Surviving 2009 to Thrive in 2010

T.D. Decker

Decker Holdings

(630) 776-7681

tddecker11@earthlink.net

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Early Warning Signs of Business Failure

• There are certain early warning signs that troubled companies frequently exhibit.

• Many of these signs can be observed up to two years before a crisis is “officially” recognized.

• It is important to remember, the sooner the problems are recognized and addressed, the more flexibility management has in solving problems and returning the company to heath.

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Sales Characteristics

• Sales forecast – Can you forecast with certainty?– Are there shortfalls?– Does it show increases far in excess of current levels?– Does it show increases far in excess of prior year performance?– Is it based on growth rates that are greater than the past ?– Is it greater than the industry is expected to grow?– Increased in order to assure that all overhead expenses covered?– Includes more low margin products?– Includes many new low margin, small customers?

• Negative trends in industry pricing practices• Significant decline in market share & backlog• Sales concentrated with customers experiencing problems• Products experienced obsolescence relative to the competition

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Cost Characteristics• SG&A expenses growing faster than revenues• Gross margin % declined• Executive salaries & perks greater than industry norms• Actual costs exceed budgeted costs• Cost monitoring and measuring vs. budget and prior periods• Need for more accurate reporting on a timely and consistent basis• Need better cash flow monitoring?• Need better capital expenditure controls • SBU’s or product lines that require significantly more capital than

others and earning lower returns on investments? • Capital projects fallen short of the expected revenue growth• Capital projects fallen short of the cost savings projected• Cost accounting system need to be updated• Adequate controls over discretionary spending• Understand key cost drivers and customer profits

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Financial Characteristics• Inconsistent monthly financial results• Financial bank covenants worsening• Inventory & A/R growing faster than reserve accounts• Cash &/or revolver declining• A/R increasing• A/R increasing b/c customer dissatisfaction due to poor quality,

shipping delays or returned product? • Payables over 90 days increasing or vendors tightening credit terms• CAPEX delaying threaten survival or competitiveness• Non-critical cash spending when should be saving • If business improves do you have working capital to support growth• Experienced inventory shrinkage problems• Trouble reducing inventory levels on sales declines• Working capital declining

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Constituency Characteristics• Lender raising concerns about deteriorating financial performance• More frequent calls & meetings with your banker• Suppliers difficult to deal with • Customers dissatisfaction with products, quality or service• Losing large customers• Lenders, shareholders or directors concerned about poor

performance• No Strategic Plan• Two or more different Strategic Plans or budgets over the past year • Top management spending more time away from day to day

operations and more time on financial issues• Understanding of commodity risk• Absorbed price increases and scared to pass them along

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Industry Characteristics

• Shrinking or consolidating?• Technology shifting away from your products• Products become technologically obsolete? • Impacted significantly by economic cycles or seasonal

shifts? • Large number of competitors offering similar products or

services with more competitive prices/terms? • Foreign competition increased• Significant OSHA or environmental problems • Company be impacted by a recession or depression• Proper hedging techniques for commodity volatility

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Management Characteristics

• Need to improve teamwork• Significant changes in the company “culture” • Morale or turnover in top or middle management • Need better communication and focus• Plans, programs, budgets and accountability for

their results made clear to managers? • Labor unrest • Problems with absenteeism, increased workers

compensation claims, poor productivity or missed production quotas?

• Formal downsizing within the past year

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SWOT AnalysisThe internal & external environment that the organization operates.

To think and act strategically, you need to know and understand your situational analysis, to look around and see what is going on inside and outside the organization.

1) What are your internal strengths? 2) How would you assess your internal weaknesses? 3) What are your external opportunities? 4) What are the threats externally to your organization’s success?

Before any plans are made about where you are going, one who is wise will assess the circumstances in which your organization operates.

Out of this assessment, you can then more realistically start to make plans toward the future.

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Monitor and Maximize Cash Position13 Week Cash Flow Forecast

• Stop spending to at least break-even• Don’t just reduce X% of people • Reduce work and strategic initiatives first• Reduce people last

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Financial Fundamentals Monitor & Maximize Cash Position

• Forecast revenue• Reduce & control monthly costs• Understand fix costs & variable costs• Produce a rolling 13 week cash flow report

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Financial FundamentalsTightly Manage Customer Credit

• Segment customers based on credit risk• Only offer financing to credit worthy or strategic

customers• Assess trade-offs between credit risks and

marginal sales

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Financial FundamentalsAggressively Manage Working Capital

• Reduce inventories by monitoring production & sourcing

• Reduce receivables by actively managing customer credit

• Work with vendors to extend payables

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Financial FundamentalsOptimize Financial Structure

