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Your Turn

Even longer hours, stakeholder pressure and hostile colleagues — CFOs trying to save ailing companies don't have an easy ride.
Tim Burke, CFO Europe Magazine
May 11, 2009

Desperate times call for desperate measures — but desperation can also encourage innovation. In April, UK retailer JJB Sports staved off bankruptcy thanks to an agreement with some 200 of its shop landlords. The company, which had to renegotiate terms with its banks and expects to record a loss for its latest fiscal year, used a company voluntary arrangement (CVA) to restructure its rental payments on a monthly, rather than quarterly, basis, easing its cash flow woes. In return for flexibility from its creditors, it will pay £10m (€11m) in compensation to the landlords of 140 closed stores. The company's shares soared by more than 30% on news that the deal had probably saved the business.

If there's ever been a time for fresh thinking such as at JJB, it's during a turnaround, something more and more finance chiefs will learn as the downturn takes its toll and companies need rescuing. And even if firms never reach what's often now referred to as the "zone of insolvency" (see "World Turned Upside Down"), plenty will come perilously close, requiring their CFOs to acquire new skills at breakneck speed.

While turning around a company is arguably tougher during today's financial crisis than it would have been a year or two ago, there are plenty of lessons to be gleaned from veteran turnaround CFOs. Regardless of the business cycle, they say finance chiefs new to turnaround management can expect three things: extremely long hours (100-hour weeks are not uncommon in a full-blown turnaround), more intense pressure from stakeholders and an even more hostile work environment.

But what is it that CFOs need most? A dose of Einstein, says John Darlington, head of KPMG's turnaround division. "I love Einstein's definition of madness, which is trying to do the same thing [repeatedly] and expecting a different outcome," he says. "One thing I categorically will not do is go into a company and deliver a strategy that someone else has been trying to deliver, and failed." Seeking a new approach, as at JJB, is one alternative.

Cash Back
In 2002 Darlington was drafted by UK drinks group HP Bulmer to help it through the aftermath of the sudden departures of the CFO and other board members, multiple profit warnings and the discovery of accounting irregularities. As a special adviser to the board — "effectively, a finance director" — Darlington dissected HP Bulmer's portfolio of 300 products to figure out which drinks were profitable and which were not. Apart from its main cider business, he found that "there was very little that was making money." He stripped back the portfolio to 80 or so products that showed the most promise, helping to cut infrastructure, production and storage costs. Thanks to such measures, the company, whose market capitalisation was about £20m on the day he joined, was sold only a few months later to brewer Scottish & Newcastle for £278m.

Turnaround CFOs also need to apply fresh thinking to cash flow — an area identified in a recent survey of turnaround directors from PricewaterhouseCoopers as the most important area to focus on when saving a company — far more than, say, cost control or hiring new management. (See "All Hail The King" at the end of the article.) The problem, however, is that most companies in trouble don't know where their cash is, as Donald Muir found as a senior finance executive at a number of telecom companies and, more recently, as an independent turnaround director, whose latest posting was at Northern Rock, a troubled UK bank now under government ownership.

His advice is to get everyone in the company thinking as if they were the owner. Getting a grip on cash means "getting back to basics, as if you were starting off as an entrepreneur," he says. "You get back to daily cash flows — how much is coming in, how much is going out."

While CFO of Cable & Wireless Global, a £3.6 billion division of the UK telecoms operator, between 2001 and 2003, Muir found that the company did indeed need to get a grip on cash, having launched ambitious dotcom-era investment programmes to become a major internet carrier. "Cable & Wireless was a business that had cash and had sold some businesses to generate cash — but we were burning it at an alarming rate, particularly in the US where we had just done a couple of acquisitions," Muir recalls. By his second year at the company, CEO Graham Wallace laid down the law. "Our chief executive said we needed to get cash flow breakeven in 18 months, which necessitated finding £600m per annum of positive cash flow," he says.

One of Muir's most critical turnaround measures at C&W Global was to introduce daily cash flow forecasting over 13 weeks. "People hate it at the beginning," he says. But even if the cash flow reports are "wildly inaccurate" to start with, with staff grumbling through weekly phone calls about cash management, he says that within a matter of weeks a CFO will start to get better visibility into money coming in and out of the company.

Another important step Muir took was to set up dedicated turnaround teams which were held accountable for driving cost controls and other improvements. In this case, there were five Project Management Offices, or PMOs, which had around 50 to 60 work streams, with a finance person assigned to each one. Muir gave each of these teams their own P&L — "because if you don't do that, people say they've saved the money and they haven't." He kept a close eye on each PMO. "We talked to everybody once a week and asked, 'How are you doing this week?'" he recalls. "It's quite a tough, uncompromising environment in the beginning."


As in every turnaround, speed and quick gains are of the essence. In the first six months of the turnaround, the division saved some £500m. Headcount was reduced to 6,000, from 18,500, and investment plans were curtailed. "We went from a £2 billion capex spend a year down to £200m, one year to the next."

But a CFO can't do all this alone and, as Muir learned, the speed of a turnaround depends on staff, and they may not always agree with the plan of action. "If I get someone who's blocking the process, I don't hesitate," he says. "I take them out quickly and decisively. I don't mess around."

By the time he left C&W Global in 2003, the division had achieved most of its savings targets, although it was a hollow victory for Muir. The company's troubles became so severe — including a write-down of fixed assets — that it underwent a major restructuring, resulting in a withdrawal from the US market.

