regus business confidence index issue 6

Walking the Tightrope

April 2012

Regus Business Confidence Index Issue 6

Regus Business Confidence Index | Walking the Tightrope | Issue 6 | April 2012 |

Management summary

As business confidence stabilises, companies are looking for additional ways of containing and reducing overheads while also driving growth.

The latest Regus Business Confidence Index, based on over 16,000 interviews across the world, shows business confidence levels stabilising, after experiencing a significant fall in the previous edition (September 2011).

Surprisingly, confidence has increased more in counties that were initially hit hardest by the downturn, suggesting that reform and/or economic stimulus measures may be having a beneficial effect. Globally, the proportion of companies reporting revenue growth remains unchanged on six months ago while a slight squeeze on profits is revealed.

Mindful of the need to contain costs in the quest for sustainable growth, companies are looking for ways of capping overheads without reducing their competitive advantage. This latest edition of the Regus Business Confidence Index reveals that ‘lack of access to capital”, ‘inflexible office overheads’ and ‘high/inflexible distribution costs” have contributed most to corporate distress over the last few years.

In order to reduce costs without damaging growth prospects, companies worldwide are prioritising ‘shortening supply chains’, ‘reducing fixed office costs with more flexible arrangements’ and ‘increasing use of cloud IT applications’ as their key initiatives.


Key findings & statistics

• The latest Regus Business Confidence Index, which incorporates both forward looking statements and actual performance factors, reveals that global optimism is stabilising – down only 1 point to 113 since autumn 2011. This signals that the marked decline in confidence (-11 points) reported between March and September 2011 has arrested and gives grounds for hope in a return to the confidence growth trend recorded between April 2010 and April 2012.

• This new research from Regus shows that revenue and profit growth remain largely stable since September 2011 with no variation in companies reporting revenue growth from September 2011 to March 2012 (51%) and 40% reporting profit growth compared to 42% six months earlier.

• 75% of businesses expect their revenues to rise in the next twelve months.

• Respondents identified key factors that contributed to corporate distress during the slowdown as:

• lack of access to cost effective capital (47%)• paying for unnecessary fixed office space (45%)• and inflexible margins paid to distributors or resellers and

introducers (44%)

• In order to achieve cost savings without damaging growth prospects companies identified key cost-cutting initiatives such as:

• a shorter supply chain (40%)• fixed office space reduction through more flexible options (39%)• and more ‘cloud’ IT applications (39%)

• These findings highlight that businesses are emulating the efforts of global governments to identify areas for belt-buckling that will not affect growth and are particularly keen to increase flexibility within their operations.

• Top initiatives to provide growth sustainability and stability were identified as:

• a wider distribution of customers (45%)• and more flexible working conditions for staff (37%)


Confidence and business size correlation

• The research found that large businesses are more optimistic than their smaller counterparts with a Business Confidence Index rating of 124 compared to only 107 for small businesses.

• A greater proportion of large businesses identified permanent staff redundancies as one of the main reasons for distress in the economic slowdown (47%) than small businesses (41%).

• More small businesses (40%) than large businesses (34%) identify greater use of pay-as-you-go business services as key for cost saving highlighting a strong propensity to opt for more flexible operations.


Introduction

At the start of 2012, the world economic outlook remains uncertain as the Eurozone crisis continues to affect global markets. Consumer confidence in India and China remains high according to Nielsen1 although emerging economies are expected to be affected by slower internal demand during 2012.2 In order to provide a backdrop for this latest edition of the Regus Business Confidence Index, it is necessary to paint a picture of current financial and economic indicators around the world, which show the measures being taken by government and central banks to support economic growth in their country or region. Seen in the light of these supportive measures, readers may choose to conclude that the stabilisation of business confidence revealed in this report is evidence of their success.

