Troubled Companies

The following text has been prepared by Arthur Lipper III for British Far East Holdings Ltd. and is intended to be part of a book, “Troubled Companies”. No reproduction or publication of these writings is authorized, except with written consent of the author and owner.

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Chapter 2

Situations and Decisions that Make a Major Difference:

In most companies experiencing problems, standard operating procedure is to reduce staff in the face of disappointing revenues.

Of course, the problem then compounds itself as, more often than not, the company’s best people leave, as they have the most options, on sensing danger, leaving the troubled company with its less desirable employees. The natural reaction of management is to bribe the best of staff to stay by making special deals with them re increased compensation, etc. Of course, it quickly becomes known throughout the business that some of the key people are in effect benefiting, at lest temporarily, from the carnage. There are no secrets in most companies.

Reducing executive compensation, reducing staff salaries, reducing overhead, reducing inventories, reducing selling prices, attempting to accelerate collections, delaying payments, restructuring sales territories and perhaps even ascertaining what went wrong are all the normal corporate reaction to crisis - before the search for the guilty begins.

That which doesn't happen enough, if usually at all, is a questioning of the basic premise of the company. Is the company conceptually viable and useful to its customers? Has anyone asked the customers what they want which the company isn’t or can’t provide? Why are customers usually treated to a “business as usual” response when they are themselves the best source of support and intelligence leading to effective decision making. The customer is the friend of the vendor and not, as is frequently seen, the enemy.

All of the steps, listed above, taken in the face of fear and disappointment could have, to some extent, been taken much earlier at less cost and more effectively. Although it can be argued that “from periods of destruction comes periods of accelerated growth and progress” it is not necessary for the barn to burn to the ground to improve it. A company Chief Problem Sensor”, as a job function, would be a useful addition in many companies. Why not? There are now Chief Learning Officers, Chief Information Officers, etc. Why not an individual charged with the responsibility of identifying, not necessarily solving, the problems. It is much the same as my having always believed that in equity portfolio management there should be a designated sales recommender as well as the more normal portfolio management approach of having all of the attention focused on the buying of positions. Those charges with discovering opportunities are not always the best people to seek signs of danger.

Assuming a shortfall in revenues, the owners of the business, probably through the members of the Board, should make or commission an immediate assessment of the strengths and weaknesses of the business. If the business is to continue, and whether or not this is the best course of action should be considered, it will probably require more money than had been budgeted when success seemed so much more assured. Then, there will, all too often, be a delay in focusing on the refinancing matter as management hopes the situation will improve, as the sales and marketing departments are likely to predict, ultimately making the amount of money necessary greater and more expensive and the need more critical.

If, as a result of the appraisals of strengths and weaknesses, it is decided that seeking an affiliation is desirable or necessary there is a need to identify the logical prospects and to approach then aggressively. If there are significant strengths then affiliation proposals will be relatively easy to solicit. If there are not significant strengths then a closing of the business seems probable and desirable, before it consumes greater resources. Not all businesses were meant to be.

One other result of a study of a strengths and weakness appraisal could be a determination that there are better applications of effort and resources than the one in which the disappointment occurred. One does not have to stay in a business just because one is in that business. Restaurant suppliers can become restaurateurs and car dealers can become car rental agencies or car repairers or some other activity building on their actual and competitive strengths.

The bold decision to change direction and focus can be the better decision than changing vector and speed. Of course, such a decision will be more likely to be prompted by someone other than the guilt-ridden and naturally defensive CEO.

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Reader comments and suggestions as to specific examples are welcome. All submissions will become the property of British Far East Holdings Ltd. with our appreciation, but without compensation to the party making the submission.

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