CFOs unnerved by prospect of Brexit and minority government

20 July 2017 Consultancy.uk

Confidence among UK CFOs has tumbled, largely as a result of the latest election result. Companies are increasingly worried about the effect of Brexit and weak demand will have on their operations, while many are opting to reduce investment and begin cost cutting.

The 40th quarterly Deloitte CFO Survey saw Chief Financial Officers and Group Finance Directors of major companies in the UK mark out the “omnishambles” of the nation’s snap general election as delivering a sharp drop in optimism, following a period of growing positivity among business leaders about the effects of Brexit on the long-term prospects of the UK economy. Now, a sudden sense of the reality of what Brexit could mean for the UK with an unpopular government with a questionable mandate at the negotiating table, appears to be rattling the confidence of CFOs.

The survey saw 122 CFOs participate, including the CFOs of 22 FTSE 100 and 54 FTSE 250 companies, between the 12th and 27th June. The remainder of respondents included CFOs of other UK-listed companies, large private companies and UK subsidiaries of major companies listed overseas. The combined market value of the 92 UK-listed companies surveyed is £509 billion, or approximately 20% of the UK quoted equity market.

While the lack of an overall majority for the Conservative government boosts the likelihood of a closer long-term working relationship between the UK and the EU, the election result, and the increased pressure placed on the UK to provide a coherent strategy going into the negotiations – has prompted key business in the UK to sign a letter, urging the government to consider a softer option for Brexit – citing immigration and market access as key areas of importance to business.

Long-term impact of Brexit

Since the end of Q2 in 2016, CFOs were becoming increasingly optimistic that the result of Brexit might not be as bad as predicted, with 19% saying in Q1 2017, that they would be better off if the UK leaves the EU. This has, however, changed significantly in the most recent quarter, with a drop of 11% noted to the ‘better off‘ category, to 8%, while 72% said that they would be worse off, up from 60% in the previous quarter.

The drop in confidence about the UK’s business community to thrive post-Brexit is further reflected in the overall business optimism of respondents, which has fallen sharply since Q1 2017. The fall, of around 35 percentage points, from a +15% net result among CFOs to a net -22% result, is still well above the most negative result in recent reporting, which immediately followed the Brexit referendum. However, the fact that those rates are higher than that nose-diving -70% net confidence vote, will give little comfort to those charged with implemented the UK’s divorce from the EU.

Business optimism

Remarking on the sharp decrease in confidence, Ian Stewart, Chief Economist at Deloitte, said, “This latest dip likely reflects the surprise outcome of the election, so a drop in confidence is understandable. CFOs are also more focused on the prospect of slower UK growth. What is striking from this survey is that concerns around geopolitics and weak global growth, which dominated CFOs’ concerns in 2015 and 2016, have eased significantly.

He went on to say, “This survey ran at a point of high political uncertainty and it is worth noting that sentiment and risk appetite are still well above the levels seen last summer. Favourable financial conditions and an improving global backdrop are also helping to support business at a time of rising domestic uncertainties."

The decrease in confidence translates into a mixed-bag result for four key industry indicators, presided, in part, over by CFOs – with the result largely negative.

Effect of Brexit on spending and hiring decisions

In terms of M&A, which has already been on hold in the UK in recent quarters, around 17% say activity in the sector will decrease in the coming period. Capital expenditure too is seeing a likelihood of decreased activity, as cited by 33% of respondents, up from 26% in the previous quarter. Hiring activity is found to have been negatively affected by negotiations so far and the election result, falling to 38% of respondents. Discretionary spending sentiment is up slightly, from 50% to 49% saying that investment is set to decrease.

The research suggests that Brexit looms large in perceived risks to business, with its effects averaging 60 on a weighted scale between 0 (no risk) and 100 (existential risk), up from 55 points in the previous quarter. Weak demand in the UK too is increasingly seen as a risk, up from 51 points in the previous quarter to 57 points on the same scale. Linked to this, the prospect of higher interest rates and a general tightening of monetary conditions in the UK and US, continues to hover at 50 points, as stagnating wages in particular threaten to cause consumers to further scale back on their spending, causing demand to fall.

Risk to business posed by the factors

Some areas have seen general improvement however, such as the risks associated with a ‘bubble in housing and/or other real and financial assets and the risk of higher inflation’, while risks associated with protectionism in the US on the UK have abated somewhat, from 47 points to 45. The biggest decrease was noted in ‘weakness and/or volatility in emerging markets and rising geopolitical risks in the Middle East/Ukraine’, which fell from 35 points to 32 points.

Sensitive to risk

In the face of risks from Brexit, among other items on the plates of CFOs, the respondents to the survey opted to increase cost reduction, from 42% last quarter to 46% this quarter; introduce new products/services or expanding into new markets, from 41% to 42%; and increase cash flow, up from 34% to 36%.

A number of areas of large increase were noted however, including inorganic growth, up from 19% of respondents to 25%; and reducing leverage levels, from 9% to 14%. Increase capital expenditure, raising dividends or share buyouts and disposing of assets, are considerably reduced in importance.

Coporate priorities inthe next 12 months

Remarking on the result of the latest survey, David Sproul, Chief Executive of Deloitte North West Europe, said, “Business sentiment is highly sensitive to political developments and surprises. The outcome of the General Election, like the result of last June’s EU referendum, was hugely unexpected and has knocked optimism. A period without such large shocks, and with the negotiations with the EU gaining direction and momentum, should help bolster business sentiment."

