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The Six-Month Fix: Adventures in Rescuing Failing Companies

Overview

Acclaim for The Six-Month Fix

"Finally: a turnaround guide that explains the nontrivial difference between those who work for debtors and those who work for shareholders, and gives readers a peek at why most turnaround guys should not stay for long."
— John Carrington, Chairman and CEO, WebSense

"Too many celebrate financial victory; too few dig into business tragedy. Ultimate success comes from saving the ...

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Overview

Acclaim for The Six-Month Fix

"Finally: a turnaround guide that explains the nontrivial difference between those who work for debtors and those who work for shareholders, and gives readers a peek at why most turnaround guys should not stay for long."
— John Carrington, Chairman and CEO, WebSense

"Too many celebrate financial victory; too few dig into business tragedy. Ultimate success comes from saving the disasters, and this book tells exactly how."
— Craig McCaw, Chairman, Nextel

"A solid turnaround guide from one who's been there."
— Peter Ueberroth, Chairman, Contrarian Fund

"Hard-hitting, practical thrusts."
— Philip Thurston, Professor Emeritus, Harvard Business School

"Winning basics for sports, war, or business."
— Don Drobny, Partner, Perot Systems

"Uncommon, in-your-face thinking that resurrects business."
— Carole Rhoades, Vice President, Seaport Ventures

"Powerful. I reread it on trips."
— Allan Shaw, Executive Director, MS Society

"Executives must read this."
— Martha Demski, VP and CFO, Vical

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Editorial Reviews

From the Publisher
"...it is full of firecrackers that make some valuable points.." (Financial Times, 13 February 2002)

"...but this book is not typical and is well worth reading." (Eurobusiness, April 2002)

"...better than almost any fiction novel I have read...could keep even non-management glued to it for hours..." (M2 Best Books, 30 July 2002)

Financial Times
..it is full of firecrackers that make some valuable points..
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Product Details

  • ISBN-13: 9780471036265
  • Publisher: Wiley
  • Publication date: 11/28/2001
  • Edition number: 1
  • Pages: 304
  • Sales rank: 1,052,725
  • Product dimensions: 6.00 (w) x 9.00 (h) x 0.81 (d)

Meet the Author

GARY SUTTON has been a "turnaround CEO" for various firms, including printing, software, retail advertising, aerospace manufacturing, satellite communications, and online data storage. Currently, Sutton sits on two public and several private boards. Sutton also writes a column for a local business magazine, the T-Sector, and has authored several books.

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Read an Excerpt

If you're the CEO of a struggling business, let's hope we never meet.

I'm a turnaround guy. When I arrive, you leave, and profits return. This book shows how we can avoid that unpleasantness.

You're probably smarter than me, undoubtedly know your industry better, and may be a superior leader. But I've fixed more businesses. I don't cling to unrealistic hopes or hesitate to change things. Any fresh set of eyes, not just mine, will simply do the rational and obvious things, getting results before those nasty creditors padlock your doors.

We outsiders, having seen it all before, free of your emotional baggage, find the fixes and do them with comfort and confidence. The process would nauseate you. This faltering child was yours. We discipline and save the kid. You and I, together, might celebrate this youth's graduation much later. But for now, stand aside.

To check my thin veneer of credibility, flip to Chapter 68. This gives audited or publicly reported performances on every single CEO, founder, or chairman's job I assumed from 1980 until The Six-Month Fix rolled off the presses in 2002. You'll see garbage hauling, satellite communications, forms marketing, retail advertising, aerospace manufacturing, printing, a private college, burglar alarm sales, plus a data storage business. It's nowhere near a perfect record, but every investor saw either losses vanish quickly or profits jump above their industry norms. A few basked in outrageous cash returns. Some was luck. Some wasn't. I'm not sure which was which, but the same basic tactics somehow worked every time.

Being the CEO du jour in eight different industries gave me an unusual perspective. Yup, I'm a mile wide and an inch deep. You think your business is unique from all others and most folks say that. You're all wrong. Sorry. The tactics described here work in all nonregulated businesses. How to use this book depends on who you are.

1. If you're a director, shareholder, or executive of a company that's losing money at a rate that'll bankrupt you within the year, please, do not read the whole book. You don't have that kind of time, pal. Go straight to the turnaround chapters titled in boldface. These tell how to stop the bleeding. Follow them and within six months your losses will be gone, your cash stabilized, and employees shall smile once again. Really. If you're the CEO, however, you'll have been “made available to industry” in this process and should be doing other things. But your stock will rebound, so chin up.

2. If you're breaking even, or making modest money but losing ground to competitors, skip the turnaround chapters and go straight to the chapters headlined with italics. These 52 management lessons read easy. Each ends with three action steps. Commit your management to executing one chapter a week. No more, no less. At the end of twelve months your company will coin money and great things will be within your grasp. But my fears are greatest for you break-even people, even more than for those hemorrhaging cash. The impending doom that motivates losers is absent from your comfy, mediocre existence. Crank it up a notch.

3. If you're making sinful and growing profits, good show! (I'm thrilled you bought the book, but why?) You can enjoy this more than the other readers. Try a dollop or two of the secret sauces when you have time, and if you feel like it. Your reward is that you get to read straight through, starting at the beginning and shuffling straight through to the end. The turnaround chapters, which are in boldface titles and longer, are mixed with the profit-boosting sections, which are italicized and shorter. This gives you changes of pace as you go. Hey, I cater to winners.

Stopping losses and boosting profits, by the way, are day and night, hot and cold, yin and yang. Think of turnarounds as blacksmith work, throwing off sparks, energy surrounded by clanging noises while the turnaround manager flails away, reshaping some stressed iron. Think of boosting profits as watchmaker tasks, with quiet discipline, thought, and small, careful moves by a professional manager. Both shape the metal, but these two moments demand different mentalities, speed, and leadership.

Saving your business requires bringing in an outsider, often a turnaround professional. Some are birds who work for creditors while others are fish who toil for shareholders. Even battle-scarred professionals remain strangely unconscious of this distinction, but these folks, unaware of the difference themselves, think and act uniquely without knowing, and share few objectives. You'll learn the difference here. The turnaround sections also tell how to identify frauds.

Oh yes, there are frauds aplenty. Anytime a board or owners are paralyzed by steep losses, the one-trick ponies and unemployed CEOs come acalling, soon followed by those firms who specialize in bailing out the seven-piece-suit lenders from their nervousness, getting that debt remortgaged to tougher guys while the quivering client corpse gasps for air, stripped of any prayer for equity recovery within the current ice age. You'll learn how they maneuver you into this.

Another trap, common as a cold, is that even the top turnaround managers are wholly incapable of leading a business after it's fixed. These Cinderellas stay too long at the dance, and get ugly after midnight. Chapter 17 peeks at those embarrassments.

Don't think about this turnaround stuff for a second if you're above break-even.

