Turnaround and Change Management: Do Not Waste a Good Crisis

by Pete Abilla on September 3, 2009

This entry is part 1 of 12 in the series Turnaround, Transformation, and Change Management

poka-yoke, mistake proof, fail proof, drugs, embeda, lean, six sigma, cost to recover a customer, customer recovery function, customer service, customer solutions, loyalty, net promoter score, private equity, turnaround, ebitda, free cash flowI’ve been part of several turnarounds and have led a few in my short career. One thing that I’ve learned is this: one cannot underestimate the people-side of a turnaround.  In fact, it’s very likely that your turnaround will fail, if your people aren’t with you.

In this article, I’ll share a simple, pragmatic model that has proved effective for me in the past and, in proceeding blog posts, I’ll show several examples of how you can implement this model in your various turnaround efforts — from very small to very large.

A Crisis

Most turnaround efforts begin with a recognition that the business is in trouble.  This recognition typically comes through the review of a troubled balance sheet, or struggling EBITDA numbers or losing several key customer accounts simultaneously.  These are decent indicators, but they are clearly lagging indicators.  Most likely, the morale of the organization — if one has the awareness and the sense to feel — is a more accurate leading indicator for the health of a company.  Indeed in some cases, morale precedes financial trouble.

Creating Urgency

Once awareness of a crisis is realized, then productively channeling, communicating, and creating a sense of urgency for the entire organization is the next and ongoing step.  What the organization — what each person in the organization — will need to know, feel, and remember is found below:

  1. How is the company doing: to be shared with complete, emotional honesty, and NOT intellectualized or sugar-coated in any way.  In a crisis, the organization cares more about emotional connection, not about intellectual or detached positions from the leadership team.  We’re all in this together should be the banner call.
  2. This is what we’re going to do about it — short-term and long-term: An appeal and a return to company values can be very powerful here.  Remind the troops of what made the company great, the values that underpin the behavior of everybody, and how those values will be a guiding light in how to navigate through the crisis.  Then, be very specific about the steps to be taken and milestones we expect to reach and when we expect to reach them.  Doing this will give confidence to the organization and will empower them to ask themselves “How can I help?” or “What can I do?”
  3. Here’s what you can do – specifically: Your employees will want to know exactly how they can help navigate the organization through the crisis.  They are yearning to do something meaningful and important — help them find a way to contribute in a meaningful way.

Your employees are adults and they can take bad news with dignity.  Be honest.  Don’t sugar-coat.  Emotional connection is the key here; people will see right through any statement or behavior that isn’t authentic or sincere.

The Plan and Change Management

Your plan should be very specific, addressing the key themes and parts of your company crisis.  That plan will most likely require change — it has to: if you keep doing the things you were doing before the crisis, then you’ll just extend the crisis even longer.  You must do things differently — which requires change management.

If you keep doing the things you were doing before the crisis, then you’ll just extend the crisis even longer

A simple model that I’ve used in past turnaround efforts — both big and small — is the model below:

shmula-change-management

The model follows basic human development patterns of Unaware, Aware, Understand, Believe, and Act. Below is a more readable image of the behaviors in each of the human development spectrum:

shmula-change-management-zoom

In any change effort, you will probably have, in general, people that might be considered Saboteur, Fence-Sitter, and Fully-Committed.  This model also explains the specific behaviors that define what it means to be Unaware, Aware, Understand, Believe, and Act.

In proceeding blog posts, I’ll explicate on each role in this change model and how to build a strategy from it.

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Complacency, Urgency, and Change

by Pete Abilla on November 22, 2009

This entry is part 2 of 12 in the series Turnaround, Transformation, and Change Management

urgency, complacency, turnaround management association, lean thinking, six sigmaJohn Kotter makes a good case that urgency is the key ingredient in any organizational transformation.  Conversely, the lower the urgency, the higher the likelihood that the firm will collapse or fail or not transform in a way that will enable it to win in a changing marketplace.  Kotter does something else that is interesting: he defines True Sense of Urgency, Complacency, and False Sense of Urgency.  This was very instructive.

