WIXLIB

Strategic Management Partners, Inc.Management must address issues related to the major stakeholdergroups: executives, function managers, employees, lenders, vendors,customers, and others. To accomplish a turnaround, a company mustmake a concerted effort to change how it operates. Most turnaroundcompanies have a lack-of-sales problem that necessitates a change tojump-start sales and drive revenue. There must be information that allcan rely on for decision making. Production management must support and make what the market wants to purchase at competitiveprices. Management must nurture the critical human capital resourcesthat are left within the company, while at the same time holding themaccountable for results.Changing management is synonymous with changing the philosophy of how a company is run to achieve results. Communication withall stakeholders is paramount throughout all stages of the process. Setgoals that achieve stakeholder objectives, then apply incentive-basedmanagement to motivate the proper results. Tie everyone to the samebroad set of goals and emphasize how functions can complement theperformance of related departments.Situation AnalysisThe objective at this stage is to determine the severity of the situationand whether it can be turned around. Questions to ask include: Is the business viable? Can it survive? Should it be saved? Are there sufficient cash resources to fuel the turnaround?This analysis should culminate in a preliminary action plan stating what is wrong, how to fix it, and which key strategies can turn theentity in a positive direction. There should also be a cash flow forecast(at least 13 weeks) to understand cash usage.Identify effective turnaround strategies. Operational strategiesinclude increasing revenue, reducing costs, selling and redeployingassets, and establishing competitive repositioning. Strategic initiativesinclude adopting sound corporate and business strategies and tacticsand setting specific goals and objectives that align with ultimate stakeholder goals. Too often, goals are misaligned with the ultimate direction and lead to confusion, wasted time, false starts, and employeessent in the wrong direction. Understand that many of the good employees have already left the company. Managements have to work withthe “second string” in the interest of time and build as they go.Understand the life cycle of the business and how it relates to thechosen turnaround strategy. Document key issues so that all partieswill understand what you are trying to accomplish and will pull in thesame direction. Identify which product and business segments are mostprofitable, particularly at the gross margin level, and eliminate weakperformers and nonperformers. Make certain that all functional areasare working to support the goals of their counterparts. Selling workwith flexible delivery times can fill valleys in production cycles, whichreduces costs per unit. Producing only what sales staff can sell to meetcustomer demand will increase sales and gross margin.Turnaround strategies often are affected by local government policy considerations and regulations. In the United States, the WorkerAdjustment and Retraining Notification (WARN) Act requires 60-daynotice of massive layoffs, which certainly impacts cash flow. In manycountries in Europe and the Far East, stringent rules govern payment ofwages after layoffs, as well as dealings with local authorities; someregulations even prioritize which workers can be laid off. When government policy favors labor and employment is not “at will,” there willbe complications.Emergency ActionAt this stage, the objective is to gain control of the situation, particularly the cash, and establish breakeven. Centralize the cash management function to ensure control. If you stop the cash bleed, you enablethe entity to survive. Time is your enemy. Protect asset value by demonstrating that the business is viable and in transition.You must raise cash immediately. Review the balance sheet forinternal sources of cash, such as collecting accounts receivable and Copyright 2010, Strategic Management Partners, Inc.410-263-9100 Page 3renegotiating payments against accounts payable. Sell unprofitablebusiness units, real estate, and unutilized assets. Secure asset-basedloans if needed. Restructure debt to balance the amount of interestpayments with the level the company can afford.Lay off employees quickly and fairly. It is much better to cutdeep all at once than to make small cuts repeatedly. Remaining employees are more likely to focus if they believe their jobs are secure.Rightsizing the company means much more than laying off employees. Correct underpricing of products, prune product lines to onlythose that are profitable and meet demand, and weed out weak andproblem customers. Sometimes too much overhead is applied to support customers that aren’t paying their fair share of that service. Emphasize selling more product at profitable rates. Reward those whochange the situation; sanction or release those who don’t.Business RestructuringIn this stage, the objective is to create profitability through remainingoperations. Stress product-line pricing and profitability. Restructurethe business for increased profitability and return on assets and investments. This is the point at which the focus should change from cashflow crisis to profitability. Fix the capital structure and renegotiate thelong- and short-term debt.Ensure reporting systems put in place are operationalized to showprofitability at each revenue center, cost center, profit center, cash center, incentive center. If employees can’t see it, they can’t manage it.Incentive-based management drives employees to get involvedsmartly and manage to the goals all ascribe to. Create teams of employees to identify and rework inefficiencies and promote profitability.There are only two ways to increase sales: 1) sell existing productto new customers, and 2) sell new products to existing customers. Ifyou want growth, do both.Return to NormalThe goal at this final stage is to institutionalize the changes in corporate culture to emphasize profitability, ROI, and return on assets employed. Seek opportunities for profitable growth. Build on competitive strengths. Improve customer service and relationships. Build continuous management and employee training and development programs to raise the caliber of your human capital.This could be time to restructure long-term financing at more reasonable rates now that the company is stable and on a path to growth.The odds of a successful turnaround increase dramatically if a turnaround phases-and-actions plan is implemented and followed (table).This plan can certainly be adapted to unique situations when required. John M. Collard is chairman of Strategic Management Partners Inc., (www.StrategicMgtPartners.com),Annapolis, Maryland, a turnaround management firmspecializing in interim executive leadership, privateequity advisory, asset recovery, corporate renewalgovernance, and investing in underperforming distressed companies. Inducted into the TurnaroundManagement, Restructuring, Distressed InvestingIndustry Hall of Fame, he is a certified turnaroundprofessional and past chairman of the TurnaroundManagement Association. Contact him atJohn@StrategicMgtPartners.com or 410-263-9100.The RMA Journal is the official publication ofthe Risk Management Association. RMA is aprofessional association whose objective is tofurther the ability of members to identify,assess, and manage the impacts of credit risk,operational risk, and market risk on theirbusinesses and their customers. Serving theFinancial Services Industry.Copyright 2010 Risk Management Association(www.rmahq.org). All rights reserved. Used bypermission of RMA.Page 7 of 46

