Is it really going to be a case of ‘all change’ in 2015? With factors like the collapsing oil price, new working templates like public/private partnerships and almost-here technologies such as the ‘internet of things’, the average SME is faced with a dramatic roller-coaster of possibilities. What’s more, how do these new horizons shift the ways in which SMEs can work with traditional financial partners, or alter the banks’ perception of what’s appropriate and when? Senior Editor Paul Godfrey investigates…
Immediately before the financial crisis, the world was an inherently simpler place. It was underpinned by the two key beliefs that both worked to the benefit of the mid-size SME. Firstly, we all knew categorically, of course, that you could buffer investment risk via a good-quality hedge fund and a suitably diversified portfolio; and secondly, that an oil price of around US$95 a barrel was a given – with this latter factor massively contributing to the growth of many middle eastern economies. Now, however, we know – ahem – that the ‘best’ hedge funds were often based on flawed algorithms and that with the oil price effectively halved, only about three of the mighty fossil fuel economies of the GCC can be profitable at all. What’s more, where once we knew categorically that the USA was a slowly declining economy, it’s re-emerged to true world dominance and can again set daunting benchmarks that are in part led by extraordinary generation of techno-SMEs (surely the best in the world?).
What does the still-tumbling oil price presage for SMEs in the region here in 2015? A series of Gulf News articles, for example, have made the point that SMEs in Dubai are likely to be worse hit than those in Abu Dhabi, not because the emirate has less oil production, but because of the importance of tourists and investors (especially from oil producing countries) to Dubai. The logic is simple: as their own economies feel the pinch from unprofitable oil production, they have less money to come here. Note, though, that in terms of home-grown economic phenomena, capital expenditure by fossil fuel businesses in Abu Dhabi may slow, affecting the SME base that is inevitably depending on it further down the food chain. Plus, low oil prices are impacting the budgets of GCC countries, which in turn will tend to put the brakes on imports from Dubai – not to mention tourist levels as well. Capital inflows have also tended to slow, commensurate with the slight fall in the property market.
Notwithstanding, the fact remains that the UAE – along with KSA and Kuwait – remains one of only three producers in the region able to be profitable at current oil price levels (Kuwait is especially strong in this respect, achieving profitability from only US$37 per barrel) and this bodes well for a reasonably buoyant background climate.
The Infrastructure advantage
Just as the celebrated Expo 2020 win put the spotlight on the forthcoming raft of infrastructure development – classic good news for SMEs – there is also no doubt that Infrastructure spending in Dubai is accelerating. The Contracting business has received a large boost thanks largely to property projects being announced by government-owned entities. What’s more, most pundits estimate that it’s here in Qs 1 and 2 that the impact on the economy will now start to be felt strongly. Terrific news for SMEs, since this is a sector supported by a massive SME substrata.
The bigger news, though, is that more and more initiatives are starting to come to fruition as part of the Abu Dhabi Economic Vision 2030. This is the most comprehensive and far-reaching economic plan in the GCC – and it’s rich with opportunities for SMEs. But the question remains as to whether businesses know how to benefit and whether they truly understand the style and scale of opportunities on offer.
The Abu Dhabi Economic Vision 2030 emphasizes the role of public/private sector liaison, with special opportunities in areas such as infrastructure, financial services support, IT and professional services. It also celebrates the role of the entrepreneur, seeing the SME as a critical component in the evolving mix and the catalyst towards a self-funding development model. More and more of this activity is progressively set to come to light, especially given that a number of 2030-themed conferences and events are planned in the months to come, all aiming celebrate the infrastructure message and what it entails.
The ‘work smarter’ challenge
According to the research firm Gartner, there will be 26 billion devices on the Internet of Things (IoT) by 2020 – and the first critical quantum leap begins in 2015 with the increasing readiness of technology in sectors such as construction, manufacturing and warehousing. Here, completely new ‘intelligent’ interaction between the key machine, stock and delivery components (note: not between the operators of these items but between the working elements themselves) can make dramatic changes in levels of profitability and productivity. Will your business be up to speed with the changes? Don’t think for a second that this is technology reserved for larger Enterprise-level firms and MNCs – a vast layer of SMEs service the key sectors where IoT is set to be biggest. Example: you agree with an insurer that the ladders in your storage facility can be fitted with IoT data sensors, monitoring safety, load tolerances and usage. Result? A 35 per cent saving in insurance premiums.
