That was week ending 26th October 2012

Last week saw the end of recession with growth of 1% in GDP in the last quarter. This is of course the end of the second technical recession we have experienced; it may not be the last. If you are just about keeping your head above water it doesn't take much to push you under again. The government keeps coming up with a variety of schemes to kick start growth in the economy but they don’t seem to be generating much traction. However two events from last week made me think about why this might be.

Pay me now, tomorrow, sometime, never.

On Tuesday the government announced its new “supply chain finance” scheme, with David Cameron hailing it as a “win-win” solution for large companies and their suppliers. The principle is that a large company will notify a supplier’s bank when an invoice has been approved for payment. The bank can then offer an immediate advance of 100pc of the invoice value to the supplier at lower interest rates knowing the bill will be paid. Government estimates that this would enable leading companies to make available as much as £20bn of cheaper finance to their suppliers.

There has already been a fair bit of comment on the idea with the consensus that this scheme could work but only in a limited number of situations.  However the question that occurred to me when I first heard the announcement and which began to be voiced by others towards the end of last week was:

If a large company approves an invoice for payment why doesn't it then just pay the invoice? 

To quote Philip King, Chief Executive of the Institute of Credit Management (so he should know), “my preference would be that people just paid on time”.

The real problem for small and medium size businesses financing their debtors is the UK’s slow and late payment culture, which is now endemic throughout the UK business system. The late payment legislation has now been in force long enough to prove it is not the answer, certainly not for small businesses trying to extract payment from large customers.

Paying on time pays off

Apart from the obvious benefits to cashflow for many suppliers to large businesses would paying on time actually benefit business and the economy overall? Or is it just an ethical argument and I am being naive in thinking that paying bills on time is a realistic proposition? Well here’s a true story.

A family owned specialist retailer based their growth strategy on 3 principles, the latest products and technology at competitive prices, outstanding customer service and advice and, paying suppliers on time. This last principle was the key to enabling the other two. When goods were delivered, provided they conformed to spec, quantity and agreed price, the invoice was approved and logged for automatic payment on the agreed date. The supplier knew that provided they performed they would always receive payment on time. Consequently they did perform and gave this retailer their best prices and service and always offered them the latest products and technology first.

This is an example of how a sufficient and balanced flow of credit through the business system creates competitive advantage. The retailer expanded from one premises in one location to a nationwide chain to become a household name in its sector and highly profitable. Eventually the family sold out to a venture capitalist for a handsome sum. The new owners’ strategy was that having bought the market leader all they had to do was to further expand the number of stores and then float the company to make a handsome return. Financing this was simple, or so they thought; just cut stocks and extend the payment terms to suppliers.

However this disrupted the flow of credit which removed the business' competitive advantage. The business rapidly lost market share, plunged into losses and eventually into administration and the shareholders lost everything.

Two black holes for the price of one

Has the recession made things worse? The continuing tight credit conditions won’t have helped but there is a more deep seated problem in the banking sector that is reinforcing the late payment culture and making it part of the problem.

Last week Sir Mervyn King, Governor of the Bank of England warned that the banks have significant amounts of undeclared losses on their books from loans that are just never going to be repaid.  He pointed out that this is a significant drag on the economy. Until banks own up to this black hole in their balance sheets and are fully recapitalised we will not be able to return to the levels of banking provision we need to drive economic recovery.

Many of these bad loans are with creditors who are managing to survive and pay the interest on their loans but are unable to repay the principle. Moreover in order to survive they pay their trade creditors as late as they can.
The inability of banks to deliver adequate banking provision also means that many viable businesses just cannot get the finance they need from their bank to grow. Many are then forced to push out their own payment terms to creditors and so on through the system. There are undoubtedly some companies that are accumulating cash at the expense of their suppliers. However there is also clearly another black hole in UK plc’s overall balance sheet, which manifests itself in the widespread and counter productive late payment culture.

The effect of all this is to disrupt the sufficient and balanced flow of credit throughout the UK business system. As the story of the retailer's demise above demonstrates, when the flow through any system is disrupted in this way it becomes inefficient, incurs unnecessary cost, fails to deliver as required and ultimately can break down altogether. We are disrupting this flow on a national scale with the inevitable adverse consequences for economic growth.

