A recent article in McKinsey&Company’s Insights and Publications discusses pitfalls to avoid when trying to manage a turnaround, and also some tips on how to stay focused on the long-term view.
Authors Kevin Carmody, Ryan Davies, and Doug Yakola note: “The most successful turnarounds are those in which managers balance the short and long term in business decisions, both financially and organizationally. Financially, many investments that do not pay back their costs quickly (in less than two years) still create value and are important for the viability and health of the company.”
The article explores common errors managers make when trying to determine how to invest dwindling resources and how to make the best decisions with the information you have.
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Avoid drastic measures unless truly necessary
Many businesses respond to a financial pinch by instituting a freeze on all spending, including capital spending, hiring, travel, and other discretionary expenses. Carmody et al. argue that “it’s better to take a more nuanced approach” in most cases.
They argue that execs should always discuss major investments individually, considering both the short-term and long-term implications of making or delaying the investment. Making important decisions by default because of a broad spending directive is not a good idea.
Take the time to carefully analyze potential investments
Carmody and colleagues also point out that managers under pressure in turnaround situations often have only minimal time to evaluate which activities and investments to continue supporting and which to cut. In many cases, these decisions boil down to which department head has the most clout or who has the strongest personality, instead of what does the company really need to do to stay afloat.
Don’t sacrifice the long-term for a short-term benefit
Greater accountability and pressure on managers to hit their numbers can lead to short-term thinking, which often leads to poor long-term decisions. Short-term tactics may be just financial risk, such as giving big sales discounts to meet near-term volume goals or setting up back-loaded or risky contracts.
Other short-term strategies can be more risky, such as shipping lower-quality products, delaying a maintenance shut down until the next accounting period, or continuing operations in spite of safety or reliability concerns.
The authors highlight the tension between execution and innovation. They note that innovation usually involves experimentation and failure, practices that can be hard to justify if you are counting every dollar.
Consider employees an investment in your turnaround
Carmody, Davies and Yakols say “the single largest attribute of a successful turnaround and a healthy company is the people who manage and run it. Yet, in many cases, investment in people is one of the first areas to go when companies struggle.”
They go on to note that many companies they know of reduced or eliminated hiring of entry-level management talent during the 2009 recession and are now struggling with leadership at the mid-levels of the organization.
The authors argue that when a business is in trouble, firms rely on their employees even more than they do when all is going well. In tough times, companies expect employees to increase productivity, come up with creative ideas, improve teamwork and/or offer moral support. Not laying off employees as long as possible makes it clear that people are valuable, and can energize the entire team to buy into the turnaround.
Keep in mind that personnel decisions should almost always be made on a case-by-case basis, but making an effort to prevent across-the-board cuts for employees and benefits should be a high priority.