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How to increase the return on your application investments

driving results with application management

This report examines major trends and challenges in application management and offers practical advice to help organisations increase the return on their application.

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Executive Summary

Like a well-trained pit crew, application management can help your business operate at peak performance – which in today’s hypercompetitive business world can be the difference between sipping champagne in the victory lane and crashing into the wall.

Unfortunately, some organisations invest so much time, money, and energy on application development that they do not have anything left for application management. Others mistakenly believe that by deploying a standard ERP package, their application issues will magically disappear. And in many cases, application management organisations that were well-suited to the challenges of the past have simply become obsolete.

While many organisations continue to view application management as a secondary technology function or “helpdesk”, a number of leading organisations have begun to recognise the broad potential of application management and are using it to help boost their business performance and results.

Deloitte has a global AMS practice, and based on our experience, effective application management revolves around eight specific elements:

  1. Strategy: Developing an application management strategy that aligns with the organisation’s overall business strategy
  2. Organisation: Designing an operating model and organisation structure – including external service providers – that fit the needs of the business while increasing application management efficiency and performance
  3. Financials: Using financial tools, such as business cases and chargebacks, to quantify the value that application management is creating and to make investment decisions based on hard data
  4. Talent: Overcoming the global talent shortage through new approaches to recruiting, development, retention, and skills management.
  5. Processes: Using structured process models and/or formal process certification to improve performance.
  6. Technology: Developing hardware and software tools to improve service delivery and reporting.
  7. Service delivery: Defining and measuring success through Service Level Agreements (SLAs) and Key Performance Indicators (KPIs) aligning performance measures and incentives across the entire value chain.
  8. Infrastructure: Planning, architecting, implementing and securing hardware, database and network infrastructure – including related managed services and disaster recovery/business continuity services.

These elements work in concert to define an organisation’s application management capabilities. However, each presents different challenges and elements to achievement of goals – as well as a dizzying array of options. For example, in structuring their application management organisation, organisations can choose from insourcing, outsourcing or a shared service model. Or, they can choose from a large number of hybrid approaches to produce something entirely new.

In the end, every organisation is different – and every application portfolio is different. One way to get started is to take a hard look at your capabilities in each of the eight areas listed above and then to design an application management strategy that fits the particular needs of your business.

Click here to download the full report

If you have any questions or would like to unpack the content presented in the report in more detail, please contact Glen Krynauw at Deloitte Technology at gkrynauw@deloitte.co.za.

Is there a future for manufacturing in South Africa?

Frontier Forum Blog Image

Written by: James Ueckermann

“The country is in a negative head space, a fractious environment of low trust between stakeholders” – Martyn Davies

Manufacturing in South Africa has been a hot topic in recent times and there is some uncertainty around the future thereof. Are we able to react to the warning signs and obstacles facing our economy? What does the future look like and how will South Africa recover?

At the Frontier Forum a respected group of individuals engaged in a discussion to address these questions in order to provide comfort on the topic. Martyn Davies, CEO of Frontier Advisory, states that South Africa is the only country that sticks to reindustrialisation, which is clearly a setback as we are not moving forward, but repeating the same mistakes.

The biggest debate between the panel of astute individuals was around labour and how this negatively impacted the state of South African economy.

Jonas Mosia, Coordinator for Industrial Policy from COSATU, mentioned that we have to fix the issues of procurement as there is no coordination behind it. He wants businesses to employ more unskilled labourers in order to minimize the unemployment rate, but protecting and creating low-skill, low-pay jobs will simply be economically irrelevant in ten years’ time.

Raymond Padayachee, Head of the Industry and Manufacturing Sector SA and Africa from Siemens, challenged this statement. He feels that SA is an attractive market, but the level of unskilled workers is not of much value to the economy as there is no progression in the industry and therefore creating escalating costs which, SA cannot afford at this stage. The future of manufacturing will be limited if we keep heading in this direction and further contributing to the pandemonium.

