Recession hits business models of 88% global firms

The rules of running a business have changed forever due to recession and 88 per cent of global companies say their operating model has been altered by the slowdown. A study of executives at 570 international companies by Ernst & Young – a global leader in assurance, tax, transaction and advisory services – shows the depth of the impact of the worldwide recession on corporates. The comparisons with a similar study in January also reveal that while the white heat of the crisis has passed, the majority of companies worldwide are still focused on survival although there is a significant minority who are looking to take advantage of the situation to pursue new opportunities. For this study, the Economist intelligence unit surveyed 569 C-suite and board-level executives. Respondents were drawn from across industry sectors worldwide. More than half the executives polled worked for companies with an annual global revenue in excess of $1 billion (Dh3.67bn). The research was carried out this month. Nearly half of those surveyed [43 per cent] said their operating model had been permanently altered by the events of the past 18 months. A further 45 per cent said there had been a temporary impact. Similarly 56 per cent of the executives surveyed said their risk management processes had been permanently altered, 33 per cent said temporarily. For 45 per cent the regulatory framework for business had also fundamentally been changed. Other alterations to their business model – price sensitivity, profitability, competitive sensitivity and economic stability were viewed by respondents as more temporary although a significant minority – above 20 per cent in each case – viewed the changes here as permanent as well. John Murphy, Global Vice-Chair Markets, Ernst & Young, said: "Not only does this research show the permanent impact of the change that has taken place in the past 12 months, but it also demonstrates how rapid that change has been and how very few people saw this coming. More than three quarters of the executives surveyed were surprised by the severity and speed of the downturn." Ernst & Young carried out a similar study five months ago. The corporates the company talked to them, and the thousands of companies they discussed the research with since, are still seeing considerable competition on price. Companies around the world are still seeing significant numbers of bankruptcies and competitors withdrawing from their sector. However, there was also an increase in those organisations reporting new entrants in their sector. The overall mood is still sombre. Although 64 per cent of executives said they had been able to make cost reductions – 31 per cent said they had improved revenues and more than a-third said the environment was more positive in terms of making strategic acquisitions – a majority of executives had seen deterioration in revenues [58 per cent] and profitability [56 per cent]. Only 20 per cent had seen an improvement in investor confidence and a similar low number saw any improvement at all in accessing affordable capital or credit. Murphy said: "Given the pressures that these corporates are under it is remarkable that a slim majority had seen their business either improve or stay static over the past 12 months. The management challenge over the coming year will be to act even more quickly and decisively." According to the study, back in January over a quarter of executives surveyed said cash was not an issue. That proportion has now slipped to 18 per cent. Respondents also highlighted an increase in communications to lenders and rating agencies. There was, however, less talk of companies disposing off assets purely to raise cash. Instead more companies were focusing on renegotiating their debt covenants. Three quarters of respondents said their company had undergone a top-down review of working capital management and cash flows. Murphy said: "Without easy access to credit, cash management becomes an even more essential discipline – sharpening the focus on customers, tightening the approach to suppliers and constantly reviewing the amount of cash that is 'stuck to the machinery." Going into how firms have responded in the short term, the study said over the last year, 86 per cent executives said they had accelerated cost reduction programmes, 52 per cent had speeded up their restructuring plans and 38 per cent had pushed the button on a "significant employee reduction programme". When asked about their key drivers in the short term there was increased scrutiny on profitability [73 per cent], pricing strategy [55 per cent] and 52 per cent on their relationship with customers. Internally it was no surprise that 38 per cent had seen more investment in risk. Companies across all sectors worldwide still report being surprised by the speed by which the downturn happened. It is more severe and has impacted their businesses more profoundly than they expected. This is true of the Middle East, which was