Business

Thursday June 4, 2009

In current conditions, performance effectiveness is critical to survival

COMMENT
By AZWAN BAHARUDDIN


PERVERSE as it may seem, a period of crisis can provide an opportunity to drive change more rapidly and effectively than a period of prosperity.

At the beginning of this year, Ernst & Young worked with the Economist Intelligence Unit to interview over 300 senior executives from major companies around the world to see how they were being impacted by the economic crisis and what they were doing about it.

Seventy-four percent reported that they were focused on “securing the present”; 40% expected to see a significant increase in protecting their current assets; and 39% were seeking significant performance improvement.

Whether it is a crisis or not, management should always be seeking to maximise the effectiveness of their operations, but in times of broad economic growth and profitability, this goal can sometimes be downplayed.

Instead the focus would be on achieving market and reputation share, strengthening client relationships or long term strategic positioning.

However, in the current market conditions, improving performance effectiveness becomes critical to business survival.

Overwhelmingly, therefore, management is focused on maximising the effectiveness and efficiency of their operations, seeking improved performance from the assets and operations that it currently has.

Now is the time for a business to ensure that it is getting the maximum return on the assets that it employs.

In a challenging economic environment, the first response of management is to seek to improve efficiency.

Cost reduction, headcount reduction and inventory reduction are common steps taken in response to a difficult market.

Of the survey respondents, 84% had already implemented or started to implement cost reduction initiatives that overwhelmingly focused on four major areas – headcount, information technology, employee benefits and real estate.

However, with such cuts, there is also the very real risk of reduced effectiveness.

Reducing resources can impact on the efficiency of the core processes of a business and its ability to react quickly to major opportunities.

Cost cutting is considerably difficult to achieve regardless of economic conditions.

Frequently it is, at best, a short-term solution and only the starting point. Improved effectiveness must be the goal.

Therefore, leading companies that want to win in the market longer term need to set their sights firmly on the effectiveness agenda no matter how difficult the conditions get.

Besides reducing resources used, it is crucial for companies to also reexamine the processes they adopt.

When reviewing performance, it is important to go back to the fundamentals to better understand the situation and distill the needs.

The mantra “cash is king” cannot be more true today – greater liquidity means greater options and chances of success.

However, 55% of the survey respondents reported increased delays in cash collection from customers.

Therefore it is imperative that steps be put in place to mitigate against the fall in the creditworthiness of customers and to preserve and generate cash.

Businesses need to ensure that their functional processes are streamlined with higher visibility and better communications between business functions, operating units and their customers.

Streamlining internal processes will facilitate improved cash collection, reduce revenue leakage and allow companies to identify customer-debtor issues early on.

The current market conditions have also impacted on the growth engines of business.

A cutback in mergers and acquisitions is understandable given the levels of market uncertainty.

However, cut backs on marketing, research and development and operations may make it difficult for a business to capitalise on and secure the opportunities that the market offers.

Indeed, 70% of the survey respondents believed there are opportunities to do more in the current downturn, to take strategic decisions that will distinguish them from their competitors.

So while others may have taken their eyes off the ball, the business which emerges strongest will be the one that reshapes fastest to fit the new reality and exploits the new market to find growth.

The need for performance improvement has never been more compelling than now.

The speed of change is a challenge, and business success depends on management’s ability to achieve considerable improvements quickly.

Consequently, effective performance improvement is now a crucial differentiator and can provide significant competitive advantage.

In the worst of markets, balance emerges as the key.

All too often, the immediate reaction in a downturn is to cut costs, stop capital programmes and delay strategic initiatives.

Companies that emerge in the lead, however, are the ones that maintain balance.

Balance between improving operating efficiencies and improving revenue growth, and balance between cutting costs and investing in process improvement to prepare for the future.

History has shown that companies that have emerged successfully from previous downturns are the ones that focused on reducing expenses without sacrificing their long-term health.

The writer is a partner with Ernst & Young Advisory Services Sdn Bhd. The views expressed above are the personal views of the writer and not of Ernst & Young.

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