Survival of the Smartest | BTalk Australia

(11min 43) Have you prepared your business for the economic downturn? On today’s BTalk Australia Greg Joffe from the Nous Group suggests to Phil Dobbie four areas of focus that will help a business to survive.

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• Today’s Transcript

Phil Dobbie: Hello I’m Phil Dobbie and welcome to BTalk Australia. Today, more on the economic downturn. For business is it survival of the smartest?

We’ve spoken a fair bit of late about the economic downturn. What does it really mean for your business? Well Greg Joffe leads the Strategy and Public Policy Practice of the Nous Group. He’s provided strategic planning for CEOs and boards of many private and public sector businesses. So Greg, with the downturn, what is really changing here? I mean credit we know is a lot harder to come by right now. But it’s not just the financial changes we’re experiencing. What do you think are the big changes for business this year?

Greg Joffe: Phil the two big trends are the one you’ve already identified, much less access to capital, which is putting severe financial pressure on companies that need capital to keep going. The second is actually on the operating level. So revenues have been dropping across the board, both in Australia and overseas quite dramatically in some industries. And as a result of that, many companies are now moving into dramatic cost cutting in order to try and stay profitable.

Dobbie: And are they cutting in the right areas do you think? Or is that where part of the problem is? They’re just, they’re slashing willy nilly.

Joffe: Certainly there’s a wide range of responses. And we would say there are some people doing it very well, which is carefully considered cost cutting. But there are many others who are cutting willy nilly or cutting things that seem obvious for the short term, but actually really undermine them for their long-term positioning.

Dobbie: Right. Now you’ve got four key points that businesses should be looking at to try and manage themselves for the downturn. So where do we start?

Joffe: One is you need to really think very carefully about your strategy. In good times you can get carried along because everybody’s doing quite well and the general growth in the economy. In tough times you really need to know what is our strategy, who are the target segments we’re targeting, who are our key customers, what are their real needs and how do we deliver against those needs better than our competitors?

Dobbie: Now these are all questions that you should be asking yourself or should’ve been asking yourself all the time. But I guess, do you think companies just do get carried along when times are good and there’s less need? I mean it’s easier to survive?

Joffe: My experiences working consulting for about 20 years in Australia is during good times, companies look for expansion opportunities and during bad times they really get tough on their business, focus very heavily on where they’ve got competitive advantage and tend to compete best and actually really the good companies use this as a time to refine their competitiveness. But there is a wide range in how companies respond to this situation.

Dobbie: Now your second point relates to those, the cutbacks that were already mentioned. On making sure you’re making the right cutbacks.

Joffe: Yes, many companies sort of get spooked by the drop in revenues and try and make across the board cuts or make cuts in areas that seem like obvious areas or easy areas. Our experience suggests that much like step one which is really think about your strategy, think about where you’re going to compete and think about what gives you competitive advantage, equally if you’re going to do cost cutting it needs to be aligned with your strategy. You know, don’t cut 10 percent across the board. Don’t cut the obvious things like travel because if you’re cutting back your marketing and your sales staff, you might actually find that your revenue starts to drop even quicker.

Dobbie: Yeah, so that’s a double whammy. So you actually have to cut further because you’ve actually widened the gap by those cuts.

Joffe: Exactly. You can get into a cycle where you basically make cuts but then I mean, either on the sales side you’re undercutting your sales going forward or on an operations side you’re actually unable to continue delivering the quality service that you need to stay competitive. And therefore you actually start losing clients. So very careful consideration about where you can cut. This is also an excellent time to think about non-people cuts which many people overlook. So thinking about your supply chain and aggressively looking to push some costs out of your supply chain. There are many opportunities at the moment to improve on that because it’s a tough market. And equally procurement; aggressively looking at where your main procurement costs are and managing those down.

Dobbie: And I guess your product line as well. Are you selling stuff that’s just not moving?

Joffe: Well that would go back to our first point which is really thinking through your strategy very clearly, understand your competitive advantage and make sure that’s where you focus. So yes, it’s part of that analysis. Whereas you might have built up products but you could carry in good times, this is a good time to be thinking which products are giving you the lowest returns and which would get you better returns focusing more on key products.

Dobbie: Now your third point relates to cash flow and I guess this is the one that most people are really struggling with at the moment.

Joffe: Yes, obviously with tight availability of finance and with reductions in revenue that can put a cash squeeze in. So companies need to be very clear both in the short term, what is our week by week cash position likely to be and we’re also recommending companies plan now for the next six to 12 months using scenario planning to think about what position could we be in and how do we prepare for it now rather than having it hit us. Scenario planning is not just the oh, let’s do 1 percent or 3 percent or 5 percent projection. But really pushing your thinking around things like if our revenue dropped off 50 percent, what might happen? You know, what would our financials look like and what would we need to do now to make sure that we were positioned for that? So much more dramatic scenarios should be run just in case. Hopefully they won’t eventuate.