Jeff Nemeth, President and CEO from Ford Motor Company of South Africa, added that his company has the fastest line of productivity in Africa, but the short term trends in South Africa has lead to 17% inefficiency because of the strikes. He also feels that we have to find a way to drive local demand as the African Customer finds safety in multi-national brands and not supporting its local economy.

Deloitte professional services group added some hope as they foresee an exciting future ahead regarding new developments in the manufacturing sector.

“Future jobs in successful economies will be high-tech jobs, not low-tech. To this end, Deloitte is globally spending time working with leading universities, and the public and private sectors in various countries to understand and shape the future of manufacturing, and what this means for local economies such as South Africa. We have no option but to play in this space – the only question is how soon we do so,” said Mr Pillay.

Bronwyn Kilpatrick, Automotive Leader and Assurance Partner mentioned exciting developments in the automotive industry such as the ‘Uber App’ (which is an easy to use transport service and thereby introducing mobility), the Google Car (that drives on its own) and also covered was 3D-printing (the move towards additive manufacturing).

Deloitte Advanced Materials System Specialist, Jason McPherson spoke about the need to deliver systems versus materials in order to lead the race in value creation. What this means is that a new materials development process should start at addressing unmet wants and needs and then working backwards to determine what materials would be required to deliver a solution for these.

Deloitte Audit Partner and Forestry, Paper Pulp & Packaging Leader – Roy Campbell, told of interesting facts about the forestry sector and the impact of the iPad (as many are now reading the news on tablets). This however does not mean the end of paper in our time as most of the cellulose in trees is used in manufacturing these iPads and even in the clothes we wear and the food we eat.

Dr Martyn Davies concluded that for South African economy to re-industrialise we are going to have to diversify and differentiate ourselves by focusing on what we’re good at.

If you have any questions, feel free to contact Antoinette Shand (Manufacturing Marketing Lead – Deloitte) at ashand@deloitte.co.za

Integration technology flashback

integrationThe integration strategies over the past decade have leveraged centralized Enterprise Resource Planning (ERP) technologies, middleware standard and systems integration resources, to fulfill systems integration requirements. This was used to create a knitted business process solution after the evolution from mainframe systems to the client server environment.

It was an approach we saw widely being used to integrate ERP (off the shelf packaged applications), legacy applications and data. What this left behind were integrated Business solutions which required extensive integration monitoring.

This gave rise for the need of an Enterprise Architect to govern these integrated solutions after implementation. The run or support factor of these integration layers required monitoring and strong governance. This left certain considerations to be noted when looking at re-architecting these integration layers.

Today’s integration challenges

However simplified enterprise integration can be, these knitted solutions still have their own set of challenges.

It’s about monitoring

  1. Many of businesses today use EAI solutions for their day-to-day operation. Once these processes are set up, they are expected to be up and running 24x7x365. Any downtime or mis-routing can cause the business to virtually stop. This requires much integration monitoring.

It’s about niche skills

  1. The skills required to maintain an Enterprise Application Integration (EAI) solution are quite scarce. Troubleshooting complex problems requires a combination of functional and technical skill sets including insight into business scenarios, which are generally spread across various individuals. When staffing new integration enhancements or integration maintenance projects, these niche skill sets must be noted and expect a strong people collaboration aspect to this mixture as well.

It’s about governance

  1. Lack of standards is another major challenge. Though many standards have evolved and been adapted across multiple EAI tools, not all EAI tools agree or work on the same standards. Added to this are the extensions to the standards which provide a means of increased customization into the normal integration method. A significant contributor to this situation is that the integration standards which were initially used have not been followed nor aligned to, over the years. Governance is lacking.

  It’s about integration mapping insight

  1. Most of the EAI tools use eXtensible Markup Language (XML) for exchanging information. XML is a free-flowing language where the tags can be marked up as and when needed. Hence, when we talk about interoperability, one still needs to resolve the semantic differences between these XML standards. This is time consuming and requires significant technical and business insight. Further qualifying these XML data mappings is significant effort.

