Week ending 26th July 2013

Bound to end in tears

China provides a news item most weeks but last week was a little different.  Instead of the focus being on the economy the big headline was about the accusations from the Chinese authorities that GSK executives in China had been bribing doctors and other medical professionals to prescribe GSK drugs.  This caused me to think about the nature of selling and sales people.

For many years there has been a school of thought amongst many business leaders and especially sales managements that sales people are primarily motivated by money and status.  The money being both the means of acquiring and of demonstrating status.  So generous sales commission schemes are devised often including other “perks” such as top of the range company vehicles and access to exclusive events in the name of corporate entertaining.  In many sales driven businesses such as the drug companies, computer systems and banks in recent years, sales people are seen as the king and queen pins and their reward packages and status in the company reflect this.

This has bred a culture where as long as you got the sale any questionable practices around how you got the sale would be overlooked or even encouraged.  If you incentivise people to earn a lot of money in a short time don’t be surprised if that is exactly what they go and do.  And, don’t be surprised about HOW they go about doing it!  Because it is all about money, moral and ethical considerations just get lost.

I believe GSK’s Chief Exec Andrew Witty is genuinely disappointed and shocked by what some of his people in China have been up to.  However when he looks closer he should not be surprised.  The cause and effect from the incentives for his sales people in an environment where medical professionals cannot make a decent living unless they accept kickbacks meant it was bound to happen.  What is more this is a classic example of how unethical practices will eventually turn round and bite you.  When appointed earlier this year President Xi Jinping announced that cracking down on corruption would be a priority for his administration.  So a crackdown involving a high profile foreign owned global business is just what the Chinese authorities would have wished for and will use to maximum effect.

Is there another way?

This leaves us with a question, just how do you motivate sales people?  If financial reward carries the risk of encouraging bad practices with expensive consequences just how do you get your sales force out of bed in the morning?

In my career I have come across a number of very successful sales people who do not seem to be motivated primarily by money.  Because they are successful they earn plenty of it, but it does not seem to have been their primary motivation for working hard and winning business.

What they seem to have in common is the conscious or unconscious understanding that selling is about understanding the customer’s problem first and then offering a solution.  They seem to be particularly skilled in “needs identification”, really getting to understand the customer’s needs and in many cases helping the customer to understand what their needs really are, as opposed to what they think they are.  These kinds of sales people seem to get a real buzz out of how this builds relationships with their customers and how this in turn drives sales success.

This switches the focus away from me and my needs on to the customer and their needs and this is what changes the moral and ethical dimensions in the relationship.  The process changes from “selling to” to “getting bought by”.  Ah, I hear you say what if the customer’s need includes a free holiday in the Bahamas?  However sales people who “get bought” seem to have the ability to differentiate between the needs of the customer as opposed to the personal needs of the individual buyers involved.  They seem to be able to spot when these cross the line when a buyer’s personal needs and motivations may be detrimental to the customer’s needs.  They become skilled in handling these situations, including being prepared to walk away from “bad business”.

Sales people who “get bought” invariably in my experience are amongst the top performers in most sales forces. However when they are successful a strange thing can happen.  Far from encouraging them to keep on doing whatever it is they are doing, their employers start making life harder for them.  Because they are earning lots of money from a commission structure designed to motivate the average performer to work a bit harder, they find their targets are increased whilst others are left alone.  They are required to report to managers who are far less experienced and competent than they are.  Often this involves them being subjected to sales performance management systems that have little to do with sales or performance management.

Inevitably this leads to these top performers leaving, either to retire early, join a competitor or set up their own business in competition with their previous employer.  Often this means they take the business with them because they have the relationship with the customers, their employer doesn’t.  They also know what their customers did not like about their previous employer’s offer, giving them an immediate competitive edge if they set up their own business.

Why does this happen?  Well I believe this is a demonstration of what happens when opposing moral and ethical outlooks collide.  The people who understand that doing the right thing and doing it really well delivers the best results vs. those who believe that doing whatever it takes to deliver results for them and now is the way to do things.  The lessons only get learnt when the consequences of the latter approach become apparent, possibly in the shape of a Chinese anti-corruption official.  By which time of course it is too late!

