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The RenĂŠ Carayol column

The living dead

Too often, no one confronts the bosses with harsh reality | Page 2

Zombie firms in danger of stifling economy, say experts | Page 5

September 2013 | business-reporter.co.uk

business turnaround

Bringing business back to life

A 16-page report on revitalising British firms

Business Reporter · September 2013

an independent report from lyonsdown, distributed with the sunday telegraph

Business turnaround

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Opening shots René Carayol

Merging two bad businesses tends to produce one bigger bad business The truth is, no company should ever have to perform a business turnaround. The signals that things are not well are always clear for all to see. The danger is the leadership may refuse to acknowledge the warning signs, and their people are usually too intimidated to tell them. The £4.6 billion acquisition of Nokia’s mobile business by Microsoft is an all-too-recent example. These are two failing businesses, which have missed or ignored all the obvious signals that they need different leadership and a new direction. It is rare that the joining of two once-great businesses, in potentially terminal difficulty, is ever a positive way forward. The mighty fail when the CEOs tend to spend their time trying to explain the brutal facts rather than confronting them head on. How many more strategic gaffes did Steve Ballmer have to make before he eventually considered resigning? The biggest danger to embarking on a business turnaround is former glory – it’s sometimes helpful to have a “near-death experience”, like Apple or Asda, for wholesale changes to be made in time. The breathtaking rate of technological change has left many of yesterday’s heroes straggling dangerously behind. Just think about Polaroid or BlackBerry, who quickly went from market leaders to dinosaurs.

Some huge recent failures, Kodak or HMV to take two examples, were years in the making, but no one was brave enough to confront the leadership with the harsh reality. This refusal to hear bad news also saw the American automotive industry crash simultaneously. Everyone in Detroit knew car sales were on a long-term decline but they still built overcapacity to destructive levels. What works in terms of corporate culture in a specific era may not be transferable to the next. The power that fuelled Microsoft in a world where the PC was by far the most important platform has worked to nearly kill them in a world where mobile computing is all the rage. Many turnarounds require the infamous “burning platform”, where change is forced on a company and there is no option but to do things very differently and quickly. Not every failing organisation is “blessed” with a burning platform; consequently, well-informed leaders create a similar rallying call for the survival of the organisation. Most successful business turnarounds usually start with the appointment of a strong, bold and visionary leader. This can be helped by relentless competition or disruptive technological breakthroughs. When we look at the Microsoft and Nokia deal there are no obvious indicators of success. Microsoft has

been far too successful to consider change; in its it hubris refused to recognise a resurgent Apple, and a powerful Google. This allied to a successful and seemingly unbreakable business model; its preeminence in PC software and the dominant Windows PC operating system. Things would never change… would they? However, the biggest barrier to Microsoft’s transformation has been a too dom i na nt a nd entrenched CEO. Nokia has had a history of total transformation, completely stepping out of one industry to become a leader in a different one. Strangely enough, while many analysts feel that Nokia sold out for next to nothing, the company might have got out just in time. This was no shock to many who were proud of Nokia in its native Finland – in fact, many were relieved that they could now move on, and not a moment too soon. In my experience, two wrongs never make a right – putting two bad businesses together tends to mean a bigger bad business.

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Business Reporter · September 2013

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Running on empty?

British businesses are under huge pressure but, by using the right turnaround specialists, an end to the slump may be in sight

By Dave Baxter In a world where one big mistake can end a business, optimism is rarely taken without a generous pinch of salt. A global financial crash, the demise of some household names and the relentless financial squeeze on businesses and consumers make things much harder for life’s glass-half-full types. But optimism may be returning to business. Tentatively, some are beginning to feel more upbeat about Britain’s trajectory. According to recently revised GDP figures, the economy grew by 0.7 per cent in the second quarter of this year. This accompanies strong results for some British industries over recent months. The Organisation for Economic Co-operation and Development seems hopeful about Britain’s future, having recently revised its growth forecast from 0.8 per cent to 1.5 per cent. Encouraging as this is, British firms are under huge pressure. Years on from the financial crash, many are struggling with overwhelming debts, fighting a slump in demand or grappling with market forces. Many businesses, from SMEs to large corporations, need a fresh strategy. Turnaround specialists, who throw themselves at saving a business, whether this involves simple balance sheet tinkering or a complete shift in how the firm operates, are in greater need than ever. Some industries are particularly troubled. Some property companies have joined the army of “zombies” because they have debts they cannot service, but are allowed to limp on by creditors waiting for their assets to gain value. Many legal firms are fighting to survive, thanks to a range of factors. And retail, baffled by changing consumer behaviour, is facing its own crisis. Turnaround may be the answer. But some experts believe their message is being drowned out by other

‘Would you nurse a patient back to health, or cut his arm off?’ – Alan Tilley

voices. Alan Tilley (inset), director of the European branch of the Turnaround Management Association, says accountants and insolvency practitioners, who are less likely to fight for a company, are presenting themselves as turnaround experts. “There is a joke that you can go into a struggling company and find a guy from one of the big accountancy firms with one business card for corporate advice and another for corporate recovery or insolvency work,” he says. “They are a vested interest, because they are working for the creditors and trying to recover value for them. There is a difference between an insolvency practitioner and someone who will go to extreme lengths to save a business.” He argues that, while turnaround experts are enjoying a bigger profile, they still need to shout louder. He says: “I think there has been a lot of progress, but there is more to do. We need to get the message across that turnaround is better for directors than insolvency. It’s like in medicine: would you nurse a patient back to health, or cut his arm off? “Directors are reluctant to choose turnaround, because they feel it’s an admission that they can’t manage their own company.” While bosses should see the threats to their company, the wider effect on the UK is equally serious. Christine Elliott, CEO at the Institute for Turnaround, believes that if companies cannot become more successful, economic growth could stay weak. She says: “We have got the prospect of a low-growth economy for the next five years. The growth everybody is talking about in the economy doesn’t just happen on its own. “You have got to have enterprise and strategic change. That is what turnaround is good for.” Even in more optimistic times, the turnaround industry has much to do. Telling that to businesses is one of the big hurdles.

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Business turnaround

Business Reporter · September 2013

Business turnaround

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Why the right attitude is the right priority Christine Elliott of the IFT on keeping your glass half-full INDUSTRY VIEW

onvenience, flexibility and lifestyle choice are reasons high on the list of why people choose to be owner-managers. A great theory, but it’s tricky to strike the right balance between being close to the operations while staying sufficiently objective to see the elephant traps and keep the long-term goals in view. Perhaps it’s no surprise, then, that business leaders deeply entrenched in their enterprise may have a “glass half-full” attitude when it comes to growth opportunities and external investment. It’s natural to focus on how the company is now or in the past, rather than taking a considered look at what it has the potential to become. The number one determinant of how much your business is appreciated is attitude. Strategic position at the outset of a journey through change counts for much less than actually making things happen. Here at IFT, we know from long experience about the importance of culture to delivering superior economic returns. Furthermore, if a

business hits hard times (quite usual during its natural life cycle), it is the human factor that decides whether a turnaround will work, the company will return to viability and success will be sustainable. One example is a world-leading supplier of services to the growing marine sector. A new investor came in. Within a few months of ownership the business was tracking 33 per cent below budget and in danger of breaching covenants. A few things were obvious. The chairman was not involved. The newly appointed CEO was a numbers man and stuck to his office, making phone calls and complaining. With seven reports around the world, there was no team to speak of. A company acquired previously had never been properly integrated. They had unwisely expanded. So the task was clear – refocus back onto the core business and build a team, with the right culture, to encourage cross-selling between the businesses. It was all about having the right attitude and culture. In four years, EBITDA quadrupled. IFT members, who are all rigorously accredited, have serial experience in taking businesses through all stages of

development. They do this by working hand-inglove with management and their focus is on “getting stuff done”: results, not reports. Invariably, they add proven value to companies, way in excess of their costs. Here is the IFT recipe for making sure your business, and you, are appreciated: 1. Develop a business plan to build from the current performance and realise long-term potential 2. Get a consensus on current value, competitive positioning and market perception 3. Conclude a fit-for-purpose capital structure, with appropriate cash headroom 4. B uild an experienced and motivated management team 5. Implement open and transparent communications, constructively and consistently to engage all stakeholders 6. As Peter Drucker said: “The best way to predict the future is to create it.” Christine Elliott (left) is chief executive of IFT +44 (0)20 3102 7711 www.instituteforturnaround.com

