Though a number of businesses in the region are dealing with economic downturn effectively, a majority of them, including listed companies, are not dealing with the crisis well, according to a global management consulting firm.
Talking to Emirates Business about how companies in the Middle East are coping with the current crisis, Ahmed Youssef, principal, Booz & Company, said: "When the crisis hit the region many of the companies out here were a bit surprised and did not know what to do and so almost everything froze for some time. But now the companies are taking it much more seriously and the good ones are actually thinking about taking advantage of the crisis. So now we are witnessing some major, tough and good decisions from many of the leading companies in the region. These are the companies that will most likely emerge stronger from the crisis and able to grow beyond the region as a result of the decisions they are taking now.
"However, this is not a common practice in the region. Many of the listed companies in the region are not dealing well with the crisis as they were not prepared for it, in the sense that they did not adopt fiscal discipline in the last three to four years. This left them exposed to liquidity risks. As a result, they are facing short-term liquidity issues as they have high receivables, high inventory and many have high short-term debts. It's a common problem here. In Saudi Arabia, more than half have an imbalance between the maturity of their assets and the maturity of their liabilities. They have long-term assets and very short-term liabilities. So if the banks were to ask them to pay today they would be forced to sell assets in order to generate cash in any way possible."
Giving advise about how companies in the Middle East can manage the downturn better, Youssef said: "Companies in the Middle East don't differ that much from the companies around the world and the key to managing better during a downturn is that you have to first understand the impact of the crisis, and you have to do something about it. Companies have to gauge the impact of the downturn on their business and then deal with it. They have to ask themselves "is this going to affect my topline, growth potential, or will I be left with inventory that I bought at very high prices, or will I have problems with my receivables?" They have to understand where the business is affected the most and based on that they have to be proactive and define key actions to address the impact. Those actions don't necessarily mean cutting workforce. They can be much more comprehensive than that and can focus both on the cost side and the revenue side.
"Often companies think of cost based on travel, workforce, etc, and fire people but they have to think about it with a much larger perspective in a much more holistic way and decide how they want their business to react and accept the fact that their business might not meet certain targets and work on that.
"Instead of looking at an easier way of cutting cost, they need to examine the business closely to see where they really need to cut cost. For example, if you have obsolete inventory lying somewhere and are spending the money on warehousing, maintenance and transportation, etc, it might be better to let go of it even at a loss because it might generate cash and help a bit."
According to Youssef, companies need to prepare for the upturn that will eventually come now. This is because, during a downturn they have the time to step back and think about how they can build the right capabilities for their business to be much more competitive.
Youssef said: "When preparing for an upturn, it is important for the companies to think about the competition and how they can be more competitive while going up. If your business has cost as its main competitive advantage then you need to focus on how you can build a leaner business moving forward. You need to think about the kind of synergies. You need to look for between your businesses and different entities that you can leverage.
"The top executives of the business need to take the time today to do just that, because during a downturn you don't really have the pressure from the market to deliver. So use the time well.
"Also, for businesses the downturn is a very important time because the shareholders will understand if you don't grow by 40 per cent or even 10 per cent. They will understand that you have to make tough decisions because times are bad. Investors will also be much more understanding and managers should take advantage of this."
Youssef said the biggest mistake and by far the most common one that should be avoided during a downturn is too much focus on the short-term gains. This is specifically applicable to listed companies.
"When companies are faced with a downturn, they start taking on projects in any direction without a clear thought because they look at the short-term advantage. But what they forget is that it is better to forgo some gains in the short term for a much better and healthier growth in the long term.
"Executives should look at their business from a financial discipline point of view, in a much more holistic way. Because when you look at the financial statements, executives, especially in the Middle East [because they are entrepreneurial by nature], have a tendency to look at the income statements, profits and revenue growth but tend to forget that there is a balance sheet and a cash-flow statement to look at. Managing the receivables and the inventory well are all things that are typically not thought of in a very disciplined way by Middle Eastern companies across sectors," said Youssef.
Focusing just on cost reduction during a crisis is another thing to avoid. If they simply focus on cost reduction then they are not really preparing themselves for the time when the market will pick up. They need to think about building capabilities. This is the best time to recruit the best people. Earlier, top executives commanded very, very high salaries as the market was driven by supply constraint. But now there is no supply constraint. This is the best time to increase capabilities. So spend wisely to build capabilities, he said.
Youssef said: "Another thing that businesses need to learn is recognising and letting go of sunk projects. Many companies keep on putting money in a project that is not viable anymore due to the crisis. The reason for this being that they have already sunk so much money, time and effort into it that they find it difficult to accept that it is unviable and that they ought not to put in more good money into something which is already sunk. If the demand for a particular project or product is not there anymore then why put more money, time and effort into it. They have to learn to accept the loss and move on. It's a very difficult decision for most managers but they have to bite the bullet and move on."
Talking about what companies need to do to survive the downturn, Youssef said: "For survival in a downturn, firms have to consider three main elements. Their customers, their staff and their shareholders [be it banks for debts or their equity shareholders.]
"Companies must focus on their most valuable customers and not reduce the quality of their offering or their service. They need to keep investing in the clients that have been loyal to them. Businesses must not lose their top performing employees. So they need to make sure that they are adequately compensated and also there is continuous communication with them about the situation, the risks, and what the company is doing to deal with it.
"With the shareholders also, continuous and transparent communication is needed at all levels. They need to know the challenges your company is facing, how the company is dealing with them. The companies also need to work with them to find ways to make sure that these shareholders will not turn against the management. Particularly in case of banks, the firms need to make the banks feel comfortable and assure them that the loans that have been provided by them are protected. The firms need to tell the banks all the plans they have for dealing with the crisis and work with the banks to restructure the debts accordingly."
According to Booz & Company, it is imperative that companies use the downturn to seize the future with their own hands, before a top-down mandate is imposed.
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