The week before this week: 2013

27 August 2013

Week ending 23rd August 2013

The silly season continues. Most of the business stories in the media are about the possibility of various football clubs paying vast sums of money for certain players. However in the absence of meatier news to dissect the silly season does allow us time to ponder on matters that we would perhaps ignore at other times of the year. There is one topic that most of us ignore most of the time.

Must try harder!

In last week’s TWb4TW I introduced you to the “productivity puzzle”. This puzzle is that in spite of recent encouraging signs that economic growth is gaining some traction the fact is that on an output per worker basis UK companies require more staff to produce the same amount now than they did before the financial crisis.

But what is actually meant by “productivity” in this context? In the boom years between 2000 and 2008 the economy was apparently able to produce more goods and services to meet the growth in demand, without price or wage inflation kicking in. However much of this was achieved through cheap imports and cut-price foreign labour. So whilst production and consumption of goods and services grew the actual “productive capability” of the UK economy did not, or at least not to the extent that it really needs to.

This is because we seem to think of productivity as being about “doing more” rather than “doing better”. Ministers are telling us that we now have more people in work than ever before. But is that really as good as it sounds? I talk to businesses who, in spite of lower sales and profits than before the recession and not giving their employees a pay rise for three years tell me they are now “doing well”. But is this kind of “doing well” what these businesses really need to be achieving? We know that in the NHS, in spite of huge increases in spending and treating more patients than ever, productivity has been going backwards.

So do we just need to “try harder”, maybe get some “efficiency experts” in and tighten up those KPIs? After all there are examples of high productivity companies out there; surely more of us could be like them? Well in my experience it is worth looking at those companies, but it is not about what they do, it is about how they think.

A different way of thinking

Some years go I was lucky enough to spend some time at Toyota Manufacturing UK at their Burnaston plant near Derby. I will always remember two statements from the then Operations Director when explaining how Toyota thought about productivity.

“Everyone at Toyota Manufacturing knows they have two jobs. One is to make vehicles and the other is to find better ways of making vehicles. The working day and the business processes are designed and structured to enable all our people to do these two jobs”.

“This way we can reduce the costs of making vehicles, enabling us to lower the price to customers who then buy more of our vehicles which lowers our costs even further”.

For me these two statements embody the principles required for achieving true productivity growth. These principles can be seen in the thinking of every “excellent” business I have been fortunate enough to have had contact with. These organisations think first about how they can “do better” knowing that this is the route to achieve the sustainable capability to “do more”. This “different thinking” is the key to the productivity puzzle.

Regrettably too few UK businesses think this way and even fewer areas of the public sector, where the primary purpose seems to be to exist rather than actually change anything. This is in spite of the fact that research has proven consistently that businesses that achieve superior productivity growth are at least twice as profitable as the average. Until the thinking changes I fear that the prospects for our economy achieving the level of true productivity growth we need to provide the standard of living we would all like in this country are remote.

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.

19 August 2013

Week ending 16th August 2013

The silly season

Since returning from a week’s holiday in what turned out to be a very sunny Norfolk, I have been scanning the media for any stories that contain interesting topics with angles that could be worth exploring for the benefit of my discerning readers. At first I found it difficult to find anything that caught my interest, until I realised that we are now in the “silly season” so it is not surprising there isn’t much to work with. A sign of how silly it is was that the only reason Ed Milliband made the news at all last week was because a man threw eggs at him. EM missed a trick by not having John Prescott with him at the time as this would have guaranteed the front page. However amongst the silliness I found some news on the improving prospects for the UK economy that have potentially interesting and challenging implications for all of us in business.

Consumer confidence – of a sort

Only a few months ago official stats indicated we were in or about to enter a triple dip recession. However since April things started to change. First revisions to the figures showed there had been no triple dip and cast doubt on whether there had been a double dip. If the authorities were to continue this trend we may discover there was no recession after all, just a cunning plan by Cameron and Osborne to be able to keep “dissing” the previous Labour government.

More recently the news seems to just get better and better. This is more in line with what my own network had been reporting previously on buoyant sales and general optimism about the way things were shaping up. Consequently I am inclined to believe what is now being reported in the official stats. One exception to this had been bricks and mortar retail, which still seemed to be struggling. Recently however both sales levels and footfall have been increasing in many of the UK’s shopping centres with even town centre vacancy rates dropping from a record high in April.

So is this a sign that that elusive consumer confidence is really beginning to return? Well as far as retail sales are concerned only up to a point. Incomes are still not keeping up with inflation so consumers need a very special kind of confidence to start spending more of the cash they have less of. What has provided this special confidence on this occasion is the weather. We endured a cold and miserable spring but suddenly since early in June we have actually had a summer. This means we became more confident that we were actually likely to wear the summer clothes we bought. We could see ourselves actually using the new barbecues and garden furniture. Most importantly the sunshine just makes us feel better about nearly everything and we become even prepared to actually “go shopping” as a leisure activity rather than through necessity.

However this kind of confidence will last only as long as the sun shines, if that. In fact if the sun shines for too long sales of winter merchandise will suffer and energy companies will start muttering about having to increase prices because we aren’t using enough of the stuff. At least global warming evangelists will feel vindicated. The key point of all this was articulated a couple of weeks ago by Simon Wolfson Chief Exec of Next. He said that whether influenced by weather or anything else consumers are deciding if to buy, what to buy and where to buy at much shorter notice and that this mindset was here to stay. Those retailers who understand this and can provide what their customers with what they want, the way they want it and when they want it will be the winners. There are already examples of winners are who are achieving this and proving the point. This is more important for the future prosperity of the UK's retail sector than sales growth in the short term.

