by Peter Pentecost1
The ‘APACS’ Approach To Turnarounds – The 5 Steps To Success
In this guest post Turnaround and Corporate Restructuring Director, Peter Pentecost, shares his insights into the APACS approach to turnarounds.
Each turnaround situation is subtly different and depends upon a number of factors – for example:
- The nature of the stakeholders concern,
- The urgency of the circumstances (bank or parent),
- The long term strategy for the business or business unit (organic growth, merge or sell),
- The involvement of the management team (shareholders or not),
- The market environment (forward orders),
- The HR environment (personnel profile).
Regardless of the above, all the turnaround/transformations I have been involved in over the last 20 years have involved the same 5 fundamental steps to a greater or lesser degree. These cover the following areas:
Step 1 – Assimilation
The critical first step is to understand the ‘business equation.’
- What makes the business tick?
- How does it conduct its business?
- What is its culture?
- Who are its competitors?
- How should it make its money?
- How does it benchmark against its competitors?
- What is the competence of the management team, and how much time have we got?
Or more importantly, how much cash have we got and what is the flow of cash?
This can take a week or a month, depending upon size and complexity.
Failure to take enough time to understand the cultural ethos, the market environment and the way the business ticks (the beating heart) will lead either to a plan that has little or no chance of working, or to a transformation that will prove more divisive and therefore potentially significantly more costly than it needs to.
A quick, but carefully reasoned analysis of the business situation within the context of the market environment and with a logical plan (frequently considering more than one option with the ramifications laid out accordingly) is the most powerful way of developing solutions (frequently more than one). These crystallise the decisions that have to be made by the main stakeholder – however unpalatable.
Logic to the plan is critical. Having said that – agility is also a key parameter, Stakeholders of underperforming assets are not known for their patience. One needs to find an expeditious way of achieving this within the Stakeholder time horizons.
Step 2 – Performance Review of Management Team
Make rapid decisions regarding the capability and performance of the management team and agree with the stakeholders an immediate plan of action to stabilise the business. This typically takes as long as Step 1.
At the end of the day, the current management team has delivered the business into the state that needs a turnaround or transformation. Not all the apples will be bad, but it is unlikely that they are all good.
Equally important is the team dynamic. Does the team talk to one another? Are they on the same page? Most importantly, are they up for a change – and a change of the magnitude that is needed? One sees everything from at this stage: from ‘head in the sand’, ‘we’ve been through these dips before and something always turns up.’ Or ‘a cry for revolution’ ‘everything’s wrong, I’m not allowed to do this, or go there or pursue that, there’s no communication from the top or the bottom or the middle’.
One learns to be wary of all initial comments and there is a great skill in being able to make rapid judgments on who is needed, who is not needed and who is definitely not needed. Get this wrong and the whole transformation is in jeopardy. People rarely change enough and very rarely change quickly enough.
Note ‘change’ – not necessarily always ‘cut’ (although some is very likely)! Cutting can be expensive if people are just in the wrong role; hence the importance of functional clarity before deciding on the people to be part of the way forward.
Step 3 – Analysis of Business Equation
A vital part of the analysis of the state of the business revolves around establishing whether the critical issue lies in the generation of income, the expenditure of costs or the structure and management team, or a combination of the three. This occurs in parallel with Step 1 in order to inform Step 2. Sharing this with the stakeholders is also vital as it bases the recovery on logical analysis and sets the context for the recovery plan.
Arguably this is the most important element and, also arguably, the one most often missed out by people keen on securing short-term asset value, rather than sustainable business recovery.
It is a truism to say that the course of the turnaround or transformation is critically dependent upon the nature of the problem, but what does that really mean? Anyone can look at a set of figures and work out whether a business is making or losing money, or even whether it is not making enough money – but the much more difficult question is why? Failure to get right inside the business equation to make a full prognosis of the disease inflicting the business will run the risk of leaping to the wrong type of transformation.
I have seen all too often – the immediate comment – ‘we need to cut our overheads as they are killing the business’ – ‘we’re too top heavy’, both of which may be true, but indiscriminate slashing and burning may make the figures look good for a month or two, but simply delay the demise. How often has one seen a business in trouble immediately cut its sales & marketing budget – its route to market, its means of encouraging revenue? It may need cutting, but only as part of a plan of re-positioning the business; or part of a plan to change the cost of delivery of the business; of reviewing the business we are in, of considering where we stand in the markets we are in and how we are perceived.
