probability can deliver to you those results
When you are about to hire them – hand them a resignation letter for them to sign but leave it undated. Again if they sign this – these are the type of people who will fully understand why you are doing this – so you can hold them to account. Put it in a safe place and never ever bring it up unless you have to use it

2010-07-03T06:39:00.000-07:00

One of the great things about profit curves is the easy way they present your total revenue (in green) against your total costs (in red). As you can see when the revenue line is above the cost line then a profit occurs. Further if we were to take Total Revenues away from Total Costs we get either a negative or positive figure. This is the bottom graph. From both we can see that firm breaks even when it reaches a quantity of 3 or Year 3.

Both graphs are exactly the same but give you a good example of how to use them. I have presented same the graph with quantity on the bottom X access at the top and time on the bottom.

Now that’s you know the HOW – I will now give you the WHY.

Profit curves present a glaring example to the board of not only whether or not your firm(s) is making any money ( profits) but on these same graphs you can draw those lovely financial projections you were given.

Even better you can also see the breakeven points for your company, which is where the Total Costs equal the Total Revenues - this is always one of the most important indicator for investors, because this will tell you when (if ever) you can expect to start to see a return on your investment.

The graph below is a true real-life graph of an Internet service provider I consulted on.

This is where fantasy meets reality. As you can see, the costs were rising faster than their revenues.

In fact the more successful they became, the faster they lost money. That is, as the number of customers increased, the faster their costs escalated, and hence the faster they would lose money. This was pretty ugly; because ISP's typically have increasing returns to scale, so they had done a pretty bad job of it.

When I presented this to the board, you could have heard a pin drop.

This was another example of a business model made on a spreadsheet with out any critical thinking. As both a turnaround consultant and IT Director I have seen this more than once; business development creating models without any idea of how the costs work in an industry and without any involvement of engineers or operations staff.

As such I strongly encourage that all angel investors at board meetings start of with one of these, because they quickly tell you not only the good or bad news but they also display it in a rather blunt and objective way.

Further because the Total Costs (TC) is drawn out, board members and investors can very quickly spot out of control spending.

Even better news, if you have a marginally profitable firm, then you can plot the total cost of each senior manager on the same graph as well.

Like the previous blog, plotting a CEO or senior manager’s compensation for x years can show the outgoing in wages against the companies marginal profit / loss.

It may be that removing mediocre managers or changing the structure of those large costs can make a marginal profit slightly more palatable.

E.g. if you have a CEO costing you £250k per year and you are only making £100,000 profit, then perhaps a cheaper CEO will do the job for £100k, in which case you are already better off by £150k per year.

The mortality of profits and the lack of shame.

2010-07-01T03:03:00.000-07:00

Going out on a psychological bent, one thing that continually stuns me is the lack of shame by senior managers of failing companies’.

The credit crunch present numerous examples, where there apologies presented in front of government committee hearings are just so pathetic as to make one sick to the stomach. Board meetings can be the same.

Rather than being ashamed or even angry over company or investment losses, the managers tend to just ignore any questions pertaining to them.

One CFO I encountered presented spreadsheet after spreadsheet of fanciful financial projections, all the while avoiding answering the simple question of ‘has the firm ever made any revenue at all?’

I tried to explain the investors were an insurance company and that the money came from people’s pension funds; hence someone’s retirement depended upon the firm making a profit; and that we were morally honour bound to make one – regardless of any legal fiduciary arguments.

I was met with either rolling eyes or cynical grins.

Somehow it didn’t seem to get through, or perhaps it was because it did get though, that the managers refused to acknowledge that there were consequences to firms losing investors money. That people hurt at the end of the day because of the messes they created.

A quick search of the definition of shame defines it as: A painful emotion caused by a strong sense of guilt, embarrassment, unworthiness, or disgrace.

The managers present, displayed none of these.

In fact their attitude was that because they had all gone to prestigious ‘red brick’ universities or had 20 years plus experience, they were some how entitled to their positions regardless of fact that they had not made money for their investors / shareholders.

The point is, in many turnaround situations, senior managers don’t have a moral reason as to why they must make money for their shareholders. They see it something you ‘hopefully achieve’ – a nice to have – not a need to have – and worse they don’t understand the ‘why the need to have’.

As such, without this moral imperative they may acknowledge the importance of profit intellectually but emotionally they don’t understand it. As such failure in these firms under that type of management is inevitable.

Change Management: Recessions reveal bad managers and bad investments to owners

2010-06-21T03:38:00.000-07:00

Although governments have had to bailout more than a few incompetently run financial, automotive and airline institution's, most other businesses haven't been that lucky.

What is interesting though, is that now that the super-boom is over, many managers are finally being revealed for the charlatan's they truly are.
The old boy’s network and cronyism that was rampant during the boom is slowly coming to an end. In its place managers are finding they have to hire on merit, rather than risk hiring their friends and cronies.
The focus on profitability and the bottom line however, also shows how many managers were not focusing on these during the boom....and remember this was a 'long' boom.
For owners currently concerned about how their business's are being run, there are few things you can do right now:

Accept your responsibility for not keeping an eye on them. Chances are you weren't intervening enough.

Ask the question of senior managers at your next board meeting 'Cost cutting is a part of everyday business. The customer is always on the lookout for lower prices and we'll neeed all the cash we can during our startup and growths phases. If you are focusing on cost cutting now, what the hell were you doing for the last X years? Please explain.'

Run a HR merit test. Ask for all the staff CV’s to be sent you and the board - YOU WILL GET A FEW SURPRISES! The resume's will tell you two things - a. is the company running on merit, b. who to speak to regarding the firm’s problems. (In one firm I found 2 PhD's and 3 MBA's all relegated to doing grunt work because they had 'rocked the boat'). Question your senior managment team on some of the staff and note how judgemental they are, and what standards they apply. If they are perhaps a bit slack for your liking - you have found a problem. If those standards are set too high for others, then apply the same standards to them. In short, apply the wisdom of King Solomon. That is, if the senior managers judge others harshly, apply the same unyeilding attitudes to them. If they are understanding, then likewise allow for this with them. As always it is the balance that counts, and listen carefully for excuses.

Draw up a profit curve for each of your senior managers (if you don’t know what this is see the next blog) to compare what they cost in salary against what they deliver. This is the ultimate merit test.

From a turnaround and change management point of view, it is only when ‘hard’ competition returns to the market do the true colours of bad managers really get revealed.
Further research also indicates that the recession has revealed a bias of having too many CEO's from financial or management consulting backgrounds who didn't understand the operational aspects of their businesses (the banking sector being a case in point); and so built or added products that the firm didn't really have any competency in, let alone either build or to manage - CDO'S or Credit Default Swaps anyone?.....But that is for another time.

Restarting Startups - Startup spending problems

2010-06-18T09:23:00.000-07:00

After consulting on a start-up that needed turning around or 'restarting'-up, I noticed that for some strange reason a few things keep turning up in start-up businesses.

Firstly the business loved to spend money like it was going out of fashion (and these days it is). This is a classic start up problem. The firms get all hot and sticky under the collar and to celebrate their own wonderful glorious success they decide to start shouting staff free cans of coke, pool tables and an xbox lounge with expensive coffee. As always - it's "someone else’s money" so let’s have a party. The most dangerous bit about this is that once the party gets rolling, it can get very hard to stop it. The few staff that are prudent are the first to find themselves sidelined, partly because they are a walking rebuke to everyone else. Another danger is that once people start spending, they stop thinking – literally. Business is about making the most out of limited resources – that's were innovation comes from. Once everyone starts signing off purchase orders, cash management starts to go out the windows and people stop thinking about the best way of doing things. Optimisation and resource management go by the way side.

After all it is easier to buy a second widget, than to figure out how you’re going to get by on one. Worse when the money starts to run out, management will spend more time on cost cutting, than they would have, had they done it all the way along; and this is at the very time when they should be looking for more customers.

Thesis work paper Motivating the Team

2010-05-09T15:01:00.000-07:00

As with any turnaround, motivating the software team after redundancies can be particularly difficult. Unlike manufacturing situations where firm capacity is partly dictated by the factory machinery, motivating knowledge works is considerably more difficult. Davidson (Davidson, 2001) recommends involving the staff at the emergency action phase.
Normally staff are well aware of the firm’s problems and like Teng (Teng, 2002), observes that knowledge workers can frequently feel helpless because in many cases they are more qualified than the managers (who caused the firms problems in the first place) to solve particular operational or strategic issues.
However regardless of the abilities of the staff, deep personnel cuts are still important due to cash flow constraints, and Davidson (Davidson, 2001) observes that cutting too deep is better than not cutting enough at all.
Blumling (Blumling et al., 2002) recommends putting in a new turnaround management team because like most corporate recoveries, the credibility of existing management is usually questionable at this time. He observes:
“When a company is sliding, senior executives tend to lose credibility, attrition within the ranks becomes rampant, and organisational discipline grows slack owing to poor management. The worse the situation, the more probable it is that the CEO will be forced out and an outsider brought in to manage the turnaround. A C.E.O. hired from outside is likely to turn over the management of the company in order to change its skill sets and improve its credibility.” (Blumling et al., 2002).
Even when such management changes are made, Blumling (Blumling et al., 2002) observes that unlike other turnarounds, software turnarounds often need essential skills and controls in place prior to tightening discipline. This is because the need for cost cutting is so strong (and so deep) that resolute business controls are usually needed.

Thesis work paper The Development to Marketing Ratio

2010-05-02T10:57:00.000-07:00

The Development to Marketing Ratio
Typical industry benchmarks for sales and marketing are that for every $1 dollar spent on Research and Development, $5 to $10 dollars will have to be spent on sales and marketing (Davidson, 2001). As such the cost of delaying a software product rises quite considerably, and eats in to the firms cash flow. The implied costs behind the “development to marketing ratio”, is part of the reason why turnarounds can be so difficult.

Thesis work paper Strategic Realignment: Check the Target Market and Complement Industry “Power Players”

2010-05-01T00:46:00.000-07:00

Shapiro observes that information and software companies can focus too much on marketing features rather than customer benefits.
The software turnaround then, will most likely need a strategic and marketing realignment (which reinforces Davidson’s (Davidson, 2001) observations). As always, the focus must return to solving a customer problem and presenting them with a clearly defined solution, than advertising about particular product features. As Sutton (Sutton, 2002) remarks, sometimes it is merely a need to change the message of the advertising and to target the correct market, than a need for operational measures.
Shapiro (Shapiro et al., 2000), states that normally in the software industry poor marketing is the most common problem for firms (after lack of capital).
Furthermore, he observes that even in cases where firms have targeted their market correctly, the timing of the software release has been inappropriate, as many newer products require long-term market education.
Chakravorti (Chakravorti, 2004, 58-67) recommends strategically realigning what customers want with those of the industries ‘Power Players’. By complementing their products rather than merely seeking self-contained niches, firms can feed off their product growth. E.g. Adobe turnaround was aided by their redesigning their Acrobat Reader to work inside Microsoft’s Internet Explorer. Allowing their documents to be read via web pages. Further strengthening demand for their Adobe Acrobat Writer product.

