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3 Questions You Must Ask Before You Can Turn Around a Business

Your organization has seen better days, and if you want to return to profit and prosperity, you’ll need to implement a new strategic direction. Do you choose to accept?

By Garrett Sheridan and Lei Tong

Imagine this scenario: Your business was performing well over the past several years, but thanks to a recent convergence of circumstances, you’ve lost your competitive advantage and you don’t have a clear plan for a profitable return. (Not particularly hard to imagine in 2020, is it?)

Even worse, new competitors are emerging every day to steal sizable chunks of your business.

It’s time for a turnaround. Too often, organizational turnarounds are done in-house, with few seeing the value of seeking professional help unless the company is in dire financial straits. Even organizations looking for outside help tend to narrowly focus on financials and legal issues. According to the Administrative Office of the U.S. Courts, only one out of eight companies that files for Chapter 11 achieves successful reorganization.

Companies that choose to tackle a turnaround internally will often follow an unstructured approach. What’s more, these organizations seldom define the necessary levers to make a full turnaround that is rooted in redefining a vision for growth, leadership, and investments in new capabilities.

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It has been famously said that what got you here won’t get you there. Now apply that tenet to your organization’s vision, leadership, and capabilities. If your business needs to turn around or transform, there’s a good chance you’re asking yourself these three questions: 

  1. Why do we have to do this? 
  2. Do our leaders get it, do we have the capabilities to do it right?
  3. How do I create impact that leads to successful execution?

Maybe you’ve figured out how to buy some more time on the financial side. Okay, then how will you compete in the new environment? What are your competitors focused on? How do you differentiate your products or services in ways that will quickly get you back on the right path to profitability?

You can do volumes of planning and analysis, identify reasons for poor market performance, determine root causes of failure, execute analyses, come up with all sorts of insights for the hows and whys, and make every incremental attempt to stem and turn these tides. But one thing you can’t afford to do is stay the course—because if you do, your business won’t exist in a few years.

That’s why you need a new strategic direction. It’s critical to have the right leaders in place.

These people must take a hard look at the business and put it through the inevitable pain required to deliver on the promise of a return to profitable growth. You’ll need to redraw boxes and cross off the names of some current veterans. New leaders who can communicate clear, concise guiding principles will help the organization focus, develop the right capabilities aligned with the new strategic direction, and navigate the often painful and long transition of a successful turnaround.

Got those? Great. Now let us explain how to answer those three big questions.

Question #1: Why do we have to do this?

It’s easy to spot signs of distress. Falling market share, declining revenue, diminishing liquidity, and higher customer turnover are just a few. However, not all turnarounds are created equal. Some require significant cost cutting to appropriately size the business. Others require more focus on innovation or a change in the business model. Context is everything: Which organization-level capabilities are most important for you? Which leadership muscles will be required?

Before picking the leaders for your transformation, you need to know the root causes behind why you’re turning the business around. Until a physician diagnoses your ailment, he or she can’t prescribe a treatment. Complying with the right treatment is essential to keeping a patient alive and kicking. It’s the same with a business turnaround.

In an old fable, a group of blind men come across an elephant and try to conceptualize what the animal is like by touching it. Each man feels a different part of the elephant and describes it based on his partial experiences. Predictably, no one can agree on the correct description, and so each man comes to suspect that the others are dishonest.

The moral? We all have a tendency to project our partial experiences and biases as the whole truth, failing to consider that some people may be partially right and may have partial information. This holds true when leaders are focused on their own functions and yet have strong opinions and biases for what a turnaround should look like.

To succeed in setting a complete strategic picture for the turnaround, you need a thorough diagnostic to understand how your business got into its predicament. Have you experienced a long gradual decline in profits, or more of a death spiral? Brutal honesty here can provide clues for plotting the best path forward. If you experienced a rapid fall from grace, it’s likely that your competitors have outmaneuvered you, perhaps taking advantage of technology to access customers in an efficient manner that reflects the way they want to engage or buy.

Significant industry disruptions—think Uber, Airbnb, and Netflix—require more radical efforts in response. These disruptors often take advantage of technological advances and new consumer preferences that simply make your products or services less relevant than they were before. In these cases, strategic acquisitions or partnerships may be the only solutions (as opposed to slowly developing new inhouse capabilities).

