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The ‘Softer’ Side of Managing a Turnaround

In classical turnaround theory, an advisor/consultant/chief restructuring officer (CRO) arrives on the scene of a cash-strapped troubled organization armed with expertise in preparing and analyzing cash-flow and income projections, organization assessment tools, rationalization processes, and other arrows in the quiver. These are textbook protocols well-known to most turnaround professionals. The “softer” side of turnarounds is not as well-understood or practiced. This article explores six areas that tend to enhance the chances of a successful turnaround.

Remember Who the Client Is 

Unfortunately, few financially challenged organizations reach out for professional help. Typically, lenders demand in a forbearance agreement that the organization seek help. Also unfortunate is that scenario puts the turnaround professional in a bit of a dilemma: Who is the client?

Is the client the lender who gave the referral (and potentially more referrals in the future­) or the organization that retained the professional and is paying the fees? Often, lenders consider the professional their inside person. Aware of the relationship between the lender and the consultant, the client is often suspicious of the consultant’s agenda. This suspicion is not always without basis. 

In a particularly egregious insolvency situation, the debtor-in-possession (DIP) lender asked a consultant to ensure that a financial covenant was violated. A $500,000 covenant violation fee this commercial lender was eager to charge was at stake. 

The lender, who had referred the consultant to the debtor and more or less insisted on his retention, asked if the consultant understood. The consultant said he did. Left unsaid was that what the consultant understood was that his fiduciary, moral, and perhaps legal obligation was to the debtor’s estate, not the lender, and that he would continue to do his best to make sure the debtor did not violate any of the arrays of DIP loan covenants. The consultant succeeded on that score.

On the other hand, what if the client has taken or plans to take an action that is morally wrong or, worse, illegal? Most situations in which the author has encountered unacceptable client behavior pertained to chicanery with borrowing base certificates (BBCs) for asset-based loans. Examples include:

  • A boat manufacturer that put the full value of a completed boat in the BBC as soon as the engine was received, though not paid for, and the keel was formed.

  • A supply distributor that purchased tools at an auction and included them in the BBC at 10 times the cost. In this case the borrower argued that it had made a bargain purchase and should be allowed to include the purchased items in the BBC at its estimate of fair market value. The consultant retained by the lender testified successfully in a motion to replace the management with a trustee that fair value was set at the prices paid at auction and the borrower’s write-up violated the governing inventory valuation principle of lower of cost or market value.

A chip manufacturer that included several million dollars (cost) of totally worthless chips in the borrowing base.

The consultant needs to bring such client trespasses to light and quickly resolve the issues, first with the client and then with the lender. If the client opposes informing the lender, the consultant needs to resign. Usually, however, a threat to resign results in a path to resolution.

Know When to Fold

A few years ago, a consultant received a call on a Friday afternoon to provide expert testimony for three lenders that had secondary loan positions on a long-haul auto carrier that had just filed Chapter 11. The consultant needed to review the situation, meet with the potential DIP lenders on Monday, and be ready to testify on Tuesday. 

Among the items reviewed were a turnaround plan and financial projections prepared by a major consulting firm. The turnaround firm had been working with the debtor for several months, and the plan was supported by a lengthy narrative. After reviewing the plan and other material, it was clear to the consultant that the turnaround plan would not work, the debtor was not viable, and any DIP financing was too little, too late and would just add to debt, burn cash, and forestall the inevitable for a few weeks. This determination did not stem from a eureka-type revelation—it was readily discernable to anyone analyzing the situation dispassionately and objectively. The debtor had a lot of problems, but two major issues are worth highlighting.

First, the debtor had no real strategic levers—e.g., closing unprofitable business units, selling unused, unnecessary assets, or financial reorganization. Instead, the turnaround plan consisted of a large number of disparate, hoped for cost reductions that had to be executed flawlessly and completely to have a notable impact.

Second, even if all of the cost-reduction initiatives were achieved, the debtor could not generate sufficient cash to support even a reduced debt level, or more importantly to keep its aged and dilapidated rolling stock, which was already significantly beyond the normal useful life, from further decay.

After a spirited courtroom battle among several opposing constituencies, the court mandated a conference, hoping the opposing sides could reconcile their differences. Ultimately, the DIP loan was approved. The consultant was not called to testify and advise the court that the emperor had no clothes. 

The debtor burned through the DIP loan in less than three months, 30 percent of which went to professional fees, and then converted to Chapter 7.

What went wrong? Such a scenario is not atypical. Managers want to keep their positions, equity stakeholders want to save their perceived equity value, senior and other lenders want to get paid, and turnaround professionals want to do what their mantra implies—turn around the company. Perhaps the turnaround firm did sound an alarm—the nonviability was obvious—that fell on deaf ears.

