How you turn round something that has run out of money

 

                     I have been involved in turning round companies that had too much borrowing, too little cash and too big a running deficit.  When a new team goes in to save them, everything in the first few months is designed to stem the outflow of cash. You first have to stop the losses or the running deficit, then move on to repaying some of the debt.

                      First actions usually include:

1. Ending all new recruitment. The CEO’s permission for any new person, replacement or additional, is only given if the company lacks a particular talent needed to carry out the turnround, or suddenly wins so much  new business which requires new people to provide the service or make the goods. Normally as people leave they can be replaced from within, and posts removed.

2. Ending all capital expenditure. The only exceptions the CEO might make are items that have to be replaced because they are essential to the business and no longer function, or plant and equipment specific to new orders just won.

3. Stopping all purchases of supplies and components, save where it can be demonstrated the company no longer holds stocks and is about to run out of the item.

              The second round of actions are concerned with motivating the people in the business. The aim should not be to cut wages or make life more miserable for staff. The aim should be to reward greater productivity and output. Staff will buy into a recovery plan, if they know that failure of the recovery plan means the loss of all the jobs and the end of the business, or if they see that  at the very least failure of the plan  will mean more job losses and poorer wages.  The use of natural wastage to slim staff numbers offers better promotion prospects to all employees, as more senior jobs will become available with priority given to inside candidates. It may be necessary to close the final salary pension plan to new members and to new accruals if one still exists. There should be no action taken against earned rights within pension plans. A defined contribution plan should be made available for future use. There should always be a message of hope. The changes are needed to move the business from the danger list to the success list.

           The third round entails seeing if there are assets or businesses that are surplus to requirements or peripheral to the main aims of the company that could be sold. Early disposals can generate cash, cut or eliminate the first year’s deficit and get the programme of deficit control off to a strong start. They also simplify the management task, concentrating on the main parts of the business that remain.

              The fourth round of actions will be ones to raise more revenue by selling more of the good or service. This may require quality improvements, better marketing, and in due course the launch of new ranges. Harnessing the energies of the team to this is positive work, creating a sense of optimism. As quality improves so sales and margins should improve. As new products are launched, so the business has a newer and more exciting feel to it. Staff have something to believe in.

                   The first three rounds of work for a company turnround also apply to local or central government fighting the battle of the deficits. Government does not have the option of winning new business. The nearest it has to that is raising more tax revenue. This can only be done on a sustained basis by creating the conditions for faster and  more sustained growth of the economy. Raising tax rates is self defeating, leading to slower growth and more trouble in raising living standards, consumption and public morale.

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34 Comments

  1. lifelogic
    Posted March 11, 2011 at 6:26 am | Permalink

    Agree with all this but you also need to ensure that you are in an area where you can actually compete and so are not wasting your time. If the overseas competition has lower tax, cheaper energy, finance, better materials, scale or technology, can hire and fire at will and has fewer employment and other regulations (as they probably will have relative to the UK) then you might be better finding a business that you can compete in on a fair basis. Something well protected like banking, law or being an MP perhaps.

    You say “There should always be a message of hope.” could we have one from this government please. Being subsumed into a socialist, ever bigger state , non democratic EU and having a labour government again in 4 years does not give much hope.

    • lifelogic
      Posted March 11, 2011 at 8:26 am | Permalink

      Not much sign of hope from Lord (Chris) Patton yesterday. He does not think the BBC is left wing and enjoys radio four and three. Radio 3 it seems to me has recently become a sort of Classic FM with endless waffle about the private lives of the artists, much self promotion for all, lots of “adverts” and a lot of bad jazz and Broadway music and much bad (though a little good) music for around the world.

      Please could they not just say this is Bach, Monteverde, Vaughan Williams, Byrd, Shostakovich or Wagner and just switch it on please.

      Also he does not think the BBC are left wing, which perhaps says rather more about him than the BBC. It always amazes me that to almost every man or woman they all “think” Guardian think as can been seen form every political question they ever pose. Also every “joke” the comedy section write and deliver is in similar vein.

