September 5, 2006

Hackett-REL: Working Capital Improvement Virtually Stalled Among Europe's Top 1,000 Companies

While US Companies Accelerate Improvements, Europeans Stand Still, Leaving €500 Billion in Cash Opportunity on the Table

LONDON, 5 September 2006 - After several years of consistent improvement, Europe's largest companies have now virtually stalled in their working capital improvement efforts, potentially leaving as much as €500 billion in excess working capital untapped, according to the 9th Annual Working Capital Survey conducted by Hackett-REL, the Total Working Capital practice of The Hackett Group, an Answerthink company (NASDAQ: ANSR), in conjunction with CFO Europe Magazine.

The results, which were unveiled today in the September issue of CFO Europe, address a missed opportunity in the form of cash that is unnecessarily tied up in late payments by customers, excess levels of inventory and suppliers that have been paid too early. For most companies, this excess working capital represents lower profitability and cash flow to fund growth and other strategic initiatives that can improve shareholder value.

The survey highlights a disappointing trend of weakening working capital performance improvements at Europe's 1,000 largest companies, with a reduction of only 0.6% in 2005, compared with a 3.3% drop in 2004 and 5.1% in 2003. This was primarily driven by increasing accounts payable (+3.0%) with a modest reduction in inventories (-0.6%). Improvements were offset by a significant deterioration in accounts receivables, up +2.3% versus the -1.7% drop in 2003/04.

The European results are particularly jarring when compared with the latest results from a separate study performed by Hackett-REL, which shows that the 1,000 largest companies in the U.S. actually accelerated improvements in working capital management significantly, reducing working capital by 4.0% over the same period (see separate Research Alert).

The Scourge of Corporate Liquidity

The perception in the marketplace is that corporate liquidity is much improved, causing management attention to shift away from working capital towards growing the business and the bottom line, according to Andrew Ashby, President of Hackett-REL Europe. "In reality, whilst the absolute level of cash on balance sheets has increased by 15.3% over the past year, the relative level of cash as a percentage of sales has increased by only 0.4% across the top 1,000 European companies in 2005."

Ashby continued:
"It is premature for companies to shift their focus from working capital management, because the cash the companies can generate in this area is an exceptional way to fund the growth these companies seek."

A Divergent Trend: Europe vs. U.S.

Historically, Hackett-REL research has found working capital improvements from European and U.S. companies to run in parallel. In fact, excluding the automotive industry -- which can skew results because of the large financing arms operated by the major manufacturers -- European companies improved their working capital performance significantly more than U.S. companies in the two previous years. But that is not the case this year. According to the Hackett-REL research, this year shows a significant contrast in the two regions with continued improvement in U.S. DWC performance. The table below highlights the trend.

Region                                02/03       03/04         04/05
Europe (a)                            -5.1%       -3.3%         -0.6%
U.S. (a)                              -4.2%       -2.5%         -4.0%
(a) Figures exclude the Automotive Sector

Andrew Ashby, President of Hackett-REL Europe explained:
"As in the U.S., European companies have a huge opportunity to improve working capital performance. The U.S. continues to capitalise on this low-cost source of cash despite record corporate liquidity levels and a strong economy, which suggests no reason why the performance of European companies is weakening." Ashby added: "This may be due to a perception that European companies have picked the low-hanging fruit within their businesses, like lengthening supplier payment terms and proactively contacting customers to improve receivables. Our view is that significant opportunity still exists to improve the customer/supplier relationship. Creating visibility around accurate information allows the collaboration and planning necessary to aid suppliers in achieving tighter turnarounds, supporting quicker responsiveness to customer demands, whilst holding less inventory and reducing working capital across the entire value chain, enabling cost savings and service level improvements for all."

Squeezing Suppliers? Only a Short-Term Advantage

The Hackett-REL study shows nearly 56% of the top 1,000 European companies boosted their working capital performance through extending supplier payment terms compared to 47% last year. The research metrics illustrate a continuing trend of customers encouraging longer payment terms with suppliers. With respect to this activity, Hackett-REL's experience is that some companies are formalising a process for payment terms whereas others are establishing contractual arrangements with suppliers but paying as and when it suits them. This practice is in stark contrast to the mere 4% of European companies that were able to achieve improvement in all areas of working capital by taking a structured company wide approach to improvement.