Thesis work paper Check Pricing Structures

2010-04-20T00:17:00.000-07:00

Check Pricing Structures
Hence in software turnarounds, many turnaround managers immediately reduce their prices to increase quantity. E.g. lowering the price of the software product “ClassPharmer” helped in Bioreason’s turnaround (Holtzman, 2004) (See Appendix C), while increasing the price further differentiated Microsoft’s Office Professional from its standard product offerings (Shapiro & Varian, 2000).
Shapiro (Shapiro et al., 2000) argues that the economics of the software industry requires differentiated pricing due to the high labour and marketing costs.
Further, Blumling (Blumling et al., 2002), states that software firms are in effect “in a double jeopardy game”. He observes
“Software companies benefit when their performance is rising, as their return on invested capital can exceed 50 percent and grows extremely quickly. During a downturn, however, they are hit twice once for their actual financial performance and again for what it implies about the value of their assets. If insolvency looms, investors flee because there are few residual assets to divide”.
Pricing for software is made even more difficult because firms have to factor in other additional costs. For example because technology depreciates rapidly, the average time constraints on selling software is two years (Shapiro et al., 2000). Next the firm has to ensure it has the sales volume and resulting sales costs necessary to amortise the R&D, recover the cost of selling the software and factor in the cost of supporting the software.
Davidson (Davidson, 2001) in addition, states the difficulty with selling software is that traditionally software firms have failed for one of two reasons:
• The firms sales costs were too high, or
• The firm doesn’t sell enough of the software to recoup the cost of developing it and it’s cost of capital.
These conditions ensure that inaccurate pricing will only lead to one generation of the product. Shapiro (Shapiro et al., 2000) warns that support costs can be particularly high, a view supported by Davidson (Davidson, 2001).
One form of strategic repositioning to avoid the double jeopardy scenario is to move away from selling software itself, to “opening up and supporting” the source code.
Davidson cites the example of Netscape using this strategy when it was competing against Microsoft.
Netscape’s turnaround involved repositioned itself and changing it’s business model rules by opening up its Netscape Navigator source code and then charging customers for supporting it.
Likewise Shapiro notes that software and other information firms frequently merge together when times are tough. As a turnaround strategy in markets where competition is fierce, merging together can help both ailing firms outlast other competitors. The irony of this situation, it that normally mergers occur once the firm is on its was to recovery, rather than in decline. The advantage of merging is that it is easier to reduce the combined staff head count, while allowing for better negotiation terms with venture capitalists and banks over new funding.
In many turnaround situations, the general recommendation has been to sell off the firm and let the buyer fix it, rather than merge with another company. It could be inferred that turnarounds and mergers in this industry are perhaps more concerned with personnel, capability retention and strategic issues than operational restructuring, because software companies have relatively few fixed assets.

Thesis work paper Removing Unprofitable Customers.

2010-04-15T10:17:00.000-07:00

As Sutton (Sutton, 2002) indicates, inadequate cost cutting normally occurs because customers have not been ranked or sorted according to their profitability. Davidson (Davidson, 2001) likewise states that many software companies lack clear marketing plans (especially in their early years) and commonly this is found among smaller firms. Intrinsically then, the firms underlying profitability is affected because of the lack of focus on the correct target market. This manifests itself in incorrect pricing structures.

Thesis work paper Case 4: PeopleSoft

2010-03-16T23:29:00.000-07:00

PeopleSoft started out as a Human Resources (HR) software company and later expanded into accounting software. As the company grew, the HR and accounting functions were expanded to include the manufacturing market.
However problems began when it’s new products fell behind schedule and industry competitors began lowing their prices. By 1999 the firm had lost $178 million, and its software products were receiving bad press due to software bugs and support issues.
At this point, the board hired Craig Conway as the new Chief Executive Officer (CEO) to turnaround the company.
Conway began by introducing spending limits and streamlining the budget and accounting processes. This follows Davidson's (Davidson, 2001) observation that spending disciplines are introduced first in software turnarounds rather than after restructuring and cutbacks.
Next the existing budget process was improved and semi-annual performance reviews were initiated to identify which workers were in the bottom 10% of performers in the firm. This was done to ensure the cutbacks did not remove valuable or productive staff. This same strategy is emphasised by Blumling (Blumling et al., 2002) in that cutbacks must not only be deep, but it is where the cutbacks are made that is equally important. Further it could be argued, that performance management is needed in software and other knowledge based company turnarounds, because identification of a knowledge workers performance is considerably more difficult.
Conway’s team went through each of the firm’s projects, and identified which were behind schedule and which showed the most promise (the exact same advice as given by Sutton (Sutton, 2002)). The market had labelled PeopleSoft’s current software as “legacy” and out of date, as such Conway’s team was looking for a new product that was not only different but would also improve revenue and spread revenue risk.
He went with developers new project, which was to upgrade the existing product to work via a Web browser, and build in more back-office functionality. The development team maintained the web interface was easier to use, easier to program, more customers understood how to use it and no other product on the market had anything similar.
Although seen at the time as a gamble, Conway’s team agreed that doing something different was definitely needed.
This selection of a new and different of product follows the view of Blumling (Blumling et al., 2002) that in software turnarounds firms,
“must invest in new category killers”.
Stepping up both the pace and budget on the new product Conway focused the company only on the product and delivery of PeopleSoft 8. Such a move is stated by Bibeault (Bibeault, 1998) as central to any turnaround. That is, the whole company must all be working towards the same strategic goal.
To ensure that everyone knew that financial position PeopleSoft was in, Conway presented monthly reports to the staff on “where the company at” on the turnaround plan.
He created a sense of urgency about concentrating and focusing on fixing the bottom line. A similar argument is cited by Hays (Hays III, 2003), where he states that turnaround managers must present the turnaround plan and keep the staff updated constantly. This is done so that not only can progress be seen, but to ensure that a sense of urgency is maintained in order to prevent backsliding from occurring.
Company metrics were improved and development was kept on schedule, with updates regularly communicated.
Furthermore Conway changed the company culture from the folksy, short and t-shirts, easy going, free lunches and “bring the dog to work” affair to wearing suits, no free lunches and eviction of non-employees (dogs).
Like Teng (Teng, 2002) Conway explained to staff that there would be “no free lunches” while the firm was losing money, and that the focus must be on turning the company around by developing and rolling out PeopleSoft 8.
By the time the performance review evaluations had finished, cuts were made on slower projects and in the areas of middle management where there was a perceived lack of skill in operations and scaling.
With the release of PeopleSoft 8, not only did revenues return, but also industry analysts estimated that the radical new product had left PeopleSoft's competitors at least one year behind. PeopleSoft returned back to profitability earning $146 Million in 2000.

Thesis work paper Case 3: Network Associates

2010-02-16T20:42:00.000-08:00

Like Adobe and Intuit, Network Associates Incorporated (NAI) was another software company that was having trouble in the Internet boom.
NAI board members hired George Samenuk from IBM to become CEO of the troubled security software giant in December 2000 after NAI had posted consistent loses of US$159,901million for 1999, and US$108,014 million for 2000. Even worse, “accounting irregularities” had turned up, which required US$20 million dollar expense restatements on the financial reports that were filled to the American Securities and Exchange Commission (SEC).
With morale low and the companies best and brightest jumping ship, he bet some of his younger employees that he would grow a goatee if the company stock hit $20. Even better, he would shave his head if it hit $40 -- and get an earring if it hit $60.
To show commitment to the turnaround Samenuk addressed the talent bleed by repricing the company share options at $4.
As Sutton (Sutton, 2002) mentions, such declaration quickly gives employees the signal that the company is serious about turning itself around. It also provided an incentive to stay and work hard, while having little effect on cash flow.
Focusing on the security software maker's three weak areas, Samenuk addressed each one in turn.
First was the task of winning over customers who were beginning to look elsewhere due to late product releases, bad service and poor support.
Taking a page out of Sutton’s (Sutton, 2002) book he criss-crossed the globe to talk directly to clients and harried vendors to ask their perceptions on where NAI was going wrong. Most customers reported that late products in the antiviral area were of the biggest concern as was their lack of support.
Considering that the anti-virus software was NAI core competency, it become apparent that NAI had diverged too much from its central offering, and both product delivery and customer service had been effected.
As Hoffman (Hoffman, 1989) indicates, this is a classic symptom of the need for a strategic turnaround rather than an operational one.
Samenuk quickly sold off the flagging Gauntlet Firewall and the profitable PGP Encryption divisions, to refocus the company back on to what it was good at – anti virus software.
Although staff could understand the removal of the Gauntlet division, there was concern about PGP. But Samenuk indicated to the staff in the fortnightly meetings, PGP had never made much money, and encryption products represented a tiny market opportunity.
Further, both divisions had diverted NAI attention away from what it had done best (Bibeault, 1998), and all told NAI would actually save a compounded $50 million by ditching the two units. NAI was to refocus back on its core business (Barker III et al., 1994) .
Within the first year NAI had gone from a loss of US$108 million in 2000 to a profit in 2001 of US$83.2 million. By year two of Samenuk’s turnaround plan NAI’s net income had increased to US$128 million.

Thesis work paper Case Study: The Turning Around of Four Software Companies

2010-02-08T02:06:00.000-08:00

As can be seen from above, the literature on turnarounds for software companies follow a differing path from conventional turnarounds.
As such, the case studies below seek to give an overview of the changes instituted by companies that have been turned around and compare these against the above literature.
The cases themselves will not focus in depth too much on the decline of the companies as further details of each firm and its problems can be found in the Appendix, but rather make references to the software turnaround methods outlined above.

Thesis work paper The Danger of Backsliding

2010-01-03T20:37:00.000-08:00

The final danger of any turnaround is the danger of backsliding. This is particularly important for software turnarounds, because the chances for a normal company recovering after backsliding is only 5%.
Considering that Blumling (Blumling et al., 2002) states that software turnaround success rates are only 12%, indicates that that chances of a software firm recovering from a backslide are likely to be only 1% or 2% at most.
To prevent this, Sutton (Sutton, 2002) recommends setting even tighter defined goals and accountabilities. Furthermore he suggests hanging up the project development plans in the front office for all customers and staff to see. These should be updated daily in order to clearly identify where any delays are, and forces an attitude of total transparency and continuous improvement (Walton, 1996). Staff feel motivated to help overcome any delays, because any delays detract from the company’s image.
In addition, the danger of the delay project to the firm’s turnaround is apparent to everyone. Similarly Davidson (Davidson, 2001) states that by displaying progress and delays in front of everyone, problems will be solved early enough, before developmental projects have gone too far. Sutton (Sutton, 2002) recommends having staff display their work in meetings each week. This allows for staff to better gauge which work may need more resources, allows for easier enforcement and encourages staff to ask for help earlier (rather than trying to solve complex problems by themselves).
Sutton (Sutton, 2002) also states that it allows staff to take pride in their work, develops demonstration and public speaking skills and moves the marketing and sales function down to the front lines “where it should be”.
Finally Sutton (Sutton, 2002) maintains that the question and answer sessions prevent backsliding by forcing workers to think in terms of the “bottom line” and how their work will add value to the customer.
The result is not only an open environment that speeds up the firm’s development projects but ensures that staff “keep an eye” on the corporate recovery as well, because all projects map back to the turnaround plan.

