We’ve all either experienced it in our own firm or heard about one of our competitors going through it— what I’m referring to is a complete turnaround.Consider the case of one of our clients. Although I can’t tell you who the firm is, it was a “middle-aged firm” (between 30 and 40 years old in 1994) that wasn’t doing very well. Beyond the fact that its volume was declining (about 50% off from their peak four or five years earlier), it was unprofitable and had been for four years! Its cash flow stunk (average collection period in the 150-day plus range), it was top-heavy (a partner to employee ratio of about 8 to 1), its marketing lacked focus, morale was at an all-time low, partners were bickering with each other, and it had an ownership transition underway that it couldn’t possibly afford.Today, a little more than a year later, its backlog is once again growing, its collection period has greatly improved, it is earning more than 10% profits, morale is great, and its future once again looks bright. What did the firm’s managers do to change their situation? Here’s some of the story:They changed their top management structure. They disbanded their 3-man executive committee, shrank the size of their board of directors from 11 to 5, and elected a new managing partner. These changes were made because the executive committee members were fighting with each other, there was no forum to discuss a non-performing stockholder (all were on the board), and no one respected the existing managing partner (beyond the fact that the firm’s performance was awful under his reign, he was unbillable and didn’t bring in any work). The new managing partner was someone who had been with the firm for some time, and who was respected by all as an outstanding seller and producer of work. And the other partners who were no longer on the board were all asked to go back to what they knew best— selling, managing, and doing work on projects.They got a new CFO. The firm hired an experienced financial manager with an MBA from another firm in our industry— somebody who understood what had to be done and what his priorities were. And they paid an appropriate salary to get someone who knew what he was doing. This firm had never before had anyone stronger than a controller in the top finance and accounting job. As a result, the function was traditionally led by the managing partner. This was always someone with a technical/design background, but no formal accounting or finance education, who directed the controller on a daily basis. It didn’t work. The firm was doing all kinds of goofy stuff, like accruing revenue on marketing job numbers that was rarely, if ever, written off. The result was a continuous overstatement of their income on an accrual basis. They didn’t get tough enough with their delinquent private-sector clients, and they didn’t provide good project financial data to the people running jobs. Is it any wonder their financial performance stunk?They got a new marketing director. They tried using the displaced former managing partner in the top marketing job. But that didn’t work— he was too disgruntled by his reduction in status, plus he really didn’t have any marketing vision for the firm. When he finally resigned from the firm almost a year later, they put an MBA-trained, experienced designer from inside the company in the job. He not only knew the firm and had credibility with people in design and production, but he had a strong desire to succeed. He immediately changed the way the firm did proposals (he wrote each proposal from scratch and put all the boilerplates in an appendix). That increased its hit rate. He also began to put a marketing process in place that will help position the firm, something it had ignored for years in favor of the tired approach of having all of the principals “get out and sell.” They began communicating with employees more frequently. They did a much better job of communicating the company’s financial status. They had more meetings to keep the staff informed. They got the employees involved in the business-planning process. This has increased morale and raised the understanding of what had to be done to turn things around.They cut the partners’ pay and benefits, but didn’t cut the employees’ compensation. The salaries for all the partners had grown beyond the firm’s ability to afford them. Pay cuts were made in differing amounts for each partner. Some cuts were significant. Deferred compensation deals that the firm made when times were good were also reduced to levels it could support if it could turn things around.They invested in information technology. Just when they were least able to afford it, they hired a new manager of information technology and committed to implementing a company-wide network. They put in a new accounting system, and upgraded all their hardware and software for both technical and business functions. This will pay off in the long run.They set up a new incentive compensation system. The scheme pays out a portion of the firm’s profits quarterly. The employees (and owners) can now see where the money for incentive compensation is coming from.They got rid of unprofitable branches and other unnecessary assets. Branches that did not fit into the firm’s long-range strategy and that had difficulty being profitable (with burdensome corporate overhead allocation in the small local markets they operated in) were carved off and sold. Corporate condos purchased in the good years were unloaded.They cleaned up their books. In addition to clearing out the unbilled WIP on marketing job numbers, they also wrote off significant amounts of uncollectible accounts receivable, started tracking backlog in terms of net fees, and so forth. This bad accounting data had distorted the firm’s real condition for years.What’s in store for this firm now that they have stabilized and can operate profitably again? More investment in process marketing and positioning, more investment in information technology (a shared client database), more investment in staff training, and a creative re-look at how to deal with internal ownership transition. Is this situation typical? Yes. Why are they succeeding in changing when most firms that get to this point cannot? They have a strong desire to avoid failure. Will they make it? You bet— it would be hard to fail at this point.Originally published 3/04/1996
About Zweig Group
Zweig Group, three times on the Inc. 500/5000 list, is the industry leader and premiere authority in AEC firm management and marketing, the go-to source for data and research, and the leading provider of customized learning and training. Zweig Group exists to help AEC firms succeed in a complicated and challenging marketplace through services that include: Mergers & Acquisitions, Strategic Planning, Valuation, Executive Search, Board of Director Services, Ownership Transition, Marketing & Branding, and Business Development Training. The firm has offices in Dallas and Fayetteville, Arkansas.
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