Chapter 2
Crisis Leadership
The best turnarounds often start with a shock, something that breaks through the clutter and distraction of the languishing business and refocuses the team's attention. Not being able to fund payroll is a common financial crisis. Losing a major customer or a key employee can jolt a workforce as well, and a good leader knows how to manage and refocus the anxiety that accompanies these sorts of disruptions. Good leaders never let a crisis go to waste, while poor leaders are overwhelmed in a crisis, often losing control (and their jobs). How a leader responds at the moment of shock magnifies the results going forward.
If there is no natural crisis but the leader is authentically ready for a change, then sometimes a shock needs to be created. When you tell people they need to change, they hear you but usually don't really take it seriously. When you fire their boss or shut down a division and then tell people things need to change, they usually pay attention.
The critical first step in any crisis is to establish control. Control of your thoughts and your reactions first. Control of cash, customers, and employees next.
Day 1: Cash and Controls
Priority 1 is to establish full control over cash and collateral. Do it immediately, in the first five minutes. There are only three things that can shut a business down immediately:
If you respect and control the bank's cash and collateral, it will work with you, but you've got to establish that control immediately. This is as simple as dollars‐in and dollars‐out. Right now, Day 1, you need to control dollars out. In most cases you can make it through that first day without spending any money.
Banks secure their debts with collateral, which is the hard assets that can be foreclosed on and turned into cash, usually receivables, inventory, rolling stock (trucks, etc.), and fixed assets (equipment, real estate, intellectual property, etc.). To control receivables, make sure all shipments are invoiced and that active collection processes are in place with accounts outstanding. Inventory is first controlled with a fresh count, and then by converting it to cash and reducing the overall level. Too often in a turnaround, the accounting department is squeezing nickels trying to make payroll, while purchasing just keeps issuing purchase orders oblivious to the cash impact. Theft is another way to lose value in inventory and so is perishability (think of bananas on a shelf, losing value every day they age). Perishable stock needs to be turning at a high rate. Rolling stock is protected by securing all titles (long story, but I know a bank that lost 40 cars because they forgot to secure the titles) and inventorying all vehicles and locations. Fixed assets need to be secured against theft and also protected against loss; equipment still needs maintenance and repairs.
Cash is priority 1. Without cash the business will die, quickly. Set up check and cash approvals so that nothing can get paid without CEO approval. If you or the bank don't trust the CEO, find another way. Outside advisors will avoid check signing authority because it carries legal and regulatory risk, Federal trust‐fund investigations (Chapter 6) always start by asking who had check signing authority.
Cash control is ultimately governed by the rolling 13‐week cash‐flow forecast (13WCFF), which is the standard model for all turnarounds. It's the first thing banks, creditors, and government agencies will ask for. Day 1 you'll need to start preparing this, which means building it out one week at a time. Oddly, there is no standard format, no Excel sheet you can download and populate. I pretty much build each cash‐flow forecast by hand, from a fresh spreadsheet. In businesses with broken accounting, I've grabbed the stack of bills off the controller's desk and spent the evening typing in every vendor, dollar amount, and date. That's the beauty of the 13‐week cash‐flow forecast, it removes all the mystery. If you understand the cash‐flow forecast you understand the business.
After cash, collateral, and regulators, the next thing to preserve is going concern value. This is the unquantifiable soft value of the business over and above the hard asset values. It's your customer list, your vendor relationships, employee skill, backlog, brand, reputation, and so forth. No one calls a pile of assets to place an order, but even in the worst businesses the phone still rings. There is a value to that going concern and it needs to be protected. This is mostly through communication and handling. You have to smile and promote nondeceitful confidence even when the bank is strangling you – and oddly, they expect it of you.
After Cash: Biggest Flames First
That's it, you're going to be firefighting until you can get the business stabilized. Forget strategy, forget the income statement, forget whatever you might have had planned for the next 100 days, you're firefighting. Your prima donna salesman wants to quit (to cover his own ego because he knows it's his fault that sales are down) – deal with it and keep him on board. The bank wants to drain your payroll account – deal with it. Your biggest customer wants to process a big return – deal with it. When it rains it pours, and turnarounds are hurricanes of bad luck. Keep an eye on cash and deal with everything that comes up, quickly and honestly.