While the Venn Diagram below is not his rendering but mine, the content and idea is from his book:

shmula-complacency-urgency-false-sense-of-urgency

So, Kotter, argues:

  • A True Sense of Urgency is “Urgent activity, action which is alert, fast moving, focused on the important issues, relentless, and continuously purging irrelevant activities, and leading other by example …”
  • Complacency is “Unchanging activity, action which ignores an organization’s new opportunities or hazards, focuses inward (navel gazing – not Kotter’s term, but mine), does whatever has been the norm in the past, supports and defends the status quo, asleep-at-the-wheel quality to it …”
  • A False Sense of Urgency is “Frenetic activity, meeting-meeting, writing-writing, going-going, projects-projects – and none of it is purposeful …”

The mistake most companies make is confusing False Sense of Urgency with True Sense of Urgency.  I completely agree with Kotter on this point.  To deconfuse this point, I created the Venn Diagram above and found it helpful in delineating between True and False Sense of Urgency – in which ways are they similar and in which ways are they different.  The same goes for Complacency.

Here is what is interesting.  Complacency and False Sense of Urgency are closer than we think, but Complacency and True Sense of Urgency share no attributes at all.

A True Sense of Urgency is required for ANY turnaround – a project, a division, a family, or a company.

A True Sense of Urgency is required for ANY turnaround – a project, a division, a family, or a company.  Knowing the behavioral difference between True and False Sense of Urgency and Complacency is helpful for any change agent and leader who is in the service of mobilizing people to win together.
image credit

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Why Transformation Efforts Fail

by Pete Abilla on September 28, 2009

This entry is part 3 of 12 in the series Turnaround, Transformation, and Change Management

adoption, International, Domestic, Waiting, child, baby, infant, adoption, adopt, adopting, adoptionTransformation or Change efforts sometimes fail.  In fact, the numbers are staggering – most of them fail.  While the root cause is wide and varied, there are general themes or characteristics that are important to keep in mind in your own transformation efforts.  Think of these as symptoms also — that a failure is around the corner if you see these characteristics creeping-up or, better yet, you can course-correct if there’s still time.

The data on Transformation failures is instructive:

click to enlarge image

shmula-transformation-failure

The main categories for why Transformations fail are 1:

  • Employee Resistance to Change (39%)
  • Management Behavior not supportive of Change (33%)
  • Lack of resources (14%)
  • Other (14%)

The top two reasons are instructive and actionable – the root causes for most transformation failures have to do with people: employee resistance and management behavior.

Management Behavior that is not supportive of the change and Employee Resistance are the main factors that lead to transformation failures

Typical characteristics in transformation failures are the following:

  • There is no obvious connection to outcomes that the organization values
  • The aspirations of the organization are not clear, concise, or communicated
  • The desired behaviors are not role-modeled, trained, or reinforced
  • The top team is not aligned
  • The informal “how things get done” remain inconsistent with espoused values
  • The change champions lose interest and move to the “next” change program
  • The leaders charged with implementing the change do not possess the requisite knowledge, skills, and abilities

In the next post, we’ll discuss how to surgically address the failure characteristics above, create a transformation story that is rigorously architected along broad themes, the chapters in that story, and the key initiatives that those chapters produce, and the role of the leadership team in all of it.

Beer and Nohria (2000); Cameron and Quinn (1997); CSC Index; Caldewell (1994); Gross et al. (1993); Kotter and Heskett (1992); Hickings (1988); Conference Board report (Fortune 500 interviews); press analysis; McKinsey analysis
  1. Beer and Nohria (2000); Cameron and Quinn (1997); CSC Index; Caldewell (1994); Gross et al. (1993); Kotter and Heskett (1992); Hickings (1988); Conference Board report (Fortune 500 interviews); press analysis; McKinsey analysis ↩

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Corporate Renewal, Waste, and Turnaround

by Pete Abilla on June 3, 2010

This entry is part 3 of 12 in the series Turnaround, Transformation, and Change Management

private-equity-lean-thinking-abilla-operational-improvementHaving seen and helped various businesses in various industries, I agree with Carl Icahn’s assessment on corporate waste 1:

I have observed first-hand the sheer amount of waste and inefficiency at a few companies that I have taken over.

