Ernst & Young: Company operating models have been altered by recession
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David Buckley
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A study of executives at 570 leading global companies released today by 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. The report entitled, ‘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. Similarly 56% of the executives said that their risk management processes had been permanently altered. For 45% the regulatory framework for business had also fundamentally changed. Yorkshire senior partner David Buckley at 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 they 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 they talked to then are still seeing huge competition on price, significant numbers of bankruptcies and competitors withdrawing from their sector, but there was also an increase in those organisations reporting new entrants in their sector. The overall mood is a shade more positive, some degree of confidence has returned, albeit businesses continue to adopt a cautious approach in their strategy. 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. David Buckley said, “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. Buckley 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’.” 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. Buckley comments, “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 fundamentally to change their business.” And when will that upturn be? There was a range of views from respondents with a quarter saying the worst was now behind us, 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. More articles in
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