FINANCIAL TURNAROUNDS: PRESERVING VALUE.

ENGINEERING AND MANAGING A CORPORATE TURNAROUND CAN BE PAINFUL, PERSONALLY AND PROFESSIONALLY. WHAT SHOULD YOU KNOW TO AVOID NEEDING ONE? AND IF YOUR COMPANY REQUIRES A TURNAROUND, HOW CAN YOU MAKE THE PROCESS EASIER?

At first glance, it would appear that a hostile takeover attempt and the trend toward dressing more casually for work would have little, if nothing, in common. Yet both of these were factors cited in the turnarounds of two companies -- USG Corp., a building and remodeling supplier for the construction industry, and Jos. A. Bank, an upscale menswear retailer. These companies are profiled in an upcoming Financial Executives Research Foundation study, Financial Turnarounds: Preserving Value, which examines 20 North American companies in a cross-section of industries.

The problems that may create the need for a turnaround are many, and not industry-specific. They include management misjudgments, ill-advised strategic decisions, marketing failures and ineffective financial management. Warning signs can originate from both inside and outside the company. Some of these include: a change in corporate strategy, rapid growth, increased leverage, loss of market share, deterioration in key performance indicators and market shifts.

A company's external constituents may perceive other warning signs. The study's coauthor, Henry A. Davis, a Washington, D.C.-based writer and business consultant, says these include "poor board governance processes, poor information systems, lack of financial metrics or key performance indicators (KPIs), management's failure to listen to the outside world (including customers and warning signs) and frequent turnover in the management team."

As CFO, you can monitor most, if not all, of these factors, sound any necessary warning bells and try to avert trouble. Turnarounds can be costly -- not only in financial terms, but in terms of corporate reputation, personal stress, morale and time. More than one marriage has been lost to the battle. Some of the related issues cited by the study include:

* A turnaround requires a unique and intense mindset, at least until the immediate crises pass. Some companies may experience the luxury of being able to make day-to-day decisions; others have to act hour by hour. In the short run, attention to cash flow and determining how to allocate that cash nearly obliterate all other concerns.

* Any emotional commitment to previous company policies must go. That frequently means discharging the previous management team. Whoever leads during the crisis -- an old team, a new one or some hybrid -- bears the blame, from subordinates and external stakeholders, for bringing the company to the brink.

* Entering a Chapter 11 bankruptcy may be the tool of last resort to help the company survive. But bankruptcy is expensive, time-consuming and distracting. It may cause customers to flee, employees to lose focus, a reputation to erode and common equity to disappear.

* Even when you think it's complete, you can't rest on your laurels. Successful turnarounds may not be permanent.

Yet when a turnaround works, it is, says USG's CFO, Rick Fleming, "a real victory." In fact, Fleming says, "It's a tremendous growth experience from a career standpoint, and a great adrenaline high. It takes about two years to detox!"

Head Off Problems

If, however, you never want to put your feet to that kind of fire, as a CFO you must be vigilant and think creatively. You must understand your business and its costs and continually monitor industry-specific, internal KPIs, frequently on a daily basis, You must consider the external business climate and larger sociological trends. Or, as Davis says, "You need to look for problems and try to head them off. As technology, styles and customer preferences are constantly changing, it's management's job to stay abreast of those changes, recognizing that the way the business was managed five years ago probably doesn't suit today's environment."

For example, he says, "If you're selling tailored suits and everyone goes to casual, you're going to have to change. You can't blame problems on the fact that the world is changing, but on management's failure to see changes coming."

"You need a good understanding of what makes your business work," adds William Sihler, coauthor of the study and a professor of business administration at the Darden School at the University of Virginia. "You have to look across boundaries that the people lower down don't have the opportunity to see."

Robert C. Lannert, CFO of Navistar, says, "We will see more companies go to the brink of failure because they don't see change coming. You must recognize that you have to change before there will be a crisis." However, Lannert adds, "A CFO who has faced the grim reaper and figured out how to survive is a much better part of the team than one who has not been tested."

Financial Executive asked three CFOs at different companies featured in the study to provide an analgesic crash-course in turnaround management, including some valuable "take-aways" should you have to deal with a turnaround of your own. Here's what the survivors say.

The Forzani Group Ltd.