Business Reporter · September 2013

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Business turnaround

Zombie firms in danger of strangling the economy, warn experts Industry gurus claim unviable businesses are sucking up vital capital – but letting them fail could be worse By Dave Baxter The UK could struggle to “lance the boil” of unproductive, debt-addled companies without potentially sabotaging economic growth, an industry expert claims. Liz Bingham (inset), president of insolvency trade body R3, fears socalled zombie companies, defined as those who can only afford to pay the interest on their debts, are holding up the fledgling economic recovery but could cause more serious damage if they were allowed to fail. “I think the biggest challenge presented by zombie companies is they are taking up capital that could be used and deployed in higher-growth businesses,” she says. “What you would typically see in recovery times is that churn from bad business to high growth, but this time t here’s a risk t hese

companies are limping along and not going anywhere. “It will come good in the end. But if you try and lance the boil, we are going to be facing an increase in unemployment and a flooding of the market of certain asset classes, which would depress [property] value. It’s a tricky situation to unwind.” While many companies have gone bust in the fallout of the global financial crisis, a large number of zombie companies have struggled on thanks to a combination of historically low interest rates and creditor lenience. Bingham says: “There are a number of unique factors in this recovery allowing zombies to survive. You have two of the major UK banks in effect ow ned and controlled by the government, and while the government has priority to stimulate growth, it won’t be wanting to see its banks pulling the rug out from under customers.

Bank of England governor Mark Carney denies interest rates will go up before 2016

“There’s also regulatory pressure on the banks around capital ratios, and they may feel it is easier at the moment to allow companies to limp on. You also have very low interest rates.” Business Secretary Vince Cable recently warned that the economy was still infested with zombies, which were at risk of collapsing as soon as interest rates came back up, leading to major economic damage. In July, R3 calculated that there were 108,000 zombies in the UK. Although it noted this was fewer than the 146,000 around a year before, the number is still high. Zombies could be here to stay, at least in the short term. Mark Carney, the new Bank of England governor, has so far remained firm in his plan to keep interest rates low until somewhere around late 2016 – the point at which he expects the unemployment rate to fall to 7 per cent – despite some believing they could come up sooner. And Carney has moved to dispel suspicions that he could act sooner if unemployment were to fall before 2016. He recently told a crowd of business leaders in Nottingham: “Thinking unemployment will come down faster than the Bank expects isn’t enough to believe interest rates will soon. “The 7 per cent threshold is a staging post to assess the economy. Nobody should assume that it’s a trigger for raising interest rates.” Nick Winks, a turnaround specialist and partner at WayPoint Change, argues that because many zombies are property companies, their survival is likely to be based on how commercial property prices perform in future. “Most of it is in commercial property,” he says. “Banks are being lenient with them in the hope that, in a few years, the value of their assets will rise and the bank will be able to recover more value. “I would say commercial property prices rising is more important in helping those companies than interest rates staying low, because if the prices

The UK economy is still riddled with zombie companies, Vince Cable warns

rise, rents for them will rise and those companies will have a higher income.” But he fears commercial property prices are unlikely to rise in the short term. “I’m a bit sceptical that that’s going to happen soon,” he says. “There is inflation in house prices because there is always a high demand and we are not building enough to meet that, but very little of that affects the commercial property market. “Commercial property is driven by the grow th of business. There’s not huge evidence that what we’re seeing in the economy will turn into the sort of growth you need more property for.

“Most companies coming out of the recession can grow quite significantly without changing the amount of property they have already got. And you will have demand from start-ups, but I think that’s fairly limited.” Winks argues that, if property prices fail to rise in the commercial sector, zombies could be in trouble when interest rates do go up. “I think it will be a problem,” he says. “I’m not a doom-monger but I think there will be some failing businesses.” With tentative signs that t he e c onomy c ou ld b e improving, a swathe of failing businesses would be bad news. But one way or another, zombies will have to vanish.

Business Reporter · September 2013

an independent report from lyonsdown, distributed with the sunday telegraph

Business turnaround

Find us online: business-reporter.co.uk

Dell set to go private in PC firm rescue mission By Dave Baxter

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Xxxxxxxxxxxxx CEO and founder Michael Dell

Tech boss Michael Dell is set to take his company private in an attempt to rescue it. Shareholders have given approval for his company, Dell, which began life in a dorm room in the 1980s, to be taken over by a group of investors which includes its founder. The business, once a household name, faces a number of serious threats. It has struggled with diminished PC sales as well as losing swathes of its original market share in this area, and faces tough competition from manufacturers in China. The technology world is known for changing quickly and leaving big names behind the curve, but it has also seen miraculous turnaround efforts before. Steve Jobs famously reversed Apple’s fortunes, revitalising the company’s products, marketing and overall strategy. But unlike Mr Dell, he did not choose to take the company private for the purposes of a turnaround. Speaking about the shareholder approval of the move, Mr Dell said it would allow him and the other investors to focus on saving the business without the distractions of being a floated company.

He said: “I am pleased with this outcome and am energised to continue building Dell into the industry’s leading provider of scalable, end-to-end technology solutions. “As a private enterprise, with a strong private equity partner, we’ll serve our customers with a single-minded purpose and drive the innovations that will help them achieve their goals. “As Dell continues to expand its enterprise solutions and service business, our team members will be our most valuable asset and the key to our future success.” The total transaction, valued at around $24.9 billion, has left some unimpressed. Earlier this month, Standard and Poor’s downgraded Dell’s corporate credit rating from BBB to BB- because of the tough market it will continue to operate in, as well as concerns about a loss of cash flow. A statement by the agency reads: “The downgrade incorporates our revision of Dell’s business risk profile to ‘fair’ from ‘satisfactory’, reflecting ongoing pricing pressures and volume declines in PCs, which is still Dell’s largest business by revenue.” The statement also notes that a diminished cash flow following the takeover deal “could impede Dell’s ability to invest in growth businesses”.

Tesco scales back overseas operations to consolidate UK business concerns

Supermarket chain Tesco is hoping to revive its UK operations after pulling back from a number of its global ventures. The UK-based company has made a few notable exits. It not only left the Japanese market but also backed out of America, selling its Fresh & Easy stores to a US investment company. In China too, the British retailer is expected to merge with a domestic company, meaning its brand could be wiped out entirely from the market. Tesco may have suffered abroad, but this means it now has a clear focus on succeeding in Britain, where a giant turnaround plan is under way.

The £1 billion plan, announced in 2012, focuses on six areas, from competing harder online to giving better service and changing store format to accommodate new shopping habits. Tesco’s Watford branch, for example, has been revamped to encourage more visitors, with community spaces for customers to use, free of charge, for everything from yoga sessions to cookery classes. But CEO Philip Clarke has been forced to defend his turnaround plan following a number of setbacks. Like other retailers, Tesco was badly hit by the horse meat fiasco, being forced to withdraw some beef products found to contain horse DNA. Unsurprisingly, the chain reported a slump in demand for frozen and chilled convenience food in the three months to May 25 this year. In response, Clarke insisted the turnaround was still on course, pointing to plans for a revamp of its non-food items later in the year.