And the solution is ...

Right now I don't have a solution to offer. Clearly clamping down on all the bad loans in banks' balance sheets too quickly risks Armageddon  However what I do believe needs to be done first is to recognise the problem and get to understand it. So this is not about coming up with one off schemes like “supply chain finance” that do little or nothing to address these two fundamental weaknesses in our economic and business system. Government has a key role in this and part of that role is to set the parameters for the UK business system. That in turn means deciding whether doing business in the UK means that on time payment to your creditors should be part of those parameters or not. Only then are you in a position to start devising effective solutions to bring this about.

So that was some of the week before this week. We hope you found some of the above thought provoking and useful for you and your business. We trust you had a good weekend and hope you have a great week this week.

That was week ending 12th October 2012

The merger that never was

The proposed merger between BAE Systems and EADS was killed off last week by stern Auntie Angela who made it very clear she wasn’t having any of it. What interested me about this was the human behavioural aspect and how people who are clearly very intelligent can get caught up with propositions that do not succeed.

BAE is now a pure defence company. Indeed it sold its 20% stake in Airbus to EADS in 2006 as part of its strategy to focus on the defence sector, especially in the US. However defence spending globally is now substantially reduced and likely to fall further so BAE needs to find a way of reducing its dependency on the defence sector. At the same time EADS is trying to find ways of reducing its dependency on its core Airbus commercial aircraft division.  The leaders of both companies appeared to take one look at each other and saw the solution to their problems. Let’s merge the businesses and hey presto, our problems are solved.

Something strange seems to happen to business leaders when they get involved in mergers and acquisitions, especially when they see it as the answer to their problems. They get so caught up with the idea that in one bold stroke they can transform their situation that it does not occur to them that other people whose support they will need do not see it the same way at all. It has happened with BAE and EADS and it is bedevilling the proposed Xstrata/Glencore merger right now. It happened with G4S' failed bid for ISS last year and with Prudential’s proposed $35bn dollar acquisition of AIA a few years earlier.

The other aspect of the BAE and EADS proposed merger is that each company had the same problem. How does merging two of the same problems produce a solution? I am not saying it never can but it should at least make you stop and think. However mostly people don’t stop and think.

These examples demonstrate once again that poor process produces poor results. Coming up with the brilliant idea (and it may well be a brilliant idea) but making that the focal point of the process will almost inevitably mean that you miss the other vital stages of what it takes to achieve success. Ask yourself how often a really good idea, project or proposition you tried to make happen in your business came to nothing for reasons you can’t quite understand. What did you miss out and why?

Swann song

Last week Kate Swann announced she would be stepping down as CEO of WH Smith next summer after 7 years during which she has transformed the company.

When she arrived the business was in a mess with hundreds of shops scattered across Britain’s high streets selling a bit of everything and doing nothing very well. Ms Swann’ strategy was a text book example of KISS (keep it simple stupid) and of applying robust process to implement it. First she separated the wholesale business from the retail business with separate management teams for each business. Then she identified which categories of merchandise customers wanted to buy at WH Smith and where they wanted to buy them. She then set about getting rid of products where they could not compete, such as entertainment and focusing on areas such as stationery, books, art & craft and others where they could.  Then she opened stores where customers wanted them including railway stations, airports, motorway service stations etc.

Then she concentrated on making WH Smith a better business, with ferocious attention to detail which has driven out £17m of costs to date with more to come (a further £12m this year).

In doing all this she sacrificed the sacred cow of retail investment analysts, like for like sales increases. If you are taking out product, as a retailer maintaining sales increases is hard work. In the year to August 31^st like for like sales fell 5% but profits rose 10% with the dividend up 22%. The shares have generated a total shareholder return of 306% in the 7 years Ms Swann has been in charge, more than M&S, Morrison's and Sainsbury’s put together.

All achieved without a single merger or acquisition. It could have been different, a merger with Woolworths perhaps or with HMV, both with similar problems to WH Smith 7 years ago. Now does that sound like a good idea?

