Ernst and Young research shows a challenging and rapidly changing business environment

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. Like their international counterparts, it's crucial that Middle Eastern companies proactively look at models that don't just sustain or tide over during crises but can also be flexible enough to capitalize during adjustments in the economy."

"Clearly the best prepared were those that practised judicious financial discipline during buoyant phases. The windfall along with the checks and balances in their systems would help them cushion the effect in the short to medium term," he adds

Corporates brace for tougher times ahead

Surveyed companies were also asked to name their top strategic priorities over the next 12 months. The vast majority highlighted protecting assets, performance improvement and restructuring their business. In terms of cash management two thirds of those surveyed were considering a top down review of current cash management and of cash flows, half building working capital measures into performance objectives of management and 36% considering possible assets that can be turned into cash.

Alaeddin added, "Current market sentiments in the Middle East seem to indicate that firms in the region have significantly scaled back on allocations for non-core and support functions. Effects of the downturn may not be as pervasive as in markets elsewhere, but it has prompted organizations to relook at things critically. Let's look at the bright side of this crisis; we will end up with stronger and better organizations as a result of looking critically at everything they do."

And where will they be looking to save cash in the future?

There were some fairly consistent messages around where companies will continue to look for savings. Corporates said they expected significant or reasonable savings in their supply chain operations (58%), their sales and marketing (42%), Operations (56%) and IT functions (43%).

In strategic terms 40% of Global companies and 53% of European ones said they were actively considering selling non-core or non-performing business, an increased use of shared services centre (27%), increased use of outsourcing (31%), making strategic alliances (30%) and moving operations to lower cost locations (31%). Companies particularly saw an increased role for outsourcing for their IT, Logistics and Human Resources.

This would potentially imply a position of advantage for markets like India and the region which offer significant differentials in the costs associated with the above. However a reasonable proportion of corporates saw the recession as an opportunity to expand with 34% globally and 38% in Europe thinking of making strategic acquisitions.

Emerging markets and growth

Whilst most developed markets were either perceived as stagnant or in decline companies still saw major opportunities in emerging markets. Some 18% of companies expect significant growth still in emerging markets in the near future; the majority (57%) expect growth to continue but a slower pace than over the last two years and 25% growth to slow significantly.

Alaeddin says, "Current developments point to a firming up of expected growth levels in the Middle East. With most governments and economic blocs elsewhere in the world working on bail out mechanisms for troubled institutions, GCC governments have signalled significant expenditure plans for 2009, especially on infrastructure and enhancing capacities in the energy sectors. This is expected to provide steady stimulus to the economy and play a prominent role in kick starting the engines of growth in the region."

Real estate and leisure, which were key components that fuelled the region's growth trajectory, are currently experiencing a slow down. Most analysts seem to agree that the current trough is a short to medium term phenomenon while the long term outlook remains positive. The pace may have scaled down compared to the same time last year but is expected to slowly move up in the coming months ahead.

Additionally, relatively lenient regulation and tax regimes will now be seen as a major draw as European and US business environments tighten under the pressure of the recession.

Mark Otty adds, "Companies are completely right to still believe in the opportunities of the emerging markets. To put into context a recent Ernst & Young sponsored report highlighted that Brazil Russia, India and China will contribute 40% of global economic growth between 2009 and 2020."