Leader to leader: when faced with change, how to know what your company needs

Every CEO is leading a company that is in one of three states: turnaround, transformation, or stay-the-course. Which one is yours? 

In many ways, this question is THE question. Change is a given.The hard part is sorting out the magnitude and the speed. Little changes in IT systems, mid-level changes in supply chains, big changes in products or service lines, major changes in leadership – just about every company will face all of these. Determining when, what, and how fast is the art and the science, and not surprisingly, doing it well is hard.

Over the past 30 years, I’ve been helping clients answer this question, and have also wrestled with it myself, together with our board and management team, when I was CEO of AlixPartners. When I stand back now and reflect on those experiences, it seems that there are some key factors to consider when deciding the scope, pace and magnitude of change.

External factors

• Disruptive technology: The internet and all its cousins are rippling through most industries today, with retail and media two clear examples.
• Regulatory change: There are times when the government effectively mandates change. Examples include Dodd Frank in Financial Services or the Affordable Care Act in Health Care.
• Competitive threats: Often related to disruptive technology, one of the main reasons to stay not just open to change, but also proactively seeking it, is that every day, competitors are innovating and trying to eat your lunch.
• Black swans: The global Financial Crisis and subsequent recession drove dramatic change in nearly every industry as consumers both pulled back and redistributed their spending.

Internal factors

• Deteriorating metrics: Likely the strongest signal, but unfortunately an outcome rather than a cause, and certainly not a predictor.
• Finance structure/cash flow: Many companies find that as market conditions change, a capital structure that once suited an organization no longer does and can become a major impediment. The most obvious example is when debt service overwhelms a company, leaving it cash starved for making needed operating investments.
• Internal complacency: It’s human nature to rest on our laurels, and a successful business model is hard to say goodbye to. This is particularly lethal, as only 12 percent of the 1955 Fortune 500 Companies are still on the list today.
• Organizational structure: Marshall Goldsmith wrote, “What Got You Here Won’t Get You There” in 2008, and he was right when it comes to organizational design. As companies grow, finding the right structure to match their needs is critical, and hard to time well.
• Dysfunctional management: One of the most insidious and destructive internal factors is management that will not pull together, compromise, and put the good of the entire enterprise first. A word of advice here: No “star” who won’t play nice is worth it in the long haul.
• Denial: It’s hard to believe, but in our work, we have seen many examples of management teams or boards that simply cannot see the need to change even if the evidence is clear.

While this list is not definitive, it likely hits the 80/20 rule.  So, take a moment and run though these factors with an eye on your company.  With the exception of Black Swans, it is likely that you are experiencing some degree of pain in each of the areas described above: maybe just a little in some, likely significant in others.  And, it is the aggregate of these factors that dictate whether your company is in need of turnaround, transformation, or staying the course for now.

So, what’s the difference?  At the highest level, the differentiation is largely financial.  And that mandates a change in orientation.

Characteristics of a turnaround

• Driven to hit short-term financial metrics
• Often have a cash flow and EBITDA focus
• Have frequent and short-term oriented goals
• Sacrifice precision for speed
• Generally involve headcount and structural reductions
• Is best done rapidly and completely, versus in stages or phases
• Is sometimes a required precursor of a transformation

Characteristics of a transformation

• Often involves a change to the revenue engine of the firm
• Requires careful cash flow management as one revenue model transitions to the next
• Usually involves extensive personnel change due to new skills required, but accomplished gradually
• Requires extensive communication and “selling” of the vision
• May require short- to mid-term EBITDA reductions to achieve the transformation required
• Often involves experimentation and piloting, then scaling of successful concepts

The mindsets, skillsets, time frames, and leadership models differ in a turnaround versus a transformation.  It certainly can be accomplished by the same team, but the cadence, pacing, metrics, goals, and communication protocols are very different depending on where a company is.

What about staying the course?

I leave you with two thoughts.

First, it is almost always worse than you think. Second, adopting a stay-the-course strategy is likely a bad one in today’s world. My observation is that all scale companies are either in turnaround or transformation mode today.  I may be wrong, but as Person of Interest’s Harold Finch says, “It’s not paranoia if they’re really out to get you.”

This article originally appeared on ChiefExecutive.net.