Be alert and prepared to deal with whatever comes next. When a customer or employee has an issue, you need to actively soothe them. When a vendor wants to cut you off, you have to go at them full speed to explain the value of supporting your efforts. When a collector calls to scare and intimidate you, you need to throw it back in their face.
Bending the Stick
My first turnaround was our family business. We got in trouble pretty quickly, then revenues dropped 75% over the next three years. I made plenty of rookie mistakes and remember multiple times thinking “this will kill the company” as we contemplated the next survival measure. If we layoff X number of people, service will fall, customers will leave, and the business will fail. I believed the business was too fragile to take these hits as we scaled back, but it always seemed better to try than to just quit and accept whatever painful death the bank had in store for us.
So we had the second round of layoffs, prioritized important tasks, and … and the business survived. But revenues continued to fall and eventually we were faced with oblivion again. Telling vendors we needed extra credit terms seemed suicidal; there is no way they would support us. Again, our desperation seemed certain to kill the business, but it was better than a quick trip to oblivion, so we called our vendors, told them what was happening, and suspended payments on all past‐due amounts. And, miraculously, the business survived.
Revenues continued to fall, and again we faced tough tasks. Raising prices on our customers would surely kill the business; there was no way they would stick with us. But we raised prices and the business continued (healthier). After two rounds of layoffs we were down to our core group of employees; these were the very best people we had, but more cuts were in order. A 10% across‐the‐board pay cut would certainly send them all packing and kill the business once and for all. We did it and the employees stuck with us and the business survived.
All of this amazed me – the business was four times more resilient than I would have ever imagined. I've described this with the metaphor of bending a stick: you hold a stick, flex it a little bit in your hands and think you have a pretty good idea of how far you can bend it before it will snap. But you bend it past that point and it doesn't break. As poor results continue, you keep bending and bending. Soon your stick has bent full circle and it still hasn't snapped. Despite how fragile we believe businesses are, the best operators know how hard they can be pushed when survival is at stake.
The Psychology of Crisis Leadership
Much has been written on the topic of the psychology of crisis leadership, some of it quite good, though usually third person and a bit academic. Since I've flailed and cried and hit bottom in my own life I understand these situations well. I've also had one or two brief moments of heroic triumph that showed me what I'm capable of when my mind is clear and focused. Aside from the service academies, you are not going to find crisis leadership taught in any meaningful way at U.S. colleges, and certainly not in high school. When there is a crisis, we will react; that is certain. And it will usually be far short of our aspirations. The entrepreneur's reaction will have an outsized impact on the success or failure of the business and its survival, so there must be clarity of thought.
Crisis leadership requires quick and decisive action because bringing control to chaos is the highest priority. Although an inclusive, open management style is usually the best way to guide a stable business, turbulence requires strong and unyielding resistance. The hotter the turbulence, the more authoritarian your opposing leadership needs to be. As a leader, you need to be out in front, leading the charge and showing people what is possible. There is no such thing as leading from behind.
We've all heard the popular theory about how people respond to crisis – namely, the fight or flight model. When shocked, people's natural reaction is to fight or to run away. Picture our Neanderthal ancestors coming across a bear or mastodon or whatever. Some would stand their ground and fight; some would run away. Psychologists and pop‐management gurus will carry on with this theory but I don't think it really encapsulates how people react in crisis. I find the flat squirrel theory more accurate. You know what happens when a squirrel runs out in front of your car and then has second thoughts. Some squirrels will dart off the road, while others will scurry back and forth, then get run over and become flat squirrels. Their brains get vapor locked with an avalanche of emotion and thought and the mind is no longer controlling the body. This happens to entrepreneurs.
