Improving Your Performance - Opportunities In Adversity

Improving your performance Opportunities in adversity

“I claim not to have controlled events, but confess plainly that events have controlled me.” Abraham Lincoln

Improving your performance Opportunities in adversity

How businesses can become fighting fit For many businesses, the last 12 months have forced them to adapt to unprecedented trading conditions, make significant decisions and implement step-change strategies that some would never have conceived of making during the easy-credit boom years which came to an end in 2008. Rather unexpectedly, perhaps, not all businesses are currently in a state of stress — some industries (such as biotech) and some companies have reported an improvement in profitability over the last 12 months — yet even succeeding in these current conditions requires decisive and nimble management action. With so many organizations feeling the effects of the downturn, with some seriously in trouble or even insolvent, the landscape is constantly changing and this will have an impact on business fortunes. A competitor lost, for example, represents an opportunity to recruit their experienced staff, acquire their prime real estate, or take on the mantle of market leader. A customer lost, however, could be a decisive blow, leading to valuable cash being tied up in unwanted inventory and lowered sales for the future, inhibiting the investment needed to make new products. Every business trading today must anticipate that their performance is in constant jeopardy, and that there is no room in the boardroom for complacency. On the contrary, the boardroom today should be busier than it has probably ever been.

What steps to take? Whatever the business and operating model, improving performance must be a key business objective today, closely aligned with an immediate and long-term focus on reducing costs. This is not necessarily news. Improving performance effectiveness has long been on the corporate agenda, and in our recent survey “Opportunities in adversity”, January 2009, 84% of global executives reported that it was an issue that was going to be of increased importance to them over the next 12 months. Cost reduction has always been, and should remain on the agenda of at least the CFO. However, the current market conditions should prompt a business to re-evaluate how it approaches both performance improvement and cost reduction. Is the current scope broad enough? Is the analysis deep enough? Is the business open-minded enough to revisit those areas of the business it had previously decided were exempt from scrutiny, or had apparently delivered enough? Tough times call for tough measures, but it is essential to view these twin initiatives positively, as they present a business with renewed motivation for making sure the performance of their business is as effective and as profitable as it can be — not just to be able to survive in the current environment, but to be able to take advantage of the opportunities that might arise.

Improving your performance Opportunities in adversity

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Reaping the benefits and avoiding the risks For example, if a rationalization of IT results in more manual ‘work-arounds’, can this be achieved in an environment of reduced headcount?

Companies that have successfully undertaken performance improvement and cost reduction initiatives will typically claim to have benefited from some or all of these significant and positive changes: • R  educed or re-balanced operational, infrastructure and management costs

Reducing spend and investment in the short term can also be a very real inhibitor to growth for the longer term. In our survey, a cutback in mergers and acquisitions is understandable given the levels of uncertainty in the market, but the cutbacks in marketing, R&D and operations may make it difficult to take advantage of opportunities that arise. In that scenario of the market leading competitor ceasing to trade, how can this situation be turned to an advantage if there is no budget for sales and marketing and R&D?

• I mproved balance between security and cost of controls • D  ecreased revenue leakage • C  learly identified and prioritized improvements within the supply chain • I mproved IT performance, from strategic alignment to day-to-day operations • Better return on program investments

Which of the following functions in your business have been most affected by a decline in investment?

• Process transformation • A cost effective tax function that covers tax risks while focusing on optimizing tax liabilities and related cash flows However, there is a potential downside to initiatives aimed at improving performance and reducing costs, which is the very real risk of reduced effectiveness. Already, as shown by the executives in our survey, businesses are reducing costs by focusing on headcount, IT, employee benefits and real estate. If viewed as individual ‘silos’ of expenditure, each could individually make perfect sense, but the effect of the whole across the organization needs to be very carefully considered.

40%

Mergers and acquisitions

37%

Sales and marketing 31%

Research and development

27%

Operations

25%

Information technology 14%

Sustainability programs Risk management There has been no decline in investment at our company

6% 15%

Please select up to three. (Shown: percentage of respondents)

Which of the following cost reduction initiatives have you already implemented or started to implement?

84%

Ovarall cost savings analysis 60%

Headcount reduction 44%

IT rationalization

42%

Employee benefits rationalization 30%

Real estate rationalization Other, please specify None of the above

From previous downturns, finding a balance between improving performance, cost reduction, maintaining effectiveness and agility to respond, has emerged as the key imperative. Companies that emerged successfully from previous downturns focused on reducing expenses without sacrificing their long-term health.

