Gulf needs fresh business plans

09 March 2009
The GCC must examine alternative business strategies to help it survive the economic downturn.

Bad news in February has extinguished hopes that the world will start recovering before the end of 2009. More bad results from big banks proved the pessimists were right. The slump will be deep and global.

For the GCC, the news is mixed. The Gulf downturn could last until 2011 and the region's banks are solid but not lending as much as they should. No GCC financial institution has yet reported huge losses. The region’s tight regulation has largely worked.

But parts of the GCC are suffering. Equity markets are dead, private real estate is a mess and ports and airports are quietening. The GCC construction industry is shrinking. The oil sector downturn is extreme. Oil prices are less than half their average level in 2008. GCC production in February was nearly 20 per cent lower than in July.

Opec’s March meeting will test the organisation’s resilience. Saudi Arabia has reduced output sharply and is impatient with Opec members that haven’t. Unless Opec discipline improves, the kingdom won’t cut further. This threat should whip everyone into line.

Opec production restraint and President Obama’s economic recovery programme will lift prices by the end of 2009, but by not as much as previously hoped. Oil might average no more than $50 a barrel in 2009 and recover only modestly the year after.

According to present trends, GCC oil and gas export earnings will be little more than 40 per cent of last year’s level and not much higher in 2010. The GCC economic shock will be sharp and not short.

In the new circumstances, Gulf companies have three priorities: finding new business, cutting costs and getting paid. Searching for new revenue to replace what’s lost is invariably the first, knee-jerk reaction.

Salespeople are dispatched to offer new products, often to new customers. Higher revenue may be booked as a result. Too often, all that’s happened is an insidious multiplication of risk. In a downturn, you can have higher revenue or higher certainty, but not both.

A drive for new business is challenging during a slump. It needs to be well-thought out and planned. But it should not be abandoned because things that make life less risky for customers will be needed.

After chasing money, companies usually turn to cost-cutting. Pay freezes and reductions in travel and advertising can be done at a stroke of the pen. These are often false economies.

The problem in a downturn is not that costs are too high. It is because your people don’t have enough to do. It is better to have half totally busy than all of them functioning at 50 per cent. Once a realistic business plan is in place, reducing numbers is the best option. To ease the pain for those you’re losing and to comfort those that remain, be generous.

The top priority in a downturn is getting paid. That’s why focusing on creditworthy customers should come first. Chasing late payments is vital. Credit control is a job no one wants during a boom and it is often delegated to junior employees. In a slump, only your best people, including the chief executive officer, will be good enough.

Payments are slow because people genuinely don’t have money. Their problems are often bigger than yours. They want the boss to hear, not a clerk.

Leadership is about making a few, big decisions. Your team should be able to handle details. And leadership only counts when it’s needed. In business, that’s at the beginning and end of market reverses and upturns. Everything else is firefighting in disguise.

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