Salto Partners

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Five Key Phases of a Turnaround

Turnarounds are not for the fainthearted among us.  Turning around a troubled entity is complex. There are many stakeholders: a nervous board, a thin-skinned management team and worried employees are just the beginning. There are customers who might run for the exits, partners second guessing their alliances. Public companies need to deal with the stock market expectations while private companies have private equity investors on their heels. If things are really bad, then the business needs to deal with lenders, creditors and potentially courts. Nothing about a turnaround is simple. Everything is urgent. The expectations are high, resources are scarce and time is limited.

So, what do turnaround specialists like Salto Partners do? Well, a first good advice is to stop digging further if you are already in a hole. As an independent third party we can lend the business a new set of eyes, trained in managing and advising in troubled situations. The key to a turnaround is to rebuild an enterprise that has a future, to build an enterprise that people want to do business with, to build an enterprise that people like to work for.  Here are the five major stages of the turnaround process:

Phase 1: Situation Analysis

First, it is important to find out how severe the situation is. Is the business viable? Can its products and services compete in the market place? Is there sufficient cash to go through the turnaround? This analysis should result in a preliminary action plan that shows what is wrong, what potential solutions exist, key strategies to turn the entity in a positive direction, and a cash flow forecast to understand cash usage.

Phase 2: Establish The Go Forward Team
All options are on the table. The turnaround can be managed with the existing management team, perhaps augmented by advisers. It is possible and has been done. The biggest problem for the existing leadership that presided over the downturn is to challenge its own assumptions and decisions. For that reason, it is not uncommon in turnarounds that key players are being replaced. The most important characteristic of the go forward team is that it is willing and able to function with minimal friction while executing the new strategy.

Phase  3: The 30-60-90 day plan
Now, it is important to gain control of the situation. Based on the preliminary analysis create a detailed 30-60-90 day plan that outlines how to tackle the problems. Create ownership by distributing responsibility for parts of the plan to key people in your organization. What ever causes the problem, stop it right here. The 30-60-90 day plan lays out key initiatives and actions that happen in the near term. For example the plan might include the following topics
a) Portfolio: Which products and services will be carried forward? Which ones need to be cancelled? Which ones need to be fixed?
b) Sales: What are the must-win deals for the quarter requiring executive level attention?
c) Cash flow: Aggressively collect accounts receivable, and renegotiate payments against accounts payable.  Secure asset-based loans if needed.
d) Restructure debt and equities: Sell unprofitable or non-strategic business units, real estate, and under-utilized assets. Restructure debt to balance the amount of interest payments with to a level the company can afford.
e) Reorgs: Realign organizations, reduce overhead, conduct lay-offs if needed. Do this swiftly. Avoid the death of a thousand cuts.
f) Key processes: Fix’em. If you have problems with product quality, then  fix your Q&A process. If your delivery organization is creating non referenceable clients, then fix the way you manage your custo-mer engagements. If the company doesn’t get any leads, fix your marketing. If promising deals are consistenly lost, then fix your sales process.
e) Top Talent: Identify top talent early. Create opportunities for people to grow even in these trying times.

Whenever possible, have a way to measure the outcome of each element of the 30-60-90 day plan , e.g. closed sales in $, product quality, customer satisfaction, P&L of business unit/company etc. Make the plan known. Get buy-in. You need everybody pulling in the same direction.

Stage 4: Building Momentum
Look for positive signs of recovery. This could be anything:
– Winning a major deal
– Better product quality metrics
– A new partnership
– Reaching break-even in a business unit
Look for any and all indicators that show that the plan is working. Nothing is more important than people believing into the future of the organization. Enter into another 30-60-90 day plan if need be.

Stage 5: Stabilize
At some point, declare the turn-around to be completed. For example, the business has reached profitability. Declare publicly the crisis is over. Capture the lessons learned. Make the findings known. Enter into mid range planning to ensure the future of the business. Shift the focus back to innovation, customers and the market place.

Communication is key to a successful turnaround. Get your management team aligned. Make your employees believe in the future. Most importantly, let the market place know that you are here to stay. Assume that bad news about your business reaches clients, partners and your competition. Be proactive with your communication, so you can control the message.

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Hewlett Packard’s Q1 Results

Today Salto Partners’ Andreas Scherer talked with E-Commerce Times about Hewlett Packard’s first quarter earnings for the new fiscal year 2013. No matter how one looks at the numbers, they ain’t pretty.

HP reported first quarter earnings of $1.6 billion, or 63 cents a share, on revenue of $28.4 billion. This is down 6 percent from a year ago. Some analysts expected worse, so the good news is that is not as bad as some believed it would be.

 If you take a look under the hood you’ll see that all major business units are down year over year and quarter over quarter.

 1. The Printing and Personal Systems delivered $14.13 billion revenue. That is $1.02 billion less revenue compared to the $15.15 billion revenue it did in Q1 of 2012. This division of HP is competing in a tough market segment without any significant market share in hot segments such as tablets and smart phones.

 2. The Enterprise Group delivered $6.984 billion revenue. It dropped more than $475 million compared to last quarter. The EBITDA contribution of this group has declined year over year and quarter over quarter.