Stories of 9/11 illustrate this. Some people ran down the stairs while others stayed put, paralyzed in fear. I saw this recently on the news after an active‐shooter event in Dallas where a witness recalls running away with his son but people were standing frozen in the middle of the street. He would grab their shoulder and yell, “Run.” And they would run. But short of that they were flat squirrels in the making.
A few personal experiences have helped me understand the subject well. Through a hurricane, a grizzly bear encounter, and getting clobbered mountain climbing I've learned a lot about the mind in crisis and my own fragility. This gives me some perspective on the challenges you'll face in a corporate turnaround and helps provide some context to my points.
This flat squirrel mindlock happened to me once so very acutely that I was dangerously out of control and had absolute blackout gaps in my consciousness. I was alone beneath Mt. Doonerak in far northern Alaska, about 30 miles from the only road, 60 or so miles from the nearest village (Wiseman, population 14) and a much longer distance from medical help. I had just cooked up dinner on my little camp stove when I leaned back to notice that a grizzly bear had apparently walked up and laid down right next to me, never making a sound. I noticed him out of the corner of my eye and spun around on all fours to stare him right in the face, only an arm's length away. A million (mostly dumb and unhelpful) thoughts raced through my brain as I tried to figure out what's next. A bear is most dangerous in two instances; when you're right next to him (I was) and when you're running away from him (I was about to). Quick movement away from a bear sets off their natural predatory instincts and makes them want to catch whatever is running away. So there I was kneeling in front of him, paralyzed in fear with no safe way out of this predicament.
I was kneeling there staring into his infinitely deep black eyes then my brain would go black and I would “come to” some time later and have to recalibrate my situation again. I faded in and out of consciousness a few times in the exact same place, face to face with this bear and no obvious progress between us. Other times I would “awaken” having moved a short distance and changed the dynamics of our encounter. Eventually my actions coalesced into a direction and I found myself lurching away from the bear. My mind screamed “DON'T RUN” because he would chase me if I did. So I'd stop and look to see the bear only 10 feet away tensing up as if to lunge. I breathed and relaxed to release the tension between us, which worked, but the next thing I knew, I'd be frantically dashing away again. Deep internal scream, stop, settle his tension, repeat. In extra‐conscious spasms of escape, I made it across the creek bed and up a bluff. I was maybe 50 yards away from him now and settled my mind enough to look back and try to figure out my next steps. There were none; if he wanted, I'd be nothing but a grease spot on the tundra by morning. While thinking this through, I remember looking at my arms which were carpeted in mosquitoes, maybe 100 in total, and realized that I didn't feel a thing because I was so jacked up on adrenaline. Eventually the bear wandered off and I gathered up my camp and ran back toward civilization.
The point is, I've seen entrepreneurs respond like this in a financial crisis – flailing along in a state of semi vapor lock. I've done it myself in my own turnaround, so I fully appreciate the reaction. With experience, you learn how to fight the hysteria and focus in on a few productive thoughts.
An offset to that pitiful story is that one summer day I was driving between Dallas and Shreveport on a long, flat, and boring stretch of I‐20. Up ahead, I saw dust, a fast‐growing linear dust cloud spreading out in the median. I knew there had to be an accident, and to this day I'm amazed at the clarity that took over my mind – quite the opposite of what I experienced with the bear. A large passenger van with two mothers and about eight kids had lost control and flipped multiple times in the median, ejecting kids out windows along maybe 100 feet of the wide, grassy median while rolling. I was the first one on the scene but many others stopped soon afterward to help. The van lay on its side with children, luggage, and a few loose car parts strewn in its wake. It may have flipped six times before coming to a rest on one of the mothers.
I cannot explain my lack of control during the bear encounter nor how well I reacted in this car accident. I ran from injured person to injured person, grabbing volunteers and handing out assignments; “this girl is conscious, get her some water. You two, stand here to block the hot sun and give her shade. You, tend to her, don't move her, and watch her breathing. If you can get her to communicate take an inventory of her injuries. Write it down to give to the EMTs when they arrive. Do an inventory yourself, feel lightly with your hands for bleeding or broken bones. If there's heavy bleeding apply pressure and call out for help.” Then off to the next victim, looking for life threatening injuries. Other drivers were coming to help. “Hey you two, we need help right here.” Same instructions, then off to the next.
