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Cost-cutting behaviour in the GCC: cut-throat or considerate?

Cost-cutting behaviour in the GCC: cut-throat or considerate?

With companies in the GCC spending up to $2million in cost-cutting consulting services, McGill Consulting Group explores the decision-making process cost-cutting and how firms are coping with these changes.

March 19, 2012 3:34 by

It may not be coming in thick and fast but there has been a steady stream of cost-cutting news from companies in the GCC. And it looks like the worst isn’t over yet for some firms in the region, with a third intending to go through a cost cutting exercise “in the near future”–a less than reassuring figure considering that 58 percent of companies in the GCC had admitted to holding out from cutting costs in the past three years.

These are just some of the figures McGill Consulting Group uncovered in their latest research on cost-cutting behaviours in the region. The study “takes a look at the cost-cutting behaviours of organisations and how their financial decision-makers are managing to combat the shifting demand.” It even comes with a nifty infographic poster below, which as our regular readers will know, Kipp thoroughly enjoys. (Check out our Pulse Populi section for some infographic madness.)

So how exactly are companies in the GCC coping to the changes in the global and regional markets? Which departments are the first to be pushed out the door? And are companies looking toward longer-term stability or still merely reacting to the financial blows they’ve been receiving?

Here’s what the study has found:
“The bulk of cost-cutting measures within the past three years have accounted for less than 5 percent of GCC companies’ overall annual budgets. In the UAE, 34 percent of companies have cut between 11-20 percent of their overall annual budgets, whereas in Bahrain, just under half of companies surveyed indicated that they have cut over 50 percent 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 organisations in neighbouring economies,” according to a statement announcing the results.

Which business functions are hardest hit?
HR is found to be the hardest hit department, followed by marketing, sales, and logistics.

Legal departments are least hit by cuts, averaging 2 percent in the GCC, these cuts are “largely driven by mounting legal issues stemming from poor payment and supplier performance.”

In terms of country-specific data, the lowest cuts in HR 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.”

Interestingly, Sabry also suggests aside from the economic crisis, it would have been a matter of time before legacy issues present in most of the region’s operations structures show signs of a need for organisational change anyway. “Several firms have, and are, realising the imperative of real organisational change at all levels,” he says.

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 percent.

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, 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.

Timing and impact
The study also revealed financial chiefs saw the highest pressure-points from the board of directors, who often lack the details of true impact of cost-cutting measures. This is unfortunate considering that the expectations of these decision-makers are what set the tone of results, based on their true intentions for cost-cutting, whether it be short or long-term impacts.

And according to the study, a quarter of companies surveyed indicated that they have a time horizon ranging from 12-18 months. UAE companies have relatively longer-sighted expectations with their time horizons being four times the average of other GCC countries. Surely it’s not just Kipp that is concerned to learn that companies in the GCC cannot see passed two years of operation?

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.

In any case, most organisations 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.

The future is about hanging on tight
While in the beginning we did indicate a third of companies were intending to cut costs in the near future, an optimist could look at the results and choose to focus on the figure that about 65 percent of firms who didn’t cut costs intend not to cut costs in the future either.

Overall, however, while most finance officers state that they are survivors, many still continue to take a very conservative approach.

About 37 percent of firms in the GCC are focusing their efforts on cleaning up house by “optimising and reorganising their resources”. Meanwhile, 26 percent of GCC firms are altering their financial management techniques to strengthen their bottom-line.

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.

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 percent this year).

“We are not entirely out of the woods yet, but such conditions only strengthenfirm’s long-term growth plans,” says Sabry. “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.”

Click the image below to see a larger version of the infographic.

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