The IMF confirms this outlook predicting that the Eurozone economy will enter a mild recession in 2012 due to the rise in sovereign yields, the effects of bank deleveraging, and the impact of further fiscal consolidation. In particular, Eurozone funding contracted to such an extent that the European Central Bank (ECB) offered a three-year Long-Term Refinancing Operation (LTRO) lending €529.5 billion ($712.81 billion) to 800 lenders in March 2012 in addition to the €489.2 billion dispensed in late December 2011 to 523 banks.3 In the UK alone in 2011, the Office of National Statistics reports that businesses spent the lowest amount since 1993 in acquiring other businesses indicating that lack of access to finance still weighs heavily on their prospects.4

In the USA, however, the IMF reports an unexpectedly positive trend in business capital investment and a strengthening of consumption as consumers reduced their savings rates. The National Federation of Independent Business also predicts a possible increase in domestic demand as businesses plan to rebuild stock after fully 56 months of inventory liquidation.5 In spite of this increasingly rosy picture, the IMF shows concern about any decrease in stimulus spending.6

1 Nielsen, Consumer confidence, concerns and spending intentions around the world, Q4 20112 The IMF, World Economic Outlook Update, 24th January 20123 The Wall Street Journal, ECB gives banks a big dollop of cash, 1st March 20124 The Guardian, UKplc shuns domestic acquisitions as business confidence falls, 6th March 20125 Reuters, Small business confidence at year high in February, 13th March 20126 The IMF, World Economic Outlook Update, 24th January 2012

Consumer confidence in India and China remains high


Introduction

In emerging BRIC economies growth has also slowed slightly and in China in particular higher interest rates and contracted private sector credit have affected housing investment and foreign trade. Further dampening of foreign trade activity will be caused by weak world demand. As a result the OECD predicts a muted real GDP growth for China in 2012.7 Similarly in India volatility in global markets and particularly disquiet in Europe reduced inflow of foreign capital in the past year.8 On the other hand in Brazil, although growth has slowed down, natural oil and gas reserves, plus increasing domestic demand, place the country in a position to potentially overtake the UK as the world’s sixth largest economy.9 The Brazilian economy, now reportedly worth $2.5tn, is reported by the Instituto Brasileiro de Geografia de Estatistica to have grown in the fourth quarter last year by 0.3% on the previous quarter.10

In the UK on the other hand, where unemployment rose by 28,000 to 2.67 million in the three months to January 2012,11 the Office for Budgetary Responsibility (OBR) predicts a further rise in unemployment levels.12 A joint report by the IMF and the OECD reveals that the UK is currently one of the weakest economies in the G20, although a ray of hope was cast by approval in Brussels of the National Loan Guarantee Scheme; a £20 billion programme aimed at increasing lending to small businesses.13 It is felt that the Eurozone is heavily affecting the UK’s economic prospects although within Europe prospects are mixed. On the one hand French statistical agency Insee reports that in the last quarter 2011 the French economy grew 0.2% (a contraction had been predicted),14 while Germany, so far representing a bullish exception in Europe, actually experienced a decrease in export levels and slower domestic consumption.15

7 OECD, China Economic forecast, November 20118 Business Today, Euro Crisis to keep Indian markets volatile: Economic survey, 15th March 20129 BBC News, Brazil ‘Overtakes UK’s economy’, 6th March 201210 Blottr, Brazil economy slows down and grows 2.7% in 2011, 6th March 201111 BBC News, UK unemployment rises by 28,000 and reaches 2.67m, ONS reports, 14th March 201212 The Guardian, Budget 2012: the OBR predictions for the UK economy, 21st March 201213 Daily Mail, Britain is among the worst performing economies in G20, says grim report, 15th March 201214 The China Post, France’s economy grew 1.7 percent in ’11, 16th February 201215 The Irish Times, Sagging exports hit German economy, 24th February 2012

Further dampening of foreign trade activity will be caused by weak world demand


Regus Business Confidence Index

As governments in developed economies are forced to urgently curb their debt through fiscal policies and cost cutting measures, and emerging economies struggle to maintain growth momentum and formulate significant monetary policies in an uncertain economic climate, global business is trying to make its suggestions and requirements for future growth heard by policy makers. Although revenue growth at global level remains the same at 51% in March 2012 compared to six months ago, profits have felt a slight squeeze. Nevertheless, fully 75% of businesses expect revenue growth in the next six months and are clear on their preferred growth-saving cost reduction measures.

In order to provide business leaders and companies with a up-to-the-minute barometer of their peers’ confidence and outlook for the coming year the Regus Business Confidence Index Report analysed the opinions of over 16,000 business managers and business owners from 86 countries. In addition to enquiring about revenues and profits over the past year, and about their revenue expectations for the next 12 months, the report also analysed their views on factors that had caused particular corporate distress during the downturn, stability creating policies for future growth and cost saving measures that do not hinder company growth.

16 The Wall Street Journal, The dreary Dutch economy in 2012, 23rd February 2012


Growth expectations

As governments try to provide long-term solutions to Eurozone instability, it seems that global business confidence is finally stabilizing with the proportion of companies reporting revenue and profit growth largely similar to that reported six months ago.

The majority of major world economies report stable or unaltered revenue growth with Mexico, the UK and the USA reporting the greatest positive variation. In spite of this upturn, countries where the largest proportion of companies report revenue growth remain Germany, and emerging economies Brazil, India and China. Canada where companies reporting revenue growth remain stable may expect significant improvement of conditions in the future as Canadian commercial lending reportedly increased for the fifth time in the last quarter 2011 and reached its highest level since 2009.16

16 The Wall Street Journal, The dreary Dutch economy in 2012, 23rd February 2012

0% 10%

April 2012 September 2011

20% 30% 40% 50% 60% 70% 80%

Japan

Netherlands

UK

S. Africa

Australia

USA

France

Mexico

Global Average

Canada

Belgium

Germany

China

India

Brazil

Firms reporting revenue growth, September 2011 vs March 2012


Growth expectations

Companies reporting profit growth have decreased slightly since September 2011 with a near stall in China, South Africa and Belgium and a decline in Brazil. This contrasts sharply with the positive portrait revealed by Mexico where the largest increase in companies reporting both profit and revenue growth is found. The UK and the USA confirm that they have ground for an increase in confidence with more companies having increased their profits in the past six months. Japan, Germany and the Netherlands report a double digit drop. The Dutch economy is in fact expected by the European commission to contract 0.9% in 2012 mainly due to high household debt.17

17 Reuters, Canadian business borrowing heats up in Q4- Pay Net, 15th March 2012

0% 10% 20% 30% 40% 50% 60% 70%

Japan

Netherlands

France

UK

Mexico

Belgium

S. Africa

Australia

USA

Canada

Global Average

Germany

China

Brazil

India

April 2012 September 2011

Firms reporting profit growth, September 2011 vs March 2012



Every six months the Regus Business Confidence Index presents a view of global Business Optimism. This index is a measurement formed on an aggregate of positive statements combining year-to-date revenue and profit trends with views on the timing of the full momentum of economic recovery and aims to provide businesses across the globe with a barometer of business confidence and expected growth. The benchmark average for the index was set at 100 in the first publicly published edition of in September 2009.

In this iteration of the survey global business confidence has stopped plummeting and is stabilizing with a slower drop in business confidence, down just one point to 113 – contrasting with the massive -11 point variation between March and September 2011. While emerging economies such as Brazil, India and China remain the highest scorers Germany also confirms its place as third most confident nation in spite of a negative variation on September 2011. Japanese prospects have undergone the greatest drop in confidence while the UK and the USA, western economies most gravely hit by the downturn reveal a significant increase in optimism, an important vote of confidence for measures taken by policy makers in these countries to safeguard business growth while stemming deficit.



Business Confidence Index, March 2012

0 20 40 60 80 100 120 140 160

Japan

Netherlands

UK

France

Belgium

USA

Mexico

Canada

Global Average

Australia

S, Africa

China

Germany

India

Brazil

September 2011 March 2012 Variation

Global Average 114 113 -1

UK 87 91 4

USA 90 105 15

France 110 103 -7

Germany 139 132 -7

India 145 143 -2

China 128 130 2

Belgium 112 103 -9

Netherlands 99 90 -9

Brazil 146 148 2

S. Africa 115 117 2

Japan 96 82 -14

Australia 114 114 0

Canada 114 113 -1

Mexico 102 109 7


Growth-driven cost savings

Top three ways to save cost without damaging growth Global average

Shorter supply chain 40%

Reducing fixed workspace 39%

More cloud IT applications 39%

Global markets continue to present only a fragile balance and businesses globally, although keen to pursue new growth paths are hedging their bets by continuing to look for areas in which to make savings but only if these do not affect growth.

Globally the majority of businesses identify shortening the supply chain (40%), reducing fixed office space (39%) and using more IT cloud applications (39%) as the key cost saving areas that will not damage growth in the future. Highlighting that greater flexibility is felt to be an ideal way of making economies without hampering development an increased use of pay-as-you-go business services (38%) was also identified by a large number of respondents.

On a country by country basis, a shorter supply chain was identified as a key cost saving area by more French (49%), Chinese (47%)and UK (45%) companies than average with only just over a quarter (26%) of Japanese companies highlighting this as an effective measure. Japanese companies are, however, more likely than average to identify IT cloud applications as ideal cost reducing initiatives (43%). Businesses in the Netherlands (49%) and South Africa (45%) are particularly concerned with the reduction of fixed workspace costs, a concern shared by only a quarter (25%) of Chinese companies.



Top three saving areas that will not undermine growth

0.0

12.5

25.0

37.5

50%

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Shorter supply chain Reducing fixed workspace More cloud IT applications

Respondents were also asked to identify what they felt had been the main factors contributing to corporate distress during the downturn. In particular, access to cost effective capital was identified by almost half of respondents (47%). Fully 58% of companies in the USA and India report that access to capital was a major difficulty in the downturn as do 56% of Chinese businesses and 55% of UK respondents. Only in Germany (28%) less than a third of respondents identified difficult lending conditions as a hindrance.

In the UK in particular, the Federation of Small Businesses (FSB) has been active voicing concerns over lack of lending to smaller firms. An FSB survey released in February 2012 reveals that in the UK between 2007 and 2010 there was a 24% fall in successful small business loan applications compared with only 9% in Germany and calls for public investor accounts and asset-backed lending to be brought into the £1bn Business Finance Partnership. As small businesses account for around 70% of employment in the USA and China it is no wonder that they are to be seen as a major engine of economic growth.18 Fortunately, in the USA the Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of financing to U.S. small businesses, reports that lending to small firms grew 18 per cent in January year on year. In China in February 2012 the People’s Bank of China said it would cut its high reserve requirement by 0.5% to help increase lending.19

18 Empowering SMEs Worldwide: The Alibaba Story, Brian A. Wong, May 2008; http://www.asiapacificforum.com/sub/sub_news/ns_20100318_smes.html19 CNN, China eases bank restriction to boost growth, 20th February 2012



Main reasons for corporate distress during world economic slowdown

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Access to cost effective capital Paying for unnecessary office space Inflexible margins paid to distributors/resellers/introducers

Other reasons for corporate distress were the cost of unnecessary office space, a concern that is confirmed in identifying the reduction of fixed office space with an area for cost saving. In particular Indian, Canadian and Brazilian companies felt that being bound to unnecessary office space was detrimental to them during the downturn. By contrast Belgian and French companies were the less affected by unnecessary workspace costs and more concerned about inflexible margins paid to distributors or resellers and introducers in the economic slowdown than average.

Businesses were also asked to identify the initiatives that they believed would be most likely to contribute to economic stability in the future creating a solid ground for growth. In particular, businesses identified a wider distribution of customers as the best initiative to provide stability. This complements previous reports that the majority of firms globally are looking to expand abroad in the next few years.20 Predictably emerging economies are more likely to venture abroad in their dynamic quest for growth, while businesses in the Netherlands, Canada and France appear to be more confident in their existing markets.

20 Regus, The Export Imperative, January 2012



Initiatives most likely to contribute to stable and sustainable growth

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Wider distribution of customers More flexible working conditions for staff Flexible workspace

Felxibility also featured prominently both in terms of conditions for staff and in terms of location, further confirming that during the slowdown global business learnt to shy away from lengthy fixed arrangements and is opting to remain nimble to achieve growth. Brazilian companies are particularly keen to opt for flexible workspace, followed by companies in the Netherlands and Germany while flexibility for employees is particularly sought out by companies in France and Japan.


