Albert Einstein famously noted that: "In the middle of every difficulty lies opportunity." The good news is that if you turn your underperforming business around, in probably the most uncertain business environment for 70 years, your reputation will be made. American company doctor Greg Brenneman says: "If you have a chance of working for a healthy company and a sick company, choose the sick one. The sickest ones need the best doctors and it’s a lot easier to stand out in a company that needs help." The bad news is that such transformations are a lot harder to effect than they were. Not as tough as devising the theory of relativity — but close enough.

The turnaround industry has changed beyond recognition in the last 15 years. In the popular imagination, it’s still associated with charismatic, larger-than-life characters, such as former ICI chief Sir John Harvey-Jones, who would enter a business all guns blazing, troubleshoot here, slash and burn there to create a lean, mean organization. But the era when you could turn a business around by confiscating the checkbooks is over. A more considered, multi-pronged and collaborative approach is required. Just as Alcoholics Anonymous offers 12 steps to help drinkers come back from the brink, so corporate turnaround has a few guiding principles.

1. What state are you in?
"The first thing any CEO or CFO needs to do in a turnaround is to understand why they’re there," says Philip Davidson, KPMG’s Head of Restructuring Advisory. "They need to take stock of their customers, suppliers and other stakeholders. Where do they stand vis-à-vis employees? What’s the market doing? Is the turnaround needed because the market’s contracting? They need to be crystal clear about the position they’re in."

A good example of the clarity and honesty required is Balfour Beatty Chairman Steven Marshall’s pert assessment of the troubled Torex Retail, which he was asked to rescue in 2007: "It required extremely urgent change because, financially and reputationally, it was looking over the edge of a cliff." This examination should tell you which areas are hemorrhaging money. When Brenneman saved Continental Airlines in 1994, he swiftly identified the 18 percent of its flights that were bleeding cash, cut them and stabilized the airline. Sometimes, savings can start with initiatives that sound mundane. In 2001, Cisco Systems cut admin costs by shrinking the number of key suppliers from 1,300 to 420 and earned volume discounts worth hundreds of millions.

2. Do you need your CEO?
The shift in turnaround thinking is perhaps best illustrated by the role of the existing CEO, says Davidson. "When I started in turnarounds 20 years ago, it was almost inevitable the CEO would go and a company doctor would take control." That person would be a situational expert and, in the still comparatively localized companies of yesteryear, that was often what was required.

Now, those trying to turn around businesses may see existing managers as a pool of specialist knowledge worth keeping. Managers may have been part of the problem, but can be part of the solution, commanding staff loyalty — especially if the turnaround is largely due to externalities. A rescue may involve a chief restructuring officer working with managers. The trick, as Mark Hurd showed when he rescued NCR in 2003 by cutting jobs, costs and underperforming executives, is not to suffer fools gladly.

3. Hunt for buried treasure
Examining a business’s balance sheet thoroughly can unearth undervalued assets. During the turnaround of drinks firm Robinsons, it was discovered that by drilling bore holes deeper, and bringing them within EU nitrate levels, their value multiplied 20-fold to US$34m (€27m). These hidden assets needn’t be as concrete as springs — CAD software supplier Autodesk revived its fortunes by focusing on an underperforming customer segment. This treasure-in-the-attic approach should not be counted on: only a minority of failing businesses have significant assets that are undiscovered or unleveraged.

4. Sort out your priorities
Once you understand your situation, you need to take control with a well-thought-through plan that makes it absolutely clear which parts of the business need direct attention and which don’t. Brenneman emphasizes the need to stick to a clear strategy. That sounds obvious, but in many underperforming firms, dispirited managers may lurch from one disaster to the next. Sometimes, it’s not all about cost: resuming profitable growth can be vital. After Michael Eisner had been ousted as Disney CEO in 2005, with shareholders in open revolt after a run of box-office failures, his replacement Bob Iger bought Pixar. The merger made Disney attractive to Hollywood creatives, made the studio’s model of developing animated films and TV series more collaborative and developed product to appeal to ‘tweens’ (10-14-year-olds) with synergistic successes like High School Musical.

That focus can work in surprising ways. In 1987, with sales of electronic components and computer products flat, U.S. firm Arrow Electronics, second in the market, bought the third biggest supplier and became market leader, a position it still holds.

5. Who needs to know?
The flow of information to employees and other sakeholders is almost as important as the flow of cash. If people are in the dark, rumors will spread. Show employees you respect them enough to keep them informed and they’re much more likely to stand behind you. Even if all you have is bad news, it’s best coming from you and managed by you.

