Sparking disaster What do clectrical engineers, retailers, manufacturers and nursing homes have in common? All arc prone to corporatc failure. Typically, troubled coinpanics don't voluntarily scck advicc; they wait for the axc to fall. 7'hc earlicr problems arc faced and help is sought, the greatcr the clianccs arc lor a successful turnaround.

by Colin Haig

W 'hilc Iwoad economic swings a c c o u ~ ~ ~ for a pcrcciitagc of insolvcncics, hiisincss recovery profcssioiials arc

acutely :ILVB~C that the rciiiaiiidcr arc gcncrally the province 01 poor iiianagciiiciit. l ' l icrc x c a Icw great universal tliciiics that clomiiintc literature; it's much the same with British iiisolvciicy stories.

Once u p t i a tiiiic, thci-c was an clcctrical cn4iiccring firm in London. Vicioriaii in ? origins it had, over the years, t lcvclopctl a crcclihlc client l,asc. ' I ' I ic hmiiicss gl-cw steadily a ~ i d by the c ; d y 1980s employed ovci- 400 people across tlircc regional CCIILI-CS. 'I'lic conipany tlivcrsificcl into i i L i n i I x I . ol iircas-

fortunes, the Ihiarcl tlcciclctl to crc;itc a iicw Iiigli-technology division to coiiipctc for c o n m c t s iiatioirwitlc. New senior positions were filled and support scrviccs provitlcd, londiiig suhstantial overheads 011 to a painlully uiiclcr-pel-formiiig orgaiiisation. 'I'cndcrs were OUL with n iiuinbcr oi' potciitial clients wlicn disaster happciicd: ;i lawsuit regarding a d i s p u t e on a job ciiri-icd otit 18 months previously, which liatl not I x c n rcsolvcd. SimultnncoLisIy, it l>ccaiiic ;ipp;irciit ~ l i a t tlic company was ti-ading while iiisolvciit.

I lie r c s u l ~ ? I%y the time receivers were c;illcd in at the Iwlicst 0 1 thc h a n k s and d v i . . ,

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including consultmcy - and crcatcd .I substan- tial ccntraliscd il1lrasiruciul.c to supply coi-c financial, adiiiinistrativc ;incl mar-licting scrviccs to all operating divisions.

I hc recessional-y late 1980s and early 1990s hit tlic firm 1i;u-d. Scatlcrctl coiitcicts across 1710s~ divisioris crc;itccl tlic illusion 01 incomc and stability lor a nervous I h r d and worli- /orcc, hut the actual underlying biisiiicss trcntls wcrc negative. Year-oii-year tiiriiovcr had droppcd alariiiiiigly ovci- n live-year pcriotl and tlic cnlargctl iiifraslrLicturc both failed lo tlclivcr and, b y its cxistcncc, drovc iict margins dowo ti) a noli-sustniiiablc Icvcl. 111 the mitt 1990s an incrcasingly desperate k ~ a r d ti-icd to rationalise tlic comp;iiiy's poor ti-ading position tlirougli i i iitiinhcr 01' selective rcdundaiicics and iiicrcasiiifi the business dcvclopiiicnt spciid. Corporate hopes \vcrc liigli regarding 1Litut.c contcicts; this, coiiil~iticd widi trickle incoinc, ltcpt tlic Imsincss afloat, togcthcr with ever.- increasing hank loans aiid creative financing.

'I'lic trading situation worsci icd in 1997 m t l , in a last-iiiinutc I d to revive the cotiipiiiiy's

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tlicrc \vas nothiug l e f t to rcsciic. 'l'hcrc weren't any buyers for tlic husiiicss s o liundrcds o f cniployccs wcrc madc rctluntlant, all possihlc fixturcs and fittings WCIT sold, 1'I'hartlwarc was dumped on t l i c iiiadcct a t ;1 knock-down price, tlic executive flcct (which rcprcscntcd ;I huge " x t in the iiiaiiagciiiciit accoLiiits) was sold at a loss and local estate agents clid their Gcst to get rid of sites and leases-again, at a loss. A thriving success collapsed with a bang.

Iivcntually, creditors wcrc 'rcwartlcd' with a miscrly 811 in the pound; sharclioltlcrs rcccivcd nil.

thidsight is alw:iys 20:20. It's casy to look back at any btisincss failure and climit: 'Why didn't they I-ccognisc the signs? 1 low could thiiigs go so dmmaticnlly wrong?' 111 the rcal world, ciiginccring coinpanics Ii;ivc goiic, ant l will continue tu go, htist with iiionotoiiom rcgtilaritp, thanks t o inept inanagcmcnt.

