Tag Archives: economic downturn

Aristotle and economy

Almost 90% of worldwide executives made cost cuts during 2009, a percentage that is not surprising at all considering the economic downturn. However, according to PwC’s “2010 Global CEOs Survey”, almost 80% of executives realised that they need long term results, not just short term liquidity.

What does this have to do with Aristotle? You may find the answer in the article bellow published in the last issue of “Capital” (Romanian only):

Online: Capital.ro

How can we make cost cuts stick

54% of the executives surveyed by McKinsey in April indicated that they would take steps to reduce operating costs in the next 12 months, compared with 47% in February. In April, 2/3 of the respondents rated economic conditions in their countries as better than they had been six months previously, and another 2/3 expected further improvement by the end of the first half of 2010 (“Economic Conditions Snapshot, April 2010: McKinsey Global Survey results,” mckinseyquarterly.com, April 2010). Yet any successes companies have at cutting costs during the downturn will erode with time. Many executives expect some proportion of the costs cut during the recent recession to return within 12 to 18 months (“What worked in cost cutting -and what’s next: McKinsey Global Survey results,” mckinseyquarterly.com, January 2010) – and prior research found that only 10% of cost reduction programs show sustained results three years later (Suzanne P. Nimocks, Robert L. Rosiello, and Oliver Wright, “Managing overhead costs,” mckinseyquarterly.com, May 2005).

Why is it then so difficult to make cost cuts stick?

In most cases, it’s because reduction programs don’t address the true drivers of costs or are simply too difficult to maintain over time. Sometimes, managers lack deep enough insight into their own operations to set useful cost reduction targets. In the midst of a crisis, they look for easily available benchmarks, such as what similar companies have accomplished, rather than taking the time to conduct a bottom-up examination of which costs should be cut. In other cases, individual business unit heads try to meet targets with draconian measures that are unrealistic over the long term, such as across-the-board cuts that don’t differentiate between those that add value or destroy it. In still others, managers use inaccurate or incomplete data to track costs, thus missing important opportunities and confounding efforts to ensure accountability.

Some possible solutions:

Focus on how to cut, not just how much

Benchmarks matter. External ones on some measures may be difficult to get, but where they are available – for example, on travel expenses – they can enable managers to compare performance across different units and identify real differences, as well as trade-offs that may not be in line with the organization’s overall strategy. Internal benchmarks are easier to access and provide great insights, especially because managers are more likely to understand and adjust for differences among their company’s organizational units than among different companies represented by external benchmarks.

P&L accounting data is not enough to make lasting decisions

Unfortunately, few companies have the kinds of systems they need to track costs at a fine-grained level – and they face a number of challenges in establishing them. Multiple data systems may make it difficult to aggregate and compare data from different geographies. Inconsistent accounting practices between businesses or time periods may lead to significant distortions. Changes in organizational structure (as a result of acquisitions, divestitures, or even changes in the allocation of overhead costs) may similarly distort tracking.

Clearly link cost management and strategy

Strategy must lead cost-cutting efforts, not vice versa. The goal cannot be merely to meet a bottom-line target. Indeed, among participants in a November 2009 survey, those who worked for companies that took an across-the-board approach to cost cutting in the recent downturn doubt that the cuts are sustainable. Those who predicted that the cuts could be sustained over the next 18 months were more likely to say that their companies chose a targeted approach. (“What worked in cost cutting – and what’s next: McKinsey Global Survey results,” mckinseyquarterly.com, January 2010).

Yet, many companies do not explicitly link cost reduction initiatives to broader strategic plans. As a result, reduction targets are set so that each business unit does “its share” – which starves high-performing units of the resources needed for valuable growth investments while generating only meager improvements at poorly performing units. Moreover, initiatives in one area of a business often have unintended negative consequences for the company as a whole.

Aim at results for 2-3 years not just 12 months

Most companies treat cost management as a one-off exercise driven by the need to manage short-term profit targets. Yet such hasty cost-cutting activity typically goes into reverse once the pressure is removed and rarely results in sustainable changes in cost structure. A better approach is to use the initial cost reduction program as an opportunity to build a competency in cost management rather than in cost reduction.

