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Crisis has Changed Corporate Rules: Ernst & Young

DUBAI — The global economic fallout has changed the rules of the game as far as companies are concerned, with majority of companies worldwide forced to try new strategies to survive, while a significant minority are showing a keen interest in taking advtange of new opportunities arising from the downturn.

Companies across the world and across all sectors were surprised by the speed by which the downturn has happened, said Ernst & Young in a report.

“It is more severe, and has impacted their businesses more profoundly than they originally expected. This is true of the Middle East, which was initially very much cushioned against the shock of the global downturn. However, when the effects cascaded, setbacks unfolded in quick succession. This has heightened calls for quick, decisive action and a marked departure from strategic and operational conventions.”

Nearly half of those surveyed or 43 per cent out of 570 leading global companies polled by Ernst & Young said that their operating model had been permanently altered in the last 18 months. A further 45 per cent said there had been a temporary impact. Similarly, 56 per cent said that their risk management processes had been permanently altered, 33 per cent believed it to be temporary. Forty five per cent said 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 with more than 20 per cent in each case, seeing the changes here as permanent as well.

“Not only does this research show the permanent impact of the change that has taken place in the last twelve months it also demonstrates how rapid that change has been and how very few people saw this coming,” said John Murphy, global vice-chairman, markets, at Ernst & Young.

Murphy said the overall mood among global companies is still sombre.

About 64 per cent of executives said they had to reduce costs; 31 per cent said they had improved revenues and more than a third said the environment was more positive in terms of making strategic acquisitions. A majority or 58 per cent said they had seen a deterioration in revenues, while 56 per cent said had experienced a drop in their company’s profitability. Only 20 per cent had seen an improvement in investor confidence and a similar low number saw any improvement at all in accessing affordable capital or credit.

“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,” said Murphy. Since a similar study was conducted in January where over a quarter of executives surveyed said cash was not an issue, that number has slipped to 18 per cent. Respondents also highlighted an increase in communications to lenders and rating agencies. There was, however, less talk of companies disposing off 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.

“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,” said Murphy.

· rocel@khaleejtimes.com

Crisis impact

- 43 per cent out of 570 leading global companies polled by Ernst & Young said that their operating model had been permanently altered in the last 18 months

- 45 per cent said there had been a temporary impact

- 56 per cent said that their risk management processes had been permanently altered, 33 per cent believed it to be temporary