Underperformance - Part II

A Transformation Mindset

There is a silver lining for zombie companies, if they are willing to avail themselves of it. Business transformation, especially starting from a state of distress, is an incredibly powerful value driver. The reason that distress is, counterintuitively, a compelling starting point for business transformation is that in moments of existential crisis, everything is on the table, and as such radical, previously unthinkable change becomes conceivable. It is this openness, this tabula rasa moment, that is the glorious and yet fleeting opportunity that distress bestows: a moment of crisis for a company can become the first chapter of a new story of reinvention and value creation. But only if the opportunity is seized, and too often, it is not.

A transformation mindset is marked by:

·?Clarity. Being goal-oriented and having a clear, well-defined sense of what success looks like is a crucial, yet often under-appreciated element to a successful business transformation.

·?Objectivity. A willingness to accept a present state of distress / underperformance is a necessary but not sufficient condition to any successful business transformation.

·?High expectations. Excellence has no upper limit, but mediocrity eagerly imposes a low ceiling on itself and finds contentment in a prison of its own creation. Because of this dynamic, high expectations bias companies towards excellence and inoculate against mediocrity.

·?Imagination. One of the greatest advantages that transformation professionals have over incumbent leadership in driving change is the ability to think outside of the framework of a company’s recent history and imagine something new. Very often unexamined industry practices combine with idiosyncratic factors to create and sustain a vicious cycle of value destruction within underperforming companies. Outsiders are often better able to spot these toxic dynamics and are less inhibited in addressing them.

·?Patience. This is both the element that marks the cornerstone of successful business transformations and also the crucial organizational gut-check that too many companies fail. Decision makers (owners, lenders, leadership, employees, customers, suppliers, etc.) must be on board for a transformation process. It is often the time component that results in transformational change being taken off the table for companies, as they seek the sugar high of quick fixes that do not address the root causes of underperformance. Restructuring is fast. Turnarounds are fragile. But addressing all that must be wrong with a company for it to meet the definition of a zombie, and rebuilding that company requires both broad scope and considerable duration.

Conclusion

A shockingly large percentage of companies exhibit signs of persistent financial underperformance. Extrapolating from academic research, it seems plausible that in the U.S. lower middle market alone, between approximately 98,000 and 147,000 companies meet the definition of a “zombie firm”. These companies find themselves mired in this value destructive state for a host of reasons, and as a result comprehensively addressing root causes can be challenging. Many companies, Joann being only a recent example, have found that significant investments in change initiatives fail to address the root causes of underperformance and as a result the impact of these change initiatives is evanescent, wasting time, money, and eroding the morale of all involved. Only through a comprehensive business transformation can the causes of the systemic underperformance of zombie firms be addressed and remediated.

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About the Author

David Johnson is the founder and managing partner of Abraxas Group, a boutique advisory firm focused on providing leadership and support services to companies in need of transformational change. He is an accomplished thought leader with multiple articles and speaking engagements on the topics of business transformation, change management, performance improvement, restructuring, turnaround, and value creation to his credit. David can be reached at: [email protected].

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