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Red to Black

2 July 2008 No Comment

By Helen Kaiao Chang

This article originally appeared in bizSanDiego.

Jonathan Huberman knows how to fix ailing companies.When he took over as CEO of Iomega Corporation, a data-storage disk-drive maker, the most common phrase he heard was: “It can’t be done.” Huberman quickly shot back: “It will be done. Either by you—or your replacement.” And it was.

Iomega, the Sorrento Valley–based inventor of Zip drives, had been in the red for three years, with declining revenue for eight. Four months after Huberman took over as CEO in February 2005, the company was profitable. That year, employees got bonuses for the first time since 2001, and staff meetings ended with smiles and applause.

Huberman is among a small group of business leaders who have successfully resurrected dying companies. Some are board members of the company, while others are management consultants or turnaround specialists who focus on fixing companies. All come with a fresh perspective and a willingness to act. “Business is business,” says Huberman, a former management consultant and Iomega board member. “The differences between running the country’s largest chicken producer and a major computer manufacturing company are very small. There’s always something unique about each business, but the essentials are the same.”

Gary Sutton, who has turned around seven companies and authored a book on the topic, titled The Six Month Fix, says the experiences of resurrected companies offer great lessons. “It reminds [entrepreneurs] about the basics of business, how simple it really is, and how, by staying focused on what you do best, almost always heals the company,” he says.

Business leaders who have successfully turned around companies say that the keys to a corporate resurrection boil down to basics: focus on profits, reduce overhead, streamline operations, give customers what they want and offer a clear vision.

Focus on Profits
The first key is focus on profits, say business leaders.Corporate consultant Doug Hegebarth turned around Anzus Inc., a defense software company based in Poway. During his tenure from November 2005 to September 2006, he increased revenue by 40%, profitability by 70%, and sold it for 110% over valuation. Rockwell Collins, a publicly listed aviation electronics company, acquired Anzus in September 2006.

Hegebarth revived Anzus by axing unprofitable deals. He fired a large cus¬¬tomer, whose contract put Anzus in the red. He also renegotiated another contract to yield healthier margins. “You have to understand where your profits come from,” says Hegebarth. “Every sale has to be profitable. That’s absolutely critical in a turnaround.”

Amylin Pharmaceuticals, which makes diabetic drugs, was ready to shut its doors in 1998. The La Jolla–based company had less than a year’s worth of cash on hand, and its publicly traded stock price dropped from a high of $13 to 28 cents. The company survived by letting go of all its peripheral departments—such as marketing—to concentrate on developing its two most promising drugs. “We had to focus,” says CEO Daniel Brad¬bury, who helped forge the restructuring plan at the time. Since then, the company has brought those drugs to market and raised $1.6 billion in equity.

At Iomega, years of strong revenue from its groundbreaking Zip Drive products blinded the company to profitability. “The focus of the sales effort was to generate revenues irrespective of profitability,” says Huberman. That has since changed.

Cash is king, says Hegebarth of Anzus. “When you look at a business, especially when it’s struggling, the most important thing is cash. How do you maintain and save as much as possible?”

Reduce overhead
The second key is to reduce overhead, say business leaders. This often means letting go of staff. During its restructure, Amylin shed its staff from 300 to 37. This enabled the com¬¬pany to preserve cash. When the company rebounded over the next two years, it hired back 50% of these employees, many of whom are among the company’s most ardent today, says Bradbury.

When Hegebarth arrived at Anzus, he found that many of the managers were hired because of personal friendships with the bosses. He shrunk the staff from 75 to 45, then hired 10 more technical employees, making the company more efficient.

Iomega’s Huberman shrunk middle man¬¬agement and consolidated teams, par¬¬ing employees from 300 to 200. He also demanded more. When a company is losing money, “People often feel they cannot do more than they are doing,” says Huberman. “When you challenge them to do more, to move aggressively, they can do more.”

