The theory of the turnaround is relatively simple. In practice however, it doesn't always work. Anita van de Vliet follows four success stories.
The idea of turning a failing business round is enticing. And, right now, with a relatively benign economic environment, the prospect of success should (theoretically) be good. Attitudes in the financial community are changing: bankruptcy is increasingly seen as a blunt weapon, says Mike Wheeler, head of corporate recovery at KPMG, and investors are looking for more constructive ways of preserving value. The banks are getting better at identifying problems in advance, he says; and even more important has been the Cadbury Report: 'We now have non-executive directors representing investors, who take a more direct and intelligent interest, who can spot signs of decline and who feel it is their responsibility that something gets done.'
Indeed, according to Dr Anthony Henfrey of the Postern Executive Group, which specialises in business turnarounds, increasingly bankruptcy will befall only smaller companies (turnover between £3 million and £5 million), which do not have 'enough fat to live off' while the necessary changes are made. With larger companies (for Postern clients, this means turnover of over £10 million), which have a certain critical mass, says Henfrey, something can be usually be done. This sounds encouraging, but Laura Ashley, Sears, and WH Smith, all of which are still floundering after years of ostensible turnaround treatment, serve as reminders that it's not that simple to turn theory into practice. Is there a secret to turnarounds? Why do some attempts succeed while others fail?
The answer seems to be that there is no single formula, but there are common themes. First, the business must have real potential, some genuine nuggets hidden away, be they brand names or market leadership. Second, poorly performing companies are often a hotchpotch of ill-assorted businesses, the result of previous acquisition sprees, so what is needed is clarity of focus and a return to core strengths. Third, this suggests that flagging companies need an outsider's perspective, be it from non-executive directors, consultants or company doctors. Fourth, you still need experienced managers to actually run the business - people who understand how it really works.
And, although this too sounds like fashionable management theory, these managers should be free to manage, autonomously. Fifth, faltering companies often suffer from fuzzy lines of responsibility and poor internal organisation.
Henfrey cites the example of a company founded by two entrepreneurs who became joint managing directors on flotation, with no clear division of responsibilities: 'It's unclear who's calling the shots'. Sixth, over-trading is a common failing and increasing turnover is usually not the best solution. And finally, if the company's going to grow, you'll have to make the product better.
If there is no single formula, neither is there a single timescale. However, Henfrey distinguishes between the rescue phase, which may last a year or 18 months, and renewal, which follows once the company is stabilised, steering it over the next three to five years. He also points out 'something that is often overlooked: you need very different skills in each stage'.
Thus, for example, Ann Iverson's failure to turn around Laura Ashley may have been because her talents lay in expansionist vision rather than in the required organisational restructuring. Until the organisational, nitty-gritty problems of a company are solved, there's no point in devising daring new strategies or repositioning, he says.
Wheeler describes the rescue phase in greater detail. If the company is in acute financial difficulties, the first priority will be to get in cash. This may involve an injection of new money, selling off assets to raise cash, and restructuring of debt. At the same time, however, the company must strengthen its operational side, to ensure better margins, through better cost control, better management of working capital, and better information.
Of course, a turnaround is only complete once the company is growing again - growing profitably, that is. Wickes, for example, despite achieving its goals of returning the core UK chain to profitability and disposing of its European businesses by mid-1997, claims only to have achieved 'a platform for recovery', not a full turnaround.
And if there is a secret behind both failure and successful turnaround, says Wheeler, then it is simply 'management, management, management'.
For a classic business turnaround, look no further than Blacks Leisure.
The company has been transformed from a 'bombed-out penny share' in the early 1990s into a well-managed specialist retailer focused on high-street sales of branded sports goods, with a share price to match (476p on 1 December 1997). Author of the transformation is former accountant Simon Bentley, who joined as part-time director in 1987, became part-time CEO two years on and in 1991, as chairman and CEO, ditched accountancy altogether to take on the job full-time. The roots of the company's problems dated back to 1984 when Blacks Camping - a management buy-out - reversed into the loss-making Greenfield Milletts with the bold ambition of floating and turning it around. The two weren't a good fit: 'Milletts was two or three times the size of Blacks, and at the lower end of the market, while Blacks was at the high end,' explains Bentley, and the hoped for turnaround never happened. Meanwhile bank pressure mounted. Boosted by rescue investment in 1986 and by the heady stock market of the day, the then management 'issued a terrific lot of paper' and snapped up all manner of businesses.
'A number of these didn't work out well; and then (in the early 1990s) business started getting very difficult,' he continues.
Time for the turnaround proper. This involved selling off the non-core businesses, and trimming the company down to a set of core retail concepts (three retail, and two distribution) with scope for worthwhile development.
This process was virtually complete in 1993, with the sale of the textile company (provisions for which explain the losses registered that year), although the Miss Sam women's wholesale operation went only in November 1996. All this sounds simple - but how did Bentley select which businesses to sell? Primarily, he explains, on the basis of brands. 'Neither Miss Sam nor the textile company had recognised brands.' Success in retailing, he reminds one, depends always on product, but brands are also key.