Forzani, Canada's largest retailer of sporting goods, grew opportunistically by offering myriad retailing concepts under many trade names. The company, headquartered in Calgary, Alberta, foundered when it simultaneously tried to expand nationwide in response to external threats by U.S. competitors and improve its information systems and business processes. With the help of Robert Sailor, hired as CFO in 1997, and a new head of retailing, the organization turned around through a combination of actions: astute cash-flow management; negotiation with suppliers, landlords, and other key constituents; consolidation of store trade names; reengineering the merchandise mix and store design; incentive compensation for salespeople; improved information systems, reduced overhead and attention to KPIs.

Sartor walked in fully aware of the difficulties. "The organization grew rapidly prior to hitting the wall," he explains. "It did not have a conscious plan to obtain equity or long-term financing. Therefore, if it had a hiccup, it had no flexibility."

Sartor says he realized Forzani needed to define company-wide KPIs. "You manage what you measure," he says. KPIs become a "predictive tool" that helps avoid "a flashpoint of crisis."

If there's one lesson the turnaround taught him, he says, it's "communicate, communicate, communicate. We felt the situation had deteriorated to the point where external stakeholders had lost faith in the organization. We spent an enormous amount of time developing and implementing a strong, consistently communicated plan for each constituent group and were able to deal with the inevitable rumor mill." The communication, mostly "face-to-face," Sailor says, "made for very long days, weeks and months," But this one-on-one is extremely important, he thinks: "People want to look you in the eye."

Sartor says he was surprised to learn the toughest stakeholder to manage was not the bank, as one might assume, but the shareholders. In addition, he says, "It took far longer to raise de-leveraging equity than we would have liked. At the eleventh hour, everybody wanted a sweetener."

Turnarounds, he cautions, "are not for the faint of heart." Yet, he adds, "I wouldn't be afraid of going through another one. You need confidence in your abilities and yourself as a leader."

Other lessons Sartor learned:

* Prioritize. "Because the stress and anxiety levels are exceedingly high, some people freeze with indecision, You have to prioritize. Everybody's screaming; everybody needs something. They claim that unless their needs are met, everybody's going to go down. It takes decisiveness. Know which trees in the forest have to be felled. Make decisions based on the facts presented to you, live with them and move on.

* Be decisive, "Don't procrastinate. Stakeholders will look at how decisive management is in deciding whether to extend credit or to play ball."

* Think ahead. "If you find yourself in the glue, ask, 'Why didn't I see it coming?"'

* Be realistic. "Question whether you will be the best person to take the ship off the rocks."

Navistar International Corp.

In the 1960s and 1970s, International Harvester was in the farm and construction equipment, truck and gas turbine businesses. It paid a high percentage of profits in dividends and earned less than its cost of capital in most years. The combination of a strike, high interest rates and a recession nearly bankrupted the company in the early 1980s. After a five-year, multi-stage restructuring of bank and insurance company debt -- one of the largest out-of-court restructurings in history -- the company closed a dozen plants and sold its farm equipment, construction equipment and solar turbines businesses. Renamed Navistar, it focused on becoming a world-class competitor in trucks and diesel engines.

"We needed cash to survive, and looked at every source of cash outflow and inflow," says Chicago-based CFO Robert C. Lannert, who joined Navistar in 1990. "Earnings were not a consideration. We made people do 16-week estimates of how their cash would move. We had to reforecast every 16 weeks so we could see how things were changing. We started to get a handle on how people were managing cash and take appropriate actions." As a result, Lannert says, "People became better cash managers and now manage more on a macro basis."

Lannert says a later, related challenge was to change employee attitudes, making finance more a partner than a policeman. That involved developing a two-tiered financial study course for employees at all levels. "Five or six years ago, we wanted the management people to understand how we were setting compensation targets," Lannert explains. "People who survived the turnaround had to change their cash orientation to a shareholder value orientation. The point was not to abandon cash but to get to shareholder value and other goals."

About 500 management employees took a three-clay course that examined now the stock market looks at a company, what Navistar was trying to achieve and why each employee was being asked to help reach those goals. "A good part of management bought in," he says. "We got resistance from hourly workers who didn't feel part of the management team." Thus, the company asked the United Auto Workers to help develop a course for its blue-collar employees, to personalize the meaning of shareholder value and teach workers to think beyond their hourly wage. Lannert says the voluntary course is still offered as part of Navistar University, an online employee-training program.

Lannert says the turnaround taught him focus. "We thought we were good in equity, receivables, payables and inventory levels because we were generalists," he explains. "But we got into financial difficulties where we had to give up on earnings and concentrate intensely on cash flow. We had to ask how far out we could set reasonable estimates and how far out we would have to look to survive. At times, some problems seemed impossible. But if you keep it simple and get people focused on performing, they do things you originally thought they couldn't."

