Waking the un-dead

Simon TennantConspectus

1 May 2010

While the UK may have avoided an economic apocalypse, it is clear that any form of recovery is going to be limited and a long time coming.

We are now experiencing what might be termed a ‘zombie’ economy – made up of half-dead, half-alive banks, governments, consumers and companies staggering along, struggling to function in the new world:

• The banks have suffered further global exposure to toxic assets and are too weak to support sufficient lending, which in the UK is now at a 10-year low. Government finances from Greece to China are too stretched to support expansionary policies.

• Consumer wealth and spending power is too depleted to allow them to consume.

• Commercial companies are saddled with debt that they cannot comfortably service, impeding growth and investment.

All these factors are having a dramatic effect right across the corporate landscape. Some leading companies are waiting for recovery, but in the zombie reality this is a high-risk strategy.

The zombies, created by the crisis, will have an effect across the corporate landscape. As a result, we will see many losers but some big winners. The winners will be those who act now to avoid the dangers and reposition their businesses for the new economy.

One danger is illiquidity. Despite highly profitable current trading, many banks are now nursing huge losses on their balance sheets and cannot provide the support that businesses need for growth – or even for survival.

Another danger is irrelevance: consumers are currently unable to spend in the same way as in the past. So businesses whose products and services are aligned to the changed needs of consumers and business customers will thrive; but those still focused on last year’s customers will struggle badly.

CFO’s role

The chief financial officer (CFO) must therefore ensure their organisation has the financial freedom to be responsive to the changing world and secure the stability and success of their organisation.

PA Consulting believes that returning to the basics of good business is essential – and there are four key areas of priority which the CFO must address:

• The first step in avoiding the dangers outlined above is to secure sufficient liquidity in order to survive either a long and anaemic recovery or a double-dip recession. In the new economy, cash is king and most businesses have more to do.

The top priority for any organisation must be to save money and improve cashflow. The CFO must drive this awareness through to the core of the business.

• The second step for the CFO is to orchestrate a sourcing strategy which optimises how corporate services are structured, deploying a mix of in-house, shared service and outsourced options.

At the very least, the CFO needs to identify those activities that can be standardised and shared or outsourced to third parties who can deliver better service at lower cost.

• The third step for the CFO is to audit the portfolio and remodel this as appropriate. Customer needs have changed, so any business offering the same until the return of business-as-usual will lose market share and profit. The winners will build business models to meet the needs of today’s customers.

The CFO must identify any baggage within their organisation and stop pouring capital into those parts of the business.

Even in good times, it is inadvisable to allow successful areas of a business to cross-subsidise poor ones. In bad times it can be fatal.

Fixing the baggage or selling it is now critical. This will allow the business to exploit the opportunities which will emerge from the upturn.

• The final step is to exploit information management. While the world moves at zombie pace, risk will move faster.

Given the volatility and uncertainty of the economic environment, effective business intelligence is more important than ever. It helps a lot if you know where your business is, what your markets are doing and what your customers are thinking.

Financial leaders need to put in place the analysis and information to run the business where downside is prevalent.

The zombies will have a profound effect on the corporate landscape of every sector. Most businesses have much to do in this new world. By returning to these basics of good business, leaders will free capital for investment in value-adding customer propositions.

In the current environment, capital ceases to be a commodity and becomes a powerful competitive weapon. Those who act now to seize the opportunities, will win.

Simon Tennant is head of PA Consulting’s Shared Services Consulting group.

To send an email to Simon Tennant, please click here.

To visit PA's pages on the zombie ecomomy and to request a free copy of ‘The zombie economy: leadership in times of uncertainty’, please click here.