Hence Blacks' core businesses: First Sport, catering for sports-fashion-orientated 12-to 24-year-olds; Blacks Outdoors, selling high-performance clothing and sports equipment; Active Venture, still in trial phase, but intended for premium casual fashion; and the two O'Neill and Fila distribution operations. All these sell sports-fashion brands, such as Reebok, Nike and the like, which are lavishly promoted by their manufacturers. Coupled with the manufacturers' investment in product development, this branding makes up a wonderful retail formula: 'highly fashionable, but rooted in sport, which gives the product credibility'.
'The route to success in retailing lies in a good formula - and good management, paying attention to detail, applying the necessary controls and systems.' Since 1993, with the exit of the last of the old guard, Blacks has had a close-knit management team with considerable retail experience.
The company has also invested systematically in IT (to the tune of £10 million this year) and logistics, to fine-tune stock control and customer service and to back up the increased number of shops (up from 60 to 140 over the last two or three years). It has also revamped its shops, to keep up with the competition.
By 1996, Bentley judges, when Blacks became the most successful share on the stock market, the company had passed the recovery stage, and moved on to growth. Retail specialist Lauren Mills describes the company as 'very shrewdly run, with very strong management that doesn't take unnecessary risks', and says it is growing both organically and through careful acquisition.
Finally, the key to a successful turnaround, according to Bentley, is 'focus'. Even today, he says, there are many opportunities for expansion into out-of-town shopping centres; but he and his team believe in sticking to the high street, where their sports-fashion formula has been shown to work and where there is still plenty of scope.
Physically and spiritually, Andrews Sykes lies some distance from Blacks Leisure, specialising in the hire, installation and sale of industrial and commercial equipment. But ask chief executive Eric Hook what the most important factor in a business turnaround is and, like Bentley at Blacks, he answers, 'Focus'. Even when a company is in financial disarray, as Andrews Sykes was back in 1994 (when Hook became chief executive), the first priority is to find the company's true focus: 'You need to get the focus right, so you know what you're doing. Then you can explain it to the bank.' Finances will follow.
In 1994, the company had huge borrowings (£17 million plus a further £2 million in finance leasing) and was on its way to making a loss of £4.6 million. This was after some years of indifferent results, profit warnings, boardroom ructions and departing chief executives. Company chairman Jacques Murray, then won control and appointed Hook. The new leadership focused on three clear businesses: the long-established Sykes Pumps, which had once been UK market leader; air conditioning, which serves a rapidly growing market; and heating, where the aim is to regain leadership and to expand in Europe. Meanwhile, Hook set about a major house-cleaning exercise to sort out operations and finance.
'The company had been run by people with no experience in the commercial rental business,' he recalls. He himself had been finance director at Lex Services Plant Hire, so knew how the industry worked. 'There were too many people' (so numbers were slashed, from 750 to 540, without cutting the number of depots) 'and too many products'. Management needed to be streamlined. 'Generally, hire companies like ours run better when reasonably devolved to local managers,' he says. Thus the head office has been scaled down to just 46, and most are administrative and clerical, not executive. Borrowings were reduced, then wiped out completely by end-March 1996, partly by selling off two profitable but non-core businesses; partly by the sale of freeholds and a factory in Wolverhampton; but mainly by the sheer stream of the cash-flow. 'We did shed a lot of people,' says Hook, adding that the hire industry in general has lower return on capital but should have higher cash-flow, since the capital cost of the equipment is not high.
By the end of 1996, the two-year turnaround phase was, in his judgment, over.
Jonathan Timms, construction industry analyst at Charterhouse Tilney (the company's broker), sums up where the company needs to go: 'Now they need to build additional turnover, and they will do this partly by add-on acquisitions; some will overlap with existing business, but a proportion will take them into new areas. It will be interesting and exciting to see what this management, which has been so successful in turning around its existing business, will achieve through using the same disciplines in the new parts of the group.'
Like Blacks and Andrew Sykes, Ladbroke was in dire need of an overhaul.
As a multi-billion-pound company, however, the scale was rather different.
The group had been built up over 37 years by the legendary Cyril Stein, from a tiny credit betting house into a £2 billion international empire.
A grand sweep of acquisitions through the 1980s had brought in the Hilton International chain, bought for £645 million in 1987; a £1 billion property portfolio; a cable television company; and, for no apparent reason, the Texas Homecare chain, bought in 1986 for £200 million. As the recession bit, losses spread, and debt rose (to £1.8 billion in 1993, representing gearing of 80%-90%), the discontent of the institutional investors gathered pace too, until in January 1994, Stein handed over to Peter George. As Stein's protege, George was not initially the appointment investors had been hoping for; but his actions have proved as resolute as any outsider's.
