Top of Mind: Strengthening Turnaround Tactics

Turnaround firms have been staffing up this year in expectation of increased demand for their services from companies that see trouble headed their way as the economy slows and credit markets tighten.

"It was just a matter of time," says Ron Norelli, president and CEO of turnaround consulting firm Norelli & Company. "There had been too many deals done at what was perceived to be high prices when access to cash and credit was high. Then the housing industry slowed down, and problems surfaced in the auto industry that could seriously impact suppliers."

According to the 2007 Alix Partners Risk Factor Index, 79 percent of respondents expect that corporate debt defaults are likely to increase this year. The manufacturing sector will be most likely to be hit, followed by financial services, retail, and healthcare.

Norelli says that hedge funds and private-equity firms that took big positions in cash-poor companies are leading the pack in the effort to ward off financial woes as they seek to boost performance at the first sign of trouble. According to the Lipper HedgeWorld & Schwartz Cooper 2007 insolvency survey, nearly one in three hedge funds has consulted a turnaround or workout professional regarding positions in its portfolio.

And in turnaround situations, timing is critical. "The key is getting the turnaround firm in early," says Harlan Platt, a professor at the College of Business Administration, Northeastern University. "When a person is sick, they need to get to the doctor's office or hospital quickly. What holds them back is either the feeling that things will get better on their own or that other firms in the same industry are facing similar problems, so they must be doing OK."