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 19th July 2013

Don't even mention more taxes!

Last week began with Dalton Phillips, Chief Exec of Morrison’s backing Sainsbury’s Jason King’s call for an online sales tax as a way of leveling the playing field between online retailers and those with physical shops.

Now the treasury is quite capable of dreaming up new taxes without any help from the rest of us.  I fear that Treasury officials will already be licking their lips over this one, so don’t encourage them.  Governments of all political persuasions just cannot resist taxing us any way they can and spending the money on our behalf.  They especially like taxing business because businesses do not have a vote.

So whilst George Osborne trumpets his reductions in corporation tax to “one of the lowest levels in the OECD” by 2015 he does nothing about business rates and employment taxes.  For those retailers that are physical space intensive and employee intensive these taxes are far more significant than corporation tax, and it is not dissimilar for many other sectors.  As business people and as individual voters we must hold government to task on the totality of the tax take.  Whilst recognising the need to tackle the deficit now in the longer term a “real” low tax economy for individuals and for business is a more likely means of securing and sustaining economic growth.

Dropping BRICs

It seems like only yesterday that we were all being urged to “rebalance” the economy and focus on the fast growing economies in Asia, South America and Russia.  Forget tired old Europe and clapped out USA, they said, the BRICs are where the action is.

Well Brazil’s growth has ground to a halt as the commodities boom fades.  Russia’s economy is entirely dependent on raw materials and energy exports with little sign of any reform of its business and industrial practices.  India is bedevilled with a political culture that is 30 years behind the game it now needs to play to fulfill its potential.

That leaves China.  At the beginning of last week it seemed that Chinese growth figures were coming in a bit higher than feared.  Mind you we seem to get Chinese growth figures of various kinds about twice a week, so which ones we should really take notice of is anyone’s guess.  What doesn’t help is the growing suspicion that the official figures are painting a much rosier growth picture than is actually the case.  (Surprise, surprise - or should that be supplies?)  By the end of the week some commentators were talking of just 2% growth or even that the Chinese economy was reaching the point of deflation.

The challenge for all the BRIC countries is that what has got them to where they are now is unlikely to get them much further.  What is needed is reform, political, economic and cultural.  However, as in Europe the politicians seem completely unable to face up to this, much less actually do anything.  So anything could happen, but it could be sudden, uncontrolled and not good for any of us.

Insurers opting out

The moral and ethical bankruptcy in the banking world that led directly to the financial crisis seems also to have infected the insurers.  Last week one of the countries biggest insurers Swinton was fined £7m by the Financial Conduct Authority (FCA).  This was for selling “add-ons" to customers that they had to opt out of.  This was not made clear to customers and Swinton made an extra £92m from selling policy add-ons that customers neither wanted nor needed.   To quote the FCA “Swinton did not place the customers at the heart of its business (no actual “heart” detected – my insert).  Instead it prioritised profit”.

The next day esure’s house broker JP Morgan announced that esure’s revenue growth this year would be two-thirds lower due to a regulatory market review into the sale of add-on opt policies.

In other words, “if the Swinton fine means esure are prohibited from stiffing their customers then they probably won’t make as much money”.  Are things that bad that the only way they can think of to make money is to cheat their customers and the only reason they might stop doing this is if the regulators ban them from doing it?  If financial services are to continue to be a significant component of our economy then this sort of behaviour has to stop.  Major reform is needed but will we get it?  Don’t hold your breath.

Co-op blues

Talking of stiffing customers the caring sharing Co-op is having to stiff a large number of pensioner bond holders in a desperate attempt to rescue the Co-op bank.  Who would imagine that the Co-op, the mutual which has been held up as the “ethical bank” is now punishing pensioners for being silly enough to believe that they were investing in a low risk investment with the Co-op.  I mean come on who ever heard of “high risk” and the Co-op being in anyway synonymous!  Even if you read the small print you wouldn’t believe it.