Unpopularity Contest
Another of the many lessons that chief restructuring officers, like Muir, have learned is the importance of leadership. If a CFO is struggling during a turnaround, it's usually because of a "lack of strength of character," asserts KPMG's Darlington. And a CFO's strength of character will be tested every step of the way, even by the very people who appointed them. "I've had a lot of experience of being in hostile territory, where you've been appointed and the company doesn't actually want you to do anything — they think just taking the appointment is sufficient," he says. "But I'm not the retiring kind, so I tend not to let that persist."

It wasn't so much hostile territory as fast-sinking morale that Darlington faced during a brief assignment in 2003 to help with the turnaround of MyTravel. When Darlington handed over the group finance director reins to John Allkins in December 2003, the UK travel company had just announced a £911m loss, after earning £73m the previous year, and was smarting from two profit warnings. With the company vowing to turn a profit by 2005, Allkins got to work with Darlington on a restructuring plan based on a refinancing, the sale of some of its aircraft fleet and getting a sorely needed integration programme off the ground after several years of acquisitions. Among other things, this involved outsourcing a shared service centre that was "broken."

It was an unusual situation for Allkins. Having been CFO of various tech companies previously, he had already been involved in major deal-making and efficiency plans, even setting up a global shared service centre at one company. He had the "experience and confidence that I would be able to make a contribution" to the turnaround. But MyTravel was different — it wasn't in growth mode, for one thing, and he was joining a finance team that "had three years, including 2003, of restatements, so obviously the accounting policies and practices had been questioned and found wanting," Allkins recalls. "They were pretty demoralised."

He quickly realised every step he took was going to be under heavy scrutiny, and with good reason. Allkins explains that a big change between being in the executive suite at a growing company and a company in need of rescuing is that at the former "you have lots more decisions to make and each decision leads to other decisions and you're not going to get all the decisions right." But at the latter fewer options mean fewer decisions, but with a lot riding on each one. "If you screw up, then it's game over," he says. "If we had made a mess of it, there were 20,000 people who would have been unemployed. That, to some extent, is why you have to be even more careful in your decision-making. But you can't let that paralyse you."

There were two critical, albeit controversial, decisions that MyTravel's executives made during the turnaround. The first was to pursue a £800m debt-for-equity swap in early 2004, a move challenged in court by irate bondholders. The two sides reached an agreement only hours before the final court case was due, with the bondholders accepting the stake in the restructured company originally offered. As Allkins remembers, it added a "whole other sub-strand" to an already complex turnaround.

The other major move was to make a bid for rival Thomas Cook's UK business in the spring of 2006. Before reaching that decision, Allkins recalls thinking how the turnaround would lose momentum if MyTravel continued with the classic rescue measures, focused on cash and cost control. It needed something bolder. "We were taking huge amounts of cost out of the business — some £500m — but we still weren't getting the traction we needed in the consumer marketplace," he explains. "Our brands were pretty shot, our product wasn't very good."

MyTravel's first bid was rejected, but the companies continued to talk even while each had designs on rival First Choice's package-holiday business. Eventually, MyTravel and Thomas Cook agreed to a merger in 2007, with the new board insisting that it achieve £215m in synergy savings by 2010. But the merged entity isn't out of the woods yet. In the year to October 1st 2008, the new £8.8 billion Thomas Cook Group turned a pro-forma profit of £64m, down 11% from a year before.

Never-ending Story
After the merger, Allkins left MyTravel and today has a portfolio of non-executive directorships in the UK, which keep his turnaround skills sharpened. Like him, other finance executives who complete a successful turnaround get hooked, sometimes beginning a new career which moves from one turnaround to another. That's been the case with Richard Pennycook, group finance director of Morrisons, a £14.5 billion UK supermarket chain. Before joining a floundering Morrisons in 2005, he had already guided turnarounds at fashion group Laura Ashley and motorway service station company Welcome Break, as well as at HP Bulmer, picking up where KPMG's Darlington had left off. "By the time you've done a few, I suppose you've got a tool kit that you feel works," he says.


At Morrisons, Pennycook used his tools to repair a company groaning under the weight of a £3 billion acquisition of much larger rival Safeway in 2004, leading to several profit warnings. Pennycook first secured Morrisons' survival for the short term, and then mapped out what he calls an optimisation plan, covering everything from cutting costs and increasing sales densities in underperforming stores to refreshing the company's brand.

After a £250m loss in the year to February 2006, the company's profits increased steadily, rising 13% to £636m in fiscal 2008. Morrisons has also been able to give cash back to shareholders, with the board deciding in March last year that surplus capital of £1 billion should be returned in 2008 and 2009.

Pennycook no longer sees Morrisons as a turnaround case, but he points out that managing growth once a business has stabilised is part of the larger process. "It's a continuum," he explains when asked how he knows a turnaround has succeeded. "When you're in the peak of distress, there are lots of fires blazing, the adrenaline is running, you have to move very fast to get the business stable and to get the turnaround happening. Then you move through to slightly calmer waters and you get the optimisation plan kicking in...But I don't think there's a point at which you wake up one morning and say, 'It's done.'"

Turnaround CFOs all agree a turnaround is always gruelling and daunting — particularly if it's their first. But finance chiefs such as Pennycook are encouraging, noting that completing a turnaround can be an important rite of passage for a CFO. "What we're going through now is a situation where a generation of managers who haven't been through real financial stress before are going to come out the other side and have the benefit of that for the rest of their careers," he asserts.

That said, not all CFOs will have the satisfaction of seeing their companies through to the other side of a turnaround. At JJB, finance director David Madeley resigned in March, with Peter Williams, a former finance director and CEO of department store Selfridges, now handling the role until a successor is found. Whoever takes on the job next could still face major challenges, given the downbeat outlook for the retail industry. Here's hoping that person is well prepared.

Tim Burke is senior editor at CFO Europe.






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