What you need then are the building blocks that enhance profits. Most turnarounds fail after they rebound. They celebrate prematurely and forget to shift into the next gear. That's why the 52 profit-enhancing chapters are included. They'll guide you after the fix, and lift your company to new heights.

This part, rebuilding profits, takes a full year easily. The turnaround itself happens in six months.

If that sounds too fast to be true, you are part of the problem. There's no reason to dally. It'll be traumatic and requires two management makeovers, but converting a loser into a winner is worth some turbulence.

Winning beats losing. Duh. Watching your employees sniff a breeze of success feels better than burying everybody under six feet of losses, food for worms, sucking stale air in a corporate coffin, dazed and glassy-eyed. Okay, okay, a single failure might not destroy all careers forever, but it takes years to recover reputation, self-esteem, and lifestyle. And that's not all. Customers suffer, shareholders get hurt, bankers gobble too many Tums; since you pay less tax, you don't even cover your fair share of road repairs, school costs, or the military protection we all enjoy, you parasite.

Losses are malignant. Let's stop 'em.

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Table of Contents

Introduction.

First Stop the Bleeding.

Turnaround Scams and Screwups.

Over and Over and Over Again, the Same Mistakes.

Make What Sells.

Raise a Flag, Any Flag.

Specialize Or Die.

Scorn Break-Even.

Slash Costs.

Jump-Start New Products.

Manage More than Lead.

Crawl into Your Customer's Skin.

Cheap Is Such a Pretty Word.

Nudge Value Up.

Human Resources Is Neither.

Hustle the Hustlers.

Interview Smarter.

Cinderellas.

Second Opinions.

Contracts Are Sales Literature.

Downgrade Education.

Reverse Discriminate.

Walk the Floor.

Raise Pay, Cut Benefits.

Incentivize Everyone.

Tighten the Ship.

Publish a Firing Policy.

Beat the Union.

Fight Politics.

Dance with That Debt Devil, Arm's Length.

Duck Computer Traps.

Kill Meetings.

Kick Down the Walls.

What's Your Business?

Turnarounds Yes, Startups No, and Why.

One Bubble Off Plumb.

Eliminate Sex.

Attack Drugs and Alcohol.

Stop Gambling. Oh, Yes You Are.

Send God Back to Church.

Slash Consulting.

Use Lawyers Less.

Romance the Bankers.

Use the CPA as More than an Accountant.

Insurance Stupidity.

Challenge the Do-Gooders.

Break Laws Carefully.

The Turnaround Never Ends.

How It Feels.

Dressing Up the Stiff.

Promote Offbeat Thinking.

Cash Makes You Stupid.

Demand Straight Talk.

Create Real Plans.

Get Advertising Results.

Cut Costs By Raising Quality.

Manage from One Piece of Paper.

Invest Simply.

Negotiate Faster.

Flatten That Pyramid.

Watch for Trouble Signs.

Sell Harder.

Raise Ethics, Boost Profits.

Ride the Big Wave.

Seed You Culture with the Employee Manual.

Elephant Hunting.

Boards Suck: Here's How to Cope.

Shareholders Only.

Author's Track Record.

The 31 Steps That Convert Bleeders into Winners.

Index.

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First Chapter

Chapter 1

First Stop the Bleeding

We're not talking brain surgery.

Getting a loser to break even should take six months or less. It's gut-wrenching. The turnaround happens best, and probably only happens, under somebody new. The outsider's detachment saves time and grief.

You must stop the bleeding before anything else. Management can't manage until the business is self-sufficient. Investors, bankers, and creditors assume the right to help management when an outfit is losing money, and that kind of help doesn't.

Oh, and please, don't try to sell your way out of losses. Knock down your costs first.

We never control revenues or margins, do we? Sure, we try, but our customers have more than a small effect on sales and markups. We can always squeeze our costs further down. Unless yours is that rare business where added sales create no added expense, or that bizarre situation where bringing in new business raises average prices, then don't pretend more sales will solve your core problem.

Forget, for now, the grand plan, your cure-all product, that huge new order from the attractive but unknown client. Just stop the negative cash flow. Work with what you've got. Then you can begin to think rationally about the next move, and you'll do it smarter and on your own schedule . . . after you're breaking even. And you'll analyze that next risk more carefully, since finally there's a real business to lose. That bolder thought may not look as promising when you've gotten off your money-losing belly and are finally kneeling at break-even.

It takes two things to stop yourlosses. Two. Dos. Zwei. Futatsu. Let's read the actual annual report from a 1995 turnaround, and you may detect those two moves.

September 11, 1995

Dear Knight Protective Shareholders:

Here's the last annual report. Your low expectations and my dumb luck made this year a winner, and it seemed timely to sell. So we did.

Knight netted over $2 million from operations, peddled the monitoring contracts to Protection One, sold the trademarks, a patent, and leasehold improvements to an AT&T distributor, then licensed both the industry's leading manufacturer and marketer with another two new patents for an added $12 million.

After taxes and smelling salts you received checks with many zeros and commas. Here's a second one. This is probably the end, but depending on some late bills, you might get another. That'll cover a burger and fries. No Cokes. Sorry.

A trifle of this bounty fell my way, but now déjà vu repeats itself all over again once more, and next year this CEO hopes to work for food somewhere new. Anywhere. Please.

Hence the immodest report.

In the unlikely event I've failed to cure your insomnia with my biased view of Knight's history, may I now?

This alarm company lost $3.5 million in 1989, $8 million in the prior few years, and possessed just enough cash for six more payrolls when I became CEO in 1990, provided no silly payments were made, such as rent or utilities.

I did not face excessive competition for the job.

Our California economy conspired to make any recovery tougher, while average system prices plunged from $3,200 to $1,800, enhancing this insurmountable opportunity. Our chicken-hearted auditors declined to certify Knight as an ongoing concern the year I joined, while American General and Home Finance refused all new credit applications that were Knight-related.

Employee turnover hit 380% in 1989, three distributors sued Knight for fraud, the AARP commissioned independent tests which ranked our company's best products among the industry's worst; but as the highest priced, your company showed at least one kind of leadership. Knight's two largest shareholders, a Midwestern public pension fund and a Rocky Mountain partnership, added distractions by suing each other and threatening me between 1990 and 1994, spending $4 million in legal fees. Their dispute? Who controlled Knight. Did each claim it? Nope. Both argued that the other side owned this sparkling gem.

There's more.

In my first Knight board meeting, the other directors seemed eccentric. Yeah, even to me. Perhaps it was the shouting match that developed between my new boss, the chairman, and myself. Perhaps it was the resolution he passed forbidding my say-so over any board expenses. Perhaps I displayed insufficient respect for this chairman's background as a former congressman, his billion-dollar public pension fund, the respected Republican governor who certified his books, and the prominent Democratic mayor who presided over his board of trustees through the eighties.