      So it’s on with the BBC’s ever bigger state, the non democratic socialist EU, the “proven” global warming scare stories, anti car pro bike and renewables, the endless dumbing down, the back door adds and self promotion and the general vulgarisations all round I assume.

      All led by people with absurd wages (and pensions in the tens of millions pounds) for producing this big state lefty dross.

    • Bazman
      Posted March 11, 2011 at 3:29 pm | Permalink

      Hire and fire, health and safety, pollution and other regulations. China and Russia for you LifeLogic in a race that can never be won?
      Are you talking about a race to the bottom when talking about competition? A competition I suspect you and the likes of you will never have to take part in. Nobody would cry more than you if you had to work in poor low wage conditions with pollution effecting you and your family.

      • lifelogic
        Posted March 11, 2011 at 7:33 pm | Permalink

        I am not suggesting that all health and safety and other regulations should go just the 80% that is pointless or worse counter productive. Easy hire and fire will make more jobs available and help workers as much or even more than employers.

        There is no alternative to competing – if you think there is what are you suggesting it is?

        Though clearly we do need use the UK advantages to the full where the UK has any and not try to compete in areas where the UK has no chance.

        • Bazman
          Posted March 12, 2011 at 2:21 pm | Permalink

          Easy hire and fire already exists in many forms and employers exploit this to the limit already. The emphasis being on the word ‘exploit’. You suggest there should be even more exploitation with even less health and safety? 80%? Which health and safety laws do you propose to eradicate? Make me laugh. You will never win a race to the bottom when competing with China, Russia and India. If you work for a dollar a day, then these people will work for half that. Again you and the likes of you will never have have to suffer in this exercise of making desperate people more desperate.
          Harebrained is what it is.

  2. Euan
    Posted March 11, 2011 at 7:15 am | Permalink

    What a pity your own party doesn’t take your advice. All we are getting is smoke and mirrors – Blair Lite.

  3. Jose
    Posted March 11, 2011 at 7:34 am | Permalink

    All the points you make are valid but I would go along with lifelogic, can we really afford the costs of membership of the EU? It imposes so many restrictions on us in terms of running our businesses and we have to pay for the ‘joy’ of it.

  4. Simon
    Posted March 11, 2011 at 7:54 am | Permalink

    “It may be necessary to close the final salary pension plan to new members and to new accruals if one still exists. …. A defined contribution plan should be made available for future use.”

    Whilst John Hutton’s proposals for pension reform are a vast improvement on what exists today it still lands the taxpayer and the next generation with all the risks .

    It fails to put a proper market value on pensions benefits making it impossible to compare packages with the private sector .

    His mandate should have been to come up with a pensions scheme which was open to everyone , private sector as well , which public servants would be moved into .

    The real problem is it still leaves the other 80% of people who are working in the private sector without access to decent pensions themselves . Doesn’t it .

    • lifelogic
      Posted March 11, 2011 at 2:38 pm | Permalink

      I tend to agree the idea the the average state sector pension pot should be perhaps 10 times a private sector one is an outrage after Browns private sector pension mugging.

      Why should poor people in the private sector feather bed richer ones in the state sector though over taxation.

      Far more need to be done to redress the balance.

  5. alexmews
    Posted March 11, 2011 at 7:54 am | Permalink

    agree with Euan. John’s is an ironic post indeed as it pertains the the Government. talk cuts and make people worried; carry on spending. seems the direct oppostite of the necessary medicine and the worst of all worlds. that there is no hiring freeze even today tells a story. a very sensible / handy turnaround plan outlined in the original blog. thx john.

  6. Johnny Norfolk
    Posted March 11, 2011 at 8:21 am | Permalink

    In the end the country will HAVE to take this advice. We have been run by Labour and now the wets. Its like last time when Heath took over in the end he made matters worse.

