How to find some value in hitting rock-bottom

First published in the Financial Times on 17th September 2013.

Most large and failing companies can be saved. But they need fresh leaders

The phrase “hitting rock-bottom” is normally reserved for addicts. It defines the point at which their life cannot get worse: they either die or reinvent themselves – and recover. I believe this concept has a broader application: it can be used for companies, cities and even countries.

Reaching rock-bottom is necessary for rehabilitation, because until an addict falls that far, they tend not to make the radical reforms necessary to save themselves. Without a nadir to act as a wake-up call, they are likely to remain in denial, blaming others and finding excuses for their problems – and not making the difficult changes necessary.

Bad management in broken companies behaves in the same way. It is always someone else’s fault. Decline happens stealthily, masking the true state of affairs. Almost every turnround I have tackled had executives unwilling to take responsibility for their blunders. As they say in the 12-step programme of Alcoholics Anonymous, an addict should take a searching and fearless moral inventory. How many chief executives and finance directors of insolvent companies do that, and admit they are unfit to lead?

Politicians running destitute cities and countries are similar. Only those companies, towns and states that seriously alter their habits really improve – otherwise organisations are liquidated, while countries remain mired in poverty and stagnation. We should watch the progress of Detroit with interest. Here is a once proud metropolis that has certainly hit rock-bottom.

There can be no pretending if a municipality goes bust: the old model does not work and cannot continue. Will its bankruptcy oblige the creditors, City Hall and the unions to take the painful medicine and restructure? Or will they fudge the issues and try once more to push the hard choices into the future?

Similarly, Greece has been forced to face its demons after effectively defaulting on its obligations. Its citizens will all have to pay more taxes, work until they are older, borrow less and ensure their spending does not exceed the earning capacity of their economy in the 21st century. Only by taking these excruciating but necessary steps will they become more productive and competitive. The addiction to foreign debt and living beyond their means is over.

Last week I had lunch with the Colombian ambassador in London. He told me about the remarkable improvements his country has made in the past 15 years. The murder rate and cocaine crops have both fallen by more than 60 per cent; inflation has declined by 90 per cent to just 3 per cent; unemployment has halved; foreign direct investment has risen tenfold to $15bn a year; while the government deficit has fallen to 2 per cent of gross domestic product.

This impressive comeback happened because the nation decided to reconstruct itself. It was declared a failed state by Foreign Policy magazine: a place notorious for lawlessness, drug barons such as Pablo Escobar and terrorist organisations such as Farc. All this chaos and misery, despite abundant natural resources.

But thanks to the strong leadership of successive presidents Alvaro Uribe and Juan Manuel Santos and others, open admission that the system was broken and the energy of entrepreneurs, the vast majority of hard-working Colombian citizens forced change. The country was lucky – its renewal happened during a worldwide commodity and mining boom, from which it has benefited greatly. But it also took the will of tens of millions of people who wanted something better than violence, corruption and a reputation as a pariah nation.

Most large but failing companies can be saved. But they need fresh leaders, an admission of previous mistakes, a new culture and transformed operations. Unfortunately it is always easier to repeat the actions of the past than to change and perform differently. Institutions can find it especially difficult to reform, because they are less likely to have owners and creditors clamouring for change, and they tend to have more history – which always militates against innovation.

From Nissan to Apple to Next to Ford, there are plenty of case studies of epic corporate rebound after hitting rock-bottom. I would wager each one had to take the challenging steps I have outlined above to succeed once more.