For instance, when I took over a rail freight car company called ACF during the 1980s, they had 12 floors in a Manhattan office building which was filled with workers. I couldn’t figure out what they did. I really tried to find out what these people did and even went so far as to pay $500,000 to a consultant to study the issue and get back to me.

After weeks of research, even the consultant couldn’t figure it out. So I shut down the division and it had no discernible impact on the performance of the company, which I own to this day.

This experience, in my view, is emblematic of the extent of waste in corporate America. There are few companies that you can’t come in and cut 30 percent of operating costs and no one would know the difference.

I agree with his general assessment2, but not with how we went about shutting down the entire division so abruptly.  But, he is correct in saying that most organizations are full of waste – and, the unfortunate thing is that – they don’t even know it.

Learning to See

Learning to see waste – no matter what business you are in – is critical.  Once you learn to see waste, then you can do something systematic about it.  Ideally,

  1. prevent corporate waste
  2. reduce corporate waste
  3. eliminate corporate waste

Corporate Renewal

There are may signs of a troubled business 3. Each of us has a responsibility to improve those areas where we have influence.  Given that, what are you going to do today to improve the business you are in?  Help the people you work with?  Improve the world around you?

It can be difficult, but is sometimes required to get the organization back to health.  It is, of course, preferrable, to avoid turnaround situations, if the steps of a turnaround 4 can be avoided.

But we must begin now.  What are you going to do to add value?

  1. Periods of economic and financial distress pose special challenges to the capabilities and decision-making processes of most professional management teams. Not only do such occurrences increase demands on existing managerial abilities, but they also create a whole new spectrum of legal, accounting, and financial considerations that impact the renewal process.

    Today’s increased competition, cyclical and volatile financial markets, and economic trends have created a climate in which no business can take stability for granted. As once-stable, profitable, and competitive companies struggle to improve operational and financial performance, the expertise of corporate renewal professionals is critical to this revitalization process. The chances of successfully navigating the corporate renewal process increases through the use of qualified turnaround professionals, who have the experience and expertise to apply sound practices of turnaround management to failing businesses.

    While many companies have turned to downsizing as a stopgap measure to improve their economic health, downsizing alone has its own adverse consequences in that it thins the ranks of managers groomed to assume top positions. Moreover, a volatile business environment may turn once-successful, growth-oriented CEOs into hesitant managers who no longer can provide strong leadership during periods of retrenchment. New lender liability laws also have increased the need for turnaround management. At one time, banks could take control of client companies that were in serious financial peril.

    Today, courts view this action as equity participation, forcing banks to avoid direct involvement with corporate management. A turnaround specialist, operating as either an interim manager or consultant, may replace a company’s CEO and temporarily take over the decision-making processes of a company to lead it toward stability. Alternatively, a turnaround professional may become an active advisor to a troubled company’s board of directors. ↩

  2. A turnaround specialist enters a company with a fresh eye and complete objectivity. This professional can spot problems that may not be visible to company insiders and implement solutions. Turnaround managers have no political agenda or other obligations to bias the decision-making process, allowing them to take sometimes unpopular, yet necessary, steps required for a company’s survival. A turnaround manager’s experience within a particular industry is less important than experience in crisis situations when a company is facing bankruptcy or the loss of millions of dollars in revenue. Like an emergency room doctor, a turnaround professional must make critical decisions quickly to staunch the financial bleeding and give a patient the best chance for recovery. Operating in the eye of the storm, a turnaround specialist must deal equitably with angry creditors, frightened employees, wary customers, and a nervous board of directors. Clearly this is no assignment for the faint-hearted. ↩
  3. Executives who encounter corporate distress often go through the same emotional stages as dying people: denial, anger, bargaining, depression, and finally acceptance. The last stage is when most corporations hire turnaround professionals, unless they are forced to do so earlier by a lender, equity sponsor, or bankruptcy court. Corporate managers who recognize and acknowledge the signs of trouble and get help in the earlier stages have a much better chance of a successful recovery for their corporation. Most businesses in distress display more than one of these external and internal signs of trouble:

