That was week ending 23rd November 2012

What goes down must come up

I have emphasised before that I am not any kind of expert on the stock market. If I was, I would not be writing these articles every week. However I have learnt that in general good news from a company tends to lead to a rise in the share value and bad news to a fall.

So what do think might happen to a company that has issued 5 profit warnings since May, whose loss will now be 6 times higher than it forecast in July and is under investigation by the FSA for how it handled inside information? Following the fifth profit warning its shares increased last week by 17pc!

The company is Lamprell an oil rig maker and wind turbine installer. This story seems to demonstrate that you can't have too much of a bad thing. However incoming Chairman John Kennedy has moved fast and cleared out the former CEO, CFO and COO. He also brought in PwC to give the big projects a good going over and although this produced a lot more bad news the markets seem to prefer to know the worst. The better news is that there is still a pretty good and now verified order book and the company’s bankers are supportive.

Now this may not last and I for one will not be piling in to the shares any time soon. However maybe the lesson is that if you have the courage to front up on all the bad news and to take decisive action then this just might be the beginning of some good news.

Did, didn’t, did, didn’t

By far the biggest business story last week has been the Hewlett Packard (HP) Autonomy pantomime. HP paid $10.4.bn for Autonomy in 2011, an 80% premium and 34 times projected revenues! Then in May, just seven months later, HP announced a disappointing quarter for Autonomy and 25,000 job losses, including Autonomy founder and CEO Mike Lynch. Last week they went further and alleged that Autonomy had misrepresented its financial results resulting in HP paying more than the company was worth. Not surprisingly Lynch disagrees, claiming that HP has mismanaged the business.

HP have taken an $8.4bn ($5.4bn for Autonomy) write down and their shares fell 10% to their lowest for a decade. Naturally investors are hopping mad and are asking about what happened with the due diligence. The list of advisers (and £40m of fees) appears to back Meg Whitman’s (HP’s CEO) claim that “we did a whole host of due diligence”, there were certainly enough of them. However she went on to say “it is a little challenging to go in and say gee we need to double check Deloitte (Autonomy’s auditors)”. This must qualify as the “I wish I hadn’t said that” CEO quote of the year.

HP has been thrashing around for years trying to find its way to a future away from the dwindling PC and IT peripherals market. The future is software they decided hence the purchase of Autonomy, which they appeared determined to do at almost any price. This is just the latest in a series of expensive accidents for HP. It demonstrates they simply don’t have the capability to make the changes needed in their own business, much less be capable of taking on other businesses they knows nothing about.

Whether HP’s allegations or Mike Lynch’s claims of mismanagement are eventually proved to be right is frankly irrelevant, this result was always going to be the same. Ms Whitman insists that Autonomy will remain a key part of HP’s future. However with Autonomy personnel leaving in droves as I say, the result is always going to be the same.

Euro Crash?

I was at the CBI conference on Monday to hear speeches from David Cameron and Ed Milliband and to witness a “performance” from Boris Johnson. (If you want to see Boris’ speech there is a link to CBI website below)

Both Cameron and Milliband had much to say about Europe. Cameron talked tough playing shamelessly to the euro sceptics even though he has no intention of taking Britain out of Europe. Milliband talked about how he would not let the country “sleepwalk towards the exit” and the need for Britain to be “in the room and at the table”. Quite how much of this is Milliband’s sincere belief and how much is political opportunism to prise open the cracks in the coalition and the Tory party on Europe is hard to tell. His answer to the short comings of Europe and the Eurozone is that he would seek to bring about reform. He did not explain what reforms or how they might be achieved. The fact that the European commission is building itself palatial new premises in Brussels and the wine served to Europe’s leaders this week cost £120 a bottle might give him some idea of the challenge involved.

The sentiment amongst the business people at the conference was to support what Milliband had to say. Most, though not all UK business leaders do not want us to end up outside of Europe.
However what nobody appears prepared to talk about is the very real possibility of the Eurozone imploding. Greece is supposed to have run out of money this month, yet still the tranche of bailout funds they need to avert this has not been cleared, even though the Greek government managed to get its latest austerity measures through its parliament. Several other countries are just spiralling down with no bottom to their economic well in sight. France lost its AAA credit rating last week, mainly because there is no sign the French government has even recognised, much less is prepared to deal with its fundamental uncompetitiveness.

