Recession Will Leave Its Mark

Posted by Mark Brousseau

The impact of the economic downturn has clearly been significant, however not all companies are equally affected by the recession, according to a study of executives at 570 leading global companies by Ernst & Young LLP. 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. However, a significant minority are looking to take advantage of the situation to pursue new opportunities.

The study 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.

“The impact of the market changes has clearly been significant and some business models have changed radically,” said Michael Rogers, Principal, Transaction Advisory Services, Ernst & Young LLP. “Company management is being forced to review their methods of organization due to a range of macro influences such as challenges from diversification, globalization, and (de)regulation. Businesses that emerge strengthened from the current crisis will be those that reshape intelligently, not those tempted to move quickly to extract additional value. ”

It is still really tough out there
Ernst & Young LLP carried out a similar study five months ago. The corporates Ernst & Young talked to then, and the thousands of companies it has 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 somber. 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.

“Perverse as it may seem, a period of crisis can provide an opportunity to drive change more rapidly and effectively than a period of prosperity,” noted Rogers of Ernst & Young LLP. “Company leaders are finding ways to take advantage of this economic climate. This survey shows 25% of companies are actively planning for growth, 34% are seeking strategic alliances and 36% plan to enter new geographies.”

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.

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.

“Working capital is the lifeblood of a company, and the ability to manage it becomes even more important in a downturn due to falling revenue and restricted access to funds,” said Kevin Cole, Americas Accounts & Business Development Leader, Ernst & Young LLP. “Companies need to secure their position by identifying and resolving critical issues quickly to protect against value erosion, or to be well placed to take advantage of opportunities.”

How have companies responded in the short term?Over the last year 86% of executives 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 their relationship with customers (52%). 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. “Companies that maintain a sustainable business model through the current downturn will not only survive the downturn, but will emerge stronger and in the best position to take advantage of new growth opportunities as the economy improves,” said Cole of Ernst & Young LLP.

“The bottom line is, that in both good and bad economic conditions, successful organizations are those that have clarity around their proposition, strategic direction and brand positioning,” said Donna Campbell, Americas Advisory Performance Improvement Leader, Ernst & Young LLP. “A successful company also has an effective management information capability that is aligned with the business strategy to enable agility in responding to market or other environmental changes.”

What do you think?