Ernst and Young research shows a challenging and rapidly changing business environment (page 1 of 2)

As stress rises and the slowdown intensifies how are leading international companies responding?.

Cutting costs internally and freeing up cash

The starting point for any business is cash and many corporates have already drastically tightened their belts. Nearly 40% of the companies surveyed felt there had been a significant deterioration in the business environment in their individual sectors, with over a third noting competitors withdrawing and a rise in bankruptcies.

More than two thirds have already implemented increased frequency of reporting risk to their boards. The drive to cut costs has already impacted internal business strategy.

Over 80% of respondents have already undertaken a major costs saving analysis, nearly two thirds had instigated a headcount reduction programme and over half had rationalized their IT spend. European companies were more likely than their US counterparts to look to cut costs on Real Estate and IT rather than cutting direct or indirect employee costs.

The credit crunch has forced companies to seek alternative ways of improving liquidity. Nearly half of all companies had disposed of or shut down parts of their business and 43% were looking at alternate short term finance facilities whilst 23% were considering options to renegotiate their debt covenants as well as proactively communicating with lenders, analysts and rating agencies and considering renegotiating debt covenants. Barely a quarter said the availability of cash was not an issue.

Mark Otty, Area Managing Partner of Ernst & Young EMEIA said, "This is an important snap shot of global corporates already facing up to a credit crunch and thinking how to prepare for a recession. But the business world has experienced serious downturns before and there are opportunities to learn from past crises. There will inevitably be losers over the next 12 months but there will undoubtedly be a significant minority of clear winners."

Hitting customers and suppliers equally hard

The companies surveyed have already been keeping a close eye on both their customers and their supply chain. And with good reason, as over half had seen a deterioration in creditworthiness of customers (nearly 60% in Europe) whilst over half said that some key customers are in distress, and that there was an increase in the time lag between customer order and cash collection.

Companies around the world have adapted their strategies to fit with this new environment, with nearly three quarters showing an increased focus on key accounts and over 40% developing new products. A third said that fears about existing customers meant they had broadened their customer basis and a third said they had terminated contracts with customers they perceived as high risk.

In terms of suppliers, respondents were split equally between two very different strategies. Half the companies surveyed have narrowed their supplier base to obtain more favourable prices or terms whilst the other half have broadened the supplier base to reduce the impact of the failure of a key supplier. The majority of companies are already communicating more proactively with suppliers, half were negotiating payment terms with suppliers more frequently and over a quarter of companies said key suppliers were experiencing financial distress.

Fouad Alaeddin Managing Partner, Markets leader, Ernst & Young EMEIA says, "Companies in the Middle East are not immune to the credit crisis and are facing similar issues.