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The Death Spiral

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Sometimes things just happen. Maybe we lose focus and take our eyes off the ball. Maybe we don't recognize the signs. Sometimes it happens quickly due to a loss of a major customer or loss of a major product line. Sometimes it is a slow, gradual process. Market share seems to evaporate; gross margin exhibits an extended period of decline. Morale suffers, employee turnover increases, net profit declines, costs seem to get out of control and losses become imminent. Some Owners, Presidents and CEO's who find themselves in a situation facing these warning signs may actually contribute to the creation of “The Death Spiral” if they aren’t careful.

What is “The Death Spiral” and how do you know if your company is in one?

“The Death Spiral” is a fatal illness if not corrected immediately. This illness can be brought on by many factors including the process of building an infrastructure (“Ivory Tower”) prematurely based predominantly on the self-gratifying needs of our ego. It can also be created by the circumstances mentioned in the opening of this article. Whatever the reason, the warning signs generally appear and, if ignored long enough, red ink from losses on the P & L statement will become the megaphone that finally gets your attention.

If it becomes an infrastructure problem that doesn’t have a revenue stream of sufficient magnitude to support the fixed costs it generates, then the infrastructure must be torn down and rebuilt.

Unfortunately, however, late recognition of the problem can cause the CEO or Owner to resort to a mental mode of retrenchment that should be called “Panic Response Management.”

Panic Response Management is, in effect, crisis restructuring. There's nothing wrong with crisis restructuring by itself. However, in an ego-driven situation, this restructuring is more apt to occur from the bottom-up versus the top-down. In other words, revenue producing functions or people may be prematurely cut. These people or positions may be, at a minimum, covering their variable expense and contributing to some degree toward fixed expenses. This creates a redistribution of fixed cost which may now jeopardize the profitability of some other segment or division. This can create pressure to close other divisions and business segments or cut deeper into revenue producing functions that are contributing at least a portion to fixed costs, thus creating "The Death Spiral."

To most of you, this may sound ridiculous or even laughable, but it does really happen. The right approach is to view restructuring from the top-down, including taking a serious look at corporate and/or family overhead. You begin this diagnosis by asking questions like the following.

• How do you define your business strategy?

• How do you communicate your strategy to the employees?

• How would you define your company's competitive advantages?

• What are your strategic initiatives?

• What changes have had a significant impact on your business?

• What keeps you from being the most efficient and effective source for customers?

• What competitive advantages do your competitors have?

• What is the competency level of your executive staff?

• How do you rate yourself with respect to the success of the Corporation?

• What volume does the top 10% of your customers represent?

• How many of your customers represent 80% of your revenue?

• Do you measure account retention and growth?

• What is the turnover rate of your sales force?

• What is your overall corporate turnover in personnel?

• What percentage of your customers consider you to be their number one supplier?

• Have your average sales per invoice increased or decreased over the past three years?

• What single thing has had the greatest impact on your company's profitability?

• What single thing has contributed the most to your decline in profits?

• How does your company compare to the industry par report?

• What metrics or industry surveys are available to you from your trade association?

• Do you have a strategic plan?

• Do you have business segment or divisional business plans?

• Do you have or promote a culture of cost containment?

• Do you provide functional leadership or do you dictate as a management style?

• Is there accountability within your executive staff and your upper management? • Is there accountability within your sales force?

• Which departments and individuals are competitive strengths to the organization and which are competitive weaknesses?

• What initiatives do you have to improve highest delivered value?

Get each member of your executive staff to go through this exercise for each department. When all the soul searching has been done, meet with your executive team to review the entire process and formulate "The Real Deal." What is the situation you are really facing? If you are an outsider working for the owner or CEO it is quite easy to be objective. If you are the owner or the CEO it is often difficult to admit the facts.

If that’s the case, it is highly recommended that you hire an outside pair of eyes to help you through this assessment process.

During the final assessment review you should be able to understand the scope and severity of the situation you find yourself in.

Develop a complete and accurate picture.

What is really wrong? What is unique about your problems, if anything?

Attempts to resolve problems and get back to profitability often fail because we don't understand the problems in general. We don't get details specific enough to formulate solid resolutions, achieving a complete and accurate picture of the situation.

– "The Real Deal" –

This is absolutely essential so that everyone can see and understand collectively. This allows collaboration aimed at restructuring and regaining profitability.

Understand the purpose to be served.

The executive team must answer the question, “what are we trying to accomplish?” You need to be data and goal specific. Becoming profitable is an unacceptable response. You must identify all contributing factors to your lack of success. Then you must determine exactly what you should be doing and what your objectives are. You must develop a common understanding of and a universal commitment to the objectives not only by your executive staff but also by every employee within your organization. Failure to be data and goal specific often leads to disruption.

You can find a cure for “The Death Spiral.” You can stop the spin. But, like convincing yourself to go to a doctor to get a professional diagnosis, you must start with a self-imposed reality check.

Step back; shut your eyes to the forest surrounding you and the swamp filled with alligators. Let your brain sort through the images created by your internal assessment. Deep down, the answers are there. You should now be able to clearly define and recognize the problem.

If the problem happens to lie within the executive staff and you own the company, don’t languish in self-pity. Don’t immerse yourself in the delusion that you’re going to wake up tomorrow, look in the mirror, and see the “Jack Welch” of your industry staring back at you. Be smart enough to swallow your pride and ask for help. It’s only a phone call away.

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