Restructuring lessons from the coalface Every restructuring situation is different. So what does experience teach us? INDUSTRY VIEW

enry Nicholson (below) and Jas Sahota (main image), co-heads of Deloitte’s corporate restructuring team, reflect on 10 lessons learned while leading many of the UK’s most complex restructurings, including Biffa, NCP, Travelodge, and the restructuring of Dubai World. 1 First find a client No company likes to admit its difficulties: direct requests for help are rare and if you do your job properly, repeat business is unlikely. Shareholders, non-execs, lenders and lawyers are more likely to recognise the need for external support and introduce you as an adviser. 2 Look past the flagpole An old joke suggests that companies needing restructuring have flashy headquarters with flagpoles and fountains (not always unfairly: the CEO of one calamitous situation had four speed dials on his phone: Aston 1, Aston 2, Yacht, Plane). But today, many clients are strong businesses crushed by legacy capital

structures or escalating leases – where they are literally unable to pay the rent. 3 Become a psychiatrist Lenders are normally objective and dispassionate. The opposite is true for management, whose jobs are on the line and who – hopefully – will only go through a restructuring once. Emotional intelligence is key for advisers – it’s not just about technical expertise. 4 Private, not public Disclosure rules for listed companies can add unwanted complexity and publicity. Privately owned situations can be resolved more quietly, but raise different challenges – there is typically more tactical planning before approaching lenders, and the shareholder is more visible, so conflicts of interest must be managed.

management and their role needs careful definition and communication, particularly if appointed by lenders.

5 Don’t expect lucky breaks Prepare for the worst as things rarely get better during restructuring. Be sceptical of salvation via M&A – few situations have been resolved by disposals.

9 Welcome hedge funds (sometimes) Depending on the situation, funds can be helpful rather than a hindrance – buying up debt to consolidate fragmented syndicates, or providing liquidity when incumbent lenders cannot.

8 Nearly everyone is logical If counterparties appear irrational, understand why – the odds are they are holding out for something you’ve missed.

6 The devil is in the detail The collaborative “London rules” approach has been replaced by stakeholders focused on their own interests. Identifying individuals’ positions, options and contingency plans early is key, so we start by reading documents through a restructuring lens. Detailed diligence can provide surprising answers which can protect a company against precipitate stakeholder action.

10 Agree what success looks like Lenders assess a successful restructuring on one thing – economic recovery. Success is about long-term sustainability of the underlying business. While an uncompetitive business may only be restored to health by reducing headcount, the greatest satisfaction for advisers is likely to come from defending jobs.

7 Clarify the CRO’s role Chief restructuring officers can be excellent, but their appointment can be emotive for

020 7007 4009 www.deloitte.com

Business Reporter · September 2013

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Business turnaround

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Be careful what you wish for!

Troubled security firm lands triple deal

G4S enjoys overdue boost from Dubai contracts By Dave Baxter BELEAGUERED security giant G4S has some reason to be cheerful after a torrid year for both its reputation and finances. The firm, primarily known for its outsourced security work, enjoyed a boost this month when it announced a contract with Dubai Airports set to last for at least three years. The company will carry out functions including boarding pass checks and security screening, as well as a new lost-and-found service at Dubai Airport, in a contract which could be extended for another two years. It will also provide services at Dubai’s World Central Al Maktoum International once it opens its passenger terminal. G4S also recently revealed a five-year contract with Shell, which will see it provide security and other services in more than 30 countries. The good news comes after what has been a difficult year for the company, both in terms of reputation and finances. G4S is currently attempting an ambitious turnaround involving moves to slash its debt, which currently stands at around £2 billion. The company’s new CEO Ashley Almanza came in this summer, prompting hopes he would lead an impressive turnaround. There was initial

enthusiasm when he unveiled plans for £250 million of asset disposals in June to help improve the firm’s finances. The company also issued extra shares to raise funds, and in future will have to look at problems including underperforming peripheral businesses. Though Almanza has enjoyed a warm reception, others have been more cautious about the company’s future. Recently analysts at Credit Suisse downgraded G4S, claiming it was too early to predict a significant turnaround success. And just as seriously, the G4S brand has been damaged by a number of prominent fiascos. In 2012 the otherwise successful Olympic Games were marked by the company’s failure to provide the agreed number of security personnel, meaning government ministers had to assign thousands of extra armed forces staff. The botched assignment cost the firm tens of millions of pounds and led to its then chief executive, Nick Buckles, being hauled up for questioning by MPs, with Buckles later leaving the firm. A G4S statement released at the time read: “The company acknowledges and regrets the serious failing of not identifying the workforce shortfall at an earlier date. As soon as the company knew that it could not assure the full workforce numbers in the build-up to the games, the relevant people at LOCOG

INDUSTRY VIEW

G4S has secured a lucrative security contract at Dubai International (above)

and the Home Office were informed. “G4S has a longstanding track record of delivering on government contracts to a consistently high standard. Everyone connected with the company is extremely disappointed that G4S was unable to deliver on its full commitments on this contract, but this does not reflect the high standards G4S delivers continuously in its other work for the UK government every day.” The company was also embroiled in a fresh scandal this summer, when it came out that both G4S and its rival Serco may have overcharged the Ministry of Justice for providing electronic tags for use on criminals. G4S said it had co-operated with a previous audit earlier in the year and

had not found any signs of dishonesty or misconduct in its own investigations. But the consequences for its reputation have again been stark. Shares in the company fell after Justice Secretary Chris Grayling called on the Serious Fraud Office to probe G4S and Serco for the overcharging, and the G4S name was once again plastered across headlines. Almanza is now attempting to tackle the company’s legacy issues. He has ordered an extensive review to get to the bottom of the Olympics and tagging scandals in an attempt to restore confidence in the firm. The new CEO has made a promising beginning. But from such a tainted reputation he has a huge challenge ahead of him.

New CEO for struggling Tanzanian mining outfit A FTSE 250 mining company concentrating on resources in Tanzania has placed its future in the hands of a new CEO. African Barrick Gold (ABG) is hoping its new chief executive, Brad Gordon, can turn things around after it was hit by problems including power generation issues and strikes, leading to a decline in output. The miner is one of many in the industry struggling with a number of problems. Mining in general has been knocked by share price

falls and a scramble for dwindling resources. Some of the bigger names, such as Xstrata and Glencore, have attempted to combat this with consolidation. Operational problems will only be worsened by some large price drops for commodities. Prices have plummeted for both gold and silver over the past year, meaning precious metals miners such as ABG find it harder to make money. As a result, producers have been mothballing

ABG’s operation in Buzwagi

projects and making other attempts to slash costs. In a statement, Kelvin Dushnisky, chairman of the board at ABG, said: “I am

pleased to welcome Brad as our new CEO. “The board is confident that Brad’s experience and track record in generating shareholder value, combined with his strong appreciation of community and employees, make him the right person to lead the company at this pivotal time.” Gordon will not have an easy ride, however – his appointment, announced on August 21, narrowly preceding the

resignation of chief operating officer Marco Zolezzi, who left the company to pursue other interests. Zolezzi had been at ABG for around two years. Gordon has taken over Zolezzi’s duties until a replacement is found. With its own operational problems, ABG has specific issues to face. But with share and gold prices dropping, this is a struggle other mining organisations around the world will surely recognise.

t is now more than five years since Lehman Brothers went bust, with such dramatic consequences for all of us. Back then, the expectation was that the resulting credit crunch would lead to a slew of corporate defaults and restructurings. In the event, of course, that has not really happened. Instead, we have seen the rise of the term “zombie company”, with all that that implies. With signs of economic improvement beginning to emerge, it is worth remembering that recovering from turmoil can be as problematic on the way out as it was on the way in. The last time we had to manage a recovery was in the early Nineties. So anyone under 40 years old has not done it before. There is potentially a dearth of experience, particularly in the SME world, in managing in a recovery as businesses struggle to deal with increased orders, growing capital expenditure requirements and, dare I say, an increase in interest rates. But help is available from many sources. At the Turnaround Management Association, of which I am currently president in the UK, our members cover the whole spectrum of skills required to assist with corporate turnaround and restructuring – from lawyers and accountants through individual turnaround professionals, to specialist turnaround investors. With 10,000 members worldwide and branches in 19 countries, even complex cross-border situations can be managed. My plea to corporate managers involves seeing an increased order book, yes, but many other problems can be solved by being honest with yourself. You are not the only one involved, and an early call for help can lead your business to prosper in the medium term. It is important that you get help early – whether that is from your accountant, your trade body or even from the TMA. Chris Hart (left) is president of TMA (UK) 0844 804 0116 www.tmauk.org

