Financial decision making in the downturn

Or, conversely, did the downturn perhaps make it easier to make difficult long-term strategic decisions?. The research uncovers the biggest decisions they faced, examines the strengths a

Financial decision- making

in the

downturn

Financial decision- making

in the

downturn

It gives me great pleasure to present you with Financial decision-making in the downturn, a report summarising the findings of a survey commissioned by ING Commercial Banking and conducted by the Economist Intelligence Unit

As we all know, difficult economic times call for difficult decisions In light of this we were interested in finding out how financial executives in Europe arrive at these decisions, but also hoped there were lessons to be learned for the future

We are currently coming through some unprecedented economic times The downturn of 2008 persisted in 2009

as key indicators continued to slide and business and consumer spending shrank With capital becoming more expensive and harder to obtain, many companies found their futures were in the balance Stakes were high and financial decision-makers were forced to make tough choices to guide their company through the turmoil

Often they found themselves having to perform a dangerous balancing act On the one hand, to survive you have to look at the near term and ways to navigate the liquidity crisis On the other, while emergency measures may help weather the storm, they do not always chime with the company’s long-term performance and strategic objectives

These were my own observations in dealing with clients and they were borne out by the findings of the

Economist Intelligence Unit research study Financial decision-making in the downturn reflects on the thoughts and experiences of senior financial executives and academic experts What were the challenges and how did decision-makers come about resolving short-term issues without jeopardising the company’s long-term future?

Or, conversely, did the downturn perhaps make it easier to make difficult long-term strategic decisions?

Tough times call for a focused strategy and clear direction That means keeping an eye on the long-term picture while facing short-term challenges in a well-considered manner And taking advantage of the situation to make positive changes for the future beyond the turmoil Working together and sharing information is vital if we are to meet the challenges head on

It is all too easy to look back and chastise ourselves for the choices we made, especially in difficult times

when  mistakes and failures are magnified And of course there is no guarantee that we will get it right second time around We hope nonetheless that the experiences and views documented in this report provide valuable insights

to help you negotiate future hurdles and benefit your company in the long term

At ING we know first-hand how an unstable market can affect your finances and how important it is to optimise your balance sheet That’s why we work with you to devise an ambitious and proactive approach to tackle your  financial issues, whether they relate to working capital, de-risking, shortening your balance sheet or financing future growth

In both tough times and when things are picking up, the key is to realize balance sheet optimization in close cooperation with our clients by resolving short-term issues with taking the company’s long term future into account.Should you have any questions or comments after reading the report or wish to find out more about what ING can

do for your business, please feel free to contact me or visit www.ingcommercialbanking.com/bso

Kind regards,

Annerie Vreugdenhil

General Manager Corporate Clients

ING Commercial Banking

In co-operation with the Economist Intelligence Unit

Financial decision-

making

in the

downturn

Table of contents

About the surveyExecutive summaryThe long-term view – a key measure of decision qualityCool under pressure

Sidebar: Investing in IT at ABBThe hazards of hindsightSidebar: The pre-mortem: Imagining the worstConclusion – lessons for the next time

6 7 9 12 17 18 21 22

About the survey

ING commissioned the Economist Intelligence Unit to survey 327 UK- and based senior finance executives in October 2009 and write this white paper based

Europe-on the results More than half of respEurope-ondents were chief financial officer level or above Half of respondents came from companies with more than €500 million in annual revenues, and 19% of respondents came from companies with more than €10 billion

in annual revenues All major industries were represented In addition, the Economist Intelligence Unit interviewed 15 senior finance executives and academic experts on decision-making and the results of these interviews appear throughout the report

Executive summary

The UK and Europe, like much of the rest of the world, experienced a steep and sustained economic shock throughout 2008 and most of 2009, from which the region is only now beginning to recover According to the European Commission, GDP growth for the European Union dropped year on year from 2.9% in 2007 to 8% in 2008, and was projected to fall 4.1% in 2009, before seeing a modest rise in 2010 Productivity, consumer confidence, industrial production and trade all experienced similar precipitous declines during the same period

There were devastating consequences inside European companies First, revenues fell well beyond previous worst-case scenarios, as business and consumer spending shrank significantly Second, the ongoing credit crunch that touched off the crisis made capital more expensive and harder to obtain These twin conundrums put chief financial officers (CFOs) in the eye of the storm, as companies looked to them to cut costs, hastily revise growth forecasts and renegotiate loans In many cases, as this report demonstrates, the decisions they made determined whether their companies would survive the crisis This paper, based on a survey of 327 senior finance executives and 15 in-depth inter-views with CFOs and academic experts, provides a history of the economic downturn from the CFO’s perspective How did they respond to the high stakes and high pressure

of decision- making during the crisis, and what lessons can be learned? The research uncovers the biggest decisions they faced, examines the strengths and weaknesses of the processes and tools they relied on, and asks how successful they were in making short-term, crisis- driven decisions without sacrificing long-term performance