    • lifelogic
      Posted March 11, 2011 at 7:41 pm | Permalink

      Just like Heath with inflation, power cuts too soon with the wind power nonsense and perhaps soon a law to limit pay increases and stop people taking their money out of the country soon?

      Like trying to lift yourself off the ground by pulling your shoe laces – but rather more damaging.

  7. English Pensioner
    Posted March 11, 2011 at 8:51 am | Permalink

    “Staff will buy into a recovery plan, if they know that failure of the recovery plan means the loss of all the jobs and the end of the business,”
    And this is exactly why it doesn’t work in the civil service or local government, because they know that they won’t loose their jobs and that the business must continue regardless of costs.
    Add this to the fact that there are no new staff at the top to push these measures through, just a Minister instructing existing staff to carry them out, absolutely nothing happens.

    • lifelogic
      Posted March 12, 2011 at 7:23 pm | Permalink

      I agree – the worst that can happen is they get a good pay off and a good pension.

  8. Brian Tomkinson
    Posted March 11, 2011 at 8:59 am | Permalink

    John, I wonder how many, if any, of the cabinet have any such relevant experience. Their actions show little evidence that they know how to deal with the problem.

  9. Deborah
    Posted March 11, 2011 at 9:16 am | Permalink

    East Herts Council’s approach is different.

    1. Make IT staff redundant then employ IT consultants for 18 months.
    2. Sell off major property assets to developers at well below value to Council.
    3. Spend nearly all capital reserves (and proceeds of above) on leisure facilities before next election (making sure to open theatre with a loss-making pantomime)
    4. Choose not to seek 3 quotes for contracts.
    5. Announce a reduction in terms and conditions for junior staff.
    6. Top up Chief Executive’s pension so she can take flexible retirement at 50.

    Great management.

  10. Dr Alf Oldman
    Posted March 11, 2011 at 9:18 am | Permalink

    Having spent much of my early career in turnarounds, I recognise these points as “Classic Turnaround Practice” (CTP) in the Private Sector. Many would still challenge CTP as being little more than Asset Stripping.

    Applying turnaround practice to the Public Sector ignores two fundamental differences: (1) Complexity; and (2) Context.

    Reflecting on recent political & media attention on the Public Sector, it occured to me that perhaps there has been a bit too much simplification in order to score political points.

    Reply: Saving a business is not asset stripping.

    • Geoff not Hoon
      Posted March 11, 2011 at 11:19 am | Permalink

      Dr. Alf, You say two fundemental differences, complexity and context. Whilst I do not understand the latter I could find you dozens of SME business’s far more complex than even the UK’s largest council (Birmingham). What also makes public sector v private so much easier is the former has cast iron guarantee’s of income (whether slightly reduced or not) and the customer, ie the rate payer, is someone the average council treats with contempt. Not a route for success in the private sector.

      • lifelogic
        Posted March 11, 2011 at 7:50 pm | Permalink

        Agreed fully – most of what councils do is not very complex at all. The other thing that makes it easy is that there is so much fat and pointless activity that could be cut out and so many areas that could be run so much better.

        The main problem is the staff and the unions who have got used to this position and will fight any change tooth and nail.

  11. Geoff not Hoon
    Posted March 11, 2011 at 9:20 am | Permalink

    Mr. Redwood, in addition to your fine list for what we guess is UK PLC we should add sorting out debtors and creditors. In wrecked companies I have bought these are almost always in a total mess and prompt attention can highlight sources of cash not showing in any balance sheet. For the UK one gets the impression we are still being nice to our largest creditors and telling them everything is going to plan when in my view we should be asking them to consider better terms etc. For debtors when we see benefit fraud and a convcted party told to pay back £5 per week one has to ask are we serious? The Police recovery of fraudulently acquired assets dept. now costs more to run than it recovers so couldnt this be sold off and the new owners put on a pro bono basis thereby saving probably millions. Only two examples but you will know dozens more I feel sure.