Thesis work paper Have a Loose Organisational Structure that Changes Constantly

2009-12-24T12:38:00.000-08:00

Due to the fact that software companies are in a rapidly changing market, Brown (Brown & Eisenhardt, 1999, 72) recommends institutionalising organisational change by creating only temporary organisational structures.
Known as “patching”, Brown advocates changing business units as the market changes. Although used for successful organisations, this is similar to Khandwalla’s (Khandwalla, 1983) and Hay’s (Hays, 1998) recommendation of making changes to the organisational structure as the turnarounds recovery progresses.
It could be argued that patching for companies in rapidly changing markets is in fact the organisational equivalent to a turnaround recovery situation. Actively moving people, resources and assets about, to reflect the organisation’s new place in a changing market market.

Thesis work paper Kill Delayed Projects

2009-11-20T20:02:00.000-08:00

Likewise, Davidson (Davidson, 2001) warns of “flogging dead horses”. With managers not willing to cancel delayed software projects (so further endangering the firms cash flow), in the hope they can turn the product development around.
In these cases Sutton (Sutton, 2002) and Teng (Teng, 2002) recommend, selecting only the most promising project(s) and cancelling the rest.
Furthermore, it is normally advisable to stop all further research on the product and set a development and marketing timeline to release a basic version within three months, with only major benefits included.
This is because as Shapiro (Shapiro et al., 2000) remarks, 80% of the value will come from less that 20% of the product’s features. He gives the example of Microsoft Office where customers use fewer than 20% of the product features, but the product still commands a price premium.

Thesis work paper Case Study Summation

2009-09-17T22:15:00.000-07:00

It can be seen from the cases above that all followed a similar order and pattern.
First the board of directors sought a new Chief Executive Officer to run the company. This was followed by the new CEO finding out what was wrong with the company in general terms and where.
It should be noted that after this had been done the turnaround manager then recruited the turnaround management team. This makes sense, as by finding out the particular problems in the firm, one can then hire the appropriate person to solve that particular issue. In nearly all cases both the CEO and CFO were removed.
Secondly once the turnaround management team has been assigned, large-scale management changes seem to be in the order of at least 10% regardless of the number of staff laid off.
Thirdly, not all layoffs were done at once. This may reflect the international business element of some of the companies or the perhaps the logical and financial difficulties or remove large numbers of staff at the same time.
Fourthly all the software turnarounds focused on financial discipline, budgeting and general human resource and performance management restructuring prior to removing people.
Fifthly all development projects were investigated and late projects terminated, while promising one’s were given more resources, money and made the central focus of the business through cultural and strategy realignment.
Again it is noted, that the projects that did succeed were all based around the firm particular core competencies.
Finally all the turnarounds sought new product categories to not only enhance revenues, but in many cases to also spread revenue risk.

Thesis work paper Improving Cash Flow in Software Companies

2009-09-08T22:22:00.000-07:00

The basic premise is to produce more versions with fewer features more quickly (Davidson, 2001), with a more targeted customer base and at a lower cost. In short using continuous incremental improvements to improve cash flow and thereby increasing profitability.
This follows exactly on from Dr W Edwards Dening’s “Process of Continuous Improvement” (Walton, 1996). The increase in the number of software releases is similar to a ‘virtual subscription’, with customers updating their software more frequently.
One example of this has been in the software gaming industry. Epic Games Unreal Franchise has moved from releasing a brand new gaming version every 5 years, to a new version minor version every year. For example the original Unreal Tournament was released in 1999, and the next version was released in 2003. Although the product met with commercial success, customers were also faced with increasing choice from new market entrants. Europe, the United Kingdom, Australia and former “Eastern Block” countries have all entered the software gaming industry and prices have begun to drop as competitors fight for customer’s share of wallet. Responding to the change in competition, Epic released the minor upgrade version of Unreal Tournament 2004, which met with huge success. Davidson (Davidson, 2001) and Shapiro (Shapiro et al., 2000) both observe that releasing software more often and at lower prices not only improves cash flow, but also generates significantly better customer feedback.

Thesis work paper Case 2: Intuit Software

2009-08-16T12:02:00.000-07:00

Intuit Software’s turnaround began in Nov. 29, 1999, when Stephen M. Bennett was headhunted for the job of Chief Executive Office (CEO). Like Adobe, Intuit had been stagnating and stumbling during the dot-com boom.
As the new CEO Bennett formed a turnaround team and began a major reshuffle of Intuits QuickBooks small-business programs and TurboTax consumer software.
Further, all money losing business like Intuits online finance businesses were sold or shutdown. Again, we see a consistent pattern on removing non-profitable projects as advocated by Blumling (Blumling et al., 2002) and Davidson (Davidson, 2001). Intuit also purchased half-a-dozen small acquisitions to beef up Intuits small-business offerings and to increase earnings. This follows the trend observed in the research above, of instituting a strategic turnaround by creating or purchasing new products (Hofer, 1980) to increase and stabilise cash flow (Sutton, 2002).
Intuits turnaround also shows the same trend as other software companies. With the new CEO and turnaround team changing the company to a disciplined and results focused organisation, before beginning any cutbacks (Davidson, 2001). He recruited former General Electric (GE) subordinates to run both of Intuits major divisions and demanded better-thought-out budgets and clearer objectives from all of his managers.
To make Intuit much more efficient, the goal was set to deliver like software's top performers whose margins are more than 30%.
To get employees focused on the bottom line, he adjusted pay incentives. Like Teng’s (Teng, 2002) preference for more worker commissions or bonuses, workers at Intuit with top performance reviews get annual salary raises up to 10%, even when the average raise is 4% or less.
Furthermore, the turnaround team began pushing GE-like programs to boost software quality and trim waste. An argument supported by Davidson (Davidson, 2001) on the huge cost of supporting bad quality software.
One result was that error rates for Quicken’s Personal Finance software fell to 2% during the release of the 2003 version from 22% for the 2002 edition. Intuit says its quality efforts have saved $10 million so far, with an additional $20 million due from projects under way.
Like Teng (Teng, 2002), Bennett requires Intuit managers to groom their replacements. He also follows Sutton’s (Sutton, 2002) opinion that only be leading and teaching by example in management seminars to the up-and-comers, can the disciplines needed to turn the company around become truly effective.
Strategically, Bennett follows the same advice of Pate (Pate et al., 2002) and Harker (Harker et al., 1998) on sticking to businesses product areas where Intuit was number one or two.
Hence Intuit focuses on its core competency of small business software for companies with up to 250 employees (these companies are still considered small by US standards). Its new software applications extend Intuits hold on this market by adding human resource and payroll functions.
Like most software turnarounds, the effect on the companies’ profitability was exceptionally quick, with a net income that went from an $82 million loss in 2001 to a profit of $140 million in 2002.

China statistics, market structure changes and target marketing

2009-07-05T02:12:00.000-07:00

The massive availability of credit at cheap prices allowed numerous companies and entrepreneurs to invest in stupid ideas. Many of which, had no market research to indicate that there was even a target market for their products.

I will admit I was guilty of the same crime myself. My first software didn't sell, and it was completely my own fault.
Thinking that something is a good idea, doesn’t make it a ‘profitable good idea'. I had not correctly narrowed down who my target market was and so had produced some high quality software that simply did not sell; but at least it was with my own money and in my own time and so I learned to think like an investor.

Once I realized I had screwed up 'I stabbed it in the crib' and started again on a new project.
The rules this time were:

If it doesn’t have a measurable target market, it doesn’t get made.
If it does not have a target market big enough to make me money, it doesn’t get made.

The point is losing your own money is one thing, losing other people’s money however, is entirely another matter. Directors have a legal duty of care towards their investors (read: bosses) and so making mistakes with other peoples money takes on a moral aspect; not just the financial, legal and marketing ones outlined above.
The moral aspect is at the very least ‘knowing when to quit when you’re behind’.
For example many start-ups not only fail to do their marketing home work like above, but worse once the product fails to sell, they make the even bigger mistake of creating a version 2 or 3 or 4 of the product.

If that wasn’t bad enough, the managers forget the basic product development lesson of ‘the longer you stay with a failed product, the less objective you become and the more emotionally attached you become to it’. This results in classic creeping commitment but with someone else’s money, resulting in throwing good money after bad in an attempt to improve on a product that no one wants.

Naturally having a go and failing is part of business, but continuing with a failed product is one of the most common errors seen by turnaround managers.

The love of Power Point and Excel of course adds to the problem. People turn on their software and turn off the judgment centre’s of their brains.
A case in point is to start going through managements financial and marketing projections and question the underlying assumptions.
Once you start questioning people on where these assumptions were made, you will notice many are ‘made up as we went along’ as the 'business model' was built; many without them ever being tested.
The most common errors seen are the widely optimistic growth rates for the firm and its target market.
Many firms make the mistake of using 'China statistics'.
This is thinking at its most lazy and simplistic and goes something like this:

'China has 1 Billion people, so that is a huge market for our product, lets invest' or
' China is growing at 10%, that’s the market to be in' or
'The Internet is going to totally change the structure of this market. Lets get a head start and start pushing this new technology now'.

This shows a classic lack of proper target marketing.

The first reason being is that most people in China are on the poverty line, so the majority of the population may not be able to afford to buy your product.
The second reason is the growth assumption. Just because China is growing fast does not mean your target market is growing fast. E.g ever brought a buggy-whip lately?
The final reason is the structural change argument. When a new technology comes along, many start ups rush in thinking that the technology will cause a structural change in any existing market. Many don't. In fact the majority simply fail. The main reason is because they are e they are competing against a CHEAPER existing technology.
Even in the ones that do succeed, many take while to gain a foot hold. Faxes for example took over 100 years - not the 5-6 most people assume. Again because the prices of fax machines had to come down to a price that was the same or less than average same-day courier costs.
Likewise, the Internet didn't take hold until it was not only deregulated,But also that desktop computers were again cheap enough for households to be able to buy one.

As always it comes down to the cost of the new technology versus the existing low cost alternatives, and sometimes the cheaper alternative for the customer is to simply not buy.

Another 'china statistics' example is to use existing market data for a competing product to estimate the size of your products target market. All the while not realizing that your market is completely different from the one whose figures you are using e.g. using the market size of the domestic television market in the US to estimate the size of the home video projector market in the US.
These products not only compete against each other but their pricing structure is different, as is the amount of wall / floor space required by the customer.

Further in many cases, the target market is not only incorrect but the firm has not realised what industry they are actually in. This means they discount the differing economics they will experience compared to existing players.
E.g .The wire industry and the fibre optic cable industry both target the telephone infrastructure market, but their cost structure, inputs, outputs, suppliers and economic make up are totally different.

Let’s look a bit further to see what I mean.
E.g. if we were to apply this to Women's High Heel shoes (The Product), lets see what happens.
1. The cost of the shoes narrows down the market size - The Price
2. The sex of the consumer cuts the size of the market - The Position
3. If the woman in question is on a sheep farm then the market is also effected by the location - The Place
4. She is 60 years old and does not go out much, and the advertising is put in the city - The Promotion
5. Finally are their competing / alternative products - e.g. boots which may be more practical to her than high heels etc.

