GCC firms undergo cost cutting to offset economic downturn impact

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According to the recent study conducted by McGill Consulting Group, significant number of companies in the GCC were forced to implement major cost cutting measures in the wake of economic downturn.

The cost cutting measures also proved that the worst scenario in the region is not over yet. It is also being reported that 58% of companies in the GCC admitted holding out from cost cutting during the past three years.

In the UAE, 34% of businesses have been forced to cut down 11-20% of their overall budget during the last three years.

The latest study from the consulting firm also looked into cost cutting behaviours of firms in the region and uncovered how financial decision makers of regional firms are combatting the shifting demands.

The report also revealed details about companies in each region of the Middle East on how they are coping up with global market pressures and devising long term stability strategies.

Cost Cutting

According to the McGill study, about 20.14% of the UAE businesses focused largely on cost cutting during recession. Around 18.51% of UAE firms are largely focusing on cutting HR spending in coming years. The study also revealed that 35% of firms in the Emirates have invested between $2m and $5m in cost cutting.

Apart from HR, departments like marketing, sales and logistics are also among the hardest hit in the UAE. The report showed that 17.96% will largely focus on cutting marketing and sales. The measures will be implemented in the coming 7-12 months, the report added.

In country specific data, the study showed that cost cutting has been the lowest in the HR department in countries like Saudi Arabia, Oman and Kuwait, compared to higher cuts in the UAE and Bahrain.

Legal departments in the GCC are least hit by cuts, averaging only 2% which is driven by mounting legal issues and poor payment.

Similarly, spending on logistics in Kuwait witnessed cuts during the last quarter, which is highest in the region, followed by Oman. The study said that other countries initiated 6.5% annual cuts in logistical resources.

However, the cost cutting came with its drawbacks. Most firms in the GCC have spent $1-2 million, to help reshape organisational structures.

Nader Sabry, managing partner at McGill Consulting Group, said: “This is a healthy sign that a balanced approach in cost cutting is being taken. Cost cutting can become a habit that blinds decision makers and weakens their ability to rebound when needed.”

He also suggested that besides economic crises, it would have been a matter of time before legacy issues present in most of the region’s operational structures show signs of change. “Several firms have and are realising the imperative of real organisational change at all levels,” Sabry said.

Fluctuating Growth Rate

Over the past few years, the projected growth rate of the UAE has varied significantly from zero to 7% while 4% growth rate is being expected in 2012 which, according to many analysts, is positive for the country. However, regional political tensions, increasing oil price, worsening global economy and other crises are creating further uncertainty.

A third of companies in the region have indicated that they would still engage in cost cutting measures. They are also very confident that the economic growth of their country would be sustainable and that real estate will pick up again.

The consulting company surveyed a quarter of the GCC companies, which indicated that they have time horizon of 10-12 months.

Compared to other regional companies, the UAE firms have four times bigger horizon whereas Kuwait and Bahrain have the shortest of time horizons. Kuwait had less cost-cutting needs, whereas Bahrain witnessed sudden macroeconomic conditions which pressurised costing factors.

Equal Outcome

Although the result of cost-cutting varies from firms across the GCC, outcomes are largely equal across the board.

Firms in Qatar and Oman have witnessed an impact on profits. However, the UAE firms have reserved judgment on assessing impact at this stage and are waiting for the outcome. Around 48% of Bahraini firms have accounted for the poorest profitability performance.

According to the survey, most organisations in the region have predicted poor outcome even after cost cutting measures. But on the other hand, financial decision makers are optimistic about meeting their expected results. Financial decision makers believe that global economic challenges are continuously affecting results. They have also pointed out that the more focus on seeking global opportunities, the more success in times ahead.

“Financial decision makers pride themselves on their ability to survive. As an example, some of our clients have taken highly proactive measures in preserving their market position and sustaining profitability. Interestingly, they have become more global oriented than before by seeking new sources of revenue,” Sabry said.

Presently, 37% of firms in the GCC are focusing on cleaning up their house by optimising and reorganising their resources. The report added that around 26% of GCC firms are focusing and changing their financial management techniques to strengthen their bottom line.

UAE and Bahrain firms are the most outward looking and are securing sources of financing to bridge the gap and have better development, the survey highlighted.

According to the study, cost cutting measures for human resources will not let up in future. Apart from that, the focus will be on logistics for cost cutting which signifies the shift from sales and marketing.

“We are not entirely out of the woods yet, but such conditions only strength 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,” Sabry concluded.

Sources: Kippreport, ArabianBusiness

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