Thursday, January 2, 2014

'Tis the Season for Growth

At the risk of stating the obvious, most companies – across all industries – have followed a common priority since 2008:  find a way to survive the recessionary markets that have ensued from the financial crisis.  For most, this has led to a sustained period of cost-cutting, constrained investments, reduced capacities, and general contraction mentality. 
Anything that appeared to be discretionary, or speculative, or prospective … these were the assets that were jettisoned in favor of a leaner operating cadence.  In my mind, these lost assets are the necessary ingredients for growth, and they have been mortgaged in favor of the imperative of weathering the storm.

Now, I am no economist and don’t pretend to offer informed perspectives on causes and effects of recessionary markets, but a few impacts are evident to me as I meet with executives about their agenda for 2014.
To frame their mindset, it’s important to note that US average annual GDP growth (including the Great Recession and an estimate for 2013) has been just 0.9% compared to 2.4% in the years before 2007 and way below the average real growth of the 1980s and 1990s.

Across the major economies, the hope is that central bank policy will convince corporations that interest rates will stay low and so they can be confident of investing more.  Most pundits attribute central bank interest rate cuts, asset purchases (quantitative easing) and ‘guidance’ for boosting stock markets up to today’s record heights. 
Yet, these actions have had little effect in getting banks in most countries to start lending to corporations or for those corporations to borrow to invest. Banks have still a lot of toxic assets from the credit boom on their books and prefer to improve their balance sheets rather than lend. And, large corporations flush with cash don’t need to borrow to invest. 

Bolstered, in part, by the exceptional performance of equity markets I sense that optimism is returning and companies are willing to place a few strategic bets on new sources of revenue and profit expansion.
Goldman Sachs is also showing optimism about an investment boom in 2014.  “The growth rate of nonresidential fixed investment (also known as capital spending) has slowed from a cycle peak of around 10% in late 2011/early 2012 to just 3% in 2013, and we expect a reacceleration to about 8% over the next year.”

But, investment depends on the level and growth in business profits and profits ultimately depend on the profitability of the existing stock of capital. Yet, companies are cautious about ramping up the spend on capital assets, thus burdening their balance sheets at a time when great energy was spent to diminish the intensity of capital employment.
So … what does all of this mean to the outsourcing and shared services industry?  I sense an accelerating appetite for “As A Service” offerings as a strategy to avoid capital expense.  Companies are looking to fund their growth through their P&L statements, rather than their balance sheets.  This means that they will contract for capacity with a variable provisioning model – pay-as-you-go – as opposed to making a fixed cost commitment.

Driving to a higher Return on Invested Capital is a top priority for most companies, and “As A Service” market offerings will be a key strategy in 2014.  Growth, enabled by a business model that is flexible, agile, and variable.

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