Turnarounds typically begin once a management team runs a company into trouble then gets run out of town. New management, especially when brought in from the outside, tends to be better equipped to view the situation in an objective light and is able to make the tough and unpopular decisions often required to get a business back on its feet. Getting an early sense of whether the organization is responding to the manager and moving in the right direction is a key to successful turnaround investing.

One very impressive turnaround I am following now isn't taking place at a publicly traded company but it's one that I have learned from nevertheless. The turnaround is the Dallas Cowboys, and it's being orchestrated by the NFL version of a turnaround specialist, head coach Bill Parcells. Parcells has turned around three terrible teams in his career in surprisingly short order, winning two Super Bowls in the process.

After retiring from the New York Jets after the 1999 season, Parcells had been away from coaching for three seasons before being seduced this last off-season by the lure of one last challenge. The results have been remarkable -- the Cowboys are 7-2 this year after three consecutive 5-11 seasons, and the luster has definitely returned to one of the NFL's marquee franchises.

People are people
Back in late 2000, Parcells shared some thoughts on turning around an organization in an article for the Harvard Business Review. If you think it's a stretch to extend lessons from the gridiron to the business world, I'd like you to read some of the more interesting excerpts from that article:

The people in your company have little loyalty; some even want you to fail. Your star performers expect constant pampering. Your stockholders are impatient, demanding quick results. And the media scrutinize and second-guess your every move. I can relate.

I'm not saying that business is like football. I am saying that people are people, and that the keys to motivating them and getting them to perform to their full potential are pretty much the same whether they're playing on a football field or working in an office.

Parcell's three rules of leadership
In the article, Parcells notes that his experience has taught him three basic rules for turning around any organization. His first rule is simple: make it clear from day one that you are in charge. Don't wait to earn your leadership; impose it. Here are some of his more interesting points on that subject:

On the first day of training camp, I laid it on the line: I told everyone that losing would no longer be tolerated. Players who were contributing to the team's weak performance would be given a chance to change, and if they didn't change, they'd be gone.

With the Giants and with other teams I've coached, I've found that holding frank, one-on-one conversations with every member of the organization is essential to success. It allows me to ask each player for his support in helping the team achieve its goals, and it allows me to explain exactly what I expect from him.

Those turnarounds taught me a fundamental lesson about leadership: You have to be honest with people -- brutally honest. You have to tell them the truth about their performance, you have to tell it to them face-to-face, and you have to tell it to them over and over again. The only way to change people is to tell them in the clearest possible terms what they're doing wrong. And if they don't want to listen, they don't belong on the team.

Confrontation is healthy
Parcell's second rule is that confrontation is a necessary and healthy part of turning any organization around.

If you want to get the most out of people, you have to apply pressure -- that's the only thing that any of us really responds to. As a coach, I've always tried to turn up the heat under my people, to constantly push them to perform at a high level. Creating pressure in an organization requires confrontation, and it can get very intense, very emotional. I've seen coaches avoid confrontations with their players because they don't like conflict, and I assume the same thing is true among the leaders of business teams. But I've actually come to relish confrontation, not because it makes me feel powerful, but because it provides an opportunity to get things straight with people. You need to do what it takes to get a strong reaction because then you know you've reached them.

In the end, I've found that people like the direct approach. I have many players come back to me ten years later and thank me for putting the pressure on them. They say what they remember most about me is one line: "I think you're better than you think you are."

My father used that expression with me, and there's a lot of truth to it. People can do more than they think they can.

Break the losing habit
In his article, Parcells described the challenge inherent in changing the mindset of an organization that has gotten used to losing and has come to accept it. To recreate an atmosphere of success, Parcells has a third rule: Set small goals and hit them:

When you've done a lot of losing, it gets hard to imagine yourself winning. Confidence is only born of demonstrated ability. In training camp, we don't focus on the ultimate goal of getting to the Super Bowl. We establish a clear set of goals that are within immediate reach: we're going to be a smart team; we're going to be a well-conditioned team; we're going to be a team that plays hard; we're going to be a team that doesn't criticize one another. When you set small, visible goals, and people achieve them, they start to get it into their heads that they can succeed. They break the habit of losing and begin to get into the habit of winning.

When we start acting in ways that fulfill these goals, I make sure everybody knows it. I accentuate the positive at every opportunity, and at the same time I emphasize the next goal that we fulfill.

What's in your turnaround?
I think these rules on turning an organization around are very germane to investors. While every leader has his or her own style, I think one can see the pattern of establishing a clear vision, communicating that vision throughout the organization, and setting clear and achievable goals in the work that Jim Cantalupo is doing at McDonald's (NYSE:MCD). I see some of these qualities in Fred Hassan at Schering-Plough (NYSE:SGP) as well, though I think in some ways he's got a tougher job in front of him.

Nevertheless, if you invest in turnarounds, you are betting on management -- and knowing what to look for is the best place to start.

Agree or just agree to disagree? Have it your way, but talk it over on our Turnarounds/Value Investing discussion board.

Zeke Ashton has been a long-time contributor to The Motley Fool, and is the managing partner of Centaur Capital Partners, LP, a money management firm in Dallas, Texas. Please send your feedback to zashton@centaurcapital.com. At the time of publication, Zeke did not own shares of any stock mentioned in this article.