Naah! Scratch that. A trained chimp could hardly overlook this guy's flaws. His bipartisan support is everything we've come to expect from either flavor of politics.

So I made a pitch. The pension fund gave me their proxies and I fired the board, including their own chairman. Delicate surgery, that was.

One year later, this former chairman misplaced $67 million of the tax-payers' money. His upper body absorbed four 38-caliber slugs two weeks before the first public whitewashing was scheduled. Another ex-director now makes little rocks from big ones, courtesy of the Colorado penitentiary, the third was just indicted by the SEC, while a fourth filed for bankruptcy. World class board, eh?

No kidding. I couldn't make up this stuff.

How did it affect Knight's employees? I'm delighted to report we discovered entrepreneurs in our group. The northern California installers, for example, displayed this by burglarizing customers. The Orange County office boosted margins with cocaine sales. The recurring revenue after an initial snort apparently was more predictable than monthly monitoring fees from burglar alarms. Oh, and our two top vice presidents had set up a dummy corporation that, interestingly, had become the fastest-growing vendor to Knight, in spite of stratospheric prices. Once this vendor's ownership was suspected, we merely placed some huge orders with the bogus outfit, received the goods, and stiffed them on the payment. Funny. The perpetrators never quite worked up the courage to attempt collecting. Justice outside the system can be quite a kick. Anyway, from all this, Knight Protective did boil down to a hard core of solid employees and we restructured for a positive cash flow in my first half-year.

It's easier to think when you've stopped bleeding.

Previous annual reports documented parts of this, and brashly anticipated record profits which our employees exceeded. Knight Protective always had a semi-unique method of monitoring, called two-way voice. It offered legitimate benefits. Management dumped all distractions, concentrated on two-way voice, and, as happens each and every time, things got better. Profits and new customers followed.

"What did you do?" one shocked shareholder asked.

"Less," I answered.

This is not nuclear science. We did little more than uncover one positive within this bag full of tragedies, focused on that, and spun off the rest. You have been complimentary, but it's all so simple that I should be indicted for fraud.

You invested at different times and prices, experiencing varying returns, but the public reports from the pension fund show their $130,000 in 1991 Knight stock returned over $6 million in cash last year alone. Not shabby.

Happy ending. But it wasn't always a barrel of laughs. In a desperate and, some say, failed attempt to maintain sanity, I helped start another business through these five years. It is totally disrelated to Knight. No surprise there. Some shareholders don't know about this second job I held. Others asked, so for broader disclosure, here's that story.

This other business, which I cofounded in 1989, is developing a satellite-based telecom network that will bring service to sparsely populated areas of the globe. Among the humble requirements, the project needs to:

  1. hoist 840 satellites into low earth orbits,
  2. get worldwide approvals from Albanians, Mongols, Buddhists, Muslims, etc., even (gulp) the French, to enter their airspace and beam into their countries,
  3. negotiate launches at a fraction of current costs,
  4. prove, finance, and develop theoretical breakthroughs in phased-array antennas,
  5. develop new gallium-arsenide chip technology, and
  6. make high-speed packet switching work with voice signals.

Piece of cake, huh? Oh, by the way, this project also requires a mere $9 billion more to get going. That's "billion" with a "b"... "$9" followed by so many zeros it looks like a bowl of Cheerios... big bucks. After spending that, the investors may find out if Teledesic, as it is named, can come close to working.

My deranged friend, a venture capitalist who conceived this modest proposal, and I might have faced investor reactions more suitable at the Improv, had it not been for one thing: This proposed network reaches an unserved market, and can do it with costs per minute and variable bandwidths that none of the other so-called information superhighways approach. (Any of you out there know what an information superhighway is? Me neither.)

So he and I put together a list of 100 possible investors, each with billion-dollar pockets, oversized glands, and potential lapses of judgment. We screwed up our courage. Sketched it. Made some slides. Did a spreadsheet. Showed it to the first three.

"Yes," "Yes," and "Yes," they said. We were prepared for anything but that.

In this Lewis Carroll scene, we actually declined one investment, accepting just enough for feasibility studies and started.

Through the years that followed, some leading aerospace, telephone, and financial types started shaking their heads. Some even shook them up and down. Not many. Another sent a check. This saga was so unique that pages 215 to 219 in Tight Ships Don't Sink chronicle it. When Simon & Schuster published, I didn't have a clue if big-time financiers would ever bite on Teledesic or not. Please order copies through your bookstore. My last royalty check caused no unsolvable tax problems. Costs you $15.95. A hardback edition, with the Teledesic story updated and a Knight Protective chapter added, comes out next month. It is retitled Profit Secrets from a No-Nonsense CEO and sets you back $21.95. Hey, a guy's got to eat.

Anyway, Craig McCaw invested. Bill Gates followed his lead in 1994. Teledesic received a firestorm of publicity when the press learned about their involvement. The October 10, 1994, supplement to Forbes, ASAP, devoted ten pages comparing Teledesic with Motorola's Iridium, GM/ Hughes's Spaceway, and Qualcomm Globalstar. Some George Gilder quotes:

"Motorola should join Teledesic now, not later."

"Globalstar is the easy current winner, but Teledesic can add phone to broadband computer services. Over time, Teledesic will outperform Globalstar. Iridium is too expensive and too narrowband. Spaceway is maturing. Big winner for the next decade is Teledesic."

"Teledesic's impact on the world may rival McCaw's and Gates's contribution in software and cellular."

Well, that quickens my breath, but there are no slam-dunks in high tech. The Teledesic game rapidly ascended, or degenerated, depending on your tastes, into a multimillion-dollar-per-year lobbying effort and the moment passed for the original round pegs like myself, so I stepped aside, seconds before being nudged, while more socially graceful and colorfully suspendered talent was recruited, leaving me to cling to this vision as a minor, minor shareholder.

Sad? Nope. Normal. And it could be worse. For example, I might be sipping Chardonnay right now with some bureaucrat in Washington, but this management makeover saves both that slack-jawed zombie and myself from those irritations.

So last summer I moved into the dormitory at Christ Church, Oxford, and studied Roman history. Veni, vidi, vino and Guinness. Now I hit the streets again, seeking a new scam. Enough self-promotion. On to the close.

Do you know:

  1. an absentee owner of a troubled business,
  2. a venture capitalist with a less than perfect portfolio,
  3. an investment banker,
  4. a CPA firm partner, or an
  5. outside director who sits on several boards?
  6. If so, would you pass this report on to them?

They may be entertained. Possibly they'll even call. It could end up with my tutoring one of their "F" students into a barely passing grade.