Business Reporter · September 2013

an independent report from lyonsdown, distributed with the sunday telegraph

Business turnaround

The best advice? Get it early... INDUSTRY VIEW

lthough the economy is looking stronger, many businesses are struggling. Banks are pushing for old loans to be repaid and cash remains tight. Working capital is limited. Firms are struggling. And Tony Groom (inset), of K2 Business Partners, says companies often leave it too late before seeking advice. “Directors are often caught on the horns of a dilemma. They are paralysed by a situation where the earlier you seek advice, the more options you have,” he says. “In a turnaround, professionals can have conflicts of interest, such as looking after the interests of the bank. “Insolvency practitioners earn more in fees from insolvency by working for creditors, so it’s not in their interest to support turnaround options.” Groom says directors need independent advice, and he also believes turnaround options should always be considered. Groom says: “I worked with a software company where hedge fund investors were funding losses of £150,000 a month. The hedge fund wanted to grow it rapidly, but changed its mind and turned the funding tap off. “We managed to avoid insolvency by reaching

‘In a turnaround, professionals can have conflicts of interest’ standstill agreements with creditors, employees and landlords. The hedge fund converted its debt to equity and gave 75 per cent of the company back to the founders who, with my help, cut costs and saved the company without further investment.” Examples like this show businesses can be saved. Getting early, independent advice is essential. tony.groom@k2-partners.com www.rescue.co.uk

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n w Do

High Street? by Dave Baxter A month after one of the UK’s hottest, driest and sunniest summers, British life is back to overcast normality. A season dominated by shorts, skirts, sun-bathing and even a euphoric Wimbledon win is little more than a fading memory. The heatwave which bore down on tourists, commuters and festival-goers alike, and the cheer that accompanied it, are long gone. As September draws to a grey close, the good stint looks to be over for others. Retailers enjoyed a sales boost for much of the summer, attributed to the good weather and other feel-good factors. But after an initial boom, sales unexpectedly flagged in August, dropping by 0.9 per cent, according to the Office for National Statistics. In a wounded economy, many of the prominent turnaround efforts and companies going bust have been retailers. Supermarket goliath Tesco is retreating from a number of its global ventures as it struggles with a £1billion turnaround plan in its domestic market, while this year opened with a gaggle of household names, from HMV to Blockbuster, falling into the hands of administrators. According to figures from research group Company Watch, there were 20,152 zombie retailers in July 2013, making up a negative net worth of £2.3 billion. And with the rise of mobile

After a brief summer fling with prosperity, UK retai doldrums. So what went wrong, and how can it be and e-commerce, traditional retailers will suffer or stagnate unless they can adapt to these sweeping industry changes. The situation has stung groups, campaigners and some of the industry’s big hitters into action. From the Portas Review to statements from business groups, questions are increasingly being asked about how to make retailers competitive and sustainable. And calls have been made for government involvement to help retailers, particularly in the UK’s embattled high streets. Bill Grimsey, who commandeered the turnaround of DIY chain Wickes in the 1990s, has worked together with other veterans from retail to look at how high streets are operating across Britain and what can be done to safeguard their survival. The Grimsey Review recommends a number of measures, from establishing teams to focus on making the high street successful to a revaluation of business rates. His argument is that retailers cannot afford to ignore new market forces, even if they are doing good business. “What we are saying is to imagine you were in HMV in 1990, at the top of your game, and sat in that boardroom and asked ‘Can you see 2013? We are going to go bust. Why don’t we change what we are doing to accommodate those changes?’ “Retailers need to ask, ‘How can I make sure my business is prospering instead of reacting to

what’s happening?’ I think that’s what turnarounds are all about, and looking forward and saying what your goal is.” Grimsey argues that retailers need to stick to the basics of aiming the right products at the right customers. “Retailers need to get their product right. If they haven’t got the right properties, whether that is the product for the right customer or reaching businesses through the right channels, it’s never going to work,” he says. “Retailing is successfully positioning your product against the defined customer and delivering it to them. If you do that and it’s good value for money, you are fine. That’s not changed for centuries.” He argues that high streets will need to change, with perhaps fewer physical shops and with more of a focus on serving as community hubs, as well as on the web and new shopping habits, such as buying online and collecting in-store. And he says that despite some positive signs in the economy, he fears many retailers, including some of the big names, could be close to going bust. He says: “I know people throw around statistics, but it’s a merry-go-round with as many start-ups as failures each year. Until we get some movement from government to help the SMEs, there are going to be more business failures.

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Leading the WayPoint Company management should seek help voluntarily to aid turnaround approach INDUSTRY VIEW

ayPoint Change LLP was founded in 2006 in response to the growing need for a joined-up turnaround approach. Delivered through individuals with complementary skills working together, this approach became known as a ‘boutique’. Seven years later, WayPoint’s senior team includes an experienced corporate lawyer (Amanda Allen) and a property specialist (Mark Bayley) as well as turnaround FDs (Andy Pearson and Claire Burden) and CROs (Nick Winks and Paul Herbert). Other team members are highly skilled in cash management and developing integrated financial forecast models. Since 2010 we have seen more emphasis on stakeholder-led pressure for change in a company’s performance. Some of this is more about transformation than turnaround. The difference being that transformation is about increasing shareholder value over a period of years, while turnaround is usually about very rapid action to safeguard creditor positions, delivered in a few weeks or months.

‘Since 2012 we have seen more emphasis on stakeholderled pressure for change in a company’s performance’

il is back in the turned around? “It’s not just confined to the small ones. There are about five or six big failures out there. It will only take a bad autumn and bad weather for them to get to Christmas, fill their tills and fall over. I think that’s cynical timing by the creditors. “I don’t hold with the economic recovery. I don’t think we have turned any corner. I have seen consumer spending increase, but that’s down to the good weather.” Helen Dickinson, director general of industry body the British Retail Consortium, believes the debate on the future of the high street needs to be held. And though Bill Grimsey and Mary Portas have been critical of each other in parliament and the press, Dickinson sees similarities in their suggestions. She says: “We have had the Portas Review and the Grimsey Review. There are other activists, whether that’s the Future High Streets Forum, which involves central and local government departments, or others. “What I would say is, what Mary Portas succeeded in doing is putting the profile up. And if you look behind the detail of her and Bill Grimsey’s reports, there’s a lot of consensus.” Dickinson’s tips for revamping the high street include reforming business rates, offering affordable parking, having local leadership to plan how a high street develops in the long term, ensuring that public spaces are attractive and well-managed, and allowing non-retail

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HMV, Woolworths and Blockbuster (top right) are all recent high-profile high street failures

uses of high street buildings to form more of a community area. She says: “A proportion of our town centres are looking like disaster areas. We have to find a way to reinvent them to work with what’s happening. Those market forces are unstoppable, because they are all about the power that consumers have. They are absolutely in control.” Michael Green, CEO of the British Council of Shopping Centres, believes retailers need to make life convenient for those who still want a high street shopping experience. “People still want the butcher, the baker and the candlestick maker,” he says. “But I think there will be less space required for physical shops, and you will see a completely different use of buildings. “Retailers, wherever they are, need to be adaptable and flexible. And what town centres can’t do is say ‘We are dead’. “If you are willing to change, it will pay off. Marks & Spencer and John Lewis are doing well with that. And even Tesco will deliver to your house. The internet means there is a different way to do things.” As calls for action get louder, some hope the government can help drive action to save the high streets and much of the retail sector. Asked if he can see this happening, Grimsey takes a cautious attitude. “It will only succeed if we can keep our foot on the gas,” he says.