One of the mothers was trapped under the van and unconscious. I crawled underneath with another guy; she had a pulse and was breathing. We got about ten of us to roll the van off her, but she came up with her head pouring blood. I got some guy to give up his shirt and showed him how to apply pressure to her head wound. One by one, I ran around to every victim, assessed their injuries and assigned tasks to keep the injured with water, shade, and personal attention. The accident scene was now filled with motorists as traffic backed up on I‐20. I assigned two bystanders to collect luggage and personal items of the victims that had been splayed across the grass. Soon after, helicopters descended on the scene and a long line of ambulances and police cars arrived. When the EMTs arrived, 10 accident victims were well tended to, each with observers and a list of injuries. All the family's personal affects had been piled up and secured. In retrospect it was the most efficient and effective moments of my life. I got back in my car and continued east toward home, totally drained.
So, I've seen myself utterly, dangerously flail in crisis and have also responded quite well. What's the difference? I don't know. But I do know that I've got both responses in me and I suspect we all do. When charged with great stress, I'll have an idea of what to expect and how I might be able to control my reactions. But we never really know how we're going to react to that first shot of adrenaline.
Hurricane Katrina was my third big event, it wiped out our neighborhood and homes, damaged our factory and scattered our employees. My reaction was sometimes brilliant (my ability to organize our neighborhood, our damaged factory, and my flooded home) and at other times pathetic (exhaustion, confusion, selfishness, crabbiness) but I got through it with about two cents, my family, a bit of PTSD, and one hell of a lot of determination to rebuild.
A Little Bit of John Wayne
A secret trick in turnarounds is that the more you act like John Wayne, the better your results will be. When trouble hits the fan, people want leadership, and in many people's mind leadership walks and talks a bit like John Wayne. One of the most powerful acts of leadership I've seen was after Hurricane Katrina when New Orleans had fallen into crisis following days of lootings and shootings. It was ugly and dangerous, and it brought out the very worst reaction from those sent to help. Instead of helping, National Guardsmen were heavily armed and fortified, pointing guns at helpless flood victims in a dangerous standoff of fear, desperation, and uncertainty. Then General Honore arrived with the presence of George Patton. He marched right between the heavily armed soldiers and the poor folks huddled outside the Superdome. “Put your guns down! Put those damn guns down! These are American citizens, put your guns down!” Within seconds soldiers had dropped their guns, walked forward and began handing out bottled water. That was it! In those 10 seconds, the entire city of New Orleans shifted from armed confrontation into recovery.
Yes, being a three‐star general helps deliver orders in a crisis, but sometimes it can be subtle messages that speak loudly. After Hurricane Irene hit Vermont, there was a segment on Vermont Public Radio about guys in one town who put on orange vests and happened to have police‐type ball caps – not official hats but in that style. They did this for no official reason, just to let people know they were willing to help. All day, they noticed that people were drawn to them, asking for direction and advice. So they would dispatch people to run errands and be productive. They continued to do this over the first several days and ended up in a de facto leadership role for their entire village. Regardless of the form, people seek leadership in crisis. They want to help, they just need someone to give them confidence and direction.
I once walked into a turnaround where the patriarch had died suddenly leaving three traumatized family members in the business. This coincided with the FBI investigating two financial felonies and a third felony for knowingly and willfully shipping defective airplane parts to their largest customer. Meanwhile, the business had been run into the ground, no maintenance or investment had been put into the equipment in six years, employees were upset, coming and going as they pleased, and occasionally drinking on the job. Now the patriarch was dead and the bank wanted its money. I was in there the next day, and it felt like stepping into a hurricane. I faked confidence. I told everyone things would be just fine as long as they got back to work and quit screwing around. I was totally freaked out, convinced the place was going up in flames and would take me with it. But I hid my fear and moved forward. Somehow we got through it and afterward people told me, “I thought we were done for without any hope of survival, but you were confident and that's what got us through.”
