Lessons from the Global Financial Crisis

By Oxygen for Business

The extent of the global financial crisis and some key lessons learned are plumbed by an excellent SAP-sponsored research report from the Economist Intelligence Unit – title ‘From Hindsight to Foresight: Improving business transparency in the wake of the financial crisis’.

It began with the US sub-prime mortgage meltdown in 2007. Two years later, cautious talk of recovery is moderated by the blow to business confidence wrought by the  greatest financial meltdown since the Great Depression of the 193O’s: The international banking system teetered on the verge of collapse, stock markets crumbled, hedge funds imploded, export volumes plummeted, hundreds of thousands of factories closed along with millions of jobs.

Governments poured in a staggering total of $US10 trillion – $10,000 each for each of the one billion people in the world’s developed economies – in rescue and stimulus packages.

A total of 258 senior executives participated in the SAP-sponsored research report carried out in June and July this year. Of these, 23 percent came from Australia and New Zealand, with the balance from Japan, China, Hong Kong, Singapore and India. Over half the respondents were from companies with annual revenues in excess of US$500m.

The survey revealed three very strong ‘shared views’ among the respondents.

The recovery is still in doubt. Only a third believes there is a sustainable recovery, with the balance either doubting its sustainability or denying a recovery is even underway.

Strengthening internal reporting is a top priority with the focus on Finance. Forty percent say the crisis has exposed internal reporting that has turned out to be of poor quality in terms of accuracy, timeliness and completeness.

Almost half of the respondents say their organisation is increasing the frequency of internal reporting, placing more emphasis on forward looking analysis and transparency and strengthening market intelligence gathering tools and processes, with the Finance department being the main focus among 73 percent of respondents.

Precedence is being given to fixing existing systems and developing existing staff. Half of the executives surveyed said that in preparing for any upturn, streamlining existing operations and systems will take precedence over innovation, new markets and new products and processes. Only 24 percent are taking advantage of the downturn to hire new quality staff.

But along with this interesting trend data, the report drills down into the participating companies to take a case study approach to uncovering systems, processes and attitudes which enabled some of the participating companies to weather the financial storm better than others.

One example is Singapore-listed Noble Group, a global market leader in commodities logistics and trading with US$36 billion a year in revenues. At Noble, a risk dashboard on each key executive’s computer screen is produced every day, containing a whole range of metrics that updates information on the company’s underlying exposures.

“We had market intelligence and some leading indicators telling us that we were going to have significant reversals in the commodities market in the second quarter of 2008,” says Richard Elman, Noble Group CEO and founder.

“That led to a period of time where we started to mitigate our exposure to counterparties and extending our hedging programmes on our assets. As a result although revenues fell 36 percent in the first quarter of 2009, gross profit margin was stable at 3.7 percent and cash levels jumped to a near-record US$1.2 billion.

The 34-page Economist report details numerous such first person accounts which illustrate how those companies with the systems and disciplines to understand their risk and exposure and quickly develop and implement appropriate strategies have successfully weathered the storm – and are well placed to continue to do so.

Perhaps the lesson to be drawn from this report is that good businesses with good strategic reporting and financial forecasting and management systems survived the crisis with profits – and their business confidence – largely intact.

That confidence will drive balanced decision making into the future.  Businesses who were caught napping are pedalling fast to upgrade their systems with their confidence at a low point and this lack of confidence likely to affect their ability to correctly balance entrepreneurial investment against retrenchment and consolidation.

From hindsight to foresight: Improving business transparency in the wake of the financial crisis is available free of charge at: www.eiu.com/sponsor/sap/foresight

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