Strategic Management Partners, Inc.410-263-9100 Page 4Turnaround Phases and ActionsStageObjectivesManagement Change(Leadership) Put top managementteam in place.Situation Analysis(Viability) Can the company survive? Go into survival mode. Should it be saved? Select turnaroundspecialist. Replace some/all topmanagement. Eliminate impediments. Jump-start sales. Drive revenue. Volume in revenue. Get control. Is the business viable? Establish breakeven. Are cash resources Turn cash flow positive.available to fuelturnaround? Raise cash to supportBusiness Restructuring(Change) Create profitability through Seek profitable growth.operations.returns.increased return on assets Build competitiveand investment.strengths.turnaround. Analyze products andservices distribution,sales and marketingstrategies and systems. Protect asset value. Correct underpricing. Prune product lines. Reassess competitive and Explore new markets andproduct line pricing. Weed out weak customers Exploit existing products.and distributors. Develop new products.costs within industryaverage. Sell, sell, sell more. Track cash. Analyze cash flow, Develop trusted reportingand analysis. Emphasize profits and Restructure business for Bring sales and marketing Improve customer andFinancialReturn to Normal(Going Concern) Develop preliminary action Protect resources.plan and nature ofturnaround.Sales and MarketingEmergency Action(Crisis Control)breakeven, profitability,cost reduction, balancesheet, and reportinggross margin by product.distribution mix. Improve sales andmarketing effectiveness. Restructure debt. Improve liquidity. Improve work/capital. Clean up balance sheet. Sell nonproducing assets. Fix capital structure. Reduce cost/ Develop control systems.increase revenue. Eliminate creative Create managerialaccounting system.customer segments. Examine industryrestructuringopportunities. Pursue value-added chainrestructuring. Consider synergisticdiversification. Develop strategicaccounting. Restructure long-termfinancing. Develop stock valuationand buyback system.accounting practices.Manufacturing andProduction Operations Produce to meet saleslevels only. Balance peaks andvalleys. Analyze facilities, Shut down operations.equipment, systems and Reduce work force.procedures, and suppliers. Reduce inventories. Control purchases. Volume out throughput.Engineering, Research Develop new productsand Developmentand services to supportsales. Increase productivity. Analyze new productdevelopment,improvements in product,process, and productivity. Accelerate high-potentialprojects. Shut down tangentialprojects. Unbundle productofferings.Organization Organize for change.Analyze systems: Rightsize the company. Does organizationalstructure make sense? Accounting/Control. Incentive/performancemeasurement andcompensation.Personnel andHuman Resources Hold employeesaccountable. Nurture critical humancapital resources. Slow the turnover rate. Analyze managementteam; sales, finance, andops personnel; recruiting,selection, training,starting, and promotionalsystems. Institute incentive-based Structure turnaroundteam. Review individualaccountability andteamwork. Reward those whochange the situation;release those who don’t. Develop productivityimprovement programs. Reevaluate overhead. Establish ongoing profitimprovement programs. Make new productdevelopment marketand customer–oriented. Build an economicvalue-added orientationinto process engineering. Restructure forcompetitive effectiveness. Develop rewards thatreinforce turnaround. Demonstrate with actionthe seriousness of thesituation. Get peoples’ attention. Improve people mix. Establish who’s in charge. Institute incentive-based Create a professional,management.business-like atmosphere. Bolster people to believein consistent rewardsystem. Sanction nonperformers. Restructure operations forcompetitive advantage. Consider strategicalliances withworld-class firms. Establish advancedtechnology monitoringsystems. Seek competitiveadvantage, strategicleverage in all R&Dactivities. Restructure to reflectchanging strategies. Organize to succeed, thenfill positions with talentedpeople. Don’tcompromise. Institutionalize continuousmanagement andemployee training anddevelopment programs. Grow human assets. Get people to think profit,management.ROI, and cash flow. Copyright 2010 by The RMA Journal March 2010, and Strategic Management Partners, Inc.www.StrategicMgtPartners.com (410) 263-9100 Copyright 2010, Strategic Management Partners, Inc.Page 8 of 46