  12. waramess
    Posted March 11, 2011 at 9:21 am | Permalink

    You have missed out “4”, deliberately I suspect because it does not fit the argument. “4” is to effect all redundancies necessary quickly, in order that those remaining mighht know that the job has been done and they have as secure a future as is possible.

  13. alan jutson
    Posted March 11, 2011 at 10:17 am | Permalink

    You state the obvious John. Shame your leaders (and those of the opposition) cannot understand a similar strategy, but then your other topic of the day exposes perhaps the reasons why.

    Few people in the public sector, and many MPs, have little or no business experience at all.

    The public sector is in a privileged position:
    It has customers as a right, with absolutely no competition.
    It has customers who have to pay by law, no matter how poor the service.
    It has no marketing costs.
    It has no product development costs.
    It has no incentives to provide value for money.
    Its employees are protected with excellent employment and pension arrangements.
    Its employees are now paid well, in comparison to private industry.
    It produces absolutely zero income for the Country, as all of its costs are paid for out of tax revenue of one sort or another.

    Then we have the situation where thier CEO’s claim they must have parity with COO’s of large Private industry PLC’s, which are subject to market competition and shareholders demands.

    They need to wake up and smell the coffee, and realise how well off they really are, and that the present situation cannot continue, because we simply cannot afford it !

    • alan jutson
      Posted March 11, 2011 at 10:18 am | Permalink

      Oops, should be CEO’s of large private industry PLC’s.

    • Geoff not Hoon
      Posted March 11, 2011 at 11:27 am | Permalink

      Alan, I think JR would agree the lack of business experience not only applies to both main political parties (but not JR) but also the great monolith called the civil service and public sector. There have been many attempts over the years to bring private sector mentality (I am not thinking of BHS’s Green)to bear but it always gets lost when Sir Humphrey is given the overseeing role.
      Perhaps from his sub committee work JR could look again at the role of say retired and little or no cost former business leaders to help turn around the ship of state that appears to be getting into a bigger and bigger mess.

    • Simon
      Posted March 12, 2011 at 8:10 am | Permalink

      What makes me laugh is when some of the say “it’s your fault that you don’t have pensions like ours , you need to get strong unions” .

      It doesn’t seem to occur to them that they are abusing their almost unique situation of having an employer which cannot go bust or shut up shop and go overseas .
      Thus they can blackmail the state by resorting to industrial action .

      The abuses of the pension scheme are legendary ; promoting people on the last day of service so they received a bigger pension and in the 1990’s 51% of policeman not even wanting to work until 50 years of age retiring in their 40’s on full pension .

      I want teachers to teach and medics to treat people .

      We actually get very good value from both but of course there is room for improvement .

      It’s counterproductive for anyone in the country to have to divert their attention from their specialism to learn about speculation , investment , personal financial services etc .

      The real need is to provide access to decent pensions for the other 80% of the community who work in the private sector . The financial services industry does not do that .

  14. Steve Cox
    Posted March 11, 2011 at 12:13 pm | Permalink

    Isn’t the problem largely that implementing the cuts (or spending growth rate reductions) is mainly being left to the overpaid managers and bureaucrats who have the most to lose? This is already evident in the NHS where, despite being ring fenced, all sorts of horror stories are emerging daily about cuts to services, but seldom to excessive management. When such a story is aired, one is left to wonder if it will ever actually happen.

    What’s needed here is a team of a few hundred John Harvey-Jones types to go around the various parts of the public sector that need trimming with the power to make decisions on the spot about what and who to get rid of. Maybe they could make Richard Littlejohn redundant if they got rid of enough of the pointless deadwood in the public sector.

    The current government plan of eroding the real cost of the deficit via high inflation while allowing it to increase in nominal terms is cowardly and deceitful. Mr. Osborne needs to man up, admit the truth and get the capitalist stormtroopers out.

