By Peter Tourtellot, CTP
Anderson Bauman Tourtellot Vos

This article recently appeared in The Journal of Private Equity.

In the last decade, companies in need of innovative change-agents learned to look outside their industries for new chief executives. One of the movers and shakers who came to a troubled company from the outside and turned it around is Carleton (Carly) Fiorina, chair and CEO of Hewlett-Packard, She took a sleepy company, entrenched in the old ways of doing business and catalyzed its growth after a terrific battle with shareholders, mainly family, that resisted change. Similarly, former IBM chief executive Lou Gerstner came from RJR Nabisco, and Mattel's Robert Eckert was president of Kraft Foods. These leaders were just what the companies needed: outsiders with a fresh perspective that encourage strategic and organizational change.

Shouldn't the same hold true when it comes to hiring turnaround experts? Obviously, when a company is in distress, it needs to make drastic changes. It has to stop doing what it has always been doing. An industry outsider with a wide range of operational experience is in the best position to get a handle on the root causes of trouble and identify applicable solutions from other industries that may never have occurred to the faltering company. After all, having access to industry experience didn't prevent the crisis, so why should it extricate the company now? Simply put, the need for industry experience in a turnaround situation is a myth. An industry-outsider is the best source for the out-of-the-box thinking needed to reverse a company's decline.

LOOK OUTSIDE THE BOX

When a company interviews potential turnaround experts, it usually looks for someone with intimate knowledge of the industry. One reason this tactic is a mistake is because the company's problem has nothing to do with management's lack of industry experience; in fact management likely has plenty of experience on their side. Rather, it stems from inefficient operations and processes and/or poor communications with customers, employees, and vendors.

When insiders fail to avert a crisis, outsiders can prevent disaster in one of many ways:

• Ask questions that lead to new solutions.
  Insiders usually don't ask the right questions because they think they already know the answers. Based on a broad scope of experience in diverse industries, outside experts can bring solutions to a problem that may not have even occurred to management because their experience is limited to one company/industry. Here's an example. An $85 million distributor of educational science materials was failing, and bankruptcy seemed unavoidable. One of its challenges dealt with inefficient processes for the global delivery of live specimens for classroom study. It took an outsider to suggest researching the way other industries solved delivery problems. Surely companies in the pet, floral, and nursery industries arrived at efficient solutions long ago. The failing company's managers were amazed to learn about the way it was done in other industries, especially because it was so easily transferable to the distributor company. Regardless of the problem, it's a sure bet that another company, perhaps in another industry, has already found the solution.
  
  
• Update the answers.
  Oftentimes, internal managers do not ask the right questions because they think they know the answers. However, while appropriate 10 years ago, their answers may no longer apply to a rapidly changing, globally connected world. Manufacturing companies, for example, still tend to resist outsourcing because they "tried it 10 years ago and it didn't work because they didn't know our business." That may have been so 10 years ago because outsourced service providers still lacked the sophistication to handle tasks across several industries. However, today specialists are available to perform just about any function more efficiently and cost-effectively than it can be done in-house. Industry leaders such as IBM, for example, can take over a company's entire IT function. Especially distressed companies should concentrate on what they do best, while outsourcing functions beyond their prime area of competency.
  
  
• Maintain perspective.
  Outsiders lack the emotional baggage that often blinds the insiders from recognizing the root cause of a problem-or from correcting it even if recognized. Particularly, family-owned businesses are often split apart by bitter feuds unless outsiders step in. It is virtually impossible for a family-owned company to handle a crisis situation unemotionally. When the need for downsizing arises, leaders cannot make the tough decision to lay off family members. Or, when the business has grown beyond the competence and skill sets of relatives on the payroll since the company was founded, the owner cannot replace them without creating family turmoil. It takes someone with no vested interest or emotional ties to set goals without a preconceived agenda and take the quick action needed to correct corporate ills.

  Succession is a huge issue in family and closely held companies. Most owners simply refuse to deal with it because they don’t want to think about dying or don’t want to cause upsets in the family. For example, the founder of a hosiery company badly needed to develop a succession plan, but hadn’t because he was afraid his wife would accuse him of not treating the children fairly and equally. Or, a battery manufacturer wanted to see the company in his children's hands, but had no mechanism for achieving this objective. Neither company even had a training program to prepare their children for leadership positions. The owner of a construction company was undecided about succession involving two sons, a daughter, and a son-in-law. Fortunately he had objective, outside board members who forced him to work through the emotional issues. He finally recognized that only one of his family members was capable of running the company. The board also helped him make a compelling case to each of the children and develop a fair and equitable succession plan.
  
  

• Make people think.
  Particularly family-owned and closely held businesses have a tendency to cling to the traditional ways of doing business, without ever giving much thought to the appropriateness of their time-honored processes. That's why it takes outsiders to make there think, which may lead to a totally new perspective on their businesses. Consider, for example, the furniture, apparel, hosiery, textile (rugs, carpets, home furnishings), cosmetics, handbag, and shoe industries. They all share at least two things in common: they are in the fashion industry; and their primary target is retailers. Regardless of the industry, their challenge is how to appeal to the needs of retailers and the tastes of consumers. They succeed by making a good case for why their products should be displayed by a retailer. The strategies the cosmetics industry uses to get retail floor space and the compelling arguments it makes to get a retailer's attention may be transferable to shoes, furniture, textiles, apparel, and other industries.

