Reversing business fortunes

By VIKKI BLAND

Asked if he can relate to the movie Pretty Woman, visiting United States turnaround management guru David Auchterlonie chuckles and says he can.

This calls for a fast explanation. In Pretty Woman, Richard Gere plays a ruthless corporate raider who buys struggling companies for a song, takes them apart and then sells off their pieces. However, after falling in love with his pretty woman, played by Julia Roberts, Gere's character is reformed and he decides to help struggling companies survive.

Auchterlonie, who has spent the past 15 years helping businesses reverse their ill-fortune through turnaround management, likes that part.

As the term suggests, turnaround management (TAM) is the process of employing managers with the skill to steer a business away from insolvency and back towards growth and profitability. However, while TAM is a familiar option for troubled businesses in the United States, South America and Europe, awareness of its effectiveness and availability has to date been muted in New Zealand.

Auchterlonie says international statistics suggest a number of liquidated, insolvent or bailed-out New Zealand businesses would have been on the road back to health by now had TAM services been employed in time.

For example, a January TrendWatch survey of United States businesses in trouble conducted by the International Turnaround Management Organisation found 58 per cent of 269 companies cited poor management as the main cause of their crisis. Lesser reasons including faulty business models and increased competition. Of the survey group, 169 companies, or 63 per cent, were attempting a turnaround. The remainder were looking at selling up, becoming insolvent or liquidating.

Auchterlonie says unnecessary liquidation is proportionately more common in Commonwealth countries than in the United States and Europe.

"This is a pity, because TAM gives businesses revitalising opportunities which may keep them away from insolvency."

Since 1986, Auchterlonie's US-based company, The Scotland Group, has turned around 117 businesses in crisis, or, as Auchterlonie more delicately puts it, businesses "which faced uncertain viability".

He says it is not crucial for TAM professionals to have knowledge of the client's industry; TAM is an abstract process with five distinct stages. The first of these is business analysis, which includes the examination of yield management, capacity, the profitability of routes and pricing, and the underlying cost structures of a company.

Auchterlonie says the next stage, board and constituent presentation, is a crucial one: "By the time TAM suggestions are made at board level, insolvency proceedings can be very close."

The third stage involves moving ineffective or process-impeding managers out or aside, and initiating "emergency action".

"You are looking at anything you can do to generate positive cash flow. We look at lowering the break-even point, restructuring debt, establishing new performance indicators and setting up compensation programmes for employees."

The final stages force cultural change to ensure the company delivers what customers want, followed, hopefully, by a return to normal and a look at growth opportunities. Auchterlonie estimates the five stages take an average of three to six months to action within a medium-sized company.

But there must have been businesses The Scotland Group couldn't help, surely.

In 15 years there have been three. Auchterlonie says those clients sought help in the eleventh hour, their businesses found to be unsalvageable.

"Businesses need to look at turnaround management when they hit problems, not wait until things get dire," he says.

Unfortunately, New Zealand businesses appear to be do-or-dire types. Statistics from the New Zealand Insolvency and Trustee Service show 488 companies were put into liquidation by court order during the year ended June 30, 2002.

This is an improvement on the 695 forced to close their doors in the 2001 year, but how many of those 488 now in liquidation could have been turned around?

More than a few, asserts Bruce McCallum, director of financial specialist and TAM firm McCallum Petterson, which sponsored Auchterlonie's trip.

"Quite often the chance to turn a business around is missed because the interim manager isn't inclined, or trained, to look for opportunity," he says.

Auchterlonie says if New Zealand is serious about business, it needs people trained in business rehabilitation

While TAM professionals often train others on the job, formal training takes the form of a Certified Turnaround Professional (CTP) qualification, an international programme recently made available in New Zealand.

Its requirements are rigorous. On top of a nine-hour examination, candidates must have a bachelor's degree or better, three years experience in the turnaround management industry, and the endorsement of three TAM peers and three TAM clients. To date, only 350 people worldwide have acquired the certification - Auchterlonie is one of them. While these requirements may be daunting for candidates, it's a reassuring mark of quality for businesses that may need help in the future.

Says Auchterlonie: "We have entered a business era where there is an abundance of complex business issues, an increasingly competitive environment, and where global reach and global capital have changed the way businesses perform and succeed."

Warning signs

Here are the indications that a company is at risk, according to financial specialists McCallum Petterson:

* Poor delegation, dishonesty or fraud; ineffective boards of directors.

* Too much diversification, making the business vulnerable to competition

* Too much debt, not enough capital, over-extended credit, excessive fixed assets and stock

* Poor lender relationships

* Lack of operating controls: inadequate reporting systems

* Unstable customer base: for example, the business relies on too few customers

* Family issues affecting business judgement: for example, the death or retirement of a company founder.

* Operating without a business plan