The rules of the game have permanently changed - Ernst & Young - United Kingdom

• "White heat" of the crisis may have passed but majority of companies are still focused on survival
• Companies split on when we will see an upturn – 21% see no recovery until second half of 2010
• Operating models have been permanently altered by the recession
• Almost 60% of executives have seen a deterioration in revenues and profitability
• Three-quarters of companies have undergone a top-down review of working capital management and cash flows

London 15 June 2009: A study of executives at 570 leading global companies released today by professional services organization Ernst & Young 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 are still focused on survival although there is a significant minority who are looking to take advantage of the situation to pursue new opportunities.

Opportunities in adversity: accelerating the change, finds nearly half of those surveyed (43%) said that their operating model had been permanently altered by the events of the last 18 months. A further 45% said there had been a temporary impact. Similarly 56% of the executives said that their risk management processes had been permanently altered, 33% temporarily.  For 45% the regulatory framework for business had also fundamentally 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% in each case – viewed the changes here as permanent as well.

Scott Halliday, UK and Ireland country managing partner, Ernst & Young says, “Not only does this research show the permanent impact of the change that has taken place in the last 12 months it also demonstrates how rapid that change has been and how very few people saw this coming. More than three quarters of the executives we surveyed were surprised by both the severity and speed of the downturn.”

It is still really tough out there
Ernst & Young carried out a similar study five months ago. The corporates we talked to then, and the thousands of companies we have discussed the research with since, are still seeing huge competition on price. Companies are still seeing significant numbers of bankruptcies and competitors withdrawing from their sector, but there was also an increase in those organizations reporting new entrants in their sector.

The overall mood is still sombre. Although 64% of executives said they had been able to make cost reductions, 31% 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%) and profitability (56%). Only 20% had seen an improvement in investor confidence, and a similar low number saw any improvement in accessing affordable capital or credit.

Steve Varley, UK and Ireland markets leader, Ernst & Young, adds, “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.”

Are we past the worst?
A slight shift in emphasis from the responses from January gives some credence to the thinking that the worst ravages of the recession are behind us. At the time of the last study 82% said the focus of their business was on restructuring their business to deal with the recession and 74% were looking merely at survival of the present operations. 

Those figures have declined to 74% and 65% – still remarkably high – but in conjunction with the fact that the proportion of companies who said that they were “taking advantage of the recession to pursue new market operations” had increased from 59% to 69% – suggest there are some more companies out there bargain basement hunting.

Halliday says, “Many assets are at much lower prices than two years ago, which will bring opportunistic buyers to the table. The number of executives in our survey intending to carry out strategic acquisitions in new areas of business was up 7% on January to nearly a quarter. Given the continued relative scarcity of cash, we anticipate more creative deal structures and alternative financing arrangements.”

Cash is actually tighter
Back in January over a quarter of executives said cash was not an issue.  That proportion has slipped to 18%.  Respondents also highlighted an increase in communications to lenders and rating agencies.  There was however less talk of companies disposing of 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 comments, “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”.

How have companies responded in the short term?
Over the last year 86% of executive said they had accelerated cost reduction programs, 52 % had speeded up their restructuring plans and 38% had pushed the button on a “significant employee reduction program”.  When asked about their key drivers in the short term there was increased scrutiny on profitability (73%), pricing strategy (55%) and 52% their relationship with customers.  Internally it was no surprise that 38% had seen more investment in risk.

What’s next in the longer term?
In terms of looking post-recession, executives were pretty evenly split between expanding into new geographies, increased use of strategic alliances, acquisitions, and speed to market and divesting non-core business.  “In our earlier report we identified that, contrary to expectations, the crisis had actually accelerated reshaping trends.  This has continued and we are now seeing even more companies with active plans to fundamentally change their business,” says Varley.

And when will that upturn be?
There was a range of views from our respondents with a quarter saying the worst was now behind us and 42% saying that some signs of life in the global economy are evident or will be by the end of the year but a strong minority of 21% saw no recovery before the second half of 2010 at the earliest.  There are some sectors that are more optimistic than others – Telecoms, Power, Oil & 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.

About this report
For this study, the Economist intelligence Unit surveyed 569 C-suite and board level executives. Respondents were drawn from across the world and across industry sectors. Over half the executives polled worked for companies with an annual global revenue in excess of US$1 billion. The research was carried out in June 2009.