  Companies get in trouble because management lacks the necessary operational skills and/or fresh ideas to turn matters around. Most managers are skilled at growing and managing a stable business, but business school may not have taught them how to manage change or crisis. Whether a company produces auto parts, pharmaceuticals, or shoes, the operational deficiencies that lead to financial distress are the same. Thus, the best solutions to those problems come from an operational expert with cross-industry experience.

INVESTORS BEWARE

The obvious financial shortfall of a faltering company is usually only a symptom of other, more serious root causes. Unless those underlying difficulties are addressed, pumping more funds into a company is a waste of money. Such root causes usually include one or more of the following:

• Poor controls and reporting.
  If reporting mechanisms are weak, managers are unable to correct problems swiftly because they are not receiving timely performance reports. With the science materials company mentioned earlier, for example, management had to wait 60 days to obtain a report on any given month's performance. Key people had no information about day-to-day successes and failures, other than a snapshot report of how many orders had been received that day. Many key managers were kept out of the loop altogether. Worse, because the president had 40 direct reports, decisionmaking was all but impossible.
  
  
• Inefficient processes.
  If a company lacks the well-developed processes that lead to efficiency and ease of communication, not only among employees, but also with customers and vendors, it will go into a tailspin. Inefficient processes are sometimes a symptom of a company that has grown too quickly, bypassing management's ability to run it. The areas of order entry, billing, and shipping are notorious for inefficiencies that lead to poor communication with customers. In many companies, regardless of industry and size, these areas are still not integrated, or worse yet still rely on manual processing. For example, when an order is entered into the computer system without automatic inventory allocation, warehouse personnel may have just shipped the required inventory to another customer. Or, when inventory is shipped using manual systems, employees are unable to tell a customer when the order was shipped or when it's expected to arrive. Customer service today is more than being polite on the telephone. Customers demand information on the status of their orders, and inability to supply that information often means lost business.
  
  
• Substandard information systems and technology.
  Out-of-date technology wipes out a company's ability to compete. A distributor on the verge of bankruptcy riot not only had outdated software but also customized it to such a degree that the software manufacturer no longer supported it. Worse, the changes that had been made were not documented. When companies don't plow back some of each year's profits into modernization, technology will pass them by and their competitors will leapfrog over them. Both hardware and software must be compatible with the current size and complexity of the business and be supported by efficient infrastructure, processes, and people trained in today's methods and technologies.

  The real reason behind Wal-Mart's dominance is not so much its low prices as the fact that it has the most efficient distribution system of any retailer in the world. Wal-Mart has cutting-edge information systems and processes to supply products to stores in a timely manner, along with a complete understanding of exactly which products are selling in which stores every hour of the day. It's a perfect example of the kind of success that can be achieved by having superior processes and technology to provide the convenience customers expect today.
  
  

• Untrained employees (in today's methods).
  Faltering businesses usually have serious staffing deficiencies. Key functions are unfilled or employees are no longer capable of doing their jobs because they haven't received training for years. In many companies, employees are bred within four walls and remain insulated, often for decades. They do not participate in trade associations, attend trade shows, or take seminars to advance their skills and keep up with new technology and processes. Even companies that send their salespeople to trade shows and training sessions often neglect to provide the same for employees in other functions.
  
  
• Complacency.
  Many companies fail because their leaders believe that somehow they will remain unaffected by the rapid changes occurring all around them. They choose to ignore how bellwether companies, such as Wal-Mart, are constantly forcing change on an industry. For example, the radio frequency identification (RFID) technology required by Wal-Mart vendors allows instantaneous reading of the content of pallets. This practice will soon spread to the distribution of every consumer product. Every company, whether or not it supplies to Wal-Mart, will be forced to abide by the new rules of the game or lose the business. Eventually this technology will spread to the entire distribution network, whether the company is supplying retailers or is engaged in supplying other lines of businesses. This is a classic example of why managers must view the entire universe to see if changes are taking place that will impact their industry and company in the future. Outsiders have a far better chance in asking the tough questions that lead to change, thereby giving the company an opportunity to increase market share, revenues, and profits.

OVERCOMING RESISTANCE TO CHANGE

No one is immune to the complacency and laziness that comes with being intimately familiar with a company and its traditional ways of doing business, although perhaps family-owned businesses are the worst offenders. Consider these prerequisites for overcoming resistance to change:

• Improve communication.
  In many troubled businesses, even in very large companies, key managers have not been given the tools that will allow them to understand the company's problems or improve its efficiency. They simply do not have the data to permit an analysis or recognition of the problem areas. The solution is simple: Expose them to the data. Good information makes for good decisions.
  
  
• Put the right employees in the right positions.
  Make sure each employee is a round peg in a round hole, suited for that position by today's standards, not the way it was done 5 or 10 years ago.
  
  
• Embrace change.
  Identify the employees who accept and embrace change, and those who resist it. A turnaround situation requires surrounding oneself with people that want to make a positive difference and are willing to do whatever it takes.

DUE DILIGENCE

When a company is in distress, its leader almost always believes he or she knows where the problem lies. In 99% of all cases, the opinion is way off the mark. Beware of turnaround consultants who are willing to accept the problem as already identified. An identification of the root causes of the difficulty can only come from a complete operational analysis that examines every single facet of the company from personnel to product, manufacturing to marketing, and human resources to customer service. This includes every plant location, warehouse, or distribution center. It's a matter of due diligence and must precede any action to turn the company around. A skilled and objective outsider is in the best position to conduct a truly unbiased evaluation of strengths and weaknesses and identify the innovative solutions that turnaround depends upon.