FINANCIAL TURNAROUNDS: PRESERVING VALUE.

• Author: Gray, Carol Lippert

ENGINEERING AND MANAGING A CORPORATE TURNAROUND CAN BE PAINFUL, PERSONALLY AND PROFESSIONALLY. WHAT SHOULD YOU KNOW TO AVOID NEEDING ONE? AND IF YOUR COMPANY REQUIRES A TURNAROUND, HOW CAN YOU MAKE THE PROCESS EASIER?

At first glance, it would appear that a hostile takeover attempt and the trend toward dressing more casually for work would have little, if nothing, in common. Yet both of these were factors cited in the turnarounds of two companies -- USG Corp., a building and remodeling supplier for the construction industry, and Jos. A. Bank, an upscale menswear retailer. These companies are profiled in an upcoming Financial Executives Research Foundation study, Financial Turnarounds: Preserving Value, which examines 20 North American companies in a cross-section of industries.

The problems that may create the need for a turnaround are many, and not industry-specific. They include management misjudgments, ill-advised strategic decisions, marketing failures and ineffective financial management. Warning signs can originate from both inside and outside the company. Some of these include: a change in corporate strategy, rapid growth, increased leverage, loss of market share, deterioration in key performance indicators and market shifts.

A company's external constituents may perceive other warning signs. The study's coauthor, Henry A. Davis, a Washington, D.C.-based writer and business consultant, says these include "poor board governance processes, poor information systems, lack of financial metrics or key performance indicators (KPIs), management's failure to listen to the outside world (including customers and warning signs) and frequent turnover in the management team."

As CFO, you can monitor most, if not all, of these factors, sound any necessary warning bells and try to avert trouble. Turnarounds can be costly -- not only in financial terms, but in terms of corporate reputation, personal stress, morale and time. More than one marriage has been lost to the battle. Some of the related issues cited by the study include:

* A turnaround requires a unique and intense mindset, at least until the immediate crises pass. Some companies may experience the luxury of being able to make day-to-day decisions; others have to act hour by hour. In the short run, attention to cash flow and determining how to allocate that cash nearly obliterate all other concerns.

* Any emotional commitment to previous company policies must go. That frequently means discharging the previous management team. Whoever leads during the crisis -- an old team, a new one or some hybrid -- bears the blame, from subordinates and external stakeholders, for bringing the company to the brink.

* Entering a Chapter 11 bankruptcy may be the tool of last resort to help the company survive. But bankruptcy is expensive, time-consuming and distracting. It may cause customers to flee, employees to lose focus, a reputation to erode and common equity to disappear.

* Even when you think it's complete, you can't rest on your laurels. Successful turnarounds may not be permanent.

Yet when a turnaround works, it is, says USG's CFO, Rick Fleming, "a real victory." In fact, Fleming says, "It's a tremendous growth experience from a career standpoint, and a great adrenaline high. It takes about two years to detox!"

Head Off Problems

If, however, you never want to put your feet to that kind of fire, as a CFO you must be vigilant and think creatively. You must understand your business and its costs and continually monitor industry-specific, internal KPIs, frequently on a daily basis, You must consider the...