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Cable and Wireless - snatching it from the jaws of bankruptcy

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Sir Richard LapthorneIt’s the Journal of Strategy and Management’s privilege to interview Sir Richard Lapthorne, who through determination and good management saved Cable and Wireless (C&W) from bankruptcy.

JSM: Sir Richard, what was your prognosis on why a solid company with profitable but somewhat diverse and unfocussed businesses fell so far and so hard?

Sir Richard Lapthorne:

The first thing I saw when I arrived was a complete disconnect between the centre and the businesses. There seemed to be no system of control. We had businesses all round the world but the centre seemed to be distant from those businesses. I didn't see systems in place for informing the centre and I didn't see responsibility being taken at the centre.

I think we had a business that had become dysfunctional and it was a business that, despite having been privatised for quite a long time, was in many cases, particularly overseas, dealing with competition for the first time. It had a whole series of “we can't do's.”

Lawyers were reinforcing that view and so what you had was an environment that I didn't like because it was not conducive to the conduct of effective business.

It was also clear that the board did not function very well as a board with many of the non- executive directors failing to fulfil their proper roles. I am not sure if some had the breadth of experience and the ability to deal with pressure.

The board

JSM: What were your first actions as the chairman?

Sir Richard Lapthorne:

My first action was to reconstitute the board because it was not possible to address C&W's problems without an effective and functional top management team. The essence of being an effective manager is to develop and build a competent management team. Such a team is able to generate ideas, evaluate them, select options that are more likely to succeed, and implement these effectively.

These are critical in steering the organization through any phase - particularly when the organization has encountered turbulence. Clearly, having the right management team is an essential requirement for any business and it becomes critical when the objective is to steer the organization to safety through a hurricane.

Then I visited our operations overseas and started to absorb what the company was about. I didn't initiate anything day one, it was clear already however that the uncertainty around the balance sheet was the most important operational aspect that had to be dealt with. It is difficult to make strategic choices if you don't have a properly funded balance sheet.

The management team: horses for courses

JSM: Sir Richard, you were hired to shake up the management of C&W, and within 11 or 12 days of joining, you parted company with the chief executive and a number of directors. How important is it to have a credible management team in place when attempting a turnaround, and what are the key traits/attributes of a good turnaround management team?

Sir Richard Lapthorne:

In a stable business, management continuity is a positive rather than a negative. The opposite is true in the case of a business in trouble. So, I had to shake up the management team and do this quickly. I hired a new CEO and a new COO. In a turnaround situation, strategic and operational issues need to be addressed simultaneously and pressures are such that it is difficult for one person to address both effectively. I tasked the CEO with developing a coherent strategy for the business going forward. The role of COO was to address operational shortcomings and strengthen the operational side of the business, to ensure the head count was right, the capital expenditure was focused, and cash flow was improved. Other chief officers were then appointed, such as the legal director and so on.

In order to achieve transformations or recoveries, it is important to break with old habits – you probably have to bust the culture and you can't bust the culture by keeping the same players in place. Transforming an organization is a complex business and often you need to go through several phases. The demands of each phase and the skills to succeed are different. In going through various phases, and with the benefit of hindsight, I think the top management team had the right skills for the particular phases and roles were clear. The key characteristics of a good turnaround team are appropriate experience, credibility, and clarity of thought, communication skills, and the ability to create stability quickly. It is also important to bear in mind that it is not sufficient to have the right CEO but it is important to appoint the right team to support the chief executive.

In any worldwide business, there will always be a turnover of managers reasonably frequently because you run out of the ideas and you need new energy. I emulate private equity practices and private equity doesn't think twice about having horses for courses, making the change where necessary and treating people well and fairly.

“I wish that I'd been able to wave a magic wand when I first joined Cable & Wireless to give an instant first class finance network. First class controllers and finance directors provide a superb backbone to any organization.”

JSM: How important is it to have people who understand both the technical and market side of the business?

Sir Richard Lapthorne:

The technical side is less important than you would think. The telecoms industry had become obsessed with technology. In fact, we needed people who understood the market, who were capable of analysing and appreciating what was required technically. It is more important to understand what the product/service will deliver. Our next generation network is called “customer service platform” because its only value is what it can deliver into the customers' hands.

Turnaround strategy

JSM: You mentioned turnaround strategy and there were two phases of turnaround strategy – 2003-2006 and 2006-2010. Why do you think the second phase was successful whereas the first phase, from the outside, does not seem to have been a total success?

