Seven ways to turn around government-owned firms

Turning around a government-owned company, which is a substantial influencer of the local economy, is tantamount to changing a submarine’s engine when it’s underwater: the usual rules are inapplicable because the risks are too great. However, there are several contextual practices that GOCs can use to facilitate their turnaround.  

Transforming classical government-owned companies has been a continuing challenge of many worldwide governments. Mainly, governments are reluctant to take harsh steps that could be disliked, and the effects might not occur in time for national elections. This results in a deluge of lackluster efforts, driven by refutal, before a precipitous drop in performance forces a bailout or some other type of action. At this stage, most types of intervention are usually costly to government, the company, taxpayers and staff.  

Therefore, governments, erroneously thinking that all makeovers are untidy, pricey and filled with risk, postpone the process or abandon them completely. That is, they merely pass the costs of the turnaround to a future government, thus losing the potential of the company. When poorly performed, business makeovers are usually a fiasco. Nevertheless, a transformation can be effectively managed by following seven contextual practice ideas that are exclusive to GOCs.  

 

A contract between government and the GOC   

Many GOCs are either major contributors to the government’s coffers or influence important parts of the economy. Hence, a GOC’s decision to alter course without discerning the needs of the country, and the effect thereon, could cause calamity. Therefore, the GOC’s board must consult with the government and determine its owner’s needs.  

When this is established, the GOC can produce a set of credible alternatives to satisfy those needs while modifying its internal strategy. If the GOC’s transformation jeopardizes the needs of the government in any manner, the GOC must state the severity of the impact and help the government comprehend how the growth and competitiveness of the country will be impacted. Backup plans should be mutually developed as required.  

The old adage applies – never make your boss look bad in public. GOCs should operate with no surprises. If anything occurs that hinders the GOC’s contribution to the government’s strategy, the GOC’s board will lose its credibility, thus making it even harder for any potential strategy changes to be sanctioned. Furthermore, valuable goodwill will be lost among the constituents. 

 

Penetrate the old opinions for and against change  

Debates about improving GOCs’ performance are not new. Those about Cayman Turtle Farm and Cayman Airways Ltd, have been going on for years. Hence, over time, the diverse stakeholders have developed embedded views on the issues, trends and gaps in the sector. Certain stakeholders will jump on every chance to advise others about their beliefs, hoping to recruit more followers to adopt their mindset. Stakeholders, used to attending the same old meetings simply tune out and stop listening since they do not expect to hear any new concepts. Therefore, to get their attention, it is important to change the dynamic of the dialogue.  

Chief executive officers of GOCs who have managed successful turnarounds have used various strategies to refashion the debate, including: showing the board videos emphasizing key concepts, having ferocious rivals and clients speak to management, and having the senior management team participate in weekend strategy retreats. The idea here is to furnish a new perspective for old deliberations. 

 

History, affiliations and antecedent matter  

It is very important that management understands the previous set of conditions that, over the years, produced the current situation. The build-up series helps clarify causality. Moreover, in any organization, there is usually an intricate set of relationships behind the issues. Unless this is understood, the wrong issues could end up being tackled.  

When examining the GOC’s history, it is prudent not to blame past administrations or management, if possible. This practice only generates disquiet among current employees who worry how far down the organization the blame will penetrate. Management’s role is to work within the confines of the assets it receives. Trying to allocate blame wastes valuable time and energy. In other words, you own the problem once you take the job. 

 

Transforming a GOC is mainly execution, not strategy  

The contextual practices for transforming a GOC are not secrets. On the contrary, they are all renowned and well-documented. Once the strategy is right, what differentiates successes from failures is the effort to evaluate the implementation, communication and cultural issues. The CEO must first produce a realistic turnaround strategy, which he personally believes is feasible and thus can share with confidence. Next, the CEO must persuade a few prominent direct reports to back the strategy. Gradually, more executives will join until a ripple effect permeates the organization. After a few successes, more areas of the organization will start to support the effort.  

Transformation is rarely an earth-shattering method. GOCs are usually large organizations moored by years of ingrained ideas and views. While an effective transformation will yield results only after one to two years, for a large GOC, it will likely be accomplished only after three to five years. Government must anticipate this and provide the essential support management requires to execute such a long turnaround. 

 

Measurement is important  

The CEO can only manage what he measures, and this requires measuring the capacity, capability and will of his executive team. In building and managing his executive team, the CEO needs to focus on three prerequisites. Examining just one executive gives an insight into these prerequisites. For example, the chief operating officer’s typical week involves meeting skeptical employees, suppliers and vendors and other stakeholders who will regularly ask for more information and illustrations to judge the virtues of the prospective plan.  

Much patience and planning will be required to get his team to grasp the new strategy. It will mean spurring an entire operations department to change direction to back an untested plan. All other senior executives will face similar hurdles. Hence, the first step is having the resolve to attend work daily and to steadfastly plough through these hurdles while calmly persuading doubtful staff. 

The COO, like his peers, is usually very busy. Thus, the second component consists of finding the time to administer key parts of a turnaround. One method of determining whether an executive backs the turnaround is to calculate his turnaround allocation ratio: the ratio of the time spent managing the turnaround versus managing day-to-day issues, which should ideally be deputised. Any figure less than 60 percent should raise red flags.  

Executives vote with their time distribution. An executive not committed to the GOC’s turnaround is not only hurting the company and employees, but also fundamentally hurting the country’s competitiveness. 

Third, resolve and a clear diary are meaningless unless the COO has both the technical skills and diplomatic charm to do the work. Good intentions will be futile when, for example, a new system’s installation incorrectly assigns resources, thereby producing unintended costs in some departments. Also, the COO is both unable to understand the issue and lead a rigorous effort to repair the problem. Therefore, the executive’s competence is crucial, as is his ability to spur action via clear communication. 

 

Focus on both revenue and cost  

It should not come as a surprise to anyone that cost reduction, without revenue growth, produces only a one-off spike in company value. Therefore, all restructuring programs must produce both cost reduction and revenue growth. Cayman’s GOCs typically focus too little on cost reduction. As commodity prices increase, they find it easier to focus on revenue expansion rather than cost containment. Many increase profits by raising prices while ducking the harder-to-implement cost reduction programs. Although revenue-driven growth is easier to pursue for quasi-monopoly GOCs, it ultimately does not repair the long-term inefficiency problems, which eventually drive return on invested capital. 

 

Establish performance measures to inspire value creation  

Staff will only adopt the new strategy if their performance measures are linked to activities that conclusively enhance company value. Although many employees support exciting management changes, many will be unaware of what to do on Monday morning to adjust themselves to the new mindset. Management should not have staff develop their own performance metrics alone. Scores of departments preparing their own performance measures without help consumes productive hours and creates a bewildering muddle of good intentions but little value.  

Management must permeate new performance measures throughout the organization and then leave it to the organization’s leaders to coordinate these metrics with operational targets. Concurrently, it must carefully monitor conformance to the measures. 

Finally, a GOCs ultimate owner, the public, must recognize that the turnaround of the GOC is not necessarily the start of a privatisation program. It is, however, a start to the GOC’s sustainability and the owner’s own well-being.  

 

Gregg Anderson, MBA, CMC is managing director of VisionQuest Management Services Ltd., a boutique management consulting company that provides Strategy, Business Transformation, Governance, Risk & Compliance consulting services. He can be reached at gregg@vmsglocal.com  

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Debates about improving the performance of government–owned companies like Cayman Airways Ltd. have been going on for years.

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