An insightful study of cost-cutting behaviors and planning measures to be taken by organizations in the GCC.
Dubai, United Arab Emirates, March 19, 2012: In light of the global economic downturn, 58% of companies in the GCC admit to not having cut costs in the past 3 years, with a third intending to engage in cost cutting in the near future. Financial decision-makers are under excessive pressure to perform. Domestic demand is weak, however global demand is even weaker, which exacerbates the effects of low domestic demand and infiltrates into a company’s financial performance. This study, takes a look at the cost-cutting behaviors of organizations and how their financial decision-makers are managing to combat the shifting demand.
The bulk of cost cutting measures within the past 3 years have accounted for less than 5%, of GCC companies’ overall annual budgets. In the UAE, 34% of companies have cut between 11-20% of their overall annual budgets, whereas in Bahrain, just under half of companies surveyed indicated that they have cut over 50% of their annual budgets. Qatar and Kuwait showed the least cost cutting; where between two-third and three quarters of their focus has been largely minute in nature, in comparison to organizations in neighboring economies.
Cost cutting by business function
If you are from legal, you are safe. Legal departments are the least hit by cuts, accounting for an average of 2% in the GCC largely driven by mounting legal issues stemming from poor payment and supplier performance. The hardest hit, by no surprise, has been taken by HR departments, followed by marketing, sales, and logistics.
In terms of country-specific data, the lowest cuts in human resources have been in Saudi Arabia, Oman and Kuwait. In comparison, the highest cuts have been in the UAE and Bahrain.
The least marketing and sales cuts have taken place in UAE, Qatar and Bahrain. This has been driven, by the importance management has placed on focusing on the top-line, during bottom-line improvements. Nader Sabry, Managing Partner at McGill Consulting Group indicates, “This is a healthy sign, that a balanced approach in cost-cutting has and is being taken,” he added, “Cost cutting can become a habit that blinds decision-makers and weakens their ability to rebound when needed.”
Spending on logistics in Kuwait has been cut by just under a quarter, which is the highest in the region, followed by Oman. The remaining countries average an annual cut in logistics resources at 6.5%.
The other side of the coin
Cutting costs comes with its own costs. On average, firms in the GCC have spent between $1-2 Million USD, mostly in consulting services, to help reshape their operations. Their focus has largely been on restructuring efforts, i.e.: improving the efficiency of several functions and removing any excess “fat” or layers gained during the economic growth period of 2005-2008, as pointed out by financial decision-makers.
Although economic growth periods have been blamed, Sabry points out, “Most of the firms’ operational structures have legacy issues dating back before the economic growth period, which started in 2005.” He also added, “Several firms have, and are, realizing the imperative of real organizational change at all levels.”
Timing and impact
Timing is key in planning and implementing cost-cutting measures. Decision-makers expectations set the tone of results, based on their intentions, i.e. short vs. long-term impacts. Financial chiefs indicated that the highest pressure-points are from the board of directors, who often lack the details of true impact of cost-cutting measures.
A quarter of companies surveyed within the GCC indicated that they have a relatively lengthy time horizon, ranging from 12-18 months. UAE companies are leading the pack when it comes to long-sighted expectations; their horizons are 4 times the average of other GCC countries.
Kuwait and Bahrain had the shortest time horizons. Kuwait was driven by less need for cost-cutting overall, whereas Bahrain was driven by sudden macroeconomic conditions imposing pressure for change.
Measuring up results
Although results vary widely from firms across all countries in the GCC, the outcomes are largely equally split across the board.
Qatari and Omani organizations experienced the most fruitful impacts on profitability. UAE firms have the most reserved judgment on assessing impact at this stage; they normally wait for outcomes to surface. In contrast, the poorest profitability performance has been experienced by Bahraini companies, accounting for 48% of companies.
Most organizations have indicated poor outcomes on profitability so far from cost cutting measures. On the other hand, most financial decision makers we surveyed are optimistic that their expected results will be met. Most of them believe that the prolonged global economic challenges continue to infiltrate their domestic results. They also point out that a closer and more focused effort on seeking global opportunities will be a large part of their success.
The future is about hanging on tight
65% of firms who didn’t cut costs intend not to cut costs in the future either. While most finance officers state that they are survivors, many still continue to take a very conservative approach Sabry comments, “Financial decision makers pride themselves on their ability to survive” and he adds, “As an example, some of our clients have taken highly proactive measures in really preserving their market positions and sustaining profitability. Interestingly, they have become more global oriented than before by seeking new sourcing of revenue”
When times get difficult, the tough rise to the occasion. 37% of GCC firms are focusing their efforts on cleaning up house by optimizing and reorganizing their resources. Meanwhile, 26% of GCC firms are altering their financial management techniques to strengthen their bottom-line.
GCC firms are taking a healthy approach and hanging tightly with Saudi and Kuwaiti companies leading the pack in optimizing existing resources. As some firms seek the path of least resistance, UAE companies have turned to a combination of price increases and more efforts in driving up sales. UAE companies have 4 times the efforts on average compared to GCC companies focusing on top-line activities, as part of their turnaround strategies.
The most outward looking firms are UAE and Bahraini companies, who are securing other sources of financing to shoulder the gap, and continue growth in development. Finance officers associate this to the robust tools and instruments of financing access and availability. Sabry points out, “Economic policies both in the UAE and Bahrain have been very investor friendly creating a home to source and channel funds. This has been a good long-term play for both economies.”
When it comes to human resources, cost cutting measures for HR departments will not let up in the near future, according to the study. As for other areas, the second focus area of cost cuts in the future is logistics,. Interestingly, this represents a shift in focus in the past, from sales and marketing resources being cuts, to logistics (which is surging ahead of Marketing by 6% this year).
Tough times ahead, however, great results to come.
We are not entirely out of the woods yet, but such conditions only strengthen firm’s long-term growth plans. Most notably, such circumstances have encouraged several firms to think harder about their future growth plans. Many of the turnaround growth strategies are either swing from inward bottom-line focused approaches to outward top-line measures.
Although innovation is still a challenge for many firms, it is more of an imperative than ever before. Innovation at all levels is the way forward, for traditional firms to thrive in a new era of harsh realities.
Incentivized risk-taking, open communications and a clear growth strategy are key success factors in moving forward. The single most powerful outcome from this, is firms rethinking the fundamentals of their businesses.
About McGill Consulting Group
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