OK, so recent news indicates that the global economy has been faltering and the outlook is not too rosy. Three years since the credit crunch was seen as the catalyst to a global recession a new one looms. However there are some core differences as to the reason for the recessions.
The 2008 – 2009 recession was caused by years of over borrowing and the associated spending that could not be maintained. The credit crunch has been well documented as well as “toxic debts” but the true impact was largely felt by the banking community and real estate industry where prices crashed. The consumer in parts became sheltered from the effect of the credit crunch as local governments looked to stimulate growth by offering tax cuts. The stock valuation of large enterprises was also hit and a minor wave of job losses occurred. In turn this produced a vacuum where consumers were protected. Interest rates fell leading to households being able to make their monthly mortgages. At the same time inflation started to kick in with high commodity prices including core products such as food. When the likes of food and transport rise in price all are affected. This could be the ultra rich or the poor.
Moving into 2011 and into 2012 and companies are being affected. Consumers are not spending as much as now local governments are increasing taxes and inflation is still around. Local governments have been forced to cut internal costs, which have lead to job cuts as well as impacting companies who sold services or products to local governments. Costs are rising leading to a squeeze on profits. Companies are faced with reducing volumes to meet the downturn in demand, or reduce prices to compete with competitors to keep the same margin. Companies are caught between a rock and a hard place and need to navigate the following 18 months to ensure after they have weathered the storm, they are well positioned.
What does all this mean for IS spend?
Does this mean that spend on IS services should be reduced? Not in my opinion, now is the time to invest in IS. Now is the time to have the most accurate data to make the best decisions for your company. IS spend needs to be focused on key business areas and Finance in my opinion is the area to focus on. IS spend should be focused to provide the correct return to the customer. Making the decision to stay static and keep the money in the back does not seem that attractive as interest rates are low and inflation is high. Any spare cash is really losing companies money and investing in IS processes and systems with efficient ROI should be seen as a better investment. Whilst a recession may not be pleasant, you have to remember that there will be light at the end of the tunnel and to focus on where you want to be once the recession is over and the boom times appear again.
What should you focus on?
The talk of the double dip has only recently appeared. It was spoken about in isolation by a few countries but in the last quarter, none of the G7 (world’s leading economies) grew by more than 0.5%. The events that occurred 3 years ago should teach us that the scale of the change can be very drastic and the speed this occurs can be rapid. Having the ability to plan, and re-plan will become more and more important. Add into this the ability to run quick “what-if” scenario modelling and Companies will be sheltered from the quick and drastic changes, and have the ability to re-plan based on the current climate.
One of the first things Companies look to achieve is to reduce costs. To do this you need to understand where your costs are coming from. Having the ability to delve deeper into your costs, will enable you to reflect this on the true profitability of products, brands or customers. It could be the gross profit for a customer may seem very attractive but when adding in the associated indirect costs it could provide some interesting analysis that indicates the true profitability by various segments. Having this information to hand, in an accurate and speedy process will allow companies to make decisions around the strategic direction they want to take. The output could indicate certain regions are too costly to do business, or certain non core products are not profitable, and removing them will not only reduce the total costs for the Company, but the overall profitability.
As mentioned the recession will start to hit companies, and these companies maybe your customers. You need to be ahead of the game reviewing your customers to ensure the level of credit risk and exposure you have is warranted against market conditions and the cash flow of your customers. Using third party credit engines mixed with your own internal credit data should enable you to make quicker and in the end better decisions around credit risk. If one of your customers was to go bust owing you $40,000 that would make a significant impact to both your profitability and cash flow. Assuming your net profit margins are say 10%, to make up for the loss of $40,000, you would need to increase your sales by $400,000. Bearing in mind the recessionary market conditions, the likelihood of being able to achieve extra sales is that much lower.
Please note I am not talking up the recession. I hope we sail in the opposite direction, however “fail to prepare and prepare to fail” is a motto I suggest you align to. Investing in some core SAP Finance processes will not only improve the efficiency of the Finance function, it will also enable you to be better prepared if a recession were to kick in.