Business turnarounds - troubleshooting performance problems (1/3)

Turning around an under-performing company has one major characteristic in common with fixing your central heating - unless you work out what went wrong, you'll never fix it, at best you'll patch it up, keep your fingers crossed and sit there shivering next time the weather turns cold.

We have worked with hundreds of companies with performance problems. Only a handful of these had a clear and accurate picture of what went wrong to get them into trouble. With the exception of one (extremely fortunate) company, we have not seen any recover from distress without knowing the problem that got them into it.

There are occasional examples when the problems are obvious to everyone. In these cases, the decline is often rapid and can be associated with something specific, such as loss of a key contract, a change in legislation or a change in the market or competitive environment. Handling a potential turnaround in such a situation is usually straightforward, requiring brutal but obvious decisions. However, these sudden-dive situations are uncommon.

The majority of financially-troubled businesses that bring us in have experienced an extended decline, one that current or previous management has worked unsuccessfully to reverse. In these situations, management can often identify some areas of underperformance through various KPIs. However, without a clear and correct diagnosis of the underlying causes, management is shooting in the dark. It cannot possibly address business underperformance and more usually makes decisions that worsen the situation. As a result of such flawed or incomplete understanding of customer or service profitability, we have witnessed heavy targeting of loss-making customer groups, withdrawals from profitable, cash-generative business lines, proliferation of product into areas of marginal or negative return, together with a long list of progressively desperate gambles as performance deteriorates.

In a turnaround situation, the two major constraints are time and capital, and management needs to know where to direct them. To achieve this, we believe that a business needs to undertake a complete diagnosis of where it is making and losing money, and the underlying causes of performance problems. Only once it does this can it identify which areas of the business to protect, which to cut, and where to address scarce time and resources in performance improvement.

The most fruitful areas to investigate are, of course, the ones most commonly over-looked - ones that by definition do not appear in the Board pack or management accounts. In the next four posts of this series, we outline the four most common problems we see, and the ways to identify them.


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Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk