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 initially much cushioned against the shock of the global downturn. However, when the effects cascaded, setbacks unfolded in quick succession. This has heightened calls for quick, decisive action and a marked departure from strategic and operational conventions.
Fouad Alaeddin, Middle East Markets Leader, Ernst & Young Middle East, said: "We have noticed the dominant trend in the past six months has been an acceleration of management's efforts to improve business performance. This is irrespective of the economic scene – be it the prospect of continued recession or the possibility of a rebound in the near term. The focal points of management decision during downturns have undergone a fundamental shift – the pursuits of new market opportunities seem to be more prominent in an organisation's thinking."
Asked when they think the upturn would happen, there was a range of views. A quarter of them said the worst was now behind us and 42 per cent said some signs of life in the global economy are evident or will be by the year-end, but a strong minority of 21 per cent saw no recovery before the second half of 2010 at the earliest.
There are some sectors that are more optimistic than others – telecom, power, oil and gas, in particular – but others see a longer downturn, notably asset management and real estate and construction. Respondents in Europe were more negative than in Asia or the Americas.
According to Ernst & Young, what is clear from their latest findings is that some companies are identifying and taking positive steps to capture organisational benefits and market opportunities and already some businesses are emerging as leaders in accelerating that change. And they are businesses that will be best placed to win in the post-crisis world.
The company said its research confirms that management is not standing by, but has launched a series of programmes to improve performance. Most importantly, the past six months have seen major efforts to accelerate these programmes. Whether knowingly or unknowingly, businesses are being transformed. While this appears, in many businesses, to be led purely by cost cutting, there are also signs that companies are beginning to see opportunities for performance improvement alongside the challenges.
"Uncertainty in the market, and in the very fortunes of the business, will drive businesses to focus on what matters most, and to be quite ruthless in sacrificing lesser priorities. Companies are adopting a more back-to-basics approach and becoming narrower in focus, but with the intention of achieving more significant improvement," it said.
A sizeable minority of respondents see more lasting and significant change in how they need to respond to their business environment and manage their business, both in terms of their regulatory framework [45 per cent] and their basic operating model [43 per cent]. By a fairly significant margin, respondents sense that changes in risk management will be permanent.
Companies seem to be taking on board the vital need to adapt their business model to the new economic environment.
Executives could have been expected to adopt a reactive rather than proactive response to the crisis, delaying existing programmes or delaying the launch of new ones, rather than initiating organisational changes. However, in our earlier report, we identified that, contrary to our expectations, the crisis had actually accelerated reshaping trends. This has continued and, compared with January 2009, we are now seeing even more companies with active plans to reshape.
- 34 per cent are thinking about strategic acquisitions in their core business
- 29 per cent want to divest noncore activities
- 23 per cent are considering outsourcing or cosourcing
- 22 per cent are considering moving operations to lower-cost locations.
How to survive a slowdown
In the current market, companies must identify their core competencies and focus on what they do best. Ancillary functions that are not aligned with key strategic goals can be considered as potential outsourcing targets, while divestment may be envisaged for service lines that are not aligned with the core business.
Outsourcing alone, however, is not the only answer to resolving the current crisis. It represents a fundamental part of a longer-term business restructuring designed to ensure businesses remain competitive. As the real cost of capital rises, there are compelling reasons to continually reassess and reorganize portfolios. Many groups will find that some of the businesses they own no longer fit strategically, operationally or financially.
In today's economic climate, divesting non-core assets or operations is absolutely central to corporate strategy. By disposing of activities no longer aligned with the overall business strategy, cash and resources are released that can be directed to core functions.
Sellers need to work closely with buyers to create viable deal and financing structures.
International business location opportunities should be included in plans for business streamlining.
Many structural improvements can be made in a company's business model simply by optimising existing third-party agreements.
In the current environment, everything can be considered negotiable. Through re-examining existing contracts, companies may be able to gain a competitive advantage by adding value, for little extra cost.
Keep up with the latest business news from the region with the daily Emirates Business 24|7 newsletter. To subscribe to the newsletter, please click here.