Why Credit Executives Should Better Understand Corporate Failure Processes and Turnaround Management

in the 21st century

Prof. dr. Jan Adriaanse

Background Jan Adriaanse

Founder and CEO of Turnaround PowerHouse® Rotterdam | New York City (opening 2013)

– Think-tank for proactive change and turnaround management – 24 Hour Turnarounds | Speaking | Gaming | Research – Clients include: Ford Motor Company, Multicopy, Kingspan, Calvin Klein Underwear (UK), themepark Efteling,

FMO bank, Eindhoven Airport – www.turnaroundpowerhouse.com

Professor in turnaround management at Leiden University, The Netherlands

– Founded in 1575 by Dutch Prince William of Orange | Praesidium Libertatis – Research into success and failure factors of entrepreneurship and turnarounds – www.leidenuniv.edu

Context for today…

Disruptive innovation, economic and social trends heavily influence the success or failure of companies – ‘rapid change = rapid crisis’

Current success of your customer does not necessarily mean future success – ‘one day you are in, the next day you are out’ (H. Klum)

Is your customer really trying to fix her business or is she simply rearranging the furniture on the deck of the Titanic?

My hypothesis: more than ever, credit practitioners need to understand corporate failure paths and they should be able to identify good or bad turnaround practice asap… still, nowadays it’s more difficult than ever… What do you think?

Why do companies become distressed? (research by Prof. Adriaanse - Leiden University 2005-2012)

Marketing and Strategy Behaviour towards market/environment /USP

Management team Functioning/quality

Information Lack of steering on financial and qualitative parameters

Efficiency Fixed and variable costs out of control and operational weaknesses

Economy Pressure from external environment Most dominant in current economic climate?

> 9 out of 10 companies fail due to their own misbehaviour…

Sheer bad luck 1%

52% Internally generated

problems within management’s control

8% External factors beyond management’s control

24% Real balance of external and internal factors

15% Internal problems triggered by external factors

Source: Association of Insolvency and Restructuring Advisors/USA www.aira.org

Marketing and Strategy (examples)

Downfall in sales Bad account management Insufficient “sales-driven”

No clear strategy Mixing up of (non-) core business No future vision – not able to reinvent the business No real unique selling point No desirable products/services/brands (commodities) Holding on to the past…

Quality Bad service and products

Margins Sales prices too low (unwanted price competition)

Management (examples)

Weak management Insufficient reactions to operational problems Major mistakes Bad investments / fraud Conflicts in management Arguments top management [family businesses!] Expenses too high Salaries/dividend/“spending culture”

“BMW X5 Syndrome”

Most found causes of decline: why do companies fail?

(Research by prof. Adriaanse - Leiden University, 2005-2013)

(1) Lack of “strategic entrepreneurship”

(2) Insufficient steering on management information

(3) Cost structures too high and inflexible

(4) Waiting too long due to bad corporate governance…

2001

1958

From great to crisis…

11

On average companies start restructuring 16 months too late…

Small

Large

Assumption crisis

Earnings crisis

Liquidity crisis

29%

54%

17%

Large

Time

[pro-active] turnaround management necessary to avoid downfall

Healthy company

Effect Cause

Structural underperformance

Source: Restructuring in Europe 2005 – Roland Berger Germany [amended by Adriaanse between 2006-2013]

Small

Disruptive trends that shape (or mess up) your customers’ future… • Everybody is technology • We are all one-of-a-kind (customization) • The Mobile Wave (smartphones and tablets rule the world) • 24/7 economy and efficiency • Social Disruption (new codes, ideologies, myths) • Beyond the Commodity Trap: The power of Powerful Brands • Mini-nationals fighting multi-nationals

Any consequences for the industry of your customers…?

Is your customer doing the right things or just doing the things right? That’s the real question

…and are you able to identify assumption crises and

disruptive trends…?

