Complex Made Simple

Top CEO 2019: Why are you cutting costs? and how?

While restructuring should be able to spur a new phase of growth in the future, cost-cutting strategies when done incorrectly can prolong the pain points.

Is your company restructuring to stay defensive in a tight market or to reallocate resources? The core issue of cost-cutting and restructuring is that businesses forget that they are dealing with people Instead of downsizing or reskilling, if companies think of ‘upskilling’, it creates a different framework

Fears of a global economic slowdown mounted in 2018 spurred by volatility in oil prices, businesses, geopolitical tensions, and a pullback in government spending. Companies across the GCC and the MENA region have tightened their purse-strings through cost-cutting efforts and restructuring to invest in future opportunities. The UAE, in particular, witnessed a downward trend in stock and real estate prices.

While restructuring should be a regular part of economic and business cycles – and done properly, should be able to spur a new phase of growth in the future – what’s happening in the GCC region is just not quite growth-oriented. If restructuring and cost-cutting strategies are not right, they can also prolong the pain points for a company and the economy. A number of key industries in the GCC from construction and retail to logistics and energy are feeling the strain of lower-than-expected growth rates, resulting in mass restructuring and cost-cutting measures. Governments in the region have expanded their budgets in an attempt to counteract the downturn.

What are the best ways to deal with shrinking profits? How do organizations remain competitive in the current economic scenario? These questions and more were answered at the “Cost-Cutting, Profit Risks and Government Spending” panel discussion held at the Top CEO Conference & Awards 2019 organized by Mediaquest and INSEAD Business School at the Al Areen Palace and Spa in Bahrain, where the top business leaders from around the GCC gathered to discuss the way forward.

The “how” and “why” of cost-cutting and restructuring

There are two ways of looking at cost-cutting and restructuring. While some companies take a defensive stance by foreseeing a disturbance and taking preventive measures of tightening the bolts, other companies proactively cut costs from a part of their organization and restructure in order to reallocate resources to focus on higher growth and profit margins.

The challenges facing business in the Middle East have called for both the government and private players to think out-of-the-box and come up with new business plans. It has taken companies out of their comfort zone and into innovation, research, and development. Telecom companies such as the Oman Telecommunications Company recognized high penetration levels, increasing competition, stiffer regulations and, thus, decided to scale up through mergers and acquisitions. Companies are also looking to shed some of their traditional asset-weights and channel their investments into digitalization and growth models.

“When the storm is looming, there are two kinds of people. There are people who run for shelter such as the cost-cutter for defensive purposes, and then there are the people who run to build windmills. If the wind is coming, it will generate wealth and competitiveness for someone. I think the strategies need to be focused more on how to be on the winning side. Cost-cutting is a good thing. It’s always good to spend your money wisely, but it needs to be accompanied with ambition,” said Bruno Lanvin, Executive Director of INSEAD Global Indices.

Staying ahead of the curve

According to the Global Talent Competitiveness Index, the annual INSEAD Business School report on the ability of countries to compete for talent, all countries in the Middle East are below the regression line – which means that based on their GDP per capita, GCC and Middle East countries have not been doing as well as others with similar GDP per capita in areas such as ICT usage, innovation and attracting talent.

Certain countries in the GCC such as Bahrain have welcomed the volatility in oil prices by switching focus to economic diversification. According to IMF reports, while the oil sector was down 1.2 percent in Bahrain during 2018, the non-oil sector was climbing 2.5 percent with a projected growth of another 2 percent.

“The efforts over the last few years to diversify away from oil have actually been quite successful and have helped to shield Bahrain to an extent from the volatility that our neighbors have experienced in the prices of oil,” said Tala Fakhro, Executive Director – Market & Strategy Intelligence at the Bahrain Economic Development Board.

The core issue of cost-cutting and restructuring is also that businesses often forget that they are dealing with people. It’s hard for business to hold on to their workforce while going through a difficult patch, but much of this is revealing of the choices that need to be made. Most people think that cost-cutting and downsizing of the workforce are the same.

“If instead of downsizing or reskilling, companies think of ‘upskilling’, it creates a different framework. In order to upskill, you have to look ‘up’- you have to look at the future … the best place to invest is in the future. But the question is where that future is? Are we looking at a year from now, two years, five years, ten years? Your definition of a future may depend on the nature of your business – the time it may take to amortize your investment. This is where we need governance. At the same time, a vision without implementation is a hallucination. Sometimes, identifying the low-hanging fruit to show that your vision is going in the right direction is an important indication for industries, investors and stakeholders,” Bruno Lanvin said.