Cash is king across the globe as corporates tighten their belts
ZURICH/LONDON, 16 FEBRUARY 2009 - An Ernst & Young report released today, “Opportunities in Adversity”, highlights how nearly 350 major global corporates - including
8 Swiss companies - are adapting their business strategies to a deep international recession and how their key priorities are evolving for the next 12 months.
Cutting costs internally and freeing up cash
The starting point for any business is cash and many corporates have already drastically tightened their belts. Nearly 40% of the companies surveyed felt that had been a significant deterioration in the business environment in their individual sectors with over a third noting competitors withdrawing and a rise in bankruptcies. More than two thirds have already implemented increased frequency of reporting risk to their boards.
The drive to cut costs has already impacted internal business strategy. Over 80% of respondents have already undertaken a major costs saving analysis, nearly two thirds had instigated a headcount reduction programme and over half had rationalised their IT spend. European companies were more likely than their US counterparts to look to cut costs on Real Estate and IT rather than cutting direct or indirect employee costs.
The credit crunch has forced companies to seek alternative ways of improving liquidity. Nearly half of all companies had disposed of or shut down parts of their business and 43% were looking at alternate short term finance facilities whilst 23% were considering options to renegotiate their debt covenants as well as proactively communicating with lenders, analysts and rating agencies and considering renegotiating debt covenants. Barely a quarter said the availability of cash was not an issue.
Mark Otty, Area Managing Partner of Ernst & Young in the EMEIA region, which comprises Europe, Middle East, India and Africa, says: “This is an important snap shot of global corporates already facing up to a credit crunch and thinking how to respond to a recession.
But the business world has experienced serious downturns before and there are opportunities to learn from past crises. There will inevitably be losers over the next 12 months but equally there will be a significant minority of clear winners.”
Hitting customers and suppliers equally hard
The companies surveyed have already been keeping a close eye on both their customers and their supply chain. And with good reason, as over half had seen a deterioration in creditworthiness of customers (nearly 60% in Europe) whilst over half said that some key customers are in distress, and that there was an increase in the time lag between customer order and cash collection.
Companies have adapted their strategies to fit with this new environment with nearly three quarters showing an increased focus on key accounts and over 40% developing new products. A third said that fears about existing customers meant they had broadened their customer basis and a third said they had terminated contracts with customers they perceived as high risk.
In terms of suppliers, respondents were split equally between two very different strategies. Half the companies surveyed have narrowed their supplier base to obtain more favourable prices or terms whilst the other half have broadened the supplier base to reduce the impact of the failure of a key supplier. The majority of companies are already communicating more proactively with suppliers, half were negotiating payment terms with suppliers more frequently and over a quarter of companies said key suppliers were experiencing financial distress.
Martin Studer, EMEIA Business Risk Services Leader at Ernst & Young, says: “Now is not the
time for companies to be conservative or inactive. Research from previous recessions has shown that the companies who will emerge the strongest will be those that clearly identified opportunities to sustain their development during the downturn and that took strategic decisions that distinguished them from their competitors. A period or crisis can provide an opportunity to drive change more rapidly and effectively than a period of prosperity.”
Companies were also asked about their top strategic priorities over the next 12 months. The vast majority highlighted protecting assets, performance improvement and restructuring their business. In terms of cash management two thirds of those surveyed were considering top down review of current cash management and of cash flows, half building working capital measures into performance objectives of management and 36% considering possible assets that can be turned into cash.
And where will they be looking to save cash in the future?
There were some fairly consistent messages around where companies will continue to look for savings. Corporates said they expected significant or reasonable savings in their supply chain operations (58%), their sales and marketing (42%), Operations (56%) and IT functions (43%).
In strategic terms 40% of Global companies and 53% of European ones said they were actively considering selling non-core or non-performing business, an increased use of shared services centre (27%), increased use of outsourcing (31%), making strategic alliances (30%) and moving operations to lower cost locations (31%). Companies particularly saw an increased role for outsourcing for their IT, Logistics and Human Resources.
However, a reasonable proportion of corporates saw the recession as an opportunity to expand with 34% globally and 38% in Europe thinking of making strategic acquisitions.
Louis Siegrist, Transaction Advisory Services Leader at Ernst & Young Switzerland, says: “Whether companies are looking to sell parts of their businesses to raise cash to help through a difficult period or they are actively looking to buy distressed assets from their competitors the same basic rules apply. Be prepared, be flexible, think the unthinkable and take decisive action.”
Emerging markets and growth
Whilst most developed markets were either perceived as stagnant or in decline companies still saw major opportunities in emerging markets. China (59%), India (45%), South East Asia (26%) and Eastern Europe (31%) were the areas of the world that most global companies believed would have the best growth opportunities. Some 18% of companies expect significant growth still in emerging markets in the near future; the majority (57%) expect growth to continue but a slower pace than over the last two years and 25% growth to slow significantly.
Mark Otty adds: “Companies are completely right to still believe in the opportunities of the emerging markets. To put into context a recent Ernst & Young sponsored report highlighted that Brazil Russia, India and China will contribute 40% of global economic growth between 2009 and 2020.”
About the survey
The Economist Intelligence Unit on behalf of Ernst & Young surveyed in January 2009,
337 board members of international corporates, over half of which had turnover of $10billion plus, on how the downturn had impacted on their strategic objectives and the way they do business.
Report «Opportunities in adversity – Responding to the crisis» (PDF, 992 kB)
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