Tesco – a straw in the wind

It is funny how a straw in the wind can sometimes tell you more about the state of the haystack than the farmer might know.

Last week, one of my partners had a promotional email from Tesco on his main computer. Unusually, he chose to follow one of the links. It did not work. Because he is a bit geeky, he checked it out on his laptop, where it did work. All of the other promotional emails he gets do work.

He decided to do Tesco a favour and let them know there was a problem – obviously thousands of others with the same (totally standard) PC set up were also not going to get to Tesco’s email promotions. Their Customer Services did an initial good response but managed to miss the point. Eventually they sent detailed advice on how to change the computer settings so that their advertising emails would work!  The fact that solution didn’t work is totally irrelevant to this story.

However, all the way through this tiny little saga, the Tesco tried to get the customer to do something to sort out the problem. They have not recognised that:

The customer doesn't want to read Tesco adverts badly enough to bother 

Tesco do want the customer to read their adverts 

TESCO OWNS THE PROBLEM, not the customer.

Tesco are not doing well in their competitive Market.  Overall, they are not winning hearts and minds – people just don’t seem to like them.  We know that attitudes, beliefs and behaviours have a massive effect on competitive success. 

Customer Service experiences can be one the most revealing insights into a corporate culture. If they can’t get these tiny little things right, because they are not thinking about them the right way round, then there is probably something much bigger to worry about.

Shares for rights

Normally the term “rights issue” means existing shareholders being offered the right to buy new shares in a business ahead of non-shareholders. The Tories announced a new twist on this at their party conference, give up your employment rights in exchange for shares in the business you work for.

Plenty has and will be written about this policy but once again this started me thinking about the process behind this idea. To me it is like a confectionery manufacturer thinking that there are people who like chili and there are people who like liquorice allsorts. What’s more there are lot of people who like both so maybe there is a market for a chili flavoured liquorice allsort.

However before developing and launching this new product it is a good idea to do some research and some market and product testing. Maybe the people who will like the product or the flavour combinations they prefer are not what you thought they would be. There are host of questions to find answers to before you can judge if this has a chance of success and if so, how to make it succeed.

To me, this looks like yet another policy that is announced then pushed out by government without applying a similar robust process and that may be why many good ideas in principle have failed at implementation.

By the way if anyone does come out with chili flavoured liquorice allsort, remember I thought of it first!

So that was some of the week before this week. We hope you found some of the above thought provoking and useful for you and your business. We trust you had a good weekend and hope you have a great week this week.

That was week ending 5th October 2012

Don’t bank on it

Last week I wrote about Vince Cable’s announcement of the setting up of a state business bank. My thanks to the ever vigilant Bill Good for pointing out that this will not actually be a “bank” but yet another government backed loan scheme routed through conventional banking channels. This is what I understood as well but should have made clearer. I hope none of you got too excited about the potential of there actually being a real alternative source of business lending and banking.

However this is what John Longworth Director General of the British Chambers of Commerce called for last week. He wants to see a state backed, properly constituted British Business Bank. Current schemes merely “provided slightly cheaper finance to businesses that banks were already lending to” he said

I think he is right, but not just because this would help channel more finance to those businesses that need it but cannot get it from conventional banking sources. If a British Business Bank not only offered business loans but also business banking, i.e. business current accounts, direct debits etc. then this could have some real impact on competition. Very few businesses can operate without a business bank account, which means that if a business is turned down for a loan by its bank, more often than not it still leaves its business bank account with that bank. However if a business was able to access finance from an alternative source which also offered business banking then maybe many more businesses would consider switching their banking over as well. If significant numbers of small businesses did this then it would bring some significant competition into the small business banking market. Isn’t this after all what we really need?

Will it ever happen? Well last week it was announced that Metro Bank would be a primary business partner for the Growth Accelerator scheme. A small step in the right direction but much more could be done.

West Coast Blues

When ah woke up this morning, thought ah had a railroad to run

Yes when ah woke up this morning, thought ah had a railroad to run

Then ah got this call from the old Deeefftee Ministree

Saying they done screwed up the bid process and screwed me.

