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 / Summer 2007 / Issue 47(originally published by Booz & Company)


Why Wait for Trouble?

Answering three vital questions can help keep the turnaround specialists away.

Illustration by Lars Leetaru
Today, hundreds of businesses are in crisis. In many cases, the numbers are going south — profitability, cash flow, and even revenues are declining. Or the numbers may be stable, but the company habitually fails to meet the needs of its customers. Or there may be ethical problems that have led to government fines and compliance monitoring, so that the company must receive regulatory approval before making major strategic decisions. The symptoms vary, but the result is usually the same: The board of directors loses confidence in management and calls in an outsider to lead the company and bring it back to life.

In the circles I travel in, this is called a “turnaround.” Professionally, I am among the breed of managers called in to tackle turnaround situations. Personally, I am the sort of person who thrives on it. For more than 15 years, in three different roles — as a senior executive, a CEO, and an external advisor — I have led or helped lead many businesses out of crisis and back to financial and organizational viability. In a wide variety of industrial sectors, from manufactured components to medical diagnostic services, I have learned that the problems that lead to crisis often start in the same way, and I always apply a common set of diagnostics to uncover the causes.

The diagnosis essentially starts and ends with three vital questions:

  • Is there evidence of imbalance or excess, either in the company or in the industry around it?
  • Are the perceptions held by the senior executives of the company aligned or contrary?
  • What is the level of accountability among the employees?

There is no precise formula for success. However, I always start by developing answers to these questions — not just through a one-time diagnosis, but on an ongoing basis. The diagnostics can be very useful for investors as well. Had Enron’s shareholders applied these questions to that company in, say, 1999, they might have been forewarned of the collapse to come.

Of course, addressing these questions also works for companies that are already in a turnaround situation. But why wait for trouble? Any CEO can apply the same diagnostic tools inside a relatively healthy company, to identify potential problems and address them before the situation becomes critical. And with the right kinds of preventive measures, the senior leadership of a company can dramatically improve the odds of keeping turnaround leaders from showing up at the door.

Excesses and Imbalances
When I take on the task of turning around a company, I generally start by looking for the obvious but often unseen places where the organization is set up to disproportionately favor one extreme or another. Once you start to look for them, imbalances are visible in every turnaround situation. Some companies are rife with behavioral excesses; people have collectively lost their balance. They do and say things that would provide clear cause for concern for anyone who stepped back and looked at the company as an objective observer.

One typical form of behavioral excess is an oversupply of entrepreneurial zeal. MetPath (now known as Quest Diagnostics) was started in the 1960s by Dr. Paul Brown, who developed a unique model for providing high-quality, low-cost medical testing services grounded in sophisticated information systems. After Corning Inc. acquired MetPath in 1982, the executives of the merged company ran the lab business as serial entrepreneurs; they knew one primary way to make the company go, and that was growth through acquisition. By the early 1990s, Corning Clinical Laboratories had acquired hundreds of small labs across the United States. But the company was imbalanced: Its entrepreneurial zeal far outweighed any focus on reliable, responsive systems and processes. By the time I walked into the business as CEO in 1995, the industry was suffering from Medicare fraud and abuse issues, large numbers of customer defections, and a lack of process discipline. Predictably, profitability and cash flow were declining rapidly. This situation is common in many maturing companies.

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