All professionals involved in a difficult turnaround want to put up a spirited effort. But knowing “when to fold them” rather than circle the wagons and fight heroically until the bitter end, while capital and remaining value is destroyed or substantially diminished, is important. In the face of all counterarguments, a turnaround professional must emphatically insist that recognizing, accepting, and acting upon reality is paramount. 

Politics Matter

It is said that if there are two people in an organization, politics will be in the decision-making mix. Nearly all companies have political dynamics and drama at work. In a distressed situation, particularly an insolvency situation, business advisors, two or three different sets of attorneys, investment bankers, shareholders, private equity groups, and others, all with differing agendas (outcome, control, and influence), are added to the boiling stew. 

There is no magic bullet to get constituencies to work together toward an agreed upon goal. In many cases strong-willed professionals all vie to establish dominance. The antithesis of political drama is well-documented, dispassionately analyzed and disseminated information. Here are some steps a turnaround advisor can take to build political strength:

  • Control the Numbers. Income and cash-flow projections are necessary organization textbook protocols. Typically, the CRO or turnaround advisor either controls or has significant influence on the preparation of projections. Organizations falling into financial distress or a cash crisis tend to place less emphasis on projections as they are preoccupied with fighting daily battles to maintain the business. Getting key employees involved in the preparation of these items tends to enhance buy-in for the turnaround agenda. 

  • Gather Key Metrics. Protocols for weekly key metrics should be developed post haste and disseminated widely to all constituencies and stakeholders. 

Admit Mistakes. Never try to defend an indefensible position. Human beings hate to admit when they are wrong and often go to great lengths to defend a mistake. Admitting an obvious mistake does not necessarily bolster a consultant’s political strength, but stubbornly defending one inevitably erodes, and perhaps destroys, it.

Avoid Turf Wars. Being drawn into internal organizational turf wars or squabbles never has a good outcome. 

  • Assess the Terrain. While an organizational chart provides insight into the company’s power structure, a turnaround advisor or CRO needs to quickly determine how the organization makes decisions and who the major influencers of organizational action and decision making are. Often, individuals may not appear to have much influence based on where they appear in the organizational chart, but they nonetheless yield considerable influence due to outsized job performance, long-standing relationships, or other esoteric reasons. In some cases, a major influencer might not appear on the organization chart at all. 

Maintain Integrity. Perhaps above all else is the necessity of adhering to a strong code of personal ethics. Well-recognized integrity is akin to having an ace up the consultant’s sleeve that demands respect.

Getting Things Done

A turnaround professional coming into a distressed situation, even with the apparent authority of a senior interim executive or CRO, faces a number of roadblocks and/or speed bumps that can inhibit progress—e.g., organizational culture, internal political dynamics, xenophobia, disgruntled employees, fear of change, threats to egos, etc. Even a well-conceived and rational turnaround plan might not succeed in the face of such headwinds

Often, individuals may not appear to have much influence based on where they appear in the organizational chart, but they nonetheless yield considerable influence due to outsized job performance, long-standing relationships, or other esoteric reasons.


In one case, during a first encounter between the consultant and the company’s director of marketing, the director said: “I have been here 25 years; I don’t need someone telling me how to do my job.” Upon meeting the consultant, the company’s vice president of sales barked: “What have you ever sold?” In another situation, one of the sole shareholder’s children was working behind the scenes to undermine the initiatives the consultant was implementing. In that case, the person had considerable power regarding how the company was managed (rather poorly) before the consultant came on board and was unhappy with his diminished status and influence after the consultant arrived.

Most people want to do a good job and be recognized for it. In a turnaround situation, a consultant needs to harness the abilities of key employees to salute the flag and take harmonious action to save the organization. Often this is not an easy task. Here are several actions that may enhance employee support and focus:

Survey Employees. Immediately upon arriving on the scene, the consultant should have the CEO send a letter to all key employees explaining who the consultant is and why he or she is there. The letter should include a brief employee survey seeking their views on the company’s strengths, weaknesses, opportunities, and strengths. The final survey question should be: “What would you do if you were in charge?”

The responses should be sent to the consultant with only a summary of responses sent to the CEO later. Generally, employees respond enthusiastically to the opportunity to have their voices heard and suggest many good ideas. In one case, the director of material management, an especially insightful fellow, provided suggestions that were the basis for 80 percent of the go-forward plan.

  • Identify Political Influencers. Most organizations have a few individuals (directors, managers, department heads) who are better than average at their jobs, tend to be nonpolitical, and enjoy wide respect. Often the employee survey might identify these individuals. Convincing these influencers to buy in to the consultant and his or her agenda should be a priority because they can move the ball down the field by getting more people to buy in.

  • Enlist the Head of Human Resources as an Ally. The head of human resources, who hopefully is a political influencer as well, can be an invaluable resource in letting a consultant know how employees feel about a variety of things. A strong head of human resources moves freely throughout the organization, talks to many people, and gathers useful information on the pulse of the business, including what others are not telling the consultant.

