As Pakistan continues to go through increasing inflation and economic instability due to the political situation and the Rupee’s inability to hold on to the coat tails of the Dollar, local and multinational companies and SMEs face an unenviable situation: balancing cost and profit ratios by trying to predict how the economy will respond in the coming months. Meanwhile, oil prices continue to be all over the place, and the costs of oil related commodities to rise, thus effecting planning and profit forecasting and causing a perpetual headache to those who have to predict where to efficiently and effectively buy from.
Good enough to for best laid plans to go awry.
So in this uncertain scenario, how do the CIO and the strategic decision makers behind a company operate? What is the mindset and how do they go about trying to bring a semblance of sanity to the table?
The Sky is Falling
It may be a bit exaggerated to claim that the sky is falling, after all, we have all been here before, but there is no doubt that disappointing economic indicators, both nationally as well as internationally, are taking their toll on the country’s trade and payment position. This in turn is affecting various industries doing business by putting the cat amongst the pigeons in the marketplace.
To make matters worse, rising imports, amidst comparatively slower growth in exports has moved to decrease trade deficit in the first seven months of 2008. This adds to the pressure on the rupee/dollar parity. To try to remedy the situation, the State Bank of Pakistan announced a tight monetary policy in February for the next six months in an effort to try to combat rising inflation and deteriorating trade deficit. The central bank also raised its discount rates and asked the government to restrict heavy borrowings from the bank, to try to stabilize the increasing fiscal deficit.
What does all this do for people who want to make money through their businesses? Quite simply, the economic environment is increasingly dictating the policies and strategies that a company puts in place to steer itself to a place of relative safety. In many cases, there is a need to be increasingly tactical to survive and possibly build during the instability, and to plan conservatively without undermining the founding principles of any enterprise, that is profitability.
There are many fronts through which the impacts of the said issues can strike at the core of businesses: from purchase price variances of raw materials, to global profitability declarations and targets for MNCs; from security risks to the indefinite postponement of many a sought after project.
So depending on how you look at it, the sky is certainly cracking, if not falling.
Buy Less for More
In the best of times, the supply chain of any company is a tough place to be. There is an ever present need to control the costs of the products being sold to enhance profitability, and in order to achieve that, the efficient sourcing of the raw materials is vital. Leverage in sourcing these raw materials helps in negotiating to bring down the ‘bill of materials’ cost. By controlling the above, the Cost of Goods Manufactured and Sold is adjusted and profits and prices can be regulated.
Ashar Iqbal, CISSP Xnet Solutions, says, “The political conflict that we have seen for most of 2008 has lengthened buying cycles and now the steady devaluation of the Rupee against the Dollar will reduce buying power.”
The above is not just true for manufacturing concerns; even in the IT sector, purchases play a huge role, especially if you’re a hardware firm. Given the prevailing winds, these purchases may need to be put on hold, till saner winds blow. Atif Moin, Head of Purchases at Syngenta Pakistan (Ltd.), agrees, “Current buying scenario is at its worse in the Pakistan market, both in technology purchases and also on the manufacturing side.”
He adds, “We have all witnessed the decline in rupee value in recent days. Added to this is the fact that the State Bank of Pakistan is not allowing any advance buying of equipment through any kind of bridge payment facility, and the result is equipment which used to cost us 1 million rupees is now costing close to 1.3 million rupees.”
But it’s not just the rupee devaluation that is causing adverse effects on business planning and operations. One interesting factor, particularly so for Telecom firms, is the Chinese government’s reluctance to give any subsidiaries on equipment bought from them. Atif Moin explains, “Almost all major Telecom/IT infrastructure companies have a plant located in China. In the recent past Chinese currency has been appreciated against dollar and Pakistan currency has been depreciated, which is making the equipment costlier and the giving of subsidiaries more costly for the companies.” Given this, any help from any quarter would be very welcome. But as Atif points out, “The Chinese government has officially stopped giving any kind of subsidiary.”
The Oil Prices are another barrel of fish which refuses to stay settled. Increases in the oil barrel prices in recent times have lead to prices of related commodities to go up. Palm Oil and various Waxes are such items. For manufacturing firms, the headache is to either look for substitutes, or continue to pay more than planned costs for necessary raw materials.
