Corporate failure - how to spot the warning signs
by Richard Farr

Most would agree that corporate demise is caused by management inadequacy. But management can also effect a successful turnaround. How likely is it that you will be faced with a situation that requires turnaround, and how can you be part of the solution rather than part of the problem?

Let's first of all examine how to spot the warning signs of a failing business:

1. Failure to articulate strategy. If the bosses can't make it clear, how can anyone understand how to implement it?
2. Loss of key customers. You know how hard it is to win and maintain key customers – losing one is a serious mistake.
3. Increasing tension with key stakeholders. Whether it is credibility with the press, disenchantment with the unions, or disaffected pension trustees, external mismanagement of key stakeholders is only the tip of the iceberg.
4. Failure to meet deadlines. If the company is not hitting external deadlines can you imagine what is happening internally?
5. Inability to prioritise. If the business can't choose the right priorities, the wrong ones soon creep in.
6. Director churn, particularly within the CEO and CFO functions. Do they know something others don't?
7. Embarrassing complexity or opaque transparency. Keep it simple. Nothing deliberately or accidentally complex ever works in the long term. Why? Because businesses are always as strong as their weakest link. If these links don't get the picture, the whole chain will be compromised at the critical point.
8. Incomparable comparatives. If businesses cannot explain the numbers to the outside world how do you think they can explain the critical internal ones?
9. Continual explanations that a bad situation is "just another one-off" are excuses for poor planning and execution.
10. Excessive growth will invariably lead to difficulties, as the weakest links can't go as fast as the strongest ones.
11. Superficial forecasting. This often covers up management failure and uncertainty.
12. Regular policy changes are a clear indicator of uncertainty and this breeds failure.
13. Downgrades can be the final sign that a business is in distress.

Spotting one of these external warning signs in your business could be an unlucky one-off. A combination of any three or more is almost a guarantee of impending doom. As the vultures start to circle around the stricken business, a new breed of individual emerges. The old key stakeholder relationship managers are replaced by more experienced and senior people who start to look at the exposure of your business to their own businesses. Whether these are venture capitalists, banks, credit insurers, or even professional advisers, everyone starts to ask questions.

Spotlight on finance
But who do they ask them of? Initially they ask existing management and get more of the same. Something is clearly wrong so the questions become more penetrating. Who do they then ask? Clearly the CEO has lost some of his or her magic dust so inevitably the burden falls on the finance team.

What kind of finance manager is best placed to lead a company out of trouble? Let's look at the four types of Chief Financial Officer:

• Type A – those who know the right answer and act on it
• Type B – those who know the right answer and don't act on it
• Type C – those who don't know the right answer and know it
• Type D – those who don't know the right answer and don't know it.

Type As usually don't get involved in turnarounds, as they have dealt with the problem before it became too serious. Type Bs are either waiting to take over the CEO's job or are planning to leave soon. Type Cs are usually too nervous to do anything positive and are busy keeping their heads down. Type Ds are dangerous.

With the company in trouble, what happens? The Type B CFO makes a move, although the stigma of under-performance may make it too late for him or her to recover. The Type C CFO is in shock, and this often leads to outside accountants being brought in. The Type D CFO let the accountants (and everybody else) in a long time ago.

Answers and statistics
So how can you help regain control of the situation? What the stakeholders want are answers, not sales speak. You can provide them with answers. They also want to monitor the situation – you can give them the key statistics that you think they need (you could even try asking them first what they need).

What if the turnaround specialist appears? These people are experts at quickly assessing people and situations and have quite clear ideas of solutions. Make sure your numbers are correct, relevant and up to date and you will become part of the solution. But what do turnaround specialists want? To answer this, one has to recognise the two distinct skill sets required in any successful turnaround strategy – tactical skills and operational skills.

Tactical skills are those unique to crisis situations. The need to clarify, confirm and communicate to the key stakeholders the immediate and pressing issues is fundamental to regaining their confidence and will buy some time for the emerging solution.

Blend of skills
However, tactical skills in isolation do not turn companies around; good old-fashioned operational skills do. But those skills do not rest easy in crisis situations and the key to success is to allow a blended skill set to emerge over a three- to six-month period so that operational skills start to regain control. Pass the baton from tactical to operational too early and you will end up with another phase of uncertainty and restructuring. Pass it too late and you end up with an expensive funeral.

You, in the management information engine room, are key to the success of feeding the right information to both the turnaround specialist and other professional advisers that are needed to satisfy the key stakeholders. More importantly, you need to reassure the emerging management team about to inherit the solution that you are best placed to serve their needs. Turnarounds can be an uncertain and worrying time. Knowing your numbers and what the new players (including often the new CFO) want, is key to your involvement. Reacting early to the problems will ensure you have a seat at the table. Reacting too late means you'll be leaving with the old CFO.

Richard Farr is a director in the business recovery services practice, PricewaterhouseCoopers. This article is contributed by CIMA (The Chartered Institute of Management Accountants) and it first appeared in Insight, CIMA’s on-line newsletter for accountants in business. Insight is accessible at www.cimaglobal.com/insight