When times were good, executives obsessed over how to make them better. Books like Good to Great, Built to Last and countless others served up insights on the best companies and their secrets. But with the economy upside down, healthy companies are – or at least should be – highly curious to understand the secrets of the distressed.

Is it time to flip the traditional role of “teacher” and “student”? We think so, mainly from our casework with both successful companies and some of the highest-profile bankruptcies and restructurings, including General Motors, Lyondell Chemical and General Growth Properties. As we describe in this article, we have discovered critical lessons that healthy companies can learn from the playbooks of the distressed.

While not all the tools used to drive turnarounds in distressed or bankrupt companies are always available or applicable to healthy companies, this article outlines five critical lessons that healthy companies could learn from their troubled brethren. It also documents two typical turnaround mistakes which healthy companies should avoid.

The five lessons to learn are:

• Lesson 1: Speed is more important than perfection
• Lesson 2: Cash is king
• Lesson 3: Focus on the issues with the highest impact
• Lesson 4: Make the tough people calls
• Lesson 5: Unfreeze the organization

The two lessons to avoid are:

• Lesson 6: Cut fat, not muscle
• Lesson 7: Focus on survival is necessary but not sufficient

Below, we first summarize the key concepts of each lesson and then provide an example of how a healthy company has applied that lesson to rapidly improve performance.

Five lessons to learn

Lesson 1
Speed is more important than perfection

While achieving perfection is a noble cause, it is hardly one companies can afford to follow in today’s business environment. In the words of the 19th century composer, Louis Hector Berlioz, “Time is a great teacher, but unfortunately it kills all its pupils.” Unhealthy companies quickly learn that the best strategy in the world is worthless if it isn’t achievable in a very tight time frame.

Early last year, as the financial meltdown hit the banking, automotive and retail sectors, struggling companies had only weeks to remain alive unless a major intervention occurred. The strategies these companies deployed to survive while in intensive care can also be mastered by healthy companies to achieve results in greatly accelerated ways.

When auto supplier ArvinMeritor launched a joint venture in China, it learned that it needed to move fast. CEO Philip Martens noted that, “Unafraid of risks, the Chinese work quickly and cheaply, even if they don’t hit world-class quality on the first try.” We believe that seventy to ninety percent of the time taken in major initiatives can be effectively eliminated. Healthy companies often follow elaborate methodologies designed to deliver repeatable, predictable results. But in the process they can unintentionally construct rigid, one-size-fits-all methodologies that are over-engineered and drive work effort that does not create value.

Healthy company example

A major retail client teamed with us to drive an accelerated turnaround program, which included developing a new strategy and eliminating several hundred million dollars of costs. The result was an increase in revenue of 6 percent in just a few months through better pricing. As Figure 2 shows, it had previously taken the same client five times as long to achieve similar results.

Source: AlixPartners Disguised Client Example

Lesson 2
Cash is king

Unhealthy companies must have a detailed and disciplined view of the importance of cash. For distressed companies, there is absolutely no doubt that “cash is king.” Cash provides the “runway” required to work on an orderly restructuring, as opposed to an unstructured “freefall” leading to likely liquidation. As a result, troubled companies focus very intently on actual, not “hoped for,” cash every day. Focus on cash is an obsession, not just for finance executives, but every key manager, and a critical consideration before making any change. It is clear to all that cash is “precious.”

By contrast, many healthy companies have, until recently, had access to an overabundance of cash. Healthy companies typically keep an eye on cash from a distance, using an accounting cash-flow forecast derived from the P&L and balance sheet, with only a loose correlation to daily/weekly outgoing and incoming cash. As cash markets severely tightened in early 2009, the lack of cash discipline in many major corporations became exposed. . Blue chip companies had no way to accurately predict cash requirements or know if they had adequate reserves. In some cases, this led to difficult cash “surprises.”

Even blue-blood companies like Caterpillar felt the pressure. Costs for potential new debt ballooned, and as a result leaders placed a high priority on liquidity. Executives cut operating costs and capital expenditures, and significantly improved working capital by cutting inventories. In the first half of 2009 alone, inventory was reduced by more than $1.6 billion.

