“There are risks and costs to a program of action. But they are far less than the long-range risks and costs of comfortable inaction.”- John F. Kennedy
Risk is an inevitable part of our everyday life. Think of it as an involuntary supplement to all of our actions. Many a time, passively watching world events can be a disaster, such was the case with the recent global financial crisis that shook power houses to the core.
The question is how to identify that risk, specifically in the business world where so much is happening nowadays. A lack of preparation and the absence of a plan B can land you directly in the red.
It’s certainly no secret that the US economy is at the threshold of a recession that may last for quite some time. As such, Middle Eastern investors and business owners are wondering how to manage the risk caused by the impact of the global economic crisis.
So what should be done? Or rather what should have been done? For the essence of risk management is that it is a proactive activity in which risks are recognised prior to turbulent times and further re-assessed on a regular basis. Since that it is too late for regret, the challenge for major businesses today is to formulate immediate improvement plans that deal with the facts on the ground.
In light of recent drawbacks in the global market, there are numerous key risks to be assessed, both internal and external, which constitute the responsibilities of risk managers. Firstly, risk managers should ensure that their organisation’s suppliers are financially strong enough to deliver major projects and complete tasks according to pre-set deadlines. Not only externally, but also internal business units should have enough net cash flow to meet obligations, even if exposed to lower returns. Reserve funding sources and proper credit terms should also be obtainable (this can be a relatively easier job in the GCC countries due to high liquidity). On the other hand, risk managers should always keep an eye on the customer, making sure that their buyers are able to meet their financial commitments, and of course must take into consideration failure on the consumer’s part to do so.
From a managerial perspective, companies should maximise their efforts to keep their employees happy. It goes without saying that employees are the backbone of any organisation. There are many risks associated with them too, these include the lack of guidance, poor motivation, management credibility, trust issues, resistance to change and any illegal act inside the organisation; these can all lead to unfavourable results and should be closely observed.
In my opinion, the best way to manage the current market crash in Middle Eastern organisations is to have an adequate plan for the recession, thus turning danger into opportunity.
Many business managers find themselves unprepared, and ill-equipped to lead their companies through downfall. The usual response to unforeseen market turmoil is panic – which can be potentially crippling to a business.
Now recession planning adds the realistic factor of cyclic interruption of a business. This form of management can, in many cases, save the company when a crisis hits. Relatively, risk managers should be prepared for lower sale volumes, and in turn reduce expenses, lower inventory, eliminate low-profit products and lay-off unnecessary staff. On the other hand, managers can extend supplier credit, bank credit, equipment leasing and accounts receivable loans. After these cost reductions have been carried out, managers should best try to stimulate sales using commission-based representatives or by increasing sales themselves. In addition, prices can be lowered to guarantee higher cash influx.
So the crisis hit, and revenues plummet, but there is an upside. Human resource management should be focused on, and in particular productivity is the name of the game. Due to low supply in the job markets in such times, employees become more productive because they are fully focused on their work inside their organisations. After all they have nowhere else to go and are scared to lose their jobs. Furthermore business managers can replace their unproductive staff with highly skilled ones for a lower wage than is the norm and this is applicable across all levels of the organisation.
From a Middle Eastern financial sector perspective, the idea that market risk - the possibility of losing money on market exposures - can be hedged has found a more enthusiastic audience in recent years, but financial institutions are a long way ahead of their customers in this respect. The corporate sector in the Middle East is slowly climbing the learning curve of market risk management. In spite of the aggressive marketing tactics undertaken by regional financial institutions, consumers are not yet knowledgeable enough in these aspects and are therefore slow to embrace the use of hedging products unlike in more developed markets.
It is hard to foresee what might really happen in the Middle East, namely GCC, given the lack of transparency about government debts, financial obligations and plans. Concerning the future, we hear talk that the Middle East will be hit by the current crash, and especially in the first quarter of 2009. However, conservative economies, such as Lebanon, have already shown their resilience and analysts there expect the country to come out intact. In all cases, the financial situation is still too hazy, and experts are giving the crisis a year to sink in, for the true effects to be felt. This is partly due to US president-elect Barack Obama, set to be instated in early January 2009. With his extensive, yet inherited, list of issues that ‘need fixing,’ it will take him at least one quarter to develop an economic agenda and another six months for implementation. Results will certainly take time.
Meanwhile as far as our region is concerned, the logical expectations would be reasonable growth, falling oil prices, a slowdown in the rate of immigration in the GCC and Levant countries, less income from leisure and tourism, higher need for business continuity and disaster recovery plans, and increased awareness about risk management practices.
In summary, risk should not be overlooked. Failure to anticipate a sudden downturn can be devastating as we have witnessed. Hopefully, managers in Middle Eastern organisations will understand that controlling a recession is as important to the business as is the managing of growth in the firm. Plans for expansion and development, as well as a positive approach to change need to be part of any company’s five-year plan. Stagnancy in terms of business management is never healthy, as is simply hoping that things pick up – both are impractical solutions. On a final note, companies should always strive to prepare and build for tomorrow, and not be unnerved by the future. There is always room for improvement.