As we can see the good old 4 Ps of marketing start to give us an idea of how 'China statistics’ complete with generalizations and bad assumptions can really damage a start up investment. Hence any marketing, sales and revenue projections based upon them are simply rubbish. Combine this with managers creeping commitment, and you end up with multiple versions of a product that will not sell, but will be guaranteed to burn investors money every time..
By the time a turnaround manager is called in, the damage is pretty severe.

If you think your business is not delivering, do the following:
1. Write up the 4 P's on a piece of paper and hang it above your desk - using the 4P's as your guide, research what you think the target market size should be - (get outside help if you need to - it will pay for itself in no time)
2. Draw up the total investment made so far in a profit curve (see previous blog) and beside it draw / write up the current interest rate and the money you could have made if you had invested somewhere else
3. Go back to the financial projections and compare / plot these against the financial statements, note the irregularities in the projections
4. Check the target market of the marketing models against you own - just make a rough guess - chances are your target market is way smaller than the projections - you may be wrong but you have more than a 50% chance of being right because of the lousy revenue figures - note the irregularities’ in the assumptions.
5. You now have a very rough idea of few things

Whether or not your managers have actually done their homework - or
Whether or not, they even know how to do their homework

Remember they have had plenty of time to re-check their models assumptions against the sales figures.
If they have, then you should have received notification of the updated model and updated target market numbers, plus you should have been warned of the possibility that maybe you are losing money.
If you haven't received any of this, then demand to know why.

Thesis work paper Case 1: Adobe Systems

2009-06-11T19:10:00.000-07:00

Adobe Systems began in the 1982 as a small software company for creating and printing graphics and text. By 1998 Adobe was coming close to having billion dollar sales. However while other software companies were booming, Adobe was in trouble.
Adobe’s flagship product Adobe Illustrator ran late. Further the Japanese market tumbled as the effects of the Asian financial crises and the troubles of the Japanese banking system began to eat in to Adobe sales. Since the Japanese market contributed 25% to Adobe’s revenue, net income dropped drastically down 46% on the previous year. Managerial strife and a 20% staff turnover also wracked the company as desperate managers began to point fingers. An altogether common situation as Teng (Teng, 2002) points out, when no clear lines of accountability and delineation occurs.
Watching the firms ratios decline over the year, and pressuring for the delivery of software products Chief Executive John E. Warnock and cofounder Charles Geschke finally decided to implement a turnaround plan.
Eliminating the jobs of the other three top executives and laying off 10% of management, Warnock began an effort to cut through Adobe lays of bureaucracy.
Two other layoffs also occurred as the company sought to cut expenses. It could be interpreted that although cut backs were done, they were originally not deep enough as Davidson (Davidson, 2001) above warns.
A new Chief Financial Officer (CFO) was hired and the accounting disciplines were tightened and reorganised. Financial Controls were updated and changed to let manager’s track sales daily, instead of at the close of each quarter allowing for more responsive action and better accountability daily (a tactic strongly advocated by Sutton (Sutton, 2002) especially during the initial emergency action phase).
Adobe also amalgamated its four divisions and consolidated each of the geographically separate marketing, sales and engineering groups back in to the organisation.
The companies information systems were also centralised, so that less time was spent trying to integrate accounting data from differing geographies.
The amalgamation of international business units (and networks) back in to a centralised form is very common for international turnaround as Teng (Teng, 2002) indicated previously.
Khandwalla (Khandwalla, 1983) also advises such a move because it enables consistent global communication and co-ordination during restructurings.
Since 40% of Adobe's revenues had come from product upgrades sold to existing customers and another 30% of revenues came from Adobe Illustrator, made management realise that too much reliance on one product had created a revenue and cash flow shortfall. Therefore to allow for smoother income streams and reinvigorate itself Adobe began to focus on new products. A consistent approach in software turnarounds as stated by Davidson (Davidson, 2001) and Blumling (Blumling et al., 2002). As a result Adobe developed and extended the PhotoShop product range, and began implementing it’s new Adobe Internet Document Management Server range.
Adobe’s turnaround was exceptional. In 1999 it had exceeded US$1 billion in revenues, and achieved a 226% increase in net income.

Thesis work paper Limit Research and Development to 10%-20% of Sales

2009-05-04T16:58:00.000-07:00

Davidson (Davidson, 2001) explains that software firms typically spend too much on the product features, because the firms themselves have “over-developed” the product. He cites a common programming joke to illustrate this:
“It you work on a program long enough, it will eventually send email (Davidson, 2001)”
Such an inside joke does however demonstrate the “My Baby” syndrome that can get software companies in to trouble. By spending too long on software development the firms resources and capital are squeezed.
Further, because product development is slowed, a consistent cash flow is denied. Davidson (Davidson, 2001) and Tarter (Tarter, 2001) both recommend that software turnarounds begin with strong version control, limiting research and development of products to between 10% and 20% of sales.
What’s more developers should ship only a limited set of customer benefits (e.g. 10 features) for each product version.

Thesis work paper Cash Reserves

2009-04-01T16:06:00.000-07:00

Keep Cash Reserves at a Minimum of Eight Months
Davidson (Davidson, 2001) also suggests that software firms should not go lower than six months cash flow, as any product launches will increase expenses when money is already tight. This plus the fact that it could take another three to six months to find, interest and negotiate with potential investors does not leave much time for the firm operate in, especially during industry downturns or recessions.
Accordingly, Blumling (Blumling et al., 2002) points out that a firms management credibility is normally damaged unless the team has been changed and turnaround manager appointed.
“To put all this right, a company must give a turnaround team the power to act fast. First, the board of directors should decide whether the current CEO (who often has an entrepreneurial mind-set) might have forfeited the respect of customers, investors, and employees….” (Blumling et al., 2002).
Due to the constraint of finding and hiring a turnaround manager, assembling a turnaround team and going through the removal of senior managers, it is highly unlikely that this scenario alone will leave six months for the turnaround manager to seek funding and have time to implement a turnaround. As such, it would seem prudent to begin looking for the turnaround manager when eight months cash flow is left.
This argument is supported by the large cash holdings of many successful software companies. Adobe for example currently holds cash, cash equivalents and short term investments of US$1.1 billion (See Appendix A), while Intuit also keeps US$1.26 (See Appendix B) on hand. Cash reserves seem to be part of normal business planning (Davidson, 2001), despite critiques from industry analysts, that these should be invested elsewhere or returned to shareholders.
Like all turnarounds denial of the firms current predicament can exist, but fortunately the “burn rate” in software industries is sufficiently high to mean that getting both management and staff involved in the turnaround is normally easier. Failures therefore occur because of insufficient capital, lack of new products, poor strategic positioning and inadequate cost cutting.

Thesis work paper Software Cutbacks

2009-03-18T01:50:00.000-07:00

Software Cutbacks Will Normally Be Harsh Because the Expense Saving to Operating Income Ratio will be 3:1.
Due the large revenue changes that can effect software firms (Blumling et al., 2002), operational cutbacks for software companies will normally be exceedingly harsh on the companies employees because the turnaround must start earlier. Where as other firms may begin cutting back when sustained losses occur, software companies should begin prior to this, because the chances of company renewal are so much harder. Davidson explains
”Suppose…you have 3-6 months of cash flow available. The first thing that you have to do is cut back. This will be painful. It will go against all the things I have written earlier about the value of retention, the value of being an employer of choice, but if the company is going to survive, cut early rather than late” (Davidson, 2001).
For software turnaround’s, there are several ways to improve profitability quickly. Tarter (Tarter, 2001) gives the industry benchmark for the number of sales and marketing employees to the total number of the companies workers to be approximately 23%. But for computer programmers and IT employees gives the caveat that the value of the software and the type of industry the firm is catering to will determine the number of employees. He cites the examples of Rockwell Software against ID Software as examples. These firms have differing numbers if software developers, from 5000+ at Rockwell Software to only 15-20 at ID Software. Hence generic benchmarks can not be used.
Blumling (Blumling et al., 2002) recommends cutbacks should include changing the scope of its operations by eliminating products, customer segments, distribution channels, and geographies that are not linked to the companies core franchise or growth options, a tactic similar to that voiced by Sutton (Sutton, 2002). Likewise controlling outlays on IT equipment, office supplies, travel, and outside services areas that might account for 30% to 40% of overall spending are often over looked. This tactic of cost cutting is supported by both Sutton (Sutton, 2002) and Teng (Teng, 2002) above.
Blumling (Blumling et al., 2002) states that for software companies turnaround savings of 10% to 20 %, can enhance operating income by 3% to 8%. That is, on average a 15% saving will approximate to a 5.5% increase in operating income, a 3 to 1 expense savings to operating income ratio.
From these figures it can be seen that operational turnarounds for software will normally not be enough, as the cost savings needed (although deep), will probably not have a significant effect on revenue. Such a ratio supports Davidson (Davidson, 2001) and Hofer’s (Hofer, 1980) argument that some turnarounds require a strategic realignment rather than simply operational cost cutting. Furthermore, industry benchmark firm Software Success (Tarter, 2001) found that general and administrative expenses averaged to around 13.8% of total revenues over a three year period of 2000 to 2003 for the United States software industry. With the average range being between 10.1% to 14.4%. The statistics also indicate that larger firms are at an operational advantage due to economies of scale.

Thesis work paper Is the firm worth saving?

2009-02-03T20:25:00.000-08:00

The difficult question of whether or not to turnaround a software company greatly depends upon the value of the firm’s products and its intellectual capital. When there are few fixed assets, the valuation methods to assess Altman’s (Altman, 1993) argument must move beyond operational turnaround methods to the underlying strategy itself. As such, most turnarounds of software companies will involved at least a strategic turnaround because as Davidson (Davidson, 2001) argues, the firm’s products may simply not be suitable for it’s markets regardless of the intellectual capital of the firm. Like any firm, having highly skilled workers is not enough. Rather there must be a concentration on whether there is a market for the product and if not, then that particular product should be dropped. Therefore software turnarounds will be nearly always a combination of both strategic as well as operational turnarounds.
However Davidson (Davidson, 2001) warns that all good software companies must have a turnaround plan set up ahead of time.
He proclaims
“success requires a certain ruthlessness – willingness to define hurdles early on in the game that will determine whether you should proceed. Only be defining these hurdles, these criteria, can you avoid the problems of foregoing income…Remember that killing off a commercial idea quickly gives you the opportunity of tackling another.”
This assessment supports Khandwalla’s (Khandwalla, 2001, 1072) assertion that successful companies have turnaround plans and the necessary resources to implement these plans mapped out ahead of time.

Thesis work paper Analysis and Interpretation

2009-01-21T19:15:00.000-08:00

Turning around Software Companies
Although the turnaround management process of many companies is comprised of cutting costs (operational turnarounds), realigning products to new or existing markets (strategic turnarounds) and sorting out financing problems (financial turnarounds). Davidson (Davidson, 2001, 1-102) indicates the rise of software and information based companies and their corresponding wide variability in revenues has added a new difficulty for turnaround management. This view is supported by Blumling (Blumling, Frick, & Meehan III, 2002, 76) who reports that only one software turnaround in eight succeeds.