My favorite contemporary turnaround character is Winston Wolfe from the movie Pulp Fiction. He arrives to clean up a body for Samuel L. Jackson and John Travolta at Quentin Tarantino's house. The Wolf exudes confidence, hands out orders, and doesn't skip a beat when those three clowns bumble about. It's clear that Mr. Wolfe is a highly paid professional, and he's simply there to do his job and leave. The point in all these examples is that in moments of crisis, confidence triumphs over fear. As Winston Churchill once said; “Fear is a reaction. Courage is a decision.”
Messaging to Stakeholders
When I walk in the door of a turnaround, my initial messaging is pretty close to that of Winston Wolfe. They know their jobs and the business is screwed, so I've got to get them refocused:
I'm here because I specialize in these situations. It is all that I do, and I have a great track record. There is a process to solving these problems. It's not easy, but it is simple, so we're going to follow the process and we'll deal with surprises as they come up. This will be tough, but I've seen much worse. The whole key to solving this is focusing on doing more of what works and less of what doesn't. You folks know what's right and what's wrong; you don't need me to tell you how to do your job, so I need you to do your job exceptionally well in the next few weeks. If we keep our customers happy and don't screw anything else up, we'll probably get through this. But this week I've got to focus on keeping the bank happy and making sure payroll stays funded. That's my job. Your job is different and I need each of you to do yours.
Every employee is different but all employees need to be refocused and rehabilitated. Some have to be handled gently, and others might need a shock; others are hidden warriors and simply need direction and support.
Day 1, a small handful of employees will get a full dose of my intense focus, and they will be moved into action. This is usually the CFO and controller. They understand that the game has changed and we need to focus on priorities. Word spreads, and the message I want getting out there is this: Holy cow, this guy is unrelenting but he knows what he's doing and it all makes sense. He's also human, he has a wife and kids, he laughs and tells bad jokes.
I don't need to shock the whole organization and it's not healthy to do so. If I can smile, laugh, and make people feel comfortable while I triple their workload and hold them accountable, word will spread. An organization in change mode needs to get back a little of that “Officer on deck!” tension just to get people refocused. While I zero in on finances, I tell other departments; “tighten up now because eventually I'll get to you and want to find you doing all the right things when I get there – and, do you need any help from me today?”
My communication to the bank is open, sober, and frequent. If they didn't refer me to the turnaround position, I need to quickly establish myself and gain their confidence. See Chapter 4, which is all about dealing with banks and a new generation of institutional lenders.
Vendors
After employees and cash, I'm usually dealing with vendors as we rebuild the supply chain. I have no cash and no way to satisfy them, so I quickly say something like this:
You don't know me but I'm the only guy who can get you paid, and the only tool I have at the moment is my credibility. If I screw that up, I'm toast, and you'll shut us off and the business will die and you'll collect nothing. But as long as I am totally honest with you, and I get your support, we can develop a plan to get you paid. But for now I've got no cash and you're underwater. As much as you may not like it, the only way out of this is that we need to work together.
Expect that you'll need to work your way up to a credit manager or the CFO or the owner, depending on the size of the business. You need someone who can understand the concepts and make decisions. Sometimes I'll need to talk with their attorney to get my point across – that they are out the money and the only chance they have of repayment is through future cash flows, which is why they need to support our efforts. Then go for the one thing you need from them today – a shipment. Explain to them the debt stack and how they effectively own the business now: “You're above equity now so you need to act like it.”
In a closely held business I'm usually dealing with the majority shareholder who is the founder and patriarch. Other businesses may have active and passive partners with a variety of perspectives and risks in the business. Getting their support is usually pretty easy once they understand the rules of insolvency and how their equity is at the very bottom of the debt stack. Owners (equity) are the very last to get paid, so they have every possible incentive to make sure we turn the company around, pay down debt, and avoid personal financial ruin.
The message to customers is simply confidence and service. No panic, no alarm; insulate them from the issues, and tackle them if they try to leave.
