Turnaround For The Troubled Firm

A crisis point is the "moment of truth" in a design firm. Often, there is no crisis until severe losses threaten the firm. It's hard to ignore running out of money. The first time this happens, financial institutions are willing to support the firm as a practical matter, the second time they balk, and the third time they say "no way."

Eventually, a firm that is sliding downhill has to admit it. Now principals begin seeking answers and are no longer satisfied with excuses. What they do and how they do it will determine whether they survive.

While the process of correcting the problems of a troubled firm is painful; it doesn't have to be agonizing. The achievement of a successful turnaround is mostly a victory of management performance. It is also a testament to the foresight or direction, the courage of employees, and the loyalty of clients and creditors.

When Is A Firm Turned Around?

Dramatic profit improvements, unless sustained for a period of time, does not mean that a firm has turned around. The euphoria of quick results must be followed by the reality of successfully implementing turnaround strategies for two or three years. Besides generating profits, a design firm must rebuild its position in the marketplace, make the right strategic moves, and motivate its people to complete the turnaround cycle.

The "Key Factors" in implementing the turnaround are:

1. New competent management with full authority to make all the required changes;
2. An economically and competitively viable core operation;
3. "Bridge" capital from external and internal sources to finance the turnaround;
4. A positive attitude and motivated staff that will stay with the firm so that the initial turnaround momentum is sustained; and
5. A clear realization by all concerned that "cash is king.


Management Changes

In almost 70% of design firm turnarounds there is a change in management at the top. It's almost self evident that if management is the key cause of the decline, changing management will go a long way toward correcting the problem. In real life, this change in management can be traumatic since management and ownership in most design firms is synonymous, this is often a bitter pill or an unacceptable option making survival difficult or impossible.

Management Style

Once new management moves in, it can make dramatic changes quickly. The management style that seems to be effective embodies at least the following:
1. Use of hands on management style;
2. Delegation of absolute authority to management by the Board or Partners;
3. Introduction of tight financial and management controls; and
4. Emphasis on good "people motivation."

A Viable Core Business

What are the competitive aspects of the business? Is the firm worth turning around? Is there an economically viable core business that can stabilize the firm and finance the turnaround. Sometimes firms have to get out of attractive business operations in order to protect the core or basic business. In most cases it is better to stick with your core business - those clients and markets that you serve exceptionally well. Diversifying into new services, client types, or market niches at this stage can be risky and expensive. The only exception is when current markets have dried up.


Cash Is King

"Firms often fail in their turnaround attempts because they refuse to address the issue of immediate survival."

For the typical turnaround firm, illiquidity is the biggest hurdle to be overcome. Illiquid firms don't have the luxury to be concerned with making profits. When you are short of cash, the object of the game is not with profits, it is cashflow. Cash is king, but it only buys you time to fix the problems and become profitable.

Accounts Receivables

There are two elements to focus on to improve your cash flow¬-Tougher Collections, and Credit Policies.

Collections: One of the most successful methods of raising needed cash is to get tough with your receivables collection policies.

Consider The Following

1. Identify receivables that are late by a reasonable period (e.g., 30 days or more past due). Then identify the largest of these delinquent accounts. In most cases you'll find the old 80/20 rule, Pareto's law, holds true. You'll find that 80% of your past due receivables (in dollars) come from 20% of your late accounts.

2. Get management involved in collecting from these major accounts. The CEO, Principals, and Project Managers should get on the telephone with these clients explaining the severity of the situation and get firm commitments. Make arrangements to pick up the checks if necessary to ensure the commitment is not just another put off.

3. Monitor results of your collection efforts. Repeat the process each month, focusing on the top 20% Of accounts. If this doesn't work, consider offering discounts of two ten percent in return for immediate payment.

4. As a last resort, go ahead with tougher collecting efforts. Turn to collection agencies or sue the client in court.

5. Institute preventative measures to deter future overdue receivables.

A. Have your accounting department call all accounts the day they become past due to establish your requirement for prompt payment.
B. Get Project Managers and Principals more involved in collection efforts.
C. Establish tighter credit policies. Check your prospective client's credit and payment record before signing a contract. Depending on what you find, you may walk away from the project or at least require a good faith deposit up front or make payment terms clearly understood early on. Contract language with stiff payment penalties for late payment can help.

Still, it is critical that you don't increase your payables even if creditors allow it. Don't over borrow or pledge all your assets, leave yourself a cushion.

Human Resources

Of extreme importance to on going success is the motivation of the organization. Unless it changes from a defeatist attitude to one of confidence, it is doubtful that the firm can stabilize its base and return to solid growth.

In turnaround situations, the leadership must adopt a positive attitude and communicate this to the rest of the organization. People will not be committed and enthusiastic unless that feeling comes from the top. It is important that the CEO be always cheerful, assured, and confident.

A key to maintaining morale is to be open and above board about the firm's problems, and enlist the aid of the employees to solve them.

You must also examine your human resources from a financial business point of view. In a troubled company conduct a human resource audit. First, put together an organization chart, listing person and position. For each person on the chart ask:

# What does this person do?

# Why is he or she critical to the success of the business? Is he or she producing profitable new business?

# Is he or she collecting money? Is he or she cutting costs?

# Is he or she producing profitable project results?

You may be surprised to discover that, when push comes to shove, you can eliminate a number of positions and not damage the firm. Making the necessary cuts, however, is never easy.

You may find that your long time employees are collecting the highest salaries, but are not necessarily producing more. They are typically friends, that makes it even harder.

Still layoffs are usually preferable to across the board pay cuts when reducing personnel costs. Unless pay cuts are for a very short period, you'll likely end up with a fully staffed firm of unhappy employees and your best employees will be the first to leave.

Facilities

Many troubled firms have recently moved to more expensive, fancier offices with substantially higher leasing rates.

In most cases you can successfully renegotiate your current lease. Landlords understand that if you go out of business, they're at the back of the line of your creditors. If you have not guaranteed the lease with real or personal property, landlords will be much more flexible. It will be tougher if they have personal guarantees. In this case there is much less incentive for your landlord to renegotiate.

Conclusion

Financial problems won't go away without quick appropriate action and a well executed turnaround plan. Most firms then require objective outside assistance to diagnose the problem and provide the remedies.

The first priority is to stop the bleeding and focus on cutting costs, not generating new revenues. Each $ of cost saved goes straight to the bottom line, while focusing on new revenues, while important, will detract from current efforts. In short, if you don't focus on cost cutting (stopping the bleeding) you may not survive to be around for new business opportunities.

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