Nick Winks (above right), senior partner of WayPoint Change, has been leading turnarounds and transformations for 20 years following a career as MD and CEO in both public and private companies. These days he mostly takes executive chairman roles, overseeing the company through initial stabilisation before two or three years of growth followed, usually, by an exit, which he manages. WayPoint partners are currently working on five transformations and five turnarounds. These involve three of the main banks, one continental bank and four mid-market PE houses. Because of their experience WayPoint members are also often asked to advise on transactions and act as non-executive directors on the boards of public and private companies. The most common failing WayPoint sees, as do most turnaround and transformation specialists, is that so few company management teams seek help of their own volition. The impetus for change comes too often from advisers, banks or shareholders. If company directors were more proactive in asking for help quickly enough, it is likely issues would be tackled earlier, more effectively and with far better long-term outcomes. 07973 316 544 www.waypointchange.co.uk

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Spotting the signs: restructure your business for a secure future Phil Emmerson (inset) of business advisory firm BDO answers frequently asked questions about restructuring and turnaround INDUSTRY VIEW

he past six years have been busy for restructuring advisers, whose behind-the-scenes expertise in rescuing and reviving businesses has been in constant demand since the financial crisis. Today, if a company can be saved, then all reasonable attempts to do this should be explored, with consensual routes to recovery often proving the most successful. In this “new normal” of fluctuating economic conditions, formal insolvency processes are increasingly seen either as a last resort or as a means of delivering an agreed solution, where shareholders and management, rather than lenders, drive the process, having recognised the need to restructure and instigate change. As the UK economy bounces back, an increasing number of companies will face challenges – perhaps because their working capital requirements change as they try to expand too quickly or aggressively into the recovery, or simply because they need to adapt to the demands of the changed marketplace. How do I know if my business needs to restructure? The circumstances of individual businesses are unique, but tend to show similar symptoms if they are in difficulty or if they need to restructure.

Access to appropriate specialists is essential for turnaround

The immediate trigger for a restructuring is often an event that overwhelms the ability of the business to cope in the short term – for example, the sudden loss of a key client or the introduction of new payment terms from a key customer. This often highlights more underlying issues, which might include pressure on gross margin, increasing costs or inefficient processes. These situations develop very quickly. Two things normally happen next. Management may not have experience of dealing with a crisis or managing the stakeholders in their business through this process and therefore will find it difficult to adapt to new circumstances. Secondly, the problem will start to impact on cash availability in the business, which in turn can place strain on a company’s relationship with its bank or lender. Banks and lenders rarely cause problems – they react to them. Breaching banking agreements is a key warning sign that a business is experiencing stress and may need to restructure. That sounds familiar. So what needs to be done? Though the problems may be obvious, it’s a courageous step to admit that your company needs help. If these symptoms sound familiar, it’s important to take action promptly before the company is damaged beyond repair. Early intervention will increase the range of options available and is likely to deliver better outcomes for

Businesses can benefit hugely from the right financial adviser management, employees and shareholders than leaving it too late. Involving a restructuring specialist early on will help to preserve jobs, assets and shareholder value. What qualities should my restructuring adviser have? Just as someone would seek out the best and most experienced doctor to diagnose and treat a serious illness, choosing the best specialist restructuring adviser for a business is vital. As events will often move quickly, there is normally only one chance to get this right. There are many advisers in this space, dealing with some of the world’s largest and most complex businesses down to the smallest. Their approaches and expertise may vary widely, so it is important to know whether your adviser has experience dealing with similar types of situations to those your company is experiencing. Previous sector experience may be less important than having extensive situational experience. Successful restructuring assignments will draw on a wide range of skills, so having ready access to these is essential. When considering your options, take soundings from advisers, preferably professionals who already know the company well – such as solicitors or accountants – and will be in a position to make helpful suggestions. Advisers should be well networked with the banking and lending communities, and can help business owners to diagnose, identify and resolve the major issues swiftly. BDO has access to expert professionals in a number of specialist areas and can assemble the right restructuring advisory team to meet the businesses’ specific needs. While financial acumen is essential, the best restructuring advisers also have exceptional communication skills.

Communication is often the critical factor in the success or failure of a restructuring process. They will be able to identify and work constructively with all areas of a business as well as its stakeholders – ranging from HMRC and pension funds to trade unions – to provide the best chance of a successful outcome, restoring confidence in the business and providing a base to restore shareholder value. Will a restructuring adviser help to resolve an issue with my company’s bank or lender? Restructuring advisers recognise the importance of the funder’s position and will be able to present your company’s case to your bank or lender in the best possible light. This can often have a swift and positive effect by itself. An effective restructuring adviser will help diagnose the issues, understand the options and can help expedite or resolve a firm’s financial issues, communicating these to stakeholders, including the bank. Sometimes existing funding arrangements are not appropriate, or the banking relationship has run its course, in which case your restructuring adviser can help find alternative financing for the business. There are now hundreds of funds and alternative lenders in the market, all with different appetites for risk, structure and sector specialisms. Many of these will not be known outside the financial services community, but could hold the key to a company’s recovery. Your restructuring adviser should be well networked in these communities and be able to find the right match for your business quickly. Provided advice is sought early enough, business rescue and turnaround options are possible for almost all businesses, if the core proposition is strong and the right support is found. 020 7486 5888 phil.emmerson@bdo.co.uk

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Inspector Dogberry T

urnaround is neither easy nor glamorous. Precariously balancing the books, rethinking a doomed business plan and cutting jobs can all come into the equation. But turnaround can be more than rescuing a firm. It means saving a treasured brand. Companies like Woolworths may have not been viable, but they will be missed. Occasionally there is a happy ending. Roadside restaurant Little

Chef, which employs 11,000 staff, was taken over by private equity house Rcapital in 2007. Huge changes followed, including job losses and closures, as the chain tried to reinvent itself. The brand is still around, and it may be headed for better things. Rcapital recently announced it had sold the chain to Kout Food Group Restaurants UK. Rcapital boss Jamie

He may use “Google” as a verb and have a soft spot for Ask Jeeves, but Dogberry is rooting for Yahoo chief Marissa Mayer in her attempts to turn around the internet giant. From buying Tumblr to giving Twitter users retweets when they endorse Yahoo, Mayer comes across as decisive, personable and sharp as a knife. What exactly is Yahoo’s brand lacking? In a blog post explaining a revamp of the company’s logo, Mayer gave an unusual answer. It includes avoiding straight lines, keeping the name in an upper case, sans serif font. But what would really appeal to the tech crowd? That’s right – tilting the exclamation mark by nine degrees, “just to add a bit of whimsy”.

Constable said: “When we bought the chain, it needed huge changes to revive the business and bring it back to profitability. It was much harder than we expected. “We rolled up our sleeves and got on with it, we believed we could make it work and it did.” Constable hopes the new owners will “take the brand to the next stage”. Hopefully the survival of Little Chef and other beloved names will justify big, difficult turnarounds.

After a few breathless weeks of announcements of the latest iPhone models, it’s easy to see why BlackBerry, once a market leader, is having a tough time of it all. But the company, buffeted by years of competition from Apple and Android products, seems determined to regain its momentum. As part of this attempt, BlackBerry has announced what could be a savvy move: making its BBM messaging service available, for free, to Apple and Android users. BBM, regarded as one of the company’s more successful innovations, may not persuade users to ditch their shiny iPhones straight away. But it might remind them BlackBerry exists.

Dogberry is a hungry pup with a weakness for gravy. So it’s with heavy heart and rumbling belly that the Inspector considers Premier Foods, whose “power brands” include OXO and Bisto. Saddled with debt, Premier Foods needs such brands to save it. In a July statement about its half year results, CEO Gavin Darby said: “We have now grown sales in our grocery power brands for six consecutive quarters as we continue to build partnerships with our customers, deepen our understanding of consumers and invest

By Matt Smith, web administrator

www.entourageconsulting.com.au Australian business consultancy Entourage specialises in working with business owners to improve performance and achieve growth. Its blog offers tips on everything, from creating a business manual to the point at which you should seek help for your business, all wrapped up in a good-looking, easy to follow theme.

