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
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
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
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 &
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.
Does Darwin's theory apply to taxation? Colin ponders...
The EC has been instructed to draft a European Union (EU) directive authorising an EU financial transaction tax, which would apply to ten of the EU’s 28 member states
Accountancy watchdog the FRC has dropped its investigation into the former chief financial officer of Tesco, nearly two years after the supermarket was engulfed in an accounting scandal
Colin imagines how Apple's logo might change in the wake of the EC's ruling over its Irish tax arrangements