Thesis work paper Project Objectives

2008-12-22T19:22:00.000-08:00

The Scope of the Project
The project will only deal with the identification of the metrics for software companies. It will not seek to study the underlying causes of the problems in the cited examples.
Primary Analysis
The primary analysis will involve the study of turnaround literature with reference to software companies; And seek to identify the common methods, tactics, processes and financial and performance metrics used by turnaround managers in the turning around of software companies.
Next four cases will also be studied, and the steps taken by turnaround managers involved in these cases will focus on the commonalties between the cases and what has been found in current turnaround literature.
Summary:
To ensure a balanced “whole of company view”, the projects objectives will involve identification of:
• One Marketing or Sales Metric
• One Research and Development of Software Metric
• One Accounting Cash Flow Metric
• One Financial Metric
• The Creation of a short Corporate Recovery Plan for Software Companies

Thesis work paper The Turnaround Matrix of the Association of Turnaround Professionals

2008-11-16T12:43:00.000-08:00

The final turnaround model is Hays’ modification of Bibeault’s model (Bibeault, 1998). Hay’s modification creates a project management matrix that allows board and creditors to view the turnaround in terms of a business plan (Hays III, 2003). This allows for easy communication to all stakeholders and firmly defines what is to be done, by whom and in what order. Compared to the Scanlon Plan and Teng’s Patient model, the project orientation is considerably more delineated, and allows staff to understand where in the process they are at any time. This then has significant advantages in terms of communication and planning.

The turnaround matrix is composed of five phases, with each phase having a number of objectives to complete that part of the firm’s turnaround. Likewise each phase lists by department the required actions or tasks to be met, in order for the objectives of that particular phase to be completed. See figure one below.

Figure 1. The ACTP Turnaround Matrix

As can be seen, the process is far more prescriptive than Teng’s three-phase model, which in composed of the surgery, resuscitation and nursing phases. Each phase in ACTP model, clearly defines the central intent of that particular phase.

The Management Change Phase

The first phase of the ACTP model is taken from the perspective of the board of directors and the secured lender. The objective is to select a top management team to manage the turnaround and remove any impediments either in the existing management team or on the board of directors itself. This is done, to ensure that the top levels of management in the organisation have complete support for the turnaround. Hays (Hays III, 2003) emphases, that early on honesty solves a considerable amount of problems and builds credibility that is badly needed and desired by staff. This contention is strongly supported by Khandwalla (Khandwalla, 1983):

“Powerful though the change agent may be, he is likely to be viewed with indifference or distaste be many insiders if he is an insider, or with suspicion if he is an outsider. Accomplishing the implausible or facing up successfully and dramatically to a crisis seems to be a common means of earning credibility from the sceptical rank and file”.

Like in the Scanlon Plan, staff support is enlisted in order to allow a full briefing of what is wrong with the company, and to enable the firm to quickly “pull itself together” out of the current crises. Constant communication is mandatory, as this provides the unity needed to encourage stakeholders that the turnaround is on the right track. The clarity of turnaround matrix aids in this process.

Telling the truth about the current financial situation is normally the easiest decision for turnaround management, but the most difficult for senior managers who normally are in denial of the situation at this time (Castrogiovanni et al., 1992). Nueno observes that turnaround managers can detect this behaviour by the following:

“When dealing with employers or managers involved in such self-deception, on more than one occasion we come across a hyperactive person, continually immersed in mega-meetings, travelling untiringly, but carefully avoiding the real problem: the company has no future unless something drastically different is done” (Nueno, 1992, 7-182).

Should the real situation leak out later on however, all trust is lost. This situation is similar to building of committees in the Scanlon Plan, and the communication process in the surgery phase of Teng methodology. For all methodologies to be successful, total communication must occur.

This combined with a matrix timeframe for the restructuring also allows staff to plan more effectively and removes delays and insecurities, which can lead to an exodus of better staff (if they have not left already). A view supported by Hays (Hays III, 2003).

Any resistance to change by senior management should result in those people being moved on, as the chances of a successful turnaround diminish greatly if there is not full support at the top level (Colino, 1986). Leonard (Leonard, 1983, 42) in addition, spells out that there must be absolute commitment to a course of action, and to root out any ideas that the recovery plan can be “altered” or “modified” later on.

This phase maps precisely to Teng’s communication process where the board will normally hire a turnaround specialist, a corporate lawyer, and / or an investment banker to help with the process.

Exactly where the turnaround manager works will be dependent upon the board and the creditors.

Bruton observes that in many Asian situations, complete autonomy is not given right away (Bruton et al., 2001). This is very different from many western turnaround models, where turnaround managers will not enter in to a firm unless complete autonomy is given by the board and / or creditors (Sutton, 2002). Some creditors will stipulate that the turnaround manager must take the Chief Executive Officers position, while others may not show any interest, so long as the turnaround itself eventuates. Interference from creditors, shareholders and directors (now matter how well intentioned) can easy cause the turnaround to fail, due to confusion of over staff accountabilities and line authority. As such, the turnaround manager must take care to keep them at arms length during the turnaround.

The Situation Analysis Phase

In the situation analysis phase the turnaround team seeks to determine the “full extent of the damage” on the firm operations, strategy and finances. Bibeault (Bibeault, 1998) defines the primary objective at this point to be:

“Can it survive?”

The most important part after this question has been answered is to determine the companies present cash flow, income statement and balance sheets in order to assess where most of the “damage” is coming from.

This argument is reinforced by Altman (Altman, 1993)who reasons that the central objective is to determine whether or not the company can in fact be saved; with the assessment dependent upon the liquidation versus salvage values, the time involved in the turnaround and whether any turnaround is generally reasonable. Platt (Platt, 1998) cites a lack of market focus, over diversification and the need for turnaround managers to retrench business that were to highly leveraged, as common examples of business failure

Like in Teng’s concentration process of the surgery phase (Teng, 2002), this stage requires management and employees to be interviewed, departmental finances, projects and expenses assessed and finally the organisation itself evaluated to ascertain its position in the market place. By doing this, Platt (Platt, 1998) maintains turnaround managers not only have a solid grasp of the costs and headcount of each department, but also identify which managers and staff are “liberal” with the firm’s money. Such a situation also arises in the “open book stage” of the Scanlon Plan. The transparency of spending process in itself, it likely to display questionable business purchases.

Pate (Pate & Platt, 2002) recommends identifying the ratio of expenses to sales, and identifying what expenses have changed. Sales may have declined due to inadequate marketing, and low gross or net profit margins may indicate incorrect pricing. He states:

“If you want to alter and sharpen consumers’ perceptions of who you are and what you offer, you may find that changing your product-price mix is often as effective as changing the products themselves”.

This reinforces the argument that some turnarounds may in fact be strategic in nature, rather than operational (Hoffman, 1989, 46-66). As such, it is important to determine such a turnaround strategy here, before a preliminary action plan is composed.

Furthermore, price increases must be planned and take in to account where the product will be positioned in the market in the long term (another strategic decision), and should be a reflection of best practice price to volume ratios. Present customers must informed of the future price rises, with complete details as to why it has occurred. Sutton (Sutton, 2002) reinforces this tenet by recommending that if turnaround managers can’t decide, they should “force the issue”. By either removing the product altogether or raising the price 10% and if that doesn’t work lowering it by 25% to see if the product or service will be brought in volume.

The turnaround manager must then to determine what preliminary action need to be taken to return the firm to a breakeven or preferably achieve a cash-positive position. The action plan created seeks to address only the most pressing problems first. It must achieve management buy in (similar to both Teng and Scanlon), be achievable and all parties must understand that major changes may be necessary as new evidence comes to light. This is particularly important as Hays (Hays III, 2003) reports that during the last five years, situation analysis has become even more important but also more difficult. This view is support by Whitney (Whitney, 1987, 49) who states that turnaround management was seldom necessary before the 1970’s. He says:

“Then during the 1970’s, trouble appeared. Economists, political analysis, and social scientists can debate the causes. The effects were palpable: the rate of environmental change accelerated and competition intensified”.

Further Hays the increased difficulties due to the size of frauds like the Enron, the shortening of product and market cycles and increased global competition, turnaround managers face increased difficulty in assessing the situation of the firm and its market before conditions change to make the turnaround untenable.

The Emergency Action Phase

The emergency action phase’s objective is to gain control of the companies’ situation as soon as possible. This means to achieve at least a breakeven cash flow which is stable, and to ensure that the assets needed for long-term recovery remain unimpaired. It is during this phase that layoffs, plant closings, cost cuttings, the abandonment of unprofitable product line(s) & conversely the acceleration of high potential opportunities occurs.

Platt (Platt, 1998) advocates choosing the layoff targets quickly. As it is sometimes cheaper to dispose of these people, plants, processes or products as fast as possible, rather than looking for efficiency or profitability gains. This is particularly important with slow paying customers who as Nueno observes can be one of the easiest parts of the cash flow system to fix. He notes:

“It may be that the customers know the company is unlikely to threaten to stop selling to them; it may be the sales department is not on its toes…but the fact is that slow payers in an industry tend to accumulate in its weaker companies” (Nueno, 1992).

In most cases, the firm does not have the time or resources necessary to carry out any potential gains and better economic utilisation of the firm’s recourses can be made elsewhere. Further, a change in fuel costs, interest or exchange rates can make these “potential winners complete losers” anyway.

Conversely in strategic turnaround situations, aggressive marketing is of the utmost importance, especially in situations where efficiencies do not allow for more cost cutting. E.g. Strategic turnarounds as described by Hoffman can be particularly marketing orientated (Hoffman, 1989).

In order to gain sufficient cash flow during the emergency action phase (and jump-start the companies failing health), many marketing departments and sales are needed most. Sutton (Sutton, 2002) recommends poaching or hiring redundant sales staff from competitors, as this allows for inside information on costs and product differences.

Finally tight marketing metrics should be adhered to, to ensure that staff note any potential change. A few easy wins on the board by having “fire sales” or running competitions can greatly improve morale.

When cutting operating budgets Pate (Pate et al., 2002) comments that many turnaround managers immediately begin by cutting headcount, without looking at other alternatives. As a result, unrealistic operating budgets are created that do not focus on solving the underlying problem. To best identify problems, year-to-year comparisons of expenses to sales are needed, in order to correctly identify costs.

Following this, calculations can be made on the extent of the cutbacks needed in each area in order to return the company to break even or preferably a small profit (Altman, 1993). Hence, like the Scanlon Plan the amount of needed cost cutting per department or product is identified, rather than an arbitrary amount.

Likewise other alternatives to reduce costs should also be considered. E.g. pay cuts, part-timers instead of full time staff, combining staff functions, scheduling shorter working weeks, using forced leave and cutting perks.

Reducing fixed and variable overheads is the third part of cost cutting that turnaround managers must implement. Outsourcing being the easiest way to “manage out” many non-core functions, that may be cheaper to purchase elsewhere. Types of outsourcing may be payroll, security, human resources and information technology (Hays, 1998, 84). While other savings may be from getting overseas and domestic staff to work from home to save on office costs.

Finally, debt-servicing agreements should also be investigated to see if the terms need reviewing. Platt (Platt, 1998) also supports this, but describes financial restructuring as a third and separate type of turnaround. This phase is the equivalent of the Cost Control and Cash Flow Processes in Teng’s Surgery Phase (Teng, 2002).