    Ineffective Management Style. A president or founder of a company often is reluctant to delegate authority or refuses to do so. No decision, big or small, can be made without this individual’s blessing. As a result, the rest of the management staff gains no solid experience or feeling of vested ownership in the business. Dishonesty or fraud may exist, yet go undetected or unreported. The board of directors may be non-participative and ineffective. In such situations, if the president suddenly becomes incapacitated or dies, the entire company is in danger of collapse due to the resulting leadership void.

    Overdiversification. The business has yielded to pressure to diversify to reduce risk. However, too much diversification may cause a company to spread its managerial, financial, and competitive resources too thin. As a result, the business becomes vulnerable to loss of market share to better competition.

    Weak Financial Function. A company with excessive debt, stringent covenants, and inadequate equity capital is operating with little or no margin for error. Credit is overextended, inventories are accumulating, and fixed assets are underutilized. The introduction of better working capital policies and improved capacity utilization decisions are clearly warranted in such cases. Yet, incumbent management instead often engages in debilitating attempts to grow the company out of its problems.

    Poor Lender Relationships. A weakened financial condition has led to the company developing an adversarial and unproductive relationship with its lending institution(s). Fearing that its loan relationships and facilities may be in jeopardy, the company tries to conceal financial information from its lenders. Telephone calls from the bank are not returned. Interim or periodic reports are not filed. Since money is the lifeblood of most any business, this kind of lender relationship only leads to more trouble and compounds the difficulty of managing the declining business operations.

    Lack of Operating Controls. The company is operating without adequate reporting, accountability, and responsibility mechanisms. This is tantamount to flying an airplane without an instrument control panel. Management decisions based on inadequate, untimely, or inaccurate information can make a bad situation considerably worse.

    Market Lag. Changes in the product and customer marketplace have bypassed the company, leaving it with sagging sales and declining market share. For some businesses, the source of the deficiency is technology; their equipment or products and services have become obsolete. For others, the problem lies in sales and marketing; the company hasn’t kept pace with the needs of the marketplace or the ability to distribute its products effectively to the customer base.

    Explosive Growth. The business is growing rapidly. A business that is a success at $5 million in sales a year can become a dismal failure at $10 million. Companies achieving fast growth from concentrating on boosting sales often overlook the effects of that growth on the balance sheet and the cash requirements of funding it. Growth often carries a very high capital investment requirements, including significant investments in R&D, capacity, and working capital. Leveraging a company to meet these increased funding needs typically means that management must operate with little or no margin for error. In addition, growth has led to overwhelming the capabilities and effectiveness of management and employees alike. Staff is not able to work successfully at the new level. For example, management of engineering operations for a company with 12 plants is much different than managing a similar business with perhaps one or two plants. The same challenge applies to others in key positions in marketing, sales, operations, and manufacturing. A company can grow beyond its ability to manage.

    Precarious Customer Base. The business relies on a few big customers for most of its sales. If a manufacturer selling to large retail chains has two customers representing 60 percent of its business, the company obviously is vulnerable to the financial condition of its customer or the possibility of new suppliers displacing its relationship. The loss of just one of these key customers could put hundreds out of work and send the business into bankruptcy.

    Family vs. Business Matters. Family issues can cause business decisions to be made on an emotional basis rather than on sound business principles. Sibling rivalry has ruined many privately held companies. Deciding which relative should run the business after the founder’s retirement or death can be one of the most difficult challenges a business can face. Divorce can also shatter a business, leaving it in fragments. Nepotism can cause bright, skillful managers who aren’t part of the family circle to take their talents elsewhere.