There is no easy way to explain this step – it is part of the ‘alchemy’ of the turnaround process and its importance cannot be overstated.
Step 4 – Change Management
Once the immediate actions have been taken to stabilise the situation, one must further develop the change management plan, putting the necessary culture in place to enable the business to focus on making the business equation work. Develop a proposition that delivers adequate value at the revenue-less-cost-of-sales line and finds more cost effective ways to generate the right sort of business that delivers a sustainable model, again with stakeholder agreement. This can take 3 – 12 months.
Pick a date to make the necessary changes – it will be painful, but the sooner it can be done, the sooner the business can start to recover. Until there is a cathartic change on a given date, there will be degrees of ‘Damaclesian swords’ over everyone in the business; the less time that this prevails, the better.
Once the ‘Preferred Transformation Option’ has been agreed upon with the main stakeholder, you need to review and implement the following:
- The consequential actions in terms of the functional structure – the ‘go forward’ team,
- The implications of the functional structure for the people in the business,
- The market analysis that defines any changes in direction or approach to different market sectors.
This sets out the type of business we want to be and how we measure value and success against the culture and business model embarked upon. Out with the old and in with the new – just like that!
Failure to move on to the ‘Change Management’ stage as fast as possible can lead to losing the very people you wanted to keep (as they will be the first to go), due to the uncertainty of the situation and they all have mouths to feed! There can also be market place downsides (hence the migration of the use of the word ‘turnaround’ to ‘transformation’ to avoid adverse implications). At the end of the day, this is about breathing new life into a business and time is ‘of the essence’ in such circumstances.
The development of performance measures that provide a suite of indicators testing the progress that the transformation is making and the health of the business in sustainability terms is vitally important. There needs to be confidence that the process is working, even if there are bumps along the way. The transformation process is rarely smooth. There needs to be the ability to differentiate between perturbations and something going awry.
The underlying performance is critical; the rate of change will be dependent upon a number of factors (including luck), but the critical indicator must deliver sustainable, underlying progress towards the goals set out (the main one being profitability).
I have undertaken turnarounds where the fortunes of the business have been restored in six months and turnarounds that have taken six years of gradual, dogged, unremitting transformation.
Sometimes the pace is a function of the investment appetite, other times it is a function of the nature of the business, the market place it is in and the people.
Step 5 – Sustainable Business Model
Develop the team so that the business can continue in a sustainable condition. A critical ingredient here is the development of meaningful metrics that provide assurance that the sustainable business model is working and early warning signs of issues that need to ‘nipped in the bud’.
The business needs to prepare for the time when the Turnaround Director leaves, typically after 1-2 years (although there is always the possibility of a continuing role as a non-exec).
What does the stakeholder ultimately want? Well they might want to ‘stick’ or ‘twist’; ‘twisting’ could be part of a buy and build strategy or could be selling on. ‘Sticking’ would typically involve an evolution of what has been created, either organically or through a mixture of organic and circumstantial acquisition. Either way the stakeholder’s value add comes in the shape of a business that is no longer a performance problem and has a sustainable future, whether with the stakeholder or not.
‘Twisting’ investor stakeholders who want to buy and build will frequently deploy the Transformation Director onto the next part of the process, if they are suited.
‘Sticking’ investor stakeholders tend to want the assurance of the person who has done the transformation to stay on – to make sure that they really have delivered the sustainable recovery claimed. This is ideally served either in a Chairman role, or as a Non Exec Director.
Owner manager stakeholders (normally ‘sticking’) tend to want to do without the cost of an ongoing involvement – normally trying to prove that they can ‘do it on their own’.
There is not a set pattern; one shouldn’t be kept on just for the sake of it. ‘Turnaround’ type people are rarely good with steady state, so my question to a stakeholder would be: ‘what would you like to see happen to this business – what is your vision for it?’ Then decide what is appropriate.
If you are a turnaround expert and would like to add your views on the APACS approach, please leave a comment below.