Empathy
Perhaps it wasn't my strong suit in my twenties, but empathy may be the single most critical emotion someone can have during corporate distress. As I've matured, I realize how we all have fears, we want our spouses to respect us, and we want our kids to feel safe and comforted. I've been jobless and felt the depressing emptiness that builds each and every day out of work, burning through savings and faking courage and optimism in front of my wife and kids.
In the 1990s a guy named Chainsaw Al Dunlap rose to corporate fame as the meanest turnaround guy in corporate America. Referred to as “Rambo in pinstripes,” Dunlap took pride in mass layoffs and cost cutting, and he had a good string of successes early on. To him that success justified treating people as disposable digits on an income statement. Although layoffs are a necessary part of fixing business, Dunlap enjoyed the national notoriety of being a hatchet man and allowed himself to become a caricature of heartless corporate America. He lost his humanity in the process, and it didn't make him any better at his job.
Although layoffs may be necessary, I absolutely believe that you can be the strong John Wayne–type leader and still give people hugs, know their pain, and cry with them at times. I've teared up when having to let someone go. Someone who you know is unlikely to ever find work again based on their age, location, and lack of modern skills. You can see the fear and horror in their eyes, and you need to somehow let them go, give them a hug, and boost them up so they can at least make it out to the parking lot with their head held high and their dignity intact. It's tough but necessary to save the remaining jobs.
Despair
Turnarounds are awful and you'll often have to fight feelings of despair. There will be dark moments when you can feel the walls closing in on you. Suicides happen, marriages are ruined, booze and drugs sing a tempting sirens' song of escape. It is likely that you will experience your lowest emotional points during this turnaround crisis, and your team will feel it along with you, but somehow you are the one who must pull everyone forward. This is the crucible of leadership, not being liked, not being managerial, but giving people hope and a path forward when all seems lost.
Let me share a quick story that helped me understand and fight through two grueling turnarounds of my own later in life. In our twenties, my wife Alex and I were avid mountain climbers and chose to climb a big remote Alaskan peak for our first wedding anniversary. We would spend nine days in early June under clear 24‐hour skies climbing Mt. Marcus Baker, then nabbing multiple first ski descents on many of the surrounding unnamed peaks. The fantasy in our mind was amazing, and after a long Alaskan winter, our only imagined risk would be sunburn. Everything was planned down to the T and we naively expected good weather.
Our pilot flew us in about 50 miles to the upper ramparts of the Knik glacier and set down in about five feet of newly fallen snow. The enveloping silence as your bush pilot leaves you behind in big remote wilderness is always unsettling but we were young and well prepared for the adventures ahead. Alex and I set up camp, made dinner and went to sleep. During the night, a storm buried our tent, literally snow piled three feet above the roof of our tent when we woke up gasping for oxygen. We escaped upward then dug out our tent about halfway before it collapsed, jagged tent poles ripping through the thin nylon. Then we were screwed; no tent, middle of a glacier, 50 miles from the nearest road, in a hurricane force storm and totally on our own.
A snow cave was our only survival option so we dug downward, eight feet until we hit snow firm enough to form a roof, another four feet for the cave and cramped quarters underneath. After several hours of digging we had our cave and stopped to brew tea and take a break. Thirty minutes later, there was a foot of new snow piled up at our entrance, threatening to bury us well below the glacier surface. So we went back out to shovel and continued throughout the day. Twenty hours later we still hadn't had any rest longer than it took to melt snow and brew hot drinks. This meant about 30 minutes of cold, wet, shivering rest for every two hours of shoveling. At the 24‐hour mark, the storm picked up intensity and we could barely keep up with the new snow. Around hour 30 we were exhausted and losing the battle, surface winds were gusting over 80 mph, visibility remained zero, snow was accumulating, and our cave entrance was filling in faster than we could clean it.
