Even good leaders can overlook early signs of trouble, according to Doug Yakola, writing for McKinsey Insights.
Yakola has been running recovery programmes for 20 years as chief restructuring officer or CFO in over a dozen turnaround situations. He has witnessed many managers heading into crisis territory without realising it.
Yakola comments: “They’re not bad managers, but they’re often working under a set of paradigms that no longer apply and letting the power of inertia carry them along.”
Of course, if leaders don’t even know they’re facing a crisis, they won’t know what they need to do to turn the situation around. What you should do is take a step back and review your plans objectively, asking, “Is this how I thought things would happen?”
Acknowledgement that your plan isn’t working is an essential first step, says Yakola, who recommends the following ten steps for leading a company out of crisis:
1) Throw away your perceptions of a company in distress. There are many different signs of potential distress, such as declining cash flow, declining stock price, deteriorating industry fundamentals, large or unplanned reductions in workforce and management turnover.
However, the problem is rarely made up of just one or two of these signs; it is the result of many of them interacting with other external factors.
2) Force yourself to criticise your own plan. Use basic financial milestones to gauge where you are as a company, and assess where you are in relation to your industry and competitors. If you are not keeping pace then your plan needs to change.
Try to spot trends by looking back over past cycles – if you keep missing targets, find out why.
3) Have greater expectations of your board. Some leaders see the board as a “necessary evil to placate”, but it should have enough perspective to see when the company is heading for distress, so use it as an early warning system.
It’s also the board’s job to scrutinise the plans of CEOs, CFOs and COOs and assess the risks. It needs independent members who stay in the loop and ask the right questions.
4) Focus on cash. It isn’t just about keeping an eye on the bank balance. You need to forecast revenues for the mid term and long term. Yakola observes that neglecting the cash component of capital investments regularly gets companies into trouble. You need to focus on the outgoings while you’re waiting for the return, or you might find yourself short of vital funds for running the business.
5) Create a great change story. You need a change story that is understandable to everyone and creates a sense of urgency, preferably in a paragraph or less.
6) Treat every turnaround like a crisis. Don’t treat change as a stable company would. You need a crisis mindset that demands immediate, significant action.
The situation calls for bold moves you wouldn’t usually consider.
7) Gain traction for change with quick wins. Focusing on three or four big bets to turn the company around is a high-risk approach. Although big bets are sometimes necessary, they require time and effort and don’t always pay off. So as well as your big bets, you should focus on achieving a series of quick wins to build traction within the company.
These could be cost-focused, such as cutting off demand for a non-essential external service, or policy-focused, such as implementing a stricter policy on expenses. This way, you will improve the bottom line and win support.
8) Dispense with your old incentive plans. In stable companies, incentive plans can be complex and linked to many different targets and goals.
However, Yakola believes these should be thrown out in a turnaround situation and replaced with incentives tied specifically to what you want managers to do.
Introduce “meet or beat” targets, and don’t be afraid to withhold bonuses if they are not met, and pay generously if they are exceeded.
9) Replace one or two members of the top team. This isn’t about “bad managers”, insists Yakola. It’s more to do with the practical reality that some managers must “own the decline”, and they are usually those incapable of shifting to the necessary mindset for fundamental change and turnaround.
10) Find and retain talented people. Yakola recommends two types of people.
First, look for those who have institutional knowledge – those who aren’t necessarily your top performers but who know the company well and are prepared to point out the inconvenient truths.
Second, find the next level of talent in the company. Often, great leaders are two or three levels down, waiting for an opportunity.
Yakola comments: “For both groups, it’s important to realise that retention isn’t always about money and bonuses. It’s also about figuring out the individual’s needs. Good turnaround managers actively look for those people and find a way to get them involved.”