What exactly does it take to turn around an ailing corporation and set it on course for long-term prosperity? Robert Heller has been talking to those in the know At first (and horrible) sight, the task of the turnaround expert is enough to make the strongest spirit quail. Some once-viable, maybe once-great company is so deeply mired in doubt and derision that its stakeholders, above all the investors, scream for salvation and, of course, a saviour. For the latter, nothing lies ahead but trials and tribulation, hard words and harder work. Who would willingly accept this burden? Yet there's no shortage of willing souls. In the food retailing sector, Somerfield and Safeway are in the hands of presumably intrepid imports who, like the fellows at Marks & Spencer and J Sainsbury, apparently believe that the upside potential greatly outweighs the downside risks. That applies to both the new chieftains and their corporate charges. The two fates are obviously linked. If the company turns round, the turnaround leader's future is assured ­ and the odds are actually in their favour. The paradoxical truth is that turnarounds are at once the most difficult and the easiest of management tasks. The difficulty is that many messes, which usually (but not always) include financial shambles, must be cleared up. The ease lies in the low expectations. If a company is flat on its back, merely raising the hulk to sitting position will elevate the share price, rejoice the hearts of financial analysts and journalists, and very possibly create a new business hero. No matter that a company whose return on capital improves from negative to 10% is plainly worse managed than one which returns a steady 15% year on year. The former will look exciting, the latter stodgy, and the share price performance will reflect the difference. Professional company doctors are adept at spotting the abundant opportunities for improving financial performance. They are less skilful, true, at seeing and seizing the openings for future dynamic expansion. But quick results are what are wanted ­ and generally provided. By far the harder challenge, though, is to take over a highly successful company and propel it onwards and upwards. Sam Walton's successors at Wal-Mart will never win the heroic status of the founding father, even though their company's market capitalisation has risen, post-Sam, to the astonishing equivalent of seven E-bays plus eight Amazons. Similarly, Lord MacLaurin's followers at Tesco are on a hiding to nothing: condemned if they fail to keep up his great work, taken for granted if they do. Tesco itself was really a turnaround job, and a brilliant one. MacLaurin turned an old-fashioned grocery retailer into a pace-setting would-be globalist with outstanding technology, and started off well before looming crisis was due to strike. There's no reason why other company veterans can't strike out brilliantly in new directions, provided that they are given the power and opportunity in good time. Put them in charge in bad times, though, and the chalice will be poisoned ­ as the unfortunate Peter Salsbury found at Marks & Spencer and the no less unfortunate Dino Adriano at Sainsbury. By implication, the unfortunates compare less well than they would like with their generally very expensive replacements. The pattern is for these new people to come from outside (even though Sir Peter Davis did have the benefit of previous experience at Sainsbury). As Andrew S Grove, the chairman of Intel, the microprocessor leaders, has remarked: "I suspect that the people coming in are probably no better managers or leaders than the people they are replacing. They have only one advantage, but it may be crucial...They can see things more objectively than their predecessors did." The person replaced "has devoted his entire life to the company and therefore has a history of deep involvement in the sequence of events that led to the present mess". In other words, the insiders' difficulty in turnarounds is that they are wedded to the past ­ after all, they helped to create it ­ when only a violent breach with tradition will work. MacLaurin was a maverick at Tesco, as he proved when he faced down the potent and highly emotional Sir Jack Cohen over dropping trading stamps. MacLaurin behaved more like the typical outsider: In Grove's words, unencumbered by emotional involvement and therefore...capable of applying an impersonal logic to the situation". That impersonal logic is the essence of a successful turnaround. Sir John Harvey-Jones was only picked to lead ICI out of its unheard-of losses because of his well-known, radical, logical and impatient views about the company and its poor management. How he accomplished that turnaround provides a textbook for all turners. There are eight paramount principles (see panel). It's the eighth principle ­ or keeping eyes trained on the future rather than becoming overwhelmed by current toils ­ that causes the greatest turnaround trouble for insiders and outsiders alike. When the City hails you as hero for moving a business from poor to middling, you're too busy collecting the plaudits (and your stock option gains) to worry about what comes next. That's why so many turnarounds never make the jump from middling to truly meritorious. The notorious divide between proprietorship and professional management is no tougher to bridge. If, like Archie Norman at Asda, or MacLaurin, you have a clear strategic objective in view, no difficulty arises. But there's the rub. In both those cases, the correct strategic choice was relatively obvious. That is by no means a criticism. Most management errors result from blatant disregard of the glaringly obvious. Tesco needed to move up-market into Sainsbury territory and to pay for the climb by improved systems, management