4% 4%

Please select all that apply. (Shown: percentage of respondents)

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Improving your performance Opportunities in adversity

Where to look for performance improvement In the current economic situation, it’s understandable if a business is tempted to rush into a cost reduction exercise. However, with the risk of damaged performance or effectiveness, a structured, coordinated and considered approach can minimize those risks. Every business is different, but if we take a typical, simple business model, we can identify the value chain and can see that supporting the value chain and operations are management processes and supporting processes.

It is possible and probably inevitable that the business should look to the value chain as the source of short-term improvements to both performance and cost. With the unpredictable market conditions we are experiencing, we would propose, however that businesses look at making longer term changes to the management and supporting processes, and accept that changes to the revenue-drivers and operations may only have a short-term impact, as they need to become and remain highly adaptable and flexible while the market continues to undergo change.

Management processes

Supplier

Purchasing

Production, research & development

Distribution, sales & marketing

Customer

Supporting processes

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A structured approach to performance improvement and cost reduction Businesses should start by taking a holistic approach to evaluating their entire cost base and examining their working capital and revenue optimization practices. This should be followed swiftly by a fresh assessment of their core processes, the current risks and the controls that are in place, and the management of any key programs.

Management processes

Supplier

Assessing the cost base

Tax cost management

Purchasing

Production, research & development

Distribution, sales & marketing

Customer

Working capital & revenue optimization Supply chain

Supporting processes Program management

IT effectiveness

Any intention to reduce costs should start with a structured, systematic investigation and analysis of a company’s cost base. This will allow management to identify, validate and quantify opportunities to reduce or rebalance operational costs. In addition it should help lead to the design and delivery of solutions that will realize these opportunities and the associated benefits. As a process this assessment must be rich in facts and analysis — critical for grounding and justifying the findings, conclusions and recommendations. To ensure rapid completion, a hypothesis driven approach is often preferable. The responsibility for this exercise frequently falls to the CFO, but in these more turbulent times, with cost reduction very high on the corporate agenda, the responsibility may need to be shared with others, and resources freed up from the more day-to-day reporting requirements, in order to focus on this vital issue.

Process transformation

Controls framework

Assessing the cost base

As our recent survey of executives showed, IT is a major area for potential cost-savings, and since it is critically embedded into all parts of the business, the IT function is probably one of the most impacted departments whenever cost-saving initiatives are underway. However, with the current economic situation causing unprecedented trading conditions, putting the IT function under pressure when it is having to enable the business to respond to those changing market conditions, should be carefully considered. For the first time businesses may want to look to their IT function as a means of creating value, as a way of rationalizing costs throughout the business and as a way of managing the overall risk position. More than ever it is crucial that IT continues to be aligned with the business and its overall strategy, improves its efficiency and can measure and demonstrate its ongoing value. Since a large portion of a company’s expenses may flow through its supply chain, a close examination can often yield savings opportunities. That is certainly where executives are beginning to focus. In our survey, 58% of executives stated that the supply chain offered opportunities for cost reduction. But the supply chain also represents an opportunity to increase revenue by selling into new markets that may not be as affected by the current downturn. As businesses move into emerging markets to capture new revenue opportunities, they assess and balance global trade performance factors that may have the greatest impact on success. Leading companies look for this balance.

4

Improving your performance Opportunities in adversity

To take cost out of the supply chain, companies should assess current performance for improvement opportunities in areas such as strategy, planning, operating processes, product return/recycle, fulfilment and procurement. It is crucial to identify and avoid if possible any cost-saving initiatives that would negatively impact on effectiveness, however, as any action that impedes the delivery of high-quality products or services to market could severely damage vital revenue streams.

Examining working capital management and revenue optimization practices Without customers, a business has no future, and for many businesses, customers are getting harder to find. The risk of customers delaying payment has always been present, but we have seen that in the current environment the risk has greatly increased — as has the risk of non-payment. While our survey shows that businesses are currently both reacting to the changing customer environment and proactively taking steps to protect themselves against high risk customers, these delays or non-payments clearly have a significant impact on available resources and could quickly lead to the need to renegotiate banking facilities or lines of credit.

I n what ways has the global economic crisis affected your organization’s approach to its customers?