Christine Elliott’s Blog (IFT)

more effectively in supporting our brands. “The second half will see further plans to grow our power brands, in addition to a new £10m of cost savings that we have now identified.” Time for some chicken and gravy to celebrate.

www.instituteforturnaround.com/ blogs/christine-elliot

Renee Fellman’s Blog www.theturnaroundblogger. com/big_data

Institute for Turnaround chief executive Christine Elliott gives her thoughts on business turnaround on her blog. Subjects range from IFT news to steps to turn a zombie company into what she calls a “zoombie” company. The blog also highlights standout turnarounds and the people behind them.

Award-winning CEO and turnaround specialist Renee Fellman’s blog is an interesting read. Head to the Turnaround section to isolate her posts on the subject, or read Renee’s turnaround experiences along with her thoughts on current affairs and more general issues.

K2 Business Partners Blog www.k2-partners.co.uk

Journal of Corporate Renewal (Free, Android)

Accounts Assistant (Free, Android)

The Journal of Corporate Renewal brings turnaround features to your fingertips nine times a year.

With a selection of frequentlyused financial formulas and a balance sheet tool, Accounts Assistant could prove useful.

The turnaround section of the K2 blog is probably the most frequently updated on the web, with tips for corporate renewal, comment on politics, and thoughts on the challenges facing business in the context of wider economic difficulties. Worth digging through the archive for food for thought.

Ask for directions before it’s too late Avoid the road to nowhere INDUSTRY VIEW

business is like a car, and managers are their drivers. And there are reasons why insurance premiums are higher for men than for women. Cashflow crises and a numbing, yet hidden, fear are symptoms of a failing company. Think squeaky fan-belt and a broken sat-nav – and you have a meeting in five minutes... But would you stop and ask for help? Typically, men leave it too late to get directions – but why? Because we educate our boys not to show weakness. A company may be in deep trouble having lost its way, but help is not sought and value is destroyed. This is avoidable. I’m not saying women do it any better but, in general, they do come from a different point of view – and that can be a strength. Take me, running two businesses; I took direction, merged to create Legatus Law and now provide streamlined commercial and restructuring legal advice.

u Editor’s pick Entourage Consulting Blog

A dog riding the gravy train

Edited by Dave Baxter

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If a business needs help, the earlier you get a steer, the easier it is for recovery to take place. There’s a time for your business to be a Bugatti Veyron, but also time for a Honda Jazz. The ideal is somewhere in between. But it’s not just the car – the driver has a huge responsibility for maneuvering it. Consider the parallel park, in business. This requires careful stakeholder management, looking in multiple directions and understanding the boundaries of the car you are driving. As I can parallel park, I can show you a trick or two about repositioning that you might just miss if you fly by in your Bugatti. Remember, CEOs, directors, business owners – it’s not the speed that kills you, it’s the tree that stops you in your tracks. Ask for help early and prevent fatalities. Rashmi Dubé (left) is founder of Legatus Law, blending the experience of having run her own business with expertise in debt recovery and as a solicitor to provide SMES with commercial and construction restructuring legal advice. 020 7873 2279 www.legatuslaw.com

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How to turn a business around in 10 minutes – Brett McFall http://www.youtube.com/watch?v=0WDRYdivtyI Marketing expert Brett McFall shows you how to find your business’s USP.

China

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A rise in the number of zombie businesses is “now as equally prevalent” in Asia as in the UK, according to a report. Fixing Cracked China: Turnaround And Transformation In Asia claims a wave of insolvencies was expected in China following the onset of the financial crisis, but a number of factors have stopped this from happening. The report, released by consultants PricewaterhouseCoopers in June, reads: “When the global financial crisis hit in 2008, a mass of corporate failures and distressed workouts were anticipated, but have not materialised. “This is due to numerous factors including creditor banks not aggressively enforcing their rights, general low levels of debt and, in China, low interest rates and state-sponsored support.” The report also notes Chinese firms are increasingly asking for help from turnaround specialists to save them. It reads: “Over the last two years, there has been a growing trend in the engagement of turnaround professionals

to businesses, instigated by their shareholders and creditor banks. These individuals work with incumbent management and company stakeholders to effect genuine operational change.” But it also notes that, as in the UK, there has been confusion when insolvenc y professionals brand themselves as turnaround specialists. To combat this, professional body the Asia Transformation and Turnaround Association (ATTA) was set up in 2010. But progress has some way to go. The report claims a number of factors can complicate both turnaround work and restructuring. These include the multinational nature of a business, the location of a firm’s assets and the creditors related to them, and complex corporate structures adding to confusion around ta x and ownership. Turnaround may be taking off in China, but it is still a complicated affair.

United States President Obama is hoping he can rely on a turnaround veteran to change the fortunes of the troubled Internal Revenue Service (IRS). John Koskinen, who was recently announced as IRS commissioner nominee, served as a non-executive chairman at Freddie Mac from 2008 to 2011. Previously he was president of the United States Soccer Foundation, before which he served as deputy mayor and city administrator in Washington DC. The president believes the IRS, responsible for collecting taxes across the US, will benefit from his leadership after a troubled past. The service was rocked by scandal earlier this year, after it turned out it had closely investigated certain political groups applying for tax-exempt status, on the basis of their names or political themes.

New IRS commissioner nominee John Koskinen

Retail: the inconvenient truth In a shifting retail landscape, some firms must accept they are simply no longer viable concerns

Failing businesses must face some harsh truths and evolve if they are to survive INDUSTRY VIEW

uch has been written about the beleaguered retail sector over the past ten months, with high-profile casualties HMV, Blockbuster and Republic hitting the headlines at the start of 2013 and kicking off a challenging year for retailers. While the casualties are from different consumer products sectors, there are some consistent themes that can be traced back to the pre-financial crisis era: balance sheet issues with over-leverage featuring

significantly, no investment and liquidity to effect change, over-rented estates, increasing online competition, and management ill-equipped to deal with today’s retail challenges. Add to these issues such as supplier nervousness, poor consumer confidence and lower disposable income, and you have a basket of problems with no easy fix. These are once-in-a-generation issues that require structural changes before we hit calmer waters. But with these issues come opportunities for retail stakeholders to “right-size” structural and balancesheet issues to position for success. Landlords, owners, investors, lenders and suppliers have to pick the winners to support, where the basic retail proposition has a continuing reason to exist, and back these businesses to succeed. The retail sector is no different to any other in that obsolescence is a fact of life. It needs to be dealt with, not swept under the carpet. Eventually the “ostrich” effect typically produces a worse outcome for all. The retail casualty list proves previous light-touch pruning, often championed by CVAs (Company

Voluntary Arrangements), has not produced many happy outcomes, and sometimes preferred one creditor class over another when more deserving cases have become apparent. The inconvenient truth is that not all retail businesses deserve to survive. Several chains were established during the boom times on the back of high leverage, low investment and questionable business models, with little modern-day relevance to the consumer. Insolvent restructuring, using administration, has to be the way to go for deserving cases, to renegotiate affordable rents and replace overleverage with new liquidity. Practitioners and investors have to weed out deserving cases whose business models have a reason to exist. The test is easy – can the business produce enough four-wall contribution to make a positive profit and return for its investor or owner, while paying current market rents and bills on sensible credit terms? Does it have a credible digital offering to complement its stores? And is the central function fit for purpose or bloated and dysfunctional? If rescues could be done out of court, so much the better, but these situations have too many moving parts and time pressures, making this route fraught with danger and uncertainty. The message is simple – apply the test then apply the solution. Is the concept obsolete or does it have legs? If it’s the latter, stakeholders need to give it the chance it deserves, because second chances are now in very short supply. Fraser Pearce (left) is senior managing director of Investments, Gordon Brothers Europe +44 (0)20 7647 5120 www.gordonbrotherseurope.com

