Things will get worse be­fore they get bet­ter

Finweek English Edition - - Companies & Markets -

MANY DECADES AGO I coined a law of cor­po­rate per­for­mance: that com­pa­nies whose re­sults de­te­ri­o­rate in the first hal­fyear do even worse in the sec­ond half. While that was largely based on ex­pe­ri­ence, it’s easy to find rea­sons for the phe­nom­e­non. Com­pa­nies usu­ally un­der­es­ti­mate how dif­fi­cult it is to cure a prob­lem and then of­ten find the prob­lem it­self is more se­vere than was thought.

Dur­ing the years com­pany prof­its only went up, “Coul­son’s Law” fell into abeyance. But cur­rent hard times could make it rel­e­vant again. Take the case of Faritec, the IT com­pany that re­cently re­ported it fell into loss for the six months to De­cem­ber 2008, partly due to ad­verse mar­ket con­di­tions and partly be­cause its cost base is too high. It’s hop­ing to cut R4m/month off costs; but with a pre-tax loss of R31m for the six months that on its own won’t re­store prof­itabil­ity.

Six-month sales of R414m were 17,5% down on R502m the year be­fore and a whack­ing 23,2% down on the six months to July. Yet de­spite not ex­pect­ing a “sig­nif­i­cant” im­prove­ment in trad­ing con­di­tions in the sec­ond half, Faritec hopes to re­turn to profit.

Well, we shall see. CEO Si­mon Tom­lin­son has al­ways struck me as ca­pa­ble and com­mit­ted and he’s now chalked up a decade in charge. But Tom­lin­son could have an­other prob­lem: when I did a small as­sign­ment for the com­pany while founder Tony Farah was still in charge I was struck by how much even se­nior ex­ec­u­tives were not so much in awe as in fear of him. I’ve had ex­pe­ri­ence of com­pa­nies built up by one dom­i­nant in­di­vid­ual that couldn’t sur­vive his de­par­ture and I can’t help won­der­ing if the shadow of Farah even now makes Tom­lin­son’s task harder.

It also seems to me that Faritec has an above-av­er­age turn­around of both ex­ec­u­tive and non-ex­ec­u­tive direc­tors.

Now I don’t want to ap­pear to be pick­ing on Faritec and no­body will be hap­pier if it does re­turn to the black in the sec­ond half. Re­ally, I guess I’m try­ing to pre­pare in­vestors for a re­al­i­sa­tion that cor­po­rate prof­its gen­er­ally prob­a­bly didn’t bot­tom out in the im­me­di­ate past but, over­all, are go­ing to get worse.

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