processes and in-store performance. Asda needed to concentrate on the out-of-town superstore developments where its trading style was most comfortable and to mobilise its staff behind the chosen strategy. Both these strategies had the essential virtue of exploiting established trends in the marketplace. For today's struggling giants, however, the correct strategies are by no means obvious. M&S was built on value for money, providing superior quality, even if at higher prices. Sainsbury's customer value proposition had some similarity. Both platforms have been weakened over time by misplaced management of these powerful retail brands. Today, the clock cannot easily be turned back. Quality is much harder to differentiate, and higher prices are much harder to defend. Inefficiencies can be slashed ­ both companies abound in cost-savings that the consultants call low-hanging fruit'. But the low-hangers will do nothing to set the companies on the high road to new success. At Safeway and Somerfield, both with new brooms sweeping away, the same heavy problem looms. The UK grocery market is in upheaval, margins are under pressure, once-loyal customers are fickle, e-commerce is gaining ground, and there are no niches in which to hide. Nor, in these conditions, can the turnaround artist fall back on the three standard options. You can cut costs, raise revenues, or (preferably) do both. But the first seems unpromising when everybody else is on the same tack, the second is very hard in the circumstances just described, and the third ­ given the difficulty of the previous two ­ is just a wonderful dream. However, the first difficulty is not so great as appears. If you just seek obvious economies, like cutting down staffing ratios or squeezing suppliers, you may well win better financial results. But you will not win competitive advantage. That can only be created by being different and better ­ achieving lower costs through intelligent, comprehensive internal changes that streamline and eradicate business processes with the willing help and input of everybody involved. Competitors may see what's being done, but are unlikely to imitate the moves: because everybody believes that "the way we do things round here" is the best (even when it obviously isn't). That self-deception is a major reason for the slide into difficulties and the arms of a turnaround saviour. People in the upper echelons of M&S and Sainsbury's must surely have believed in the superiority of their ways even when those had become manifestly inferior over time. Nothing at M&S was vaunted to the skies more than its handling of the supplier relationship. But the chain's problems with quality and delivery indicated unmistakably that the old management magic no longer worked. Business processes are like machines: over time they become relatively slower, inappropriate to changing needs, and very possibly rusty. That is why the true turnaround expert looks closely at the three prime constituents of the company ­ customers, employees (including managers), and suppliers ­ and discovers what they really feel about the strategy and behaviour of the business. The experts value this tripartite evidence far more highly than their own opinions and those of their boardroom colleagues. True, the evidence consists of perceptions. But, in the rightly and often repeated phrase, Perception is reality'. Unless the turnaround changes perceptions in ways that favour the company and increase its long-term profits, the operation will ultimately fail. This process has to be completed at speed. The troubles that necessitate a turnaround are usually well-publicised and much-rehearsed. That benefits neither the share price nor the in-store performance. Customers are inevitably deterred by a company whose demerits are regularly aired, which is panned for lack of strategic direction, and whose stores reflect that absence. The morale of employees is similarly affected by the same facts, which again has an adverse effect on the customer. By the same token, suppliers' commitment is hardly strengthened by events like the abrupt M&S decisions to end long-lasting relationships. These wounds cannot safely be left to fester. Yet if the business has large sales, good cash flow, and a strong balance sheet, the temptation is to take the long view and make reforms slowly and cautiously. Turnaround kings in these vast empires seem to think that time is on their side. It is actually working against them. Whenever you hear a new chief executive say that it will take years to turn his company round, ask what makes him think that years are available. Anything from a sudden explosion in e-commerce to a takeover bid may strike while the company is still struggling upwards. Another most cogent reason for speed is that the competition (which by definition has been outpacing the turnaround case) will not be standing still. In the US, Al Martinez won rich praise for his turnaround of the ailing Sears Roebuck. But sales have since stagnated, earnings per share are lower than a decade ago, and the market value has drooped to a twentieth of Wal-Mart's, which has four times the sales. Tesco is doing much the same damage to its British rivals. You cannot afford to give such powerful competitors the invaluable present of time. They have, after all, already benefited from the years wasted while rivals' underlying business deteriorated. That fate would be avoided if more companies threw up MacLaurins and Normans, people who are prepared to apply the eight Harvey-Jones principles with the impersonal logic proposed by Grove, while radically rebuilding the relationships with customers, employees and suppliers. In other words, turn the company round when it doesn't need a turnaround ­ and then, with luck, it never will. {{COVER FEATURE }}