Is Your Frog Boiling?
Why enlisting the aid of a turnaround consultant could be the best decision owners make for their underperforming companies
by Ken Gaunt & David Priestley
Universal Advisor, 2008 Issue No. 1 


Are you familiar with the parable of the boiled frog? It goes something like this: if you drop a frog into a pot of hot water, it will immediately leap out of danger. However, if you drop a frog into a pot of fresh water that’s cool and pleasant, and slowly turn up the heat until it boils, the frog will remain blissfully unaware that there’s a problem — until it’s too late.

And so it goes for many underperforming organizations, who simply adjust to gradually deteriorating conditions and fail to make the changes they need to make. Why are these companies so reluctant to change or ask for help? What are the signs to watch out for? And why could enlisting the aid of a turnaround consultant be the best decision underperforming organizations ever make?

It’s Okay to Ask for Help

Underperforming organizations almost never ask for help when they should. We’ve never consulted with a client and said, “It would’ve been smarter if you’d waited to call us,” and only rarely have said, “You called at just the right time.” It’s usually once the water has started to boil (running out of cash, losing customers, or serious lender fatigue) that we tend to get the call.

Why do organizations wait too long? Many feel they should be able to turn things around themselves. Others don’t want to air their dirty laundry. Still others know what should be done but find it difficult to make the decision to enlist outside help. Either way, they’re paralyzed by pride and fear of change. Too often, everyone from the owners to the employees to the vendors pays the ultimate economic price.

In addition, underperforming organizations understandably are reluctant to spend money for professional fees. What organizations fail to realize is that the return on the investment in professional assistance usually occurs very quickly, and their lenders will support their efforts to turn things around.

The Warning Signs

When should an underperforming organization ask for help? If a company lost money one year and is beginning to lose money a second year, it’s important to seek help immediately. Banks will almost never remain with a company through a third year of losses. (Many companies will wait until the second year of losses is final and then begin to seek help; at this point, it’s often too late. The water has already begun to boil, as the lender is heading for the exit.)

Second, trend is critical. Any downward trend in revenue or margin percentage, or any rising trend in overhead costs or materials or labor as a percent of sales is a sign that organizations should seek assistance.

Third, look at the financial ratios that banks use for covenants, whether current ratio, debt to equity ratio, fixed charge coverage, etc. Banks care about these indicators for a reason — they’re signs of financial health or weakness. Companies should monitor these ratios just like their bankers do. If they’re declining, they should get help now.

Finally, keep a close watch on customer satisfaction. How are customers responding to the company? Customer support is expressed in many ways — some of them very subtle — and if companies see that customer enthusiasm for their products and services is beginning to waver, that’s a definite warning sign.

Turning Things Around

Once a company recognizes they’re in need of help, the next step is to engage a turnaround consultant, who will rapidly assess the situation and evaluate the immediate outlook for cash. If there’s a cash problem, that takes first priority.

Next, the consultant will assess the company’s financial performance and outlook. If unfavorable, they’ll look for root causes and rapid solutions and go to work making improvements. The assessment period normally lasts a few days — maybe even a single day — and consists of onsite interviews, walking the floor, talking to personnel, and analyzing data.

Once the analysis is complete, findings and recommendations are presented to the owner, who works with the consultant to develop an action plan. Speed is of the essence, and improvements should begin immediately. Improvements can be financial (collecting past due receivables, debt restructuring, negotiating with vendors for better terms, and negotiating with customers), structural (dropping product lines or consolidating plants), or operational (changes in shop floor layout, staffing, and processes and procedures). Operational improvements are an important component of this. Significant time is spent working with people throughout the organization to draw on their ideas and empower them to implement ideas rapidly, whether improving labor efficiency, reducing scrap and material waste, reducing setup times, improving machine times, or other factors.

Don’t Let It Come to a Boil

Underperforming companies can and do turn around, but it’s important to recognize the signs and ask for help early, when there are still options. Too often, companies wait until there’s a cash crisis (for example, no money for payroll) before they’re willing to get help. Consultants can do more and are less expensive when they can focus on fixing the business versus managing short-term cash crises.

Furthermore, entrepreneurs and managers have to overcome their initial reluctance to take difficult actions. To motivate companies into action, we often offer the following advice: imagine the future of the entire known universe depends on making the tough changes needed to turn around the company, and you’ll find a way to get them done. It may seem a bit exaggerated, but to many owners, these companies are their lives. It’s not too big of a stretch.