Business turnarounds - troubleshooting performance problems (2/3)

In our last post we pointed out that the most fruitful areas to investigate for unaddressed causes of performance problems are, by definition, those that aren't covered in standard KPIs or Board packs.

We find four analyses particularly insightful, depending on the area of underperformance. The first two are suitable for understanding issues of sales (and gross profit) growth/decline, and we cover them in this post. The third and fourth are more suitable for issues with profitability; we will cover these in our next post.

To diagnose issues with sales or gross profit growth/decline, the two most commonly insightful analyses are:

1. Reviewing market and competitive benchmarks, in order to understand whether the company's product mix matches market growth areas and if gross margins are in line with peers, or if, more likely, the company is working hard to hold back the tide by growing share in a low margin segment

2. Analysing the year-on-year sources of business, to understand the reliable base line of secure business, and whether the company's underperformance is a result of issues with customer acquisition, customer retention, or both.

Review of market and competitive benchmarks

A market and competitive review generates rapid and useful benchmarks of reasonable growth expectations for a company’s services and expectations for gross margin. Problems with revenue and gross margin can often be simply the result of a poor business mix, skewed towards the low growth, low margin market segments.

Plans to exceed market benchmark growth or margin are too unconservative for a sound turnaround plan. Changing business mix to higher growth, higher margin segments, achieved by reprioritising marketing and sales investment, is almost always a more pragmatic path to follow.

Given the generally strong positive relationship between gross margin and market growth, such a reprioritisation kills two birds with one stone.

Example – technology services turnaround

Sales had slowed below historic rate in the previous 18 months, and gross margin shrinkage caused impending covenant breach.

Rapid analysis of market growth and competitor margins showed that business had focused excessively on a low growth, low margin segment. This growth in excess of market had depressed margins even further. A return to sales and margin growth was possible from rebalancing business mix to higher growth segments.



The refocus took 8 weeks to implement and resulted in business returning to full-year budget performance within 4 months. The business refinanced successful with all solvent banks retaining participation and is now the most profitable player in its sector.


Analysis of new versus retained business

Understanding a company’s reliable base of recurring business is clearly important in the context of turnaround financing and planning. In addition, a review of new versus retained business over months or years illustrates whether the revenue problem is one of acquisition or retention, each of which has very different restorative actions.

Example – tour operator turnaround

Sales had declined for three consecutive years in a steadily growing niche, resulting in declining total profit, with trend rate threatening covenant breach.

The business had cut unprofitable discounted lines but maintained traditional efficient distribution in an unsuccessful attempt to reverse profit decline.

Analysis of sources of yearly bookings showed a strong stable base of regular customers but a continual annual decline of new customers, resulting in steady decline of volumes.

Cumulative bookings from previous customers show consistent annual spend



Cumulative bookings from new customers show ongoing annual decline





Evidence of reliable loyal booking provided a solid baseline for a successful refinancing.

The business refocused on new customer acquisition through a successful new online channel, regional departures to reflect changing travel patterns and the launch of lower-cost introductory products to capture new customers.

Of course, there are limitless other analyses that can be used to address the underlying causes of sales underperformance, but the two in this post are the ones we find most useful and under-used.

In our next post, we will cover our two most fruitful approaches to understanding profitability issues.


Copyright Latitude 2009. All rights reserved.

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