Desperate times call for desperate measures — but desperation can also encourage innovation. In April, UK retailer JJB Sports staved off bankruptcy thanks to an agreement with some 200 of its shop landlords. The company, which had to renegotiate terms with its banks and expects to record a loss for its latest fiscal year, used a company voluntary arrangement (CVA) to restructure its rental payments on a monthly, rather than quarterly, basis, easing its cash flow woes. In return for flexibility from its creditors, it will pay £10m (€11m) in compensation to the landlords of 140 closed stores. The company’s shares soared by more than 30% on news that the deal had probably saved the business.
If there’s ever been a time for fresh thinking such as at JJB, it’s during a turnaround, something more and more finance chiefs will learn as the downturn takes its toll and companies need rescuing. And even if firms never reach what’s often now referred to as the “zone of insolvency” (see “World Turned Upside Down”), plenty will come perilously close, requiring their CFOs to acquire new skills at breakneck speed.
While turning around a company is arguably tougher during today’s financial crisis than it would have been a year or two ago, there are plenty of lessons to be gleaned from veteran turnaround CFOs. Regardless of the business cycle, they say finance chiefs new to turnaround management can expect three things: extremely long hours (100-hour weeks are not uncommon in a full-blown turnaround), more intense pressure from stakeholders and an even more hostile work environment.
But what is it that CFOs need most? A dose of Einstein, says John Darlington, head of KPMG’s turnaround division. “I love Einstein’s definition of madness, which is trying to do the same thing [repeatedly] and expecting a different outcome,” he says. “One thing I categorically will not do is go into a company and deliver a strategy that someone else has been trying to deliver, and failed.” Seeking a new approach, as at JJB, is one alternative.
In 2002 Darlington was drafted by UK drinks group HP Bulmer to help it through the aftermath of the sudden departures of the CFO and other board members, multiple profit warnings and the discovery of accounting irregularities. As a special adviser to the board — “effectively, a finance director” — Darlington dissected HP Bulmer’s portfolio of 300 products to figure out which drinks were profitable and which were not. Apart from its main cider business, he found that “there was very little that was making money.” He stripped back the portfolio to 80 or so products that showed the most promise, helping to cut infrastructure, production and storage costs. Thanks to such measures, the company, whose market capitalisation was about £20m on the day he joined, was sold only a few months later to brewer Scottish & Newcastle for £278m.
Turnaround CFOs also need to apply fresh thinking to cash flow — an area identified in a recent survey of turnaround directors from PricewaterhouseCoopers as the most important area to focus on when saving a company — far more than, say, cost control or hiring new management. (See “All Hail The King” at the end of the article.) The problem, however, is that most companies in trouble don’t know where their cash is, as Donald Muir found as a senior finance executive at a number of telecom companies and, more recently, as an independent turnaround director, whose latest posting was at Northern Rock, a troubled UK bank now under government ownership.