Although young and strong, we were losing steam. Through the shrieking wind Alex asked, “What happens when we can't keep up?” I mumbled something optimistic and hollow, but we both knew the answer, we would be buried and die. For hours it hung in our minds, unspoken but understood. For hours we shoveled away snow and fear with our flagging energy. The idea of being buried forever on this glacier pushed heavy against us like the incessant wind.
Even today, I sometimes feel like the turnaround will beat me, that I will fail, that all will be lost, jobs obliterated, and that I will be shamed in public, never to work again in my craft. Sometimes this feeling can last for days, following me from my hotel room to the factory and back for 16‐hour days on end. But never has it weighed so heavily as those long hours on Knik glacier.
Because we eventually engineered a new cave and entrance, because after 39 hours of straight effort we were finally able to nap, because eight days later the storm finally abated, because of all that, I know that every storm will end and sunny days will return. This is the faith that allows me to infect others with my smile during the turnaround. Somehow, I can infect others with optimism that although we can't fund payroll on Wednesday we'll somehow figure out how to fund handwritten checks by Friday (or Monday). As a leader, you must be the one who shines hope through the dark stormy night. You must tamp down your own feelings of despair, because if you don't, no one else will, and all could be lost.
For now, you have to get busy fixing the business. You'll have to survey fatal threats and work off lots of detailed checklists. You will be perpetually reviewing people, products, and processes. I work outward in concentric circles, taking care of critical issues in each department before moving to second-tier issues, slowly working myself outward in priority through the departments, making sure everything stays on track. All facts need to be verified and all opinions vetted, the turnaround manager must deal with facts. I peer‐review managers, continually asking, “So on a 1 to 10, how would you rate Joe?” Within a few days, I'll have many opinions on each manager, and the strengths and weaknesses of each will be obvious.
Turnarounds are an opportunity for heroes. I give plenty of speeches about how some clever employee is going to take advantage of this situation and rapidly advance their career by helping, while others sit back with an “I'll just see what happens” attitude. A few employees will see the opportunity and take matters into their own hands. I tell everyone they are free to make changes. We are determined to work smarter and if you want to make changes, come see me and I'll start approving your changes. Want to really shake things up, I'll give you all the rope you need.
Motivation
My very firm belief is that everyone wants to be on a winning team. Everyone knows what it takes and they dream of putting in that “Rocky” effort to be a winner. People in a turnaround have had big past successes in life and work, but it's probably been a while, and they've forgotten how wonderful it feels to win. Part of turnaround leadership is convincing them that now is the time for that Rocky Balboa effort.
There are a million ways to motivate people, but sometimes it's just going straight for their heart and laying it all out there for them. The stakes in a turnaround are high, and you can't screw around trying to be persuasive. When I interviewed to take on my first consulting project by the entrepreneur who was about to leave for three months of intensive cancer treatments, he played it cool throughout, as though he didn't need my help. We walked out to the parking lot as I prepared to leave, and there was the vice president of sales, Bill, and the vice president of operations being held apart from a fist fight. They each wanted blood about as bad as I've ever seen it.
We got them broken up and I followed Bill as he stormed toward his car in the back of the lot. He seemed content to fill the air with curse words and to quit right then and there in a dramatic fashion. Bill was 60 years old, ready to retire, and didn't give a hoot any more. I could also tell that Bill was a former athlete, a competitive guy, extremely proud, and a little bit hurt that he was to blame for the decline in sales. As Bill was marching to his car, I knew I had about one minute so I went for broke:
Look, you can quit but you're going to live another 20 years, and for 20 years you're going to know you walked out of here a loser. It will haunt you, it will destroy your life and your happiness, and the regret will hollow you out inside. It will wreck your health and your relationships, and it will follow you to the grave. You will never escape it. But if you stay here and work with me, I'll help you walk out of here like the champion you are in six months. That's 20 years of feeling like a champ, holding your head high, and being a better husband and grandfather for it. Bill, you're a winner, and you need to leave as a winner. I need six months, that's it.
We beat the hell out of that business and two months later we were profitable. By month 6 our backlog was replenished, the bank was acting like our buddy again, and Bill was a hero. He stuck around another two years and retired as a champion.