Sir Richard Lapthorne:

The first stage was to get the operational issues right.

I find it very rare that the same person is accomplished at strategy as well as the execution of that strategy. Execution requires a different mindset. In the second phase, we acquired Energis and in doing so acquired a team with tremendous market awareness. This phase moved the emphasis completely away from strategy to execution and a refocusing of the customer base. The Energis team brought in a great eye for detail, tremendous affiliation with customers, and had already gone through the trauma of abandoning traditional products as the only source of income.

We also fundamentally changed the tools by which the company operated. Now everything that each business did was visible to the board – accountability shot up. We also put in place an incentive system to support the new management system.

Each phase was distinctive and flowed logically. Phase 2 was a continuation of the refocusing carried out in phase 1 – but at the time, we saw it as doing the right things at the right time.

Turnaround; the future

JSM: Can you judge in advance whether a turnaround is feasible or not?

Sir Richard Lapthorne:

I think you can judge pretty well when it isn't going to work. I don't think that means that you would definitely judge whether it's going to work well or not but there are some companies one can see immediately where turnaround is “not do-able.” Most companies, if you look at them hard enough, have a crown jewel somewhere and quite often all the focus on the problem is away from the crown jewel.
In Cable & Wireless, the crown jewel was the international cash flow but all the attention was focussed on the turnaround of the UK business. Clearly, if you have a strong cash flow into the business that gives you a strong position in which to take sensible actions to turn around the loss-making parts of the business. In addition to the normal due diligence approach, I personally like to use people that I trust as a sounding board. However, if your balance sheet is not right, then turnaround is an uphill battle. Even when the balance sheet is “right” it is difficult to judge from the onset the degree of change, the depth, the breadth of change needed to affect an effective turnaround. You only find that out over time so as you come into events. Initially it is event driven and as you handle each event in the manner that you think is right, people will start to notice, as it's different to how it's been done before.

A private equity approach

JSM: Unusually in the second phase, you doubled as the banker to the two separate businesses. What was the logic behind this approach and where did the idea come from?

Sir Richard Lapthorne:

I'm an accountant, not a telecoms CEO and yet I had put myself into that position. Managers work in their own self-interest and I had to design a management system that aligned those interests with shareholder interests, and which at the same time would give me the assurance that they would be taking sensible decisions. Fortunately, I've chaired a couple of private equity owned firms so I knew how it could work. The basis of the model is that senior managers are motivated to run the business in the most effective manner. I designed the entire management approach – balance sheets, the delegated powers, the boards, how the reward system itself would work.

I then went through a period of first convincing all my colleagues, the non-executive board members and shareholders.

From an operational perspective, the system worked well as the top management team was excellent and as chairman, there was great merit in letting them get on with the job and not breathing down their necks and irritating them. I knew that I could delegate safely and we both knew the rules, thus avoiding any potential misunderstandings.

The structure was the right one and the incentive plan is the glue to make the structure work. Unlike share plans that are well established, there's no set of supplementary rules and the system is tremendously flexible. However, I must stress that the system is a general approach where in the early days emphasis is placed on the “lower hanging fruit”, financial underperformance, and balance sheet management. After all, this is the typical private equity approach.

Reflection

JSM: Reflecting back, Richard, on your time with C&W, what would you do more of and what would you avoid?

Sir Richard Lapthorne:

I wish I had had a dozen first class managers so that one could say let's do more things at once. The sequence has taken 7 years to get here and I am not disappointed with what we have achieved. There are always bandwidth issues – how many things can we cope with? What can we get right now? I wish that I'd been able to wave a magic wand when I first joined C&W to give an instant first class finance network. First class controllers and finance directors provide a superb backbone to any organization. So it's not what I would have done differently, it's what I might have wished for

The second part of your question on what would I have avoided, there's nothing that arose that I would say was horrendous and knocked us off. I've had no sleepless nights or hassle in just turning around the company. All the aggravation came from dealing with the way in which the media portrayed the activities of the company.

May 2011
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This is a shortened version of “Rescuing a telecom giant from the jaws of bankruptcy: A case study and an interview with Sir Richard Lapthorne, chairman of Cable & Wireless” which originally appeared in Journal of Strategy and Management, Volume 4, Number 1, 2011.

The authors are Nicholas O'Regan and Abby Ghobadian.