Back from the brink

Through bold government action and massive stimulus bills most of the major world economies are starting to pull back from the brink of recession, including the UK.

While it is far too early to call a recovery in the UK, economic indicators suggest we have hit bottom ­ let’s not forget just how bad things got a year ago ­ and some companies are showing tentative signs of emerging from a crisis of financial uncertainty and starting to plan again for the future.

What we have seen is a new performance agenda emerging as boardrooms start to grapple with the lessons that can be learnt from change. Not all of these lessons are new, but they are taking on a renewed importance as organisations re-evaluate what it takes to survive and thrive in the current market.

This is the consensus after we recently canvassed the views of more than 500 of our partners from around the world on how the corporate, mid-cap and entrepreneurial clients we serve are responding to the new business environment in which we now all operate ­ published in a new report Lessons from Change.

At the start of the year business leaders were telling us that they were doing all that they could to scrape together enough cash to pay their staff and suppliers. But the mood has shifted ­ cash is still important, but it is not the number one priority for management. Even companies that are “cash rich” have a new focus on working capital management and funding.

What we are seeing out in the market are organisations re-evaluating their business models, implementing major programmes of cost reduction and restructuring ­ and its happening across all sectors. Companies are also doing everything they can to optimise the flexibility of their operations and reduce the cost of capital for the business. The exact nature of this structure will vary by company. The starting point, of course, lies with income but also with effective tax rate and cash tax management strategies.

Getting the balance right on risk management has also challenged many companies. The recent crisis showed that many organisations had it wrong. Risk models were not robust. The scope of assessment was too narrow and excluded suppliers and customers from proper assessment. You could argue that risk management became overly concerned with regulatory compliance. There were certainly many cases where risk management was too focused on internal operations, rather than on external forces where most risks arise, such as the supply chain.

More generally we are seeing organisations cast a wider net for financing. Companies have had to seek out alternative finance options and new sources of capital have emerged from sovereign wealth funds, private equity and Middle Eastern and Asian banks.

And this cross-border approach is not limited to the finance function. Companies are aggressively seeking to increase their global footprint (see box bottom left). Normally this is in pursuit of new markets ­ and hence growth. Rather than hiding behind national protectionism, as many had feared as a consequence of the recession, our clients tell us that they are already actively diversifying into new geographic markets.

Some sectors, such as automotive, have been forced to increase their focus on emerging markets. Major pharmaceutical companies are also looking beyond developed markets for acquisitions and other growth opportunities, spurred on by the removal of patent protection in more established countries.

Every business reviewed its operations at the start of the year and will continue to do so to either produce more with the same, or the same with less. Companies also took a rather short-term response to the crisis such as cutting workforce, moth-balling capacity and delaying programmes. But these practices are not sustainable as we enter a more complex and potentially more variable market.

Cost reduction may be the short-term goal, but increased flexibility is the longer-term objective. A more dynamic market calls for a more dynamic response ­ not just the speed with which a company can recognise change or opportunity, but the speed with which it can actually execute its response.

Last week’s ONS figures underline that any recovery, when it comes, will be fragile ­ the Ernst & Young ITEM Club has predicted that GDP in the UK will struggle to reach 1% in 2010. With government spending cuts around the corner and the likelihood of deeper and more aggressive regulation ­ that could carry an expensive price-tag for business ­ it is going be a bumpy ride.

The market will remain difficult and competition will continue to be intense. But competitive and performance advantages are relative not an absolute. The challenge ­ and the greatest opportunity ­ is to be ahead of the pack.

Scott Halliday is the managing partner, UK and Ireland, at Ernst & Young.

NEW HORIZONS

Emerging markets have, for the most part, rebounded quickest from the recession and our clients can see that, with 15% of the Fortune 100 now headquartered in the BRIC countries, the opportunities for higher growth and potential to expand are truly global.

Companies may well be focusing on their core competencies but that does not preclude them from looking for new customers and new markets.

LESSONS FROM CHANGE

Eight primary performance goals for organisations:

● Re-evaluate your business model;

● Optimise the flexibility of your operations;

● Optimise capital availability and deployment;

● Optimise your market reach;

● Accelerate your decision making and execution;

● Revitalise the way you manage risk;

● Strengthen your talent management;

● Strengthen your stakeholders’ confidence.