Atif Moin explains the oil price impact further, “This is just another nail in the coffin. The increase in oil prices has shifted the payment inflow outflow ratio and because of this, the balance of payment has been affected which ends up being another factor in the devaluation of the Pakistan rupee.” Interestingly, even though now the prices of oil are looking as if they are stabilizing, they were recently down to 110 from 145, the trend of the market continues to stay as before and still the materials associated with petroleum is being sold with the same inflated rates.
The Constant Change
Textbooks will tell you that industries are seldom stable, and that change is ever prevalent. Experts and consultants will tell you that this is a standard case of the need to be flexible while operating in a particularly volatile region, but no matter how astute, even the most seasoned planners have had to readjust forecasts and rethink projects that were previously about to be launched.
Prasenjit Sarkar, the General Manager Personal Systems Group (Asia Emerging Countries) at Hewlett-Packard Malaysia gives his view, “Recent day-to-day USD-PKR exchange rate unpredictability has naturally caused some corporate customers to be prudent in the actual timing of their PC purchase orders for our channel partners.”
In this environment, having the trust of the clients, buyers and customers is vital in order to reach a mutual price point which takes into account the ongoing unpredictability and difficulties in the economic environment. Negotiations that reach an optimum solution are often the best way to proceed. Prasenjit gives an example in this regard, “Acknowledging exchange rate differences between the date our partner had originally quoted for a project (say three weeks earlier) and the date our partner eventually delivered the products to the customer (after importing them from Singapore to Pakistan), several customers have, in fairness to our partners, agreed for partial revisions in their PKR purchase prices on a case-by-case basis.” He goes on, “Yet other customers have agreed to accept, for newly initiated procurements, partner quotations denominated in USD (to be converted to PKR on the actual date of delivery).”
Other parties have also acted to minimize the effect. Ahmer Ghazi, CEO at Innovative Integration (Pvt. Ltd.) says, “Some of our customers actually expedited their order processing to avoid expected increase in costs due to dollar appreciation.” This is something that manufacturing companies continually try to do, to buy more materials while the cost is lower, knowing that the future is likely to bring about an increase in the costs. Unfortunately, this can lead to an increase in working capital and lower cash in hand, thus potentially adversely affecting the current year’s profits.
At times, delaying purchases can also be a worthwhile option. Ahmer Ghazi continues, “In case of a bank, the CIO ordered all the IT equipment for their branches not to be bought until Dec 08. If the Pak Rupee was not on the devaluation trend, the ordering would have taken place somewhere in October.” He further explains, “Same is the case with new 16% GST, the corporate customer understands that this is a tax imposed by the government which will increase the cost but then their paid GST is also adjusted in their input GST claims.”
A rather common trend after the recent budget and the 16% GST announcement was an increase in the prices of consumer goods almost all across the board. This reflects on the one fail safe avenue that most manufacturing companies have: increase the price of the products to balance the profits and the purchase price variances.
Dwindling Revenues
With economic instability, projected and planned revenues end up being revised on a day to day basis, on both the suppliers and purchasers ends. Hassan Rizwan, Technology & HR Consultant and Entrepreneur, explains, “My personal experience with the declining rupee value has been very negative. One of my clients has reduced their order in half since the budget they had prepared at the beginning of the month can’t accommodate the new rupee-dollar rates.” Subsequently the projected revenues for the suppliers will have to take a severe hit. As mentioned before, one way around this is to negotiate with the buyers and to come to an optimum level price, which caters for the depreciation of the rupee, and allows for the buyers to buy as much as they had planned, and as a result, for the supplier not to face a huge fall in revenues.
In other scenarios, particularly in the Manufacturing sector, simply buying fewer raw materials will not do. Raw materials purchase plans are forecasted as per need, and are bought at higher rates simply because there are few substitutes. The end result, most often, is felt by the consumers, who need to pay a greater price to have the final product. The exchange rates further complicate the scenario. Multinational Companies that need to show revenues in foreign currencies will increasingly need to sell more in Rupee terms to meet their foreign profitability targets. You actually end up making less money in foreign currency terms than what you had targeted with fewer sales in Rupee terms.
The vicious cycle continues.
