Failure at the Top

What's the most common problem in a failing company? This is the question I am often asked. Who or what is at fault in a struggling business?

Many assume that bad employees or products are the cause

My answer? The top!
In general, once you have worked with a few diverse groups of employees you'll probably also conclude that all have a fairly typical distributions consisting of a star or two, many average performers and one or two who seem to enjoy sabotaging everything. But since this mix is typical in all companies and since all companies perform at different levels, failure must be elsewhere.
Instead, management is generally at the core of the problems. Things like emotional insecurity and dysfunction, abusive tendencies, lack of leadership and outright incompetence are normal characteristics of those at the top of poor companies.
And this would make sense if we think that management's activities are leveraged through the rest of the company's team. A great manager's input would multiply into much larger outputs. Likewise, the inverse would be the case.

Poor leaders display low emotional intelligence

Bad managerial actions create environments with silos, where cannibalism increases the need for shelter and safety. The high degree of distrust prevents synergistic cooperation among team members. Distrust then engenders management's perception of the need to micro-manage employees. Bureaucracy becomes abundant.
In general, employees hate coming to work, have long forgotten about personal or corporate goals and have no time or energy to create value. Yes, this is exactly how a vicious cycle works. A participant's actions reinforce negative systemic outcomes. This repeats time and time again until things spiral out of control.
Unfortunately bad leadership also happens with previously successful managers. Often, markets are so frothy that even bad business practices are rewarded with higher profits; gains that end as soon as the tide turns. Just as the Peter Principle defines that employees will inevitable get promoted to their level of ineptitude, so will bosses.
A previously successful sales person gets promoted to manager and fails due to the lack of adequate skills and understanding. The company then loses a great sales person after he is fired. Even demotion works to eventually end his successful career at the company.
In the same fashion, success in previous environments do not necessarily qualify a leader for the next challenge. Then, since hubris usually appears after a few wins, the manager is rendered blind and incapable of understanding how to solve the new problems being faced. This new take on the Peter Principle focuses on managers rather than employees.

Trust in business is paramount

What is the solution? In technical terms, all vicious cycles require an externality before reversal could happen. An externality is a new outside influence to the system. Applying the right amount of pressure and the correct types of externalities can in fact reverse things enough that a virtuous cycle replaces the vicious one.
But what is an externality in practice? Usually, I am; but you too could be one.
When I come into a company, like the recent factory I worked with, I face the need to quickly and forcefully apply an external force over the key fundamental factors that define the troubles. For example? I must quickly give confidence to all participants that the problem is solvable, and that the right knowledge to to so exists and is well understood.
Trust is essential in a vicious environment before anything else can happen. But do keep in mind that I am not talking about a cumbaya moment. I prefer to stay focused on the reality of the matter by making sure that there are no elephants in the room that have not been addressed. Trust is built through transparency and a commitment to progress in exchange of lots of commitment.
It is also important that the team gets a few immediate wins to start creating positive momentum. This will also show saboteurs that things are no longer safe for them; that the team is now moving positively. I usually do not have to fire bad elements. Peer pressure and group progress sends the best message. Bad players simply quit on their own. I just need to make sure that there's lots of transparency on everybody's actions. Good performers get plenty of team cheers. High-five opportunities increase. Destructive lagers find it uncomfortable and try to save face by leaving. They usually land "a great job" elsewhere.
Standards and peer accolades must remain high through out. If anyone does anything good, I tell the world. The point is to push, push, push in a positive direction, which is what being an externality is all about.

Eliminate Distractions

I also remove distractions to save the energy that will be needed to achieve the new ambitiously high goals. As previously said, bureaucracy is high at these places. Bureaucracy creates friction to movement. So, I temporarily eliminate useless reports and meetings. This creates the sense of clear air around the office. It is paramount to use the new breathing room to push hard for what's important.
While structure is very good once a company has achieved maturity, it could slow down progress in a struggling company that must change to survive. What things? Well, at first it is never clear. The only obvious answer is that something must.
A study of the fundamental constraints to progress and a risk/reward analysis of possible solutions are key. Things that waste resources and offer low returns are then easy to de-emphasize, to put it politely. Hear the sound of sacred-cows falling everywhere.
Next, I begin to create personalized plans that align employee success with company progress. It is my experience that improving employee practices and skills at work also creates benefits to their personal life. So, make sure to help them see the connections between improvements in these two worlds.

