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Aside from core CFO skills, you need an affinity for the nuances of thinking creatively, being a good listener, and trusting your intuition.
Josh Hyatt, CFO.com | US
August 12, 2008
What do you know about turning around a troubled company? Less than you think, probably.
It may seem that any battle-scarred CFO would be armed with the skills it takes to transform into a turnaround specialist, parachuting into a distressed business, assessing its financial condition, and then handily dispensing any fiscal foes.
All the options for cutting costs — which in many cases is the overriding priority, especially at the outset of a turnaround effort — are familiar to any successful financial executive: axing employees, gutting non-core product lines, selling assets. Remember "Chainsaw" Al Dunlap, the brand-name turnaround king of the 1990s? His moniker seemed to say it all: Keep hacking costs until you reach a profitable core, then accept your applause (in the form of stock whose value Wall Street has driven into the stratosphere) and move on.
Yet Chainsaw's methods ultimately led the SEC to fine him and banish him from the C-Suite forever. Could it be that a successful turnaround requires more than a familiarity with — if not a fondness for — cutting costs? "We are not hatchet people," insists Steve Gerbsman, a veteran turnaround expert based in Kentfield, California. "We provide hope and leadership to people who are in trouble."
Not that keeping a company's operations alive is just an extended pep rally; chopping expenses may enable you to get the company running on a cash-flow basis. If the investor who brought you in just wants to clean up the company so it will appeal to a buyer, then you may have to keep an iron fist extended throughout, beating up on suppliers and requiring employees to submit every check for your approval.
Eventually, though, a company that has enough potential to be fixed requires a more people-centric approach. "In a sensitive situation, you need to be a good listener," says Jim McHugh, a turnaround specialist in Concord, Massachusets. "Often you are brought in by an investor who is unhappy, and you're working with a management team that is scared. To get at the real issues, everybody has to trust you."
Only by digging deeper are you likely to find out that production schedules are routinely ignored, or a drug-addicted employee is swiping inventory, or the CFO hasn’t told his boss the truth — in a long time.
"There's a reason we used to be called 'turnaround artists,' " notes Alex Wolf, a corporate restructurer based in Wilmington, Delaware. "Fixing a company is more art than science. You have to come up with creative solutions."
That may very well involve making moves that any CFO would find uncomfortable: stretching payables way out, risking an SEC investigation by missing filing deadlines, halting all cash advances. "In a true crisis you are managing cash, not managing the numbers," says Bettina Whyte, chairman of the advisory board of Bridge Associates, a turnaround firm in New York City. "In a turnaround situation, there is no cost that is fixed."
If the broad variety and high pressure of being a financial fixer sounds appealing, you needn't fear that your potential customer base will dry up anytime soon. According to a Bain & Co. analysis, the number of defaults and bankruptcies won't peak until 2009. Furthermore, the consulting firm's Corporate Renewal Group reports that the average debt leverage ratio for LBOs of $50 million or more rose from 4.1X in 2002 to 6.2X last year, thanks to loose lending on one end and tight credit on the other.
Most turnaround experts find business through referrals by lawyers, bankers, or private-equity groups looking to save their teetering portfolio companies. McHugh markets himself as a re-starter of "stuck" companies; Wolf spends $1,000 a month on Internet ads and offers initial consultations for free, as well as structuring a portion of his fees on a contingency basis. Others, like Whyte, negotiate bonuses based on meeting certain milestones.
CFOs who want to join this elite breed of business rescuers may need to restructure their skills first. There are formal certification programs available through such groups as the Turnaround Management Association and The Association of Insolvency and Restructuring Advisors.
But, "If you haven't been a CEO — or even a COO — don't try it," warns Gerbsman, former CEO of a $250 million technology company.
Indeed, even the most competent CFOs might not be suited to play savior. Why? "CFOs typically want to have the analytics done before they make any judgment calls. Even then, they tend to leave the judgments calls to the CEO," says turnaround consultant Ken Sanginario, founder of Transitional Strategies in Westboro, Massachusetts. "In a turnaround situation, you've got to feel comfortable making a lot of decisions with incomplete information."
Sanginario, 47, was a CFO before he got tuned-in to turnarounds. In the early 1990s, when the company where he worked found itself in dire condition, the owners brought in a turnaround consultant. Sanginario spent the next three years at his side, in effect becoming an apprentice. "He mentored me," Sanginario recalls. "He taught me this art form." By 1999, Sanginario and his turnaround tutor co-founded a firm. "I like being shoulder-deep in operations," he says. "I have a knack for these very intense situations."
But do you have a knack for it? To get a whiff of that, consider these questions:
1. Are you a people person? CFOs who stay in their offices crunching analytics or reviewing financial statements — maybe overseeing a controller — aren't likely to make the transition. "When I was a CFO, I felt compelled to get out and learn," says Sanganario. "I felt I had a lot more value to add."
2. Can you trust your intuition? As a turnaround specialist, your decisions will still be based on data — much of it inaccurate or imperfect or both. Technical skills have their place, but kick-starting the supply chain means figuring out how to sweet-talk suppliers to go along. "You build credibility by getting results early on," says Sanginario — which means carefully (if quickly) prioritizing the company's problems.
3. Do you want the lifetsyle that comes with it? When Whyte is turning around a company, she moves to the area for five days a week. She's always on-call, and some days — like the one when she laid off 350 employees — are just plain painful. "I went home and cried," she recalls. Granted, turnaround consultants may find comfort in the currency they collect, which ranges roughly from $800 to $1,000 an hour for those who work at big consulting firms, to $500-700 an hour for those who work on their own.
Then there's this: "Nobody ever directly thanks you for what you have done," says Whyte. "I've learned to accept their referrals as gratitude."