Shahzad Khokar, Founder & Principal at DigiDent Solutions, talks about the conversion rate chaos, “An illustration of the situation is the negative impact on our profits through a local deal that we did recently. In a matter of a few weeks (we had net 45 payment terms); we lost over fifteen thousand dollars as the Rupee depreciated.” Conversion rates play havoc with profits. Companies who do not convert the currency post revenue are arguably the least effected by the rupee downturn. Unfortunately, for most companies this is just not doable; as conversions at both the purchase end, and the revenue declaration end is part of their operations.
And just when you thought that it’s only the economic and political instability that needs to be catered for, security concerns rise and fall. These fears have further forced certain international parties to be ‘light’ on their feet, so they can step out of Pakistan at a moment’s notice if the situation goes sour. Shahzad says, “Recently, one of our large customers who had invested heavily in infrastructure has asked all liabilities (including leases and equipment etc.) to be taken over by DigiDent. This way, they can leave quickly if they have to.”
Fear, it seems, is still a highly potent driver.
Reacquiring Efficiencies
The ongoing environment brings about a vital need to try to plan better and more efficiently, taking into account the potential uncertainties that can effect long term decisions. Efficiency in pricing and purchasing, and cutting costs wherever possible is the need of the hour. The onus, as always, is on the CEO, CFO, CIO and the strategic decision makers to lead the company towards calmer waters by giving a positive strategic direction, and showing the workforce that there have been no nasty surprises.
Mohammad Ali Mohammad, Group Head IT at Warid Telecom International, Pakistan, agrees, “It is indeed a challenging time for a CIO in Pakistan.” It becomes increasingly important to be a good judge of which decisions and projects to go with, and to where to hang back for the time being. Needless to say, mission critical purchases and projects should be the last thing a decision maker should look at for postponement.
Ali Mohammad goes on, “There is increasing pressure from management to cut costs and improve efficiency. For most areas cost has gone up due to current economic circumstances. It is critical to keep a balance and not put on hold projects which are geared towards efficiency enhancement and would save cost longer term.”
Going back to the drawing board and re-planning can also be a great idea. It allows for more flexibility, and can end up saving you more money than you had bargained for. Maria Medvedeva, Regional Director, Technology at Computer Associates MENA, advocates revisiting strategies to create better synergies, “While political situation in Pakistan definitely slows down decision making process of major organizations, it gives them an opportunity to re-examine their IT strategies, develop modernization plans and assess maturity levels when it comes linking technology to business needs.”
She goes on from her company’s perspective, “As a multinational software vendor, we are trying to utilize this instability to our client advantage by offering them health checks and information sessions about global best practices, new technologies, and innovations in business practices. We also spent significant time on planning sessions with our strategic partners to understand their skills gap and improve their ability to position, prove and deliver CA technology to Pakistan market.” Diagnosing inefficiencies and moving to curtail them, even at a late juncture, can be a huge revenue saving mean.
In this respect, it is also vital for internal consultants and government institutions to provide long term guidance and stability to the business and entrepreneurs in the country. Experts need to come forward to guide entrepreneurs and help in putting in place suitable ways forward. Institutions such as the State Bank and local oil giants need to be at the forefront, if Pakistani industry needs to stay intact at such downturns.
Light in the Tunnel
It’s not complete doom and gloom though. As mentioned earlier, for those who do not have to convert their revenues into foreign currency, there’s less of a worry. Ashar Iqbal says, “As a vendor that does most of its value addition within Pakistan, we are not as badly affected by the devaluation as others, but we do see a lowering of the sales forecast.”
Abid Latif, Manager IT at Total Parco Pakistan Limited, takes a more historical and largely positive perspective, “This is not the first time Pakistan is facing such a kind of situation. Historically we have been here before. There will be no significant impact on the sales, technology buying or infrastructure planning as such, although.global prices, global deals and global decisions may take preference over the local decisions. There will be a slight impact on the inventory part by the vendors/suppliers as fluctuations in dollars make their planning a bit wavered.”
This view is shared by a number of other people, who have faith in Pakistan’s ability to ride out the storms that it faces from time to time and still be a fertile ground for investment and business. Adnan Ali, Founder at ClickChain Pvt Ltd, Advisor at VisualSparks, takes a similar view, “As a founder of a new company in the market, I am taking this economic situation in my stride. When the economy is down, I feel it’s a good time for startups. The dollar situation is really bad but there are tactical level plans that need to be executed in all organizations.” He continues, “Long term thinking is that the dollar will not come back down by a lot, so we as well continue with business as it is.”