If the roof does fall in then I would rather be near the exit or even through it. Could it happen? Maybe, maybe not. However remember when Russia defaulted everyone said it would never happen and it did, in just one day!

Boris at CBI

Is it a bird, is it a plane? No it’s a black swan

Talking of the unexpected and unthinkable last week Nassim Nicholas Taleb published a new book – “Antifragile”.  This is the latest of his extended argument about the requirements for business success in our modern world.  Starting with “The Black Swan”, he has now produced a number of densely written and intensely demanding publications. A reviewer pronounced “Antifragile” as probably a good idea but almost unreadable.

For me, this is maddening and frustrating – because Taleb is right but has failed to communicate an immensely important idea that I and my business partners identified in 2004 and have been promoting from our tiny corner ever since! So I am able to explain a concept that could really matter for your survival and prosperity in this uncertain world and save you reading a series of books and still being none the wiser for it.  Here goes –

Idea 1 -– Unexpected things are inevitable and can have totally unpredictable consequences.  Taleb calls these Black Swans.  We say S*** Happens!

Idea 2 – A few Organisations can withstand unexpected events substantially better than most others.  We call this Competitive Strength, (Taleb’s “Antifragile”)

Idea 3 – Outfits with outstanding Competitive Strength have extraordinarily agile, adaptive and flexible mindsets, combined with superb operational competence (i.e. not HP!) and so deal rapidly and effectively with whatever happens – either bad news (Black Swans) or good news (Market Opportunities).  We call this Changeability, (Taleb conflates this into “Antifragile”, wrongly)

And there you have it, 3 challenging ideas you should pay attention to and no need to read 4 or 5 challenging books on the subject. The future is massively uncertain, S*** Will happen. Only outstanding Competitive Strength can deliver the Changeability to secure the future for you and your business in an uncertain world.

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 16th November 2012

No deal to Green deal

In last week’s article I explored the difference between “knowing what you are there for” as opposed to “knowing what you are there to do” A piece of news from last week demonstrates just how wrong everything goes when you forget “what you are there for” and blunder blindly into areas where you have no competence and are therefore bound to fail.

The “Green Deal” is a flagship government policy to make homes more energy efficient and ultimately cut energy bills. If you haven’t heard about it or are not clear what it actually is then you are not alone. Announced in June last year, so far not a single household has registered for the scheme. The scheme enables people to borrow up to £10k to have loft and wall insulation installed. The loan is repaid over up to 25 years through higher bills but the expected savings must be equal to or greater than the cost of the work.

Now if you old fashioned like me this sounds like a second mortgage. Perhaps your walls and lofts may be at risk if you fail to make the repayments. Joking apart, the scheme is so riddled with uncertainty that it is no surprise that even people who have heard of it don’t find it attractive. Also if like me you have had a rash of pimply youths (pun intended) knocking on your door and claiming to be from a government grant service and are not trying to sell you anything, it has also become intensely irritating!

One of the things government is to there for is to ensure that the country’s assets are maintained and improved, so developing a policy to improve insulation in our housing stock is fine. However they didn’t stop there. They went on to design and launch a consumer home improvement product with a personal finance component included. What experience or competence does government have in this field? None. So no take up is no surprise. Can you imagine Proctor & Gamble launching a new cleaning product without thorough market research and testing and a carefully planned and fully resourced launch and marketing campaign?

This is not the first time this has happened. A previous spectacular example was the Millenium Dome. This a was a Tory government scheme but the Labour government decided to not only to proceed with its construction but also to go into the entertainment industry as well. Civil servants were appointed to run it with the inevitable disastrous results. Since it has been run by entertainment industry professionals it has become a great success.

All politicians and government officials have become so sure they know what’s good for us that they can’t resist going into areas they know nothing about. The same happens in business when instead of setting clear directions for the people who know what they are doing and letting them get on with it, managers have to micro manage every aspect of what their people do.

