Column: Business Revival

BUSINESS REVIVAL
Regaining Lost Ground

The audit provides a three-dimensional perspective of a company that not only shows the problem but goes further to ascertain the causes.

By Pradip Chanda

Pradip Chanda, Turnaround Consultant

The tribal wisdom of the ancient Dakota Indians, a reader reminds me, says that when you discover you are riding a dead horse, the best strategy is to dismount. Am I then (going by my past columns) falling into the trap of propagating strategies ranging from buying a stronger whip to appointing a committee to study the dead horse to going on foreign jaunts to study how they ride dead horses, simply because, as a consultant, I do not want to recognise the obvious?

The truth is, I am yet to see a dead horse, despite coming across a number of sick ones, especially from the stable of state financial institutions. These are kept idle on the premise that as a 'dead horse', they do not have to be fed, are less costly to maintain, carry lower overheads and, therefore, contribute substantially more to the bottomline of the economy than do some other horses.

My enduring faith in sick companies comes from the observation that no matter how down and out a company is, it never has a blank order book, nor is it totally forgotten by its customers. Let me illustrate this argument with an example. By the late fifties and the early sixties Howrah, in West Bengal, had developed into a major industrial hub with a number of small and medium size companies producing metal castings and pipeline fittings. One company in this business became quite well-known for its BUCO range of valves. However, it was forced to shut shop in the wake of the trade unionism that ravaged West Bengal in the seventies. But even today, nearly 20 years later BUCO, receives orders for valves.

Let's face it, companies become sick because early symptoms of their ill-health are often ignored. The first warning signs appear when the company is unable to comply with its loan covenants; it is either unable to pay interest when it is due or has to ask for a restructuring of the debt repayment schedule.

In a disciplined financial environment a lender will ask for an operational audit of the company at this stage. This does not stop merely at highlighting problems but goes a step further to ascertain the causes of these problems. Additionally, it can help discover future problems as well as opportunities that have gone undetected.

Typically, such audits are carried out by an objective and unbiased third party-often turnaround specialists. Conducted early, an operational audit can help lending-institutions maintain a long-term financially viable customer. Clearly both companies and lenders can emerge as winners in the process.

Consequently, the turnaround CEO has to take up an operational audit as his first priority. Being new to the company, he may have the advantage of objectivity but may still need the help of outside experts.

There is some debate as to where the audit should begin. I believe it should begin with the customer and the market. No revival plan will succeed unless the company can identify revenue streams, and that means finding products and services the company can deliver to a customer base.

Once it is known what a customer is willing to buy from the company, the new CEO can, based on the internal process- and people-audit, begin the management of change that will, in turn, enable the company to produce what the customer wants, competitively.

Both loyal and lapsed customers are an important source of understanding the strengths and weaknesses of the company. While loyal customers are likely to appreciate the company's strengths and support its revival efforts by providing pointers to immediate revenue earning activities, lapsed customers will bring the turnaround manager closer to current market realities. Both will help him draft an action plan.

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