  15. Damien
    Posted March 11, 2011 at 12:21 pm | Permalink

    John,

    Your action plan could easily be adopted nationwide however to be acceptable it needs the backing of a dedicated task force of qualified business leaders(as yet to be formed) and others which should advise ministers, akin to COBRA.

    The scale and seriousness of our national debt and deficit should require that all publicly funded bodies must then follow an action plan of the type you propose. Its a bit like an oraganisation having an emergency fire procedure; it must be implemented to the letter and without delay.

    As Prof Nouriel Roubini is warning we are just “kicking the can down the road” by procrastination. Mervyn King is right to allow inflation to rise as this seems to be the only immediate antidote to offset against the interest rate on the national debt until the benefits of savings,sale (or lease) of national assets and economic growth can generate higher revenue receipts.

    A good example of what Roubini describes above will be seen as the outcome of the EU Finance Ministers meeting is announced today and over the weekend. Expect lower interest rates for Ireland and Greece when what is urgently needed is restructuring of debt plan.

    I would also draw your attention to this report published yesterday;

    http://www.imf.org/external/pubs/ft/sdn/2011/sdn1105.pdf

    • sm
      Posted March 12, 2011 at 1:48 pm | Permalink

      Interesting article, particularly about the costs of delay in banking reform.

      Our public sector including banking really do need reform. If they disagree move interest rates to a more a normalised level and watch carefully.

      Why don’t we abolish NI on the manufacturing sector/industrial sector? financed by QE if absolutely needed or selloff of assets such as the BBC. This should help the sector expand easing cashflow.

  16. Bazman
    Posted March 11, 2011 at 3:17 pm | Permalink

    If you are running a bank then do some of the above, then it’s free money and trebles all round.When you are running a country or a bank or maybe both, then make sure none of the above personally affects you. These markets, customers, poor people, and rules can be very inconvenient to making money as you like. The chaps do their best though above and below ground, so try to be generous.

  17. zorro
    Posted March 11, 2011 at 7:58 pm | Permalink

    John,
    Some government departments (Home Office/UK Border Agency) can do option 4 in that they have ‘products’ to sell. For instance, visa application fees, settlement fees, tax duties, are a substantial part of the UK Border Agency’s budget (c.30%). So one would think that there may be some scope to raise revenue there without getting rid of 25% of their staff.
    Options 1 to 3 are pursued with varying degrees of vigour, but could certainly be done more effectively within government departments.

    zorro

  18. Andrew Smith
    Posted March 11, 2011 at 9:32 pm | Permalink

    John, you do not seriously expect anyone in the government to have any understanding of what on earth you are talking about, do you?

  19. J leslie smith
    Posted March 11, 2011 at 10:09 pm | Permalink

    John,

    You are bang on the money and clearly have done such professional work most effectively, in your previous life. How many members of today’s Coalition Government have ever done a “Company or Major Project Turnaround”? I cannot think of one of them.. Can you help me here?

    The skills and experience needed for turnarounds are available in the UK, just very few of us are in Politics!! It is all about rebuilding trust and a vision for the employees remaining. It is about communicating that you know “Where you want the Ship to go” and how long it may take. Employees and Managers need to know what wil happen, and when, Also, if they may have any say in the matter, or not. People need to be motivated by Leaders, not played with.

    They need to see that Leaders are not simply looking after thenmselves, or leaving a “Sinking Ship” but with their own massive redundancy payment intact. Perhaps you need to appeal to the Patriotism of the Public Nation of 6 Million Civil Servants. Put your Country first and Your Country needs you now!! Maybe MP’s will agree a 5% pay reduction? ( Particularly the Government Payroll MP’s) Share the Pain, Share the Gain…. We are all in this together, states Mr Cameron.

  20. Javelin
    Posted March 12, 2011 at 10:09 pm | Permalink

    Fantastic summary John !

    When is the Government going to start phase one ?

  21. Lindsay McDougall
    Posted March 12, 2011 at 11:01 pm | Permalink

    And don’t pay your bills on time !!!!!!!!!!!!!!

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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