                                               DSO   DIO   DPO   DWC
COMPANY         SECTOR                        05/04 05/04 05/04 05/04
CARLSBERG       Distillers & Brewers            -8%   -6%    5%  -18%
KESKO           Food Retailers & Wholesalers    -4%   -5%    4%  -13%
HENKEL          Household Products,             -9%   -9%    7%  -19%
                 Non Durable                    
ANGLO AMERICAN  Mining                          -3%   -2%    5%   -7%
BUNZL           Other Industrial &              -6%   -6%    5%  -17%
                 Commercial Services            

Chart Legend

   DSO - Days Sales Outstanding
   DIO - Days Inventory Outstanding
   DPO - Days Payables Outstanding
   DWC - Days Working Capital

According to Ashby:
"A strategic approach to working capital improvement will yield greater sustainable long term results, than the potential short term impact gained from squeezing suppliers."

Hackett-REL's view is that companies should reach varying payment terms with their suppliers in the same way they are agreed with customers. The expectation of customers honouring their terms should be consistent throughout the supply chain.

Ashby continued:
"Our view is that treating suppliers as you would expect to be treated by customers will yield long-term benefits, especially in periods of an improving economic outlook. This is certainly the case when you need to call upon those suppliers to fulfil periods of high demand; the success of your business then becomes reliant on their flexibility, which is tied to your working relationship. If your behaviour towards them has historically been adversarial then they are unlikely to sympathise or respond to your needs."

Performance Improvements for Southern Europe

Southern Europe appears to be trying to close the DWC gap with Northern Europe in terms of working capital reductions with Italy and Spain (the two largest Southern European economies) registering a fall of -15% and -11%, respectively. Conversely, Northern European countries have reported increases: France +1%, Netherlands +4%, Switzerland +3% and the UK +0.3%.

Hackett-REL's research into Total Working Capital over the years has demonstrated that the perennial slow payers, from Southern Europe, have always had higher gross working capital than in Northern or Central Europe. However, from 2004/05, Hackett-REL's research metrics demonstrate that Southern European companies are driving improvement in working capital across all components. Companies showing significant improvement include Fiat SPA (-7%), Telecom Italia SPA (-39%), Pirelli & C SPA (-22%).

Overall findings

Of the 70 industry groups examined by Hackett-REL, 24 sectors managed to post a double-digit decline in total working capital, with a further 19 sectors also experiencing a decrease in total working capital. The worst performing sectors included Medical Supplies (an increase of +12%); Consumer and Household Services (a rise of +13%) and Apparel Retailers (a rise of +22%). The CFO Europe article also features profiles of two companies and their successful DWC reduction efforts: Punch Taverns, a £770 million (€1.1 billion) restaurant company and Henkel, a €12 billion household product and non- durables company.

Research Methodology

The 2006 CFO Working Capital Survey measures the working capital performance of the largest 1,000 European companies (as measured by sales) during the 2005 period. Year-to-year comparisons are based on the results of previous surveys. 80 sectors are covered in the survey.

Working capital performance metrics are calculated from the latest publicly available financial statements, focusing on sales, trade receivables, inventories and accounts payable (excluding accruals, deferred income and other cash and cash equivalents). Adjustments were made to the data to reflect the impact of acquisitions/disposals activity and off-balance sheet arrangements in order to provide true, consistent and comparable figures. Reported total numbers are sales weighted.

Working capital is the capital invested in operating processes to buy, make and sell in order to generate profit. The operating working capital comprises operating cash, trade receivables and inventories less payables. Typically, a reduction in operating capital can be achieved through improved collection, dispute and credit management, inventory and supply chain optimisation, supplier consolidation and efficient buying.

About Hackett-REL

Hackett-REL, the Total Working Capital practice of The Hackett Group, is the global leader in generating cash flow improvements from working capital and operations. For more than 30 years, Hackett-REL's expertise has helped clients in over 60 countries free up billions of dollars in working capital ($25 bln in the last ten years alone), creating the financial freedom to fund their strategic objectives, including acquisitions, new product development, debt reduction and share buy-back programmes. The Hackett Group is an Answerthink company, whose clients include 96% of the Dow Jones Industrials, 50% of the FTSE 100 and 70% of the DAX 30.

About CFO Europe

Launched in 1998, CFO Europe is part of the CFO family of magazines (CFO, CFO.COM, CFO Asia, CFO China) published by The Economist. Every month, we provide chief financial officers with the practical information they need to perform their jobs more effectively. With a global monthly readership of more than one million, the CFO magazines are among the leading business publications for C-level executives around the world. For more information, visit

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