Furthermore, half of roughly 100 retailers we surveyed in 2009 are now looking at cash details on a weekly basis. Many of those have only recently begun this practice because of the current downturn.

Healthy company example

A mid-sized European manufacturer had just been acquired by new owners. The company was profitable, but it was using approximately 60 percent of its revolving credit facility and was about to draw down more. The new owners were concerned about the level of cash burn and the potential reaction of the bank to the accelerating draws on the line. If the bank became concerned it could cut back access to cash, and that would quickly make the “healthy” company a “troubled” one.

An immediate hold was placed on the new draw requests, while we worked with company management to take a much deeper look at cash sources and uses. The key tool developed with the company, one almost universally used by distressed companies, was the 13-week cash forecast, a weekly forecast of receipts and disbursements. It was assembled by finance, but driven by inputs from manufacturing, sales and purchasing. These functions were all made accountable for providing input to the cash forecast, and, more importantly, for meeting their cash projections and identifying and prioritizing cash- improvement initiatives. The increased accountability and visibility uncovered a number of immediate opportunities:

• Excessive cash sitting in 12 subsidiary bank accounts. The amount of cash was well beyond daily peak requirements, so it was pulled back and redeployed.
• Recognition that very small moves in supplier payments would better align inflows with outflows and reduce daily peak cash needs. Relatively easily, the company was able to gain agreement from suppliers to extend payments by a few days, with the commitment and follow through that the payments would be made on the new promised dates.
• Situations in which a small number of high-revenue customers were not paying on time.

Current accounts receivable systems were flagging these issues, but until this time, there was no management focus on the impact that just a few days of lag could have on its overall cash needs. Opportunities were now available to use some of the now-available cash to help cash-hungry suppliers, in exchange for very attractive early payment discounts.

The above opportunities allowed the company to avoid the additional draw and to pay down the line so that today it is comfortably drawing well under 40 percent of its limit. In a few cases, the company was able to reduce the cost of materials. Finally, the bank is not “knocking at the door” worried about its loans and looking over the shoulder of the company and its key decisions.

Beyond the immediate impacts, management has achieved a number of sustainable benefits:

• A much greater focus on measuring and accounting for the uses and sources of cash. Actual bank balances are tracked versus projections, and questions are immediately asked if there are discrepancies. New cash-related metrics have been added to management scorecards, not just in finance, but in all relevant functions.
• Enhanced focus on cash and the questioning of disbursements, with more attention focused on “why do we have to do this” and “if we do, why now?” has resulted in increased spending discipline.
• An “early warning system,” which identifies cash shortages on the horizon, and allows the company to know the precise cause and the options for resolving the

Developing and maintaining a 13-week cash flow forecast does not come without a cost. . It requires focus and consumes significant resources, even more so if current company data are weak.

We believe that healthy companies can still achieve the key benefits, without learning from the mistakes of distressed companies, by following the practices below:

• In the absence of an immediate crisis, begin with weekly forecasts for the 13 weeks.
• Update the forecasts weekly and compare actual to plan. Assess reasons for any major changes in the projections.
• As the process becomes developed and entrenched, update forecasts every month instead of every week.

This approach reduces the effort required, but if there are unexpected challenges in the future, the company is equipped to move back to weekly updates quickly and even to daily forecasts if necessary.

Taken together, the above simplifications allow management to modulate the investment in cash management up and down as necessary, and eliminate any excuse for not investing in this critical capability.

Finally, to restate, while the cash-flow forecasting tool is critical, it will have little or no impact unless it is linked to much stronger accountability for cash across all key functions of the company. Finance has a role to measure and manage part of the cash. This is necessary, but by no means sufficient.

Lesson 3:
Focus on the issues with the highest impact

We can modify the saying that “necessity is the mother of invention,” and say that “adversity is the mother of invention.” This implies that the ordeal of a crisis can actually be a gift, one that provides the recipient with clarity/focus that otherwise could never have been achieved. It’s the adversity that unhealthy companies face that forces them to realize that, with the odds clearly against them, they must focus on the issues which have the highest impact – and nothing else.