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Malta

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Air Malta, the island’s national airline, claims it is making steady turnaround progress, having made major changes over recent years, bot h i n ter m s of f i na nc ia l restructuring and how it operates. The carrier announced its results for the first quarter of the 2013/2014 financial year earlier this month. During this period, from April to Ju ne, t he compa ny ha s significantly reduced its operating loss as well as improving both revenue and its passenger figures. The figures will come as welcome news after several years of financial trouble for the company, leading to a major restructuring plan which had to be approved by the European Commission. Under its current CEO, Peter Davies, Air Malta has set out a drastic financial plan from the financial years 2012 to 2016, involving the shedding of assets as well as backing out of certain air

routes in order to better concentrate on core routes. As a European Commission report noted last year, the company has a vital impact on the country’s fortunes because of the services it provides. It reads: “Air Malta Plc is a small national carrier with a present fleet of only 12 aircraft. Except for being a regular link for tourist and business travellers, the airline also provides other important services vital to Malta’s economy.” The report continues: “The

Maltese Islands are geographically isolated and therefore cross-border links with mainland Europe and other parts of the world are limited to sea and air transportation. Appropriate air links are crucial for Malta’s economy, given its high degree of economic openness and the importance of the tourism industry to its economy. “It is also vital for Malta’s economic and social cohesion both internally and with the rest of the European Union.”

Air Malta is a crucial asset to the small island nation

Scottish and Northern firms are surging back to recovery

United Kingdom Areas such as Scotland and the North East may be catching up with London’s recovery as they begin to see a major drop in the number of distressed companies there. According to research by Begbies Traynor, which deals with troubled businesses, the second quarter of 2012 involved an improvement across the country, with fewer firms rated as being in “critical” distress. The largest drops came in Scotland, where the number of distressed companies fell by 71 per cent compared with a year before,

and the North East, where it fell by 69 per cent. The North East enjoyed a 21 per cent drop, and in Yorkshire and Humberside the fall was 18 per cent. In contrast, London saw a reduction in “critical” businesses of just 1 per cent compared with a year before. But since the financial crisis, the capital has bucked the trend. Speaking about the research, Julie Palmer of Begbies Traynor, says: “The latest regional comparisons indicate that while the vibrant London economy continues to grow, fuelled by its burgeoning residential property market, the UK regions, particularly the north of England, seem to have finally turned a corner and are now helping to drive the recovery.”

Business distress in the legal sector: weathering the perfect storm Managing change at pace

Before taking the plunge, consider all the options INDUSTRY VIEW

he fragmented legal sector may be overcrowded today but that could soon change. Firms are being hit by a perfect storm of different challenges, requiring them to manage unprecedented change and make turnaround intervention, business model adaption and consolidation much more likely. The profession is being challenged on a number of different fronts. Companies working on personal injury cases have seen an overall drop of around 30 per cent in fees, leading to several high-profile failures as well as attempts to exit the sector as firms feel the financial pain. At the same time, historically low volumes of conveyancing transactions and corporate work have driven down fees elsewhere, and rock-bottom interest rates have led to a reduction in

work for litigation and insolvency practitioners. Many firms are increasingly challenged to secure professional indemnity insurance cover at competitive prices. The intensity of competition also means firms may be more willing to lower their fees while some hard-pressed, opportunistic clients will slash their legal spend to save costs. These factors combined mean that many legal firms are fighting to survive.

But those considering changing their business model or merging with a rival would benefit significantly by seeking help from an experienced restructuring and turnaround specialist to examine various aspects of their business first to make sure these are viable and attainable options. It is important to consider the human dynamic as well as its operational and financial positions. Before taking any drastic measures, a firm needs to look at its existing team, how well it can cope, and what the implications of any changes could be. It is crucial to understand the firm’s key stakeholders, particularly its partners and the roles they play. Firstly, it makes sense to examine the partnership structure within the firm and how effective the leadership is, including its succession plans, if any. With these factors in mind, it makes sense to assess the ability of a firm and its partners to stay together and fight for the business in times of extreme pressure. If partners are likely to leave because of these changes, the firm needs to consider what kind of impact this could have on

its future. The departure of a partner could be beneficial. It could mean a difficult personality, or resistance to change, is removed from the equation. But it could hurt the business. If a key partner leaves, they could end up taking a group of important clients with them, dealing a major blow to the finances of an already struggling organisation. The willingness of partners to embrace change and make the difficult decisions required is essential, and working with a supportive and experienced turnaround professional can help protect and preserve practice value. As the legal profession continues to weather the storm, dramatic measures look tempting. But these have consequences which cannot be ignored. The introduction of an experienced turnaround specialist to work with the firm’s partnership, who has the ability to understand this context quickly and help manage change at pace can make all the difference to successful outcomes. Mark Taylor (left) is a managing partner at Blue Sky Associates mark@blueskyassociates.co.uk www.linkedin.com/in/turnaroundman

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Can turnarounds work in the NHS? The future of the NHS, and grappling with its reform, has never been a more pressing concern. But for change to be successful, it must take place at all levels of the service INDUSTRY VIEW Jane Hurst is a director at KPMG who works with NHS organisations to develop and implement plans for longer term sustainability. Colin O’Toole is a KPMG senior manager specialising in cash management and operational governance with extensive NHS experience. Simon Dowse is a qualified doctor and a KPMG director who specialises in quality and financial performance improvement.

he future of the NHS is an emotive debate, but not one which should be confined to public sector corridors. One of the factors at the centre of the debate is financial sustainability – given the current economic climate, can we reasonably expect to continue enjoying a health service which is free to all at the point of delivery? Focus on sustainability can lead to turnaround. Turnaround in the NHS is often considered something that many trusts have done, but has not always worked. It can (and does) succeed in the NHS but often trusts are only able to fix the symptoms, not underlying issues. There are two key phases to a turnaround: stabilise and sustain. Stabilise is likely to solve the trust’s issues in the short term but the same issues may reappear or the issues could simply be passed to another trust. Of course, the NHS shares many factors associated with great organisations: a globally recognised brand; groundbreaking research; a major employer with strong links in local communities. It is, according to a recent KPMG survey of 1,000 patients, also an institution of which the public is immensely proud. Yet, they recognise that the current model of care needs to be refinanced if long-term healthcare needs are to be met. That’s why just 9 per cent assume they won’t have to contribute to the cost of care, beyond taxes. Patients clearly understand that the NHS is struggling to adapt to the clinical, financial and operational pressures it currently faces. They worry that some hospitals

are not providing the standard of care expected – hardly surprising given The Francis Report on mid-Staffordshire Hospitals, the recent Keogh Report and the debates over regulation. And patients are rightly becoming more demanding, have more choice and are better informed. These challenges have led to a perfect storm where demand is up, funding is (at best) flat and efficiencies are increasingly difficult to deliver. It’s against this backdrop that Trust Special Administrations (TSAs) were introduced. The process has been used to work out solutions – with special legal powers – to the previously intractable problems in south London, Peterborough and of course mid-Staffordshire. From these first three projects some lessons are emerging. The TSA process is complex – perhaps necessarily so as it deals with the most challenged organisations in the service – but it has been very valuable in looking at the longer term sustainability challenges. This contrasts with the many NHS trusts which have been through at least one turnaround in the last decade, where they have not necessarily considered the longer term challenges for themselves or their local health economies. In our view, the ability to create a successful “turnaround” should not be limited to the period in which a TSA is active.

