Executive decision: Know when and how to choose a turnaround consultant

Today we hear of one economic sector after another seeking help in turning around their declining businesses. From airlines and breweries to retailers and online search companies, everyone is taking steps to make the personnel and equipment cuts, process upgrades, financial changes, and other moves needed to get back on a solid business footing.

By David Priestley November 1, 2008

Today we hear of one economic sector after another seeking help in turning around their declining businesses. From airlines and breweries to retailers and online search companies, everyone is taking steps to make the personnel and equipment cuts, process upgrades, financial changes, and other moves needed to get back on a solid business footing.

But struggling manufacturers largely have been reluctant to make essential changes—or they’ve made them far too late. These companies are more likely to accept gradually deteriorating conditions and hope for the best.

Why are manufacturers so hesitant about asking for help when a turnaround consultant may well save the company and make it profitable again? No such consultant I know of ever told a client, “It would have been smarter if you had waited to call us.”

And it’s an almost equally rare occurrence when the consultant can report, “You called at just the right time.”

Manufacturers often get caught up in issues related to expectations for success, as well as the entrepreneurial personality. Frequently they delay seeking turnaround help for these reasons:

  • Pride : They don’t want to admit that the company they poured their heart and fortune into isn’t succeeding.

  • Fear of change : In the manufacturer’s mind, changing management structures, facilities, products, or operations presents unknown risks, and trusting someone else to guide this change may be even more threatening.

  • Inability to make difficult decisions : Manufacturers often have personal or emotional ties to managers, employees, vendors, customers, or financial institutions, and it’s difficult to abandon them. So the owner simply may freeze, unable to do what is needed.

  • Unwillingness to spend : The unknown results of a financial investment may form a barrier to doing what’s best for the business.

Repeatedly, however, experience demonstrates the ROI from an effective consultant can improve a company’s performance rapidly, and lenders usually support such turnaround efforts.

When to turn

At what point, then, should manufacturers ask a consultant for help? They should look for any of four developments that raise a red flag:

  1. If they have lost money one year and are beginning to lose money the next.

  2. If revenue or margin percentage is trending downward; or if overhead costs—materials or labor costs as a percentage of sales—are trending upward.

  3. If the ratios banks use for covenants indicate trouble, especially since these ratios indicate financial health or weakness to a banker.

  4. If deterioration occurs in such operating measures as quality, scrap, delivery, productivity and customers satisfaction, any of which can lead to financial problems.

When any of these negative tendencies emerge, the manufacturer should engage a turnaround consultant. Otherwise money losses will worsen, pressures from vendors and the bank will build, and the company eventually will run out of cash and fail. The consultant’s goal will be to make changes that will help the company make money and generate positive cash flow quickly—in other words, to get time on the client’s side.

Your turnaround consultant should have the range of experience, expertise, and concern for your business that will support the revival of your company. Evaluate the experience level of the individuals who will be working actively on your behalf. If seasoned partners convinced you to choose their firm, be sure they don’t switch your team to an army of newly scrubbed MBAs with much eagerness but little experience.

Realize that most turnaround consultants are proficient at such short-term financial management strategies as cash management, cash projecting, financial modeling, and refinancing—but your company may need more than that. Your solutions may require expertise in functional areas such as quality, inventory control, cost estimating, IT, manufacturing, logistics, real estate taxes, benefits, pensions, and vendor management. Your consultant’s experience should be steeped in all the areas where your business needs help. Furthermore, the consultant should have access to specialists in many fields—experts who can be engaged as needed in a cost-effective manner.

Beyond this functional expertise, your consultant should bring lessons learned from other industries. You may be tempted to favor a consultant who specializes in your business vertical, but that may be a disadvantage since such a consultant has not gained the best practices developed in other industries.

Another factor to consider is whether the consultant is creditor-oriented or debtor-oriented. Often a consultant may work principally for a single large customer, like an automotive OEM. But if these consultants get most of their work from creditors or customers, it may be difficult for them to work with your company, which is a debtor/supplier.

You’re often better off with consultants who draw referrals from many sources, as well as those with a long-term stake in the industry and your geographic area. These advisors generally want to preserve their reputation of professionalism, act in the best interest of their clients, and demonstrate a service-oriented culture.

Managing expectations

Before work begins, be sure to set clear expectations with the consultant:

  • Establish a clear scope of work with stated objectives in a signed contract so that the boundaries of the consultant’s work are set and the desired outcomes are delineated—as are the types of support the client will provide, including data and personnel.

  • Set fair commercial terms by requiring a good-faith estimate of the consultant’s fees, and advance notice if the fees will increase.

  • Pay consultants on time by agreeing on a reasonable retainer and paying concurrently with the work provided.

  • Negotiate a brief notice-of-termination clause that can be executed by either party.

Once the arrangements have been made, the consultant should immediately begin assessing the situation and evaluating the current outlook for cash. The consultant will examine the company’s financial performance and outlook, and then interview personnel, walk the floor, and analyze data to identify root causes and rapid solutions.

The consultant also will work with your company’s staff to collect their improvement ideas, and empower them to implement those improvements rapidly.

Primarily, all these activities comprise a methodology to make changes in four areas:

  • Financial : Collecting past-due receivables, debt restructuring, negotiating with vendors for better terms, and negotiating with customers;

  • Structural : Dropping underperforming products, consolidating plants, reorganizing;

  • Operational : Changing the shop-floor layout, and staffing and processes; and

  • Managerial : Tracking key operating statistics.

A productive relationship with a consultant should generate full engagement in the project among client personnel, and establish open and honest two-way communication, mutual trust, and results that are delivered as promised.

If you are not receiving the agreed-upon results; not communicating efficiently with the consultant; and running into situations where the consultant becomes too involved in your company’s daily activities, runs up hours and fees, or caters to the interests of lenders or customers instead of your business, it’s time to look elsewhere.

Consultants do their best work when focused on fixing the business rather than managing a short-term cash crisis, and manufacturers can repair their companies by recognizing and accepting evident warning signs that they need guidance from a turnaround specialist. As a business owner, your company is your existence, and turning it around to become a successful enterprise should be the most important objective of your life.

Author Information
David Priestley is consulting manager for the Restructuring and Operations Improvement Practice of Plante & Moran , a leading certified public accounting and business advisory firm.