With a massive challenge and very limited resources, distressed companies require a clear vision of the end-state, one that helps them see the shortest critical path from where they are to where they want to be. We refer to this as “right to left” thinking, because you start on the right side of the page and clearly define the end state, objectives, and goals, and then work from the left on the fastest, most logical and efficient path to get there. Simply stated, management teams in distressed companies have a sharper focus on what will have the greatest, quickest impact.

Healthy companies struggle with mastering this discipline much more than unhealthy ones. Because they manage resources within siloed functional groups and never have the “shock to the system” that distressed companies face, they find it much harder to develop the ability to think this way. Without the context of the envisioned end state, these projects can easily lose their way and create a complex patchwork that is impossible to stitch back together.

Focusing intently on the desired end-state and then only on the highest-impact issues had a tremendous impact at Solo Cup: it reduced its debt load by over $360 million and was honored as the “Industrial Turnaround of the Year” in 2008 by The M&A Advisor.

Healthy company example

At a $2 billion consumer products manufacturer with a strong historical performance, a large acquisition distracted leadership from its typical focus on execution. The subsequent decline in market share and margins led to a flurry of activity. The sales force pumped orders for unprofitable customers, inventories didn’t match new demand, and factories were reengineered without understanding the larger manufacturing footprint.

We worked with company management to develop the clarity and sharpened focus to drive a rapid transformation:

• Eliminating hundreds of unnecessary projects and freeing up resources by clear prioritization
• Firing unprofitable customers
• Harmonizing costs and inventories to the correct future size
• Trimming and simplifying the manufacturing footprint and product portfolio

In just four quarters, the result was a 16-point change in operating margin and several hundred millions of improved cash flow. The results allowed the company to regain its dominant market position in a fraction of the time that it would have been required otherwise.

Lesson 4:
Make the tough people calls

Experienced turnaround managers have varied styles and approaches, and often disagree on the best way forward. But when asked “What would you do differently next time,” there was one common response: “I would have made more key management changes, and made them earlier.” That insight is from a base of executives who already typically change 1/3 or more of the senior team within a month. Bottom line? There is no justification for leaving an ineffective executive in place, especially those in critical positions.

Healthy company example

A major food services company, with 80 percent of its total cost structure dependent on food-related items procured from suppliers, was trying to deal with declining performance. The board knew that significant procurement improvement was needed. However, it left this task to a trusted, well-liked executive who had limited procurement experience and almost no capability for dealing with situations in which rapid results are critical. An interim Chief Procurement Officer plus three other external experts were installed and within 6 months all supply contracts, including allowances and terms, were renegotiated with a multi-hundred million dollar impact. The current staff of 100 was not replaced. They simply needed the new leadership and focus to capture the improvements. The crisis did not have to happen to see the need for stronger executive leadership in the procurement group.

Unhealthy companies are at a distinct disadvantage for sourcing the best talent, but the ones that survive do so by having a very disciplined strategy for talent management. To accelerate results they often incent based on the end result, and may bring in interim executives to “right the ship” and then transition to permanent management.

Healthy companies have no such challenges, and therefore even less of a justification for leaving weak managers in place. Our experience shows that healthy companies have four elements in common when it comes to managing talent:

1. Focus on the positions with the largest impact on results. In the above example, procurement had the top impact on costs. Make sure that the best possible people are in those roles. Multiple factors (e.g., skills, experience, passion) come into the picture, but demonstrated results have to be central to the decision. Periodic deviations can be justified, but the overall track record on delivered results has to be the primary consideration.
2. “Time box” the decision process, usually in weeks. Don’t allow decision making to become prolonged.
3. Take advantage of formal testing tools available in the marketplace. One of our clients was anticipating major changes and needed a sense of which executives could lead major change and which would struggle. The company took advantage of well-established testing tools, which quickly provided insight and knowledge and allowed it to make decisions about which executives were best positioned to lead the changes.
4. Tolerating consistently underperforming managers is serious enough, but allowing this in critical executive positions is unconscionable. Near-term results suffer and the culture is poisoned in the long term. These issues are rarely private. To the contrary, they are typically well known in the organization. The CEO must have the courage and conviction to act.