It’s about qualifying the cloud promise around integration

  1. To add to this complex situation the drive to utilize cloud integration solutions is also a disruptive factor to conventional integration trends. It certainly does provide food for thought on data privacy around the interchange of data in integration scenarios and the service level measurement for integration monitoring for a cloud based offering amongst others.

Now that the integration challenges facing business are understood, what are the potential solutions to these challenges?

Technology Integration Solutions

One of the most suitable answers is SAP HANA, a next generation platform that now powers SAP Business Suite Applications. This platform brings together transactions and analytics into a single, in-memory system and features powerful integration tools like SLT, Replication Server, Data Services and Smart Data access to facilitate the integration of data in real-time or batch.

Businesses can benefit from the platform by fully leveraging the power of hardware and the advanced capabilities such as predictive, text analytic, spatial processing, and data virtualization on the same architecture. That means single database, one environment and therefore reducing TCO by consolidating heterogeneous servers into SAP HANA servers. This directly reduces the hardware, lifecycle management, and maintenance costs.

Integration efficiency is not the only benefit derived from this platform. The ability to get real-time insights along with the speed that it processes data gives you the potential to fundamentally reshape and improve business processes and becomes a strategy enabler and not hindrance.

If you have any questions or would like a more detailed discussion around this, please contact Arun Jagroop, Michael Bell or Richard McWilliams.

How to transform IT from cost centre to strategic partner

Value driven AMS

This article discusses the shift from service-level maintenance to value-driven management and how it helps IT to transform from a cost centre to a strategic partner of the business.

The revenge effects of Application Management Services

The history of business is filled with stories of new ideas that come back to bite companies – unintended consequences that can ricochet through the value chain like bullets. They’re called revenge effects – and you can find them all over the outsourcing marketplace.To the extent that you’re supporting applications through a low-cost labour pool that’s isolated from the business; you can expect huge opportunity costs. Performance improvements in efficiency, knowledge transfer and automation can all suffer. Inertia can swamp agility. And you can sacrifice the value of innovation.

The problem usually starts with low expectations. Traditional AMS can create a divide between applications support and the rest of the world. Even worse, the support function gets moved to denominator of the value equation, where the measure of success is cost reduction through labour. So, when you finally do get around to looking for improvements, the people and resources aren’t in place to deliver. Organisations then end up shuffling talent, hiring consultants, relearning and rebuilding. And the practical knowledge needed to respond quickly to changing business demands is hidden in the heads of a floating labour pool, out of reach except at prohibitive cost.

Click here to download the full article

If you have any questions or require a more detailed discussion on the content of this article, feel free to contact Glen Krynauw at gkrynauw@deloitte.co.za and Sharryn van Tonder at svantonder@deloitte.co.za.

A fundamentally different approach is needed when dealing with cyber risk

Changing the game on cyber risk

This report encourages businesses to gain more situational awareness to threats that are prevalent within their industry in general as well as those that are unique to their business. It helps them understand where threats are coming from, what their motives might be, and what can be done in advance to anticipate or respond to an incident.

Despite heightened attention and increased spending on cyber security measures, the number of cyber incidents – and their associated cost – continues to rise. This phenomenon is attributed to the growing sophistication of hackers, a rapid evolution of technological and digital landscapes and an increased reliance from business on technologies aimed at improving the efficiency of their operations.

According to a report released by Deloitte Risk Advisory team on Changing the game on cyber risk 2014”,the scary truth is that these days your business strategic models aimed at business growth are at the heart of the cyber risks that your organisation faces.

Business and the digital landscape

Business efforts to use digital tech to grow, serve and differentiate offerings in the market are now targeted by attackers, as such information can be used against you.

Given that technology touches every point of business it becomes clear that protecting everything, while not impossible, would become economically impractical and would impede most of your organisation’s strategic initiatives.