In the best teams, everybody wins

This stage is about negotiating for mutual value. Once locating the important points, I must be the relentless couch who drives them to success. Personal progress must be measured often; not for punishment, as it is often used, but to show them how to gauge their good decisions. An important goal is to help employees learn how to independently operate in an upward direction.
As part of my job, I have to try to create a temporary gap between management and their team. I need at least a little separation and some time to improve things. As the source of the troubles, management is usually not very patient. I thus have little time and must act swiftly. Fast visible improvements are key. I must maintain a focus on positives and as much transparency as management can handle. It is not easy but it's what makes the challenge fun.
It goes without saying that costs must quickly be cut, that receivables collection must be accelerated and that supplier terms should be extended. While not a solution themselves, cash and cost improvements grant the time needed to solve things. They are thus very important.
Even when anyone can drive cash and cost improvements, those within the company usually struggle. This too must change. A revived team that has been conditioned to think in terms of cash flows will ensure that cash is never a problem again in the future.

The only hockey-stick chart that works for me
is the one that looks back at factual data

At the end of the day, expect measured performance of the improved team to seem to come right out of a too-good-to-be-true presentation. You know, the same charts showing logarithmic improvements which inevitably raise suspicion.
I too do not believe in hockey-stick charts as a forecasting tool. But when they are used to report on verifiable performance, then I love them.
The best part of working with struggling companies is that I am left with many long term friends; people who have quantifiably outperformed all bench marks.
And how about their bad managers? Well, some get better jobs elsewhere. Others demonstrate that the Peter Principle does not negate improvement-after-failure. In fact, the creation of a virtuous cycle is so infectious that everyone. including management, comes on board.
There is just something fantastic about sharing a golden moment with all these fantastic people. I love doing turnarounds.



Update January 5, 2014
An expert in the matter, commented the following in an e-mail sent directly to me:

"The failure of a company is not always caused by "the top", at best only 65% of the time. The picture that you draw in your article is pretty heavy handed and very convoluted. It reminds me of an old saying, "it is not what you say, but how you say it." 
In my 33+ years as a retained search consultant, I have replaced many a CEO, and the first thing we do is a forensic analysis of what went wrong and why. As I mentioned earlier, failure from the top is only about 65% of the causal factor."

He is right! 
The problem with making any statement like mine is that it comes out as being absolute. And as he correctly observes, there are no absolutes in complex systems. 
My apologies!
I am nonetheless excited to see that his experience results in a close to 65% number. 

Failures at the Top
Typical Outcome Distribution
vs. those from 65% CEO/CFO/COO
and 50% CEO

If we apply a little statistical distribution modeling, we know that it is exceptional to see that such a small group of company employees (CEO's) account for such high number of failure events. Under normal distributions (I am geeking out here), the worst one percent (1%) of any group would be responsible for about 25% of failures. This comes from breaking down the curve of a common 80/20 distribution. 
So a 65% would certainly result from a curve with a very fat head and almost no tail. 
This is not an attempt at being cute. To find what is normal in business and what's not, I always try to look at how observed distributions compare to what would be expected under typical circumstances. In this case, while my implied message that 100% of business failures are due to failure at the top would be absolutely wrong, a 65% of failures coming from leadership would be equivalent to a catastrophic score card for the C-Suite. 
I therefore feel that my comments are statistically supported by the evidence gathered through this gentleman's long experience. 
My goal with my blog is not to just be heard but to open educational discussions, even if in the end it is proven that I am wrong. I thus feel that the value from this update lies on the way that one should benchmark things. 
I once met an executive who religiously followed an exhaustive hiring method. When I asked him how many of the chosen ones would go on to succeed at what was expected of them, he said 25%. 
Well, if I had a monkey flipping coins to decide who to hire, I would end with a random group. It could then be expected for the group to reach a success threshold around 20% of the time. In other words, his results were not much better than those from random luck. Needless to say, I was not impressed with his process, which I though was more of a pacifier than effective. 
On the other hand, one of his industry competitors achieved a 42% success rate hiring for the same positions. Now that was impressive. Any time that one can double expected results, the system is doing good work.
I appreciate the opportunity granted by this gentleman to address what I feel is a very important tool for management.