Lesson 5:
“Unfreeze” the organization

A crisis does miracles to “unfreeze” organizations. In recent work with an automotive manufacturer, we found that decisions that traditionally took months to make were made or undone in merely hours or days. The rapid decisions are at least as good as the prior “slow” ones.

Healthy company example

The North American parts division of a global equipment manufacturer created a trigger point to drive a major improvement in performance. The business was profitable, but management had calcified, setting safe and incremental goals to avoid any surprises. As the economy turned down and equipment sales started to evaporate, leadership seized on the opportunity to drive a transformation:

• Internal benchmarks allowed the company to compare performance with divisions in Europe and Asia, which showed that North America was lagging in critical areas.
• External benchmarks versus its peer group revealed very significant gaps. The company was in the bottom quartile in many key categories.
• The regional president eliminated the perception that the business was thriving and set specific targets with time frames for achieving them. The benchmark comparisons were widely distributed internally, and goals for closing the gaps were cascaded throughout the entire operation, making everyone accountable.
• In addition, company management placed a much greater emphasis on critical cost drivers that impact the bottom line. Purchasing, the largest cost driver, was made more visible, and key commodities were properly resourced. Marketing & Sales was given additional resources to begin identifying, developing and closing new opportunities with a focus on pricing, since the department had by far the largest near-term potential.
• At the same time, less critical activities were reduced or suspended. For example, the never-ending small IT changes in the warehouse were stopped, and replaced by much more important and sustainable process changes. The large “fix everything” systems project was scaled back to better align resources with expected results.

The results were nothing less than spectacular. The company is on track to achieve a 55% increase in profits, with 60% of those profits captured within the first 6 months.

Reflecting on this example and others, we can see what the key factors are for unfreezing the healthy organization.

1. Clear, strong, fact-based messages about the performance gap
2. Unambiguous objectives for results and the timing to achieve them
3. Changes in key management positions where needed, even if painful
4. A focus on the top levers to improve performance and in parallel, eliminating/cutting back projects that do not have a strong, near-term business case

Two lessons to avoid

Lesson 6
Cut fat, not muscle

In their zeal to cut costs, downsizers can resort to using a “chainsaw” approach, taking drastic measures that yield green shoots of recovery early and may increase the share price in the short term. However, those forced to work under these strategies struggle and even revert back to crisis mode, because the cost cutting was crude.

Between 2005 and 2007, a $4-billion retailer experienced more than 10 percent revenue erosion due to the weakening economy and stiff competition from online competitors. This resulted in a net loss of over $150MM in 2007. Its largest controllable expense after merchandise was payroll. Therefore, the company decided to focus on payroll for cost reduction.

Unfortunately, cutting payroll without carefully considering the impact on customers can be quite risky. Having the right people in the right place to sell merchandise when the customer wants to buy makes all the difference. The major pitfall in trying to keep payroll down is the danger that the shopping experience can become diminished and customers won’t buy. Using payroll savings to improve operating margin is certainly a worthy goal, but if customers feel slighted in the process, that can be the beginning of a death spiral.

This retailer decided to adjust payroll as it always had, cutting the payroll budget by 15 percent and allocating the budget among stores on the basis of individual store sales volume. The company considered this a “share the pain evenly” approach. This was a simple way to quickly manage the reduction of thousands of hours across hundreds of stores. However, the cuts backfired. The costs contributed to lower customer experience scores at many stores, and 2008 revenues that were almost 10 percent below the already weak 2007 revenues. Now they were in a position where they needed to continue to cut to align their costs with their top line, but they could clearly not afford to continue to put revenues at risk.

What caused the “share the pain evenly” strategy to fail? All stores are not the same and should not be treated as such. Just because two stores generate the same sales volume doesn’t mean they require the same number of staff hours. As an example, consider two, $4-million revenue stores: One is in a mall where shoppers pass by/through. The other is a stand-alone destination where customers go with a specific reason to buy, or at least look for and seriously consider buying. The mall stores need higher staffing to generate the same sales. They must be more active in engaging the customers to increase the chance of purchase. The years of treating each store the same led to understaffing and lost sales in some stores, and overstaffing in others.

