Senior Partner & Managing Director, Global Leader, Transformation, Client Team Chair
Related Expertise Corporate Development & Finance
This article is an excerpt from the e-book Transformation: Delivering and Sustaining Breakthrough Performance.
Many transformation initiatives focus on improving a company’s financial and operational performance from “good” (or moderate) to “great”—that is, the company is already doing well in some or most areas, yet management still sees a need to make improvements. Other companies occupy a separate category of transformation because they are in the midst of immediate, urgent crises. We refer to these as turnaround and restructuring efforts. With the business environment becoming so volatile and unpredictable, an increasing number of companies need to take dramatic actions to generate rapid impact or they risk going out of business.
Typically, business problems unfold in three phases. (See Exhibit 1.)
During the first phase—a strategic crisis—the company is no longer able to compete effectively. Sales numbers may be stable, or even growing, yet profitability has begun to decline. Very often, management has tried a new strategy, or several, without success. (In some cases, management may not recognize the scope of the problem.) This is the phase at which traditional transformation programs are relevant.
If the company does not change its course, the second stage is a profit crisis. Sales are now stagnating or declining, while profit margins turn markedly negative. At this point, the company starts burning through cash reserves and needs to launch a turnaround.
Failure to do so—and continuing to burn cash—leads to the third and final phase: a liquidity crisis, in which the company may soon lack the financial resources to keep operating. At this point, the management team typically loses the ability to make changes on its own, and different stakeholders such as banks and other debt holders may have a say in trying to restructure the company.
Based on BCG’s experience working with clients, we have developed a three-part transformation framework. (See Transformation: The Imperative to Change, BCG report, November 2014.) Turnaround and restructuring programs involve applying all three components:
A turnaround or restructuring program should include all three elements, but the relative importance of each changes at various points in the process. In addition, it requires an initial triage and assessment stage, to determine the severity of the company’s challenges and determine the right path forward. (See Exhibit 2.)
The initial stage, triage and assessment, is aimed at generating a clear picture of the company’s financial situation and identifying the most immediate priorities. At this point, management needs to launch rapid measures to stop the bleeding and free up capital as soon as possible—ideally in weeks; certainly no longer than a few months. (See the sidebar “A Retailer Cuts Costs and Fuels Growth.”)
A large international grocer was struggling with increased competition from discounters and online retailers. Its operations were overly complex, and its costs were too high. After decades of strong growth, the company lost considerable market share and half its profits in just three years—along with the trust of its customers.
In response, the company launched a full transformation program, which included:
Collectively, these measures delivered $500 million in cost savings, new revenue, and profit over the first 18 months of the transformation, helping the company regain its leadership position in the market.
For situations in which the company is extremely stressed and on the brink of going under, short-term measures include postponing or canceling capital investments, freezing new hires and salary increases, and improving working capital. Management teams can also reach out to financing partners and ask for a short-term infusion of capital to maintain enough liquidity to continue operating. More broadly, companies at this stage need to generate a fully transparent view of their true liquidity situation. Detailed data at the level of individual business units and entities is critical for the company to make accurate short-term forecasts. In addition, companies need to understand the legal requirements of various options. For this reason, many organizations set up a liquidity office that collects, synthesizes, and reports this data directly to the C-suite and board.
Once the immediate crisis is over, companies can shift away from the intense focus on short-term liquidity and adopt broader measures to generate the capital needed to fund the forward-looking initiatives. Those measures—which typically generate results in 3 to 12 months—fall into several broad categories: revenue increases, organizational simplicity, capital efficiency, and cost reduction.
Although companies tend to focus on cost reductions and capital efficiency at this stage, we find that measures to boost revenue and simplify the organization often have similar short-term effects and lead to more sustainable improvements. Measures to increase revenue include reorienting the sales force to sell the most attractive products, identifying the most promising customer segments, and improving pricing. Organizational measures include simplifying the corporate agenda to focus on only a few critical areas, tasking the right people to oversee them, and clarifying roles and responsibilities. Removing management layers is also a powerful short-term tool to cut internal bureaucracy and complexity. (See “A Vehicle Manufacturer’s Turnaround Generates $700 Million in Savings in One Year.”)
A $10 billion heavy-vehicle manufacturer was struggling to earn sustainable profits in a highly cyclical industry. A downturn led to consistent losses that threatened the long-term viability of the business.
To save the company, management launched a turnaround that focused on dramatically reducing costs and boosting sales, in part through an emphasis on aftermarket vehicle parts.
The company reduced head count by 25%. It generated more than 3,000 ideas about how to reduce product costs. And it rolled out a new pricing structure and boosted its market share in some segments from 35% to 50%. Overall, the measures led to $700 million in savings in the first year and $2 billion in margin improvements in the first three years (70% more than the company’s original savings target).
As the company shifts to winning in the medium term, management will need to address four principal areas:
A leading global technology company was under pressure because of slowing growth and increased competition. In response, the company launched a detailed diagnostic to identify critical priorities. On the basis of those results, it developed a full transformation program to streamline the company’s cost structure and processes, build new capabilities, and increase margins.
Specific measures included:
Within the first year, the company had reduced its run rate operating costs by more than $1 billion.
In some turnaround or restructuring cases, companies will need to secure additional capital in order to execute the transformation. (Successful funding-the-journey measures are often, but not always, enough.) Improving the capital structure of the company might also require extending the terms of its existing debt, stopping payments temporarily or even negotiating a “haircut,” in which lenders waive their rights to some of the payments they are due.
Implementing turnaround and restructuring programs is extremely challenging in that management needs to fix the business as it continues to operate the business (often with scarce resources). Our experience shows that success comes from prioritizing several initiatives: