Chief Financial Officers around the world worry about the combined effect of low inflation and low growth and are taking familiar defensive measures.
by Michael Nossaman
Low inflation and low interest rates constrain price increases, yet salary and wages, and health care costs continue to rise above the level of inflation. It is a bottom line squeeze.
One result is that corporate debt has increased but is not being deployed for capital expenditure (CAPEX) that would provide growth. Instead, companies are using available cash to replace existing equipment only as needed and for other short-term needs rather than investing in new production capacity. More and more, companies are using debt to support dividend payouts needed to placate nervous investors.
Contrary to popular belief that all U.S companies are sitting on the mountain of cash estimated at $1.84 trillion, the top 25 richest companies hold 50 percent of it. Among all other U.S. companies, cash on hand as a percentage of debt is at a 10 year low.
The cumulative effect is that CFOs in the U.S. have doubled their prediction of a recession from 16 percent 9 months ago to 31 percent today. CFOs in other regions of the world think the likelihood of recession is even higher.
In addition, CFOs confidence in their companies and economies has also dropped to new low levels.
A familiar phrase is now the refrain: cut staff, freeze wages, reduce spending, search for new product and service schemes, pursue merger and acquisition, and rely more on outsourced staff.
On the surface, that last directive-outsource staff-may have the luster of gold to contact security providers. Beware; it might be fool’s gold.
It is self-evident that compelling reasons to outsource are ongoing unique capability, short-term need, and lower labor cost.
Unique capability is something for which a company may pay a premium. For example, advertising, licensing, and component parts are among the many things that, even at a premium price, might be better and easier to buy than produce internally. Security does not reside in this category.
Security does reside in the short-term need category. Special events, temporary executive services, and consulting are common examples. However, even when profitably priced, ad hoc engagements as a core business offering are highly volatile.
Reducing labor cost, that is when contract security really gets attention. Any CEO worth his salt will jump at the chance to buy labor below internal cost.
It is a perpetual buyer’s market for contract security services even when optimism is high. The current economic sentiment and forecast described above, if accurate, is likely to bring with it additional pricing pressure from existing clients as well as new prospects.
That is not a rosy picture by any measure but at least it provides some advance warning about what may be coming and time to prepare a profitable response.
Michael Nossaman is the founder of the Protective Security Council.
SOURCES:
“Red Skies and Blue Oceans,” CFO Magazine, April, 2016
http://ww2.cfo.com/the-economy/2016/04/red-skies-and-blue-oceans-executive-confidence/
“The Next Debt Crisis,” Bloomberg Businessweek, June 13-16, 2016, pp 22-24
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