Sometimes the turnaround may require quick surgery, in order for the firm or company to be sold. If however, the cuts are not deep enough, then the risk of liquidation is likely. All this requires a very focused and fast action oriented management, and a clearly defined strategy. However because turnaround actions are so fast, (Castrogiovanni et al., 1992) observes that promoting active communication from the organisation (especially direct to the CEO from frontline staff) becomes more important.

Like firms that grow too quickly, decisions can be made that have hidden caveats or errors, that other staff may spot. Hence both feedback and vision are important. Vision because it maintains company directions through careful planning, and feedback to gauge staff concern on company decisions. E.g. Loose spending, or the long-term effects of short-term decisions. Frost (Frost et al., 1973) maintains that lack of planning and feedback has resulted in huge corporate blunders, most of which could have been avoided, had management heeded the advice of their staff.

Naturally staff can not communicate, if management is not there to listen. As such, open communication can only occur if the CEO and senior managers “walk the office” (Bibeault, 1998). Locking one self away not only isolates management from staff, but worse, communication can only occur via the senior staff that enter the office. Sutton agrees, stating many managers can “bunker themselves in” (Sutton, 2002). This can enable misinformation because “news feeds” are coming from a source which may not have the turnaround managers best interests at heart. Whitney observes:

“Managers… often discover unsuspected problems as well as suggestions for solutions. One-on-one encounters may spark insights that can lead to new product ideas or marketing programs. These direct contacts may also point to potential new managers who have been submerged by the chin of command or hidden by a hostile supervisor. An additional bonus can come in the form of improved moral and greater enthusiasm for the companies goals” (Whitney, 1987).

The Business Restructuring Phase

As Hay’s (Hays III, 2003) indicates, the business-restructuring phase is particularly difficult. The objective is to enhance profitability by gaining operational and strategic efficiencies.

Bibeault supports this argument; remarking the focus is on increasing the firms return on assets, and shareholder value (Bibeault, 1998). Likewise the emphasis also moves on to staff and management development. Careful resource planning is required when setting time periods for rehiring people. Delays can result in productivity problems when economic recoveries occur; and even then significant time and energy is may be required to recruit employees who are knowledgeable about the business and the customers, an argument also raised by Teng.

Like all business restructuring phases, the change of the organisation to a customer and competitor focus is another commonality. Harker (Harker et al., 1998) recommend managers determine where the present product mix is against their competitors and from there, determine where it should be moved to, and reinforcing accountably by setting clear responsibility based on product or market lines.

“Involvement status and trust of the sales teams improved dramatically…. As they became responsible for their own markets”.

A recommendation reinforced by Teng (Teng, 2002). However, determining an appropriate combination of customer to competitor orientation can be difficult especially if the market is in flux. Further, some products may simply need to be dropped, even if profits may be forthcoming, due to the long-term likelihood that the competition will dominate that market.

The danger of this particular phase Hays (Hays III, 2003) discusses is for the firm to start becoming lax in its management practices. Old processes and ways of doing things can start to slip back in to the organisation as workers start to relax. Therefore Sutton (Sutton, 2002) recommends keeping cash tight by paying off debt or investing in new products, forcing vigilance on company efficiencies.

Should this phase not succeed, the likelihood of another company demise is greatly increased.

The Return to Normal Phase

This last phase has some overlap with the previous phase. Although the business has now been restructured, the focus moves to ensuring that the company culture is “bedded down”. Therefore spending during this time must be particularly stringent and good best practice processes and values rooted in to the firm culture. To do this the turnaround manager must refocus the firm back on to its central values.

In the case of turnarounds, staff have be used to a new way of doing things. Ghoshal (Ghoshal & Bartlett, 1994, 91-112) reiterates that staff must be taught that change is constant and only by having a willingness to accept failure can firms have a chance to enter new markets when old products begin to mature. As such, training and development take on an important focus from the CEO downward. This view is similar to Sutton who observes that many managers are enthusiastic of lifelong learning, but when one checks their resumes it seems the interest is held so long as others are learning lifelong.

Ghoshal (Ghoshal et al., 1996) explains, that by encouraging ongoing development, all staff are taught to constantly re-evaluate what they are doing. This encourages a flexible approach not only to their existing work, but the benefits of ongoing training mean that movement to newer work areas is easier and offers their associate’s a different perspective.

At this point Hays (Hays, 1998; Hays III, 2003) warns that the greatest trap for turnaround managers is a drop in morale. “Nothing can deflate a motivated worker more than the cynic, the armchair critic or the bystander”. Mediocrity can be situational and dependent upon the subject/interest being worked on. Personalities of this type give just enough capacity for management not to spot the pattern until it may be too late. As Sutton (Sutton, 2002) reflects, many managers can get used to this attitudinal display, and begin to just give the “occasional prod” when in fact removal may be preferable, as the effect on others is more insidious. To monitor such possible cultural difficulties however, Nueno (Pedro Nueno, 1992), states that turnaround managers must consistently stay out of their office facilitating the turnaround process, so as not to miss vital worker, customer and market signals.

The ACTP has a number advantages over the previous identified models. Firstly it is considerably more process orientated than the Scanlon and Teng methodologies. This has the advantage of being easier to communicate to stakeholders and project manage. Conversely, if one follows the methodology “to the letter” then a number of management decisions could be left out.

Like the other methodologies its value increases when financial, marketing and operational metrics are also used. Hence, in order to perform a situational audit of the firm and monitor its progress across the turnaround matrix, these metrics need to be identified and defined.

Furthermore process based methodologies can sometimes become inflexible when they are used for a situation they were not designed for. Clearly in the case of working in Asian cultures Teng’s model has some advantages, but with the increased time and market pressures mentioned by Hays III, this may become more irrelevant. Likewise, the focus of the turnaround matrix is on operational changes first, and strategic changes second. But as Hoffman and Platt both indicate, the strategic changes needed may not be operational in nature. Drucker (Drucker, 2002, 12) observes that such a situation is occurring with increasing frequency, especially in regarding to software, biotechnology and other knowledge-based industries .

In like manner, the ACTP does not make use of staff in terms of cost savings as in the Scanlon Plan. For example, when continental airlines was facing bankruptcy, the aim of management had been to turnaround the firm via staff cuts, but eventually they adopted the Scanlon Plan when it became clear that staff had more ideas on how to cuts costs than management did. Further, because the firm was facing bankruptcy, the unions and management modified the plan, so that any savings were paid later when the firm returned back to profitability. Hence it could be argued that greater staff involvement may be needed in the ACTP methodology. This argument is support by Teng’s stipulation that many more workers are now well educated, and are not only more aware of the firm’s problems but more importantly, know how to solve them.

From this literature above, it can been seen that turnaround management has developed mainly through the industrial and manufacturing areas. It is at this point then, that the focus of the paper turns to the investigation of the turning around of software companies. An area not fully documented at this time.

Thesis work paper Teng’s Patient Model (2002)

2008-10-08T18:42:00.000-07:00

Teng “Patient Model” (Teng, 2002) is completely different from the Scanlon Plan. The use of the phased process is now common among turnaround management as remarked by Bartlett (Ghoshal & Bartlett, 1996, 23).

When compared to The Scanlon Plan however, it can be seen that more planning and preparation has occurred, rather than a crisis approach. To be fair to Scanlon, modern practitioners were not in the middle of a great depression at the time, and had the benefit of previous research.

As such, Teng’s approach is a phased turnaround methodology that treats the firm like a sick patient and proposes three different phases to his corporate renewal model:

1. Surgery

2. Resuscitation

3. Nursing

The Surgery Phase

In phase one of Teng’s model, the central aim (like most turnaround management processes) is to restructure the troubled company, improve cash flow and remove the denial by explaining the harsh reality of its present predicament. This approach similar to Nueno (Pedro Nueno, 1992, 7-182), Hays (Hays III, 2003, 1-3) and Bibeault’s (Bibeault, 1998) methodologies.

Teng breaks down the surgical phase in to four separate but simultaneous processes. They are:

· Communication

· Concentration

· Cost Control

· Cash Flow

The Communications Process

In the communications process, the turnaround manager first forms a turnaround management team to project manage the firm’s rehabilitation. Normally during this time some or all-senior managers may get replaced. A “standard” turnaround management stance similar to that by Bibeault (Bibeault, 1998), Colino (Colino, 1986, 52) and the ACTP methodology.

This is done to ensure objectivity, honesty and clarity for the future turnaround. As Teng observes

“It is simply too much to ask or expect incumbent management to be objective in evaluating its past performance when they are the same people who by mismanagement, allowed the firm’s financial health to deteriorate in the first place”.

The communications process has a “no nonsense” management style, which needs to be autocratic (Khandwalla, 1983, 5). Teng observes that the role of a benevolent dictator is the most appropriate. The turnaround manager must be “hard on performance, and soft on people”. The building of credibility is vital and Teng states that cutting all perks at the corporate level first, must be one of the first priorities, in order to show employees that the new management is walking its talk. He comments:

“…You will lose credibility if you continue to fly business class when you have decided that the managers must downgrade to economy class or continue to wine and dine in top class restaurants when your people are fired to save costs. Once you do not practice what you preach, people can see you are inconsistent. The loss of your personal credibility is detrimental to all your subsequent turnaround endeavours”.

The Concentration Process

The second part of the four-part process is Concentration. The focus in this process is on developing core competencies, eliminating marginally profitable projects, challenging past business assumptions and adopting zero-based budgeting approaches.

In the core competence area, Teng advises to divest unprofitable or non-related businesses. Teng intentionally highlights elimination of marginally unprofitable business and projects as separate parts. These businesses / projects are normally “difficult to spot or hard to drop” because they reside just between, either zero profit or marginally successful, and show promise.

In some cases, Teng recommends raising the price of the product or service as this can sometimes have either, no impact on sales volume or reduce sales volume but increase profitability by an equal economic amount.

Teng also illustrates that budget constraints are considerably worse in turnarounds and so budgeting in his model is done differently.

Using zero-based budgeting, each section or manager must justify their proposed activities as if they were in start up mode. This allows all costs (especially hidden ones) to be identified. The zero-budget does not include what is in existence now, and its central aim is to identify how much money the particular business unit, section or department is spending.

Sutton extends this argument by recommending turnaround managers sign a few checks in the finance department each day

“Since every signature shortens your companies life, you’ll discover some pretty silly things that never show up on the income statement. You’ll find yourself acting on them” (Sutton, 2002).

The Cost Control Process

Teng indicates that the CEO must lead from the front on cost control, querying any spending that does not add value. Sometimes this has to be done ruthlessly, in order to guarantee the companies survival. For the most part, it comes in three separate areas:

· Cutting the operating budget

· Downsizing the workforce and finally

· Reducing fixed and variable overheads.

Once the new operating budget is in place, the turnaround manager can have significant problems getting staff to adhere to it. This may be due to a lack of transparency, a lack of commitment or the possibility that the new budget is perhaps unrealistic.

In any case, Teng recommends getting firm commitment from the managers to their sales and profitability numbers in the budget, telling them that once they do commit, they are staking their career’s and credibility on the line.

It could be interpreted that this akin, to the Screening Committee in the Scanlon Plan. As both involve oversight and demand transparency and accountability in order to ensure not only proper budgetary planning, but also the survival of the business itself. In cases of public companies and government enterprises, which have increased pressure on corporate governance transparency and accountability, this is especially important.