 3. Enterprise Services delivered $5.919 billion revenue. It dropped more than $433 million quarter over quarter. What’s even worse. The group only delivered only $76 million EBIDTA. A service organization operating at 1.3 percent EBITDA margin is at this revenue level a significant concern. Another 5-10% drop in revenue and HP is going to lose a lot of money in this business unit.

Now, Meg Whitmen gave a more upbeat outlook for the rest of FY 2013. This could mean that the sales pipeline across the major business units looks stronger than the current numbers indicate. It could mean that there are new products in the pipeline that can make an instant impact. Or it could mean that HP’s strategy is simply hope. The next quarters will be telling which way the Silicon Valley icon is going.

You find the full article here. 

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Fall 2012 Earnings Season

It’s getting tougher out there. That is the key message from this month’s earnings reports so far. Here is what we learned in a nutshell.

IBM had to post a decline in revenue of 5%, but was able to squeak out the same profit on a reduced top-line.

Intel reported sinking revenue in its quarterly report earlier this week. They reported revenue of $13.5 billion – down from  $14.2 billion a year ago -during the third quarter.

Microsoft squeaked out a so-and-so quarter. It posted revenue of US$16.01 billion for the quarter, down from $17.37 billion in the same quarter a year ago. Operating income was down as well.

Hewlett-Packard announced a catastrophic quarter with not much hope for a short term turn-around. HP anticipates revenue declines of 11-13 percent in fiscal 2013 with operating margins of 0-3 percent.

Google’s report came in earlier than expected and worse than expected.  Google reported revenue of $14.10 billion — an increase of 45 percent, compared with the same period last year. However, they were below the market consensus. Also the company was less profitable than expected.

eBay was the outlier. They reported revenue of US$3.4 billion, a 15 percent increase over the same period in 2011. Its Q3 net income on a GAAP basis was $597 million, or $0.45 per diluted share; non-GAAP net income was $718 million, or $0.55 per diluted share — increases of 22 percent and 14 percent, respectively, year over year, driven by top-line growth.

Those numbers are telling the story of a tougher macroeconomic climate. Business in the US is slow. Jobs are coming back, but there is huge uncertainty about the government Fiscal Cliff. It’s a combination of tax hikes and massive spending cuts including a sizable reduction in federal jobs starting January 1, if the House and Congress are not able to agree on a new deficit-reduction plan. While the Fiscal Cliff has not occurred yet, it causes a lot of uncertainty in the market. In situations like that, businesses are pulling back, delaying investment decisions and trim costs.

In the rest of the world there are even stronger head-winds. The Europeans trying to avoid an economic Armageddon with Greece being on the brink of default and Spain being on the verge of having to request a bailout. These countries are followed by Italy, Portugal and Ireland. Other European economies do better but overall things are not looking good. China has slowed down, too.

The numbers we hear this month are certainly reflecting this situation. But there is another insight that these times are providing. They allow us to gauge how strong the value proposition of each company’s products and services really is. We learn about the ability to execute in tougher times. A few examples.

The contrast between IBM and Hewlett Packard could not be more pronounced. The former was able to put a somewhat decent quarter together. The latter had to concede defeat across all business units.

eBay not only posted great numbers. The company upgraded its web presence and launched a new same-day delivery service right in time for the Holiday season. It’s an example for a company that executed well in tough times while getting ready for the next round of competition in their market.

We learn to appreciate the pockets of strength. Take Microsoft Entertainment & Devices Division as an example. Revenues for that division were down and losses were higher compared to the same period last year. That is because Microsoft shipped 1.4 million Xboxes during the last quarter that is 1.3 million units less than from a year earlier. However, they were able to sell 100 billion minutes of Skype calls which is up 40 percent year over year.

These times are not easy for operating executives as well as investors. They are testing. We learn how companies can execute  marketing and selling products and services. We learn about their ability to operationally execute keeping expenses in line with revenue. We learn about areas of growth that can defy a challenging market climate.

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Hewlett-Packard

In another interview with ECommerce Times we talked about HP. At their last earnings call Hewlett-Packard CEO Meg Whitmen had not a lot of good news to report.

1: The PC business, Servers and Storage business were down

2: Enterprise services were the boat anchor of the business

3: The Autonomy integreation was still work in progress

 A few months later Whitmen had to concede that we are not talking about a bad quarter or two. We are talking about bad fiscal years ahead perhaps until 2016 which is light years in the tech industry. HP is in a real predicament. For many moons the company could rely on their personal computer and printer divisions to make the numbers. Those days are gone. Now, we buy smart phones and tablet computers. Unfortunately, there is not one product division that really outperforms the market. Their enterprise service business struggles.

 HP was built on innovation. This is exactly what is needed. New products, world class solutions and a lean and efficient organization that is able to sell and deliver to a world-wide customer base. While not impossible to overcome, none of the challenges that Witmen is facing can be overcome quickly. Her  problem will be time. After her first year, she won’t be able to disassociate the company performance from her own.

You can read the article here.