• Reduce debt & other liabilities• Secure access to lines of credit• Secure access to equity capital by tapping

nonmarket sources

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Reduce Costs & Increase Efficiency

• Eliminate long-standing activities that add little value

• Revive earlier efficiency initiatives too controversial to fully implement in better times

• Consolidate our centralize key functions• Analyze current suppliers & procurement

practices• Reexamine the economics of outsourcing & off

shoring

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Aggressively Manage the Top Line

• Revive customer retention initiatives• Realign sales force utilization & incentives to

generate additional short-term revenue• Reallocate marketing spending toward

immediate revenue generation• Consider more generous financial terms for

customers in return for higher prices

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Rethink Product Mix & Pricing Strategies

• Offer lower price versions of existing products• Identify products customers are still willing to

pay full price• Consider creative strategies such as results-

based or subscription pricing• Unbundle services and adopt a la carte pricing

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Rein in Planned Investments & Sell Assets

• Establish stringent capital allocation guidelines• Shed unproductive assets that were difficult to

dispose of in good times• Divest non-core businesses

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Denying Reality Video

http://www.youtube.com/watch?v=YR71GnQ4CU4

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Now What Do You Do?

• Don’t Just Announce a 20% RIF• Remaining People will Just Work Harder• Stars Might Leave• Not Every Area is Overstaffed

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Now What Do You Do?

• Get Rid of Work• Work Smarter Not Harder• Eliminate Things That Aren’t Getting a ROI

– 80/20 View– Product Line Simplification– Prioritize Strategic Initiatives– People

80/20 View

A Process for Improving Performance

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80/20 Rule

RESULTSRESULTS # OF ITEMS# OF ITEMS

80%80%

80%80%

20%20%

20%20%

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80/20 Data

Number Sum % of Sum % ofof Items Items Total Value Value Total1-100 100 10% 600 600 60%101-200 200 20% 200 800 80%201-300 300 30% 100 900 90%301-400 400 40% 50 950 95%401-500 500 50% 20 970 97%501-600 600 60% 10 980 98%601-700 700 70% 10 990 99%701-800 800 80% 7 997 100%801-900 900 90% 2 999 100%901-1000 1000 100% 1 1000 100%

Items Results

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Focus Work on Focus Work on 80%80%

80/20 Strategy

Reduce Work Reduce Work on 20%on 20%

Separate Separate 80 from 2080 from 20

Simplify EverythingSimplify Everything

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Use 80/20 in every aspect of your business

• Products• Customers• Suppliers• Inventory• Product cost• Geographic distribution

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With Peanut Butter AllocationsAll Business Looks Good

Total 80% 20%REVENUE 1,000$ 800$ 200$

Material Cost 300 240 60 Process Cost 100 80 20

Margin 600 480 120

Overhead 400 320 80

OPERATING INCOME 200$ 160$ 40$

% to Revenue 20% 20% 20%

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Some Business May Not Be So Good

Total 80% 20%REVENUE 1,000$ 800$ 200$

Material Cost 300 240 60 Process Cost 100 80 20

Margin 600 480 120

Overhead 400 80 320

OPERATING INCOME 200$ 400$ (200)$

% to Revenue 20% 50% -100%

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Real Costs of Complexity

• Scheduling• Tooling• Set-up• Engineering Drawings• Order tracking• Invoicing• Order entry• Credit & Collection

• Bill of materials• Catalogues• Purchasing• Testing• Material Handling• Sales Calls• Lack of focus on the

important parts of business

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Every Business Can Reduce Complexity The Places to Look

• Products (Multiple products with similar function?) • Customers (Lots of special handling instructions?)• Suppliers (Complex bills of materials, frequent OSWO’s?) • Transactions (What’s avg invoice, avg payable?)• Cost structure (Under capitalized? Over managed?)• People (Can you clearly state how each teammate adds

value to the business?)

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Focus Work on Focus Work on 80%80%

80/20 Strategy

Reduce Work Reduce Work on 20%on 20%

Separate Separate 80 from 2080 from 20

Simplify EverythingSimplify Everything

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Actions “Above the 80/20 line”

• Focus on the 20% of the items that account for 80% of the importance!

• Study them carefully!• Micro-manage them!• Negotiate good prices for them!• Be the best at them!• They are what matters!

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Actions “Below the 80/20 line”

• They only account for 20% of the importance!• Eliminate!• Combine!• Simplify!• Do not waste resources on them!• Outsource• Tolerate inefficiency!

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What is PLS?

Product Line Simplification

A systematic approach to defining and streamlining your product and service offerings.

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Objectives of a PLS Program

• Reduce the number of discrete products or services offered.

• Eliminate the interference of “specials.”