    Operating without a Business Plan. Armed with 15 or 20 years in the business, management often operates a growing company by intuition or the seat of its pants. Its plan may change overnight because it is based on management’s own “feel” for the market. In some cases, the business plan exists in everyone’s head rather than in writing. The result is that plans are carried out according to individual interpretation. Moreover, plans are inadequately communicated to employees. ↩

  4. Stage One: Changing Management: Management change can begin only when company leaders have decided that changes are necessary. As most CEOs or company presidents do not relinquish power easily, the motivation for management change must often come from the board of directors. Even if incumbent mangers are willing to implement changes in an effort to turn a company around, they often lack the credibility or objectivity to do so because they are viewed as having caused or contributed to the problems in the first place. During this stage or after Stage Two—situation analysis—steps are taken to weed out or replace any top managers who might impede the turnaround effort. This may include the CEO, CFO, or weak board members.

    Stage Two: Analyzing the Situation: Before a turnaround specialist makes any major changes, the individual must determine the chances of the business’s survival, identify appropriate strategies, and develop a preliminary action plan. This means that the first days of an engagement are spent fact-finding and diagnosing the scope and severity of the company’s ills. Is it in imminent danger of failure? Does it have substantial losses but its survival is not yet threatened? Or is it merely in a declining business position? The first three requirements for viability are analyzed: one or more viable core businesses, adequate bridge financing, and sufficient organizational resources. A more detailed assessment of strengths and weaknesses follows in the areas of competitive position, engineering and R&D, finances, marketing, operations, organizational structure, and personnel. In the meantime, the turnaround professional must deal with various constituencies and vested interest groups. The first and often most vocal group is angry creditors who may have been kept in the dark about the company’s financial status. Employees are confused and frightened, and spend more time worrying about their own job security than fixing the business. Customers, vendors, and suppliers are wary about the future of the company. A turnaround specialist must be open and frank with all these audiences. Once the major problems are identified, the turnaround professional develops a strategic plan with specific goals and detailed functional actions. The individual must then sell the plan it to all key parties in the company, including the board of directors, the management team, and employees. Presenting the plan to key parties outside the company—bankers, major creditors, and vendors—should restore confidence that the business can work through its difficulties.

    Stage Three: Implementing an Emergency Action Plan: When the condition of the company is critical, the plan is simple but drastic. Emergency surgery is performed to stop the bleeding and enable the organization to survive. At this time emotions run high. Employees are laid off, and entire departments may be eliminated. Having sized up the situation objectively, an experienced turnaround leader makes these cuts swiftly. Cash is the lifeblood of the business. A positive operating cash flow must be established as quickly as possible. In addition, a sufficient amount of cash to implement the turnaround strategies must be sourced. Often, unprofitable divisions or business units are sold as a means to raise cash. Frequently, the turnaround specialist will apply some quick corrective surgery before placing these businesses on the market. Units that fail to attract buyers within a given time frame may be liquidated. The plan typically includes other financial, marketing, and operational actions to restructure outstanding debt obligations, improve working capital management, reduce operating costs, improve budgeting practices, correct product line and customer mix pricing, prune product lines, and accelerate high-potential products. The status quo is challenged, and those who change as a result of the turnaround plan should be rewarded while those who don’t are sanctioned. In a typical turnaround, the new company emerges from the operating table as a smaller organization that no longer is losing cash.

    Stage Four: Restructuring the Business: Once the bleeding has stopped, losing divisions have been sold, and administrative costs have been cut, turnaround efforts are directed toward making the remaining business operations effective and efficient. The company must be restructured to increase profitability and its return on assets and equity. In many ways, this stage is the most difficult of all. Eliminating losses is one thing, but achieving an acceptable return on the firm’s investment capital is quite another. The financial state of the company’s core business is particularly important. If the core business is irreparably damaged, the outlook is bleak. If the remaining corporation is capable of long-term survival, it must now concentrate on sustained profitability and the smooth operation of existing facilities. During the turnaround, the product mix may have changed, requiring the company to do some repositioning. Core products neglected over time require immediate attention to remain competitive. In the new and leaner company, some facilities might be closed; the company may even withdraw from certain markets or target its products toward a different niche or market segment. The “people mix” becomes more important as the company is restructured for competitive effectiveness. Reward and compensation systems that reinforce the turnaround effort get people to think “profits” and “return on investment.” Survival, not tradition, determines the new shape of the business.