Relax. You need not feel any implied endorsement. If your contact responds, before we even meet, I'll mail them clippings and annual reports that prove my ability to fool auditors, media, and Wall Streeters. One prospectus shows the largest printer in the West enjoyed a 30% average annual profit growth from 1980 to 1986 while I was CEO. A closer look reveals it was a lumpy 30% due to leverage. In 1986 to 1988 Price Waterhouse verified that their PC accessories client snapped around to industry record profits from a decade of losses and was acquired at a lofty price by an industry leader while I ran it. Ernst & Young admits that their aerospace client rebounded from steep losses in 1988 and 1989, while I was chairman, and was acquired. Since then, it's been all Teledesic and Knight Protective.

Should one of your contacts be so panicked that we negotiate seriously, I may also hand them copies of:

  1. interviews with every director or shareholder I've worked for between 1964 and 1989, done by a search firm on behalf of an overzealous Midwestern fund a few years ago, and
  2. two separate psychological profiles on me, done for LBO investors in the eighties.

That should subvert their due diligence, or I don't know what it takes. Some love these second opinions. Besides, it gets you off the hook. I will not consult. I assume complete control, take a modest salary plus 20% of the profit improvement. $10 million is the revenue minimum. Bigger yet is better and easier.

No happy, healthy deals please: only wobbling startups or well-established losers.

Thanks for your support at Knight. I'm relieved that it worked so well for us. Okay, okay, I'm amazed. Flabbergasted even.

Gary Sutton

Those investors averaged a 53 cash return on their shares during my five years. My personal bank account wasn't damaged either. And it wasn't so consuming that I couldn't write a couple books and start Teledesic, which blossomed into a $3 billion valuation in the ten years after scratching it on an airport napkin.

Some ask if Knight Protective was really this bad. No, it was worse, but I was afraid to divulge some of the truly scary stuff. And that's why the opportunity interested me. It's tough to step into a totally upside-down situation without showing dramatic improvements, since almost anything you do will make things better. And management rarely does only one dumb thing. Where there's a single stupid practice, be ready to discover many more. So you'll make lots of improvements.

This is why a shrewd turnaround practitioner seeks terrible situations. Expectations are gone and the outside interference is minimal. Owners and creditors are terrified, and step away in delight when you're dumb enough to grab the wheel, which makes fast change possible.

At Knight, we did the two classic things. First we found the margin. In this case it was all in the monitoring. Second, we shut down or sold everything that had little to do with the margin-generating part of the business, regardless of effect on revenues. This is not brain surgery.

In this case, manufacturing, marketing, and installation divisions were chopped. In a "minor adjustment to payroll," Knight went from 230 employees to 40 in my first quarter. The normal arguments, that the profitable part of the business couldn't survive without the losers to support it, were made by voices shrill enough to clear sinuses in each contiguous zip code, but, as is often the case, those fears proved false. (A lot of folks get comfortable in a money-losing company, and fear any change. You must splash cold water in their faces. Show the bank account and trend lines to those in denial. With them, estimate the date all paychecks stop.)

Hold it right there. If you're thinking that this layoff was awful, eliminating that many jobs, then you are truly clueless.

The shareholder that was a pension fund, for just one example, had 5,000 retirees, blue-collar workers who one way or another lived on $20 less per month for their lifetime of work, while this disaster had its grasping hand clawing into their pockets and the taxpayers'. Most of the fired employees were a long way from models of citizenship. And the customers were getting systems installed that were embarrassingly deficient and dangerous. In every way, this layoff was positive, if momentarily unpleasant.

The turnaround took five months. The business couldn't sell for four more years, because the two largest shareholders were suing each other and there was no way to peddle the stock until that spitting contest ended. I hung around as a caretaker.

Finding the margin is easy sometimes. In the case of Knight, the accounting was good enough that it was self-evident. The only question, and a serious one, was whether this business could continue by monitoring other accounts without generating its own.

Monitoring other accounts is much lower margin, since that only gets wholesale pricing, not retail. But the competition was less, way less, the skills more specialized, and it helped that we didn't compete anymore with our only sources for new monitoring accounts, other alarm installers. So it worked.

In a different troubled business, a few years earlier, the margin was hidden. Checks To-Go made and sold two products. One was software-compatible forms, mostly checks, but some invoices, envelopes, and so forth that were laid out to match the particular format of different softwares like Peachtree, Intuit, and Great Plains. The second business was custom forms, made to fit unique needs of customers. All sales were by phone.

The markup on custom forms was 100%. Costs to produce them, mostly purchased outside, were simply doubled. This looked wonderful.

The markup on software-compatible forms was 40%. Standard forms were purchased with magnetic codes and users' imprinting done internally.

But the software-compatible-forms business faced only four competitors nationwide: RapidForms, NEBS, Moore, and Deluxe Check. Our point of difference was color at no extra charge, a minor point, but since it brought in more business, we got better and better at it. Most of the market was happy with black and white, by the way, but we didn't want most of the market. Plus the trend, as always in every business, was toward more color.

Custom forms, on the other hand, faced 99 competitors in the San Diego Yellow Pages alone. And the returns of custom forms, with changes and free replacement required, hit about 10% compared to less than 1% with the software-compatible forms.

Then a simple walk around the floor, sensing how much artists' time this custom work seemed to actually require, plus listening to the customer service talking about them versus the software-compatible forms made it pretty clear that the accounting records didn't really show where the profits came from. There was too much overhead and return expense being generated by the custom work.

But I made a sickening mistake.

Fearful of the effect that simply shutting down the custom work would have on revenues, and being quite tight on cash, we simply began to price our way out of it. Every month for an entire year we raised quotes on the custom work by seven percent. Month after month, prices chunked up, seven percent every month, twenty-one percent per quarter, eighty-four percent within the year. We drove most customers away, began to make some serious money on what was left, and had half as much custom business in a year, but a horrendously profitable half. The most complaints had come from the customers who disappeared as their prices first edged up, so the remaining were easy to deal with. (There's a universal truth right there, by the way: Get rid of those cheap whiners.)

But custom forms were now a declining part of our business, so this move of pricing our way out, while cute, probably cost us time and distraction compared to simply shutting it down. Cutting your tail off an inch at a time causes more pain in total. And it distracts from the bigger growth opportunity.

In a turnaround right after Checks To-Go, and immediately preceding Knight Protective, Smiley Industries straightened out quickly by doing the same. All margin came from a particular type of work, described in Chapter 13. In that recovery, which was idiot-simple, identifying the best type of work for the business got the employees and reps moving smarter, and profits returned overnight. No cost-cutting was required, the business just fell into its natural strengths and was acquired. All we did was define what we did best. And raised prices, which got easy when we stopped doing the me-too kind of work.

Henry Ford is often ridiculed for selling his cars "in any color as long as it's black." These storytellers totally miss a greater truth. Yeah, Hank was insensitive to customers' superficial requests. But Mr. Ford created the mass market for the cars by understanding their deeper need, low cost, so he shipped one color. He merely stuck with it too long. By driving costs down no matter what, he delivered what the market truly wanted in the beginning: transportation that cost less per mile than feeding a horse. And no tidying up after it.