The licy is recognising wlicii .I busincss is in trouble; signs for clcctrical cnginccring firtiis includc:

Uiminishccl sticccss rate lor iicw tcndcrs. ~ o w n t u r n in atlditional/incrcincn~il

Shrinliing c~stoi i icr hasc. e I<cgioiial falI-OLit/Liiidcr-I)c1-C[)riiiiiiR i n

Stcady dccliiic in turnover. S11riiilcing margins. l l igh staff tLiriiovcr (NE senior lcvcls). Excessive gearing (dc1)t fin;iicc). Fully financcd u s c t hasc (ix. fixed assets on

lntlatc~d ovcrlicxts, particularly non-

contracts from cxisting clicnts.

lcasc, 1 IP etc.).

performing cciitral services. (::ish pressure hindering tlic firm from I<ccping up with coi i ipct i tors. Long-tcrni ~ ~ ~ i d ~ r - i ~ i v e ~ t ~ i ~ ~ ~ i t , I i i~cnsc short-tci-iii Cash prcssurcs hitting supply lincs.

'l'lic inatlcqu,?cp:iiisoIvency link J<ccciit figures l*om the I)cp;irtmciit of

lkidc and Tntltistry (IYl'I) sliow a sharp rise in liquiclations last year, with IiiiiiJrcds of husincsscs put straight into Iiqtiiclation without any oppoi-tuiiity to CIILCI' into iiiorc rc- liahilitativc proccdurc. Fipircs issued by the Association ol Business l l cc~~vcrp Profcs- sioiials show that i~iorc than 1 Io 000 jolis wcrc put in jeopardy by poor riianagcincnt clui-iiig this period, with a n additional 275 000 jobs placcd at risk by insolvent companies. hlm'igc-

mciit failings were tlic riiaiii ciiiisc for nearly one in two company i11so1vc1icics antl wcrc cited as tlic ltcy factor in 80% of cases.

Uritisli managcmcnt scciiis Litiahlc cithcr 10 Icarn or to buy in the necessary business sltills to recognise and ~ C S C L I C a company on tlic brink of ruin; this holds true for the cnginccring sector, which has sufrcrcd from significant corporate failures over tlic years.

Fcar rules v(4iilc sonic factors arc hcyond any

orgiiiiis;ition's coiitrol, many can be ovcrcoiiic. When a conipany hits a tough patch, ow1icr- iiiaii'igcrs and directors run lor cover, Tlicy'rc afraid to scrutinisc inaiiagcmcnt accouiits, overheads, rciiiuiicratioii pacltagcs, staffing Icvcls, inlrastructurc costs, the quality of t he c~~s to i i ie r base, the cost of delivering turiiover, s t d C attrition and other wariiiiig sipis. l 'hcy bclicvc that voicing problcnis is taiitaiiiwiit to admitting individual and collective f i lu rc , whilc tlic reality is q ~ i i t c different. Typically, troullcd comp.inics don't vr)luntarily scck atlvicc; they wait ior t l ic axc to fall. 'I'hc carlicr that problems arc laccd and h e l p is sought, tlic

the c l ~ s e r a Lusincss is to insolvciicy, the fewer rcsc~ic opprtuii i t ics exist.

I ~irnaround profcssioiials cxpcct to sec tlic

grcatcr cI1;~lIccs arc 101. a SLlcccSsfLII turllaroulld;

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Salllc S C t oc 'fLlndall~cnt'11 flaws' \vIlcIl thcy arc callcd in as advisers to failing husincsscs.

Rlaclc holcs When askctl to rcvicw a company on the

brink of i ~ ~ s o l v c ~ ~ c y , business rccovcry profcs- sionals anticipate balance sheet black holcs, despite the ciidcavours oi iiitcriial hiancia1 and accounting staif, rcgular inontlily ;iccouiits, d i t o r s and tlic likc. 1)ctcctioii taltcs, 0 1 1

that surface cscapc inanagciiiciit action bccausc they rcprcsciit tlic unthinkable, unspcaltahlc or irrciutablc.

