Turnaround the Revenue
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<i>The spread of the U.S. turnaround model is good for business, as long as revenue enhancement is given its due.</i>
</blockquote>
<p>Over the past three years, corporate turnarounds have gone mainstream. Bankruptcies have become a more
accessible, as well as quicker, option for a reorganization. Assets or liabilities involved in bankruptcy filings for
chapter 11 have rocketed from $14 billion in 1996 to $383 billion in 2002, while the average period of time a
company spends in chapter 11 has fallen by a third since the late 1980s. The term "turnaround" has been
dramatically expanded to include not just companies in or on the verge of bankruptcy, but large-scale performance
improvement drives at all underperforming and loss-producing companies.
</p><p>Unfortunately, the perception of the U.S. turnaround model is fixated on cost reduction. Its misguided
poster child is "Chainsaw Al" Dunlap, rather than Jack Smith or Louis Gerstner. The very essence of the hardcore
turnaround is to move the management focus at a distressed company to immediate, sure-thing cash-generating
initiatives. The blueprint generally includes finding a company's profitable core, exiting other businesses or
functions, and reducing the cost structure of the core business as fast as possible while managing expenses with an
iron fist, so as not to ever run out of cash.
</p><p>But the pendulum has swung too far, and some turnarounds are foundering due to an over-reliance on cost
reduction. There are powerful "quick and certain" revenue initiatives that work; they must be included in a balanced
turnaround or performance improvement program. It is all the more so today, with the U.S. economy poised for an
upswing, and Alan Greenspan chiding corporate managers for being overly cautious about investing in the future.
</p><p>The following three initiatives often show a sure and immediate return as well as any cutback.
</p><h3>Focus on Where the Profits Are</h3>
<p>The operational side of the turnaround game is all about mix—employing the 80/20 rule in every aspect of
the business. Analyze the overhead and working capital required by each product line. Which ones are giving away
the store and which are bringing home the bacon? Target sales efforts and sales resources to those high-cash-return
segments, and milk, sell or shut down the losers. In many types of businesses, this is a relatively quick and
high-return strategy.
</p><h3>Raise Prices Selectively</h3>
<p>Turnaround managers whose only tool is a meat-axe are inclined to slash prices to move goods, often
instigating price wars that benefit no one. In their frenzy, they fail to recognize powerful opportunities to make
selective price increases. Price is the sharpest of all the revenue turnaround weapons. It has the quickest impact for
the lowest cost.
</p><blockquote><blockquote>
<hr>
<big><i><center>
The very essence of the hardcore turnaround is to move the management focus at a distressed company to immediate, sure-thing cash-generating initiatives.
</center></i></big>
<hr>
</blockquote></blockquote>
<p>Studies have found that underpricing typically occurs four times as often as overpricing. Salespeople rarely
believe they can charge more for the goods, unless management gives them no choice. In fact, a major study by
Richard Skinner found that only 7 percent of industrial companies believe that their prices are below average!
</p><p>In a recent turnaround of a chain in the HVAC service and installation industry, we found that the prices at
four out of five locations could be increased with no drop-off in volume. Pure margin dollars are left on the table
because when salespeople set the price, they inevitably err on the side of lowering the price rather than risk losing
the sale. In this case, a quick analysis of pricing in the local markets, combined with the insight that this was a
relatively price-inelastic business, allowed management to hike prices by 5 to 15 percent, giving a big boost to the
top line that flowed directly to the bottom line.
</p><p>Even where volume reacts more sensitively to price, it sometimes makes sense to hike price using
yield-management practices, as well as in emergency situations inside the company. Raising price at the expense of
volume is beneficial to the bottom line as long as the drop-off in volume and market share does not cancel out the
revenue impact. In a number of recent airline turnarounds, aircraft were mothballed while prices were maintained or
even raised in some segments. However, we also have seen cases, especially in commodity and consumer goods,
where price elasticity is high, and price increases quickly led to reduced overall cash. New World Pasta is an
example, where new turnaround management is now rolling back indiscriminate price increases.
</p><h3>Sharpen Sales and Marketing Incentives</h3>
<p>A surprising number of distressed companies have suffered a total loss of traction on the sales side.
Managers shrug and reply that "it's always been that way," or that "good salespeople expect a substantial
non-variable component to their compensation." In other words, the "draw" long ago morphed into a salary,
although without the benefit of evaluating if the performance side of the compensation equation needed to be
adjusted. With the right calibration of goals or incentives, including upside bonus potential along with great leadership, an unmotivated sales team finds renewed energy and drive.
</p><p>Incentives can include the entire marketing team. In a turnaround environment, the marketing department
may need to be trimmed back, but don't fail to exploit the potential of aggressive promotional tactics that produce
cash. Consider the hard-hitting, product-moving advertising of the type that General Motors has been rolling out
recently. Watch what happens when the marketing staff's incentive compensation is tied to short-term sales goals or
cash in the door.
</p><p>The turnaround industry has matured and reached the age of majority. There are well-known and widely
accepted techniques to stop the cash hemorrhage and generate cash from cost-cutting. As charter members of the
industry, we champion the belief that learning to apply strategic revenue enhancement initiatives is a powerful
technique for the industry to adopt. And of course, implementation is everything in order to change the outcome.
