Gustaw Duda, a management accountant based in Krakow, Poland, speaks candidly about his experiences turning around a distressed company with liquidity problems.
Among the numerous roles played by mid-market professional accountants in business (PAIBs), that of turnaround specialist ranks among the most important and most sought after. But so many stories about successful corporate turnarounds obscure the struggles PAIBs confront in sorting out distressed mid-sized enterprises (MEs).
Gustaw Duda prefers to highlight the successes and the stumbling blocks he encountered when playing a central role in turning around Poland-based Poligrafia.
Duda, who now serves as the CFO of Krakow-based Orlen Oil, and his former colleagues at Poligrafia managed to maximise their wins and minimise their losses in such a way that this turnaround story produced a happy ending.
The ups and downs of the middle
Like so many other mid-sized companies throughout the world, Poligrafia’s history contains numerous swings among periods of stability, growth and distress.
Poligrafia began its existence in the early 1990s as a printing plant subsidiary within a construction company. The business, which targeted small to mid-sized publishers in Poland, hummed along with modest-but-steady profits for the next nine years … until the parent company was acquired by a large international construction corporation.
The printing business’s new parent company quickly sold it to a private equity fund, whose management took oversight of the business. They quickly injected large amounts of capital into the business, which had been run extremely conservatively for the first nine years of its existence. The investments largely went toward the purchase of new production equipment, giving the business the capacity – and, more daunting, the need – to serve much larger publishing customers.
Poligrafia doubled in size in less than two years, transforming from a stable company on the verge of small and mid-sized status to a fully-fledged, rapidly growing ME. Problems arose in equally rapid fashion, and it became evident that the existing management resources were not suited to operate a much larger entity. At the time of this transition, in 2001, the company’s president still conducted most of her communications to her departments via letters. She did not use a computer.
The primary problem was that Poligrafia could not generate sufficient production for its new printing equipment. The company’s existing customer base consisted of publishers whose publications boasted circulations of 20,000 to 40,000 copies. Poligrafia’s new infrastructure demanded more customers with circulations of 100,000 plus to generate sufficient returns on investment.
In 2001, profits decreased significantly as a result of this production gap, and the company’s banking relationships began to sour.
Symptoms, root causes and solutions
By 2002, the shrinking profit turned into a major loss of roughly 8 million Zloty (PLN), with PLN 200 million in revenue. Later that year, Duda was hired as CFO. At that time, two other executives also were brought in to replace the previous management team and given a mandate to address these problems.
‘At the beginning of 2003, I had trouble with our banks,’ Duda recalls. ‘It was the first issue I confronted because the banks decided not to roll over our credit lines, and the company was quickly losing liquidity. We needed to convince the banks that the recent change in management would help make our profitability issues temporary.’
Duda also recognised that the company’s sagging credibility with its bankers represented more of a symptom than a root cause. He set out to eliminate this symptom by making some fundamental improvements, all of which were within his responsibilities as CFO.
Revamping the budgeting and control function
When Duda joined the company, it lacked a proper budgeting and control function. The budget was prepared on a very high level by comparing the targets for the next year with the previous year and then making small adjustments as needed. The approach was passable when the company was small and profitable, but offered little, if any, guidance and cost-control capabilities now the company had grown and profits had disappeared.
Duda started from scratch while emphasising the value of a reliable budgeting and control process to the entire company. The work included reorganising cost centres, implementing processes to more accurately track costs, better understanding different sources of revenue and fostering a more budget-savvy culture. It was a tall task, and one Duda would have liked two years to execute. He accomplished it in less than half that time, and Poligrafia’s banks took notice.
He says: ‘It included information such as production volume per machine and currency exchange rates.’ New modelling capabilities also showed the bank what would be the impact of fluctuations in sales volumes, prices, interest and currency exchange rates on the company’s profitability.
Establishing a credit control function
In addition to remaking the budgeting system, Duda also established a credit control function to attack costly debt-recovery problems and, by doing so, increase working capital. First, Duda trained one of the employees as a credit specialist to manage the newly created department. Second, they established procedures for pre-qualifying customers based on their credit histories and analysis of their financial standing. Third, they communicated the new guidelines to the sales force and the entire company. These procedures instilled greater financial discipline in the sales force that previously sold to customers without devoting much care to whether the customers would pay on time, or at all.
Addressing a lack of specialists
Additionally, a more human problem contributed to the company’s challenges. On first glance, Duda thought that the company simply had not hired enough specialists to implement, manage and, when necessary, improve the types of business processes that a growing ME required. He had, in fact, hired a handful of planning and analysis specialists to help strengthen budgeting and cost control. On closer inspection, however, Duda discovered that the problem was more structural.
‘We had too many different departments,’ he says. Several departments consisted of only one or two people; when one of those people left, the department practically stopped functioning. Duda and his executive colleagues reorganised the company into a smaller number of larger departments. They also hired managers to lead some of the newly created departments but did so without increasing previous salary costs. The restructuring provided higher-skilled and more reliable support processes throughout the company.
By highlighting all of the improvements Poligrafia presented a story to the banks that ‘convinced them that we would be fine,’ says Duda.
Achieving all of these improvements was difficult and time-consuming. Duda would have preferred to delegate the specialists issue to someone better qualified to conduct an external market analysis on skills and salaries. ‘I had to do this work personally because at that time I didn’t have a person I could ask to do it,’ he recalls.
The right diagnosis
The lack of executive talent on the administrative front created other challenges, including complicating Duda’s attempt to revamp the compensation system. After Duda and his team addressed the process areas at the root cause of performance problems, they wanted to establish greater accountability for executing the new processes through an incentives-based compensation system.
The previous system was highly subjective, Duda recalls. It essentially involved the previous president determining who warranted a bonus each month. Duda and his executive colleagues assembled a team of 30 key employees from across the company, and they set out to design a new quarterly bonus system based on EBIT (earnings before interest and taxes) realisation that would align behaviours in different functions with corporate objectives. Despite those sound intentions and the highly collaborative approach, the effort did not get off the ground, in large part, due to communications problems. A skilled HR executive – a luxury the company could not afford at the time – probably would have handled communications and training around the new system more effectively, Duda believes. ‘It was the right diagnosis,’ he acknowledges, ‘but the execution was not 100% correct.’
Although that objective fell short, the other process improvements Duda and his team implemented hit their mark. Poligrafia returned to profitability in 2004, posting PLN 10 million in net income. The success of the turnaround strategy quickly gave way to the need for an exit strategy. In January 2005, Duda and his team launched a due diligence process to prepare the company for sale, which was completed 10 months later when US-based RR Donnelley purchased the business.
Duda then moved on to his current role, content in the knowledge that his efforts had doubled the value of Poligrafia in three years of work, rich with ups and downs.
Key lessons:
- Make sure that you keep your credit lines open, especially in tough times.
- Don’t be misled by symptoms; set out to identify and then address the root causes of problems that cause profits to decline.
- A proper budget and control function becomes even more important as an organisation grows and confronts new challenges.
- A proper credit control function instils greater financial discipline in the organisation and improves the balance sheet.
- A well designed and properly implemented incentive system aligns behaviours in different functions with corporate objectives.
This article was first printed in the International Federation of Accountants report ‘The crucial roles of professional accountants in business in mid-sized enterprises’.
This interview was based on an article in 'The crucial roles of professional accountants in business in mid-sized enterprises' of the IFAC’s Professional Accountants in Business Committee, published by the International Federation of Accountants in May 2008 and is used with permission of IFAC.
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Leading in a downturn
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January 2009