    Stage Five: Return to Normal: In the final step of a turnaround, a company slowly returns to profitability. While earlier steps concentrated on correcting problems, the final stage focuses on institutionalizing an emphasis on profitability and return on equity, and enhancing economic value-added. For example, the company may initiate new marketing programs to broaden the business and customer base and increase market penetration. It may increase revenue by carefully adding new products and improving customer service. Strategic alliances with other world-class organizations may be explored. Financially, the emphasis shifts from cash flow concerns to maintaining a strong balance sheet, securing long-term financing, and implementing strategic accounting and control systems. This final step cannot be successful without a psychological shift as well. Rebuilding momentum and morale is almost as important as rebuilding return on investment. It means a rebirth of the corporate culture and transforming negative attitudes to positive, confident ones as the company maps out its future. ↩

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Extraordinary Response

by Pete Abilla on November 24, 2009

This entry is part 4 of 12 in the series Turnaround, Transformation, and Change Management

urgency, complacency, turnaround management association, lean thinking, six sigmaOften, our best moments are during times of trial. Indeed, what we remember most and what is most inspiring are not the scores of naysayers that exclaim “it’s dark, it’s dark” to describe the gloom that is all around us, but the humble, smug, and steady person that lights a candle so that others can see.

Neal Maxwell said this best:

Men’s and nations’ finest hour consist of those moments when extraordinary challenge is met by extraordinary response. Hence in those darkest hours, we must light our individual candles rather than vying with others to call attention to the enveloping darkness.

In a moment of Hansei and reflection, how are you behaving?  Are you exclaiming that things are dark?  Or, are you doing your part to lift others?  As for me, I have much yet to learn.  I’m thankful for the time allotted to me, that I might still learn and become better.

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Ring Fence Operational Improvement

by Pete Abilla on June 8, 2010

This entry is part 4 of 12 in the series Turnaround, Transformation, and Change Management

Many might argue against my claim, but I firmly believe that Private Equity and Leveraged Buyouts add value to the world economy.  More and more, acquisitions by Private Equity firms are focused on creating long-term value, rather than financial engineering.  That is very healthy.

Of course not all Private Equity firms can be described as long term thinkers but those that do think more longer term and are vested in the operational improvements of their portfolio companies do add value to the world.

Kohlberg, Kravis, Roberts & Co. (KKR) 1 is by far the leader in the Private Equity buyout world.  It is not surprising that a key ingredient in their approach to creating value in the companies they acquire is the implementation of Lean Thinking in the enterprise.

100 Day Plan

For KKR, a key aspect of their value creation approach to acquired companies is what they call their 100 Day Plan, which is a Ring-Fence, or Timebox, or One-Piece approach to improving a company (as opposed to a batch approach).  In their words 2:

One of the key components of KKR’s value creation process is the 100-Day Plan. Developed by the KKR industry professionals, KKR Capstone professionals and the management team of a new portfolio company, a 100-Day Plan details the steps necessary for the team to achieve specific strategic, financial and operational goals.

How will margins be improved? How will supply chains be shortened? What departments need more resources? Who will be accountable for what?

Line by line and business unit by business unit, the 100-Day Plan charts a path to value creation by ensuring that everyone involved in the running of a portfolio company agrees upon a plan for improvement, is committed to executing it and is held accountable to it from day one. Because they find the experience of forging and adhering to the first 100-Day Plan so valuable, KKR and portfolio company management teams often develop and implement second and third 100-Day Plans.