60% of executives say R&D will be top priority this year

Scientist Nestlé R&D Centre Tours, France
Image by Nestlé via Flickr

Research and development has risen sharply on the corporate agenda in the wake of the global economic crisis, a McKinsey survey finds. Four in ten respondents report that both R&D budgets and activity levels are up this year relative to 2009. What’s more, executives are remarkably optimistic that the R&D moves their companies made during the downturn will serve them well in the coming three to five years.

Moreover, nearly 60% of executives say R&D will be either the top priority or among the top three priorities this year – significantly higher than the 47% of executives who said the same last year. Despite the increased levels of spending and activity, companies are taking a wait-and-see approach to R&D hiring. Relatively few respondents say their companies are hiring or firing; the most common approach is a focus on retention.

Executives recognize that delaying, reducing, and eliminating R&D projects can limit long term competitiveness. Still, 42% of respondents say their organizations cut R&D costs in 2009, perhaps reflecting the lengths to which some companies needed to go in order to survive the recent economic turmoil. Further, when compared to the moves companies had made in spring 2009 (when McKinsey’s first R&D survey was conducted) with the moves they made by year’s end, it becomes clear that for many R&D organizations, conditions worsened steadily. Far more companies eliminated projects, delayed spending, and instituted hiring freezes as the year progressed.

These actions may well haunt some companies for years to come. A significant share of executives whose companies cut costs expect that these moves will have adverse effects in the coming three to five years. The problems respondents are most likely to expect include reduced market share, a loss of technological ground to competitors, a weaker R&D talent pool, a loss of institutional knowledge, and damage to morale.

Meanwhile, a significant number of companies appear to have used the downturn as an opportunity to add a measure of discipline to their R&D organizations, infrastructure, or processes. Among the most frequent changes in 2009 were increased accountability for performance and spending, increased collaboration with outside R&D groups, increased use of global R&D resources, and the streamlining of core R&D processes. All these moves should help companies innovate more effectively over the long term.

Moreover, high performers in the survey appear more attuned to the “softer” aspects of R&D than other companies are. Executives at high-performing companies, for instance, are significantly more likely to say their organizations are focusing on retention of key employees (40% versus 29%). And while the majority of high-performing companies didn’t cut R&D costs in 2009 — 63% of high performers didn’t, versus 56% of the others — those that did are far more likely than other companies to fear weaker R&D talent pools, a loss of institutional knowledge, and damage to company morale. Finally, high-performing companies appear to be markedly more proactive than the others in two operational areas that represent significant long-term investments: the streamlining of core R&D processes and the expansion of R&D infrastructure.

You may find more details at:
https://www.mckinseyquarterly.com

Transform: business trends in 25 markets across the Central & Eastern Europe

Tallinn, Rotermanni new neighbourhood
Image by Bookish type via Flickr

Transform is the bi-annual magazine of PwC in Central and Eastern Europe (CEE). It covers the latest business trends in 25 markets across the region, from the Czech Republic to Kazakhstan. Each issue of the magazine goes out to 10,000 business leaders, financiers, politicians and opinion formers in CEE.

Within the last issue, PwC brings the regional CEOs of three leading companies – Siemens, Orange and the ROLF Group – together to debate this issue and asks Romanian business veteran Dinu Patriciu for his insight. Staying in Romania, PwC features an exclusive interview with Bogdan Dragoi, Secretary of State at Romania’s Ministry of Public Finance, on how the government is trying to get the economy there back on track.

Also, in the wake of the World Eonomic Forum’s annual leaders summit in Davos, Switzerland, in the New Year, PwC turned to four commentators with expertise in the region for their thoughts on what CEE’s business and political leaders should be tackling this year.

You may download a free copy from here

International fraud, corruption and the economic crisis: what connection is there between defence contracts, banks, USA, Tanzania and Romania?

A possible answer may be found in the article bellow which I wrote for the last issue of Forbes. The article aims to look for reasons of the sharp raise in international corruption cases compared to the global downturn trail. References are made to SFO’s investigation of British Aerospace (BAE) as well as several corruption surveys and FCPA analysis.