• Alignment of capacity & capability.

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Continuous Application of PLS Principles will Result in

• Reduced CostsReduced Costs

• Lower Inventory LevelsLower Inventory Levels

• Higher QualityHigher Quality

• Higher Service LevelsHigher Service Levels

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Customer / Product or Services

# PRODUCTS HIGH $ VOLUME LOW $ VOLUME

80% 20%

# C

US

TO

ME

RS

LO

W $

VO

LU

ME

HIG

H

$ V

OL

UM

E

20

%

80%

A AFort

64% revenue25% costs

200% profitsHigh Volume CustomersHigh Volume Products

A BNecessary Evil16% revenue

25% costsBreak-even profits

High Volume CustomersLow Volume Products

BBGet Rid Of

4% revenue25% costs 25% loss

Low Volume CustomersLow Volume Products

B ACould Be Better

16% revenue25% costs5% profits

Low Volume CustomersHigh Volume Products

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AA – Fort

Reality: This is your business! 64% of sales, 25% costs & 200% profitsDevelop business plan around AA customers/products &

services

Goal: Focus key resources here. Reduce distractions / resources on the other 3 quadrants.

Strategies: Trade focus sales / marketing» Protect and grow your market share» End user intimacyTrade focus R&D» Identify high value opportunities» Dedicate the appropriate capital / resources» Design to simplify and add value» Utilize innovation and IP

Operations / Manufacturing» Dedicated “A” lines / in-line production process» Reduce overhead cost

Accounting - Reduce transaction costs

High - volume Customers buying High - volume Products

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AB – Necessary Evil

Reality: Low profit, Must satisfy A Customers16% of sales, 25% costs & break-even profits

Goal: Minimize cost while meeting customers needs

Strategies: Direct Substitution B → A productsRaise PricesMinimum Order QuantityLonger lead times for productsDiscourages sales, encourage substitutionTreat B Products Differently (outsource, MTO, etc)Combine / Enhance Products B + B → A (VA)

High - volume Customers buying Low - volume Products

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BA – Could Be Better

Reality: Hidden cost to service many customers (80 / 10) 16% of sales, 25% costs & 5% profits

Goal: Increase sales to high potential customersReduce support cost to the rest of the customers

Strategies: Increase sales of B customers (Trade Focus work, pricing, incentives)

Treat B Customers differently (2 step, reduce sales support, pricing)

Outsource with repsDifferent customer serviceSay noNo specials

Low - volume Customers buying High - volume Products

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BB – Get Rid Of

Reality: Low profit, High hidden costs4% of sales, 25% costs & lose 25%

Goal: Minimize distraction, improve profitability

Strategies: Elimination (“low hanging fruit”)Direct Substitution B → A productsRaise PricesMinimum Order QuantityLonger Lead TimesDiscourages salesIncrease profitabilityService B Customers Differently

(internet, direct mail)

BB – Low - volume Customers buying Low - volume Products

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Prioritizing Strategic Initiatives

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Prioritize Initiatives

+Jewels

Insure you execute

High Hards

Can only afford a couple

ROI-

Low Hanging Fruit

Eliminate

- +

Cost / Effort / Time

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People

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Evaluating Teammates

Values /

+Team

Players

Star

Players

Behavior-

Problem Children

Hired

Guns

- +

Performance / Results

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Evaluating Teammates

Values /+ Rudy Peyton Manning

Behavior

- Ryan Leaf Dennis Rodman

- +

Performance / Results

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Coaching Techniques

Values /

+

Refocus

Train

Redeploy

Encourage

Mentor

Train

Promote

Behavior

-

Confront

Fire

Confront

Contain

Counsel

Fire- +

Performance / Results

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People Decisions

• Retain Stars– Encourage, mentor, train and promote– Redeploy Stars to Biggest Opportunities– Redeploy Stars to other departments– Even if you’ve eliminated their department

• Confront & Contain Hired Guns on Behavior– Ensure they don’t spoil the culture– If they are spoiling the culture then terminate

• Refocus, Train or Redeploy Team Players to Perform• Terminate Problem Children

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How do you know you need to make a Firing Decision?

• If you’re tightly managing someone, you’ve made a hiring mistake. The best people need to be guided and taught, but not managed.

• When you give 3rd and 4th chances in hopes of improvement.

• You continue to invest a lot of time and energy.

• At home, you spend a lot of time thinking about and talking with your spouse about the person.

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Making the Firing Decision

1. Would you hire the person again?

2. If the person resigned today to pursue an exciting new opportunity, would you feel terribly disappointed or secretly relieved?

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Impact of Delaying the Firing Decision

• When they do leave, our star players wonder what took you so long to pull the trigger.

