As I opened up the newspaper today, the word “crisis” appeared in no less than 22 articles. In addition to the run-of-the-mill crises businesses face everyday—bankruptcies, production halts, labor disagreements, natural disasters—the current economic climate has added new categories of crises that place even greater stress on companies and their financial sponsors. With this tumultuousness, how can leadership ensure their companies emerge healthy? Where should managers focus in times of crisis?
In the majority of crises, there is a tremendous focus on the financials, primarily leverage and liquidity. Little attention is paid to the underlying fundamentals of the business. While restructuring the balance sheet may be necessary, what will bring a company back from the brink of possible extinction and produce long-term improvement is a close look at the “guts” of the company—simply put, a company’s operations.
By going beyond the numbers to properly analyze every aspect of their operations, managers in times of crisis have an opportunity to affect a true turnaround of the organization, ultimately guiding their company to long-term financial and operational health.
Beyond The Number Crunching
Traditionally, when companies are in a crisis they do their financial analysis to see if they can determine the root of the problem. Management works with the company’s accountants and/or financial sponsor to review financial statements to analyze and validate the financial metrics of the business. Though this analysis can help pinpoint problems, it is difficult to identify all of the fundamental factors driving the company’s performance, let alone begin to address these problems. We believe it is necessary to thoroughly review all aspects of the organization in order to identify trouble spots, and those are often not visible in the financials. Operations, along with the “qualitative” due diligence (i.e., tangible factors such as strategy, culture, risk profile, and company management) are all evaluated thoroughly before we give our clients counsel on a solution.
A recent client assignment offers a perfect example of why companies should analyze every aspect of their business when involved in a crisis—financial, operational and strategic. We were engaged by a private equity firm to review the performance of a manufacturing company in the metals industry. The company was highly leveraged, and additional liquidity would be required from the sponsor in order to stabilize the business over the near term.
A major part of our analysis of the metals company was operational. For example, BBK operations professionals toured the plant facilities and reviewed the operational metrics and manufacturing techniques that the company used. What we found was typical. This was a company that claimed to be using lean manufacturing techniques, but, in reality, some of their manufacturing employees didn’t understand the principles of lean manufacturing, and had to rely on charts and graphs hanging throughout the plant. This gave us and our client, the private equity firm, a major cause for concern, because the proposed productivity improvements and cost savings were supposed to rely on the lean manufacturing process. Unfortunately, it was clear by our review that the company was not ready for the productivity improvements that would be required in order to generate the cost savings necessary for a financial turnaround.
Next up was the qualitative portion of the analysis. We performed individual assessments of the company’s management team, interviewing the chairman, CEO, CFO, and vice presidents of HR, technology and the plant managers. We analyzed their backgrounds, industry experience, and ability to serve as change agents who could effectively lead a turnaround effort. Every member of the team was given a grade from A to F and, at the end of the day, our analysis indicated that the management team didn’t make the grade.
After further assessment of the risks and growth opportunities, we concluded that our private equity client should be very cautious in considering how to address the business’s current plight. The company had a mediocre management team charged with implementing a difficult strategic plan that required major cost reductions simply to achieve break-even margins. With significant uncertainty regarding the company’s ability to affect a successful restructuring, a sale of the business’s assets and wind-down of its operations appeared to present a more reasonable approach.
Bad Crisis Gone Good
In a crisis situation, operational expertise can determine the difference between a company worth saving and a company that should be allowed to go out of business. I have been part of crisis situations where, because of our operational insight, we were able to recognize value where no one else could.
For example, in the late 1990s, BBK was brought in to manage a brake coatings plant that was in bankruptcy. Under normal circumstances, most investors would have walked away from the company. The factory had half-installed equipment and a scrap rate that exceeded 50 percent—not good. The factory produced coatings that would more often than not corrode the steel in brake components they were meant to protect. It was an enormous challenge, but we recognized the turnaround potential.
Three months later, new equipment had been installed and was up and running. Within 18 months, we had redesigned and retrofitted much of the plant and reduced the scrap rate to seven parts per million. Production rates continued to climb and labor costs were slashed, and by the time the company was sold (for a profit, which is no small feat in the auto supply industry) it was designated a world class supplier by Delphi Corp. Without this operational expertise, we would never have seen the potential in the company’s production line, and the turnaround, and subsequent value creation, would never have happened.
Regardless of your industry and the components that make up the operations, there are several key measures of operational health that bear examination in a crisis:
1) Analyze The Value Stream
When in a crisis, begin the operational review process by looking at each aspect of your operations. In manufacturing companies, operational waste and inefficiency produce significant cost overruns. When companies face cost overruns, they frequently focus on the balance sheets and thereby prolong the crisis. Identifying waste starts with an analysis of the “value stream,” the map that defines a product’s path from raw material through the various work envelopes to finished goods shipment. In a plastics plant, for example, value stream analysis begins with finished consoles and travels back to the purchase of plastic resin.
In a perfect world, the management team keeps a close eye on the value stream from an early stage, and thus avoids the crisis in the first place. Once a crisis hits, management should go right to the value stream and look for holes in the company’s operational aspects. Finding poor communication systems or inefficient operating systems and quickly fixing them helps the company get back on a more solid setting. Once value-stream analysis reveals weak areas of the operational process or low productivity, an action plan to eliminate waste and drive out cost should be developed.
2) Talk To The Employees
In a time of crisis, management often clams up. A crisis is not the time for silence, as it’s important to explore each aspect of the operations to help identify areas that contribute to the crisis at hand. For example, management should speak to the employees on the floor and find out what they think is working and what needs improvement. Are there inefficiencies that are slowing down the company? For example, does material arrive wrapped at workers’ stations in high-density bubble wrap, requiring them to spend hours unwrapping the bubble-wrap when a different kind of packaging could save the company considerable time and money? Engaging employees on the line and making them feel that they are contributing to helping their company emerge from crisis will prove valuable as they will work smarter and more responsibly.
3) Create A Leaner Manufacturing Operation
Eliminating or reducing processes that don’t add value to operations is another area to explore during a crisis. When scrap and waste affects the bottom line negatively at a manufacturing company, for example, it’s a sign that processes don’t make sense. Getting rid of anything that doesn’t add value helps free up capital and makes the business more efficient when attempting to emerge out of a crisis.
4) Ensure There Is Crisis Expertise At The Table
No matter the size of a company, it is imperative to have a crisis manager with a good track record and adequate experience. Ideally, the bulk of a crisis manager’s experience should be operational. If it’s not the current manager, there needs to be expertise brought in from outside the organization. The crisis manager should understand the mission of the company and be able to work with all members of the team, management and employees. A good crisis manager assesses the situation at hand and above all, executes a plan.
Crisis managers who focus solely on the financial side miss the importance of the operational aspects of a company in crisis. They may focus on the financial side of things because they are more comfortable tackling numbers than assessing the inner workings. But my experience has shown that those managers willing to lift up the hood in times of crisis ultimately emerge successful, with re-stabilized companies coming through the process.
James Connor is managing director for BBK, an international business advisory firm.