100-Day Plans tend to focus on identifying critical, forward-looking operating metrics, such as customer satisfaction measures, on-time delivery and sales pipelines. At times, this enables KKR portfolio management team to identify challenges facing a business before those challenges are revealed in the financial data, thus allowing teams to make difficult operational decisions as early as possible in KKR’s ownership.

In the succeeding posts on Private Equity and the implementation of Lean Thinking to improve portfolio companies, I’ll share several examples of how Lean can quickly improve companies, add value, and remain true to the Respect for People pillar.

  1. Kohlberg Kravis Roberts & Co. (commonly referred to as KKR) is a New York City based private equity firm that sponsors and manages investment funds, focusing primarily on leveraged buyouts of mature businesses. Since inception, the firm has completed over $400 billion of private equity transactions and was one of the pioneers of the leveraged buyout industry. In March 2010, KKR filed to list its shares on the New York Stock Exchange. The firm was founded in 1976 by Jerome Kohlberg, Jr., and cousins Henry Kravis and George R. Roberts, all of whom had previously worked together at Bear Stearns, where they completed some of the earliest leveraged buyout transactions. Since its founding, KKR has completed a number of landmark transactions including the 1989 leveraged buyout of RJR Nabisco, which was the largest buyout in history to that point, as well as the 2007 buyout of TXU, which is currently the largest buyout completed to date. KKR has completed investments in over 160 companies since 1977, completing at least one investment in every year except 1982 and 1990. KKR is headquartered in New York City with thirteen additional offices in the US, Europe and Asia. In October 2009, KKR listed shares in the company, through KKR & Co. an affiliate that holds 30% of the firm’s ownership equity, with the remainder held by the firm’s partners. ↩
  2. Super Return 2006 Presentation ↩

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Role of Lean Thinking in Private Equity

by Pete Abilla on June 5, 2010

This entry is part 4 of 12 in the series Turnaround, Transformation, and Change Management

When a Private Equity firm considers buying a company, the role Lean Thinking plays depends on the stage of the buyout deal. But, Lean Thinking is appropriately placed at the following steps:

  1. Lean and Pre Acquisition Due Diligence
  2. Lean and Post Acquisition Short Term Improvements
  3. Lean and Enterprise Broad Organizational Improvements

Due Diligence

The main questions to consider at this stage are the following 1:

  1. What are the opportunities for improvement in the company?
  2. What degree of waste is present in the company?
  3. If acquired, how much waste could be eliminated and by when?

Post-Acquisition 100 day Plans

Once the company has been acquired, it is imperative that the Private Equity firm and the current management create a short-term and long-term strategy to bring the company back to health – corporate renewal is the ultimate goal.  But, shorter term goals might involve cash flow opportunities 2.

Enterprise Improvements

Once the short-term bleeding has been stopped, then a broader and more enterprise approach to implementing Lean across the organization is appropriate.  It is at this stage where a full focus on the front-lines including training and coaching on the A3 method and how to apply Plan-Do-Check-Act at the lowest levels of the company makes sense.

  1. The pre-acquisition due diligence engagements range from a limited scope that addressed one or two issues to a comprehensive assessment of operations, margins, personnel, and strategic direction at $1 billion plus companies with a number of worldwide locations. Consultants can swiftly exploit and integrate data from the company’s ERP/MRP systems, key performance indicators (KPIs), and quality systems to understand a company’s fundamental problems and opportunities. Due diligence reports address the investment thesis, identify cost-saving opportunities and potential risks, and are often relied on in providing financing. ↩
  2. Post-acquisition assessments typically arise when a sponsor wants a third-party to review a portfolio company’s performance, or a specific, troubling aspect of the company’s operations such as the urgent need to generate cash now, deleverage, or downsize while maintaining or improving margins.  An outside assessment is especially valuable in times like these when there’s a lack of transparency or when there are problems in a company’s corporate or IT systems that are causing scheduling and delivery problems and excessive or inaccurate inventory, among other issues. Lean based assessments are also often used in developing a company’s strategic plan to achieve enterprise improvement targets. Lean methods are based on a structured approach which is based on Lean Thinking, Lean Enterprise, or Lean Manufacturing methods of identifying and eliminating wastes ↩

