Retrenchment, across the board cost reductions and disposal of non-core businesses and assets are becoming the default strategies for the financial services (FS) industry as it navigates its way through the global recession, according to Ernst & Young.
Opportunities in Adversity, conducted by The Economist Intelligence Unit for Ernst & Young, was based on a poll of 90 financial services organisations around the world with turnovers in excess of $1bn.
As credit availability remains tight and the broader financial distress intensifies, unsurprisingly financial services are most affected by the downturn: 60% of businesses polled said that net profitability within the FS sector had significantly deteriorated. This compared to 40% across the other industries polled in the research. Additionally, almost 75% of financial institutions had experienced a slight or significant deterioration in their organisation compared to just under two thirds of all the businesses polled.
Tom McGrath, managing partner for Ernst & Young’s European, Middle East, India and Africa (EMEIA) financial services business, says: “Across the FS landscape we are seeing a real focus on operational efficiency and cost reduction, either through headcount reduction, demand management or heightened focus on outsourcing.
“We are also seeing an almost ‘real time’ definition of what constitutes core and non-core for our clients, with the focus on accelerated disposals of newly defined non-core businesses or assets. The challenge is to have a clear view of how businesses will continue to perform effectively in its chosen marketplace. Our research shows that future sustainability will be achieved by reshaping not downsizing.
“The current marketplace is also presenting unprecedented growth opportunities for businesses that are relatively capital or cash rich to take market share in profitable segments from weakened competitors or pick-up ‘game changing’ acquisitions. We are already seeing the impact of the slowdown on the financial services landscape with banks on both sides of the Atlantic divesting assets to free up capital. This has to be anticipated over the coming months and we should expect to see a considerable reshaping of the financial services landscape.”
Faring up in the global recession
The research also found that almost 90% of financial institutions have already started or are starting to implement overall cost savings analysis; just under three quarters are doing the same with headcount reduction; and more than half are rationalising employee benefits.
Over the next year and in direct response to current market conditions, more than 50% of the respondents are planning to divest non-core or non performing business; almost 40% plan to increase outsourcing or ‘co-sourcing’; and just over a third are considering moving their operations to lower cost locations.
Andy Baldwin, markets managing partner for Ernst & Young’s EMEIA financial services business, explains: “Traditional outsourcing and co-sourcing has tended to focus on enabling functions, with a particular emphasis on IT, finance and data management and selective voice processes with businesses being largely driven by a mixture of ‘wage arbitrage’ and ‘improved productivity’ .
“In future, it’s likely that this trend will continue at a new, more aggressive level in FS – although the direct financial interest of many European governments in a number of financial institutions is likely to heighten the political sensitivity around this topic.
“In addition, uncertainty in the future regulatory landscape, future fiscal policy and the impact on remuneration structures are likely to feature prominently in the decision of where to locate some of the smaller, entrepreneurial FS businesses that retain a strong owner-managed culture. For some of the major FS centres across EMEIA, this represents a particular set of challenges which the authorities will need to navigate with great care.”
Balancing the customer and supplier tightrope
Financial institutions are also treading a fine balance in their relationships with customers and suppliers alike: almost three quarters have increased their focus on key accounts; just over 50% have terminated high-risk contracts with customers; while just over a third have launched new products or services to maintain customer numbers.
When it comes to suppliers financial institutions are split into two camps: almost 55% have narrowed their supplier base to obtain more favourable prices or terms, while precisely a third have broadened their supplier risk to reduce the impact of a supplier’s bankruptcy.
Cash is king
The old adage that cash is king still rings true: just under 75% of FS respondents had seen the credit worthiness of their customers fall away; well over half said that some key customers were experiencing financial distress; and almost a third were seeing an increase in customer order and cash collection.
Where suppliers are concerned, more than half of financial institutions are communicating more proactively with suppliers as they seek to maintain cash management, and a third said they were negotiating more frequent payment terms.
In terms of their own cash management, almost 70% of the companies polled have conducted a top-down review of current cash management and flows; half have considered possible assets that could be turned into cash; and almost four in ten are building working capital measures into the performance objectives of their management teams.
Andy Baldwin commented: “Over the last 10 years many FS businesses have experienced a period of unprecedented boom. Inevitably during such periods of high growth the basic housekeeping of cash and working capital management received less management attention. Any manufacturer will tell you that cash flow has brought down many businesses long before the profit & loss showed a loss.
“With the deteriorating market conditions, increases in corporate defaults and the risk of bad debt, many FS businesses are refreshing skills and putting increased organisational focus around cash in and cash out processes. We have found that by getting this right some FS businesses can generate a further 3-5% of total sales value.”
Other findings from the research:
- 63% of financial services companies expect a significant increase in efforts to protect their assets, compared to almost 40% of overall respondents;
- Just under half (46%) expect a significant increase in restructuring their business to meet new conditions (compared to 37% overall);
- Six in ten firms are considering alternate sources of liquidity while almost half are obtaining access to short term finance facilities and/or credit. A similar number were also proactively communicating with lenders, analysts and ratings agencies;
- Protection of the brand and financial reputation was the key driver for an enhanced risk assessment in the current environment (62%), closely followed by better liquidity and cash management (61%);
- Sales and marketing is the activity that six in ten financial services businesses thought would be most affected by decline in investment (compared to a third of all businesses); and
- Just over four in ten financial institutions believed that an information security breach could severely impact their brand and financial reputation (compared to 32% overall).
Opportunities in Adversity
The Economist Intelligence Unit on behalf of Ernst & Young surveyed in January 2009, 337 board members of international corporates, over half of which had turnover of $10billion plus, on how the downturn had impacted on their strategic objectives and the way they do business.
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