Just when you might have thought it couldn’t get much worse for the Co-op, it did.  Last month in their retail business, in spite of sales rising by 0.2pc after four months of decline, the Co-op’s market share fell from 6.6pc to 6.4pc.  The continuing loss of market share means that the Co-op is the worst performing major grocery retailer in the UK.

Things are bad for the Co-op.  It is by no means certain that they can get agreement to the rescue package for the bank and now that its core business is in decline, you can actually see the writing on the wall.  Again major reform will be needed, but is this organisation up for that?  Probably not.

Kate does the right thing

No not that Kate, but Kate Bostock, former head of M&S clothing who moved to Asos 6 months ago as head of product and trading.  Ms. Bostock has decided that “Asos isn’t the right place for me” and has left the online retailer.

Whilst she won’t be short of other offers I say respect to Ms. Bostock for realising she was in the wrong place and doing something about it.  No severance package either, bankers, the BBC, SFO, NHS and nearly everybody else take note!

One thought occurs.  Ms. Bostock has spent her career with bricks and mortar retailers like Next, George and M&S.  Does the fact that she found she could not adapt to a rapidly growing, highly innovative online business with a fast moving culture say something about why a number of established businesses have struggled with their online offers.  In order to create a different business successfully do you actually need a completely new business with new people?

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 5th July 2013

What’s Ocado?

Last week’s theme for TWb4TW was the reality of unreality in business, economics and especially politics today.  Along similar lines a few of last business stories I noted prompted the thought “what is really going on here?”.  The first of these concerned Ocado the online grocer.

Launched a decade ago and yet to make a full year profit Ocado claimed it would revolutionise the supermarket sector.  The foundation for the launch of the business was the deal with Waitrose.  This gave Ocado some scale in its early days and provided Waitrose with a short cut into an online business.  This all looked good at the time but since then Ocado somehow never seems to be quite getting there.  It is always the next investment, systems, distribution centre or whatever that will crack it, but still no profit.

So some excitement a few weeks ago when Ocado announced its deal with Morrisons giving them more or less the same leg up into online as it provided for Waitrose.  On the face of it this could provide the extra scale through Ocado’s operations to lift it into profit.   One small problem could be Ocado’s existing contract with Waitrose.  “Not a problem” they say, “we will have to look at this carefully” say Waitrose.  What this has prompted though is a change of view on where the value is in Ocado. Perhaps it’s not in being a stand alone online supermarket, but in its technology, systems and the facilities that Ocado have developed to power an online business.

Ocado Chief Tim Steiner has previously hinted that his company has developed superior systems and facilities to other online supermarket businesses.  I say “hinted” because he has not really spelled out precisely what is the competitive advantage this gives Ocado.  Nor have we seen a clear demonstration of this competitive advantage in action.  Perhaps Morrisons have seen it which is why they have done the deal with Ocado, although they have been surprisingly quiet since the deal was announced.

Last week Tim Steiner said that since the Morrisons deal Ocado has been visited by companies from around the world and “there was a lot of interest” from those looking to launch their own online ordering services.  So what is going on?  Is Ocado a stand alone online grocer or could it become a service provider?  Is it worth more for what it does or what it knows?  If it is worth more for what it knows does it know how to turn that into shareholder value?  So far it has failed to prove itself in this respect as an online grocer or service provider, a problem often found in businesses that are uncertain of what they are there for and what they are good at.

Battersea déjà vu

Last week we had the latest launch of an £8bn redevelopment project for Battersea power station, attended by the Prime Minister, Mayor of London and the Prime Minister of Malaysia.  The latter attended because last year a Malaysian consortium bought the derelict site for £400m.

David Cameron promised that this time the redevelopment will definitely happen.  Mr. Najib the Malaysian Prime Minister declared “we are partners in prosperity”.  Boris asked “Does anyone seriously doubt that this amazing scheme is actually going ahead? No is the answer”.