Optimism and business size correlation

0 20 40 60 80 100 120 140

Small Business

Medium Business

Large Business

September 2011 March 2012

Business confidence by company size

The Business Confidence Index confirms a difference between the confidence levels of small firms and large businesses. Globally large businesses are 17 points more confident than their smaller counterparts confirming the trend uncovered six months ago.

Some interesting differences arise between small and large businesses’ best cost saving strategies with large firms clearly opting for shortening the supply chain, reducing fixed office space and an increasing use of IT cloud applications. Smaller businesses instead put an increased use of pay-as-you-go business services at the top of their cost saving measures followed by another flexibility enhancing initiative such as reducing fixed workspace. A positive sign of the intentions to grow expressed by smaller firms is the preference for economising by increasing sales through third parties.



Main reasons for distress during world economic slowdown

Small business

Medium business

Large business

Inflexible margins paid to distributors/ resellers/introducers

43% 43% 47%

Access to cost effective capital 49% 40% 44%

Paying for unnecessary office space 47% 39% 43%

Making permanent staff redundant 41% 48% 47%

Top savings areas that will not undermine growth

Small business

Medium business

Large business

More use of pay-as-you-go business services

40% 34% 34%

Reducing fixed workspace 38% 34% 45%

More sales through third parties 38% 43% 32%

Shorter supply chain 37% 43% 51%

More cloud IT applications 37% 40% 44%

Small and large businesses also differ in their identification of the main causes of distress during the downturn with large businesses indicating that flexible margins due to resellers, distributors or introducers had weighed heavily on their firms, less so for small companies which instead found that access to capital was very difficult. Difficulties accessing capital is rated as the third greatest cause for duress by large businesses that rate making permanent staff redundant as second greatest cause for distress in the slowdown. Small businesses on the other hand report that paying for unnecessary office space was the second greatest difficulty felt during the downturn.



Initiatives most likely to contribute to stable and sustainable growth

Small business

Medium business

Large business

Wider distribution of customers 45% 48% 46%

More flexible working conditions for staff 34% 42% 43%

Flexible workspace 33% 32% 33%

More remote working 32% 32% 33%

Reducing non-core activity/functions performed in-house

23% 30% 36%

A higher proportion of part-time and freelance staff

32% 21% 18%

Small and large businesses largely agree on the initiatives most likely to contribute to stability for future growth differing significantly only on the increased use of part-time and freelance staff which small firms rate highly and large firms do not. Small firms likely make greater use of part time and freelance staff to respond to varying growth and retrenchment requirements which in larger firms, already made leaner by staff cuts during the downturn, are not necessary.


Country & geographic highlights

• Surprisingly business confidence has increased more in counties that were initially hit hardest by the downturn such as the USA (+15) and the UK (+4) indicating that the business community feels optimistic about reform measures taken.

• Confidence continues to grow, although more conservatively in economies that represent major global growth engines such as China (+2), Brazil (+2) and Mexico (+7).

• Germany reports a 7 point contraction in its business confidence index value, perhaps due to uncertainty in the Euro area or a slight slowdown in China, although at 132 points it remains the third most confident nation.

• Brazil (148) and India (143) top the business confidence chart confirming their role as key drivers of the global economy. At the other extreme we find Japan which at 82 points appears to still be suffering from the March 2011 disasters.

• The majority of companies regard shortening the supply chain as vital to reduce costs and this is particularly true in France (49%) and China (47%) where almost half of companies agree.

• A wider distribution of customers is seen as a key measure to help achieve growth by Germany (64%) and China (73%) both countries having pursued this measure successfully in the past. By contrast only 25% of companies in the Netherlands agree highlighting perhaps an intention to retrench into specialist and local markets.

• Lack of access to cost effective capital was identified as the main reason for corporate distress during the slowdown by fully 58% of firms in the USA and India and 56% in China highlighting that if these major economies are to be expected to continue generating growth access to capital must be improved.

