CRO’s People Skills Are One Key to Success
by Joe Sullivan
Aug 27, 2008
(TMA HQ Chicago)
A name or title can have a powerful effect in shaping the expectations of others and those who bear it. What does the title chief restructuring officer (CRO) really mean, for example? What is expected of someone who occupies the position? Does the individual get into the guts of the business to improve processes and operations, attain positive cash flow, and help it become sound and profitable, or does the person stick more specifically to financial and legal activities? Does the CRO take charge or offer advice?
The answers to these questions are mission specific and mission critical. Capable management can find itself in a tight spot that requires specialized restructuring skills for dealing with lenders, trade creditors, and legal processes. At other times, management must be heavily supplemented or replaced. Then, too, a CRO sometimes must be diplomatic enough to take charge while existing management retains its titles and very real power.
All of the variations on the theme of restructuring require a core set of skills in financial analysis, troubled situation finance, negotiation, and bankruptcy (the ability to evaluate and advise on bankruptcy, if nothing else). Few business executives really understand these things; that’s what makes a restructuring advisor valuable.
However, there are plenty of cases in which it is not enough to act only in an advisory capacity, and a skillful financial restructuring only buys time for a company that is in a terminal decline. In those cases, a restructuring officer must take charge, or the engagement is destined to fail. Taking control requires different and critical skills, in addition to those already mentioned. The specific skills needed vary according to whether the restructuring officer is formally in charge.
If a CRO is officially “the boss,” dealing with a crisis is reasonably straightforward, although far from easy. The individual first must acquire a good understanding of probable cash flows while simultaneously reaching out to lenders and other key creditors. In many cases, if a CRO is credible, the mere change in management can buy considerable time that can be used to analyze a company’s operations, product lines, and overhead expenses with a single-minded focus on achieving positive cash flow.
Once a plan for positive cash flow is in place, formulated from some combination of internal improvements and creditor concessions, the real turnaround work begins. While competent process and financial analyses are both important to success, generally speaking, the CRO’s people skills are of the essence in a turnaround.
The CRO must work with the internal team as he or she found it to determine who can and cannot perform, and who might perform better under different circumstances. Often people — good people — must lose their jobs. Ingrained habits and work approaches, often called “corporate culture,” must change.
Change on this scale is frightening to most people. They tend to freeze up or go into avoidance and denial. They don’t know what to do, or they are afraid to do it. They need to have confidence that the changes, the personal disruption, and the pain caused by people losing their jobs will lead to something better in the end. They need to believe that the process is fair. They need to know with certainty that there is no alternative to change.
In such situations, a CRO who is the boss must have the right stuff. The best are able to:
1. Express clearly the direction of the company, even if the end game cannot be known.
2. Project calm, confidence, and control to all constituencies.
3. Listen well because clues to a successful turnaround can come from the lowest levels within in the organization as readily as from the highest.
4. Be both firm and flexible in execution.
5. Build confidence among the workforce that the tough decisions are being made fairly and with consideration of their impact on the people who will be affected.
6. Motivate workers whose morale has been battered by the situation.
7. Size up senior people quickly while working with them
8. Replace non-performers and fill holes in the top team quickly
In the end, this all boils down to being a pragmatic and agile leader who is prepared to act and who can build morale and motivate people in bad times.
The importance of these traits cannot be overemphasized. No CRO, not even one with a handpicked top team in place, can personally turn around a company. Rather, he or she must lead a turnaround. Most of the work must be done by the employees who are usually good, but almost always worried and demoralized. The CRO must “re-moralize” the workforce. The difference in productivity and solution finding between a demoralized workforce and one that is re-energized is as dramatic as the difference between night and day.
Hands-on Management
Those charged with selecting a CRO should keep in mind that highly skilled technocrats, who might excel in bankruptcy or out-of-court restructurings, might not be the best choices for an engagement that involves a management change. Technical skills are less important than are change management skills in such a case. After all, CROs can hire staff or consultants to supplement their technical expertise. But if employees who make the business run have poor morale and lack motivation for change, all will come to naught.
An American steel foundry, for example, was caught in the price crunch caused by overseas competition. The 90-year old business was hemorrhaging. It was in default on its covenants. Its debt burden was clearly higher than it could bear. Bankruptcy was a clear possibility. Management had brought in a couple of teams of technically competent advisors, who cut the workforce and renegotiated with trade credit arrangements. Those efforts failed to turn around the business, despite being based on a competent analysis of the financial situation and operating ratios. Cash was still negative and headed down.
Finally, under direct threat from the bank, management hired a fresh turnaround team. Using the bank as a foil, the new team persuaded the management, who were also owners, to fire themselves and leave the premises. This impressed the bank and the trade and restored cooperation — on a guarded basis, of course — which in turn stabilized cash flow for a reasonable working horizon.
The new turnaround team was hands-on. It instituted daily management meetings at 6:30 a.m.— a steel foundry works all night, so this was the end of the day for the managers in the meeting. Turnaround team members created a culture of accountability. They used the financial and operating ratios as pointers rather than as diagnostic tools. They discovered that operations were sloppy, from the flawed mold design shop, to the melting process that often rendered unacceptable alloys and had to be redone, to the careless cleaning shop where the newly cast items were broken out of the molds and trimmed rough shape.
While working to understand where the process was failing, the turnaround team quickly identified the capable senior employees and managers. As usual, the company had quite a few who were keeping their heads down, venting at home or in the corner tavern, and hoping that something would change. Once the turnaround team won their confidence, they not only did their jobs, but they also were full of ideas and ready to learn. In reality, these men and women performed the turnaround. The CRO and his team put in place the policies, processes, training, accountability, and above all, the atmosphere that allowed them to do so.
Of course, some didn’t make the cut. Overall, however, the CRO actually increased the workforce and brought back good people who had been fired “by the numbers.”
Improved operations led to improved margins and reduced costs, and profitability that had eluded the company before. This inspired confidence by potential new lenders. The turnaround was capped with a refinancing that unloaded unused real estate to lower the debt and put in place a new and favorable financing package.
About 18 months after the turnaround team took charge, it left again. A CRO’s job is intense and temporary, and the individual’s final task is to lead the search for his or her replacement. Now, 13 years later, that foundry is doing well, even as many of its competitors have been liquidated.
The Right Match
The turnaround team on this foundry case required the full toolbox of technical restructuring skills to succeed. But technical skills were not enough. Critical to their success were the people skills of the CRO and his team. Because the people being managed are experiencing fear, anxiety, anger, and low morale, a more extensive skill set than most typical managers possess is required.
Ultimately, the characteristics needed by a CRO depend on the circumstances of a case. Some companies simply need help from competent restructuring advisors. Others need that, plus interim management with crisis leadership skills. It is essential for anyone searching for a CRO to understand the circumstances of the business and the capabilities of the prospects well enough to make the right match to achieve a successful turnaround.
Joe Sullivan
President
JSA
Sullivan has served as interim CEO, restructuring advisor, and a member of 12 corporate boards of directors. Sullivan holds an MBA from the Graduate School of Management at the University of Dallas and is a Chartered Financial Analyst (CFA). He is extensively published; has spoken at conventions and seminars in the United States, Mexico, and Puerto Rico; and hosts a monthly series of teleconference business seminars for a trade association. He can be reached at (972) 463-1125.