He added, “Nonetheless, this underscores the importance of the Brexit negotiations producing a favourable environment for UK businesses, with access to the skills and markets they need for their future success. Business and government must work closely together to achieve this.”

Profile

More news on

×

Project management industry adds £156 billion of value to UK economy

15 April 2019 Consultancy.uk

Project management has grown into one of UK’s largest areas of business over the past decade, amid the increasing ‘projectification’ of work. With the gross value added to the UK economy by project management estimated to be £156 billion, this trend is likely to continue in the coming era.

Despite the huge success of project management in recent years, until now there has been relatively little data available on the size of project activity. As a result, there has been a great deal of debate on things like the number of people involved in the sector, the number of projects, and how it contributes to economic output. Due to this need for clarity, APM, the UK’s professional body for project management (the largest organisation of its kind in Europe, with 28,000 individual members) commissioned economists from PwC to shed light on the industry's economic impact.

The research concluded that the profession makes a more significant contribution to the UK economy than the financial services sector. 2.13 million full-time equivalent workers (FTEs) were employed in the UK project management sector, generating £156.5 billion of annual gross value added (GVA). In comparison, the financial services sector contributes £115 billion, and the construction industry adds £113 billion.

Gross value added to UK economy

Commenting on the discovery, Debbie Dore, Chief Executive of APM said, “Project management runs as a ‘golden thread’ through businesses, helping to develop new services, driving strategic change and sector-wide reform.”

Who is a ‘project manager’?

To reach these estimates, PwC’s researchers used detailed models to map out the value of project management activity. They ultimately defined relevant ‘projects’ as “temporary, non-routine endeavours or rolling programmes of change designed to produce a distinct product, service or end result… [with] a defined beginning and end, a specific scope, a ring-fenced budget, [and] an identified and potentially dedicated team with a project manager in charge.”

Building on this, they then went on to define what the act of project management actually is. The job consists of applying “processes, methods, knowledge, skills and experience” so that clients can meet their objectives and bring about planned outputs or outcomes. The analysts added that this includes “initiating the project, planning, executing, controlling, quality assuring and closing the work of an identified and dedicated team according to a specified budget and timeframe.”

Importantly, it should be noted that the profession is not exclusive to only roles explicitly labelled as ‘project manager’, but to any role where specialist project management skills are used. This means that across sectors these roles can have very different titles, from the self-explanatory contract managers of procurement, or the campaign managers of advertising, to the likes of festival co-ordinators in the events sector, and many more. The roles in question also span all strategic levels of the profession, from strategic to tactical and operational positions.

Gross value added of project management profession

From a sector perspective, the financial and professional services, construction and healthcare industries make up almost two-thirds of the total project management GVA. At the same time, understandably, the UK Government has a huge project portfolio, which further drives the size of the GVA the sector contributes, thanks to megaprojects like HS2 and Crossrail.

Commenting on this to the report’s authors, Oliver Dowden, Minister for Implementation remarked, “Project delivery is at the heart of all Government activity, whether it’s building roads and rail, strengthening our armed forces, modernising IT or transforming the way government provides public services to citizens. Getting these projects right is essential if we are to ensure that we build a country that works for everyone.”

Throughout 2019, 26 major government projects were delivered, representing a fifth of the overall Government Major Projects Portfolio (GMPP) of 133 projects. According to the IPA annual report 2017-18, these represented a whole life cost of £423 billion. In addition to this were a plethora of smaller scale projects, and those in early development.

Elsewhere, with the increasing digitalisation of the economy impacting entities of all shapes and sizes, IT and digital transformations tended to dominate the projects of the UK scene alongside new product development projects, with a respective 55% and 46% of organisations in the research sample having undertaken these types of project in the past year. At the same time, this varied across sectors, and unsurprisingly, in the construction and local government sectors, fixed capital projects were the main project type undertaken.

Outlook

Looking to the future, 40% of business leaders expect project management will grow in the coming years due to the increased use of projects – or the ‘projectification’ of the UK. In a trend that has been witnessed elsewhere, organisations have to rapidly and continuously change in the digital age of business, driving the need for project management.

Outlook for project management services

An increased focus on value over cost – especially in the construction sector – and a forecast increase in the number of international projects are predicted to be key drivers of growth, according to the expert contributors. However, this will not happen in the absence of challenges; more than half of organisations expressed concern over the perceived impact of political uncertainty in the UK. Skills and capability shortages were also cited as a potential barrier by a third of organisations.

With regard to budgets, meanwhile, a third of those surveyed by PwC said they expect the size of project budgets will increase in the coming three years, while 40% anticipate a growth in project size. As the profession continues to mature, and as the recognition of the importance of good project management grows, it is expected that a greater proportion of project work will gain more distinct attribution to the profession itself, giving more recognition and appreciation to the role of the project manager.

Speaking on the findings of the study, Sandie Grimshaw, a Partner at PwC, concluded, “The project management profession is relatively new compared to some other professions, such as lawyers, teachers and doctors. However, as project management is a core competence vital to organisations in the UK, the profession is critical and will continue to grow in stature.”