When the decline is gradual over several years, it tends to point to a lack of innovation in building on the core foundation of the company’s products or services. This is often the case with larger organizations that have achieved success and become complacent. It’s not that leaders wake up one day and realize the company is in trouble; rather, they haven’t tended to innovation and important signals from customers and the market over a period of time. How long have the brick-and-mortar retailers been watching trends in the market and assuming that they could survive?

The critical first step is clearly establishing a data-driven fact base on which leaders can agree. Without facts, companies are reliant on a visionary savior to ideate his or her way out of trouble. These leaders are few and far between, so the rest of us must be data-driven. But the key here is to strike the right balance between big data and relevant data.

Data in and of itself won’t make decisions or set a course of action, but the right data can give leaders confidence that their proposed decisions and future direction will in fact deliver improved results. Tools like Tableau have greatly simplified how data visualization can be used to integrate multiple data sources and provide interactive, real-time insights and drilldowns to guide leaders in their decisions.

Any strategic diagnostic should incorporate the voice of your customers, so that you can hear directly how your products or services are missing the mark. During a turnaround, it can be somewhat of a balancing act to ensure that you maintain your highest-priority customers as you rethink the business at its core. However, keep in mind that 5 years from now, those customers could have completely different preferences than your core customers today.

Ultimately, the diagnostic must result in decisions that get you back on track. Sometimes, taking a disruptive innovation path and better leveraging technology will be the key. Other times, the answer might be to play catch up through incremental innovation or a more disciplined sales force. Of course, if the business has become bloated, then you might need to lower your expenses while you figure out the growth agenda.

Cost cutting has its place in a turnaround, but it’s very rarely a panacea. It can help create the financial headroom for efforts that are focused on improving innovation and regaining market share. With the added headroom, leaders must be decisive in areas where strategic investments are needed to drive the most value for the organization. This could be in the form of innovation, talent, or strategic acquisitions.

Additionally, during times of distress, employees are looking for signals of hope. What’s the growth narrative you can create that will provide your people with leadership and a steady hand.

You must understand the current profitability and growth opportunities across the product and service portfolio. Let’s say one is lagging behind the rest. Can we trim it out and focus on the products or services that create greater value to customers? In that case, we may also need to reinvent the business model. This could even involve rethinking your sources of competitive advantage, channels, points of differentiation, talent, revenue model, and optimal cost structure.

Question #2: Do our leaders get it? Do we have the capabilities to do it right?

Most turnarounds treat the symptoms, not the causes. This is why many turnarounds focus on cost cutting and restructuring debt, where financial or legal experts define the applied treatments. A true turnaround needs to address changes in leadership, organization alignment, and capabilities to succeed in the future. Let’s look at each.

Changes in Leadership

So how do you test for the “right” kind of leader to do the turnaround? What experiences does he or she need to have? The type of leader that shepherds a turnaround is different from the one who guides growth. This leader does things that take the cost out of the organization while simultaneously investing in new capabilities and growth. The behaviors they exhibit will be critical for creating and sustaining lasting change. They must do the following things:

Stay on message. When leaders at different levels in the organization send different signals about their commitment during a turnaround, it can have a devastating ripple effect. It’s not uncommon for employees to ask different leaders what they think about the turnaround plans and their potential for success.

They also have to get comfortable with repetition. If you think you’re over-communicating, communicate again. Employees are worried about the business and their jobs. Their capacity to absorb information is compromised, so practice clarity, consistency, and simplicity.

Be transparent. Leaders who paint an overly optimistic view of the future or fail to own previous mistakes may feel better about themselves in the short term, but they’re not winning the hearts and minds of their people. Be specific about the actions you will pursue, and how employees can contribute. In times of great success, leaders simply need to “manage” the business and be good operators. But in times of turnaround, they need to “lead” and inspire with direct communications about the current state, supplemented with a compelling vision for the future.

Break down the walls. You want to align people around a shared set of objectives, but legacy silos will persist. Recommendations are often too inwardly focused on functional capability versus delivering results for customers and the business.

Use a simple method called a “value tree analysis”—where you rank objectives that drive value in two dimensions—to assess gaps in alignment. 

Example: Ask the leadership and manager ranks to assess each objective on two scales: strategic importance and ability to execute. The results will reveal the collaboration gaps you’ll need to bridge. 