By developing an ongoing cyber programme aimed at being more secure vigilant and resilient your organisation can be more confident in defending against cyber risk, which in turn will justify the spend on such an investment.

Being Secure

You can’t secure everything equally. Being secure means focusing your protection efforts around the risk-sensitive assets at the heart of your organisations mission. Attackers motivated by financial gain tend to operate on a cost or reward basis. A strong cyber defence raises the risk of completing a job most likely deterring any efforts to attack your business.

It is important to address weak points across the business process, most importantly the following areas: data applications, specialised control systems and critical infrastructure need focused security attention from organisations. Sensitive data can be found anywhere across your business and may be viewed by more users than necessary, opening the door to potential risk incidents.

Being vigilant

Organisations need to develop threat awareness throughout their processes and developing the capacity to detect patterns of behaviour which may detect or even predict the compromise of critical assets.

Keys to being vigilant

Take heed of the following:

  • Know your industry landscape
  • Understand the specific business risk your firm faces
  • Design threat detection systems
  • Consider and plot the potential motivations for cyber threats from your competitors
  • Consider the implications of an accidental incident borne from your employees or partners

Being resilient

To be resilient an organisation must be geared toward rapidly containing the damaged caused by a targeted threat, having the capacity to mobilise all resources to minimise the impact of the threat safe guarding against:

  • Loss of revenue
  • Brand reputational damage
  • Operational disruption

Response to cyber incidents are viewed primarily as a technical function for business, however resilience not only requires investment toward technical capabilities to handle a cyber crisis, but also to a complete set of crisis management capabilities that involve a host of business unit leaders and decision makers. Protection against these threats must become an entire business responsibility.

It won’t work without governance

To drive a secure a secure, vigilant and resilient cyber risk programme over the traditional standard IT driven security programme, your business must realise that the approach is not driven by spending money high tech security programmes. It’s about tailoring and identifying what assets and operations are most important to the business and protecting them from cyber attacks.

Where to begin if you haven’t started

The report lists this 4 step process to help you get your business on the right cyber protection direction:

  1. Appoint a senior executive to the project: A cyber crisis requires a strong leader to drive cohesive and decisive action
  2. Map the threats to the business assets that matter: Gather your top business executives and threat intelligence specialist to pre-emptively discuss who or what could cause harm to your organisation.
  3. Launch pilot initiatives: Identify tests which directly affect your business or your mission achievements to drive a secure, vigilant and resilient culture within the business.
  4. Accelerate behavioural change through incentives and experience based awareness campaigns: Create active learning scenarios that give a deeper understanding of the impact of cyber risk exposure.

For more information on how to become secure vigilant and resilient download the report here

If you have any questions or require a more detailed discussion, feel free to contact (Cathy Gibson), Africa Leader, Cyber Risk and Resilience, Deloitte Risk Advisory.

Exploring the innovation imperative in the mining industry

mining helmet

Commodities may be broadly moving back into global market balance and even surplus, but the mining sector’s challenges are far from over.

In a world of deeper mines, more complex ore bodies, rising energy costs, social and geopolitical issues, infrastructure shortages and resource nationalism, mining companies remain under exceptional pressure to control costs, heighten efficiency and improve safety performance.

Although there are no easy solutions, it is becoming increasingly apparent that technology will play a growing role in the mine of the future.

Click here to download the article

If you have any questions or require a more detailed discussion on the content of the report, all regional contains are provided at the end of the article.

How behaviour change communications can impact your marketing strategy

reuse towels

by Erin Schiavone

If you’ve been to a hotel recently, you’ve probably been subject to a social experiment. Ever notice that card in the bathroom asking you to consider the environment and reuse your towel? That was an experiment in behaviour change communications at work.

