Why turnaround specialists are always called in too late to distress firms.

It is fair to say, turnaround specialists, are often on-boarded in the very last moment of distress situations. For firms, this can be dramatic, as the on boarding of a turnaround professional increases chances for going concern from (only) 12.5% to more than 90%.

Reasons are linked to the degree of the ability of an organization to reflect its own status and true performance.

The most striking elements include:

  • Transparency (and accessibility) of KPIs and performance.
  • Governance and distribution of decision rights to the management team.
  • Culture to discuss and challenge KPIs in the management team.
  • Review and challenging of the companies performance by stakeholders outside the existing eco-system.

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SME businesses, controlled by the owner / entrepreneur / her family etc. are more likely to stumble over these pitfalls. This is not excluding publicly listed firms from the risk to end in a distress situation, however, implementation of a state-of-the-art corporate governance, intends to avoid many of the notorious pitfalls. Hence, including outside perspectives and diversity to the evaluation of data and the decision building process, helps to overcome the biases of the inside executives.

Whereas the absence of reporting and KPIs can conceal the early signs of an upcoming distress situation, not taking appropriate actions, is a psychological, very human problem.

The company to the couch – stages of depression in distress situations for individuals and organisations

Analogue to the psychological state of grief and depression, a company on its way down is also going through certain stages.

Elizabeth Kübler-Ross described already in 1969 five stages of grief and depression for individuals.

  • Denial
  • Anger
  • Bargain
  • Depression
  • Acceptance

Whereas the individuals of the executive management of an organisation are likely to go through these stages, for the organisation as a whole this translates into stages of distress. Rosabeth Moss Kanter describes the four significant stages.

  • Secrecy and denial
  • Blame and scorn
  • Avoidance and turf protection
  • Passivity and helplessness

To solve the distress situation, the management team needs to reach the state of Acceptance. For each stage, certain behaviours / perception of the situation are observed.

With regard to the specific executive roles, this includes the admittance of individual failure, the hopelessness of the situation and, hence, the need for the help of external experts.

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Balancing for the half-fullness of the glass

Only, when accepting the crisis as reality, and also admitting, the own inability to resolve the situation efficiently, this can lead to the engagement of external turnaround experts.

Sometimes, it is easier to see this from the outside. The non-executive board or investors can be the driver for this step. Disregarding here, potential agent conflicts of the executive team, this also balances for the (natural) biasness of the executive team. Before reaching the state of Depression, it is natural (and actual required), for the executive team, to be committed and convinced of the operative decisions and actions taken.

In distress, there is barely any black or white, just no time to lose

Analysing the behaviour of an executive team in the turnaround or prior the turnaround will deliver a lot of grey.

In hindsight things are always much clearer than for the executive team, with its boots on the ground. Skilled managers may hold all required skills, to manage a turnaround.

The question is not, IF the team holds the skills, but IF the team can resolve the situation effective and efficiently. Margins for mistakes and trial and error are eroding. Investors / the non-executive board, must challenge the management team and “force” the team through the “process of depression”, in order to either quickly resolve the crisis situation or, reaching the stage of acceptance without unnecessary delay, so way can be given to external professionals.

The alternative to the engagement of external specialists would be the grounding of the firm (fire sale, merger, controlled liquidation).

Any unnecessary delay down this road will only consume resources, which will be missing later, executing the turnaround, and, hence, add to the burden that decreases chances for success.

Take away:

The application of sound corporate governance helps to avoid and solve distress situations.

A distress situation causes serious frustration to the individuals of the executive team as well as the organization as a whole. The stages of distress for the individuals of the management team, determine the state of the organization. To allow a turnaround, the team at the helm has to go through all stages without losing unnecessary time.

Coming up:

We all have been to the same schools and read the same books, but performance in turnaround situations varies widely. What are the reasons and criteria, to look for, when a firm is in distress?

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