Taxing Times

The debate about how much tax businesses pay or don't pay rumbles on. The week started with Amazon, Starbucks and Google appearing before the Public Accounts Committee (PAC). Amazon made the mistake of sending Andrew Cecil their “Head of Public Policy” or PR man to you and me. He was eaten for breakfast by Chair of PAC Margaret Hodge describing his responses as “unacceptable nonsense” and accusing him of being clearly “not credible”. Why some businesses when they are clearly in a hole over an aspect of the way they do business persist in sending out these lightweight PR people to continue digging I don’t know!

The politicians have now moved the debate to the moral high ground where they take the high ground and make it very clear that business is on the low ground. Ms Hodge accused the companies of using accounting strategies that were “cynical” and “unjust”. She didn’t stop there, adding “we are not accusing you of being illegal; we are accusing you of being immoral”. When politicians start “accusing” others of being “immoral” we are well into pot and kettle territory. Just how many jobs with their accompanying income tax, NI and VAT tax revenues have Ms Hodge and her colleagues on PAC created recently? Any chance of a grown up dialogue that could get to the root of the problem and find practical solutions goes out the window as soon as the “M Word” is deployed.

Whilst there is a ”moral” dimension to the problem of some companies being able to legally reduce their tax liabilities to near zero, this is not a helpful argument. The real point is about competition. If these businesses can save huge amounts of money by paying very low tax on their profits this gives them an unfair and unearned advantage over their competitors who are not able to access the same mechanisms. Andy Street, Managing Director of John Lewis put is finger right on it.

“There is less money to invest if you are giving 27pc of your profits to the Exchequer. Clearly, if you are domiciled in a tax haven you’ve got much more. They will out-invest and ultimately out-trade us. And that means there will not be a tax base in the UK”.

Not a single mention of morality just plain common sense that highlights what the real problem is and what the consequences could be.

What this whole episode is demonstrating is that the taxation system for any business based or operating in the UK is a mess. Even a dog would not want it for dinner. The world has changed a great deal but the tax system has not, apart from continuous tinkering. This is why Tolley’s tax guide is now twice the size it was 10 years ago.

Politicians think a “competitive” business tax regime is just about tax rates, but it is not, it is also about the system itself. Reasonable rates of business tax based on a simple, transparent and above all stable system is what businesses really want. There are lots of reasons why businesses would want to operate in the UK but a tax system that mean they pay little or no tax shouldn't be one of them.

Several other commentators made this point about the failings of our tax system last week. However not one politician, whether a government minister or an MP lauding it on a House of Commons Committee, gave it a mention. Those of us in business need to give them an earful on this at every opportunity.

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 9th November 2012

Last week could be described as momentous, given that Barack Obama was elected for a second term as US President and the Chinese continue ponderously through their leadership change process. It is difficult to work out what is going on with this. However it seems pretty certain that one of the blokes in suits will become the new leader of China sometime soon.

This and some other stories from last week prompted me to think about the difference between “knowing what you are there for” and “knowing what you are there to do” and whether this difference matters. The connection is not immediately obvious between this and Presidential election and Chinese change of leadership, but bear with me.

Hurricane heroics

I am grateful for this story from my business partner in Melbourne, Barbara Craven. It concerns a US company called Squarespace who provide cloud based services including running hundreds of thousands of websites for customers. When hurricane Sandy struck their data centre in downtown Manhattan it suffered a total loss of power in spite of multiple levels of back up systems and resources. It took out much of the building services including fuel reserves for back up generators. And yet none of their customers experienced any down time as a result of the power outage!

How did they do it? For three days employees carried fuel manually up 17 flights of stairs to fuel the remaining back up generator. By day four they had installed a pump system to deliver fuel to the generator on the roof. They now have plenty of fuel on site and a further generator connected at street level but they are still not connected to the power grid. Yet the service to customers has never faltered.

This for me this is an example of people who know what they are there for, to serve their customers. So when struck by a disaster of such unprecedented proportions that they could not possibly have planned for it, they quickly worked out what they had to do. So maybe there is a difference and the difference can make a difference.