Another time, I took over a remote mill that had failed. As so often happens, the union and former owners had gone through the plant like locusts, draining every last scrap of value out of a business that should have been profitable. The owners announced that the mill would be closed and dismantled, customers left, inventories were run down, local real estate prices tanked, the whole town braced for financial depression. Three weeks before the closing, a gutsy distressed investor stepped in with a plan to save the mill (and town, and region, etc.). I was put in as the turnaround agent, and my message to the 650 employees and contractors was simple:
You just got a second chance at life. You ate fried chicken and smoked cigarettes every damn day for 20 years and you had a heart attack. Now you have to decide if you're going back to fried chicken and cigarettes or if you're actually going to get serious with your life and your career. The whole town is watching, and what I can guarantee you is that time will pass. Ten years will come, that's certain. What's uncertain is what you're going to do with it. In 10 years, are you going to walk around town with your head held high because you took control of your future? Is this mill going to be the best place to work not because it pays more than the Quicky Mart but because you have helped build a great company the whole town can be proud of? Or are you going to walk around in shame because you embarrassed your kids and neighbors by publicly screwing up your second chance? Your name is on this. Not mine, I'll be gone. But you'll be here and it will either hang around your neck or be a crown on your head. You have to decide. It's your responsibility and you have to ask yourself what you're going to do with your second chance?
One hundred percent to their credit (not my speech), that mill is now profitable and self‐funding tens of millions of dollars in capital investments. They are truly creating something special up there, and I'm thrilled to have been able to play a role.
Sacrificial Lamb
It is turnaround doctrine that there must be sacrificial lambs to make it clear that change has begun. In fact the professional certification exam for the Certified Turnaround Professional designation, administered through the Turnaround Management Association includes questions on the value and need of sacrificial lambs. More practically, mistakes have been made and people want justice. Lenders want to see blood, someone needs to pay for putting their money at risk. Vendors and customers want to see justice, and employees are upset that their jobs have been put at risk. In fact, employees will usually tell you who needs to be shown the door. When eight people tell you it's the same person pulling them down they're probably right.
The best thing about sacrificial lambs is that they usually volunteer. There is always some knucklehead who is slow to pick up on the concept of a new sheriff. Sometimes it's the guy who says; “that's not my job” or the fella who refuses to hustle when we clearly need extra effort. Once I caught someone sleeping, so I took a photo and texted it to his union boss before waking him up. Another time I was at a factory with no controls on overtime. It was so bad that one guy had milked only 20 hours of legitimate work into a 70‐hour workweek, for years. I declared an end to unauthorized overtime. I'm happy to authorize overtime, just help me understand why it's needed. In one department the guys managed two machines each, but one of them refused to start his second machine that day. When asked by his supervisor he responded; “If I'm not getting overtime anymore then I'm only running one machine.” His supervisor was stumped at this logic. So he asked his manager who was also flummoxed. They then came to me. Meanwhile I'm white‐knuckled trying to keep the business afloat. I said very simply, “Have him come in here and explain this to me so I can fire him on the spot in front of the whole office and everyone can see how serious I am about saving this business.” They went back and delivered my invitation; he chose to start the second machine. Word flew through the factory and I had the benefit of a sacrificial lamb without even firing someone.
When laws have been broken, the guilty person must become the sacrificial lamb. If the CFO has falsified the borrowing base certificate (felony bank fraud), he has to be fired immediately and it has to be explained to the bank. If there are thefts or falsified records (say environmental compliance or safety), they must be fired immediately. This sends a message, but it also protects the business and insulates management from being mistaken as co‐conspirators.
Crisis leadership is absorbing the initial shock and keeping everyone focused on their jobs; the bank needs to lend, the workers need to work, the customers need to buy. If everyone does what they're supposed to do, then the turnaround can work. But we need to get everyone through the turmoil, establish complete control and buy time to address the core issues. Crisis leadership is largely psychological work, and it takes a certain temperament. Once you can get the people doing what needs to be done, the rest of the turnaround is more mechanical.