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”.