The second part of cost cutting is downsizing the workforce. Here Teng advocates first motivating the workforce similar to the Scanlon Plan, rather than beginning with layoffs, as low morale and productivity result in a more difficult recovery. Further he argues that if not handled correctly, it will result in good calibre staff leaving first. This is especially prominent in city-states and smaller countries like Singapore and New Zealand, where

“News of the impending R word – whether rumour or reality, spreads like wildfire and the companies good calibre staff (those that the CEO wishes to retain during the retrenchment exercise) will probably be the first to leave the company. …The problem is further compounded by the troubled company’s inability to attract good calibre staff to replace those who left, since its reputation in the market has been tarnished”.

Nevertheless the popularity of downsizing is still the dominant method for cost cutting for the primary reasons that it:

· Cuts short-term costs immediately,

· Is a more predictable way to achieve cost efficiencies and

· The costs of downsizing can be covered under restructuring charges.

If cutbacks are necessary, Teng recommends removing unproductive senior executives, middle managers, dysfunctional staff and head office staff first; And lower paid workers and unions last, citing that the last groups have a greater interest in the company succeeding than management does. It could be argued at this point, the Scanlon’s work itself reinforces this argument.

Teng warns that downsizing has other dangers too. It can cripple product development, marketing and customer services, as evidenced in the restructuring of Kodak. As Floyd (Floyd & Wooldridge, 1997, 465) explains:

“Rather than achieving performance improvements, innovation and creativity declined and the company fell behind in the crucial race for new products.”

Finally, Teng observes there has been a strong growth in both workplace violence and hostility, as workers become more educated and aware of management’s intransigence to solve business problems that they perceive are putting their jobs at risk. This combined with record pay packages and golden handshakes to “retired” manager’s and directors (who are likely to have caused the problems in the first place), can now result in unprecedented levels of distrust, cynicism and disrespect that are likely to cause permanent cultural damage to the companies involved. Like other turnaround managers, there is a consistent focus on the type of cuts, rather than the size. A fundamental tenet of the Scanlon plan.

The Cash Flow Process

Like most turnaround processes Teng takes the view of “Cash is King”. To enable the firm to increase it’s cash flow he recommends selling off unrelated and non-core assets, controlling inventory levels, reducing purchases and perks, and reviewing and renegotiating terms with existing suppliers, customers and unions. As Platt (Platt, 1998) explains, the primary aim of any cash flow (and credit re-negotiation) process is to seek more favourable terms and economic conditions thereby boosting cash flow and jumpstarting the companies operations.

The Resuscitation Phase

Phase two of Teng’s model, moves the turnaround management process on to growing the company. As Teng indicates cost cutting has its limits, and will not successfully restore the business if the market does not desire it’s products, or the market itself is diminishing. Eight parts are needed to resuscitate a business. They are:

· Ascertain corporate objectives

· Staying on the ground / using consultants (if necessary)

· Focussing on the customers and competitors

· Developing the right product and price

· Implementing an aggressive marketing strategy

· Differentiating using service quality

· Strengthening the brand name

· Investing in future expansions

The first part of the resuscitation phase is to refocus the company, so that all staff are moving in the same direction. Teng recommends turnaround goals that focus on profitability when it comes to defining corporate objectives. E.g. Number one in profitability, rather than number ones in sales. He cites Jack Welsh former CEO of General Electric Corporation.

“You can’t grow long term, if you can’t eat short term. Anybody can manage short. Anybody can manage long. Balancing these two things is what management is.”

Staying on the ground for Teng meant “walking the floor” (Sutton, 2002) and staying in constant touch with workers, customers and unions. Likewise he recommends the occasional use of consultants (after reference checks) in order to provide a third opinion.

The follow on from this is developing the right product(s) at the right price(s). Like Harker (Harker & Harker, 1998, 55) Teng warns against the temptation to become too product focused during a turnaround, without focussing also on cost. This is view is reinforced by Sutton (Sutton, 2002), in that a cost focus can lead to standardisation which in turn can lead to better quality control. Eventually (as in the Scanlon Plan) other competitors will provide similar features, hence price will be the determining factor.

Differentiating using service quality, can be particularly successful for turnarounds especially when competing against products with similar feature sets.

However, only a certain amount of cost cutting can be done on any product before the firm has to differentiate through service. As he observes:

“How the company handles the customers is often of more importance than the product per se (Teng, 2002).”

How the service is differentiated is an important factor, but with turnarounds Teng observes that companies can wow their customers even better as a new “customer service culture”, can encourage staff to voice customer service ideas that till recently were kept quiet for fear of challenging the status quo.

In order to help restore the business Teng next recommends strengthening the firm’s brand name. This insures that as the firm goes through its recovery, brand equity is built up also. Sutton (Sutton, 2002) goes further, and give the examples of applying the brand to anything and everything that goes out of the firm.

”Use the phrase in speeches, advertising and letterheads and on the front door, shipping labels and brochures”.

The final part of the Resuscitation phase is investing in future operations. In this area a number of pitfalls can occur. First Teng remarks that many foreign expansions are done without adequate market research using “china statistics” [1] rather than doing legitimate market research. The second pitfall is rapid expansion, a common condition that can end up with the company back in trouble, especially if, thirdly the expansion occurs at the wrong time.

The Nursing Phase

The final phases of Teng’s model take a more eastern and holistic view of the organisation. Like Scanlon, Teng verifies that most company failures normally begin very early with a decline in the cultural, heart and soft issues of the company. Although the previous two phases have returned the company back to profitability, keeping it there and reinforcing good business is still difficult without the third phase. As he explains:

“Cutting back products is relatively easy, and has short-term pay-offs. But they do not help….the generation of business growth in the longer term”.

To address the “soft issues” in this third phase Teng states there are nine processes involved:

· Incorporating a new corporate philosophy

· Strengthening the free flow of internal energy

· Installing a strong and healthy corporate culture

· Engendering action-drive orientation

· Eating a balanced diet: vision, feedback, and action

· Promoting active communication

· Cultivating a positive mental attitude

· Emphasising exercise: Training and development

· People, people, people

The first process of the nursing phase involves addressing the decline in corporate philosophy. The central tenets of the founders normally form the rock of many corporate mission statements or values, but over time become eroded by hypocrisy, people taking the value system for granted, diluting them to justify situations or simply not “walking the talk” (if it is still even talked about).

In strengthening the free flow of energy, Teng likes to equate organisational energy and fervour to the Asian energy of Qi. From western eyes, it is that part of the human condition that constantly seeks self-improvement. Be it enthusiasm, drive, passion, determination and spirit. It is normally witnessed among company founders. As he explains

“You do not create Disneyland or build personal computers or invent the Walkman because the outside environment demands it. These things rose out of the inner urge for progress. The drive to further, to do better, to create new possibilities without any external justification or request.”

This is why installing a strong and healthy corporate culture is important. Teng describes this as similar to building a strong immune system (Birkinshaw & Fry, 1998, 51). However when change to a corporate culture is needed, it must be fast. Like an immunity system, if cultural change is not done quickly, the very system seeking to be changed can turn against the change agents. A similar observation is reported by Birkinshaw in the case of a NCR subsidiary in Dundee, Scotland (Birkinshaw et al., 1998).

Teng also cites the example of Jan Timmer who was given the task of turning around Philips. Timmer remarked that earlier efforts to change the organisation had failed due to significant resistance by senior managers and a piecemeal attempt; while in Birkinshaw’s case study, the corporate immune system attacked new ideas in three ways:

· Ignoring them first (hoping they’ll got away),

· Being sceptical about them second and

· Outright resistance the third.

Hence the turnaround manager must reinforce an action-driven orientation. Billionaire Donald Trump on the television show “The Apprentice”, remarked a similar comparison. When talking to contestants in the first episode he describes management as only two things “monitoring and action…”and you didn’t take action!!””. The turnaround manager must reinforce to staff that allowing resistance or inertia to derail any event should not be tolerated. Scanlon supported this position, by using the team approach to counter any resistance “head on”, so that staff should be more worried about not acting. As Sutton reinforces:

“Don’t expect things to get better. They don’t! (Sutton, 2002)”

Such an action orientation also encourages a fast and flexible approach to solving problems and winning new markets. Teng cites Kotler, who observed that when market and product cycles are shorter, most value must be captured earlier in the growth or introduction phase.

Teng’s next recommendation is to cultivate a positive mental attitude. This can mean being realistic enough for the turnaround manager to know when to leave (Sutton, 2002) and preparing for a successor a head of time. Naturally part of a positive mental attitude, is the ability for an employee to know that they can grow and progress in the company if they work hard.

Unfortunately Teng states that this is not likely when managers intentionally hold good workers back, if their subordinate are better than they are. As such he recommends turnaround managers consider implanting an “apprentice and succession policy”. (Again a similar policy to Joseph Scanlon’s, who remarked that operational efficiencies had occurred because of transparency, and so should succession).

In this case no manager(s) can get promoted if they do not have a capable successor to take over one’s portfolio, and part of the succession planning becomes part of the managers performance measurement.

Teng final part of the nursing process is People, people, and people. As he states, it is not companies that fail, it is people, and finding good people is not easy. Therefore, one must be on the constant lookout for good staff. Sutton (Sutton, 2002) describes this as “Hustle the hustlers” and encourages managers to go further by hunting down staff ahead of time. Locating those studying part-time for their own interest, working at night or demonstrating a willingness to work beyond what is normally expected.

Teng’s Patient Model took a modern-day Asian/Eastern look on the turnaround management process. This is the current trend in academic research on the discipline.

The advantage of Teng’s model is its strong focus on it’s communication processes, and the ability to handle Asian turnarounds more effectively, by coming in with a “white knight”. However, the disadvantage with Teng’s model is the focus is particularly human resource and marketing based. This is probably an outcome of most Asian firms being relatively low cost producers, with the focus being more and strategic realignment. Another disadvantage is the speed it takes to intervene in order for the turnaround to occur. It may be that by the time intervention is allowed, the firm is already in dire-straights. Finally Teng’s model is not as prescriptive at the ACTP model, which allows for the braking down of each phase by objectives and departments.

[1] An incorrect measure based upon the assumption that population size determines potential market size, rather than “who can afford to pay and may possibly buy” determining potential market size.

Thesis work paper The Scanlon Plan (1936)

2008-08-02T12:03:00.000-07:00

Perhaps the first initial approach to the turnaround management methodology was Joseph Scanlon’s “The Scanlon Plan” (White, 1979, 292-312) created during the depression. Scanlon was a local union president of a financially troubled steel mill who created a methodology to help enlist the employees in a turnaround of the company, with the success of the effort leading Scanlon to apply the methodology to other declining firms.

Although originally designed as a crisis management plan, Scanlon received recognition when the methodology applied equally to healthy companies as well with a 46% increase in productive efficiency for the Adamson Company. So impressed was organisational behaviourist Douglas McGregor, that Scanlon was persuaded in to joining M.I.T Industrial relations staff (Lane, 1975, 57-64).

The Scanlon Plan Process would now days be described as participative management, but at the time the plan was used by firms in financial crises.

The Scanlon Plan involved two systems:

· The Participation System and

· The Equity System

The Participation System is comprised of an open suggestion system and two committees.