Obamarama

However a positive rather than negative “purpose” can, I believe, influence results. In the 2008 Presidential election much was made of Obama’s election machine, particularly that part of it that “got the vote out”. In 2012 the Republicans said they would match or even exceed this. However it looks as though they didn’t and that it was a crucial factor in their defeat. From what I have read it wasn’t about money or about the numbers of people involved. The Obama people just seemed to have the more positive sense of purpose which was to get their man elected. Consequently they had a very clear understanding of what they had to do, which was to find every single possible voter who might vote for Obama and make sure they voted. The Republicans on the other hand gave the impression that they were there to stop Obama being elected, rather than to get Romney elected. This showed on the ground in the lack of purpose, drive and resources they put into getting their vote out.

The lone voice

I came across an example of what happens when people are not clear what they are there for when talking last week with a friend of mine who works for a European manufacturer of capital goods. The company has brought in consultants to improve “sales” performance and they have introduced a sales performance management system. This requires everyone in the sales force to log every phone call, e-mail, meeting etc. and to carry out their sales activity in line with performance standards set by the system. Even though my friend has been the top sales person in Europe for most of the past fifteen years, they want him to conform to the new system as well. Their argument being that if he doesn’t do it then no one else will.

The company has also spent €35m “rationalising” its manufacturing facilities. Whilst this has produced cost savings, these have not been used to offer lower prices or even better delivery times to customers. My friend is clear on what he is there for, to sell machines to customers, but others don’t appear to share this view. They think they are there to tell others what to do and to micro manage them into doing it.

Whitehall revolving doors

However I also think you often need time and experience to understand what you are really there for. This is not surprising when most of our education and experience of work has been all about WHAT we must do rather then why we are doing it.

Regular readers of these articles will know that I regularly castigate government for its lack of competence and capability to deliver what the country needs. This week a report from the Better Government Initiative (BGI) will be published highlighting the shortcomings in government which have caused so many policy failures, including record levels of staff replacement in Whitehall.

Did any of us realise that staff turnover in the Treasury over the last two years has been 50% and the average age in the department is now well under 30?  High staff turnover is affecting all departments from the lowest to highest levels. Only 2 of Whitehall’s 16 departments have the same Permanent Secretary as they did two years ago. The Department of Transport is now on its fourth Permanent Secretary since the election. No wonder it screwed up the West Coast Mainline bid.

It seems that no one has given a thought as to whether this indicates a serious problem at the heart of government. With staff turnover at these levels people will hardly have time to figure out what they are there to do, never mind what they are there for.

China Syndrome

Judging by some of the rhetoric from the Chinese leadership last week they know what they are there for - to maintain one party government so as to keep the communist party in power in China. A key component of the strategy to maintain this political status quo is government control of state enterprises that dominate key areas of the economy. Many of these behemoths make huge losses and are a source of much of the corruption in the Chinese economic system.

However the other goal set is to double per capita income by 2020. This is an example of where what you have to do to achieve what you think you are there for is actually an obstacle to achieving your goals. I may be proved wrong, but in the last 100 years autocratic government with state control of the economy has not been a successful formula for delivering sustainable growth in prosperity for its citizens. This is because it favours the relatively few to the detriment of the many and always encourages corrupt practices by the few to maintain their privileges.

It’s all about outcomes

If you can set a clear outcome that both you and your people can relate to and find inspiring, then quite extraordinary things can happen. A positive outcome will nearly always beat a negative outcome. Focusing just on what people are there to do can make it really hard work to make anything happen at all. Even when you have set an outcome people need time and support to work out how they personally can relate to this and consequently what they are really there for. Finally if the outcomes you set are about you having your cake and eating it, this is likely to be self-defeating.

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 2nd November 2012

My purpose in starting this series of weekly (well mostly weekly) articles is to take a different perspective on some of the news stories from the previous week to see what lessons might be learnt. However I am beginning to find that many of these lessons keep coming round again. So here is a quick canter through some of last week’s news stories with my take on the lessons they contain.