Z.ocli-up, or unh i l l cd work in progress, i s v.il~icIcss until it is billctl and tlicn paid. It inay liavc a value in mauagcmciit accou~its, but is irrclcvaiit in tcr i i is of cash flow, and a builcl-tip of work in progress caii tcmlx)rarilp flatten bottom-liiic profits.

Collcctioii of individuals or team? Most managcmcnt teatiis aren't teains -

instead, they're an unhappy assembly of people with ill-matched sltill sets aiid pcrsonalitics, Corporatc activity is gciicrally biased toward

,ivcragc, al.oLlnd a couplc ol clays. 'I'hc problcms

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the ~ L I I K ~ ~ C I I I untlcrtakcn by the iiiost powerful tc c o n t l - i h c financi;ilIy to crc(Iitors’ Iosscs. tcain mcmbcr (e.g. II: operations, sales), while IXrcctors frcqucntly sail closc to the willcl to others arc ignored. Wlicn cough tratling ofCsct the c&cts or a n cconoinic clownturn. conditions persist, tlic management team’s Listed coinpanics arc under iiicrccliI)lc p rc s s~~rc historic and strategic imlnlancc hinclci-s it fro111 to deliver clillaliccd profits ,irulually, \vliilc pinpointing and ovcrcoining tlic rcal b u s i n e s s private c o l n p l i c s fight lor survival. 111 ally issues. Insicad, they plough the saiiic furrow re .ion, ()f{cl,ccs involving tax e\’aSioll an‘[ anti wondcr why the p r d - false accounting surge, with l c m dccpcn It’s particularly A well-~ok~s;id& disastrous cCJllScClLlCllCCS Tor sad whco tnarltct Icadcrs tlic directors involved and forget ~ iow t ~ i c y acliicvcci tliat rnanagQmei~% their crcciitors. position and bccoinc t‘c;irful Directors can suffer per- a 1 s o - r ~ ~ . A well-roundctt sf rives for “e sonal liability citlxr for t~cb t management team strives corporate good and iiictiri-cd or for offcl ices coin- for the corporate goocl iiiittcd by the coinpany while and m e s s e s all issues and assesses ail issues u n d e r their controI; they cat1 opportunitics against a cogent also he jointly ;1nt1 scvcrally strategic plan. and 0~po~tuniEies liahlc for t l i e action of their

This is particularly t rue in hoartl colleagues. All direct- 01-s s11ould cllsurc tl1at thcy the ciigiiiccring sector, whcrc against a

icchnical skills iirc cl uitc arc regularly ;idvised or thcir rightly prized-but shouldn’t co i i ip ip’s fiilancial position, be over-valued at the cxpcnsc of otlicr essential ‘IS ivcll as the stailis regarding sensitive areas lilic attributes. Great engineers arc great engineers: duties toward clnployccs. they’re not ncccssarily great salcspcoplc, financiers, client handlers, project managers, l’r Slavcs to salcs gurus, administrators or 1 II< pmctitioncrs. Is turnover paramount? In our cxpcricticc,

I.cgislatinn froin the late 1980s rcgartling i i ios t senior iilarialgcIIIciit sLficrs frCJIl1 the dircctors’ roles and rcsponsibiliiics is having ‘1 dclusion that annually increased tLImovcr significant iiiipaci on ailing organisations. creates a strong business, yet tbcp don’t uiidcr- Increasingly, tlic courts arc using legislation to stand and calculate the act~i;ll cost ol’ dclivcriilg obtain rcdrcss from directors persoilally, whcrc incl-cmcntal sales. the co~i r t is satisfictl that the dircctor’s conrluct What Iiapl~ciis in i i diininisl~itig or changing; has fallen below the standard rcquirctl. iiiarkct whcrc cnginccring contraciors arc The rcdrcss might bc a ban from actiiig RS a forced to d r o p tcnclcr prices ( a d L ~ L I S cut director; worse still, it might bc a tlcniaiid niargins) in ;I d c s p ” c l id tc win co~~ t rac t s and

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maintain top-line sales? The true effect 011

profitability might riot he tlctcctcd lor 12 months or iiiorc, by \vhich t i m e the husiticss cou ld he in serious financial t r o ~ ~ h l e .

The C O I ~ L I I ~ ~ I - L I I I I : ailing cnginccriiig rirlus must rcvcrsc dicit. sales cLcliiic and c h w back l os t income, yet doing so might wreck their businesses.