Creating a successful turnaround When a trust enters a turnaround situation, stabilisation activities should focus on three core areas: quality and safety, cash control and operational “grip”. This makes these projects all the more challenging – focus on the cash and grip is essential to buy short-term survival, but such control cannot be at the expense of the quality and safety of care provided. It is, however, important to recognise that “stabilisation” is not a one-off activity. The NHS must look to future models of care to become sustainable as short-term stabilisation tactics treat the symptoms, but will not always address the underlying issue. Begin with an analysis of demand. This is the province of commissioners and should be used to plan services properly and consistently on a collaborative basis with the trusts – just as automotive OEMs work with their suppliers to manage stocks and supplies. Patient and public engagement is also vital. Countless turnarounds have been slow to deliver, or not delivered, as they have not been developed alongside local partners, regulators, clinicians or patient groups. Local communities need to be onside or understanding of any changes to their local NHS provider. Work with local partners. Turnarounds in the NHS require more than one organisation to succeed, due to the level of interdependencies. By working with primary, community and social care providers, trusts can take money out of the healthcare system while improving care via different models. And of course, be brave and get creative. The NHS needs to challenge normal ways of working and foster a culture of innovation. There are multiple examples of innovative approaches around the world in terms of care models, culture, workforce and technology – and when you talk to NHS staff there is a wealth of ideas in the system

waiting to be developed. A major barrier is risk adversity in the system. And finally, a cultural shift is needed, to acknowledge the impact of actions, both within the NHS and on patients. The cultural challenge within the NHS is a crucial one to address if sustainability is to be achieved.

The NHS cannot survive without wholesale transformation The debate over finance seems to overshadow the scale and gravity of the wider challenge which is – and always should be – delivery of quality care for patients. Funding is, of course, a critical issue. But with the strain on the public purse set to continue for some time, attention must be given to both how care can be redesigned so that it improves, and how private and voluntary bodies can work together with government to ensure patient needs come first. There are innovative solutions to the problems seen in the NHS, but there also needs to be a willingness to develop and implement them. The onus is on a wide group of leaders to come up with an affordable way to pay for the care today’s society will need, and soon. If the NHS does not embrace change, the cost of failure could be catastrophic, both in terms of patient outcomes and the cost to the taxpayer. If that happens, the founding principle of the NHS – healthcare that is free for all based on need, not the ability to pay – may become a thing of the past. jane.hurst@kmpg.co.uk colin.o’toole@kpmg.co.uk simon.dowse@kpmg.co.uk

Business Reporter · September 2013

an independent report from lyonsdown, distributed with the sunday telegraph

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Business turnaround

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Saving a business needs quick, skilled teamwork by turnaround professionals INDUSTRY VIEW

irms are as good as their directors during a crisis. Unfortunately, directors often find it difficult to know what to do, which can result in attempts to save a business being too late. Advice may be given by professionals who themselves lack experience or who do not have the company’s best interests at heart. Often lenders and finance providers, seeking recovery of their loans, will introduce advisers who are normally insolvency practitioners (IPs). While IPs are experts in dealing with a balance sheet, their advice is often to begin insolvency proceedings and recover assets for creditors. Anyone introduced by a creditor will have conflicting interests and their approach can massively reduce value and hamper turnaround initiatives. As David Bryan, of Bryan, Mansell & Tilley says, insolvency should be an “absolute last resort”. “Insolvency destroys value and is fee-intensive, whereas turnaround managers preserve more value for all stakeholders. Management should not feel diminished seeking their help.” Tony Groom, of K2 Business Partners, adds: “Turnaround involves a consensual

David Hole Galen Partners

Tyrone Courtman Cooper Parry

Justin Stephenson Jeffrey Green Russell

www.galenpartners.co.uk david.hole@galenpartners.co.uk

www.cooperparry.com tyrone@cooperparry.com

www.jgrweb.com cjs@jgrlaw.co.uk

Libby Aird-Brown The MacDonald Partnership

David Bryan Bryan, Mansell & Tilley

Tony Groom K2 Business Partners

www.tmp.co.uk libby_aird-brown@tmp.co.uk

www.bmandt.eu dbryan@bmandt.eu

www.rescue.co.uk tony.groom@k2-partners.com

approach to achieving a viable and sustainable business for the benefit of all stakeholders, including employees and suppliers. Banks and creditors will also be better off. “Turnaround is a complicated process, going beyond financial restructuring. It always involves operational change and may need a rethink of strategy.” Justin Stephenson, of Jeffrey Green Russell, says: “Owners and existing management often do not have the full set of skills needed in a turnaround situation. For example, they may be brilliant engineers or salesmen but lack financial back-office help. A turnaround professional will identify what is lacking, allow management to concentrate on what they are good at and supplement management with any skills that were previously lacking.”

Turnaround also involves encouraging proud bosses to accept change. Libby Aird-Brown, of The MacDonald Partnership, says: “Somebody described the decision [to make changes to the business] as a grieving process. A turnaround specialist has to act as family counsel, or shareholder counsel, or emotional counsel.” But businesses are unsure who to contact in a crisis. Tyrone Courtman, of Cooper Parry, says: “Many business owners find it difficult to plan for the unthinkable, but actually taking expert advice to help them improve business performance sooner will pay enormous dividends. There is an incredible amount of support and experience that can be provided by turnaround professionals, if only we could convince business owners of the need to take it.”

SRA intervention risk requires quick reaction KSA Group starts with rescue and turnaround in mind INDUSTRY VIEW

he legal sector is in trouble. The introduction of the Legal Services Act has led to the option of forming alternative business structures (ABSes), meaning a number of distressed firms with failing businesses may be snapped up by larger players. But, as is customary in any marketplace, whenever you see consolidation, you also see failure. Businesses close down, other companies purchase distressed assets and a consensus between stakeholders is rarely reached. If the Solicitors Regulation Authority (SRA) thinks a firm is a risk to the clients, then it may instantly intervene. “Effectively the business dies there and then,” says Keith Steven, managing director of KSA Group. “To put a company into liquidation takes three weeks, but the SRA can intervene in a flash – if they’re ready to go, they can be there ‘today’.” In most cases, the SRA will give prior warning by writing to distressed firms requiring the management to seek external insolvency advice. But often if it gets to this stage, it’s already too late. “Smart lawyers should be thinking about turnaround options that are available before it’s imposed upon them by the SRA,” explains Steven. “The aim should be, even

David Hole, of Galen Partners, says: “We need to spread the word about the very benefits that turnaround can bring to the wider business and financial community, and by flushing out those with ulterior motives and sharp practice through professional regulation.” Measures are being taken to elevate turnaround. The Turnaround Management Association has introduced the EACTP turnaround qualification. This is aimed at reassuring clients through accreditation, and distinguishing experienced turnaround professionals from other advisers and IP’s. There are hundreds of thousands of businesses in financial difficulties that are rightly worried about the vested interests of advisers. Turnaround professionals are keen to reassure them that help is available.

before the SRA gets them on its watch list, to get advice before insolvency options are required.” Common warning signs such as poor cashflow, falling sales or not being able to meet payments to HMRC should be taken seriously by partners and directors. Struggling with PAYE and VAT payments are indicators that management must act. “A new pair of eyes coming in can spot the issues,” explains Steven. “The reason management doesn’t address structural business problems is fear of change. But change has been forced upon them by the market and smart directors must act to turnaround the business.” The KSA Group offers a variety of solutions including plans “A”, “B” and “C” to the distressed firm, and works with it and the SRA to prevent regulatory intervention. Plan “A“ can be used while it’s still possible to defer creditor payments, restructure bank debts, chase debtors, cut costs and turn the business around. If creditors choose to reject this informal deal, then Plan “B”, may be used, this is often a formal Voluntary Arrangement (CVA or PVA) to pay creditors over a fixed period while continuing to trade. Debts are substantially discounted on the way through. If it gets to the stage where it is impossible to turn the business around, that may mean plan “C”, when a break-up sale to buyers or a prepack administration becomes necessary. “That’s not desirable for all parties, but it can sometimes be the only outcome,” said Steven. The KSA Group also offers a free online guide at www. companyrescue.co.uk which has served as a crucial aid for companies feeling the pressure of a tough economic climate, with thousands still trading with its help. 020 7877 0050 www.ksagroup.co.uk/ help-for-lawyers