By Ernst H. Gemassmer
Startups struggling for survival are not uncommon, due to economic changes, management problems, or product issues. If these challenges can’t be resolved by the existing team with “course corrections” or “pivots,” an investor will often bring in an experienced CEO to tackle the turnaround before or after bankruptcy.
This is a hard and painful process for everyone, but it’s usually better than the alternative of liquidating or losing the assets and antagonizing many customers. The issues are often similar, so I’ll relate a real case from my own experience to illustrate the process and the results.
In this case, a private equity firm engaged me to assist in the purchase of a German software supplier. Upon successful completion of the acquisition I was asked to initiate a major turnaround or business restructuring, since the current course had led to bankruptcy.
Here is a summary of the processes required, timeframes, and the results:
- Restructure management teams. This effort required two weeks of interviews with senior and middle managers to identify the team required to take the company forward. The challenge was to locate current staff with enough product/customer knowledge but with enough drive and desire and willingness to make the required changes.
It was essential to move with deliberation and speed. Procrastination could only cause unnecessary additional anxiety. Clearly required was ‘leadership from the front’.
- Determine key customer satisfaction levels and requirements. The company had succeeded in selling its products to the leading German and international automotive companies and their suppliers. Customers interviewed were generally satisfied with the software products as well as customer service. However, they were confused by the company organization structure.
- Optimize staffing requirements. The first order of business, which soon became apparent, was a significant reduction in staffing. During its rapid growth the company had followed an unusual growth path by establishing a separate company with its own infrastructure and staffs in each German geographic region. Fully staffed entities were also established in a number of countries in both Western and Eastern Europe.
In addition the company had started to sell its basic software to other industries as well. All this led to a staff level exceeding 700 employees, contributed to lack of control and eventual bankruptcy. The organization both within Germany and other countries was quickly streamlined, in line with customer feedback.
- Negotiate changes with the company union. The company had a worker’s council similar to a labor union in structure. German law dictated the need for a worker’s council based on the number of employees. Numerous meetings were held with individual members of the council as well as the entire council. Eventually several key members of the council understood the challenges facing the company and worked hard to convince their colleagues to agree to staff reductions. This task took about two months and required a lot of patience, soft pressure and persuasion.
Patience on part of the new management team ultimately led to a successful restructuring. When I returned to the US after many months, the company had been restructured, had come out of bankruptcy, and did not lose a single important customer.
The message for startups is to do course corrections or pivots often along the way, and you won’t have to endure a bankruptcy and turnaround to get back on track. An even better course is to seek and heed the advice of experienced advisors during the critical early phase of charting direction and growth of your startup.
Today’s article is presented by one of the founders of our Startup Professionals team, Ernst H. Gemassmer. He has long helped entrepreneurs in Silicon Valley, as well as providing turnaround assistance as interim CEO for several companies in Europe. You can contact him directly at email@example.com.