</p><hr>
<h3>Footnotes</h3>
<p><small><sup><a name="1">1</a></sup></small> Peter Van Niekerk and Kevin Leary, senior associates with AlixPartners, specialize in designing and implementing performance improvement initiatives that have a direct positive impact on clients' bottom lines. <a href="#1a">Return to article</a>
</p>
</p><p>Unfortunately, the perception of the U.S. turnaround model is fixated on cost reduction. Its misguided
poster child is "Chainsaw Al" Dunlap, rather than Jack Smith or Louis Gerstner. The very essence of the hardcore
turnaround is to move the management focus at a distressed company to immediate, sure-thing cash-generating
initiatives. The blueprint generally includes finding a company's profitable core, exiting other businesses or
functions, and reducing the cost structure of the core business as fast as possible while managing expenses with an
iron fist, so as not to ever run out of cash.
</p><p>But the pendulum has swung too far, and some turnarounds are foundering due to an over-reliance on cost
reduction. There are powerful "quick and certain" revenue initiatives that work; they must be included in a balanced
turnaround or performance improvement program. It is all the more so today, with the U.S. economy poised for an
upswing, and Alan Greenspan chiding corporate managers for being overly cautious about investing in the future.
</p><p>The following three initiatives often show a sure and immediate return as well as any cutback.
</p><h3>Focus on Where the Profits Are</h3>
<p>The operational side of the turnaround game is all about mix—employing the 80/20 rule in every aspect of
the business. Analyze the overhead and working capital required by each product line. Which ones are giving away
the store and which are bringing home the bacon? Target sales efforts and sales resources to those high-cash-return
segments, and milk, sell or shut down the losers. In many types of businesses, this is a relatively quick and
high-return strategy.
</p><h3>Raise Prices Selectively</h3>
<p>Turnaround managers whose only tool is a meat-axe are inclined to slash prices to move goods, often
instigating price wars that benefit no one. In their frenzy, they fail to recognize powerful opportunities to make
selective price increases. Price is the sharpest of all the revenue turnaround weapons. It has the quickest impact for
the lowest cost.
</p><blockquote><blockquote>
<hr>
<big><i><center>
The very essence of the hardcore turnaround is to move the management focus at a distressed company to immediate, sure-thing cash-generating initiatives.
</center></i></big>
<hr>
</blockquote></blockquote>
<p>Studies have found that underpricing typically occurs four times as often as overpricing. Salespeople rarely
believe they can charge more for the goods, unless management gives them no choice. In fact, a major study by
Richard Skinner found that only 7 percent of industrial companies believe that their prices are below average!
</p><p>In a recent turnaround of a chain in the HVAC service and installation industry, we found that the prices at
four out of five locations could be increased with no drop-off in volume. Pure margin dollars are left on the table
because when salespeople set the price, they inevitably err on the side of lowering the price rather than risk losing
the sale. In this case, a quick analysis of pricing in the local markets, combined with the insight that this was a
relatively price-inelastic business, allowed management to hike prices by 5 to 15 percent, giving a big boost to the
top line that flowed directly to the bottom line.
</p><p>Even where volume reacts more sensitively to price, it sometimes makes sense to hike price using
yield-management practices, as well as in emergency situations inside the company. Raising price at the expense of
volume is beneficial to the bottom line as long as the drop-off in volume and market share does not cancel out the
revenue impact. In a number of recent airline turnarounds, aircraft were mothballed while prices were maintained or
even raised in some segments. However, we also have seen cases, especially in commodity and consumer goods,
where price elasticity is high, and price increases quickly led to reduced overall cash. New World Pasta is an
example, where new turnaround management is now rolling back indiscriminate price increases.
</p><h3>Sharpen Sales and Marketing Incentives</h3>
<p>A surprising number of distressed companies have suffered a total loss of traction on the sales side.
Managers shrug and reply that "it's always been that way," or that "good salespeople expect a substantial
non-variable component to their compensation." In other words, the "draw" long ago morphed into a salary,
although without the benefit of evaluating if the performance side of the compensation equation needed to be
adjusted. With the right calibration of goals or incentives, including upside bonus potential along with great leadership, an unmotivated sales team finds renewed energy and drive.
</p><p>Incentives can include the entire marketing team. In a turnaround environment, the marketing department
may need to be trimmed back, but don't fail to exploit the potential of aggressive promotional tactics that produce
cash. Consider the hard-hitting, product-moving advertising of the type that General Motors has been rolling out
recently. Watch what happens when the marketing staff's incentive compensation is tied to short-term sales goals or
cash in the door.
</p><p>The turnaround industry has matured and reached the age of majority. There are well-known and widely
accepted techniques to stop the cash hemorrhage and generate cash from cost-cutting. As charter members of the
industry, we champion the belief that learning to apply strategic revenue enhancement initiatives is a powerful
technique for the industry to adopt. And of course, implementation is everything in order to change the outcome.
</p><hr>
<h3>Footnotes</h3>
<p><small><sup><a name="1">1</a></sup></small> Peter Van Niekerk and Kevin Leary, senior associates with AlixPartners, specialize in designing and implementing performance improvement initiatives that have a direct positive impact on clients' bottom lines. <a href="#1a">Return to article</a>
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