Here are the key findings:

The most important decisions revolved around short-term plans to raise cost cutting, shedding staff and selling assets at the expense of long-term goals

cas-CFOs pinpointed their most important decisions in open-ended responses that included

“dealing with sudden customer bankruptcies”, “stopping all capital investments”, and

“selling assets in Asia and Switzerland” Two-thirds of respondents agreed that tant decisions in the midst of the crisis were necessarily focused on the short term at the expense of the long term Asked to compare decision-making with other periods when the economy was growing, 68% said decisions in the recession were primarily focused

impor-on immediate or short-term outcomes, compared with 49% during better times

A wise minority took advantage of the turmoil to make positive, long-term changes

One-third of respondents claimed to have made their most important decisions with the long term in mind Examples included “transforming the IT business”, “introducing

a planning tool for more efficiency and speed” and “streamlining the lead-to-order process” Half agreed with the statement, “The downturn gave us the ability to make difficult strategic decisions more easily.”

High stakes led to collaboration, a coordinated response and bolder action

Two-thirds of respondents said a collaborative process with other senior leaders within their company was the most important factor in making good decisions Forty-two percent agreed that “contrary views were aired and discussed openly without a culture

of blame” Respondents said the crisis situation “helped to get buy in”, and drove

“bolder action” among management teams

Under pressure, CFOs took more time to reflect

The majority of respondents agreed that there was more pressure to get decisions right during the downturn, compared with other periods when the economy was growing Two-thirds agreed that the consequences of bad decisions were magnified Rather than letting the pressure rush them into rash action, however, 60% of respondents said they took more time to analyse the options and examine the possible consequences

Financial tools performed well but CFOs seek improvement

Respondents were in agreement that the tools of their trade such as financial planning, scenario planning and forecasting were more effective during the downturn For the large majority of respondents, financial IT systems performed the same or better under the added strain Yet when asked what they would most like to improve, many highlighted the need for better data and modelling

Experience breeds confidence, rather than a specific plan

Fifty-eight percent of respondents had a senior decision-making role in a previous downturn, and 42% of those with such experience said it was “very useful” The reasons cited were psychological – “diminished tendency to panic”, “to keep calm and not be pessimistic”, and “the ability to cope with pressure and the nervousness of employees”

Do the review before the decision

Relatively few respondents see any use in a formal process to review decisions after they are taken Experts say this is because of the dangers of hindsight and political blame games But they agree that CFOs should persevere with the right kinds of decision reviews – which, paradoxically, take place before the decision is made The

“pre-mortem”, for example, asks a group of executives collectively to imagine how

a decision could go wrong in order to improve the chances of success

The costs of missteps have risen sharply amid the high volatility and poor visibility that have characterised the global financial crisis since it escalated in 2008 In good times, CFOs face important decisions every day, but they are more often choices related to growth and the strategies to achieve it – where to invest, which companies to acquire and where in the world to expand During the downturn the biggest decisions often related to whether the business would survive at all The low point for Roularta Media Group, a Belgian media company, came when it was at risk of breaching several debt covenants “Banks would have taken over the company,” says Jan Staelens, the CFO As a result, most CFOs focused on short-term outcomes, and their most important decisions involved raising cash

Striking the balance between short-term outcomes and the long-term strategy is far from easy, of course, especially in turbulent economic conditions, but it is a key yardstick for decision quality, according to Daniel Kahneman, Nobel Prize-winning professor of psychology and public affairs emeritus at Princeton University in the US, and one of the experts interviewed for this report Even short-term decisions, he says, can “maintain some long-term perspective in the corner of the eye,” to view, for example, “a decision about restructuring as an opportunity There are many ways of cutting costs and some are more detrimental to the long term than others The interesting question would be, when they were cutting costs, how conscious were they of the long-term implications?”How well then did CFOs perform in this critical area? Sixty-eight per cent of executives say their most important decisions in the last 12-18 months were focused on immediate

or short-term outcomes, compared with 49% in better economic times And 65% say that short-term decisions were made at the expense of the long term Seventy-six percent say their ability to focus on long-term targets was somewhat or significantly affected by the pressure of the downturn

Please identify the top

three areas in which

you made your most

important decisions

during the last 12-18

months?

(Respondents were

allowed to choose their

top three answers.)

The long-term view – a key measure

Restructuring Risk management Refinancing (revising existing agreements)

Please indicate which

of the following best

describes your important

decisions for the last

12-18 months and for

other periods when the

economy was growing?

How did the pressure of

the downturn affect the

following processes you

took to reach important

decisions?

“We have unfortunately prioritised short-term goals over longer-term goals,” says one CFO “There are some capex investments, which we did not make, which will hurt the business in the medium to long term.”

Many business leaders are in a similar situation, notes Neil Bearden, assistant professor

of decision sciences at INSEAD business school in France Executives in crisis, he points out, exhibit similar behaviour to investors in a bear market “They respond to minor losses at the expense of long-term planning,” he says “They see something is going wrong and they cut costs to keep earnings going Many who did that are now seeing where they took short-term decisions that they have to unwind.”