Find the margin. Cut all other costs.

We live in increasing specialized times, and death is fast for those who "round out" their offerings with stuff that can be gotten elsewhere for less.

IBM can't compete in personal computers. Yeah, they sell a lot, rank in the top five, have elegant features from time to time, but IBM loses money on every last one they ship. Why do they keep it up? Maybe somebody likes seeing their stock drop, I can't figure it. Montgomery Ward got killed by Costco from below and the boutiques like the Limited from above, while Sears, being bigger, has been among the walking dead for decades. Ditto Kmart. And before you suggest that Wal-Mart has triumphed, which is correct, remember they built a business by putting stores in towns with populations under 100,000, a true niche approach.

Specialize. Do it where the margin lives. Stop everything else.

There's every probability in the world, if you're the CEO who guided the company into this mess, that you cannot emotionally fix it. It's likely that the employees, who understand it's your fault, won't follow your advice with much enthusiasm if you try the turnaround. And it's rare that the board will grant you that privilege.

This is why an outside turnaround manager gets the task. If you're wondering how to find this person, hold that thought; it'll be answered in Chapter 65.

If you're the soldier approached to fix the business, your first chore is to make sure that the shareholders are, in fact, ready to make radical changes. If not, don't touch the deal. They haven't felt enough pain yet to recognize the truth.

As the outsider, you have unfair advantages. You have no emotional baggage tied to a new product dream or a historically interesting but economically irrelevant service. You can ask dumb questions without looking dumb. One or two of those dumb questions will turn out to be brilliant.

Contrary to what most expect, you'll find you're handed loyalty from employees. Other executives have to work for that devotion, but these folks understand that you represent their last chance, and that you didn't create the problem. They knew the business was wobbling off course before the board or the owners understood it. If your demeanor is to the point, without being rude, they'll guide you immediately toward some major problems. They won't all be correct, but some will be solid, and few will hold back if you listen hard. If you've really quizzed them, and they lose their jobs anyway, it's less painful for them, since you both tried.

Here's what you do the first morning. You've already gotten the owner's opinions. Interview the CEO, wherever he is, then the CFO, VP Ops, VP Marketing, and VP Engineering. Ask each individually what the problem is and what the solution is. Try this the first morning, give each about an hour, one at a time. Don't hit them cold with the questions. This is a scary time, and catching them by surprise only gives you a measure of how articulate they might be, which doesn't have much to do with anything. Give them a day to think about it. Let them know that this is what you must hear. Those who hold back or waffle on answers are part of your problem.

It's okay if they point the finger elsewhere; in many cases this will reveal a truth. But get them to be specific about that problem and give them a chance to say where their own area is not doing well, and ask what they hope to do to make that better.

Spend that first afternoon on customer calls, and stress to marketing that you just want to chat briefly with a random selection of customers, but include a couple biggies, possibly including a good one they've failed to hook. Introduce yourself to customers as a person who's considered investing some time with the company, and you need to know what this client sees as the outfit's biggest strength and largest failing. At the end of that afternoon, you may have a decent picture of what's wrong and who the major competitors are. If there's no consistent response, well, that's why you make the big bucks, and the fix is going to be less obvious. Or if all complaints are price, then you failed to open the customers up for any honest comments. Nobody wants to pay more. Price is always important but is never everything.

Get back with top management that night, as a group, and toss out what you heard for reactions. See which comments they buy. If there's no consensus, thrash away again the next morning, and if nothing emerges then the decision is all in your lap. That's not all bad.

Also spend an hour the next morning going through the checkbook. If practical, sign a stack yourself. That'll get you energized and angry. Since every signature shortens your company's life, you'll discover some pretty silly things that never show up on the income statement. You'll find yourself acting on them.

This can be a trap. There are those who thrill and swagger at making small decisions. Your role is to do neither, but to make a rapid series of small ones quickly, only to set a tone, sending ripples by example through the outfit that are clearer than any mandates or policy statements. Don't make a big deal out of this, just start rattling them off, let them speak for themselves, and rush back to the bigger and tougher actions.

"Shouldn't we have a booth at that trade show?"

"No, but let's spend a couple days there and have breakfast meetings with potential clients X and Y."

"But won't people notice we don't have a booth?"

"The world doesn't care that much about us anymore, we can't afford it, and if we walk the aisles we'll make more contacts without being tied to a spot on the floor."

Another manager grabs your sleeve: "Can we meet to discuss the development schedule of next year's widget?"

"Of course, how about 8:30 P.M.? And can we agree to freeze the schedule before we finish tonight? That way we won't waste time redoing it next week or next month."

A secretary pages you: "We have a commercial rate in Detroit at the Ritz Carlton. Is that okay?"

"No. Book me at the Holiday Inn that's closest to the client." Then fire that secretary and book your next rooms through a travel agent instructed to always find the lowest fares, or book yourself online. Give her good severance, it wasn't her fault, it was mismanagement and unnecessary overhead. And so on. Don't get bogged down in these decisions, but make them quick to rebuild a rational atmosphere. Don't do anything that jeopardizes quality, unless quality doesn't matter. There are a few very rare businesses where "polishing the cannonball" doesn't make sense. Try to keep the most promising new development going, the company will need that one day soon, but stop spending on the fuzzy ones.

Now that you've signed a batch of checks, start interviewing employees at random. Talk with at least a dozen. Do a few in groups. These folks will point out several problems that the board and owners aren't aware of, and half of these will matter.

Your personal demeanor is critical. You must get straight to the point without terrifying people.

You can spread panic if it appears that you're counting paper clips and figuring out ways to copy documents on both sides of the page to save paper costs. Yet you will fail to spread any cost-cutting attitude if you do not, instinctively and with lightning speed, make many of these minor cuts every day without ever mentioning them. Just do them every time they pop up and don't tell anybody. The word will spread fast. And if you're talking publicly about the bigger issues, that maintains morale and displays a larger leadership.

"Jane, why do you think Amalgamated Widgets is losing money?"

Listen. Push her for details in areas that sound valid.

Ask other employees, "What would you do if you owned the business?"; make it clear to each that your entire personal incentive is to help the company survive, that you suffer financially if it doesn't, and that it will vaporize unless something big changes fast. Show them cash positions and loss rates to prove it.

Now that you're halfway conversant, call one or two trade editors. Your approach should be the same; you're an executive considering investing serious time in this company, and you'd be thrilled if this publisher or editor can confide a few observations to you. Ask lots of questions, these folks spend their lives listening and enjoy having the talk go in the other direction for once. They also happen to be in love with their largest advertisers, so factor back their praise for those spenders, but also remember somehow those competitors did succeed in order to develop those big budgets. Send them a personal thank-you note and a small gift that shows you were listening and heard something about their personal interests.