For companies that make money in dollars or euros, this situation appears rather sunny, as the same amount of foreign currency earned will get them more clout in rupee terms. Adnan points this fact out, “On the flip side, all of a sudden, payments from foreign clients are now going a longer way in Rupees than before.”
The software sector is largely where the above impact of dollar appreciation can be felt, as witnessed by Farzal Dojki, Director Products & Integrations at amaana Pvt Ltd, “I was at a gathering where I ran into engineers and managers of software companies. They are delighted. The 25% increase in their software and services revenue due to devaluation has helped to give cost of living allowance to employees in mid year, improve profits, and improve the over-all working environment.” But one need to understand the real problem that is being faced: there just doesn’t seem to be enough information made available to the CIO to manage long term planning. Farzal agrees and comments, “This is a country where the public utility company has not figured out how many hours of load-shedding it will conduct every day; PIA has zero hedging against fuel prices (compared to SouthWest which has been at 100% hedges for many years) and the SBP never knows what inflation will be, how many notes it will print, what budget deficit will be, what exports will be or what imports will be. How in the world do you except private enterprises to plan for long term when our institutions don’t provide us with any long term guidance?”
Needless to say, it is vital for the company to be able to sustain key jobs strength during such an environment, as Shahzad Khokar points out, “One temporary positive of the Rupee devaluation is that we can sustain the jobs in the office longer.” According to Shahzad, even if some business is lost, the bench strength can be kept with the company for longer. This can lead to better consistency and quality at times of economic downturn, when the job market itself begins to resemble a slumbering giant.
Despite being cautious and conservative, continuity of important projects is something that can not be highlighted enough. Tariq Mustafa, General Manager, Long Distance Network at Multinet Pakistan (Private) Limited, talks about this very fact, “We are being a bit conscious but essential projects have to move ahead in any case.” Tariq goes on to explain the impact that the situation will have on the business planning for 2009 if the conditions do not stabilize. However Dr. Aamir Matin, General Manager Cisco Systems in Pakistan says, “Perhaps the economy in isolation is experiencing an impact, however the long term impact coupled with the demand, will hopefully improve the situation. BPO, Web2.0 and an increased dependency on IP-based technologies are areas that are going to continue to spur economic activity. The situation might slow businesses for the time being but if the various stakeholders work together and define behavior that will be beneficial for Pakistan’s growth, things will get better.”
The Future is Hazy
There are divergent views amongst the government and private economists about the current economic downturn. The government economists continue to have the view that the situation is under control and the indicators are likely to improve in the coming times. Many private economists, businessmen and traders, however, believe that these very economic indicators are fast deteriorating.
Prasenjit agrees with the former view, “The Pakistan IT industry continues to demonstrate a mature resilience in the face of political and economic adversity.” He adds, “Most corporate PC procurements have continued despite everything. Projects have, at best, been tactically delayed but not permanently shelved or even indefinitely postponed on this account.” One hopes that his faith on the industry rubs on to other foreign investors.
A similar view is echoed by Maria Medvedeva, who points out, “While politics run its turn, mobile phones still work – so telecom companies must continue to run their day to day business; checking accounts and ATMs still dispense money – financials institutions must address their client needs; students will continue to attend schools – the education sector remains as strong as ever.” The cycle goes on, and ultimately tries to reestablish a state of equilibrium. She looks at the most vital ingredient in business, “Customer service remains the key to all of these organizations. This comes first and the IT Budget need to always accommodate for this irrespective of economic instabilities.”
Despite this belief that many businesses and entrepreneurs continue to exhibit, by continuing to operate in Pakistan, the coming times are going to decide if the new government’s policies will arrest the alarming decline the economy is facing, and if the Pakistani industries will be able to resuscitate themselves.
We may have been here before, and we may have survived, as many have continued to point out; but there are always factors that have helped in the economy’s survival strength. These factors at times have been foreign aid, subsidizing costs, synergetic relationships between buyers and sellers, and most importantly guidance from government led institutions. Till the time that stability and equilibrium can be re-established, with or without the intervention of these and other factors, it is the strategic decision makers who will continue to be at the forefront of this battle, and it is these generals that will need to revise planning cycles, forecasts and projects in order to reacquire efficiencies and make up for dwindling profits.