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 / Winter 2003 / Issue 33(originally published by Booz & Company)


Learning Success from Distress

Lesson #2: The numbers may not be giving you adequate warning of a looming cash crisis. At the medical device supplier, the board’s misplaced sense of security was based partly on a cursory misreading of the financial statements. A look at the accounts receivable line told them there was plenty of near-term cash coming in. After we arrived, it took only a couple of hours to realize that most of the receivables were more than 90 days overdue and were unlikely to be collected.

It’s not just receivables that can mislead. Inventory, payables, and other P&L items are subject to enough GAAP interpretation that the consolidated financial statements of many companies do not reflect the real financial condition.

There are many nonfinancial variables that should be watched as well. When Henry Singleton and George Kozmetsky founded Teledyne, which in its day became the fastest company ever to reach $1 billion in sales, they realized that the financial statements were not only somewhat artificial but also too slow to be useful. They decided that the best way to understand the health of their business was to monitor the daily quality control reports. They knew that Teledyne, as a manufacturing company, would be judged by its customers on the quality of its products; thus, the best place to examine the company’s true health was right at the end of the production line.

The important point is that directors and management need to monitor the business in as many ways as is practical, without, obviously, overburdening the company with useless “questions for questions’ sake.” What are customers thinking? How full is the prospective sales pipeline? Is delivery performance improving? How is employee morale? What is the market saying about us? We have seen many companies in which these leading indicators would have pointed to trouble long before the financials spelled distress — if only someone had looked at them.

Lesson #3: If it ain’t broken, it’s broken. The best-performing companies have gone beyond continuous improvement as a theme or an initiative and made it a mind-set, part of the organization’s culture. Even if the company seems to be firing on all cylinders, there’s always a process that can be improved or a location that needs to be turned around or a customer relationship that needs to be repaired.

Rollups, a major corporate strategy in many industries during the 1990s, frequently illustrate this principle. Many rollups have become crisis clients of ours; we think it is because the team that is good at acquisitions is often not good at integrating those acquisitions into a single business with a coherent operating model. (See “Strategic Rollups: Overhauling the Multi-Merger Machine,” by Paul F. Kocourek, Steven Y. Chung, and Matthew G. McKenna, s+b, Second Quarter 2000.)

At one rollup with which we were involved, a medical-practice management business, we arrived to find that there was no systematic effort under way to improve the poorer practices that had been acquired during the buying spree. Instead, the acquisition-minded team viewed the underperforming practices as candidates for divestiture, even at prices below what they had paid. We helped implement a turnaround process that sent teams to the worst performers to work on provider utilization, patient scheduling, back-office improvement, and implementation of patient treatment plans. The results were dramatic and kept the new management from selling valuable assets for less than the acquisition price.

The tricky part was to establish the mentality that there is always a “tail end of the curve” — units, functional departments, or regions that would benefit from a turnaround approach. We are not suggesting that companies put themselves in a crisis mode at all times. At many companies, that would be destabilizing; at most, the attitude would yield diminishing returns, as staff grow inured to the frenzy. Instead, we are recommending that companies always put pieces of the business in turnaround. That not only builds an organizational capability for doing turnarounds, but also sends the message to the organization that you are serious about continuous improvement.

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