These editors are not without their own kind of ego. They deal daily with the industry CEOs, several who fawn over them, and the media is painfully aware that their paychecks display a digit or two less than these industry titans. They've adjusted to that fact, resent it only a little, and you should be able to work with them. This is just the way it is in every business. They can be irritating but they have some perspectives you need.

Always cater to anyone who buys ink by the barrel. They'll be whispering about how you're doing to the industry, long before the results show.

In weeks, not months, not even a single month, you should know what the major shift will be. You should have shared financial information with everybody inside, so they all get it and will understand and support the change. In fact, they'll be anticipating and ready for almost any switch.

Talk directly with all who are laid off, and give them as generous a severance package as the company can afford. Personally intervene with those who are undeserving victims, and have management make personal calls and write letters to get them placed elsewhere. If they can avoid missing a paycheck, and possibly gain a raise or a shorter commute, you've elevated the company through the process of a layoff. Go for that. It's amazing what a personal letter to fifty nearby CEOs will do, expressing your embarrassment at the layoff and personally endorsing this particular candidate for an interview.

This activity doesn't help the company directly. It just makes you feel better. When you feel better, the company does better. Despite what your lawyer and human resources department will urge, be preferential, and don't do this for those who were marginal performers. That's fraudulent. Helping them degrades the boost you give the worthy departees.

Paint the picture for the surviving employees around the remaining service or product, and where you all hope it can go. It's not inappropriate to show some enthusiasm, in spite of somber times.

Before planning the cutback, take ten minutes for a test. Write down the names of all the companies you've seen that failed because they didn't have enough overhead. My bet is that your list is a close match to my zero.

This is also the prime moment to fix your balance sheet. You've just restructured. A few folks were laid off. Your competitors are gleefully spreading the word, warning customers that you're tumbling over the edge. That's their job. Your trade editor friends may temper these rumors, but the noise will be loud for several days. You'll get several calls.

Most of our world thinks companies are healthy before a layoff, and our same world believes they are dying after the layoff. Usually the opposite is true. The company was sick before the layoff and is healthy afterward. Here's how you turn that misperception to your advantage.

First of all, don't spend much time fighting it, you can't win that battle yet, just reassure key customers when they call.

But somewhere among your creditors, leaseholders, or debtors are some who act way more nervous than the others. They may be sincere, it may simply be that their organization has a new policy to upgrade quality and reduce exposure, or an individual may just be one of those miscast lenders with the wrong DNA for the loan business, trembling through life.

That person will call. Explain the situation. Tell why you made the change and what you hope to achieve and when. Try to sell this to Wobbly Willy. Then wait for WW to call back (he will in days) and express your hopes then for signs of positive cash soon, along with the still unsolved problems.

You see, you can be totally honest, because it just won't matter. This person isn't buying your hopes for a second. He's mortified. When he calls back in thirty days, update him. Then offer to pay him off early, explaining that you haven't yet done this for anybody, but he will have to settle for twenty cents on the dollar, plus some warrants.

Send him a check for this amount, with a letter encouraging him not to cash it, explaining again that you fully expect the business to recover and to pay the balance due in full, and that if your plan works, he'll be making a mistake by cashing the check.

You do this, by the way, only when you're convinced your plan will work. You'll believe in the turnaround plan before anybody, so this is the moment to cash in on that.

Mark the check "Void if endorsement altered." Mark the backside "Negotiated as payment in full of outstanding debt." Call the creditor a day or two after they receive the check, and repeat your encouragement that they should absolutely not cash that check, since you believe they will ultimately be paid in full. Then tell them that "I'm a little nervous about having made this special offer, and will stop payment on that check in one week." Then call early in the morning of the seventh day to remind them that the offer expires in a few hours and that the check will have a stop put against it. Confirm this by e-mail.

At Knight Protective, the first creditor cashed the check. We offered twenty-five cents on the dollar and no warrants. After the first creditor accepted, we called all the others with the same offer, explaining one creditor negotiated this deal with us, so making the same offer to them merely eliminates any claims of favoritism. We urged all not to cash their checks, and gave them a week. Most took the deal. The balance sheet went from positive to negative in that month. Cash stayed tighter for longer, but got much better soon. It's a rare creditor who can stare at that check for a week without endorsing.

Time it for early in their quarter, when optimism reigns. Every company starts fighting write-downs as they approach reality in the last weeks of their quarter. With private companies this is more of a monthly phenomenon.

Now fix the business. You've got a tighter focus. Your balance sheet is patched up. You'll be amazed at how much better everyone performs, having a more singular mission, and the business gets better and better with fewer distractions.

Keep that focus. Remind everyone what the mission is. Do it in speeches, newsletters, and ads. Work hard on the ten words or less that describe exactly what it is that you do better than anyone. Don't let a single dollar or hour go against anything that doesn't drive the business in that direction.

And watch the cash sputter at first, then trickle up, sputter, spurt up, sputter, and finally gush into your account. Notice your banker stops by for lunch. See how your parking lot fills earlier and stays clogged later.

Now you need a new leader. Again. You began the search for this permanent CEO in the second or third month of the turnaround.

Let's assume you're the turnaround manager, and you took the assignment. Those superrational skills you possess, the icy water in your veins that guide a successful recovery, are usually strangers to the inspirational skills that accelerate a company into the next stage. That's why we change CEOs again. We'll give famous proof of this in Chapter 17.

A common question when looking for a CEO is, "Do you use a recruiter, advertising, or your Rolodex?"

The answer is "Yes." This step is too important to leave to a single source. Little else matters. Most turnarounds fail after they've succeeded. That's the bigger battle.

Use a recruiter but manage them. Extra tips come in Chapter 16. Don't hire any of the large recruiting firms. When they boast, by showing off the long list of clients they already know in your industry, that's simply proof that they cannot recruit from the most logical companies without a conflict. If they say they will anyway, you've just learned that they'll feel free to pirate your company after they get to know it, and sense who your stars are.

This is why large recruiters are merely a guarantee of mediocre performance. Get a small practitioner. Go to The Directory of Executive Recruiters. Your library has a copy, or call 603-585-6544, write them at One Kennedy Place, Route 12 South, Fitzwilliam, NH 03447, or email bookstore@kennedyinfo.com. Find several in your area. Stick with those who specialize in your industry. As smaller shops, this means they'll have a few conflicts but not nearly as many as the bigger body factories.

Agree on the number of calls to be made weekly and discuss what the feedback is every seven days. You should get a log and see that 150 relevant new phone calls were made during the first few weeks. You should spot-check these for credibility and, more importantly, let the search firm know you'll be doing this in advance. Pay only one-third of the fee per month, and don't make the second or third payments if they're not delivering.

You need to review the telephone interview notes for a dozen, and quiz the interviewer where the comments seem interesting.

