Turnaround Management: The Concept and Application

Varun Hariharan

26 Nov, 2020

Turnaround is a management technique or strategy which is applied to loss-making or sick industrial units. Turnaround, just like re-structuring, is a kind of technique used to prevent or stop a company from incurring losses or going into closure forever. Turnaround is an important aspect of the strategic management process. It simply means the radical shifting of the deteriorating performance of a business enterprise towards improvement, i.e., from loss-making to profit-making. It is an attempt to remove various weaknesses and make the business strong, stable and profit-making.

Need for turnaround

The managers of a company may put across a turnaround strategy before the company’s management, to deter the company from further going into failure. The need for a turnaround, in a particular business enterprise, may arise owing to the following factors:

1. Liquidity or working capital problem.
2. Delay or part-payment of wages and salaries.
3. Low cash inflow and raising outflow of cash.
4. Shortage of liquid assets.
5. Falling sales and an increase in stock.
6. The falling market value of shares.
7. Labour turnover due to non-payment of wages on time.
8. Underutilization of production facilities.
9. A decline in earning capacity and lowering of profits.
10. Delay in payment to suppliers or creditors.
11. The downward trend in production, profit and sales.

What is Turnaround Management?

Corporate turnaround is described as a collection of actions required to save an enterprise from business failure and return it to its operational normality and financial solvency. Turnaround management usually needs strong leadership and may include corporate restructuring and redundancies, investigating the root causes of failure, and revitalizing long-term business programs.

Turnaround management is a method of formulating and executing a strategic plan and a series of corporate renewal measures and usually restricting them during periods of extreme financial distress.

Turnaround management deals with management review; analysis of root causes of failureand SWOT analysis to determine why the enterprise is failing. Once the analysis is done, a long-term strategic plan and restricting plan are prepared. Such plans may or may not involve a bankruptcy filing. Once it is approved, turnaround professionals start to implement the designated plan, continually reviewing its progress and make changes to the plan as and when needed to assure that the enterprise returns to solvency.

Some of the related concepts of turnaround management^[1] comprise of business process re-engineering, financial restructuring, company rescue, cost reduction, debt restructuring, and insolvency.

The profitability and effectiveness of an organization can be affected by a variety of factors which can cause business failure in certain circumstances. These may include:

• Failure to control and regulate costs
• Non-adaptation of the company’s product to satisfy customer needs
• The inability to build a cohesive team with the necessary skills to finance, manufacture, distribute and market
• Deteriorating business conditions
• Bad performance
• Overtrade

The deterioration in the performance of a company may take place over many years, but circumstances can occur where an unusual internal or external occurrence can unexpectedly put a company in danger. Examples of unusual incidents include fraud, such as Enron, WorldCom and Satyam; product failure; lack of financing; a large customer or supplier’s bankruptcy; and natural or man-made disasters.

Typically, if a firm is in the early stages of business failure, then the following signs of financial distress will be shown:

• A considerable cash shortage with borrowings at or near the maximum
• Suppliers start pushing for more speedy payments
• Monthly accounts depicting that the business is losing money consistently

These signs are often indications of underlying organizational or strategic business problems. Unless these signs are treated and reversed rapidly, for example through a corporate restructuring plan or turnaround management program, the company may enter a vicious cycle of decline – resulting in failure and liquidation of companies.

What are the features of turnaround management?

The features of turnaround management are explained as follows:

1. Involves restructuring
2. Applicable to a loss-making unit
3. Needs consultation of experts
4. Long and time-consuming process
5. Involves an in-depth planning
6. Capital-intensive strategy
7. Optimum utilization of resources
8. Leaves a permanent effect
9. Needs co-operation of people

• Involves restructuring:

Turnaround means restructuring the sick business. Restructuring involves rearranging the company’s resources to boost its productivity and efficiency. Restructuring can be financial restructuring, technical restructuring, marketing restructuring, personnel restructuring, etc.

• Applicable to a loss-making unit:

Turnaround management is a technique to turn a loss-making orunprofitable business into a productive one. It applies to a business unit generating losses. Itis achieved by making systematic efforts (applied or implemented). It serves as a solution tothe industrial sickness problem.

• Needs consultation of experts:

Turnaround may be done by consulting the own (internal) experts of an organization or by external experts (consultants hired). Internal experts know the history, finances, technology standard, etc. of the business a lot better. They can, however, be biased because it concerns their interests. On the other hand, while external experts may be impartial, their recommendations may not be realistic and employee feelings may not be taken into consideration.

• Long and time-consuming process:

The technique of turnaround is a long-term strategy. It is not a task for a single day. It is a lengthy and time-consuming procedure and, in some situations, turning around a sick unit can also take a few years.