Adapting to – and working wisely with – IoT technology is a ‘must do’ fundamental for SMEs in 2015. So is the need to come to terms with increasingly flexible patterns of working: with factors such as collaborative mobile software and Cloud computing, there really are no limitations on where any member of staff needs to be based. Yet this approach will only work if you are able to leverage full mobility by having a range of devices at the disposal of staff and replicable data across the majority of screens; and remember, there are really only two benefits from this style of flexible working –
- Firstly, it can be a great tool for staff motivation, saving personnel who live a long way from the office the daily chore of a long commute – BUT if you don’t have data replicability or work with Cloud technology, you’re inviting a potential nightmare of logistical co-ordination.
- If staff don’t require regular desk space, you could actually have a smaller office, with all the cost savings that implies. But are you really going to be able to free up enough staff from their commute to make that much difference to the physical space you need?
Changing technology requires SMEs to consider seriously whether here, in 2015, the business has reached a ‘tipping point’: will SME owners now seize the chance to alter the basic deployment of human resources or continue to buy-in to new technology in a way that simply augments the existing working structures?
PPPs – will you win the ‘beauty parade’?
Public Private Partnerships (PPPs) figure largely in the World Economic Forum’s Global Competitiveness Report 2014-2015, where they are identified as important agents of change both for SMEs and for society at large. Indeed, they will play their part locally in 2015 as we see more elements of initiatives such as Expo 2020 and the Abu Dhabi Economic Vision 2030 click into place. Yet the experience of nations such as Qatar and Bahrain – both relatively advanced in the PPP sphere – suggests that if SMEs are to benefit, first they have to ‘win the beauty parade’. Either they will have to be good enough to win competitive tenders, or will need a strong track record that positions them as the natural provider of choice. This requires the SME to be exceptionally professional in areas such as –
- Risk Management – the critical factor. No major public entity will enter into partnership with a business whose working practices endanger lives or reputation
- Corporate Governance – while the UAE Companies Act 2013 does not require SMEs to be responsible for a Governance agenda, the presence of strong in-house quality controls and a code of pristine ethical conduct are fundamentals in securing PPP link-ups.
- Audited Accounts – a business without audited accounts simply isn’t taking itself and its responsibilities and opportunities seriously. So how can a potential public sector partner?
A strong presentation across these key ‘hotspots’ will be the starting point for any serious contenders for the prizes of PPP.
The banking view
What are the views of a major financial entity – seen as strongly aligned with the SME sector – about the implications that these trends and constraints have for SMEs in the local market? SME Advisor spoke to a leading practitioner at National Bank of Abu Dhabi, who commented: “One of the factors often overlooked about the impact of a low oil price is that it discourages overseas expansion into those nations feeling the impact of falling revenues. Their markets are not well-placed to benefit or entertain the aspirations of new entrants. This means an emphasis on a more local style of growth, building the strength of the branch network in the home market. So it is likely that mature and successful SMEs with a good trading history will be looking for secondary or tertiary finance to fuel that development. Also, while the market is performing well, it’s a good time to diversify the business, spreading exposure and future risk and capitalising on fresh local opportunities.
“At the same time, focus on building a solid structure for the business, by introducing a realistic Succession plan and bringing in financial incentives and ‘key man’ protection packages – all of which will serve you in good stead when the time is right for broader expansion. If you already have overseas interests, now’s the time to prune costs, making them work hard and really crank up profitability. So, for example, closely assess the FX chain and, if your level of transaction is big enough, look for some effective solutions to hedge your risk.”
Rushika Bhatia Editor
Rushika Bhatia is one of the region’s leading commentators on business and current affairs issues. She is the Editor of SME Advisor magazine - the flagship title of CPI Business. She is passionate about infographics – with special emphasis on data, research and statistics. Rushika has a Bachelor’s Degree from Indiana University, USA and is also CIMA qualified.