72%

We have increased our focus on key accounts 39%

We have launched new products or services We have broadened the customer base (by entering new geographical markets

Customers have terminated contracts with our company

Revenue optimization is closely linked to working capital management — however, it also encompasses an examination of the customer portfolio and the customer-to-cash process itself. This is particularly crucial today, as already 55% of our survey respondents stated that the time delay between customer order and cash collection had increased, and 53% had seen a deterioration in the creditworthiness of their customers. By better leveraging targeted sales and marketing efforts to focus on a more profitable customer mix, an improved customer portfolio may be able to help the bottom line, and in our survey we saw that 31% of companies have already terminated contracts with customers as they now considered them to be too high risk. Since competition for the most highly-prized customers has been heightened during this current downturn, leading companies are working to develop products and services to avoid churn issues and the associated downward pricing pressure (although this is not an option for those businesses who have cut their investment in sales and marketing and R&D). In addition to this, revenue leakages and delays in the billing process can be avoided by improving the process and system flow of sales and billing relevant information. Correct, complete and timely billing is fundamental to safeguarding margins and returns.

34% 31%

We have terminated high-risk contracts with customers We have key customers that have suffered bankruptcy

Improving the effectiveness of working capital management could minimize the risks by reducing the time to collect and increase direct debit penetration, or facilitate a change to advance billing. It could also ease spend consolidation and supplier payment terms extensions. 68% of the executives we surveyed are currently undertaking a top-down review of their current cash management processes and their cash flows, in order to identify the improvements they need to make within their own businesses.

24% 19%

Please select up to three. (Shown: percentage of respondents)

55% of our survey respondents stated that the time delay between customer order and cash collection had increased

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Alongside revenue, there needs to be an examination of a company’s tax situation — to comprise tax liability and related cash flows (e.g., corporate income tax, VAT, wage tax, etc) and the operating cost of the tax function. As with all performance improvement initiatives, managing these costs effectively requires striking a balance between reducing the operating cost, against the risk of negatively impacting the tax liability and cash flows by reducing effectiveness. These tax liabilities and cash flows can turn out to be significant multiples of the operating cost, so a false economy is a very real risk. Businesses should not be overly focused on the cost of the tax function, but instead be applying pressure to the tax function to lower the tax cost of the business. The answer is to effectively manage what exists: effective management includes properly documenting the business case and targeted outcomes for tax projects and transactions. For the tax department as a whole it is important to establish well defined objectives, measures and service level agreements, with both executive management and the resources on which the tax function relies (such as shared service centres or third party providers). As tax liabilities can be impacted in significant ways by even the smallest change in operations or business practice, the tax function should actively participate in any business restructuring and enterprise-wide strategy as it has great potential to contribute significantly.

Evaluating and transforming core processes The purpose of evaluating the current core processes is to enable a business to step back and develop both a clear identification and prioritization of areas of improvement, and a new aspirational design for the operating model and strategy. Following the analysis of the cost base, the nature of these areas of improvement and any subsequent process transformation, will undoubtedly be influenced by the identified cost-saving opportunities, and of course the current market conditions. Taking both of these factors into consideration, a rigorous assessment of the current readiness to adopt a new model, and a business case for change would be the next steps. If the business is in an industry that has been greatly impacted by the economic downturn, then a continuous assessment of the suitability of the new model, and its performance post-implementation is essential, and highly recommended for all.

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Assessing risks and improving controls With every change to the market in which it operates, and with every change in strategy, so the risk profile for a business changes. With the market in such a volatile state, it is more than likely that a company’s risk profile is today incomplete with the ‘gaps’ having the potential to — at the very least — damage performance and drive up the costs of doing business. In our survey, 78% of executives said that businesses should be improving their controls now to respond to the increased business risks arising from the current market conditions. Companies cannot afford to be neglectful and the controls framework needs to cover a wide range of day-to-day issues from financial reporting and information management, health and safety or environmental assurance, as well as major strategic changes (e.g., outsourcing, acquisitions, process re-engineering). Within the overall risk management approach, the management of key programs is particularly critical when improved performance and cost reduction are high on the agenda. There are often such large sums of investment tied up in major projects that careful, senior-level scrutiny is in place. In the current market conditions, however, the risk of putting an entire business at stake has increased if a major program fails to deliver the intended program benefits. Strategic programs are facing higher expectations than ever, with the scope often increasing to accommodate changes forced upon the business. To improve performance effectiveness may require initiating another major company-wide program, and so businesses need to ask themselves whether they have the skills or resources to take on another large program, especially where there have been headcount reductions, experienced staff lost, or the business has diversified into unfamiliar areas.