Behaviour change communications specialists are trying to figure out how to persuade people to adopt a healthy behaviour, like conserving water by reusing hotel towels. Researchers Noah Goldstein and Robert Cialdini (2008) decided to take on this particular challenge. To do it, they applied constructs from social psychology like social norms to influence the guests’ behaviour. They got remarkable results.

Researchers divided hotel guests into three groups. Each group received one of the following messages on their towel placard:

Message 1: Please consider the environment and reuse your towel. (Control group.)

Message 2 (Hotel): Please consider the environment. Most guests in this hotel reused their towels. (Guests were 26 percent more likely to reuse their towel.)

Message 3 (Room): Please consider the environment. Most guests in this room reused their towels. (Guests were 33 percent more likely to reuse their towel.)

The results suggest that what your mom told you about peer pressure is true: People do what they think others are doing. Guests who believed that most hotel guests were reusing towels were 26 percent more likely to reuse the towel. When told guests who stayed in their room reused towels, guests were 33 percent more likely to do the same, even though the connection between the current and past guests was purely arbitrary (Goldstein & Cialdini, 2008).

The towel experiment demonstrates that it can be easy to impose an identity on someone. Playing off social norms can significantly influence behaviour. And, as marketers, isn’t that what we’re trying to do?

What is behaviour change communications?

Much like commercial marketing, behaviour change practitioners are trying to figure out what motivates their audiences, remove barriers to taking action and understand the emotional triggers that prompt change. The key difference between traditional product marketing and social marketing (the approach most frequently used in behaviour change campaigns) is the aim to benefit society. Examples include campaigns encouraging people to exercise regularly, quit smoking, use condoms, sleep under a mosquito net, etc.

How can this impact my marketing strategy?

Behaviour change typically focuses on changing long-term behaviours, applies behavioural theory and requires rigorous measurement of outcomes and impact. Digital marketers can benefit from adopting some relatively simple best practices traditionally used in behaviour change efforts. Here’s how:

Use behaviour change models to inform strategy. Behaviour change models are well-researched explanations for why people behave the way they do. For example why do I recycle? Is it because I’ve seen the behaviour modelled? Is it because I think my neighbours will respect me for it? The National Cancer Institute has a good overview of behavioural models.

Understand social norms and emotional triggers that drive your audience. The Washington Traffic Safety Commission wanted to increase seatbelt usage. The organization held focus groups and tested positive messages like “We love you. Buckle up,” but they simply did not motivate the target age group of 18-24 year olds. Messages like “Click it or ticket,” which stressed the penalty for not wearing a seatbelt were far more effective (Lee & Kolter, 2004).

Frame issues in a way that resonates with your audience. The Chesapeake Bay is famous for blue crabs. In 2003, the crab harvest hit a historic low, partially due to harmful lawn fertilizer that polluted the bay. So the Academy for Educational Development, the Chesapeake Club and partners came up with a clever campaign to persuade people to wait until the fall, after crab season ended, to fertilize their lawns. With ad slogans like “protect the crab cake population,” the organizations reframed the environmental issue as a culinary one. As a result of the campaign, the number of people who planned to fertilize their lawn in the spring dropped from 52 percent in 2004 to 39 percent in 2005 (Lee & Kolter, 2004).

Be aware of barriers to behaviour change and try to overcome them. This can be as simple as timing a tweet correctly. Being aware of the most effective time, place, and channel for reaching your audience is critical.

Make participation fun, easy, and popular. This is an often-repeated behaviour change axiom. It links back to the behavioural models, which emphasize self-efficacy and motivation (fun), reducing barriers (easy) and social norms and social support (popular).

So the next time you see a placard on a hotel towel rod or you skip out on exercising or your marketing campaign is struggling to take off, consider applying some basic behaviour change communications strategies.

Did I mention that most people who read this article shared it on their social networks?

Erin Schiavone is a senior communications analyst at Deloitte Digital. Previously, she supported communications for United States Agency for International Development health programs, frequently capturing stories on the ground. She received her MA in Communications from Johns Hopkins University.