The first was the production committee for which there was one for each department. This committee composed of one management representative and one or more non-elected non-supervisory employees. The committees job was to identify problems which interfered with increasing productivity, reduce costs and increase output. Small expenditure suggestions could be put in to effect immediately, while large expenditure items were sent to the second committee, which was the screening committee (Check, 1979, 9).

The screening committee held representatives of senior management and an equal or greater number of elected non-supervisory representatives. It acted on the suggestions recommend by the production committee, and also assumed responsibly for suggestions not acted on by the production committee (i.e. oversight).

Finally the screening committee oversaw the production of financial data supporting the assignment of the monthly bonuses. The participation system allows full communication throughout the firm on production improvements, financial position, upcoming changes and bonuses (Frost, Ruh, & Wallace, 1973, 282-285)

Likewise the Equity System allows for the transparent calculations of two metrics. The ratio and the bonus plan.

The ratio is normally calculated by the total payroll cost divided by the total sales value of production, within a specified timeframe that does not work to the disadvantage of either the employee or the employer. The ratio is used to calculate the payroll saving.

The bonus plan works by assigning all cost savings for the period to a pool. Distribution of the pool is based on three requirements:

· Both the employee’s and the company receive fair shares

· A reserve fund is set a side each month for months when bonus deficits occur.

· Each member must receive a fair share of the pool.

The advantage of the Scanlon Plan is that the company must go through an exacting analysis of profit and loss in order to derive the ratio (Lane, 1975), hence encouraging a focus on financial results. This audit is similar to the situation analysis in the ACTP methodology. Likewise the increased transparency, which means that all employees know the financial situation of the company, is also similar.

With both, performance improvements can be made in an open atmosphere free of denial and politics, and finally all staff receive the same bonus in order to recognise the contribution of both staff and management. It also makes administration easier.

The disadvantage of Scanlon plan is that the very advantages can also be disadvantages. The equal bonus may not reflect the actual work or contribution performed by all staff, because education and specific skill sets may have a major effect on what savings were the most cost effective. Further, the Scanlon plan can take some time to introduce in to large companies, even though it was originally set up as a crisis measure (Check, 1979) because few multinationals (if any) existed when the plan was invented. This can mean that by the time the system is implemented financial ruin may be inevitable, especially if management were in denial about the firm’s problems (Castrogiovanni, Baliga, & Kidwell, 1992, 26).

Finally, the Scanlon plan relies on the presupposition that the firm itself is inefficient in its operations; but as the turnaround of British Steel in the 1980’s shows (Beauman, 1996, 16), the timing of the recovery is equally important, because market, currency and interest fluctuations still effect underlying profitability.

Moreover as Hofer indicates (Hofer, 1980) company operations may already be efficient, and it is a strategic turnaround that is needed. That’s is “super” operational efficiencies won’t work, if the firm is not correctly targeting the proper markets (O'Neill, 1986, 80-88).

There has been considerable debate as to whether the Scanlon Plan actually works due to a both a lack of empirical research, and a surplus of partially biased research (White, 1979). The inclusion for the Scanlon Plan however, is included for historical purposes in relation to the next methodology created sixty-six years later.

Thesis work paper An Evaluation of the Turnaround Management Practitioner Methodologies

2008-07-22T21:42:00.000-07:00

Although the academic discipline of turnaround management has been relatively young, the practice of turnaround management is a consequence of everyday business. Practitioners (based upon their knowledge and experience) sought to create both process-based and management-based models in order to cut costs, create cash flow and stabilise the business prior to recovery. It should be noted then, that the first turnaround plan for a failing business was actually developed during the great depression, not by an entrepreneur or an industrialist, but by a trade unionist.

Thesis work paper The Rise of Turnaround Management as an Academic Discipline

2008-07-20T14:02:00.000-07:00

The central premise from which turnaround management began is best summarised by Altman (Altman, 1993)

“If an entity’s intrinsic or economic value is greater than its current liquidation value, then from both the public policy and entity ownership viewpoints, the firm should attempt to reorganise and continue. If however, the firm’s assets are worth more dead than alive - that is, liquidation value exceeds economic value – liquidation is the preferable alternative”.

Although it can be said that turnaround management has been around as long as commerce itself, the treatment of turnaround management as a separate academic discipline from the strategic management discipline did not begin until the late 1970’s/early1980’s in the United States.

Chronologically Bibeault’s (Bibeault, 1998) work in 1982 created a cohesive model of turnaround management broken down in to five stages. The focus of his work was on creating a turnaround management process to be used out in industry. At the time these processes had not been discussed in an academic sense. Bibeault’s (Bibeault, 1998) study focused on the major conglomerates of the nineteen seventies, working to formulate a manageable process that could handle the turning around of large corporations.

In the early 1990’s the focus turned to the strategic underpinnings of turnaround management. Robbins and Pearce’s (Robbins & Pearce II, 1992, 287-309) study moved the bias away from a process-based view alone to a strategic investigation of the cause and effect of turnarounds. This resulted in their creation of a two-stage model based on the firm’s retrenchment (the cause) and recovery (the effect). The central tenet being that management of the first stage was considerably different than what was required in the second stage, and due to the wide variety of industries and bushiness a more generalised approach was needed.

However, Barker and Mone (Barker III & Mone, 1994, 395) argued with the casual influence of Robbins turnaround process, debating that the causal influence was the decline of the firm itself, rather than the retrenchment. Further they maintained confusion was added over whether efficiency improvements found in turnaround firms were the result of retrenchments, sales improvements or both. Likewise the retrenchment itself, could put the firm in a worse predicament by sapping employee morale, encouraging the best and brightest to leave (genetically, the rats that jump ship first are the best swimmers) and that other problems would not be solved by asset and cost reductions.

By 1995, the focus of academic literature had returned to a process view, but tempered with the strategic underpinning brought on by the previous authors. Arogyswamy, Baker and Yasai-Ardenkani (Arogyaswamy & Barker III, 1995, 493) paper defined a two-stage contingency approach which maintained that firms first exhibit decline stemming strategies to reverse the dysfunctional consequences of decline and then move in to recovery repositioning strategies so that the firm can then compete better in its industry.

With the Asian financial crises in 1997/1998, the rise of globalisation and the global recession in the year 2000, the focus of turnaround management research turned toward Asia and China.

Practitioners and researchers found the existing models needed to be adapted or changed completely to work in the differing cultural, commercial and legal environments. Likewise, an international business focus began to evolve as growing cross-border commercial distress issues raised the awareness of the need for turnaround management processes to handle these difficult questions.

Bruton, Ahlstrom and Wan (Bruton, Ahlstrom, & Wan, 2001, 146) identified a number of historical issues in Asia that make turnarounds longer and more difficult. Many firms required strategic retrenchments (rather than operational ones). Having the added problem of a high proportion of owner/managers meant that it was harder to replace existing management; and even if this was possible, there was a significant lack of turnaround specialist’s in the Asian region. Most commonly, firms required a “white knight” to buy in to the company, assume control of the board with majority equity and then remove the Chief Executive Officer (CEO). However, the length of time between when problems were recognised and the CEO removed, could be up to 18 month’s resulting in prolonged losses and risk exposure.

It is from these circumstances that present research has refocused on the need for a turnaround management process in Asia[1].

From the historical discussion above, it can be seen that the focus of academic thinking has been to divided up in to two areas.

A process based view of turnaround management, that sought to create a turnaround management model which could be applied to organisations in order to rehabilitate them and;

A strategic management view, which sought to evaluate the implications, pitfalls and successes of these processes on the organisation and the local culture in order to see if they were effective.

Although the academic discipline of turnaround management is relatively young (Arogyaswamy et al., 1995), the creation of different theoretical processes has been a major focus. Academics have sought to maximise the economic benefits of corporate renewal while trying to avoid some of the costs that resulted from major restructurings and retrenchments (Barker III et al., 1994). Moreover, as each process has been developed, issues have been addressed or contingencies developed (Bruton et al., 2001).

It is at this point then, that focus of this paper turns from the historical development of the academic discipline to an evaluation of the ACTP methodology against the first turnaround method by Joseph Scanlon (i.e. “The Scanlon Plan”) and last turnaround methodology developed namely Teng’s Patient Model. The methodologies are completely different, but from a historical perspective provide an insight in to how much turnaround management has changed; from starting off as an emergency plan to save one company, to a fully fledged profession.

[1] Note: There is a process model being researched in Asia by Falkenberg and Chong. “Turnaround Strategies in South-East Asia", will be presented at the 24th Strategic Management Society Annual International Conference 'Strategic Balance: Driving Innovation and Maintaining Performance', San Juan, Puerto Rico, in October 2004.

Thesis work paper What is Turnaround Management?

2008-06-30T11:35:00.000-07:00

Turnaround Management has a large number of differing descriptions, which reflects the breath of the field and the number of distinct turnaround situations. Hofer (Hofer, 1980, 19-31) noted there were generally two different types of turnaround. A strategic turnaround where the focus was on the firm repositioning itself in the market; or an operational turnaround, where the firm sought operational efficiencies. In either case, the turnaround function seeks to return a firm to profitability from its current situation of value destruction.

With no formal definition found, and arguments about what constitutes a turnaround, it may be prudent to define the various types of commercial distress that turnaround managers work in. By doing so, we may determine what work can be defined as turnaround management.

Altman (Altman, 1993) defines four generic terms that are commonly found in the literature on commercial distress. Their formal use is as follows:

– Failure, in economic terms, to deliver an economic rate of return that is significantly and continually lower when compared to similar investments.

– Technical Insolvency, when the firm cannot meet it current obligations, signifying a lack of liquidity.

– Insolvency in a bankruptcy sense, when the firm finds its total liabilities in excess of a fair valuation of its total assets. I.e. the real net worth is negative; and finally

– Default. A legal and/or technical condition when the debtor violates a condition of agreement with a creditor class.

From the formal definitions above, it can be seen that the focus is on three general areas of decreasing liquidity and one area of circumstance, namely default. We can begin to limit the various areas of corporate distress that turnaround management works in by referring to Hofer’s (Hofer, 1980) work on turnaround management strategy, where he notes:

“Before beginning a turnaround make sure the going-concern value of the firm is substantially greater than its liquidation value” (Hofer, 1980).

This leads us to the conclusion that turnaround management could be defined as

“The task of shifting an organisation from value destruction through either business failure, technical insolvency or default back to value creation using operational and strategic methods”.

Thesis work paper Problem Statement

2008-06-20T01:33:00.000-07:00

This paper seeks to answer the question “What are the differences in turning around software companies as compared to the turnaround management for “old economy” firms? And if so, what are the possible solutions to fill these each of these differences?”

Thesis work paper Introduction

2008-03-12T04:06:00.000-07:00

1.Introduction

This thesis investigates the turnaround management process from it’s origins in the United States and refinement in academic literature through to an assessment of the turnaround management process methodology as constructed by the Association of Certified Turnaround Professionals (ACTP).

The evaluation will compare and contrasting it with two other methodologies. In this case Joseph Scanlon’s “The Scanlon Plan” and Dr Michael Tang’s “Patient Methodology”. Once an overall picture of the turnaround methodologies has been done, the paper will investigate the relatively new area of turning around software companies. So as to add further depth to the turnaround management methodology.