PDF version available at the link bellow (Romanian version only):
“International fraud, corruption and the economic crisis”, Forbes Romania Nr. 24, 8-19 February 2010, 80-81

PwC Global CEOs Survey results released at the World Economic Forum: 60% of CEOs said they expect recovery in their national economies only in second half of 2010 or later

Overall, the survey found that 81% of CEOs worldwide are confident of their prospects for the next 12 months, while only 18% said they remained pessimistic. The results compare with 64% who said they were confident a year ago and 35% who were pessimistic; 31% of CEOs said they were now “very confident” of their short term prospects, up 10% from last year, a low point in CEO confidence since PwC began its tracking.

The survey revealed striking differences in confidence levels – and by extension the impact of the global recession – among CEOs in emerging economies and those in developed nations. In North America and Western Europe, for example, about 80% of CEOs said they were confident of growth in the next year. That compared with 91% in Latin America and in China/Hong Kong, and 97% in India.
Looking at the longer term, the results were more even. Overall, more than 90% of CEOs expressed confidence in growth over the next three years. Those results, coming at the start of a new decade, were about on par with confidence levels of CEOs in PwC’s 2000 survey. But 10 years ago the economic split was very different, with 42% of North American CEOs extremely optimistic – twice as many as in Asia.
For the future, a total of 60% of CEOs said they expect recovery in their national economies only in second half of 2010 or later, while 13% said recovery was already underway, and 21% said it would set in during the first half of this year. Return to growth was fastest in China, where 67% of CEOs said recovery had begun in 2009. However, nearly 65% of CEOs in the US and more than 70% in Western Europe said the turnaround would not begin until the half of 2010.

Other key findings of the 13th Annual PwC Global CEO Survey:

Fears for the future
Protracted global recession remains the biggest overall concern of CEOs around the world (65%), followed closely by fear of over-regulation (60%). More CEOs are “extremely concerned” about over-regulation (27%) than any other threat to business growth. Other high-ranking potential business threats included instability in capital markets, and exchange rate volatility. At the other end of the spectrum, concerns over terrorism and infrastructure were cited by less than a third of CEOs globally as threats to growth.

Love-hate relationship with regulators
CEOs were very clear about the threat of over-regulation. Over 65% of CEOs disagreed with the notion that governments have reduced the overall regulatory burden. They also opposed government ownership in the private sector even in the worst of times – nearly half agreed that government ownership helps to stabilise an industry during a crisis. CEOs from two sectors that received considerable government support during the crisis – automakers and banks – were amongst the most appreciative of government ownership in troubled times.

At the same time, CEOs were optimistic about governments’ efforts to address systemic risks such as another economic crisis – 65% of CEOs agreed that regulatory cooperation will help successfully mitigate systemic risks.

Combating the effects of recession
To combat recession, nearly 90% of all CEOs said their companies had initiated cost-cutting measures in the past 12 months, led by those in the US, Western Europe and the UK. And nearly 80% overall said they would seek cost cuts over the next three years.

Public trust and consumer behaviour
Over one in four CEOs believe their industry’s reputation has been tarnished by the downturn. However, 61% of CEOs in the banking and capital markets sector said there has been a fall in trust in their industry.

Nearly half of CEOs are concerned that the recession caused a permanent shift in consumer behaviour. Most say that consumers will place greater importance on a company’s social reputation (64%), spend less and save more (63%), or be more active in product development (60%).

Risk management
Risk management took on greater importance among CEOs as a result of the recession; 41% of CEOs plan to make major changes to their company’s approach to managing risk, and another 43% report plans to make some change to their processes.

Boards of Directors are becoming more engaged in key aspects of management; such as assessing strategic risk, monitoring financial health, and overseeing company strategy.

Climate change
More than 60% of CEOs said their companies are preparing for the impact of climate change initiatives and believe those efforts will improve their company’s reputation. The recession had little impact on the green momentum; 61% of companies with climate change initiatives saw no effect of the recession on their strategies and 17% raised such investments last year.

The full survey report plus supporting graphics which can be downloaded are available at: www.pwc.com/ceosurvey

McKinsey Survey: less than 25% of the companies whose primary market is in the European Union or the United States, are effective at lobbying

A recent McKinsey survey show that among companies whose primary market is in the European Union or the United States, less than a quarter of respondents say their companies are effective at developing and executing strategies for engaging with all relevant government stakeholders.

