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News & Insights
April 2, 2021
The Psychology and Perspectives of Business Turnarounds
By James E. Harney, CTP

“So, what do you do for a living?”
When asked this question, my first answer is that I’m a business consultant. If the person probes a bit deeper, I explain that I work at a boutique consulting firm that helps companies manage their way out of trouble. Occasionally, someone will be intrigued enough to ask further questions such as, “What’s involved with a turnaround? How do you do it?”

Then and Now: The Evolution of My Response

My answer to the “What’s involved with a turnaround?” question has changed over the years as I have gained insights from the broad range of stakeholders that are involved in a distressed business situation. Early in my career, I would further elaborate by providing some specific financial and operational examples, such as… “We help companies analyze cash flows to determine where the rough spots are and where they might consider cutting expenses. Or, in extreme situations, we may explore alternatives like the sale of the business or a bankruptcy proceeding.”

Today, after a 30+ year career in the turnaround industry, my response remains mostly the same. Yet I would be remiss if I did not also mention that in addition to financial and operational expertise, I’ve come to realize that a critical part of our job involves some “armchair psychology” – having the ability to recognize and consider the myriad of perspectives and attitudes of the people involved in the situation.

Business Psychology: What’s Your Perspective?

I have learned that what largely impacts our success in business turnaround engagement is the ability to understand and empathize with the different perspectives of the various stakeholders – leadership, employees, service providers, etc. When the stakes are high, so are emotions.  As turnaround consultants, we typically come into a situation when the energy level is low, and the fear factor is high. People never call paramedics unless they are concerned for their life, and so it is with turnaround consultants.

So, does being a turnaround consultant require a psych degree? Probably not, but it does take a healthy dose of emotional intelligence, intuition, and attention to detail to understand the conflicting perspectives and attitudes of all the players.

A Fictional Example on Perspective

My colleague and I arrive in the parking lot of a new client’s office to kick-off an engagement. Our confidence is high, our ducks are in a row, and we are ready to get started. We fire up our laptops and begin the process of data gathering… the A/R aging, the A/P aging, historical financials, interim financials, inventory designation reports, borrowing base certificates, loan and security agreement, customer contracts, and oh yeah, let’s talk to the company leaders. “You start with the President, and I’ll take the CFO and we’ll meet back here in an hour and start working on the 13-week cash flow.”  And so, the project begins.

Or, let’s rewind …

Let’s take a slightly different approach to the same scenario. This time, my colleague and I drive into the parking lot, turn on our “feelers” and immediately start observing. As we walk toward the building, what do we notice? Are the parking spaces closest to the building all “Reserved for the President” and other execs, or are the first several spaces reserved for visitors? Next, when we enter the building, are we greeted by an individual who is energetic and happy to be at work, or someone whose coffee and muffin have been interrupted by our arrival?  Is there a display of the company’s products in the lobby, or is there a model of the corporate aircraft?

These are all subtle but important clues into the leadership’s perspective of their roles within the company, as well as the company culture. While this is a simple example, it demonstrates that first impressions and intangible clues can be very telling when conducting the business assessment.

Dissecting Leadership and Employee Perspectives

What’s next? The deeper understanding of a complex business situation is revealed throughout discussions with the team. And while learning and understanding the Owner/CEO’s perspective is a top priority, it is equally important to learn from a broader team of people. This information can be the key to understanding the company’s strengths and weaknesses while gaining insight into what really went wrong.

Sometimes, the top leaders may inherently distrust the turnaround professional or feel that they couldn’t possibly understand his or her company as well as they do. With that in mind, developing a trusted relationship with the company leaders is the cornerstone of any successful turnaround effort. As an independent advisor, it’s our job to ensure that the existing team does not feel marginalized. Even if we are “appointed” CRO or interim CEO by the company’s lenders or investors, it remains important to maintain the upmost consideration and respect of the predecessors’ perspectives.

Uncovering Business “Feelings” and Building Trust with Stakeholders

The process of developing trust in a challenging business environment requires listening closely and gaining understanding of the team’s underlying perspectives and feelings.  For example:

  • Is the chief executive fearful of the situation or confident in the actions he/she has taken?
  • Is denial the operative work in explaining the current strategy, or is the CEO appearing like a deer in the headlights?
  • Are there ill feelings toward the company’s lender and trade vendors, or is there a solid recognition of the needs of the other stakeholders in the company?
  • What is the background of the individual – is he/she from an accounting background or sales and marketing?
  • Does the leadership have formal management training, or have they progressed strictly on their entrepreneurial instincts and determination?