78% of executives said that businesses should be improving their controls now

Improving your performance Opportunities in adversity

Measuring improved performance and cost reduction Organizations often underestimate the importance of having the right measures. In some instances, companies work with too many metrics — primarily financial and internally focused — which do not acknowledge external benchmarks. In addition, using the wrong metrics can result in the creation of undesirable behaviors and actually damage performance when the objective is to improve. To effectively demonstrate the benefits achieved, measures need to be aligned to the vision and strategy of the business. Cost reduction — if it is a key strategic imperative — can be a key measure in its own right. Other key measures could include speed to market compared with competitor performance; improved customer profitability; more timely and accurate billing and faster receipt of payments; fewer resources allocated to key functions such as supply chain, without any negative impact on performance, through greater automation; greater functionality or processing power of IT through more effective use of the existing technology.

Conclusion “An economic crisis is too good an opportunity to waste.” Improving performance effectiveness and reducing costs can deliver significant benefits throughout the organization in the short and long term — and in the current market conditions we would propose that both are sought. 2009 could be the year in which financially sound organizations make their corporate fortunes. Under stress, and forced to re-examine their business models, it is possible to build successful foundations for growth. What is important is that all businesses consider improving their performance as a matter of urgency, so that the business can be in better shape to survive the downturn, emerge ‘fighting fit’ at the first signs of recovery and in a strong position to maintain or take over the dominant position in their market. Adopting a ‘wait and see’ approach may be tempting — there may be more clarity tomorrow, and conditions may have improved — but it is important to recognize that the crisis has happened and its consequences will continue to emerge. We believe that now is the time for leaders and management to focus on the performance of their business and make cost efficiency gains. Keep the process transparent, involve your employees, embrace the changes that arise and maintain a focus on a successful future.

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Contacts Role

Name

Email

EMEIA campaign sponsors:

EMEIA

Lars Weigl Arco Bakker

[email protected] [email protected]

Role

Name

Email

Africa

Mike Kane

[email protected]

(Tax) (Advisory)

Arco Bakker Lars Weigl

[email protected] [email protected]

Belgium and The Netherlands

Aloys Hosman

[email protected]

EMEIA solution champions:

CIS

Elena Tsaturova

[email protected]

Central and Southern Europe

Lukasz Zalicki

[email protected]

France and Luxembourg

Sabine Fouchier

[email protected]

FSO

Pierre Pilorge

[email protected]

Germany Switzerland, Austria

Krystian Pracz York Zeollkau

[email protected] [email protected]

India

Raju Lal Ashish Nanda

[email protected] [email protected]

London

Steve Wills

[email protected]

Mediterranean

Donato Ferri

[email protected]

Middle East

Rami Nazer

[email protected]

Nordics

Eirik Albrigsten

[email protected]

UK and Ireland

Adrian Davis

[email protected]

8

Role

Name

Email

Cost of control

Oliver Wright

[email protected]

Enterprise cost reduction

Jean-Benoit Berty

[email protected]

IT effectiveness

David Tidd

[email protected]

Process transformation

Stephen Lambert

[email protected]

Program management

Luca Gargiulo

[email protected]

Revenue management

Andreas Bonnard

andreas.bonnard@ de.ey.com

Supply chain

Alex Milward

[email protected]

Tax cost management

Robert A. Guarnieri

[email protected]

Visit www.ey.com/opportunities-in-adversity for more information

Improving your performance Opportunities in adversity

About this report For this study, the Economist Intelligence Unit surveyed 337 C-suite and board level executives.

What is your primary industry? 25%

Financial services 18%

Manufacturing

Respondents were drawn from across the world. All executives polled worked for companies with a turnover in excess of US$1 billion and businesses were cross-industry. The research was carried out between 6 and 19 January 2009.

IT and technology, Telecoms Healthcare, pharmaceuticals and biotechnology Professional services Energy and natural resources Chemicals

In which region are you personally located? Asia-Pacific

Construction and real estate Retail

Other

29%

What are your company’s annual global revenues in US dollars? 49%

$10bn or more

7% 7% 6% 5% 3% 3% 3%

Government/Public sector 3%

41%

EMEIA* Americas

Transportation

30%

14%

4%

What is your job title? (number of respondents) 121

SVP/VP/Director 44

CFO/Treasurer/Comptroller $5bn to $10bn

16%

39

Manager 32

Head of department $1bn to $5bn

35%

31

CEO/President/Managing director 24

Other C-level executive

18

Head of business unit CIO/Technology director Board member Other

10 6 12

* Europe, Middle East, India and Africa

Improving your performance Opportunities in adversity

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Ernst & Young Assurance | Tax | Transactions | Advisory

About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 135,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit www.ey.com Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. www.ey.com/opportunities-in-adversity © 2009 EYGM Limited. All Rights Reserved. EYG no. AU0224 In line with Ernst & Young’s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content. This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.