A business transformation presents an abundance of challenges for any leadership team, regardless of tolerance for conflict. In the business press, financial issues often take center stage in reporting on a business transformation, and with good reason. The task of systematically resetting the capital structure and profit potential of an enterprise is an enormous endeavor, and when that task is combined with intense time pressure, it is easy to see how financial concerns naturally take the forefront, particularly in the discussions of outside observers. The challenge in focusing too narrowly on financial issues in a business transformation is that such a focus obscures a key driver of success: fostering stakeholder support by rebuilding relationships and crafting a narrative of future success that effectively sets the stage for productive collaboration moving forward.
It is difficult for many leaders to intuit the crucial importance of stakeholder support, and as a result that importance is felt most keenly when it is absent. By their nature, relations with stakeholders are often marked by long stretches of monotony interspersed with intense periods of rancor. The time commitment necessary for productive relationship building with multiple stakeholders has none of the glamour of the 11th hour restructuring that saves a company, or the heroic return to profitability following years of losses that the most dramatic business transformations are known for. And yet, as the work of professor Michael Jensen at Harvard Business School suggests, value maximization is inextricably tied to cultivation of stakeholder support. Simply put, the headline grabbing value maximization results of a successful business transformation are impossible without stakeholder support.
The stakeholders in every situation are varied, but the overriding theme in the early stages of a business transformation is their sense of anger and betrayal. Capital providers feel misled by performance that has fallen short of forecasts and are impatient for a credible pathway to an acceptable level of profitability or a palatable option to cut their losses and exit the investment. Employees are demoralized by poor performance and frustrated by management’s inability to solve the problems that are overwhelming the company. Suppliers are furious at a lack of communication as they nervously assess their exposure while hoping for a return to better days. Each stakeholder group has a good deal to gain from a successful business transformation, but the reality is that, for any transformation effort to truly be successful, each stakeholder group is going to need to grapple with a set of hard truths first.
Earning stakeholder support in the context of a business transformation is very much a process of guiding stakeholders through the acknowledgement of hard truths and on to a workable framework for a forward-looking relationship with the company. Over time I have come to see this process as one of the defining crucibles of transformational leadership.
We can safely generalize stakeholder constituencies into the following groups: Capital Providers, Employees, and Suppliers. Each of these broad constituencies has a unique set of concerns, risk tolerances, and levers at their disposal to help or harm a nascent business transformation. It is the role of leadership in a business transformation to manage each constituency for the maximum benefit of the enterprise.
With each of these constituencies a few key principles apply:
Capital Providers: This group, which comprises lenders ranging from banks to private credit funds and shareholders ranging from family owners to private equity firms, is broad but has a common interest in earning an attractive risk-adjusted return on investment. The challenge with this group is in respecting a party’s risk/return preferences and structuring a formal proposal that will result in a palatable long-run equilibrium. Banks, almost always at the low end of the risk/return spectrum, will seek a path to reduce their exposure in a business transformation, while private equity firms, at the opposite end of the spectrum, will be more amenable to deploying additional capital at an attractive return.
The hard truth for this stakeholder constituency is the definitive end to prior forecasts and a resetting of the baseline, both short and long-term. In the short-term, this resetting of the baseline will often involve a violation of lending covenants, a worrisome level of liquidity (cash plus untapped borrowing capacity), and a need on the part of capital providers for intensive monitoring (often weekly, but usually no less than monthly). In the mid-term, a restructuring is often necessary, which raises the specter of considerable losses to all capital providers, but most often to equity investors and subordinated debt providers. Given these dynamics, trust is low, all analysis is heavily scrutinized, and it is of the utmost importance that leadership at the company under-promise and over-deliver.
Employees: As a group, employees are the stakeholder group most open to a plan that will return the company to success, but most resistant to the idea that they (individually) had a role in the company’s troubles. Executive team members are often defensive and unrealistic in assessing their performance prior to the launch of a formal business transformation initiative and are noteworthy in their frequent attempts to envision a successful business transformation that somehow leaves their personal status quo unchanged. The hurdle with this constituency is to address layoffs, reassignments and key promotions quickly, and instill a sense that, following a brief but intensive transition period, their efforts will again be the prime determinant of their future success at the company.