Streamline operations
The third point is to streamline operations, say turnaround leaders. At Iomega, Huberman streamlined the supply chain. This meant renegotiating freight fees and changing suppliers, thus cutting costs. He also increased efficiency in its products. Their data storage products, for example, used custom screws, expensive casings, custom-printed circuit boards, and nonstandard-size PC boards. “We had the false notion that we were adding value by adding hidden features that made our product more reliable,” says Huberman. “In fact, they did not make them more reliable, they only increased the costs.” After three months of streamlining, production costs dropped by 15%.

Turnaround expert Sutton, who has resurrected companies ranging from aerospace manufacturing to advertising to garbage disposal, says it is critical for companies to maintain tight controls. “When you don’t know where you’re making money and where you aren’t, a lot of stupid decisions are made.”

Give customers what they want
Another key is to give customers what they want, say business leaders.When Amylin was nearly shutting its doors, shareholders were demanding refunds. But its customers—diabetic patients who had gone through the clinical trials—wrote letters saying the medicines had changed their lives, and the work was important, says Bradbury. The company called in experts to review the data. Regulatory experts, statisticians and clinical experts confirmed that the science was still solid, which encouraged the leaders to continue.

Sutton says the first thing he does when hired to turn around a company is to find out what customers want. He does this by asking customers what the company is doing right. “An ability to find out what the customers really value matters more than anything,” he says.

Clear vision
The fifth key is to have clear vision, say business leaders. Amylin had a long-term plan. Even when it was down to 37 employees, the company worked on developing two products—one for the shorter term and one for the longer term. This way, if the first one failed, the company would have another product, which, in the pharmaceuticals industry, can take nearly a decade to develop. With only one product, “you have no options,” says Bradbury. “Even if you’re successful with that first product, you have nothing else coming behind it, so you have no long-term growth.”

This clear vision applies to investors as well. When Amylin raised money during its turnaround days, says Bradbury, “we laid out clear plans for our investors, in terms of what we were trying to achieve with the money they were entrusting us with. You have to have a “very clear alignment with regard to expectations.” Making business decisions with a view toward the long-term is important, he says. “We’re talking about building a business, as opposed to creating a financial event.”

When Huberman took over at Iomega, he had short-, mid- and long-term goals in mind: regain profitability, grow the business, and leverage the company’s core assets. “As the short-term goals were being realized, I focused my shareholders and employees on the long-term goals,” he says. But “first, you have to achieve the short-term goals for them to believe your long-term goals.” Sutton says fuzzy direction is another common weakness he sees in failed businesses. He notes that Domino’s Pizza rocketed to success with one clear selling point: pizza in 30 minutes. “That was a very specific promise. You cannot be the best product with the lowest price with the most service. You’ve got to pick one or the other.”

Ultimately, say turnaround leaders, running any business is a mental game. Huberman’s biggest obstacle to success was people’s mental barriers. “When com¬¬panies do poorly, you build emotional structures to help you rationalize why you’re not doing better,” he says. “One of my principal jobs coming in was to destroy those emotional and mental barriers, [to tell people] that we could and had to do better, or none of us would have our jobs.” Sutton agrees. “When the business is struggling, then the owners have accepted substandard results in their life,” he says. “Every CEO I have replaced has known their business better than I, but they lost perspective.”

5 Pointers for a Turnaround Success

More pointers from Gary Sutton, corporate turnaround specialist and author of The Six Month Fix:

1. Move quickly. You should have a plan in two weeks, start executing within a month and complete the turnaround within six.

2 Find out what the company is doing right, by talking to employees, customers and trade editors who follow the industry.

3 Make a list of 10 things that your customers say you do best. Focus on the first one or two. Drop the rest.

4 Watch for market shifts. If everyone in your industry is losing money, it’s time to get out.

5 Wait for buyers. When the business is profitable, buyers will naturally come knocking on your door.

Helen Kaiao Chang is a ghostwriter, editor and journalist. She can be reached at www.ghostwriter-needed.com.

Follow Helen on Twitter @HelenChang

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