Once the company recognized this issue, they adopted a much more “surgical” approach. Management began by identifying the key factors that drive staffing and productivity, including store layout, open hours, customer traffic, delivery days, mall vs. stand-alone locations, density of weekend vs. weekday sales, etc., and grouped similar stores together, regardless of sales volume. The company then set common staffing guidelines for allocating labor to the stores in each group, based on forecasted units and transactions, while allowing for significant differences across groups. In the case of special considerations for a particular store that might need additional labor, the company factored in incremental hours. These special considerations were treated as exceptions.

During 2008, the retailer used this surgical approach to reduce payroll by an incremental 10 percent (see Figure 3 below). Labor in some stores was cut by as much as 30 percent, but as many as 1/3 of the stores actually received additional labor. The result was investments in staff that were much better aligned with business opportunities. As a result, predicted declines in revenue for the future have been avoided. In addition, the company is very well positioned to optimize additional payroll investments when the economy turns.

Figure 3-Labor was both better deployed against
revenue opportunities and reduced by 10%

Lesson 7:
Focus on survival is necessary, but not sufficient. A realistic plan is needed to thrive in the long term.

A common mistake in turnaround situations is made when managers consider survival as a goal rather than a means to an end. It is mandatory for management to be honest in its assessment of whether the company or business unit/ division is worth saving, and then identify what can be influenced and controlled, and what cannot. Many companies in crisis have an extremely strong will to live. This can drive massive efforts in complex financial retooling or restructuring, without fully knowing if the reason the company was distressed in the first place is truly curable in the long-term.

We have identified two flaws that lead to unsustainable turnarounds:

1. The operation is proclaimed successful, even though the patient will die. The will to survive is strong, and executives will often put their nose to the grindstone, just wanting to survive in the short term to feel a sense of progress, even though long-term sustainability cannot be achieved.
2. Companies adopting unrealistic planning strategies, forgetting it took years and perhaps even decades to get into trouble, yet they plan to solve these issues instantly. Others build plans that are based on significant improvements in the economy or industry pricing, or other areas outside their control.

The approaches below can help ensure that plans are realistic and “bulletproof”. The need for self-evaluation and honesty about future prospects isn’t just relevant for unhealthy companies, but for healthy ones as well.

Healthy company example

A turnaround team developed a plan to return a large printing company to profitability. The plan attacked costs aggressively by streamlining people and real estate costs, and simplifying corporate structures. A new CEO recognized that the plan would lead to a turnaround. However, the plan wouldn’t address the structural and strategic issues that created the crisis, and therefore it likely was a “band-aid” solution.

A closer look at the dynamics showed that demand was steadily declining as cheap technology eliminated the need to do business with a particular vendor. Further, a younger generation was more comfortable with the digital world and didn’t need to print documents as often as their parents did. Finally, technology shifts had changed the industry, and demand had moved to Internet-based print facilities, bypassing the traditional walk-in print shops.

Recognizing that the best cost-reduction program could only slow the pace of decline and not prevent it, the CEO retained the nucleus of the original turnaround program, while expanding the focus to ensure the company could stop revenue shrinkage. He mapped the flows of demand and studied the sustainable segments in the industry that would grow and thrive in the long-term. He based his strategy, not just on current supply and demand, but on likely future demand and pricing based on trends and competitor behaviors. By doing this, he developed a more complete and more realistic timeline that took into account both revenue growth and cost-reduction initiatives. While the strategy was more ambitious and required more capital and time to implement, it ultimately solved the whole problem and provided the company with the long-term growth and profits that ensure a strong future.

The Chinese curse “May you live in interesting times” has become a reality for many senior executives in the current economic environment. Today’s environment may be particularly interesting, as the roles of the teacher and the student in business are being reversed, with the healthy having the opportunity to learn from the distressed.