Cloud Orchestration And System Integration

Systems IntegrationCloud adoption right across the enterprise is a fast growing reality. By the end of 2013, Forrester surmised that large organisations will subscribe to an average of 10 software as a service (SaaS) applications.

But much of the usage is not in the place of on-premise enterprise systems; only 9 percent of new cloud adoption is projected to replace existing systems. These cloud services are increasingly requiring integration back to core internal systems—linking edge offerings to legacy financials, order management, inventory, HR, manufacturing, and other enterprise wide systems. And companies are connecting clouds together—in strings, clusters, storms, and more—cobbling together discrete services to create an end-to-end business process.

Tactical adoption of cloud is giving way to the need for a coordinated, orchestrated strategy. As cloud services continue to expand both in number and sophistication, gaps in managing cloud-to-cloud and cloud-to-core portfolios are beginning to appear, leading to new and smarter ways to operate in this hyper-hybrid IT environment. It is also opening the door for a new category of offerings: pre-integrated and orchestrated cloud offerings delivering higher-order business outcomes-as-a-service.

So where are we today?

When IT cannot stretch to take on new projects or business initiatives without losing ground somewhere else, something has to give. This is precisely the predicament that many IT organisations discover or are faced with when unexpected new challenges such as a mergers or acquisitions; new product launches or having to rapidly and seamlessly integrate new software architectures (such as cloud and mobile) into their existing environments to deliver the expected business benefit.

Part of the problem is the technology infrastructure itself, which may not be able to accommodate new solutions effectively. As highlighted, capability to integrate these new solutions and related capacity is also a typical bottleneck for business change, but people’s reactions are just as important. After years of working with the same infrastructure, they may not be prepared to embrace a new one quickly enough.

Systems integration assists by allowing companies to focus on the roots of their technology problems without starting from scratch, improving the ways in which their solutions connect with and complement one another.

Systems Integration

What’s The Bottom Line?

As enterprises use more and more seperate cloud offerings to handle critical business processes, the desire to link these offerings to core legacy systems and the data within those systems grows. IT organisations are being looked at to provide that critical orchestration between cloud and on-premise systems.

In fact, Gartner estimates that 30 percent of the Global 1 000 will be brokering two or more cloud services in 2014. That need has generated challenges that extend beyond just back-end integration; but now also include critical areas such as security, data integrity and reliability, and business rules for managing this new hybrid state.

For more information around our Point of View around Systems integration; please download our thought piece.

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Alternatively contact Thys Bruwer, Director: Technology Integration, on tbruwer@deloitte.co.za or Ernst Swanepoel, Senior Manager: Systems Integration, on eswanepoel@deloitte.co.za

5 key strategies to successfully implement project portfolio management

project portfolio management

Dr Clive Enoch of Deloitte Consulting has written an article which identifies 5 key strategies to successfully implement project portfolio management.

Project Portfolio Management – Strategies for successful implementation

Organisations continuously face the challenge of meeting the demand of doing more with limited resources. Increasingly, organisations have to get their products even quicker to market, and must be able to adapt quickly to changing environmental and legislative needs and requirements.

Management by projects has been marketed in industry as the key towards meeting these challenges, or at least help in bringing about some structure in the way work is managed in an organisation; however, projects themselves do not provide the complete solution.

While projects focus on delivering work in a focused and disciplined manner, the ability for organisations to choose the right projects in the first place will help them go a long way in maximising their resources on investments that will bring the most benefit.

Click here to download the article

If you have any questions or require a more detailed discussion, feel free to contact Dr Clive Enoch at cenoch@deloitte.co.za

The ins and outs of business rescue through the lens of the construction industry downturn

construction

by Wanya du Preez (Deloitte) and Trevor Murgatroyd (Nimble Group)

  1. Introduction

In recent times, a spate of local construction companies has been featured in the news due to financial pressures. Due to the slow rate of fixed investment and many construction companies experiencing financial difficulties, one is led to believe that the industry is in distress and that many companies face the possibility of financial collapse.