I think you should

Turnaround PowerHouse® Rotterdam | New York

Turnaround PowerHouse® Regus Rotterdam Brainpark Lichtenauerlaan 102-120

3062 ME Rotterdam The Netherlands

tel +31 (0) 10 204 56 70 rotterdam@turnaroundpowerhouse.com newyork@turnaroundpowerhouse.com www.turnaroundpowerhouse.com

Opening soon in Rockefeller Center

Diagnose your customers… as if you were a doctor

Appendix

…Is your customer looking for long-term viability or just cutting squeezing the lemon…?

1. External environment 2. Customers & customers of customers 3. Competitors & peer group 4. Suppliers & supply chain 5. Banks & financiers 6. Shareholders & governance 7. Employees & culture 8. Management 9. Vision, strategy & business model 10. Branding, marketing & sales 11. Financial management & operations 12. Extern supervisory 13. Technology road map 14. Foreign competition 15. Corporate social responsibility & sustainability

Turnaround Plan

Disruptive Trend

analysis

Base case SWOT

analysis

Problem analysis

Assumption testing

Some critical questions to be answered…

1. External Environment

- Is your company active in shrinking markets? - At which loss of demand or any other threat will your company collapse? - Are there any new (unexpected) competitors active in the market? - Are there any uncontested assumptions about your market/industry?

2. Customers & customers of customers - What are the 5 frequently heard complaints of your customers concerning your

company? - Are there any indications of customer preferences changing? - Has a large customer gone bankrupt in the past? Did this have a large impact on

your company?

Some critical questions…

3. Competitors & peer group

- In which aspects is your company better than your number one competitor?

- Which competitor do you “hate” the most? Why?

4. Suppliers & supply chain

- Who are your 3 most important suppliers? - Do you have relationship based upon (mutual) trust with them?

Some critical questions…

5. Banks & financiers

- Have you got on occasion some irritations with respect to the behavior of your bankers? - Do you expect on the basis of your current financing that you will be able to attract

additional financing with your bankers?

6. Shareholders & governance

- Do the shareholder(s) [owners] have financial resources available to supply the company with additional funding in order to strengthen the balance sheet (solvency) if needed?

- Is there also willingness to do so?

7. Employees & culture

- Is there a large willingness to change with your employees? - What do you dislike most of the behavior of your employees?

8. Management

- Do you sometimes have the feeling that within the company money is wasted (for example in

respect to luxury goods, cars and/or declarations)? - Who is responsible for the financial management of the company? What is the largest mistake

made by him or her recently?

Some critical questions…

9. Vision, strategy & business model

- Which aspects does your “ideal company” have? - Does your company finds itself in a “Blue Ocean” in other words, does it really

have a “unique selling point” (USP)? - Which activities, subsidiaries and/or business units are losing money?

10. Branding, marketing & sales

- Is the company and/or her range of products known as “desirable” and can one

speak of a true brand (“Primal branding”)? - Which 3 improvements can be pointed out concerning the sales team [function]?

Some critical questions…

11. Financial management & operations

- Can unused assets be sold and are they together worth at least 10% to 20% of the total of the balance sheet?

- Are “worst case” en “best case” calculations being made with respect to the development of revenue and profits?

- What kind of influence would the reduction of 10% of the total work force have on the functioning of your company?

- Is the production process [operations] efficient? Can we speak of operational excellence?

Some critical questions…

12. External supervisory - Are there any disagreements between yourself and the [formal or informal] advisory body [or

advising persons like accountants] of the company?

13. Technology road map - What are in the next 2 years the most important innovations in your industry?

- In which way do the innovations in your company differ from those of your most important

competitor?

Some critical questions…

14. Foreign competition

- What are in the next 2 years the most important threats from abroad? - What will be the influence on your revenue and company results when you do not respond

to this?

15. Corporate Social Responsibility & Sustainability (CSR)

- Are there any changes in rules or laws and/or public opinion noticeable or to be expected which could influence the company regarding social and environmental behavior?

Some critical questions…

Magic question

Why should the customer buy from you?