• Paying for unnecessary office space during the downturn was regarded as particularly detrimental in many growing economies such as India (61%) and Brazil (50%) as well as developed economies like Canada (51%).


Country & geographic highlights

CountryRevenue

riseProfits

riseShorter

supply chainReduction of fixed

office spaceIncrease in IT

cloud applications

UK 43% 36% 45% 41% 37%

USA 48% 40% 35% 42% 44%

France 49% 34% 49% 41% 36%

Germany 62% 51% 44% 32% 37%

China 67% 56% 47% 25% 33%

India 69% 58% 39% 40% 36%

Belgium 53% 38% 43% 44% 43%

Netherlands 39% 28% 41% 49% 43%

Brazil 71% 57% 33% 40% 44%

South Africa 43% 39% 40% 45% 35%

Japan 18% 13% 26% 29% 43%

Australia 46% 40% 39% 37% 43%

Canada 51% 40% 41% 40% 31%

Mexico 50% 37% 43% 39% 38%

On a country per country level a number of interesting variations occur. These are tabulated below for ease of viewing with particularly significant values highlighted in red.


Conclusion

After plummeting significantly between March and September 2011 on the back of stock market and Eurozone crises, business confidence seems to have arrested its fall and to be stabilising once more.

It would appear that business believes that it has experienced the larger part of economic slowdown and is now determined to proactively climb back to growth. Although consumer confidence is still low in the UK where high levels of unemployment have affected consumer outlook,21 it is rising in China, in Canada and the USA where outlook continues to improve in spite of rising gasoline prices.22

These are hopeful signs for businesses that the market is stabilising and laying more solid foundations for growth in the months to come. Perhaps the most positive indicator is that, surprisingly, business confidence has increased more in countries that were initially hit hardest by the downturn (such as the USA and the UK).

Businesses across the world want to grasp the growth possibilities of a recovering global economy, while also continuing to contain, or even reduce, costs. To do so, there is an evident interest in reaching a level of flexibility that best favours future growth with a particular emphasis on creating shorter supply chains and introducing more flexible ways of working. In particular, businesses report that inflexible property arrangements were a hindrance to them during the downturn while increased flexibility for staff and making less use of fixed office space will help provide the stability necessary to pursue future growth. With solutions readily available on the market for flexible workspace arrangements there is no doubt that the number of businesses benefiting from more nimble and scalable arrangements will increase in the coming years.

21 The Telegraph, Consumer confidence dented by job fears, 23rd February 201222 USA Today, Consumer confidence rises despite higher gas prices, 28th February 2012; China Daily, Chinese confidence rebounds, 12th March 2012


Regus is the world’s largest provider of flexible workplaces, with products and services ranging from fully equipped offices to professional meeting rooms, business lounges and the world’s largest network of video communication studios. Regus enables people to work their way, whether it’s from home, on the road or from an office.

Customers such as Google, GlaxoSmithKline, and Nokia join hundreds of thousands of growing small and medium businesses that benefit from outsourcing their office and workplace needs to Regus, allowing them to focus on their core activities.

Over 1,000,000 customers a day benefit from Regus facilities spread across a global footprint of 1,200 locations in 550 cities and 95 countries, which allow individuals and companies to work wherever, however and whenever they want to. Regus was founded in Brussels, Belgium in 1989, is headquartered in Luxembourg and listed on the London Stock Exchange. For more information please visit: www.regus.com

Methodology

Over 16,000 business respondents from the Regus global contacts database were interviewed during January 2012. The Regus global contacts database of over 1 million business-people worldwide is highly representative of senior managers and owners in business across the globe. Respondents were asked about their recent revenue and profit trends, along with their future views on a number of issues including the measures they regarded as most effective for companies to reduce costs without damaging growth. The survey was managed and administered by the independent organisation, MindMetre, www.mindmetre.com

About Regus

Whilst every effort has been taken to verify the accuracy of this information, Regus cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report.

regus business confidence index issue 6

Business

inflexible margins paid

wall street journal

initially hit hardest

unnecessary office space

dreary dutch economy

fixed office space

shorter supply chain

cost saving measures