(with apologies to all blues singers who have ever lived!)

Yes I have sympathy with Tim O’Toole of First Group who I can fully understand must be feeling “sad and blue”. Winning the West Coast franchise wasn't just a contract win it was the answer to a lot of FirstGroup’s problems. Now all the concerns about the balance sheet, cashflow and profits have returned and FirstGroup’s share price sank 20% on fears that a dividend cut is now likely.

Since I wrote about the decision to award the franchise to FirstGroup in the middle of August, 2 out of 3 of my predictions have come to pass. It has ended in tears and after Justine Greening moved on from Minister of Transport to International Development. However I did say it would take time when in fact it only took 6 weeks! Had she still been Minister of Transport it is likely Ms Greening would have had to resign after insisting she had overseen a “robust” process. There has been no sign of her offering that, in fact not a word from her (again). I suspect she is too busy down on her knees thanking the powers that be that she got reshuffled (Justine Time perhaps?) and parliament is still in recess.

Confidence – not if we can help it

It does look increasingly like FirstGroup put in a rather "desperate" bid but even so the company does not deserve to be treated this way. Apart from being a spectacular display of government incompetence the West Cost episode is another dent in business confidence. There are now 4 rail franchise bids in a state of limbo with all the implications that has for stalled investment and job creation in the rail sector. I wonder how many rail franchise bidders are having second thoughts. Also last week Ofgem reported that thanks to years of government dithering we can look forward to energy blackouts as early as 2015 and as for any clear policy on aviation strategy don’t hold your breath.

There really are enough uncertainties in the world without our own government inventing any more. We seem to have a real problem with politicians and civil servants having the slightest understanding of what business confidence is, why it matters and the damage inaction, muddle and sheer incompetence in government can do. A clue as to how politicians and civil servants think about this and how they view their priorities can be found in a statement from the Department of Energy in response to the Ofgem report. It said that there is "only a very low risk to householders".

No mention of businesses, especially those with interruptable supply contracts. Then of course householders have votes and businesses do not.

Euro tragi-comedy continues

After the lull during the summer whilst most European governments were on holiday we are now back to the run of announcements, counter announcements, demonstrations and confusion we had before. One minute Spain needs €100bn to prop up its banks, now it appears it’s only €60bn.  Then up pops Moodys saying that it needs twice as much as that, i.e. €120bn. I hope you are all following all this so far. Meanwhile Super Mario Draghi is still dancing around the ring shadow boxing and saying “he is ready to act” that is if anyone is man enough to take him on.

The Greek comedy moved into Greek farce last week with the announcement that they propose to spend €95m on a state of the art motor racing circuit, with ambitions to stage F1 events. Now I know that spending on infrastructure can be part of the answer to boosting economic growth, but I don’t think F1 circuits count. Neither is Greece noted as any kind of centre for motor racing. I think the last time they won anything major involving wheeled transport the date had the letters BC in it! To be fair neither Bahrain, Singapore nor Malaysia were noted centres of motor racing and they all have F1 circuits. However they do have plenty of money. If you have ambitions to get in to motor racing especially F1 then you need to talk to Bernie Ecclestone and he only talks to people with plenty of money.

However shortly after this news broke the Greek PM Antonis Samaris announced that the country will run out of money in November. Stern Auntie Angela is due to visit this week and I think the PM was hinting that it would be helpful if she could stop at a euro cashpoint on her way and bring some cash to help them through the weekend.

As I said there really are enough uncertainties in the world without our own government inventing any more.

So that was some of the week before this week. We hope you found some of the above thought provoking and useful for you and your business. We trust you had a good weekend and hope you have a great week this week.

Week ending 28th September 2012

I am now returned from a very relaxing holiday in Mallorca where I managed to remain oblivious to anything that was happening in the world outside of the small area of my hotel pool and nearest beach. Ignorance is indeed bliss and I can thoroughly recommend it.

