8 July 2012

That was week ending 6th July 2012

Too big to ...?

There is a perverse streak in me that means when everyone is talking or writing about a particular story I feel compelled to write about something else. This makes it difficult for me this week because last week the Barclay's story dominated the airwaves and column inches to the exclusion of almost anything else.
However it reminded me of the “too big to fail” problem we have with all our banks. The government has said it will introduce reforms so that in future a failing bank can be wound up without the need for taxpayer support. Not much sign so far of anything actually being done about this.
This made me to think more about the “too big” thing and about organisations that become “too big to work”.  There is emerging evidence of disconnects between different levels of management in Barclays creating a situation where the manipulation of Libor by traders was perceived by them as the thing to do. Those disconnects are a symptom of an organisation that has become “too big to work”.
By definition becoming big means a business has grown and growth we are told is a “good thing”. However you can have too much of a good thing. Growth that is the outcome of sound values and continuously building organisational competence and capability is sustainable and delivers value. Growth that is achieved through temporary market advantage, merger, acquisition, financial engineering etc., but without sound values and which outstrips growth in organisational competence and capability usually ends in tears. You may think you need to be big “in order to compete in a global market”, but if you are just not good enough then just being big doesn’t do it. Which brings me to …


Apart from spending zillions rebranding with a name that means absolutely nothing at all, Aviva is a classic example of becoming too big to work. Ask any independent financial advisor and they will tell you they are complete nightmare to try to work with. A sure sign of a business that has become “too big to work” is when, like Aviva they come up with one new strategy after another. Each time they convince themselves that this next one is going to work. These strategies always have fancy strap lines like “one Aviva, twice the value”. Under former Aviva CE Andrew Moss this became “one Aviva half the value”, as the share price fell by 60pc.
New Chairman John Macfarlane pronounced last week that the business was a mess and he was going to clear up the mess (though he didn’t use the M-word). Central to his strategy is making the business smaller by selling or winding down 16 of its 58 businesses. However demonstrating that Aviva has not lost its preference for fanciful sound bites the man leading the restructuring, David McMillan, will become “director of group transformation”. In my experience anyone accepting such a title is either very brave or very foolish, possibly both. But, we shall see.

Whose side are they on?

I end this week with a story from one of our clients, a £5m t/o construction services business. In spite of being in a very tough market they have continued to grow and create jobs. However they have to carefully manage their cashflow to support their working capital requirements. Their bank has been supportive but not generous in this respect.
So when the opportunity came to receive a grant from the Regional Growth Fund to help them fund the deposit for some capital investment they were considering they decided to apply. A grant would make it possible for them to make the investment earlier than would otherwise be prudent and create a few more jobs in the process.
In spite of being informed they were exactly the type of company this was designed for our client’s grant application has been refused. The reason given is that the underwriters have calculated that our client can service the borrowing at the funding level required and does not need the 10% deposit support. In other words because the bank felt they could make the repayments there was no grant available.
If they had demonstrated an inability to service the debt payments then they would have qualified for the grant. This means that you have to be a bad risk before you qualify for support. Our client now has to reapply for higher funding up to a level (which they don’t need) at which the risk calculation confirms they can’t service the debt without the 10% funding.
This is just nuts and shows how the people administering these schemes have no idea at all how businesses, especially small businesses, perceive and manage their risks. Lack of confidence is cited as the reason why so many businesses are not investing. A scheme like this can help business mitigate risk and therefore encourage them to invest sooner rather than later. In my client’s case it would have meant that they reduced the risk of having to dip into their cashflow which they need to service their working capital requirements.
Mr Cable this is a serious disincentive for businesses like our clients to apply for so called assistance like the RGF. At this rate the management time they will spend on this is likely to outstrip the value of any grant. No wonder small businesses wonder just whose side the bizarrely named Department of Business, Innovation & Skills is actually on!

No comments:

Post a Comment