Efficiency slowed profit deterioration

Effectiveness will replace efficiency as the main strategic goal of UAE companies in 2018. At least, it will for the successful companies. 2017 was the year of efficiency, as companies learnt to do what they used to do with less. Less money, less time, fewer people. Efficiency cut costs and slowed down profit deterioration. As important a step as that was, it was a stepping stone to the important strategic goal of effectiveness. In simple terms, efficiency is getting things done whereas effectiveness is getting the right things done. After all, there’s no point finding cheaper ways to reach a goal if it is the wrong goal.

Effectiveness leads to profit growth

Effectiveness looks at where new revenue, and profit, are going to come from as, opposed to efficiency’s focus on costs. There is nothing wrong with working to achieve efficiency first, as it gives the company time to understand the new external environment. But there comes a time when cutting costs no longer works. In the end, sustainable profit growth is driven by increases in revenue, not decreases in cost. So how do companies become effective? What does it even mean? It means evolving, even transforming if necessary, so as to adapt to the new realities of the economy.

Executives might ask what can they do to generate revenues in a challenging economy? A simple example, just to make a point, is this: take advantage of all the efficiency initiatives. Cost cutting means downsizing, so moving companies will thrive. But what else can happen? Property management companies might provide a discounted rent during the time a client is unemployed.

Corporate transformation leads to effectiveness

Think of it this way: what is in the best interest of a property company, to charge high rents which might spur the newly unemployed to quickly pick up and leave, or to provide price and term flexibility to allow the newly unemployed a chance to search for new employment and become a long term client? This idea is not exclusive to rent, it matters in many other areas, such as education. Parents naturally prefer that their children complete their school terms if not their school year in the same school. Why can’t schools offer some sort of flexibility that could be mutually beneficial? One possible idea would be to offer the option of pro-rata or monthly payments.

The point here is not that companies simply cave in to clients. It is for companies to understand that the economy in which they operate is an eco-system and that maximising profit or cash flow in the short term can lead to disastrous outcomes in the long term. What would a landlord prefer, to maximise cash flow and profit via high rent paid in advance for a few months before the tenant leaves and the unit remains empty, or to perhaps spread the cash flow across the year and lower the rent to a level that is fair to both sides? The same goes for schools. If people leave the country with a bad experience, the result will be that slowly but surely the reputation of the UAE will change from a great expatriate destination to live and work into something more negative. Nobody wins.

Effectiveness is not simply helping clients manage their cash flow. Effective companies also look at an altered landscape and transform themselves into relevant, viable, sustainable commercial businesses. GDP growth has been falling since 2011 according to the World Bank, from 6.4 per cent year-on-year growth to 3 per cent in 2016.

Human nature being what it is, when GDP growth was extremely high, executives forecast a continuation of that growth. But growth of gross fixed capital formation, after a contraction in 2013, exceeded GDP growth in 2014-2015 before finally sinking to a growth rate of 2.3 per cent in 2016. This is one economy-wide indicator that companies are scaling back on investment, a sign of better efficiency. But this still does not explain how companies will become effective.

Innovation necessary to meet today’s realities

Effectiveness comes from transforming a company’s goods and services in innovative ways to tackle the realities of today’s client demands and preferences. On a strategic level, it also includes getting the company to its target business and operating model before its competitors. For example, in hospitality, one might expect that the mix of five star facilities versus four and three star facilities will balance out in favour of more affordable options.

In travel we might see a tilt towards budget airlines, or even budget flights of high-end airlines. Banks will have to learn to provide innovative products to higher risk segments of the economy. Asset management firms might need to rebalance from an overwhelming public markets suite of products to the foundations of the economy, namely seed and venture capital.

Effectiveness in a challenging economy is a pivot from a preponderance of low volume, high margin products and services into high volume, low margin business and is the underlying transformation theme for companies.

This article was originally published in The National.