Party Time

On my return I find we have entered the political party conferences season. People we only ever seem to see or hear from at this time year seize their moment to tell us what they think will be good for the rest of us. The fact that they can actually say some of these things in public without embarrassment is a demonstration of the almost infinite human capacity for self-delusion. But hey that’s what politics is all about!

However I have to give credit to Nick Clegg for going against this political norm in his closing speech to the Lib Dem conference. “If we fail to deal with our debts and tackle the weaknesses in our economy our country will pay a heavy political price. But the human cost would be higher still. Not only would we fall behind internationally, we would leave a trail of victims at home too”. This to my mind is going further than any other politician to date in demonstrating real leadership and being prepared to tell it like it is to both his party and the voters.

However this moment of real leadership did not last long, because when it comes to what we should actually do about it the best he can come up with is the idea of a mansion tax. He is positioning the Lib Dems as the party of “fairness”. So anything that sounds like “fairness”, even if it is of no practical use in dealing with the problems of the economy is going to get his backing. That’s politics Mr. Clegg not leadership and many voters can tell the difference.

Banking on the State

Another highlight of the Lib Dem conference was Vince Cable’s announcement of a £1bn state backed Business Bank. I would bet that when they first took office no member of the coalition government, Tory or Lib Dem, would ever have thought that they would find themselves setting up a state bank. However the government has finally had to accept that there is a failure in the market for finance for small business that is not going to be addressed by the big banks.

Whilst I accept the need the whole idea of a bank run by the government makes me nervous. Danny Alexander, Chief Secretary to the Treasury has promised that the bank will be “fast tracked” into existence. However what he means by this is the legislation required to bring it into existence. I accept he might know how to do that, but I am not at all sure that he or any other politician knows how to run a business bank. We need to know a lot more about how it is actually going to work before we can have any confidence that it will.

Oh BUMi!

Not a good week for Nat Rothschild whose stake in Bumi Resources lost another 25pc having lost 33pc the previous week. Bumi is an Indonesian mining and natural resources business that Rothschild bought in to using a cash shell for which he raised £707m with a London listing in 2010. By changing the name of his cash shell to Bumi, Rothschild achieved a London Stock Exchange listing for the Indonesian Company.

Bumi’s main shareholder is the Indonesian Bakrie family and it is now apparent that their corporate governance fell short to say the least. Missing funds, “development assets” that are nothing of the sort and compensation liabilities are just a few of the problems that have come to light in a document sent to the board by a whistleblower.

Regular readers of these articles might expect me to launch into a scathing criticism of Nat Rothschild. It certainly appears that the words “due diligence” didn’t feature in support of his boasts that investors would make “two or three times their money”. However Rothschild is what he is, a merchant adventurer and they don’t do things like due diligence. If you get involved with this type of business person you might make a lot of money or you might lose the lot. He has lost his own money as well as other people’s in this venture. But the city knows Rothschild and they know what he is like, so why was the London listing allowed? Could it be that the chunky fees involved have once again enabled greed to triumph over common sense?

Nothing is forever

Another company with bad news last week was model train maker Hornby. A combination of disappointing sales of Olympic merchandise and disruptions in delivery of products from a Chinese supplier, will wipe out any profit for this year. Hornby shares fell by a third.

For Chief Exec Frank Martin, following disappointing Christmas sales and poor final results announced in June, this could be the third strike that signals out. However it is the Chinese supply situation I find most interesting.

When Hornby switched all their manufacturing to China they appeared to have solved their cost problems and acquired the ability to produce product with the level of detail that customers wanted. The company went from strength to strength on the back of this strategy. However its Chinese supplier has passed from one owner to another and is now struggling to cope with the problem of rising costs.

The Chinese owners’ response has been to close factories thus reducing supply of Hornby products. So even if they can generate increased demand Hornby won’t be able to meet it. A strategy is that in effect saved the business is now causing serious problems. So the first lesson is that nothing is forever. You cannot stand still, however well it all seems to be going. You have to go on changing and innovating in your business constantly. The second lesson is that forever can be a very short time these days.

So that was some of the week before this week. We hope you found some of the above thought provoking and useful for you and your business. We trust you had a good weekend and hope you have a great week this week.