Thinking Out Loud: A&M Turnaround Artist David Coles

In January 2001, when Leiner Health Products hired Alvarez & Marsal Inc., a business strategy consultancy and turnaround specialist in New York City to restructure its flagging operations, David Coles, a managing director at A&M, was assigned to oversee leiner’s recovery. Coles, who specializes in business performance improvement, profitability analysis and working capital management, served as chief financial officer at Leiner through February 2002.

What was your first impression after analyzing Leiner?

Leiner had structural, financial and informational problems. In terms of data, the company needed better operational information and a way for management to use that information to make timely decisions about the company’s operations. Leiner isn’t the only company that has suffered from this. In fact, many organizations that have grown quickly may put information systems on the back burner. It’s an expense they think they can avoid while sales and cash flow are strong. But ultimately, lack of good data always hurts.

How did you attack the turnaround?

The best way to look at many turnarounds is to think of the balance sheet as a Jet Ski and the profit-and-loss statement as a super-tanker. It’s far easier to work the balance sheet to generate cash flow initially than it is to make a company profitable. In Leiner’s case, accelerating collections of accounts receivables was the first thing we had to tackle so we could bring some cash into the company to support operations. This was going to have to be a cash-based recovery because there was no more money to borrow and no more equity to sell.

So we went out to the customer base and found that, except for a few problems, senior management at Leiner had strong relationships with the company’s customers. And they were able to work out accelerated payment terms with most of those customers. We also stretched Leiner’s payments to vendors and renegotiated contracts. On top of that, we installed Emagia cash-flow software, which was our attempt finally to get a handle on the cash flow involved in every account, from invoice to billing. By doing that, we virtually eliminated chargebacks. This whole effort was critical, because the money we received from our accounts receivables strategy was probably the difference between turning Leiner around and losing the company.

That accounts for the Jet Ski. But how did you move the supertanker—the profit-and-loss statement—from red to black?

We began that part of the turnaround with a customer, product and channel profitability analysis. Again, Leiner was lacking solid operational information about its performance—minute-to-minute, day-to-day, week-to-week, month-to-month, quarter-to- quarter. So we analyzed the customer base, the products Leiner made, and the supply chain for past and current profitability as well as future forecasts. We produced thousands of new data points—production information from historical sales trends, point-of-sale systems at key customers, and current manufacturing output—to assess the company’s performance. We ended up with a roadmap to get back to overall profitability based on identifying, retaining and improving lucrative operations and eliminating unprofitable ones. For instance, we dropped 60 percent of the company’s money-losing products and sales fell by only 15 percent. And we cut out three factories and improved productivity; by having longer production runs of a smaller number of products, plant efficiency was improved.

Did collecting the real-time information that was lacking at Leiner let you cut the complexity that was strangling the company?

Yes, and that’s very important, because that’s what this turnaround was really about: reducing complexity. Complexity means different things to different companies. It can be all the extra, non-performing operations that a company has built up over the years but can’t justify. Or it can be extra layers of technology or inefficient processes that have developed unchecked over time. By reducing these complexities, a company can realize disproportionate gains that can’t be anticipated or forecast. These disproportionate gains are an example of what’s called an “emergent property,” which is something unforeseen that arises out of an interaction or a series of actions. For instance, in chemistry, who would have thought you’d get water by mixing hydrogen and oxygen? Water is an emergent property of the combination of those two chemicals.

In terms of business strategy, the emergent property theory says that as you reduce complexity throughout the system, a turnaround becomes supercharged by the multiplying and unexpected gains from simplicity, efficiency, streamlining, less confusion and more usable information. In Leiner’s case, I figured that $40 million in cash flow from negative $2 million was realistic, but because of emergent property, Leiner has already surpassed that. That was something I couldn’t have predicted.

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