Adaptability, access to info key to thriving through the recession

Companies that are nimble, adaptable and have access to the right sort of business information still have many opportunities to grow their businesses, even amidst uncertainty about when the global economy will emerge from its prolonged slump.

That was the key message to emerge from the Recession to Recovery conference that information solutions firm, Experian South Africa, held for its clients on 28 October.

Speakers at the conference outlined a range of economic scenarios and business realities to delegates, and then presented a range of strategies organisations could use to defend and grow their businesses through the perfect economic storm.

Economic downturns that disrupt growth are an inevitable fact of nature, said Kim Jenkins, managing director at Experian South Africa in her opening address. Empires, climate change and biological populations are all subject to natural cycles, and the world economy is no different.

But the larger economic booms and downturns are themselves comprised of smaller cycles of growth and decline, she added. That means businesses have pockets of risk and opportunity to address at any time in an economic cycle and need to plan for multiple scenarios of positive and negative growth across different sectors of the economy.

Organisations cannot afford to sit in a corner with their eyes closed waiting for the recession to go away, but should instead be using it as an opportunity to re-examine their business models and become more competitive for their future, said Jenkins.

In his talk, Clem Sunter, the world-renowned scenario planner and management strategy speaker, outlined a range of possible economic scenarios for the world in the years to come:

*The current ‘Hard Times’ scenario persists 10 to 15 years into the future because the economic fundamentals that caused the present global recession are still in place;

*The ‘New Balls, Please’ scenario, where economic growth resumes but where businesses find themselves playing a whole new ball game. The rise of the Eastern economic powers and dwindling oil are among the factors that will change the rules for businesses worldwide.

*The ‘Forked Lightning’ scenario where government stimulus packages spark a flare of short-term growth that fizzles out quickly and gives way to an even deeper recession. |

As for, South Africa it could retain its position in the ‘Premier League of Nations,’ be relegated to the Second Division, or at worst, end as a failed state, said Sunter. Sunter currently gives South Africa a 70% probability of staying the Premier League and a 30% chance of relegation, based on factors such as the inclusiveness of its government and the pockets of excellence in certain parts of the public service and private sector economy.

Businesses need to develop the ability to conceive of multiple scenarios and what these mean for their organisations and adapt their strategies accordingly, rather than betting big on one forecast for the future said Sunter. Those that can conceive of, and adapt to, a range of outcomes are best positioned to survive and thrive in uncertain times.

For example, those that have a sold a premium product in the past may need to think about how they will compete on price if a ‘Hard Times’ scenario persists or if South Africa ends up relegated to the Second Division where most Third World countries reside.

Signs of economic recovery

Emerging markets such as Russia, Brazil and South Africa are starting to show the first signs of economic recovery measured by indicators such GDP growth, said Rick Gallagher, managing director of Experian’s Emerging Markets Group. But an influx of new credit will be the key to sustaining a recovery.

Credit facilitates people making investments in themselves such as education, drives the housing and vehicle markets, and enables people to start or grow their small businesses. Against that backdrop, credit information solutions such as those supplied by Experian will have a key role in spurring economic growth into the future since credit information empowers lenders to give loans to more people.

Experian holds credit information about more than 450 million consumers and 40 million businesses around the world. It also has access to 600 million vehicle histories and 60 million credit card transactions a day.

Companies around the world can leverage this sort of information to take better decisions throughout the customer lifecycle from marketing and acquisition of new customers through to collecting debts and managing delinquencies and pre-delinquencies. Lenders benefit from maximising their revenues and minimising their risks.

But the availability of credit information also benefits consumers and the broader economy. In Brazil, the government calculated that it could boost its GDP by as much as 0.8% if credit bureaus were able to supply lenders with positive credit information about consumers, said Gallagher. For that reason, Brazil’s banking association and larger banks are preparing to share positive credit data – that is, information about consumers’ total indebtedness and payment histories.

Turning to the South African market, Marc Gaudert, senior vice president at Experian Decision Analytics, said that Experian’s data reveals that there has been a sharp fall in lending following the introduction of the National Credit Act (NCA) in 2007.

Delinquency rates post-NCA have also declined significantly, from more than 1% before the Act came into effect to less than 0.5%, said Gaudert. But lenders cannot afford to be complacent because there are some worrying signs, too, such as a sharp rise in credit card usage.

The number of inactive cards in the market has reduced significantly, suggesting that cash-strapped consumers are using previously inactive credit cards to service debts and pay for day-to-day expenses. What’s more, consumers are using up more of their credit card limits.

Rather than waiting for many of these consumers to default on their debts, organisations should use the information at their disposal to address possible problems before they arise, suggested Gaudert. For example, they could identify customers that show behavioural patterns that indicate they might become delinquent and speak to them about restructuring their repayments.

Up to the minute info for survival

Four Experian customers representing some of South Africa’s largest lenders to consumers and businesses took part in a panel discussion and shared some of their insights into how they have managed to survive and even thrive through the recession.

Echoing the Experian speakers, the panel put up-to-the-minute credit information and sophisticated scoring techniques at the top of the list of factors they identified for success in difficult times. Panel members also agreed that the recession gave them opportunities to solidify relationships with existing customers and to fine-tune their business models.

Hannalie Crous of African Bank said that the bank is constantly looking for new sources of data and new ways of understanding trends in its customer base because it operates in a fast-changing environment. New legislation such as the NCA has brought new dynamics into the market. And the bank is observing new patterns emerge in the ways that the same consumers behave across different financial products.

Up-to-the-minute information is becoming increasingly important in managing credit for companies that operate in the business-to-business space as well, said Moosa Suliman of Transnet. Transnet now refuses to make any credit decisions based on reports that are older than six months.

The transport operator also undertakes modelling exercises to stress-test its top clients to understand how well their businesses are likely to cope in a range of economic scenarios.

Lewis Group has always managed its credit business tightly and didn’t need to make dramatic changes to its policies in response to the economic downturn, said Brett van Aswegen, credit risk director at Lewis Group.

But it has seen that the data around its customers is changing at an unprecedented rate. In the past, it used to re-examine and re-develop its credit scorecards on a three-year cycle. Now, Lewis re-evaluates its risk models and scorecards every year.

Lewis has discovered that it is more profitable to cross- and up-sell to existing customers than it is to win new customers. The primary reason that it is more profitable to grow business with existing customers is that delinquency rates among these customers are lower than they are among new customers, said Van Aswegen.

Thane Duffin of Lombards Insurance Group said that many organisations start become internally focused during a recession and look towards systems and regulations to correct a downturn. But Lombard sees the downturn as an opportunity to cement its position in the market and consolidate its customer base. “We are saying to our customers that we are there for you in the tougher times as well as the good times.”

In his closing address, Victor Nichols, the chief executive officer of Experian UK and EMEA, summed up the prospects for the world economy by saying that “the only thing we know about the recovery is that we don’t know anything about the recovery.” But even in uncertain times, companies should not stop trying to grow their customer bases.

There is a lot of merit in complementing customer retention efforts with customer acquisition strategies, said Nichols. Companies that are not striving to win new business are losing out on a lot of opportunities. With sound credit risk management, they can grow their credit-based business without exposing themselves to unnecessarily high risks.