Other lessons Lannert learned:

* Collaboration. "Finance people and operations people have to collaborate on what they agree is the doable deal. You have to know everyone is on board."

* Management and employee alignment. "Management has to put forth a plan. Employees have to understand what they've got to do and take pride in the results."

* Awareness of industry changes. "IBM is a different company today than when it couldn't see PCs were the wave of the future. You can say that about Xerox, Kodak and others. Management is more willing to recognize that the world is changing every day. Be aware of the changes in your industry."

* Self-awareness. "A CFO has to relearn the job continuously. When I joined Navistar, it was in crisis. I've since had to teach myself to be the CFO of a successful company. If you've done that before, you have to be vigilant about what's different this time. You might fall into the trap of being too glib about things."

USG Corp.

In 1988, USG had a conservative balance sheet and a long-established, leading market position selling essential building materials. It had used excess cash to diversify into other building-related products. A hostile takeover attempt put the company in play. Management responded with a leveraged recapitalization. The combination of high leverage and a poor housing market in the early 1990s caused USG to default on several loans and to undergo a complex financial restructuring that culminated in a prepackaged bankruptcy. But the company had an underlying business worth saving despite its balance sheet problems. It has now regained an investment-grade credit rating and developed a less hierarchical, more entrepreneurial and team-focused corporate culture.

Rick Fleming, who became CFO in 1994 after serving as treasurer, recalls that Chicago-based USG initiated the leveraged recapitalization in response to a hostile takeover attempt by corporate raiders who offered half cash, half junk bonds. However, he adds, "The board was troubled that people would be treated unequally, so it offered a package that was worth less but that treated everyone equally. The shareholders voted for the board offer."

Despite an arduous turnaround that involved a 38-day Chapter 11 bankruptcy proceeding, Fleming is bullish on the turnaround process. "The financial restructuring and crisis we went through in the early '90s was a highly positive experience. Every trade creditor and senior lender got 100 cents on the dollar," he says.

The company now runs leaner and meaner. "A turnaround is a great catalyst for change," he says. "There's less organizational resistance during a crisis. It empowers people. We shortened the approval process, changed our system of rewards and incentives, streamlined management and ended up with a highly skilled and motivated workforce. We created a stronger company in many ways."

Yes, the process was difficult. "We had to become shuttle diplomats. It took several years to strike all bargains," Fleming says. "Every layer of the capital structure has different objectives and views of how the agreement should be structured. Nobody agrees unless everybody agrees. It took longer to reach consensus than I imagined. You have to find the intersection point between greed and fear."

Other lessons Fleming learned:

* Focus. "When you have lots of moving parts, it's hard to set a grand strategy. It's incremental, fine-tuning the plan as you go. Know where you want to get and keep forging ahead."

* Simplify. "Have adequate equity and no near-term maturities creating strains."

* Communicate. "Be astute relative to financial-management planning and cash-flow management. Be a communicator. Explain your situation in a straightforward and credible manner to all stakeholders. Make them want to bet on you, not against you."

* Collaborate. "You need to be a team player, to have hand-in-glove cooperation with operations. Collaborating is important."

Carol Lippert Gray, a former editor of Financial Executive, is a freelance writer in Morristown, N.J.

The CFO's Turnaround Skill Set

Henry A. Davis, coauthor of Financial Turnarounds: Preserving Value, believes it's useful to distinguish between the skills a CFO needs at the crisis stage -- when it's uncertain whether the business will survive -- and longer-term skills for strategic turnaround management.

CRISIS STAGE SKILLS

Financial skills -- Manage day-to-day receipts and disbursements, distinguishing between necessary and unnecessary expenditures -- recognizing that if the company runs out of cash and can't get external funding, it will have to declare bankruptcy.

People management skills -- Recognize those able to work as part of the turnaround team under pressure, and develop the ability and willingness to listen to people at all levels of the organization concerning problems and potential solutions.

Negotiating and diplomatic skills -- These are required for working with creditors, debtors, landlords, shareholders and other stakeholders.

Other personal attributes -- These include adrenaline, speed, decisiveness and more.

LONGER-TERM SKILLS

Understand the fundamental model under which the business is able or unable to operate profitably.

Understand key performance indicators (KPIs), both financial and non-financial that show whether a business is operating according to plan.

Develop the ability to coordinate the finance function with line management.