Incrcxcd turnovcr is i i icaiiinglcss if it robs ;I business O C iiiorc than it provides; the c o s t of gcncrating tw iovc r ii1~1st b c ;iiidysed Gcforc tlriving to~ards unprofitable lcvcls of sales activity.

Marlict cotitlitions Tlic reality of any free m d t c t cconomy!

'I'liat a certain pcrcciitagc o f coiiipatiics will natur'illv fail. ' i ' l icrc arc limits

tiialting a pcrccntagc of the workforce redun- dant isn't an appcaling prospect-bur nor is going bust.

Most companies fill into the trap o[ culling tlic staff it i s cheapest to lose; instead, thcy should focus 0 1 1 tlic pcoplc i t i s cssciitial to retain to rchui ld and revitalise the htisiiicss.

Muppet ofCspriiig Ikinily-run biisiiicsscs frcquciitly suffcr

from thc 'Muppet offspring' syndroiiic, sliorthand for second- or third-generation matlagctncnt who expect the h t ~ s i n c s s to run itself while they rcap the profits. Where Muppct offspring exist, they arc gcncrally ;I

significant contributing factor in iiiost cases of husincss [dui-e. Whilc Muppct offspring

frcoLIelltlY hnvc cxccllct1t

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to the s i x of ;iny iii;irItct, which translates into iiilicrciit rest r ic t ions rcgirding the iititiibcr 0 1 busiiicsscs it can

cloiiiiiio effect believing lli;it,

begins, it doesn't end until i L

lias destroyed cvcrytliing in its path. Ast~itc ohscrvcrs know that many companies tratlc on the hrinlt of insolvency and tli:it it taltcs vcrv little to utisli them over

support. IIlnocc11Ls blnl l lc the

ollcc a cyclollc o i colla]'sc

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customer-liandliiig sk i l l s , placing tliciii at the helm ol a fading b ~ i s i n c s s in a precarious sector is nsking for disaster.

Turnaround 1 h e first and iiiost import-

ant step in any business rccovcry is conquering iiiaii-

;igcmcnr fear, Oncc this his bccn overcome, professional

t 11 m the 1x1 s i 11 css aro Ll t ld

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help can be cn1ploycd to

tlic cdgc. 'ho iiiany companies compcting for too sinall a marlict s l ia rc g c n c r " ~ J. logical I.CSLllt.

I~ in ; i i~c i~ i l ly - t ro~~l~lc~~ coiiipanics aCfcct a m;irlict: creditors aiid suppliers in a ~ c c t o r s c c I ~ swift paynicnt; banks anti othci- Icnding institutions insist on atllicrciicc to re-paytiicnt schcclulcs; potent ia l investors look clsc\vhcrc; biisiiicss and city j o ~ i i . n a l i s t s on national ;id rcgioilal ricwspapcrs create their LiniqLie mayhem: analysts can drag bus incsscs down. Utisurprisingly, strong compaiiics cnicrgc in a bcttcr trading position, while their wobbly counlcrparts topple.

'Rand-aid' stratcgy i solutiolis to long-term

problems arc sought hp cmbattlccl inanagevs thc result is the saiiic prohlcms with ii iorc noughts 011 the cnd. A succcsslul business strategy niiist bc framed by current marke t conditions allied t o a rolling five-year vicw. Tough long-tertii dccisions must he made regarding rcsourcing, operations and Cinaiicing. <:losing si tes aiicl

hcfnrc it Ixcoincs atiothcr insolvency statistic. Uusincss rccovcry prorcssionals spcciialisc in

rescuing t r~)~ihled conipanics through Loth

with tlic clcaring baoks and other organisations they rc-strLicttirc dcbt, sti-camlinc operations and gcricrally do w1i;itcvcr i s ncccssary to liccp the hLisii icss going while it trades out of trouble, i s 1-e-fiiiaiiccd or i s sold LO 01- merged with aiiotlicr firni, preserving coiitracts, jolx and tlic hroadcr iduscry.

Many husincsscs can hc rescued il profes- sioiial help is SoLigIit cai.ly i i i tbc d o w i i w a r d cycle. I'lcctrical engineering i s ~indcrgoing significant change, a pro accompauicd hy high insolvency. Iroublcd firms can be saved hy positive m;inagcmcnt action, if help is sought early in the cycle.

fol.tid atid i d o r ~ ~ l a l ~ ~ O C C ~ U I - C S . 111 tandem

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