Barclays to slash pay – senior employees at Barclays are to have their pay cut by up to 50%, with the bank happy to take the risk that some will leave rather than accept this. This is one of the key outcomes of Project Mango, a three part review into the future of the former Barclays Capital. So it appears that reality does catch with everyone eventually and the longer you ignore it the bigger kick in the backside it gives you. The mystery that remains is why big corporates continue to give major projects such silly names.

BT Sports Channel – perhaps to its surprise BT came away with two of the seven Premier League broadcasting rights packages plus the rights to Premier League Rugby from next year. The idea behind this move is that it will enable BT to compete with Sky in offering bundled telephony, broadband and TV services. However it is unclear how BT will earn a return on the near £1bn of its shareholders money that it has spent so far when it doesn’t even have a sports channel yet.  The major impact so far is that BT’s entry into the bidding process forced Sky to pay 40% more than in previous Premier League auctions. Perhaps the lesson is be careful what you bid for, because you most likely will end up with some of it, having paid a lot more than you expected.

PPI miss-selling hits banks profits – one clue as to why Barclays and the other banks feel confident they can reduce the pay of their senior people without any mass exits is the scale of the financial headwinds facing all banks. In addition to PPI compensation, the consequences for interest rate swap miss-selling, HSBC’s money laundering and Libor rate manipulation have yet to be fully quantified. PPI compensation alone could top £12bn and be the biggest miss-selling scandal of all time. PPI miss-selling wasn’t just wide-spread; it had become a way of life. If it made money for the bank and for you, it was alright. The lesson is that these days HOW you make your money is just as important as how much you make. Dubious practices that society deems unacceptable will find you out and cost you dear.

Official, West Coast bid fiasco was a fiasco - a preliminary report on the investigation into this sorry saga has confirmed that the DfT’s part in the fiasco is every bit as bad as we thought. Officials in the department knew that they had neither the resources nor the expertise to manage the bid process effectively but they went ahead anyway. They even accepted the “risk of a challenge” from Virgin Rail Group. This wasn’t a risk; it was a cast iron certainty!

Given that rail is a key part of this country’s infrastructure and the DfT has a key role to play the least the government could do was to ensure it was up to its job. Right now it is the equivalent of sending a village football team with just seven players out to play Manchester United. The lesson for those of us in business is that we must demand that government massively improves its own competence and capability before it starts telling us how to run our businesses.

Hitachi buys in to UK nuclear – this Japanese white samurai came riding out of the sunset to buy up RWE and E.ON’s nuclear business in the UK. This is good news because before this the only nuclear game left in town was the Centrica/EDF joint venture. Hitachi has a record of building reactors on time and on budget which would make a welcome change if they could do this in the UK.

However major obstacles remain before this investment will become a reality, notably getting Hitachi’s Advanced Boiling Water Reactor licensed for use in the UK. This could take four years. Once again a key role is played by government, not just in the licensing process but in settling the price to be paid for electricity generated from the new plants. Get this wrong on the scale of the West Coast rail bid and we are in serious trouble.

The lesson is that when you have pulled a rabbit out of the hat, don’t then starve it to death.

Royal Mail delivers Parcels! – another bit of potentially good news was the announcement by Royal Mail that it is to invest £75m into a four year expansion programme that will fuel a decisive shift away from delivering letters to servicing online retailers instead.

Many of us can be forgiven for thinking about time too! To be fair Royal Mail has had a stack of legacy problems to deal with before they could get to a position where they have a chance of making this investment a success. Successive government indecision and general messing about with Royal Mail hasn’t helped. However the lesson is that when it’s obvious what you need to do, best get on and do it. You will be surprised by how often doing the bleeding obvious doesn’t get done.

And finally – I have a feeling in my water that overall things are starting to get better. This is not to do with last quarter’s growth figure, but just a general feeling in spite of all sorts of potential further difficulties that there are more signs pointing up rather than down. Two big events this week may turn out to be significant, namely the result (if we get one this week) of the US Presidential election and the change of government in China. In one millions of American voters will decide the result, in the other a few thousand people turn up in Beijing and put their hands up when they are told to. I am not sure which I find the scarier!

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.