Business Unit Turnaround — An invaluable leadership growth experience

Recently, I had the privilege of leading a midsize revenue business unit that was part of a larger conglomerate. The business unit was in a high growth market, had a strong legacy of innovation, but had fallen on hard times. The business was facing the tricky technological disruption along with the need to shift the business model shift from hardware sales to a SAAS hardware, software, services bundle. I started with a strategic focus to gain market share through a roll-up play (build would take too long and the organization did not have the necessary skill set), but ultimately had to engage in a restructuring and drove the business exit through a combination of a stock-deal and an asset carve-out.

I learnt a few key lessons that will be invaluable for the future. I hope the lessons shared here help others become more effective leaders when faced with similar situations.

The situation

- The business unit was small and in a niche area in Public Sector. The business had been acquired by the larger conglomerate during an acquisition spree more than a decade before and continued to operate as a business in a holding company/operating company structure.

- Overtime the conglomerate lost, exited its businesses in Public Sector, however held on to this business due to its positioning in a niche growth area of the market.

- The business had been profitable in the past and was deemed a pioneer in its niche field. Overtime the business had fallen into a slow growth and ultimately into a loss-making situation due to a competitive disruption and changing business model from a hardware focus to a software and a service bundle offering.

- I was recruited to focus on tripling revenue quickly through acquisitions to enable sustaining market share and enable transition of the business model to a recurring revenue base model.

- On joining, I soon realized the revenue numbers, the milestones and roadmap shared during recruiting differed from reality. The business unit leadership had made commitments to corporate stakeholders and wanted the revenue and milestones to be true for survival. However, the business was operationally and in capital allocation not aligned to deliver on the commitments.

- Failed product commitments, personnel issues, lack of products to sell, aborted acquisitions, forced retirement of the founder leader and declining market position formed the backdrop of my taking over the reins of the business.

Result

- The revenue run rate was stabilized. Cost base was restructured in line with revenue, investments were maintained for longer term viability of the business

- Focus was shifted to customer acquisition, retention and short term cash flow

- Loss making products and products that would not position the organization for the 12–24 month future were discontinued

- Pricing, discounting and inventory management policies were changed balancing customer retention and cash flows.

- New hardware and software products were launched to re-position the organization from a hardware centric to a recurring revenue business model. Recurring revenue went up from 5% to 25% in 15 months

- The business was sold to a strategic in a stock sale with a asset carve out

Leadership lessons

Financial

• Build out of weekly Income statements, balance sheets and cash flows/working capital needs is critical very early on to understand working capital and cash needs of the business
• Seek external help to get an analysis of the business from a financial perspective. Having a strong CFO or external resource who can explain what is driving, impacting the business is critical. I will seek greater help in this area from a best practices’ perspective
• Engage in zero-based budget very early to clearly understand each number on the income statement and balance sheet. Tools such as ROIC trees, step wise regression, fish bone diagrams help build the story of the business as well as identify business seasonality
• Build out quarterly income statements and balance sheets so the 3–6–12–24–36-month strategy, tactical actions become very clearer from a investment as well as a return on investment perspective
• Understand off-balance sheet commitments to customers, vendors. Items such as open PO’s, vendor contracts can hide committed funds. It is critical to know and quantify these commitments as part of building operational strategies. Off-balance sheet commitments can be critical hindrances is case of asset-sale of the business.

Process

• Most organizations are focused on inside-out commitments. It is critical to start with the outside-in approach especially with the end customer focus customers are the reason for the business
• Start with customer views around product commitments, support needs, attrition, returns and customer pricing data. Translate working capital needs into business process and impact
• Clearly understand customer lifetime value — Key metrics of focus are customer acquisition rate, average customer acquisition cost, average customer deal size, average customer buying frequency, customer attrition rate. This influences willingness to pay, discounts and margins
• Endeavor to articulate and apply best practices by discipline sales, product management, product development, services and support.
• Growing top-line is a nuanced balance between product investments, sales investments, partnerships, channels and marketing
• Cost cutting and margin expansion is a more defined practice for which one can seek external expertise. It is important to cut costs deep enough that one does not have to do it again and again
• Business practices are codified in operational tools such as Salesforce, Netsuite, Gainsight, CRM dynamics to change operations change the operational rules in the tools with focus on desired best practice

People

• People make the business, drive execution. There is never a wrong time to get the right people in the right seat. Action/inaction in this area will empower/cripple execution
• Organizations can be risk averse especially when it comes to hiring and restructuring. Having a strong business partner is critical to work through corporate red-tape.
• Alignment of the leadership team early is critical to setting direction as well as opening room for newer desired skill sets. Get help to get alignment. Some people can change, some cannot and those who cannot need to be provided exit strategies quickly.
• Restructuring is difficult and needs to be balanced with a optimistic focus on the the future. One needs to move quickly on this aspect and some good employees are affected. The cost of inaction affects many more lives, be empathetic but decisive

Product

• Products are what brings customers, revenue and provides purpose for the business. Identify key products that drive the business now and what will enable sustained growth in 6-12–18–24 month timelines per external market need and competitive dynamics
• Agile, lean start up processes are applicable to hardware driven businesses too and work very effectively. Voice of customer, iteration driven development is applicable to hardware too. 3-D printing, customer led design thinking are invaluable in hardware driven deployment
• Applying iterative development process is important for hardware solutions as the timeline to fix issues can be very long and the investment needs to be amortized over long periods

Culture

• Foundation of a good culture is trust and feeling of safety in the organization. A broken trust relationship with corporate parent is extremely difficult to mend
• Providing a values-based anchor, a customer focus and commitment to action and short-term wins was critical to provide focus and a cultural anchor
• Culture changes are hard, take long and are an evolution. Unfortunately Changing people is the fastest way to change culture quickly. Focus on desired state and capabilities during restructuring

Governance

• Governance practices with the board and external entities is critical. In heat of the battle this aspect can end up being overlooked
• The onus of being in tune with the needs, expectations, dynamics of the board and investors lies with the business leader. A balance in seeking appropriate guidance, help, counsel and communication is critical to success especially in a turnaround
• This is a skill that needs time, effort and cultivation

Self

• Driving a restructuring while also pursuing an Executive MBA from the Wharton school was very demanding.
• Managing time, focus and energy was a balancing act. Food, exercise and sleep help drive focus and energy. This was a struggle for me given the business unit, my residence and MBA were in different locations
• Each business leader owes it to oneself and their families to take care of their body, mind, spirit. Seek help to build disciplines around exercise, food and energy management. It is a critical component in building authentic leadership and making an impact

I hope some of these lessons are valuable to the broader community and looking forward to hearing from more seasoned leaders and hope to continue the leadership journey to become a more authentic effective leader.

Key books that were invaluable to me during the process

1) First 90 days — Michael Watkins

2) Profit from the core — Chris Zook

3) Beyond the core — Chris Zook

4) Leaders checklist — Michael Useem

5) Zero to One — Peter Thiel

6) Hard thing about hard things — Ben Horowitz

7) Lean Startup — Eric Reis

8) Monk who sold his Ferrari — Robin Sharma

Books that would have been invaluable to make a greater impact

1) Stacking the deck — David Pottruck

2) The blue line imperative — Kevin Kaiser

3) Strategy from outside in — Day Moorman

4) Customer Centricity Playbook — Fader and Toms

5) Valuation — Wessels

6) Change by design — Tim Brown

7) Sprint — Jake Knapp