Construction companies globally have been affected by the global financial recession, however due to the fact that South Africa was hosting the 2010 FIFA World Cup, government spending contributed to infrastructure development probably being at its highest leading up to the 2010 FIFA World Cup. Following the World Cup, the effects of the global recession and reduced government spending on infrastructure development filtered through to the construction industry.

When a construction company underperforms, it is not only the company itself that is in distress, but the ripple effect is also felt by the ecosystem that is served by the company. This includes all the smaller local suppliers to the industry and the more than 1 204 000 (according to Stats SA) people being directly employed by the construction industry.

In the recent Deloitte Restructuring Outlook Survey 2014, Construction was listed as one of the top 3 industries predicted to be in distress in 2014.

In the past, companies in financial distress faced liquidation or judicial management, with little likelihood of survival and/or recovery for such companies. However, the new Companies Act (Act Number 71 of 2008) came into effect on 1 May 2011, which includes a chapter on business rescue, Chapter 6. This provides a potential solution and help to companies in financial distress. This entails a company filing for business rescue and with the help of a Business Rescue Practitioner (“BRP”) returns the company to a profitable and/or sustainable operating position, if identified early enough.

  1. Overview of the current state of the construction industry

Since the introduction of the Act in May 2011, a number of sizeable construction companies have commenced business rescue proceedings. The success rate of these business rescues remains disappointing, rendering the question whether the objectives of business rescue has assisted the construction industry to protect their businesses or alternatively whether it has provided a better return to their creditors by not filing for liquidation immediately.

One of the prominent cases to date has been the business rescue of Sanyati Holdings. Sanyati Holdings and its wholly owned subsidiary Sanyati Civil Engineering and Construction filed for business rescue in June 2012. One of the contributing factors to their financial distress was long outstanding payments from provincial governments totalling approximately R79 million. In July 2012, the operating company was liquidated due to the lack of post commencement finance to continue operating and continued to incur substantial losses. Unfortunately, in excess of 2,000 jobs were lost as a result of the liquidation.

Subsequently, a host of other construction companies have filed for business rescue. These include Civcon (including Erbacon) who filed for business rescue on 20 June 2013. Fortunately, on 15 November 2013, they announced that they have terminated business rescue as the approved plan had been substantially implemented and that 772 jobs were saved.

Others include Rainbow Construction (filed September 2012), Stedone Group of Companies (filed April 2013), Cosira (filed in July 2013), and hot off the press, Protech Khutele (filed for business rescue in the first week of June 2014). Business rescue for Stedone is ongoing and proving to be problematic, while Cosira was subsequently liquidated. This is an indication of the level of distress in the industry.

  1. Reasons for distress in the industry being  

One of the key ways to avoid the failures and liquidations experienced in the industry is to understand the reasons why companies in the construction industry become distressed. Following this, plans can be put in place early enough to ensure the company’s return to financial health.

As with most other companies in distress, cash constraints are often the number one signal that a business is in financial distress, signalling that action is required to bring the business back on course.

However, if key stakeholders of the business are on the lookout for some of the early warning signs, there is still time to save the business. Some of these signs include:

  • Poor quality, insufficient or “layered” management information that loses key messages between the site and the Board
  • Consistent underperformance and failure of management to address below target divisional performance
  • Operating profit not translating into cash
  • An over-recognition of contract revenue and expenses not being matched to the appropriate period
  • Management incentives focused on P&L performance, rather than cash flow
  • Market rumours around project performance and supply chain payment complaints
  • Increasing advance payment requests from the supply chain
  • Signs of key clients making significant reduction in supplier numbers
  • Evidence of reputational damage emerging from press coverage
  • Reducing staff numbers across management and delivery functions
  • Increasing numbers of claims (for or against the business)

Contractors and other key stakeholders face increased financial and operational risks if mitigating controls are not implemented to counter the effects of deteriorating market conditions.