Setting up the process like this is more important than interviewing and looking at presentations to find the perfect recruiter, a person that doesn't exist, by the way. They'll all interview and present well; that's the heart of their business. It's knowing the precise effort level that determines the success rate and protects you in case they land three unexpected other assignments the day after they sign up for your search. (When that happens, you never hear about it. You just end up scratching your head 90 days later, wondering what went wrong, irritated that you've spent big money and have no viable candidates. This happens to 40% of all searches. Programming the effort ahead of time improves your chances.)

Prepare a selling document that the recruiter can email or mail. Work hard on this, using the text from your want ad to start, but filling in with history and market details to give candidates total comfort.

Don't try to hire a vice president from the largest company in your industry. That person hasn't had real profit-and-loss responsibility, but has merely proven her political skills by rising high. That person has her salary set in relationship to her department size and budget, so her entire motivation has been to hire more and spend more to get paid better. Bad training. They'll immediately increase staff, need a new IT system, and enlarge the HR department.

Too many people understand that the best salesperson won't always make the best sales manager, but fail to understand this holds even more true for a VP becoming a CEO. VPs are political and have peers. CEOs work alone, and are measured by results. (Converting Controllers to CFOs is just as tough. The skills are the same but the personality is different, and even the Mayo Clinic isn't performing personality transplants just yet. Controllers set budgets, squeeze dollars, and control. CFOs sell forecasts. One sells the outside world. The other squeezes internally.)

Bigger company experience fails. Lee Iacocca did a masterful turn-around of Chrysler, less by the shabby K-Cars and more by his charisma and the fact there were enough voting employees and vendors to force a government bailout. Later Mr. Iacocca floundered, trying to resurrect Koo Koo Roo, a chicken restaurant chain. He enjoyed having fewer staff to bully and not enough employees to get any political help, so he quietly exited.

And don't hire a superstar from a company 10% your size; that person won't let the staff do anything and will die trying to handle every chore alone. Size matters. Find a track record within a similarly sized company.

Open up the industries you'll search in. If you are Cessna aircraft, and have a CEO candidate from Merck drug and another CEO candidate from Chris-Craft boats, you've got an interesting choice.

The boat person understands marketing a leisure product to upscale individuals, from a factory with welding equipment, jigs, and dies. Hey, that's just like a small plane business. But the Merck candidate understands the FDA, and might handle the FAA more effectively. Hey, working through the FAA is critical to a plane maker. Think through that stuff, and expand your list of companies to recruit from.

Somebody from GE might adapt well, despite size. GE creates smaller profit-and-loss centers and truly manages against those numbers, eliminating marginal performers. Somebody from IBM won't work out. They create processes, and reward the most nondisruptive disciples of procedure.

After recruiting several CEOs, I began to wonder if there were any predictable patterns.

There are.

To find these secrets, I surveyed 1000 directors who sit on six or more boards. This was intended to get a perspective from those with the greatest personal exposure to a variety of CEOs. My letter asked them to think of the best and worst CEO they'd ever worked with. The questionnaire asked that they not name them, just answer a few questions about each; 280 responded.

By encouraging them to speak about the best and worst CEO specifically, the survey attempted to rid the directors of their personal biases and find out what career backgrounds worked best and worst. If I had asked what experience worked best, they'd just spew out their own prejudices. This approach, hopefully, guided their responses closer to the truth.

The single most important key for success was prior profit-and-loss experience. Without that, the disaster rate jumped. With it, success was far more probable. The CEO spot is no place for on-the-job training. And be careful, every candidate claims some profit responsibility in their current position. Most of them even believe it. But unless their compensation is primarily based on profits, they do not have that responsibility.

Career paths weren't as effective as predictors, but they showed certain trends. Engineers with prior profit-and-loss experience were about as good as it got, with financial and operational types close behind. Marketing followed, and legal and scientists were on the bottom. As a wheezing, balding, marketing guy, and a research and development retread, a couple of the worst places for breeding CEOs, I can report that without being accused of bias.

Their answers also showed that coming from a similar-sized company counted much more than coming from the same industry. Coming from a customer or vendor, however, was good, while coming from a direct competitor was bad. Maybe there's a character measure in that. Perhaps they just knew the candidates better, ahead of time, when they came from a customer or vendor.

If I ever do another survey, getting similar growth rates might also be key, since the attitudes in a fast-growing outfit vary so radically from a slower business.

Now the search firm will lecture that they do the best work because they find executives who are employed and not looking to change, unlike advertising. And a search firm should be used. But that doesn't preclude some advertising. The argument for search is that you should want somebody who is happy in their current job. This, however, also suggests that the person can also be recruited away from you later, even if you fill them with bliss. And they're certain to cost more. Not being content with one's current position is no black eye. It may be a sign of intelligence. So both advertise and use a search firm. However, be ready for a disturbing pile of nonqualified resumes from advertising.

When looking for marketing talent at Teledesic, I used a three-column, two-inch ad in the Southern California edition of the Wall Street Journal. It ran twice. The price was about $1,200 and generated two Safeway bags full of resumes, mostly junk but a few gems.

Part of the process is simply being prepared to wade through these stacks, setting aside time to telephone-screen a couple dozen and personally interview eight to ten. Identify the company, situation, and salary range. This doubles response and gives a more qualified group. (Instead of 98% inappropriate, it'll drop to only 96% inappropriate.) So you have to answer all, increasing the chore, but you get twice as many good ones.

Never let the HR department write or place the ad. That's why most ads fail. Personnel people are more worried about putting in phrases about EOE and Affirmative Action, never even thinking deep enough to realize those programs contradict each other, and cannot generate any excitement with their careful words.

Use the regional edition of the Wall Street Journal plus several appropriate trade publications. Appropriate means "Boating Business Monthly" and "Pharmaceutical Executive" if you're filling Cessna's CEO slot, as well as "Aviation Weekly."

The reason for a regional ad is that our country is large enough now that wherever you are, you can find all the talent you need within your own time zone. Instead of running one national ad, and getting several cross-country prospects, comb your region more tightly. Inevitably, there will be trips and travel and real estate questions in the process, and soon that will dominate the process. By not reaching so far geographically, you end up with the same number of qualified interviews but half the hassle. And hassle, with its frustration, is the danger to this process. You do not want to get antsy.

Yeah, I know, what about the perfect candidate who's several time zones away? Well, trust me, response doesn't drop for an ad until you've run it three times in a row. And the reality is that there's time and expense to this process, and keeping it efficient by talking mostly to nearby folks means you talk to a few more with less time and expense wasted. And you'll be excited at the beginning of this process but weary near the end, creating a dangerous situation. Conserve your energy so you don't settle for mediocrity.