Dobbie: So that all relates to risk, doesn’t it? Do you think companies have almost ignored the element of risk? For example running scenarios which are, as you say, 10 or 20 percent rather than 40 or 50 percent because they just didn’t believe those percentages were realistic.

Joffe: Those percentages probably weren’t that realistic a year ago. But certainly now a days they are realistic and need to be looked at. Many companies talk about risk on a standalone basis. Again, our experience is that risk needs to be tightly tied to your strategy. So you need to really understand what are the key risks that our business, our specific business faces? And if you go back a year or two, you know they can vary dramatically for different types of companies. So some companies face massive technology shift risks. If a technology changes, they get left behind. Some have faced like Age Care, have faced a major risk around workforce and the fact that there is unlikely to be a workforce available over the next 20 years to actually meet the needs of the aging population. And of age care providers. Obviously a key risk for all companies almost will be financial or finance in the economy. And so with a reduction in available finance, that is a risk that should have been planned for but particularly now has become a very realistic risk.

Dobbie: Now you’ve done your pessimistic cash flow forecast. I guess that sort of links into your final point which is that where are you going to access finance, which obviously is a big issue. There’s not a lot of trust from banks at the moment and so where else are you getting that what could be working capital for your business?

Joffe: For the last few years, many companies have been able to continue with business as usual because it’s been a bland economy. These times mean you have to look at different ways of doing things. Perhaps you traditionally relied on bank financing. At this point that may be constrained. A number of the overseas banks are pulling out or dramatically reducing their presence in Australia and some of the main Australian banks are also becoming harder to borrow from. So we’ve heard companies looking at a range of different factors. Obviously actually looking at whether you can issue equity. For some of our companies they have been looking at spending some of their assets into investment trusts and then putting those assets into the market. Obviously it helps if you’ve got a treasury function that can do that. Other companies have been looking at JVs where they might actually use access to capital as one of the criteria for the JV, so bringing in a partner who’s got money. In fact in these unusual times, conglomerates actually look like they’re back in fashion at least in the short term because of their ability to move cash between different businesses. We don’t predict the future because only economists pretend to do that. But one would expect over time that the financial markets will come back into operation. But certainly in this time it is necessary to look outside of just classic bank financing to look for other ways you might raise money.

Dobbie: Yes, and, of course, the other way of course is just good old fashion hoarding cash, just making sure which gets back to the cash flow I guess. Just make sure you’re stocked well with cash so there’s less need to draw on external sources.

Joffe: Yes, as much as you can. And that includes things like changing your working capital terms. So looking at your receivables, potentially trying to get that money in quicker, renegotiating your payables with people you owe money to so you actually have a little bit more leeway. Again in these times many companies we’re worried about key business partners going down and if you say, you know and that may give you an opportunity to say, well we will pay you but we’re going to need a bit more leeway so we’ve got some working capital.

Dobbie: I’d imagine a lot of businesses you know they’ve been through good times, perhaps have a whole management team who really haven’t seen times like this before. And so for them, some of the points you’ve talked about particularly when we’re talking about realigning your strategy, you know they may have become a management team that’s very heavily operationally focused and really don’t have that innate ability to try and make these changes. I realise this is a leading question for a management consultant, but it is going to be a problem for a lot of them, isn’t it?

Joffe: Obviously some companies are very good at this, others much less so. And in terms of your question of is it valuable to have external expertise to push your thinking, twofold answer. One is as a consultant, of course, we’d say it’s generally almost always useful to have someone from outside who really pushes the thinking. These times may require thinking quite dramatically differently about your business. You may actually have to cut pet projects, you may actually have to cut product lines that you’re very fond of. And it may require someone who’s not emotionally attached to what you’re currently doing in the business to help you work through what needs to change. Equally I would say the best companies or the companies that use consultants best are those who have already pushed themselves as hard as they can and have thought heavily about what do we want to get out of having external input. So companies that we find use us well have a very clear mandate for us which may be something like we’ve pushed on these ideas, but we want you to really test us on these other ones or help us look for other opportunities to free up cash flow etcetera.

Dobbie: So this must be a good year for you I would’ve thought.

Joffe: Yes and no. On the cost-cutting side, most consultants are very busy. But a lot of the general revenue increasing work that you do the rest of the time is dramatically cut back, particularly in financial services which has been a boom area of Australian economy for the last 20 years.

Dobbie: Yes, well maybe it will be subject to another government bailout package. I think they’re working through alphabetical order. I think they started with banks, cars, they’re on to construction now, so consultants are just around the corner I reckon.

Joffe: I think that was originally a joke offline between you and me where I said it’s amazing they bail out the car companies and nobody says, oh the consultants are having a slightly slow time. Let’s throw some money at them.

Dobbie: I couldn’t resist it. Pleasure to talk to you. We’ll talk again soon I’m sure.

Joffe: That’s great, thanks Phil.

Dobbie: We’ve got to look after those consultants.