Light at the end of the economic tunnel

Warren Buffet is rumoured to have said that it is only when the tide goes out that you discover who has been swimming naked. When I first heard of the quotation and its source, I found this to be a contradiction in terms, especially because Buffet is on record saying that while other men read Playboy, he reads annual reports. That aside, this saying and its many variations such as “when the tide goes out, the rocks are revealed” is very instructive.

From a global economic point of view at least, there is not a shred of doubt that the economic downturn left the global economy dry, leaving in its wake few companies, big and small, exposed and those with weak immune systems in intensive care units and the less fortunate ones in corporate cemeteries. As we all know, South Africa did not escape this scourge. To note, SA went through three quarters of negative growth until its modest rebound in the third quarter of 2009.

Though the tidal rebound bodes well for all of us, the big concern, however, is that the current tidal rebound is mainly driven by the weaker ocean current ie government expenditure. The stronger ocean current, household consumer spending, is still on sick leave from burnout after powering the economic tide for more than 90 quarters non-stop. From an organisational point of view, if we use Statistics South Africa’s liquidations and insolvencies data, then it would appear that a substantial number of private firms were left exposed, some fatally. To note, Statistics South Africa recorded 4 133 liquidations in 2009, 25.2% more than in 2009 — 26.9% of these liquidations were recorded from those entities that voluntarily decided to stop swimming, especially when faced with the prospects of swimming exposed in less than benign conditions.

These numbers may paint a dim picture of the business landscape, but as they say, every dark cloud has a silver lining. There are three silver linings that I can think of in this regard. Firstly, a UK study on financially distressed small-and-medium sized businesses found that 75% of business banking clients whose accounts were placed in banks’ intensive-care units emerged from these quarantines after 7.5 months and avoided formal solvency procedures altogether and ultimately got turned around.

The study, at least, in my opinion, suggests that that there may be some light at the end of the tunnel for financially distressed entities. The problem, however, is that this does not give us an indication of what the picture looks like in South Africa and also whether the picture would still look the same in a recessionary environment or not. Nevertheless, the fact that 3.75 financially distressed companies out of every 5 get a chance to live another day, contribute to the economy and save jobs, is good news in my book.

The second silver lining relates to the mere fact that it is possible to stem the decline early on before it develops into a crisis. Fortunately, public and private-sector organisms face fewer silent killers compared to humans. In addition to this, public and private-sector entities have access to well-documented, early warning signposts that signal the presence of deeper corporate health issues that if attended to in advance, can prevent the onset of decline. These include, but are not limited to: lack of strategy or poorly defined and articulated strategy, poor market position (declining net promoter scores, client defections, eroding magnetic appeal), inefficient operations (increasing lead times, poor service, increasing costs), poor organisational health (dysfunctional or weak leadership, inappropriate or unclear organisational structures and processes, unclear and overlapping accountabilities, low staff morale, poor staff retention), public sector-specific signals such as audit outcomes specifically relating to inability to comply with treasury regulations, inability to spend budgets, unfilled vacancies etc.

Thirdly and lastly, it appears as though there are some attempts to stem the tide of corporate failure and the collateral damage that comes with it in private and public sectors. In the private sector, it looks like development finance institutions are helping out financially distressed businesses with much-needed cash injections to help them live for “one more day”. In the public sector as well, it looks like there are plans afoot to introduce a “delivery unit” within the presidency that will, among other things, help remove blockages and bring about service-delivery turnarounds.

Though these initiatives are welcome my sense, however, is that in some of these cases we will need to go beyond stabilisation and recovery of publicly visible symptoms of distress and address the underlying causes. With our global competitiveness challenges, especially of the infrastructural front, as well as our developmental needs, I do not think we can afford to divert scarce resources to keep “no hopers” afloat and to keep bailing out repeat offenders. Otherwise the flicker of light that we see from a distance will end up being that of a passing train.