Turnarounds
Changing polarity
How Paul Evanson turned a negative into a positive at Allegheny Energy by creating a solid turnaround team
By Ray Marano
Smart Business Pittsburgh | June 2007
When Paul Evanson came on board at Allegheny Energy Inc. in
June 2003 as its new chairman, president and CEO, the utility was
dangerously close to sliding into bankruptcy.
The company had made some speculative ventures that had
failed, including an energy trading company it had purchased from
Merrill Lynch and a financial reporting system rendered largely
inoperative as a result. Just getting the needed cash to keep the
company afloat until Evanson could set it back on the right course
looked like a Herculean task. With cash reserves of just $20 million
when he arrived, the time horizon to get the company on track was
a short one.
“They just made a lot of bad decisions and the trading business lost
$1 billion in two years and we paid a half a billion dollars for it, so that
was $1.5 billion gone,” Evanson says. “We bought some assets for like
$1.1 billion that were sold subsequently for $300 million. It was a huge
amount that was lost, so we were really on the brink of bankruptcy.”
At the end of fiscal 2003, the company posted a net loss of $355 million on revenue of $2.4 billion.
The company needed help and it needed it fast. Unfortunately for
Evanson, he had to start from scratch when it came to building a team
that could help him. Everyone would have to come from outside the
company.
“They had an early retirement program that, unlike anything else I
had seen, they had made applicable to everybody in the company,”
says Evanson. “Usually, they exclude the senior officers because they
meet the age and experience requirements, but the company was
headed toward bankruptcy and all the officers in the company opted
for the retirement program and getting their benefits and secured supplemental executive retirement plans.
“So we had to replace the entire team. The board had already terminated the CEO and the CFO, so we didn’t have a CFO when I came.
We had to replace the top team while we’re issuing securities and
dealing with all of that.”
Establishing connections
Evanson knew that the standard, off-the-shelf managers just would-n’t do in Allegheny Energy’s situation.
“When you’re in the urgent need that we were, to have people who
have been in similar situations is almost a prerequisite,” says Evanson.
Evanson knew he didn’t have a lot of time to assemble his team and
he didn’t have much room for error. He knew his choices had to be
quick, deliberate and near perfect, and the more conventional methods of filling key positions just weren’t going to work,
“Doing job interviews, it’s very difficult,” Evanson says. “Some people come across great in interviews and then you work with them a
month and you say, ‘How did I miss that?’ Then there are other people who don’t come across that well and turn out to be great talents.”
But coming to a faltering company wasn’t the most attractive proposition for many executives, least of all for many top performers, who
often find themselves in situations that are comfortable and without
the rigors a turnaround can demand. So Evanson had his work cut out
for him in attracting talent. To build the team he needed, virtually from
scratch, Evanson went to people that he had either worked with,
knew through his business dealings or who came highly recommended by friends.
“It wasn’t the easiest thing, necessarily, to attract people, in the
beginning at least,” Evanson says. “I went to people I had known or had run into in one way or another, had some relationship with, and
could get them interested in the company and the potential.”
To sweeten the deal for the incoming executives, Evanson tied their
compensation to the company’s performance.
“It was high risk, but we tried to structure it where it was high
reward, where the compensation was geared to stock, so if we went
bankrupt they got nothing, but if we were successful, they could do
well.”
The lack of leadership had created problems within the company, so
it was important to get the team assembled quickly.
Without a CFO with an experienced team to serve as a rudder for
the company’s financial practices, the company was responding in
ways that weren’t consistent with a company in dire financial straits.
Evanson was surprised to find, for instance, that a company with a
weak cash position was carrying few payables. Instead of a process
geared to improving cash flow, bills were being paid as they were presented.
“When you don’t have a CFO and you don’t have a controller, people start managing for other things in terms of the basics of the business,” says Evanson. “That was, perhaps, the most surprising thing for
me, because I thought, from the outside ... how could it be that bad?
We could fix that in a month or two, but it was a big problem.”
Three weeks into his tenure, he had a long-time acquaintance in the
CFO spot. His pick was a veteran of turnarounds and restructurings
at the likes of IBM and RJR Nabisco, someone who was not only capable but who thrived in the rough and tumble of turnarounds. His second selection for his team was his legal counsel, again, someone he
had known for years and who had extensive experience with SEC
issues, a valuable background for a company whose financial reporting system had crumbled and had fallen behind in filing its mandated
reports.
Evanson filled in his team using people he knew from past engagements or who came with strong recommendations, and one by one,
filled in the team members he needed to turn the company around.
While filling positions, he kept in mind that the company would
need a strong team even after the turnaround was complete, so a key
consideration for team members beyond the immediate needs was
how they would function at subsequent stages.
“I wanted people who would be open, who would communicate,
who would be directly involved and would report across units and
divisions, rather than in so many places where there are stand-alone
silos that never quite communicate,” says Evanson.
Leading the team
Evanson says landing a team of players who are competent is one
task, but getting them to work as an effective unit is just as critical.
“You want to get people who are really capable, but you want to
get them to work together as a team, and when you get a lot of talented people and aggressive people in that situation, it takes a little
time to get them to meld together as a team,” he says. “I’d say I was
hands on, on a lot of the issues and areas to make sure I was aware
fully of what was happening, to make sure that the organization was
getting some of its confidence back and an appreciation that we can
work our way through it.”
Evanson says one of his key roles in meshing the team together
was as a coach, in some cases smoothing the relationships among a
team of high performers.
“In some ways in the beginning, there’s so much to do and to get
done in a short period of time that people didn’t need as much sense
of the personality styles because they could see somebody as being
essential to getting the job done,” Evanson says. “But you really had to
spend some time and have a session with everybody to say, ‘Hey, we
really all have to work together as a team. That’s the only way we’re
going to be successful over time.’”
Even with the best of intentions, some hires don’t always go as well
as planned.
“We did make some changes, and the changes we did have to make
had to do with personalities and styles,” says Evanson. “You don’t
want five stars on a basketball team and nobody wants to pass to each
other.”
In a situation like the one he faced at Allegheny Energy, as with the
necessity to put together a team quickly, Evanson could waste little
time in making changes when circumstances required them.
“In a normal situation, you’d probably spend more time talking to the
person and making sure that he understands what the job involves,
getting him some training or get someone to work with him, but in the
situation we were in, we really didn’t have a lot of time for that,” says
Evanson. “Frankly, we’d say we made a mistake — and I made the
mistake because I made the hiring decision — and I said, ‘I’m sorry,
you’re just not what we need at the moment,’ and we went out to hire
again. I think it was obligatory that we corrected them right away. It
might seem cruel at the moment, but given that the company was riding on the success of what every guy was doing and it was so critical,
it was something we had to do.”
Evanson’s philosophies have paid off. Since taking over at Allegheny
Energy, its financial performance has improved dramatically. In fiscal
2006, the company posted $319 million in net income on operating revenue of $3.1 billion. Between 2003 and 2006, debt was reduced by $2.1
billion.
While Evanson had to put his team together in a hurry, he says that
there are some fundamentals that apply to team-building in any situation, turnaround or otherwise.
“I would say you really have to spend the time and really do an analysis to know what you’re into,” says Evanson. “Develop a plan and execute as fast as you can, and make sure you have the right team. If you
don’t have it, get it.”
HOW TO REACH: Allegheny Energy Inc., www.alleghenyenergy.com
