"The definition of a turnaround situation depends on which role player you ask."

Like beauty lies in the eye of the beholder, views on what constitutes a turnaround situation are coloured by who you ask.

As a troubled company’s situation deteriorates over time, more stakeholders and turnaround profession disciplines (and professionals who don’t have turnaround in mind at all) enter the arena.

Each party, often myopically, not only looks at the turnaround situation from the perspective of the managerial, financial and legal aspects associated with the particular stage of decline it is involved in, but also from the perspective of the rights and interests of the constituency it presents, and its own professional background and education.

Narrow view of a turnaround situation

"Facing imminent failure ..."

In narrow terms, a turnaround situation is a distressed company normally facing imminent failure due to a cash or solvency crisis.

Although they acknowledge the wider view of turnaround, turnaround gurus Slatter and Lovett provide a good description of the narrow view.

They state that turnaround situations are "firms whose financial performance indicates that the firm will fail in the foreseeable future unless short-term corrective action is taken."

The narrow view represents the classic turnaround view, often involving making use of business rescue legislation to save the distressed company from failure.

Wider view of a turnaround situation

"To turn around the trend of results from down to up ..."

Modern thinking, however, leans toward the need for turnaround before a distressed situation has developed.  

World-wide, the banking industry has for long influenced their troubled clients’ affairs through informal creditor workouts, which often involves turnaround action.

Furthermore, more demanding boards of directors, often prompted by shareholder activism, are increasingly placing pressure on management to improve results before the banks get concerned.

The classic view of a turnaround situation therefore needs to be widened.

Moreover, organisations with benevolent shareholders such as government institutions, or those that are subsidiaries of strong groups, will hardly fail even if in dire financial distress.

Yet, organisations in such conditions are in need of turnaround too.  Accordingly, there is the need for a wider view of a turnaround situation as a company that is underperforming or in distress.

A good example of the wider view is by another turnaround guru, Stanley J. Goodman, who states that a turnaround is "to produce a noticeable and durable improvement in performance, to turn around the trend of results from down to up, from not good enough to clearly better, from underachieving to acceptable, from losing to winning."

View the restoration of corporate value at different levels of company health.

If follows from the aforegoing that the later the stage of corporate decline, the lower the Z-Score and the more difficult a turnaround becomes.

The financial situation worsens and the ability to attract funding decreases.

Externally, customers stop buying and suppliers stop supplying.

Internally, management and staff leave, systems stop operating.

We regard both business transformation and turnaround as dimensions of corporate renewal.

Our management consulting division, Corporate Renewal Solutions, focuses on business transformation of less serious situations, where we work with management.

Our turnaround management division, CRS Turnaround, focuses on turnaround management of distressed companies, where we work not only with management, but normally also with the companies' board and banks.

We prefer to be engaged when a client starts showing signs of failure.  Since there is no crisis to stabilise, drastic emergency management action can still be largely avoided

However, in practice, turnaround practitioners tend to be engaged only once a crisis has developed.  

Invariably, action is triggered by lenders or a board of directors, rather than by management.

Fitzgerald Associates employs a useful model describing three stages of decline:

Click on the thumbnail for an enlarged view of the stages of corporate decline diagram.

Management-led correction and informal creditor workout are informal processes occurring outside the legal framework provided by the new Companies Act and Insolvency Act.

In contrast, business rescue and liquidation are formal insolvency processes, court-driven and therefore relatively inflexible and expensive in comparison.