Organizational Alignment

Once the leadership team establishes the direction for the turnaround and identifies the key levers to pull, be honest about the capabilities required to pull off the change. If you’re a brick-and-mortar retailer, trying to become an exclusively digital marketplace with your current capabilities won’t work. You simply can’t win if you’re playing hockey with a team of soccer players.

Capabilities to Succeed

How do you know which capabilities you need? Start by mapping your desired results, the capabilities required to deliver, and then prioritize where you’re over- or under-invested. Turnarounds create an opportunity to take stock of talent. If you haven’t used objective, third-party leadership assessment tools, now is a good time to start. The Hogan Leadership Assessment, for example, can provide helpful insights into leadership potential and how leaders are likely to “show up” during the change. You need leaders who can mobilize people during a turnaround. If you’re making cuts to the workforce, you have to quickly turn your attention to creating a growth narrative that’s both compelling and believable.

One common and costly mistake: leaving poor performers in important roles. You want A players in your most strategic roles, though it’s probably okay to have a B player. Look at historical performance data and objective assessments to pinpoint your players and deploy them appropriately. If you can’t fill strategic roles with A players from within, it’s time to cast a broader net.

Change management during a turnaround needs to focus on actions and investments that align, equip, and sustain the change.

  • Align: Get leaders and employees to agree on the path forward and commit to it.
  • Equip: Provide leaders and employees with the skills and capabilities needed to drive the turnaround.
  • Sustain: Create ways to monitor and measure the turnaround and reinforce positive results and behaviors to maintain momentum.

Easier said than done, right? Consider setting up a program management office, a team of taskmasters who keep the organization on point to hit milestones during the turnaround.

Question #3: How do I create impact that leads to successful execution?

The board of directors has replaced the CEO after a failed turnaround attempt. Now you’re in charge. You have 12 months to return the business to growth and profitability. How do you avoid the pitfalls that sullied the last turnaround attempt? Here are five ways:

1. Set a new direction and start walking. You need to establish a solid fact base, but also be able to make the tough, strategic decisions when you don’t have all the information. Things are in transition; you can’t wait for the new players to redefine the market. Even if the strategic decisions aren’t 100 percent correct, you’ll have the opportunity to make adjustments over time.

2. Cost cut and growth plan. You need to understand sources of organizational value, whether they’re strategic, operational, or foundational. Do you have the discipline to add one area while cutting another? You must also articulate the link between turnaround efforts, cost reductions, and overall turnaround strategy to help employees understand the changes. Communicate a side-by-side contrast of which things will stay the same and which will change. 

3. Categorize your capabilities. Group your resources as “strategic,” “core,” “requisite,” or “surplus.” Align your talent around these. You must discontinue surplus and requisite and strengthen or reallocate resources to build strategic and core. Don’t make the wrong cuts, because you never want to trim the organization’s strategic capabilities.

4. Align and empower leaders at every level. Give your leaders clear goals, objectives, and expected outcomes of the turnaround initiatives. Then create appropriate levels of responsibility and accountability by scheduling standing meetings to discuss progress, challenges, and results. Empowering your managers to make decisions that directly impact their areas will increase their commitment to change. Remember: One of the most common turnaround pain points is that leadership focuses on mistakes rather than helping their people solve actual problems.

5. Cut once with precision. Use a bottoms-up approach to identify which teams, departments, and functions have excess capacity, and then use a data-driven approach and objective measures of performance to determine which employees to let go. Employees often know who the low performers are, so a subjective approach to reducing headcount and refocusing the business will create discontent.

A turnaround CEO is willing to cut deeper than expected, and in a single event rather than in protracted or recurring iterations. Given that a turnaround almost always means staff reductions, it’s critical for the CEO to clarify the new roles, responsibilities, and expectations to avoid declines in morale.

Turnarounds are never easy; every case is different. But if you establish clear mandates and priorities—and execute with discipline—you’ll guide the day-to-day decisions that will ensure the future health, viability, and growth of your organization.

Garrett Sheridan is the president of Axiom Consulting Partners. He specializes in working with leaders to align business strategy, organization design, and talent management practices to deliver improved performance and results.

Lei Tong is the corporate director for strategy and operations at Gallagher. Before that, he was principal at Axiom Consulting Partners. He is a highly analytical and quantitative business strategy advisor who finds innovative ways to integrate his technical background to help leaders solv