The results show that government actions have a significant effect on companies’ economic value: 34% of respondents say 10% or more of their operating income is at stake. Some government actions, such as providing infrastructure and access to capital, are likelier to have a positive than a negative effect on company finances. However, passing laws and setting policies—the actions executives say most often affect their companies’ economic value—have an overall negative effect. Respondents whose primary markets are in developing economies are more positive than others, however, about the effect of government actions, such as the passage of laws and enforcement of rules.

Given this value at risk, it’s promising that 71% of respondents say companies should proactively and regularly engage with government, but it’s less encouraging that only 43% say their companies actually do so.

Some of the reasons for the relative lack of engagement may be executives’ own views of government. More than 75% agree that business must be actively involved in shaping government policy to succeed and that it’s beneficial for companies to be as transparent as possible with government, but large shares also express frustration with government along various dimensions.

When companies do engage with government, executives indicate they’re not particularly good at it. Engaging with the governments of their companies’ primary-market countries is a top-three priority for only 30% of CEOs—although the figure rises to nearly 60% in China. More are involved in overseeing their companies’ efforts to engage: almost two-thirds of respondents say their CEOs either sponsor those efforts personally or oversee the group that does so.

Romanian readers may find usefull the following resource on the subject of lobbying:
www.reglementare-lobby.ro

According to McKinsey, the survey received responses from 1,167 executives representing the full range of industries, regions, and functional specialties.

Detailed survey results may be found on McKinsey Quarterly: www.mckinseyquarterly.com

A year after the global economic system nearly collapsed (II)

McKinsey received responses from 1,677 executives, representing all regions, industries, company sizes, and functional specialties for their last Global Economic Conditions Survey, dated September 2009:

  • Executives in China are no likelier than others to say that an upturn has already begun, but they are particularly hopeful about their own country’s prospects: 82% expect its GDP to increase in 2009, and 30% expect its GDP to regain pre-crisis levels in 2010.
  • As has been true throughout the crisis, large public companies are much likelier to decrease the size of their workforce than small private ones – although these two kinds of companies don’t have different expectations for customer demand or profits.
  • Fears that countries will restrict international trade seem to have receded in the past six months: 42% of respondents now expect it to rise in the long term, compared with just 16% half a year ago.
  • Although just under half of all respondents expect tighter credit at the national level over the next five years, less than 10% expect sales to fall because consumers or businesses can’t get credit.

What’s next?

  • Most companies are managing in a new normal, with an enlarged role for government and lower long-term growth expectations.
  • Innovation is more important than ever; the companies that have the highest hopes for their own futures are likeliest to be focusing on it.
  • January was the month when executives expressed the direst views about the economy. They now look forward to economic growth, but few expect a quick, full recovery.
  • Executives indicate that the past year has slowed but not stopped globalization – and that skepticism about the value of free markets will continue as well.

For more details, you may find the full report at:
http://www.mckinseyquarterly.com

A year after the global economic system nearly collapsed (I)

BBC launched a series of TV programmes offering an account of what happened to create the greatest financial crisis for eighty years.

They explain how the attitude towards risk has been changed during the last decades, and, above all, how governments stepped back from regulating any of it. Moreover, the programmes capture a glimpse of the boom years before the global crash, with testimonies from key decision makers.

Part of the series may be viewed online at:
http://www.bbc.co.uk/programmes/b00mqmjs

How do we measure success? Is short-term performance an appropriate solution?

Ziarul Financiar published today one of my articles in which I asked myself these two questions. The article’s conclusion is that short-term performance is no longer a good way of measuring success and it should be measured in decades instead of quarters.

Regarding the current economic context, I underlined the fact that the USD 50 trillion contraction of global assets between September 2007 and March 2009 shows than many companies took excessive risks and used unrealistic expectations.

You may find a PDF copy (Romanian version only) at:
“Cum măsurăm succesul”, Ziarul Financiar, 2 Septembrie 2009

or you may read it online at:
http://www.zf.ro/