Under any set of circumstances, the turnaround consultant must validate the strengths of the team, recognize their feelings, and express the desire to support and assist the individuals as well as the company. However, this does not mean representing the interests of the individual over that of the company, but rather connecting with the team’s leadership in a candid and compassionate way, opening the door to a partnership that enables critical and necessary collaboration in the turnaround process. Leading by example, the turnaround consultant should be an inclusive part the team and gain respect by demonstrating open-minded communication as well as sound, consistent and considerate recommendations.

But wait, there’s more.

As turnaround consultants, we must also interact and manage relationships with external company stakeholders. While there are many external players involved, the primary relationship is with the company’s senior lender/s which is typically the lifeline between the company and the operating capital. Invariably, this relationship may be strained due to performance expectations not being met and/or limited availability on the line of credit. In short, the company is losing money and the lender does not want to fund those losses.

Ultimately, we must consider all the different perspectives—internal and external—to smoothly manage conflicting interests.

Understanding the Company Leadership/Team Perspective

From the company’s perspective, they may feel that the lender is being unreasonable and is not allowing enough latitude for the company to operate. The overwhelming “fear factor” may also affect communication and hinder the problem-solving process. For example, if leadership fears a looming disaster, including losing their company, jobs, and income, they oftentimes react by making poor decisions or no decisions at all. They live day to day doing the same thing and hoping for a different outcome. The normal process of running the business goes out the window and they come to work focused on putting out the fires that crop up that day. They may form a bunker mentality and become adversarial with those who challenge them. The lender often becomes the natural adversary of the company when, in fact, the lender is only reacting to the performance of the business in the context of its own set of issues.

Understanding the Lender’s Perspective

The lender, on the other hand, sees mounting losses and their collateral position eroding.  More latitude on the lender’s part could potentially lead to a larger loss if the company does not ultimately succeed.

Although the lender is generally reacting appropriately to the plight of their borrower, they too have some underlying drivers that may influence the relationship. If the relationship manager has been handling the account for some time, he/she will have a personal vested interest in the outcome.  At minimum, the relationship manager wants the situation to be resolved because they do not want their superiors or peers to think they failed the situation. They may also fear losing their job if the institution loses money on a credit in which they are directly involved.  In this set of circumstances, the lender may take radical positions which further exacerbate an already unsteady business – as well as an unstable management team.

Is it any wonder that with the underlying issues of both the company and the lender, we now have the perfect breeding ground for major differences of opinion brought on by basic human instincts for survival and preservation?

So, what do we do now?

The Role of the Turnaround Consultant

First, the consultant needs to remember who he/she works for and start there.  With any luck, they have been successful in forging a trusted relationship with company leadership. It’s important that the situation be clearly explained to management and owners so there is complete understanding of the situation from all perspectives. Although the fear may not be eliminated completely, it will be greatly diminished by setting the stage for a rational thought process with a straightforward and honest approach.

The situation should be compartmentalized and analyzed in an orderly fashion so the team can step back and begin to work on the different pieces with guidance and assistance from the consultant. This environment allows for the highest likelihood for success and the ability to move forward with successful negotiations.

Once the company has regained a rational perspective, company management and the turnaround consultant need to sit down with the lender to discuss the situation openly and honestly, including the realistic alternatives and the risk profile of each. In some cases, the lender is not willing to accommodate a joint solution; however, in most cases, with an understanding of the issues and a firm plan of corrective action, the lender will provide a time frame of support in which to turn the company around.

There are more stakeholders in a turnaround in which to manage and communicate. This includes the board of directors, customers, suppliers, subordinated debt holders and investors.  And each party has its own issues – both on the surface and behind the scenes. So, it is imperative that we, as turnaround consultants, also have a strong understanding of the dynamics driving these parties before attempting to negotiate a solution.  Stay tuned for a follow up article addressing additional stakeholder perspectives.

Turnaround Consulting: It’s an art and a science.

To come full circle, my answer to “What’s involved with a turnaround?” has evolved over the years. Along with the ability to diagnose technical data and business metrics, one must also be able to diagnose and treat interpersonal drivers and perspectives of the parties involved. A holistic approach will greatly increase the likelihood of a successful outcome. With all the “feelings” involved, perhaps being a turnaround consultant can be best described to an outsider as “a financial, operational, business psychologist.”

jim harney
James E. Harney, CTP
President

Jim has a 20-year career as a commercial lender in Chicago and New York, followed by another 20+ years of consulting after founding Harney Partners in 1991. He is a recognized industry leader in the turnaround and crisis management field providing management and advisory services to companies facing complex situations. His successes have been recognized by his industry peers through numerous regional and national awards from the Turnaround Management Association and the M&A Advisor.