With the UK economy back from the brink, some companies are showing signs of emerging from a crisis of financial uncertainty and starting to plan again for the future.
However, many leading firms also recognise that they are now operating in a very different business environment.
According to a recent piece of research by Ernst & Young, which has looked at how leading global companies have dealt with recession and are preparing for an eventual recovery, there is a consensus that many lessons can, and need to be, learned from the experience of the past 18 months – but few companies think it will be business as usual.
The study, entitled Lessons from Change, is a distillation of the conversations that more than 500 of the firm’s senior partners from around the world have had with their international clients in the last few months.
Significantly, the report revealed that companies are now looking towards the future and at the business opportunities available to them.
This was particularly evident in their attitude to cash. Whereas six months ago clients were telling us that it was all about survival and getting enough cash in the door to pay their staff and their suppliers, corporates have now broadened their focus to looking at re-evaluating their business model and doing all they can to optimise the flexibility of their operations.
Cash is still important, but so is planning for the future and optimising market reach, either by geography or by new products and services.
After the last 12 months, it is perhaps hardly surprising that nearly 90% of the clients examined in the report had either adopted or were considering adopting a strategy of refocusing on core competencies.
This is either because non-core assets are being sold or there has been a fundamental recognition that it is a high-cost and high-risk strategy to aggregate competencies.
We have seen a similar trend in the oil&gas sector, where the focus for petroleum majors has continued to revolve around the disposal of assets in non-core markets and differential investment in markets with superior growth potential.
However, the pace of asset disposal has slowed somewhat since the deterioration in the economic environment. The financial crisis has constrained the ability of private equity and independent investors, who had been active acquirers of downstream and upstream assets in the last two years, to fund further acquisitions.
In addition to looking at their business model and strategy for a changing world, companies were also looking at ways of permanently driving down cost and adapting more quickly and effectively to a changing market.
More than 90% of companies had either accelerated cost reduction programmes across their business (74%) or were actively considering doing so (18%).
The numbers of companies that had already introduced outsourcing or shared service centres was lower, at 55%, but a further 31% were actively looking at introducing some sort of efficiency drive for business support functions. Companies were also actively pursuing an agenda of reducing fixed costs.
Cost reduction, as part of an increased scrutiny of operation efficiency, was a particular focus for the oil&gas industry. In addition to reviewing the size of their workforce and implementing shared service centres, our research revealed that oil&gas executives were more likely to have negotiated longer-term contracts with suppliers over the last six months than any other sector (60% of oil&gas respondents, compared with 43% of overall respondents).
The report also looked at the variations across sectors and how the recession has impacted different industries in different ways. The banking and automotive sectors have, for instance, undergone a massive change in the last two years, while others – such as oil&gas, life sciences and technology, for example – while clearly feeling the pinch, have not seen the same kind of upheavals.
Taking a closer look at the oil&gas sector, the industry has long become accustomed to commodity-price fluctuations and the need to respond quickly to changing market conditions. For example, in the past decade, we have seen oil prices anywhere between $10 per barrel to $147 a barrel.
As such, while a new business agenda may be emerging for many sectors, the oil&gas business model already accounts for the cyclical nature of markets and economies.
This has perhaps sheltered the industry from some of the worst effects of the economic downturn and will help to maximise future business opportunities.
However, despite the differences across sectors in terms of how they have been affected by the recession, there are also some common principles that all have learned, or are learning, as a result of the last two years. No company, regardless of its sector, can afford to believe there will be a return to normality any time soon and every industry has participants who will not survive longer-term.
Perhaps one of the more surprising findings from our discussions with clients (and most welcome) was that rather than hiding behind national protectionism, as many had feared as a consequence of the recession, many corporates were already actively diversifying into new geographic markets. When asked, 85% of companies had already done so (59%) or were actively considering such a plan (26%).
From an oil&gas perspective, we have already seen that companies with operations more focused towards international markers with greater growth potential have fared better during the downturn.
For example, as with many other global oilfield services companies, Petrofac has seen a major increase in share price and has also reported an 8% increase in pre-tax profits in the six months to June 2009 because the capital and operating expenditure plans of its global and geographically disperse clients have not slowed or stopped.
Emerging markets have, for the most part, rebounded quickest from the recession, and our clients can see that, with 15% of the Fortune 100 now headquartered in the BRIC (Brazil, Russia, India and China) countries, the opportunities for higher growth and potential to expand are truly global.
Companies may well be focusing on their core competencies, but that does not preclude them from looking for new customers and new markets.
Alec Carstairs is head of oil&gas for Ernst & Young in Scotland
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