Be specific in the ad. You'll screen away nonqualifieds and get more that fit. Say something like:

CEO
Small Aircraft Maker

Widget planes makes one of the safest and most economical light planes in the business. The company stumbled two years ago, and is just emerging as a recovered business, with new cash in the bank and happy lenders. Better yet, the next-generation model looks like it just might startle our industry with some unheard-of performance and unique value. But we need a CEO who can grasp that and mobilize the troops for a head-turning launch.

I'm the interim CEO and it's time I move on.

We intend to make the stock package a life-altering incentive, with a livable salary, for the executive who escalates this progress. If you have several years of profit-and-loss experience, and the plane business interests you, could you drop me a personal note? I'll get a packet back to you, and suspect you'll find the details interesting. This contact, of course, is strictly between you and me.

There are some exciting possibilities. I'd love to hear your reactions. My board does insist on several years of profit-and-loss experience, and we'd like to see that most of your past compensation was incentive-based.

Sincerely,
Mr. Turnaround or Director
phone number, address, and email

Don't let the recruiter become involved in this part. Recruiters favor their own finds, and won't sell as hard to candidates that the ads dig up. Let them know you're doing this parallel effort, but keep them out of it, making this a competitive function to their solicitations.

Now, here's how you get that ad to really perform. Make 200 copies after it runs. Enlarge them 100% for drama. Send copies to every contact you now have in the industry, with a note asking if anybody comes to mind. (They'll consider this more real after seeing the ad, and you'll get noticeably more response.) Send copies to vendors and customers. Offer everybody a trip for two to London or Hong Kong for one week, all expenses paid, if they uncover a candidate who's hired. Also hit several dozen appropriate folks from your personal Rolodex. Ask everyone to pass the ad along to the single most qualified CEO they can think of, whether they presume that person is looking for a change or not. Remind them that most executives hide their restless moods.

Send it to your shareholders and directors and ask them to come up with one or two names each. Do this last. This group, which should be your most supportive, won't be yet; they're wrongly hoping you'll stay, but as they hear about some great resumes coming in, they'll remember the strategy and start to pitch in.

Doing this will generate more leads than the ad itself. Your contacts take it more seriously when it's set in type. You'll describe the opportunity better after writing the ad. They'll start to think seriously about the position. You've done some of the work for them, put the selling words in their mouths, so they can deliver the message. And they will. Ironically, this is the most important function of the ad: mobilizing your contacts and honing the message.

Do not restrict the recruiter geographically. They typically call someone who ends up referring them to someone else who's a great fit, and requiring those candidates to come from a specified area is counterproductive. With the ads, it's merely a choice that must be made, so regional space is better than national.

Now, about the package: Don't get woozy and assume you have to pay twice the industry average to capture a star. Overpaying gets you candidates who got lucky once and are just insightful enough to fear they can't do it again, and show this by seeking big pay and low incentive. The income tax bite vs. favorable capital gains on a stock option illuminates this, so counter with more incentive but don't push too hard. Just fade away quickly from those who show no eagerness to bet on themselves. They should know. There will be some slick ones who are very articulate at the reasons for hesitating, and they'll agonize in front of you about the family, the great position they're leaving, and so on, and you shouldn't even fall into the trap of discussing. They've bared their soul, and it lacks confidence.

This is no longer your decision, however, since the board must pick your replacement. For board support, it's important they make the pick and set the pay. The board will be a little giddy at this stage, so prep them with these attitudes, lest your recovery efforts slip away fast under a new leader with a fat salary and skinny incentives.

Once hired, introduce the new leader to the employees and disappear. Don't lurk. If invited to stay on the board, do so only under the condition that you won't attend meetings for six months. The new CEO needs to make some decisions and changes to things you've done without looking over his/ her shoulder for your approval. This is a new leader. Let's pray that this new hire won't agree with every change you made. The new person needs to live and die by their own acts.

You, as the turnaround manager, came into the mess with huge advantages. You weren't emotionally attached to the business. The employees rallied to you as their last hope, especially when you talked frankly with them and coughed up the bad news as quickly as you raised new hopes. You had the privilege of being able to ask dumb questions. You're not as beaten down as the incumbent was. A fresh set of eyes has all these advantages.

But the next step, building a new business, takes a year and different skills. Don't overstay.

Why six months for the turnaround? And why a year to rebuild a solid profit base? Well, I hope you're suggesting neither should take that long. That's a healthy attitude. It's those who suggest a slower approach, more deliberate, who are part of the problem. There are plenty of emotional reasons for trying to move slower with a turnaround, but few of them hold water. They all come back to a fear of facing the inevitable. When things are getting worse, they rarely get better spontaneously. Bad trends accelerate. All by themselves.

Both parts of the turnaround are rallying moments for all, and cannot be maintained as an attitude without turning into self-deception, if given too much time. Time is your enemy.

If the current losses suggest bankruptcy within the year, and you're on the board, bring in a turnaround manager on a six-month contract. Pay more incentive than salary. That manager will instinctively find where the margin exists and dump everything but the most promising of the promising new product developments, and even that'll be trimmed back. Stay out of the turnaround manager's way. Start looking for the longer-term CEO in the second or third month of the turnaround, and be as involved as you choose to be with that search.

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  • Anonymous

    Posted February 6, 2002

    Street Savvy Turnarounds

    Every manager and executive can benefit from this book. The Six-Month Fix briefly recounts the career of Mr. Gary Sutton in taking money-losing businesses that were weeks or months from bankruptcy or shutdown and turning them around. His impressive track record is detailed at the end of the book. Be sure to check it out. The key points of the book can be found in chapter 69 for handling the most difficult situations. For the subtleties of making the most of stronger businesses being turned around, you will find many of the other chapters helpful. The chapters are coded to reflect whether you need to read them or not, depending on how sick the business is. Each chapter is brief, usually containing at least one extended anecdote that explains the key principle. I was impressed that the anecdotes usually related to the author¿s own direct experience. At the end of the chapter, you get a few key action steps spelled out. The essence of the advice is to get the business back to break-even in 6 months, and decent profitability in a year. Within 3 months, begin hiring your replacement who will manage the business after it is back on an even keel. I was especially impressed with the great detail in exactly how to do the key steps, especially in handling creditors and recruiting the next CEO. These activities are focused around finding the most profitable activities, and getting rid of all the costs or selling those operations. The book is blunt, and almost crude at times. This is a Ph.D. in experience . . . rather than academic niceties. Although the subject is turnarounds, the principles apply to every business at some level. Stop pursuing hopeless causes. Get out of your old habits that hurt you. Act like you have no cash, even when you do. Find the highest potential opportunities and performers, and eliminate anything that will hold your best people back from pursuing these opportunities. Focus. Focus. Focus. Reading through this book, I also came away with a strong sense of the need to be committed to performance excellence, regardless of your role. What have you eliminated today that has been hanging around for years? Donald Mitchell, co-author of The 2,000 Percent Solution and The Irresistible Growth Enterprise

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