Opportunity in crisis

The survey and interviews reveal that most CFOs felt that they had no choice but to focus on immediate outcomes But for about one-third of respondents, the turbulent environment opened up opportunities – to make acquisitions, strengthen relationships with vulnerable suppliers or customers, or to make the most of the low-growth environ-ment to invest in enterprise-wide IT systems that may secure longer-term operating efficiencies Half of respondents, presumably even some who were primarily focused

on the short term, agreed with the statement, “The downturn gave us the ability to make difficult strategic decisions more easily.”

Other periods when the economy was growing

Important decisions primarily strategic: (focused on long-term outcomes) Important decisions primarily tactical: (focused on short-term outcomes) Important decisions primarily “in the moment”: (focused on immediate outcomes)

Didn’t affect at all Somewhat affected Significantly affected

0 10 20 30 40 50 60 70 80 90 100 %

A case in point is Millicom International Cellular The Luxembourg-based mobile telephony operator last year analysed its operations in Asia, Africa and Latin America, including market position, return on capital and expected investment requirements Subsequently, managers chose to dispose of the Asian operations “One thing that played a key role in our decision was: Where do we believe that we can better use and deploy our limited resources?” says François-Xavier Roger, the CFO “The single most important factor to make the sale was most certainly our capacity to create shareholder value over the long term.”

Another case in point is provided by a finance executive at a large chemicals company who asked to remain anonymous He said his most important decision involved creating

a plan to avoid breaching loan covenants “We aimed to solve the short-term issue, but

we also built a new financing structure, including new covenants, in order to cope with what we see as a recovery in the economy, which will hopefully allow us to ‘live quietly’ (without negotiations with banks), until 2012.”

An important lesson, says Theodoros Evgeniou, associate professor of decision sciences and technology management at INSEAD, is to take a “positive view of crisis and turbu-lence”, as difficult as that sounds “Let’s do fire-fighting,” he says, “but also look for the best opportunities in history.”

In reflecting on your

most important decisions

during the last 12-18

months, to what extent

all levels of the organisation The elements that go into good decisions are well understood but under the circumstances they

were difficult to apply effectively Important decisions were hampered by over-confidence and a tendency to

“hope for the best”

There was hesitation in taking big decisions because of the high stakes involved The downturn gave us the ability to make difficult strategic decisions more easily

strongly agree slightly agree neither agree nor disagree slightly disagree strongly disagree

30% 38% 16% 3%

40% 23% 16% 7% 40% 25% 7% 2%

43% 15% 13% 8%

A majority of CFOs say that the pressure to get decisions right increased during the crisis, and respondents are forthright about many of the reasons: “not enough time and data”, “the need to get board approvals and address differing views”, “it affected personal emotions ”, or “answers needed more quickly” Moreover, they agree that the consequences of bad decisions were magnified in the crisis Far from crumbling under the strain, however, CFOs seem to have been, broadly speaking, invigorated by the crisis This may reflect executives’ perception that the top finance role is a high-pressure job even in the best of times After all, a surprising 46% say they felt no added pressure

at all on their decisions over the last 18 months

Mr Staelens of Roularta says he joined precisely because he welcomed the challenge of attempting to extricate the company from its covenant problems “I was attracted to the company to get it right,” he says Others echoed his enthusiasm, and the response to admittedly higher pressure seems to have manifested itself in better collaboration, more effective IT tools and an emphasis on the value of experience gained in past recessions

Fighting a common enemy

This research shows that when the going got tough, it helped focus the enterprise Nearly 70% of executives surveyed say that collaborative processes with other senior leaders are the single most important factor in making financial decisions Viquar Haquani, CFO

of Radiomóvel Telecomunicações, a Portuguese mobile telephony operator, is one of those executives “We have a small, collegial team We are very open with each other, and we speak freely,” he says “At times, that can be a little bit heated – but we find it very useful.” Michel Allé, CFO of Belgian National Rail, concurs: “The most important lesson is

to tell the truth as soon as possible, even if it’s bad news When I was open with the board and with shareholders, they responded well.”

A collegial environment is conducive to frank discussion Finance executives ally say that their decision-making processes worked well when it came to contrary views This may reflect the fact that options were limited Forty-two per cent say “con-trary views were aired and discussed openly without a culture of blame” and 35% say there was a “clear, formal process to gather and decide among contrary views” Only a minority say it was dangerous to air contrary views, or that such views were overruled Toby Wilson, Microsoft’s UK finance director, points out: “The most difficult part was not making the decision itself, but agreeing the process for implementing the decision Once this had been put in place, the rest was fairly straightforward.”

gener-Cool under pressure

Did you feel more

pressure to get important

decisions right during

the past 12-18 months,

when compared with

other periods when the

economy was growing?

to get important decisions right Yes, there was a lot more pressure

to get important decisions right