Well Boris, I for one do have doubts, because some of us are old enough to remember we have been here before - several times.  Since being decommissioned 30 years ago there have been three previous failed redevelopment proposals that never passed go and numerous discussions with interested parties that got nowhere either.  The main parts of the existing building are listed and some of the scaffolding on the site has been there so long it is probably listed as well by now.

So my question is what is so different this time?  What is going on with this deal that makes it any more likely to proceed and to be completed than any of its predecessors?  There was nothing in the political rhetoric at the launch last week that even hinted at what this might be and the event itself was no different to those that have preceded it.

One question I would like to know the answer to is has the Malaysian consortium actually paid over the £400m for the site?  They may well have in which case that would be the first step completed, some of the previous attempts didn't get that far. Or they may not have, which may be for perfectly good reasons at this stage.  However when projects like this unravel it is not uncommon to find that the basic first steps were never completed so unreality never got close to becoming reality.  We really need to know if this significant and important redevelopment project, with all the implications it has for jobs and growth has more than Boris’ enthusiasm behind it.

Business rates – the elephant on the high street?

Bricks and mortar retailers are getting hot under the collar about business rates.  Boots, John Lewis, Tesco and Sainsbury’s have all called for a rebalancing of the system, claiming the current system unfairly penalises retailers with physical stores compared with online retailers.

Last week Sir Philip Green, owner of Top Shop and Arcadia waded into the argument at a hearing of the Commons Select Committee on Business.  However rather than just continuing with the “unfair” line, he claimed that government is using the uniform business rate mechanism to keep business rates high and ensure they don’t lose any revenue.  For years retail property rents went only one way, upwards and upward only rent reviews were common in rental agreements.  Business rates went the same way as they were linked to valuation which in turn is determined by rental yield. Time went on and business rates became a major source of government revenue.  No one seemed to question this, even though it was clearly unsustainable.

This was proven to be unsustainable when following the financial crash in 2008, valuations and rents on retail properties in many areas went down, as tenants threatened to close units if landlords did not lower rents.  However business rates did not because, as Sir Philip pointed out the government “can inflate the uniform business rate above RPI, so keeping their tax revenues in line.  They fix it so they don’t lose any revenue”.  He gave the example of one of his stores where the rent has come down from £500, 000 to £125,000 over a 5 year period but the rates have stayed the same at £277,000.  Sir Philip believes this should now be nearer £50,000.  He also proposed a business rates freeze and that small retailers should only pay a nominal sum, both of which could be achieved without any legislative change.

The government claims to be concerned about the decline of the high street and has put up £1.2m under the High Street Innovation scheme to finance a number of “Portas Pilot” projects to revitalise a number of selected high streets. Also the Chancellor has brought forward phased reductions in corporation tax claiming that this will give the UK one of the most competitive business tax regimes in the developed world.  However as Alex Gourlay, Chief Exec of Alliance Boots pointed out that for his company of the total of corporation tax, business rates and employment taxes, two thirds is now made up of the indirect business rates and employment taxes.  Reducing the tax on profits which the government is making more difficult to earn by inflating occupancy and employment taxes is not a low business tax regime.

So what is going on?  Has it not occurred to those in government that they can reduce costs of occupancy and employment for shops?  Or perhaps it has occurred to them but they want to preserve the tax revenues, so teaming up with a TV personality to launch yet another “innovation” scheme is an attempt to distract us from what is really going on?  Sir Philip may well have lifted the lid on something really significant here.  Namely that it is the government itself that is making the disparity in operating costs between physical shops and online greater than it needs to be.

One for the Guvnor

Once again the BoE left base rates at an historic low.  On the face of it the first act by the new governor Mark Carney was to do exactly what his predecessor has been doing.  However there was a big difference because he followed up by stating clearly that interest rates would remain low for some time to come.  The reason for this is that the economic recovery remains weak so any upward move in interest rates would be highly detrimental for the foreseeable future.

So in stark contrast to his predecessor who never commented on the future path of interest rates, Mr. Carney has told us plainly what is going on and why.  What is more it all makes sense so a good start from the new governor.

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.