The hard truth for this stakeholder constituency is that the status quo is at an end, permanently. People will lose their jobs, and for those who remain there will be considerable changes: departments will be reshuffled, executive departures and new promotions will scramble old power dynamics, former sacred cow divisions or projects will be objectively reassessed. The promise here is that the change is premised on making the company better, the challenge is in recognizing that such an outcome will be secondary to those facing an individual loss in power, status, or control.
Suppliers: This broad stakeholder group encompasses landlords, key supply chain partners, and miscellaneous service providers large and small. The key dynamic for this group is the overwhelming desire to maintain and grow their commercial relationship with the company, mediated in part by concern over their current level of financial exposure and a desire for clarity on the path forward.
The hard truth for this stakeholder constituency is that every business transformation takes time, and so the fix is unlikely to be immediate. Past due balances are more likely to be worked down over time rather than paid off immediately. In some cases, this disappointing news must be delivered simultaneously with a request for additional concessions. The key here is to focus on the plan that is being executed, and appeal to greed (growing with the company post-transformation), over the fear of current levels of financial exposure.
Time and Attention
The investment in leadership time and attention necessary to rebuild stakeholder support is considerable. In the short-term, even formerly low-value stakeholder communications should be handled by executive leadership. Routine interactions such as vendor calls, quarterly financial reviews with capital providers, and employee townhalls should be recast as opportunities to reinforce the message that a business transformation is in progress, get real-time feedback on how the process appears to those outside the c-suite, and provide a forum to address questions and concerns promptly.
Leaders executing a business transformation must recognize that they swim in a sea of skepticism, and that the way to change that condition is to address the skepticism patiently, clearly, and often. Results ultimately carry the day in any business transformation initiative, but in the early stages the process can also be envisioned as a series of interlocking public relations campaigns to different stakeholders.
Capital provider communications can most effectively be recast through upgraded report quality and an accelerated reporting cadence. If updates had been quarterly under normal circumstances, consider a weekly or semi-monthly update call along with appropriate financial reporting. Look to provide additional metrics, featuring an appropriate mix of leading and lagging indicators, and tell a consistent story. Once the transformation has gained traction, invite capital providers to an on-site presentation of the long-term strategy. The goal here is to provide visibility into near-term performance, provide advance warning of any issues, showcase improved performance, and build excitement for the future.
Employee communications offer the prospect of the rich bounty of energy and goodwill that comes from an energized, enthusiastic workforce. Unfortunately, the risk of declining morale and skepticism is ever-present. Communication to this group must represent a mix of styles: townhalls, small group gatherings, email, etc. Few people are equally disposed to all methods of communication, and leaders in a business transformation should keep that in mind when crafting an approach aimed at winning, and keeping, the hearts and minds of this group.
Vendor communications are a risk area for all but the most iron-willed leaders in a business transformation. Accusations and threats are to be expected in the early days, as months or years of pent-up frustration are released, ironically on the very leaders with the discipline to hear out angry vendors. The key with this group is consistency and access; setting a rhythm of weekly updates with critical vendors and providing them with an executive level point of contact goes a long way toward reestablishing a positive working relationship.
The investment in time and attention necessary to rebuild stakeholder support is considerable. In the short-term, even formerly routine stakeholder communications should be handled by executive leadership. While this approach might initially seem to represent a questionable allocation of precious time, when considering the crucial importance of stakeholder support, the cost is low.
Business transformations strain the political skills of even the most persuasive leaders. The dynamic challenge of setting expectations, addressing past missteps and rebuilding trust, all while driving cultural, financial, operational, and strategic change, is daunting. But with stakeholder support even the most challenging business transformation becomes less so, and without it even seemingly minor situations can falter.
About the Author
David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition. Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies. David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation. He can be contacted at: firstname.lastname@example.org.