Managing the tough market conditions

The tenth conference organised by Economic and Management Consultancy Services (EMCS) Ltd on May 17 was aimed at creating a discussion forum enabling business leaders to listen as well as put forward ideas on how Maltese businesses can manage the...

The conference format encouraged as much interaction as possible. The first part consisted mainly of a panel of speakers, who tackled various aspects of managing a business with specific reference to the Maltese scenario.

The second part was totally dedicated to a question and answer session enabling those who attended to put questions in writing, should they feel more comfortable.

Avoid quick fixes with short-term objectives

The first speaker of the morning session was Dr John C. Grech, chairman and managing director of EMCS Ltd. In his presentation he concentrated on practical measures that Maltese companies can implement to manage their businesses through difficult times.

In his view this year, like last year, will be a difficult one for business, with 2003 being earmarked as the time when we could possibly start seeing an improvement in market conditions. This means that a continuous drive to improve the performance of the company will continue to be needed.

Dr Grech commented that quite a number of Maltese companies have been caught out by the adverse market conditions with overgearing, overtrading and limited cash being the ailments typically found in these companies. He stressed that businesses must focus on their core competences and core business, and strive to improve these elements.

Fundamental decisions must be taken on those businesses which are not considered to be the core. However, one must avoid looking for quick fixes with short-term objectives since these very often turn out to be rather expensive, long-term solutions.

Giving practical examples of what could be done, Dr Grech singled out nine features of business operations which should be given particular attention: price, product, overheads, efficiency, investment, purchasing, stocks, alliance formation and downsizing.

In his concluding remarks Dr Grech said that today's highly competitive and fast-changing environment requires strategic thinking, quick, responsive tactical capabilities and, above all, leadership. Where a manager may view a problem, a leader may identify an opportunity and it is this sense of positiveness that should increasingly drive Maltese businesses.

Too much data but not enough information

The second speaker was Alon Shklarek, chief executive officer of ASP Consulting, an Austrian consultancy firm which specialises in rapid improvement programmes for businesses.

He talked about cutting costs while building future potential and growth, and in this context he commented that businesses tend to focus on financial performance while neglecting other equally important factors, such as innovation and customer needs.

Using a graphical, often amusing presentation, Mr Shklarek pointed out that in today's world we often find ourselves in a position of too much data and not enough information, and this was making it difficult to focus on the issues that require attention.

In what were aptly titled as the golden rules for successful change management, Mr Shklarek said that successful change management will happen if a business accelerates its rate of change, sheds any ballast it might be carrying, and continues to strive to delight its customers while not being afraid to slaughter its sacred cows.

Cash flow of the business is vital for the bank

The third speaker was Tom Robson, chief executive officer of HSBC Bank Malta, who spoke about what action businesses should take to ensure bank support and prepare themselves for the future.

Given the importance of HSBC on the local market and the current difficult market conditions, this was indeed a very topical theme which, as evidenced by the question-and-answer session, generated considerable interest among the audience.

Mr Robson said that all actions that should be undertaken by businesses to survive can be grouped under three broad categories: financial good health, operational efficiency and planning. The key issue for any business is cash and this is vital for survival.

Mr Robson said HSBC has always stressed that it is interested in cash flow lending and the viability of the business as portrayed in the P&L (Profit and Loss), balance sheet and projected cash flow. Businesses should be making an adequate return on the capital employed, otherwise if the business does not have a future it should be closed down or merged.

Emphasising the importance of cash flow, Mr Robson said that the bank, when considering whether to lend or not, looks into a number of issues including the level of debtors, stocks and work in progress, the amount of capital expenditure incurred and whether this is having a positive impact on the bottom line of the business, the debt position and the amount of barter that is taking place.

He said that if necessary the bank will require businesses to switch hard-core borrowing to a repayment programme and will only allow dividends to be paid with the bank's approval.

Having seen many large and small businesses experience significant problems during recessions in the UK, the bank was aware that there is no need to panic or overreact. In a clear response to criticism often levelled at the bank, Mr Robson said the bank would seek to nurse businesses with potential through difficult times but this requires the full commitment of all interested parties, including financial advisers, accountants, directors, shareholders and creditors.

Bank lending practices have changed

The fourth speaker at the conference was the vice-president of the Malta Institute of Accountants, Tonio Zarb, who provided an accountant's insight on what businesses should be doing to prepare themselves for the future, as well gaining support of the banks.

Recounting his experience when he had just started working, Mr Zarb said that till some time ago the common point of view was that you have to use the bank's money and as little as possible of your own. He said that in the past the lending practices of commercial banks encouraged high debt to equity ratios; however this has changed as the banks are no longer prepared to be risk takers.

Echoing what had just been said by Mr Robson, Mr Zarb said that for the banks cash generation was today more important than security and that timely and accurate financial information was a must. He also spoke on other possible financing alternatives and the judicious use of loans and overdrafts.

As a concluding remark he urged businesses to speak with their banks and apply cost benefit analysis before committing to discretionary fixed costs which carry considerable risks.

50% improvement in one week

The fifth session was characterised by a joint EMCS/ASP interactive session. Over the coming weeks the two companies will be jointly marketing their services, which include the introduction of rapid improvement programmes aimed at enhancing a company's performance.

Adrian Said for EMCS and Alex Reiss for ASP led the participants through how a rapid improvement programme works. Participants were asked to give their guess on what is the European average time until a crankshaft is working in a car.

After pointing out that it takes five months, 29 days, 22 hours and 50 minutes, of which only 50 minutes are actual manufacturing time, the logic and key characteristics of the rapid improvement programme were explained. The emphasis of the programme is clearly on eliminating waste while enhancing performance through more efficient production flows and practices.

The end result of this programme was said to be an astounding 50% improvement in one week. Certainly an attraction for any business, irrespective of the prevailing business conditions.

The afternoon session was totally dedicated to questions from the floor with the majority of these questions being directed to Mr Robson. One of the participants asked whether the tough policy being practised by HSBC in such adverse economic conditions was actually exacerbating these conditions.

Mr Robson said he did not think that the bank was exacerbating the adverse conditions of the market but rather that it was ensuring that financing should only go towards viable, sound businesses and that this could result in a shake-up of the market.

The overall sentiment felt at the conclusion of the conference was that the Maltese business community is and will continue to face some tough times in the months ahead.

This sentiment was however also accompanied by another one of cautious optimism, an optimism which finds its source in the knowledge that we have faced such times before and have managed to be successful, despite the odds.

As Dr Grech commented in his closing remarks: "What is needed is a sense of realism tinged with optimism about the future."