Involve Key Employees in Developing the Turnaround Plan. Several years ago a consultant was retained by a lending consortium to review why the financial fortunes of a large, private producer of consumer products went south soon after a new loan transaction was inked. The plan supporting the loan request was prepared by a sizable investment banking firm based on the firm’s discussion with senior management.

    Other than senior management’s overly optimistic view of the company’s situation, the plan’s fatal flaw was that key employees were not in any way called upon to provide input. Worse yet, they weren’t aware of the existence of the plan or their expected roles in its execution. “What plan are you talking about?” the head of one department asked when questioned about the status of the significant cost-saving initiatives the plan had assigned to his department.

    Key employees must be involved in a plan’s development. Otherwise, they will consider it the consultant’s plan, not theirs. 

Dealing with Corporate Culture 

The phrase “culture eats strategy for breakfast” might be something of an overstatement. But corporate culture is important for getting things done. How important? One interim chairman of a major corporation lamented soon after resigning, “There was nothing I could do to change the culture.” 


A good definition of culture is the combination of patterns of behavior, mental models of the external world, repetitive habits, strongly held beliefs, informal organizational structure, and internal political dynamics that determines or strongly influences how an organization makes decisions and reacts to external stimuli, and it sets the context of the organization’s personality.

Transforming the culture of a dysfunctional organization into a strong, vibrant culture is not an easy task, and there is no silver bullet for achieving such a conversion. Actions that may help include:

  • Finding the good in the culture and making it work for the consultant.

Establishing common ground with key employees on what needs to be done.

Creating a vision or mission statement with the help of key employees if the organization lacks such a statement or the existing vision is weak.

Depending on the relative size of the organization and its unique character, some of those actions will work better than others.

Keep it Simple

Infrastructure is the sum total of an organization’s cadre, capital assets, intellectual capital, processes, and systems. With a strong infrastructure, a company is generally able to achieve good financial results under most circumstances. A company with a weak infrastructure might do well in moderate to strong markets, but will fail when trouble comes.

A family-office investor hired a nationally known consulting firm to provide a strategy on what to do with a troubled portfolio company bleeding cash. The firm produced a detailed report designed to make the company a world-class, dominant provider of its products. The plan was supported by several binders consisting of step-by-step instructions on how to make this goal a reality within a year. The consulting firm did not provide management support but helped recruit a new CEO. The ambitious plan was funded with an $8 million investment from the family and a 
$2 million equipment term loan from the existing asset-based lender. 

Two major bedrock initiatives of the plan were the installation of an enterprise resource program (ERP) and the purchase of eight expensive, complicated, highly engineered, and automated production units and systems. This equipment, together with the ERP system, was expected to dramatically increase capacity, lower cost, and improve quality.

Eight months into the plan, implementation losses accelerated and execution of the plan was not out of the starting gate. The company needed more capital to continue operations. The family office was hesitant to fund, but asked the company’s lender to provide a sizable temporary overadvance.

The lender (which had good loans outstanding with other companies of the family office) asked a consultant to take a look at the situation.

The report presented to the family office and the lender included the following major points:

  • The company was out of cash, and cash losses would continue.

None of the production units was up and running, nor was the ERP system.

The initial plan had a 50/50 chance of achieving its goals if implemented.

A capital infusion ranging from $12 million to $15 million would be required if the family office wanted to move forward with the initial plan; and at least half this amount would be required for a more modest turnaround effort, which also had a 50/50 chance of success.

The plan failed because of the company’s weak infrastructure. In this case, the operating cadre was not sufficiently skilled to implement such a complex plan, particularly with outdated information systems and weak processes and systems in place.

The family-office representative concluded that neither alternative was worth the risk and the company should cease operations. Unfortunately, this company might have survived if the new capital provided by the family office had been used to enact a turnaround plan with more modest and achievable goals.

A Final Thought

No less a management guru than Peter Drucker opined that “most turnarounds don’t.” Today, the success rate is much higher since the issues plaguing troubled companies have been studied extensively, and scores of turnaround and restructuring professional specialists have established processes, protocols, and strategies to address the ills of failing organizations.

That said, an effective, sustainable turnaround of the business fortunes of ailing organizations is not easy and is never a sure thing. Internal and external politics and organizational culture and behavior all need to be addressed effectively to give a turnaround a chance to succeed.  

Ken Naglewski

Kenneth E. Naglewski, CTP

The One Eighty Consulting Group

Kenneth E. Naglewski, CTP, heads The One Eighty Consulting Group and is on the advisory board of Becket Advisors, a strategic marketing firm. He provides services in the areas of turnaround and restructuring, business strategy and planning, and executive coaching. Naglewski is a graduate of Roosevelt University and the University of Southern California Executive Development Program. In addition to being a CTP, he is a CPA and CIRA, and can be contacted at 615-491-7331 or ken@180degreeconsulting.com.

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