• Can drive away the best new teammates.

• If the decision is inevitable, it’s not fair to the person, so let them get on with their career.

• Waiting too long usually has to do with our own convenience, not concern for the person.

• We neglect our star players.

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When Firing

• Treat the person with dignity and respect by taking the high road.

• Decision shouldn’t be a surprise to anyone.

• Remember the organization shares some responsibility for hiring & not coaching this person.

• Consider allowing the person to land softly with 3 months severance, health care benefits and outplacement services.

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Summary

1. Understand Where You Are– Early Warning Signs of Business Failure Test– SWOT– 13 week Cash Flow Forecast

2. Confront Reality with a Sense of Urgency3. 80/20 View4. Product Line Simplification5. Prioritize Strategic Initiatives6. People7. Take Decisive Action Rightsizing to Profitability8. Communicate to All Stakeholders

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Questions?

T.D. DeckerT.D. Decker is a Turnaround President with a 28 year track record as an organization builder, change agent and coach. He has been the President of a seasonal distribution company, a $3B hedge fund, an electronics firm and an automotive supplier. He is an expert in quickly developing and executing plans that shrink to profitability, restore EBIT, preserve capital and prepare companies for growth and sale. He has a diverse background in industrial, consumer goods, technology, financial services, private equity, venture capital, life science, education, non-profits and the military with experience in start-ups, emerging growth and turnaround situations. He is a decisive leader that is willing to make tough, values based decisions that are good for all stakeholders. He also has a history of developing leaders and teams while improving the culture of the organization, customer satisfaction, business results and shareholder value.

T.D. recently was President of Aquascape, the world leader in the water garden industry. There he led the turnaround of an unprofitable, seasonal distribution, product development and training company. He improved EBITDA from a loss of ($1M) to $2M while sales declined from $60M to $48M by compelling stakeholders to shrink to profitability and cut costs 30% while repositioning the company for future growth.

Prior to that, he was President of Ritchie Capital Management, $3 billion hedge fund with 20 portfolios in private equity, venture capital, venture lending, distressed debt, real estate, energy, insurance and trading. The firm had over 200 employees with offices in Geneva, Chicago, New York City, London, Bermuda, Hong Kong and Menlo Park. The firm was unprofitable and losing investors due to $180M energy loss, SEC investigation, high coast structure and investor lawsuits. There he initiated a reorganization plan to sell assets and reduce costs to ensure viability and provide liquidity to redeeming investors. He also recruited a new legal defense team that settled the 2003 mutual fund late trading case with the SEC for $40M.

He was also an investor with Fox River Financial Resources, the family office of Joe Ritchie that invests in private equity, venture capital, real estate, water, energy and black box trading. There he coached company presidents and management teams how to turnaround their business and preserve capital. He also sourced and evaluated investment opportunities while leveraging his operating experience and personal network.

As President of Telemotive Industrial Controls, he led the turnaround of the unprofitable electronics company on the verge of going out of business. As sales declined 25% he cut costs 40% and doubled shareholder value with the sale to its former largest customer, Magnetek (NYSE: MAG).

As President of ShapedWire, a 2nd generation family owned automotive, medical and packaging supplier, he led the turnaround, transforming the company into a world class market leader and quadrupled shareholder value with the sale to Leggett & Platt (NYSE: LEG).

T.D. was Marketing Manager for United Technologies Fuel Cells business charged with commercializing the emerging technology. He was the acting CFO and turnaround consultant for Berger Industries, an $80 million troubled steel company. He was also a Principal for DHC Holdings, an investor group formed to purchase and operate major manufacturing companies. In the early 90’s, he helped market Job Bank USA, a computerized resume database service. As Director of Administration and Executive Assistant to the CEO for Great Lakes Carbon, a $450 million multinational manufacturer, he assisted in the turnaround and sale of two of the three SBUs.

He served as an officer in the U.S. Army from 1981 to 1986 as a football coach at West Point, a helicopter pilot in military operations in Grenada and the youngest staff officer for the 82nd Airborne Division. He led the turnaround of a failing unit and within four months received the highest rating in 15 years. He helped organize Pete Dawkins' run for U.S. Senate, the 1988 Republican National Convention, George Bush's Presidential and Dan Quayle's Vice Presidential Debates, and the 1991 Desert Storm Homecoming Celebration in Washington, D.C. He has served on over 25 for profit and non-profit boards and is currently on the boards of Wheaton Academy, A Christian Ministry in the National Parks and Camcraft. He is also active in YPO.

T.D. earned a BS in engineering from the United States Military Academy at West Point in 1981 and was a quarterback on the Army football team. He received an MBA from Duke University in 1988 and was president of his class.