Within months, he had slashed the dividend by nearly 50%, and published the first full set of public accounts. Working with the new chairman, John Jackson, he set about reorganising the company internally: 'You have to get the internal organisation right first if you're to win back the confidence of the City.' They reshaped the board and strengthened management at all levels, bringing in over 100 new senior executives, equipped with up-to-date marketing and managing skills. 'Cyril used to run everything himself,' recalls one executive, 'but you can't do that with a business our size, you have to push decisions down to the appropriate levels.'
George and his team also set about a drastic reshaping of the business portfolio. Hotels, along with gaming and betting, were to be the core businesses. All the rest had to go. The loss-making Texas went to Sainsbury within a year, as planned, for £280 million, while property is now down to £50 million. No timetable was set for the remaining non-core businesses, which will be disposed of as soon as possible. Gearing is now down 39%.
The turnaround process was not made easier by the National Lottery's appearance in 1995, which sliced 10% off UK profits - over twice as much as expected. But Ladbroke's response was swift, cutting costs by taking out 300 jobs from the betting head office, and successfully lobbying for change in the advertising rules and for the right to run numbers betting.
Analysts now forecast profits from betting of £100 million, just above the pre-Lottery figure of £97.7 million in 1994.
Hilton International presented a different challenge. 'It wasn't a bad business, but it hadn't expanded and marketed itself properly,' comments George. In particular, there had been no co-operation with the separately owned US firm Hilton Hotels Corporation, which was confusing to customers and wasted the brand's potential. After some press talk of acquiring a stake in Hilton Hotels, Ladbroke more realistically struck a marketing alliance with the US which aims to provide customers with a seamless operation.
The Hilton International chain is also expanding now, not through owning hotels (which is not where the money lies) but through management contracts, at a rate of 20 a year.
The group turned in pre-tax profits of £163 million on turnover of £3.8 billion in 1996, and interim profits were up 39% to £101 million in June - at which point analysts upgraded their full-year forecasts by £5 million-£10 million to £220 million, and George declared the recovery phase officially over.
'Ian runs the corporation; I run the business.' So Peter Long, group MD of tour operators First Choice, and his executive chairman Ian Clubb, explain their 'instinctive' division of responsibilities. Long joined First Choice in October 1996 - an accountant by profession, with over a decade of experience in the tour operating business. Clubb had joined as non-executive in May 1994 - a seasoned businessman, with particularly pertinent experience as chairman of CTR, the turned-around version of Tiphook. And since November 1996 the duo have been steering the First Choice recovery.
The attractions of First Choice as a turnaround candidate, says Long, are its two highly successful brands and its thriving airline, Air 2000.
The brands - First Choice in the UK and Signature Vacations in Canada - had both been brilliantly launched over the previous two years by the former chief executive Francis Baron, replacing Owners Abroad (as the company used to be known).
But what was lacking was 'an understanding of the dynamics and detail of tour operating'. (Baron's background was in television.) 'This is very much a hands-on business, based on programme management,' Long explains.
Tour operators have to plan capacity realistically, and to sell early in the season, or be left with holidays that can be sold only at vicious discounts. The dire results of overcapacity in 1995 (an operating loss on sales of £1 billion) had proved this only too plainly, as did the £8.6 million write-off at the 1997 interim stage, which related to the two prior years.
So for 1997, First Choice set itself 'a more prudent approach' to programmes.
'We already carry 3 million people - why carry more?' asks Long rhetorically.
'Let's concentrate on making the experience enjoyable to customers, and on returns to shareholders.' The company also set (and achieved) a target of selling 60% of summer holidays by end March (next year, the target will be higher); recruited a new overseas director in charge of co-ordinating overseas accommodation; brought in Viajes Barcelo as key strategic partner in Spain; and cut costs by getting rid of corporate swank, layers of management at head office and trimming the overseas resort structure. The aircraft fleet was scaled down. 'Peter and I are not in love with aeroplanes,' says Clubb.
There was no need for large-scale redundancies, numbers having been cut, savagely, by the previous regime in November 1995. Morale was boosted simply by having bosses who understood the business; and Clubb and Long held regular 'town hall' meetings with staff to explain their intentions.
Management was strengthened, with a lot of change at senior level; and the board was infused with new non-executive talent, including Tony Campbell of Asda and Terry Green of Debenhams, both of whom have first-hand experience of turnarounds.
The aim is to achieve industry margins of 4% pre-tax on turnover in three years. Long and Clubb are confident of achieving their goal, through further improvements in programme management and through broadening the product range. The company has four strong businesses, they say, including Signature in Canada to provide counter-seasonal ballast. As the only major independent operator, the forthcoming MMC Report on the travel industry can only work to the advantage of First Choice.
At the time of writing, the market was expecting pre-tax profits of at least £20 million for the year to end October 1997 (ie 2% margins, well on course to its three-year goal). 'The company has had a significant turnaround,' comments analyst Bruce Jones of Merrill Lynch. 'A lot can be put down to Peter Long ... he has really got the company moving.' As Mike Wheeler at KPMG says, it all comes down to 'management, management, management'.