In the previous blog in this series, we confronted the trap of solving “the problem that isn’t” and why clinging to old plans is deadly. The hard truth: if you want to save the business, you’ve got to shed the excess and make deep, decisive cuts.
Now we’ll talk about the necessity of shrinking, the dangers of tentative actions, and the courage required to cut fat, muscle, and sometimes even bone.
Problem #5: Shrink… Not Grow
Although this rhymes with Problem #4, it deserves a separate section. In the history of business, no company has ever been successful attempting to grow its way out of a deep crisis. If you suffer a heart attack, you wouldn’t ask the ambulance driver to drop you off at the closest gym for a quick workout before continuing on to the hospital emergency room. Every successful turnaround starts with shrinking. Pruning underperforming stores, divisions, inventory, costs, products/SKUs and people are not only mandatory… It’s common sense.
The typical CEO who has never confronted a turnaround will resist retreating. She has a growth mindset that prevents her from recognizing that these underperforming assets are actually liabilities that consume the financial resources and management bandwidth which must be reallocated to the core business operations if the company is to survive.
The key is to narrow the focus and jettison stuff that isn’t core. Review the last 60 years of the Wall Street Journal (which is how long I have been a subscriber) and you will find hundreds of examples of companies that encountered a crisis. The first course of action is never growth… it’s radical liposuction and an amputation or two.
Bumper Sticker: You can’t regain your health by growing a tumor.
Sometimes leaders have a difficult time making the hard decisions because they think it will be a negative reflection on them. There was a mistake or a misjudgment or shift in the environment that occurred on their watch, which produces a lot of emotional head trash. Frequently, when a company is in trouble, they bring in somebody like me. They need a fresh set of eyes with no emotional baggage. They need somebody in the cockpit that isn't afraid to fire Susie, even though Susie was here the day we started. Susie is no longer critical to what we're doing, and she needs to go away. I can easily make that decision. Whereas the guy who's been running the business and been around Susie for the last 25 years can’t. Susie is the family photo album we talked about earlier… and I don’t care.
Bumper Sticker: Sometimes breaking what you built is required to save what matters.
Problem #6: Tentative Actions Beget Tentative Results
When times are really bad and significant cuts and large-scale restructuring are required, the amateur turnaround CEO will face the temptation to make tentative cuts and take weak corrective actions. These half measures are a result of two deadly assumptions: An inability to face reality and excessive optimism (“things can’t get worse and will probably turn around soon”).
The reality, in most cases, is there is zero reason to believe you have hit bottom. The pros know that a continuous stream of paper cuts destroys culture/morale and unnecessarily prolongs the agony. The best course of action is to get ahead of the losses by realistically projecting the timing and corrective actions needed and then padding an extra 15-20% on the downside.
When making cuts, it is useful to think in terms of fat, muscle and bone.
- Fat is easily trimmed (and never should have been there to begin with). Trimming the fat is usually painless and is a great starting point. Liposuction of excess weight usually entails a reduction of excess capacity, unproductive assets, weak people, new initiatives and faltering projects. Usually, a CEO is aware these things should have been executed months or even years ago, but the decision was delayed until the crisis forced her hand.
Bumper Sticker: Every failure of leadership has at its root a lack of courage.
- Unfortunately, a severe crisis requires going deeper than fat, which is when you encounter muscle. Frequently, muscle needs to be trimmed as well to save the business. Pruning muscle is uncomfortable because you are forgoing some strength or asset the business has developed, but that strength (or the cost of that strength) is replaceable and is no longer critical to achieving the new primary objective of survival. Rebuilding the muscle post crisis will require “joining a gym and some limited period of working out” but it is better than trying to hang on to it while you are in trouble.
- Amputating bone requires a different decision-making process from the first two. Bone refers to a non-replaceable core asset or strength of the business which, if eliminated, causes the business to limp for a long time and possibly changes the business forever. Of the three, eliminating bone from the business is the last resort and will require the longest recovery period should the business survive. Amputation is the last gasp to save the business and has severe 2cd order consequences.
The obvious problem is what you (as the owner/founder/CEO) consider muscle might be viewed as fat to an outsider who doesn’t have the same attachments or views on sunk costs. A realistic assessment and consultation with a advisor/pro can help you differentiate the choices and decision-making process.
Up Next: The communication moves that stabilize culture and protect your pillars. Read it here.