• Involves in-depth planning:

Turnaround comprises stages like analysis, planning, arranging, testing, rearranging, and re-planning.Firstly, the turnaround strategy involves detailed analysis or study of the sick company’s failed model or structure. This begins with the preparation of appropriate, adaptable and result-oriented strategies for initiating the turnaround.

Implementation of newly designed strategies occurs by organizing (or orienting) the previously failed model framework. This is achieved in compliance with the directions (or orders) provided by a planning authority or committee.

Planning is put to a realistic test, after this basic arrangement, for a certain period. Throughout the period,experts gather and systematically evaluate data to identify changes or weaknesses in the performance, if any. If any changes are found in its testing process, the design is improved or further tweaked. In the event of observing some errors, the design is corrected and re-planned again followed by proper rearrangements.

• Capital-intensive strategy:

Turnaround management is a capital-intensive technique. It takes essentially a significant amount of money to restructure a sick company’s resources. The company requires an outstanding team of expert consultants and specialists for its implementation.

The organization also requires additional assistance and/or advice from other practitioners in addition to using the skills of its internal employees. There need to be sufficient funds to pay for these practitioners’ services.Further, as the tenure of a turnaround activity cannot be fixed, it needs a continuous supply of funds for its uninterrupted operation until a satisfactory success is achieved.

• Optimum utilization of resources:

Typically speaking, a sick organization does not make optimal use of any of its resources. These are primarily human capital, financial resources, physical resources, etc. The technique of turnaround helps allow the efficient use of resources. Turnaround aims to reorganize and restructure all the company’s available capital. It aims to channel (use) capital for successful projects only and not for non-profitable ones.

• Leaves a permanent effect:

Turnaround management leaves a lasting (mark or impact) effect on the company’s structure and operations. This allows a sick organization to suspend all of its unproductive operations and concentrate on productive ones.It allows the organization to shift its technology from a labour-intensive one (which includes many working people) to a capital-intensive one (which requires significant capital expenditure in new machinery, high-tech machines, etc., and therefore fewer working people). It can also help a sick company merge with any other company, thereby creating a brand-new company.

• Needs co-operation of people:

Total cooperation of employees is important for the turnaround to be effective. It is because the workers will be participating in the turnaround plan. For the turnaround plan to be successful, the cooperation of other groups such as shareholders, financial institutions, suppliers and others is also required. Thus, turnaround requires the full co-operation of persons associated (attached) with the sick business for its success.

What are the indicators of a successful turnaround?

The indicators of success, in a turnaround process undertaken as a major move by a loss-making company to secure its financial position, are as follows:

• Increase in the volume of goods manufactured and regular and orderly conduct of production activities.
• Increase in the sales (month-wise or quarterly) or turnover rate.
• Increase in the market share of the entity.
• Increase in the profitability of the company in comparison to losses incurred in the previous years.
• Financial stability accompanied by loan repayment capacity as per defined schedule, provision of financial benefits to employees and better working conditions and proper maintenance of plant, warehouse, machinery, etc.
• Satisfactory cash flow position and improving liquidity.
• Removal of sickness and probable signs of healthy corporate life.
• Visible signs of optimum utilization of available resources signalling that the business unit is becoming a visible one.

Positive and negative implications of turnaround

The implications of turnaround can be envisaged both from a positive and negative point of view and they may vary from company to company:

Positive Implications of the Turnaround may be as under:

1. Company’s level of net profit improves.
2. Company’s level of market share improves.
3. The customer or client response improves.
4. Share value or market capitalisation will increase.
5. The morale of employees increases as productivity goes up.
6. Employee and workers’ productivity.
7. As productivity goes up, the company’s credit rating improves.

Negative Implications of the Turnaround may be as under:

1. Probable reduction in Employee strength.
2. Good employees may quit.
3. Productivity declines in some cases.
4. Company may get merge or amalgamated.
5. Face closure.
6. Globalization takes place.

Role of finance in turnaround management

Finance plays a crucial role in aiding turnaround attempts. Usually, when business performance declines, there is a significant increase in the demand for financial information. Senior executives, banks, creditors, venture capitalists and all shareholdersbegin to ask questions.

Finance may assist stakeholders by providing key performance figures for the business, as well as identifying the main factors that cause the decline. Finance can help the organization regain its credibility by substantiating and explaining urgent and critical issues to key stakeholders, which in turn, will buy some time for the emerging solution.

When appointing an external turnaround specialist or new CEO, finance will be crucial in ensuring that they are quickly informed of the situation – providing accurate, relevant and timely information. Finance also needs to reassure the turnaround management team that they understand the business and are well-positioned to meet their requirements.

By responding early to business problems, Finance can demonstrate and prove that it is a part of the solution. However, if Finance reacts too late or provides inaccurate, unreliable and out of date information, it may be seen as a part of the problem and may end up being restructured, with the CFO replaced.

Takeaway

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