If financial distress is identified early, then business rescue is an ideal tool for a business to restructure itself under the protection of a legal moratorium.

  1. Options for construction companies and their suppliers 

If you suspect that a construction company may be in financial distress, these top 10 questions should be asked of the management teams to determine the extent thereof:

  • Is there confidence that commercial and financial reporting and controls are providing an accurate reflection of the business and not masking the true financial position?
  • Are formal guidelines in place and are they adhered to for the recognition of turnover, costs and profit.
  • What proportion of revenue is derived from government contracts and is the forward order book realistic and reflective of the impact of public sector cuts?
  • Are forecasts being stretched, based on expectations that a contract will always turn the corner?
  • Are realistic margins being secured against new contracts and will they deliver sustainable and long term financial performance?
  • What is the business doing to diversify and counter its exposure to public sector cuts, and are delivery and contractual risks of pursuing a diversified strategy fully understood?
  • Are trade insurers continuing to support the business, or are there reduced credit facilities and increasing demands for advanced payments?
  • How will the business address demands for renegotiating long term contracts and what can it do to minimise this potential impact?
  • What has been done to reduce overheads and “right-size” the business for future operations?
  • Does the business have strategies in place for the immediate mitigation of reputational damage?

If a party has concerns as to the financial situation of a construction company, they are advised to take action and challenge management around how they plan to address the current market pressures.

In order to maintain good health of the company, the most significant issue for management is the need to balance short term cash requirements with the security of long term and sustainable turnover.

  1. The silver lining: Africa 

On the positive side, the infrastructure development boom across Africa has attracted investment spend totalling US$ 222.7 billion on a total of 322 projects. Currently, the top sectors, rated by investment value, are energy and power (36%), transport (25%), mining, real estate and water, followed by oil and gas.

Africa, and indeed the world, is hard at work building, modernising and strengthening the African infrastructure, which will lead to greater African self-sufficiency and global competitiveness.

New energy generation hubs are being forged, transport and logistics corridors are being built and basic social infrastructure is being invested in. Telecommunications connections are being strengthened and development is now starting to touch the commercial property sector on the continent. 

  1. Conclusion

In order to increase the chances of success of business rescue for construction companies it is important that the distress is identified before it is too late. The turnaround of a construction company in a business rescue would typically depend on a white knight and/or a cash injection, failing which a turnaround will be extremely challenging with many obstacles.

Management should be alert to the potential distress in the business earlier and not wait until it is too late and the business has run out of cash. Business rescue proceedings should commence when there is still cash available for the operations to continue. Ideally a pre-packaged business rescue plan should be attempted. Once a company has identified that it is experiencing financial difficulties, steps should be taken to endeavour to secure an investor and/or additional funding, which may even be conditional upon approval of a business rescue plan. Although the business rescue practitioner will apply his/her own mind to the process, a pre-packaged option is more likely to succeed.

In order to improve the likelihood of a business rescue succeeding, the following aspects are important:

  • Management should identify the financial distress and commence business rescue proceedings before it is too late;
  • The choice of business rescue practitioner has a bearing on the success and should be a person with a good reputation and an understanding of and experience in negotiating with larger creditors, often the banks; and
  • The business rescue practitioner should be supported by a competent and reputable financial advisory and legal firm.

Transforming the construction industry and with it, the country, is seen by the industry as a business imperative. Business rescue is a potential solution to this.

References:

Chapter 6, Companies Act

Deloitte Restructuring Outlook Survey 2014

Deloitte publication: Construction Lending-Handle with Care June 2011

Deloitte publication: Construction Industry Outlook November 2011

Deloitte publication: African Construction Trends Report 2013

Statistics SA March 2014

If you have any questions or require a more detailed discussion relating to business rescue, contact Wanya du Preez at wdupreez@deloitte.co.za   

 

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