Managing Turnarounds in Times of CrisisPhases and Actions To Accelerate the Recovery ProcessBy John M. Collard January 15, 2010The process of turning around a troubled entity is complex. Thisis made more difficult and compounded by the multiple constituencies involved, all of whom have different agendas. Directorswant to avoid risk and litigation. Lenders want return of investedcapital, preferably with interest. Creditors want their money inexchange for goods and services. Original investors want andhope for recovery of capital. Owners want to avoid guaranteesand recoup some equity. Employees want jobs and benefits.Other stakeholders want their interests protected. These desirescan often be at odds with other parties and hamper the effort.Address the turnaround process as if all constituents are in favorof proceeding to the end, when a restructured entity emerges.There are many causes that contribute to business failure. According to a study conducted by the Association of Insolvencyand Restructuring Advisors only 9 percent of failures are due toinfluences beyond management’s control and to sheer bad luck.The remaining 91 percent of failures are related to influencesthat management could control, and 52 percent are internallygenerated problems that management didn’t control.Businesses fail because of mismanagement. Sometimes it’s denial, sometimes negligence, but it always results in loss. Mismanagement is most often seen in more than one of multiple areas: Autocratic Management, Overextension Ineffective, Non-existent Communications High Turnover Neglect of Human Resources Inefficient Compensation & Incentive Programs Company Goals Not Achieved or Understood Deteriorating Business, No New Customers Inadequate Analysis of Markets & Strategies Lack of Timely, Accurate Financial Information History of Failed Expansion Plans Uncontrolled or Mismanaged GrowthWill Rogers said, “If you find yourself in a hole, stop digging.”Good advice for directors with responsibility to lead a company.Turnaround specialists are often an excellent choice when thesecircumstances are present. They bring a new set of eyes,trained in managing and advising in troubled situations. Theseexperts are either practitioners or consultants. Turnaround practitioners take management and decision-making control as thechief executive officer or chief restructuring officer. Turnaroundconsultants on the other hand advise management, perhaps thesame management that failed before.The Turnaround Management Association (TMA) was formed in1988 and has grown to 8,600 members around the world whorepresent multiple constituencies working in the industry. TMAsponsors a Certified Turnaround Professional (CTP) programwith strict reference checking requirements and testing of a Copyright 2010, Strategic Management Partners, Inc.Body of Knowledge to become certified. Approximately 500 CTPprofessionals are registered today.The key is to build enterprises that future buyers want to investin. Investors/buyers look for: Businesses that create value. Consistency period to period. High probability of future cash flows. History of performanceand improvement, or the promise of cash. Market-oriented management team. Focus on producingrevenue. Ability to sell and compete; develop, produce, anddistribute products; thrive and grow. Track record or demonstrated changes in the right direction. Fair entry valuation. Realistic return potential. Exit options. Realize high ROI at the time of their resale.There is a process of recovery and investment. It is based uponthe fundamental premise that there is a lack of managementwhen companies are in trouble. You must conduct fact-finding toassess the situation, then prepare a plan to fix the problems.You must implement the planned courses of action by fundingthe process and building a team to carry it out. Then monitor theprogress and make changes where necessary.Stages in the Turnaround ProcessThere are five stages in the turnaround process: ManagementChange, Situation Analysis, Emergency Action, Business Restructuring, and Return to Normality. We will look at these individually to understand what should transpire at each stage byeach function within the company. The timing is important tocoordinate what is happening between functions. Stages canoverlap, and some tasks may impact more than one stage.The process is designed to first stabilize the situation, which isdone by addressing management issues, assessing the situation, and implementing emergency actions. The restructuringprocess begins with preparations during the emergency actionphase. The positioning for growth starts with restructuring andgrows when normalcy stage is reached.Management Change StageIt is very important to select a CEO who can successfully leadthe turnaround. This individual must have a proven track recordand the ability to assemble a management team that can implement the strategies to turn the company around. This individualmost often comes from outside the company and brings a special set of skills to deal with crisis and change. Their job will beto stabilize the situation, implement plans to transform the company, then hire their replacement.It is essential to eliminate obstructionists who may hamper theprocess. This could require replacing some or all of top management depending on the deal. This will undoubtedly mean alsoPage 9 of 46

replacing some of the board members who did not keep awatchful eye.the entity to survive. Time is your enemy. Protect asset value bydemonstrating that the business is viable and in transition.Management must address issues related to major stakeholdergroups (executives, function managers, employees, lenders,vendors, customers, others). There must be change in the focusof how the company will operate to accomplish a turnaround.Most companies have a lack-of-sales problem, which necessitates a change to jump-start sales and drive revenue. Theremust be information that all can rely on for decision making.Production management must support and make what the market wants to purchase, at competitive price. You must nurturecritical human capital resources that are left within the company,while at the same time holding them accountable for results.You must raise cash immediately. Review the balance sheet forinternal sources of cash such as collecting accounts receivable,and renegotiating paymen

Strategic Management Partners, Inc. 410-263-9100 Page 3 Management must address issues related to the major stakeholder groups: executives, function managers, employees, lenders, vendors, customers, and others. To accomplish a turnaround, a company must make a concerted effort to