6. Take back control
Many modern companies are fairly decentralized. This is great while times are good. But when the going gets tough, democracy and consensus can be ineffectual. Command and control may work better. In 1991, with Bang & Olufsen in deep trouble, new CEO Anders Knutsen did all the usual things: laid off staff, de-layered management and streamlined operations. But, through a strategic plan called Break Point 1993, he also dealt with many of the problems caused by an earlier decentralization, making the business more centralized and responsive to customer needs. The shift must be handled sensitively, with respect for people and their autonomy. It’s a short step from pragmatic centralization to meddling micromanagement. And you need people on side: if staff don’t believe in the turnaround, it won’t happen.

7. Understand your costs
“It’s not enough just to cut costs across the board. A more sophisticated approach is needed,” says Davidson. Costs need to be analyzed so it is clear which relate directly to sales, and over what period of time they generate returns. Cost should be viewed as ongoing investment and, like any investment, challenged by reference to the business’s objectives. If the business’s medium-term future is in jeopardy, costs that only benefit the longer term are an obvious cut. Likewise, “if you look at taking out cost and the effect on sales is neutral, then it goes. But if it is negative, you go to the next level of analysis.” You have to get the balance right. Survival depends on your stakeholders having belief in your future. Cutting costs that adversely affect the core of the business can have disastrous consequences. On the other hand, Davidson says, if survival is a matter of months, cutting a cost that relates to next year can make sense: "It’s all about allocating a scarce resource." To be able to do this with confidence, it is vital to have accurate, up-to-date information. If, as one turnaround specialist noted of a stressed business, your accounts could have been written by a novelist, your task will be considerably harder.

8. Think the unthinkable
"You need contingency plans," says Davidson. "You have this great plan in place, but what if you lose a major customer or supplier? I met with a transport business recently. Great turnaround plan, really focused on liquidity. But I asked how many of their top 20 customers would have to fail to put the plan at risk and the answer was one. One question about contingencies got to the heart of what that company needed to do next. Most companies go bust because they run out of cash. If you’re not proactively managing your situation, you increase the risk that you will go bust."

The two places you don’t want to be as a manager, says Davidson, are hope and denial. Managers often believe they can trade their way out of difficulty, forgetting they traded into it in the first place. To find the cash you need to keep going, you need to abandon the Micawberish hope that something will turn up and face reality and come out of denial to confront the uncomfortable issues that threaten your business.

As Davidson says: "You need a really good fix on where you are, where you need to get to over whatever period of time and understand all the risk factors that might affect their performance." If you do all that — and enjoy a little luck — you’re most of the way there.

What not to do when business turns infernal "If stupidity got us into this mess," the humorist Will Rogers wanted to know, "why can’t it get us out of it?" Rogers’ point has been amply proved throughout corporate history. In 1957, with the Hollywood studio system fading, MGM bosses shut their animation operations, believing reissues would yield as much revenue as new projects. Ousted cartoonists formed Hanna-Barbera, who dominated the animation world.

Cash looks even more alluring in a recession. And in 1973, with Elvis Presley and his maverick manager Colonel Tom Parker both strapped for money, Parker sold the rights to royalties on Elvis’s material for US$5.4m (€4.3m) to RCA. Artist and manager split the money 50/50. It seemed a strange deal then, but with Elvis’s record sales passing the billion mark in 2007, it looks like the biggest bargain since native Americans sold what we now call Manhattan to the Dutch in 1626 for a few trinkets. The best firms use a downturn as a reality check. But the same year as RCA bought out Elvis, dime-store chain W.T. Grant insisted on paying its quarterly dividend to shareholders, even borrowing to do so, though it was making losses. To stimulate sales, cashiers were ordered to offer credit cards to "anyone that breathed". Staff who didn’t issue enough credit cards were humiliated — some had to push peanuts across the floor with their noses — and in 1976, the chain went bust, with US$800m (€509m) of bad debt.

Sometimes, the errors are much more understandable. In the urge to fix problems, managers can forget their core business. In the 1990s, fast-growing aerospace group Loral focused so much on its troubled Globalstar satellite investment, it didn’t notice its core business was losing market share. Loral ended the 1990s as a company in trouble.

This article is featured in the December 8 - January 9 edition of Agenda magazine.

See the KPMG Global dedicated Succeeding in turbulent times site to find out more about this issue and also information on the exclusive four-part series entitled, 'Mastering Management: Managing in a downturn' published by the Financial Times in association with KPMG member firms.