Credit crunch will change the way businesses think

Jan 20 2010 by Andrew Mernin, The Journal

Will the next 12 months see us finally shake off the recession and return to the buoyant conditions we enjoyed before the credit crunch reared its ugly head? Or could there perhaps be even darker times ahead? Here the CBI - alongside other well-placed business experts - checks the pulse of the region’s economy to see if it is fit enough to take on the challenges that lie ahead.

THE recession has raised concerns about commercial models, supply chains and finance that will reshape business behaviour well into the next decade.

So says the Confederation of British Industries, which has just launched its report “The Shape of Business – The Next 10 Years”, which outlines how business believes the recession and credit crunch will create a new economic landscape.

The report flags four key areas of UK business where fresh approaches will develop because of the downturn. It says that businesses do not see credit terms falling back to pre-crunch levels and, having become wary of higher debt levels, firms will look to alternatives to debt-driven growth to protect investment and innovation. More financing options will be created and deployed as a result.

It also says that companies will reorganise and re-examine their approach to working with partners – from suppliers to universities, and even competitors. Ongoing concerns over a ‘domino effect’ of supply chain failures and issues around trade credit insurance will compel firms to forge more collaborative supplier relationships.

And the CBI believes that sustainability and ethics will become more integrated into the business model of many companies as firms seek to improve accountability and corporate citizenship further to attract and retain customers and staff.

Companies will also develop more flexible workforces. A spirit of collaboration between employers and staff has grown over the last two years and it will evolve further, assisted by developments in technology and training. For some firms that might mean a smaller core workforce and a larger ‘flexiforce’. CBI regional director Sarah Green says: “We may be at the start of a new era for businesses, in which attitudes to finance and to corporate leadership are changed for a generation by the shock of the past two years.

“What we now need is a more balanced, less risky pathway to growth – one in which the short-term returns may be lower, but the long-term rewards for management success will be a lot more sustainable and secure.

“There are important questions around how businesses are going to finance growth and investment in the future. And in a more collaborative, less transactional world, closer relationships with customers, suppliers, employees and shareholders look like becoming the new norm.” Many of the report’s findings are supported by a new survey conducted by Ipsos MORI in October and November and sponsored by the CBI and business advisory firm Deloitte.

The survey of business leaders, mostly CEOs and chairmen, and representing a UK workforce of almost a million people and a global turnover of around £1trillion, revealed a shift in attitudes towards financing and supply chains.

Over half (55%) said that they will now only tolerate a lower level of risk from gearing and, within that group, 70% said an economic recovery would not reverse their position.

More than two thirds (68%) expect no improvement in credit availability in 2010 and are reshaping their business financing: 50% said they would use less bank debt, 44% said they would rely more on equity finance, and 26% said they would make more use of bond issuance. And when asked about supply chain fragility during the recovery, only 24% said that they are not concerned. Businesses were most worried about a unique, specialist supplier going bust; that the supplier’s own supply chain would collapse; and that the supplier would be unable to obtain working capital.

Because of these ongoing threats, 68% of firms said they would be strengthening the level of partnerships with suppliers in the coming years. One in three (30%) said they would be increasing their number of suppliers.

And around one in five said they would be offering finance to key suppliers, reducing dependency on ‘just in time’ processes, and shrinking geographic distances to suppliers.

Mrs Green added: “Firms looking to reduce risk and acknowledge their interdependence are seeking more collaborative ways of working through partnerships and joint ventures.

“Perhaps we will see a flourishing of supply chain finance – in which firms with the largest, most solid balance sheets help finance their smaller suppliers or customers.

“Businesses want to adapt to a harsher credit climate by finding new sources of funding. Why not encourage new forms of institutions to finance the growth of small and medium-sized enterprises through equity and debt?

“And why not make it easier for companies to raise money locally, perhaps through new regional banking and investment institutions, rather than having to rely on a few very big players in London and Edinburgh?

“We can recognise that many businesses have proven resilient to the effects of the downturn: profitability has taken a knock but the impact has been less pronounced than might have been expected. Corporate insolvencies are running at significantly lower levels than the recession of the early 1990s and unemployment, whilst still growing, is not as high as some people feared. The route to recovery is sure to present challenges, but UK business has shown it has the ability to respond with imagination and flexibility.”

The survey, “Recession as a Catalyst for Change”, also showed that higher credit costs are hitting business investment plans. However, investment for a low-carbon economy seems to have escaped the squeeze, and 88% said they would invest as much as planned before the recession, and 27% said they were planning to spend more than planned. Government policy on green issues is vital however, with two thirds (65%) citing it as an important influence on investment decisions.

Page 2: Coping with aftermath of recession