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A Transformation Story

by Pete Abilla on November 8, 2009

This entry is part 5 of 12 in the series Turnaround, Transformation, and Change Management

adoption, International, Domestic, Waiting, child, baby, infant, adoption, adopt, adopting, adoptionWe all love stories.  Stories have characters that we relate to or hate, there’s drama, heroes and villains, and the best stories stir the emotion.  The same goes for companies and their stories – all companies have a story.  Most stories are in-process still, whereas some have ended, such as the story of Enron.  What is your story?  If your company is amidst a transformation or a turnaround, what does that story look like?  What chapter are you in?

A Transformation is a fundamental change that penetrates the heart, mind, and soul of a company.  It is not superficial, or a flavor-of-the-month change.  In these tough economic times, superficial changes won’t do anymore – a fundamental change is often required to survive and, eventually, win.

More formally,

Transformation is a conscious and purposeful transition to a sustainable way of working at a significantly higher level of business performance and health, based on fundamental shifts in:

  • Ambition
  • Collective Self-Beliefs
  • Behaviors and Culture
  • Underlying Capabilities, Systems, & Processes

Conscious and Purposeful

A conscious and purposeful approach is a necessary attribute in sucessful transformations.  What does this mean?  In practical terms, it means the following:

  • a transformation consciously and purposefully builds capability to deliver long-term performance
  • a transformation consciously and purposefully builds organizational and individual skills and competencies
  • a transformation is consciously and purposefully modeled by leadership – it is not “business as usual”
  • a transformation consciously and purposefully reforms the cultural instincts of the organization

Creating Your Story

An effective story is simple and is most effectively executed when it is everybody’s story.  Like any story, it will contain characters and chapters.  Organizational stories are no different.

shmula-transformation-story

The proposed story approach above is one I’ve used several times with organization.  It has been effective because it is so simple.

  1. Create your desired transformation story
  2. The chapters in that story should have a performance metric attached to it – a metric that describes how we are doing.  Each chapter is a “theme”.
  3. Lastly, this chapter should lay-out the portfolio of initiatives that are aligned to a theme or chapter and, when rolled-up, will collectively make your story a reality.

The recipe above is helpful and focused on the long-term, but tactically and attacks the short-term.  But the vision is toward the long-term.

Think about your story.  Does the story make sense?  Do the chapters fit together?  Do your initiatives fit within the chapters?

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Case Study: Improving the Automotive Aftermarket

by Pete Abilla on June 10, 2010

This entry is part 5 of 12 in the series Turnaround, Transformation, and Change Management

This article shows a case study of how Kohlberg, Kravis, Roberts & Co. (KKR) was able to create value in one of their portfolio companies through the implementation of Lean Thinking in the enterprise.

In 2005, Kohlberg, Kravis, Roberts & Co. (KKR) acquired ATU, an automotive aftermarket company in Germany.  ATU was acquired for 27.2 Billion Euros.  At the time, ATU had 536 stores. By partnering closely with ATU management, KKR and Capstone (their operational improvement in-house consultancy) achieved the following 1:

  1. Reduced the number of suppliers from 800, bought more from each, increased margins through volume and quantity discounts
  2. Streamlined product portfolio of 15,000 parts and 45,000 deliverable within 24 hours.  Part of this was eliminating unprofitable products taking up valuable space on the shelf and in the warehouses, reducing inventory by 20%.
  3. The end result is a growth of EBITDA margin from 11.2% to 13.8%

What is important to remember here is this: the methods and practices that led to the results above are from Lean Thinking and that Lean Thinking is a critical part of Private Equity.

Was value unlocked and created at ATU through the implementation of Lean?  Are customers happier, shareholders happier, and employees happier?  It appears so.

As with all things, it starts with learning to see corporate wastes, then systematically and surgically attacking it.  Applying the principles of Lean can achieve that aim fast, with an eye for the longer term creation of value.

  1. Super Return 2006 Presentation ↩

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