Growth is good for us. Or is it?

In the great British tradition of reacting to good news by searching out the downside the business media last week were quick to find one. The downside of all this better economic news is that it may result in interest rates increasing sooner rather than later. Mark Carney, our new governor of the Bank of England had previously signaled that interest rates would remain low for some time to come and at least until unemployment drops to below 7pc (currently 7.8pc). However all this good news is beginning to persuade markets that this could be achieved sooner than Mr. Carney had planned for, thus forcing up interest rates earlier than he would like.

Furthermore some commentators don’t like the shape and smell of the recovery that is taking place. They point to a recovery led by consumer spending and rising house prices inevitably fuelled by debt which can only lead us back to where we started. Clearly if that is all we get then it is not what we need. What we need is growth from investment and exports and a rebalancing of the economy away from government and consumer spending. This is a difficult course for Mr. Carney to steer. In particular he needs to keep interest rates and the value of the pound low but he has to do this without increasing inflation. The key to this is finding the answer to:

The productivity puzzle

In a short article last week in the Thursday’s Daily Telegraph Philip Aldrick highlighted the “British productivity puzzle”. This puzzle is “Why do companies require more staff today to produce the same amount they did yesterday? On an output per worker basis, the UK is now 4pc less productive than it was in early 2008, has underperformed the G7 average and is way off the pace set by the US”.

Mr. Aldrick points out that no one really knows the answer to this puzzle and Mr. Carney has been wise to accept he doesn't either. Setting the 7pc unemployment trigger before consideration of interest rate rises may provide the opportunity for him to get clear on what is really going on. If the economy grows without a fall in unemployment this will mean the UK is making up the productivity lost ground and interest rates can stay low. If unemployment falls fast then it means the economy has permanently lost potential and consequently inflation is a real threat. However this would enable BoE to recalibrate monetary policy to tackle what is really wrong with the patient.

If the latter turns out to be the case, then taking the medicine will not be pleasant. I will be exploring this productivity issue further in next week’s TWb4TW as I feel it is a crucial challenge for all businesses. In the meantime read Philip Aldrick’s full article here.

30 July 2013

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!

23 July 2013

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?

10 July 2013

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.

30 June 2013

Week ending 28th June 2013

We didn’t really mean it

TWb4TW is back after a well earned holiday for me and then a longer period of catching up than I had anticipated.

One of the things I noticed when I returned from holiday was that the FTSE100 which had been a galloping over the 6,600 mark before I went away was now retreating towards 6,000. This is doing my pension pot no good at all. I expected you all to be able to sustain a rose tinted view of the markets a little longer.

This change of sentiment has apparently brought on by the US authorities stating that they would begin to pull back on quantitative easing as the US economy improved and that this could start sooner rather than later. Now my understanding of the need for QE as that given the dire state of the world economy governments have been forced to print money before we all ran out the stuff altogether. So I naively thought that news from the US that their economy could be improving to the point where QE was no longer necessary might be good news. Not so because the financial world has been gorging itself on virtually free money and it can no longer imagine how it could manage without it.

By Tuesday things were getting so bad that the old line about Italy needing a bail out was being trotted out. This always seems to happen whenever the financial world takes fright. I am beginning to suspect that this a means of getting governments to panic and reverse any necessary but unwelcome decisions they may have made. “Oh no not Italy we must do something”.

So by the end of the week the US authorities were frantically rowing back saying that reducing stimulus measures would depend on the US economy recovering. Quite why this was different to what they had said previously I am not clear on. However it appears to have done the trick as the markets have recovered to a degree. It really is a question of which unreality you would like to believe in. What this also demonstrates is that you need not worry if you don’t like the unreality you have now; there will be another along soon.

All out at Yahoo

Talking of unrealities, the Yahoo share price has increased by near 70% since the latest CEO Marissa Mayer joined the company 12 months ago. Even so she found herself on the receiving end of a vote from two significant pension fund share holders calling for the whole board to be removed. Given the speed at which directors arrive and then depart at Yahoo (4 CEOs in 4 years and 11 of the 12 current directors only joined in 2012) you could be forgiven for asking “which board of directors exactly?”

So what do these shareholders want, blood? Mayer has cut 1,000 staff and bought Tumblr so she has been active. However Yahoo shows no sign of actually getting good at anything. They recently made a mess of taking on Sky’s e-mail operation in the UK (one of my business partners is still trying to recover) and lost an existing BT e–mail contract due to concerns about security. Both pretty basic you would think and if Yahoo can’t get this right what can they do right?

The issue is where and how Yahoo is going to find a way of growing but there is no sign of any clear direction on this from the Yahoo board. Pension fund investors are not going to be happy to let that situation continue for long. However they should not worry if they don’t like the current board, because given Yahoo’s track record there will be another one along soon.

My bonus, now you see it now you don't

Continuing with the unreality theme it was announced First Group's accounts published last week that CE Tim O’Toole has waived a bonus of 70% of his salary. This is the second year running he has done this. Very good of him you might think given First Group’s difficulties and perhaps a good example to others.

Hang on a minute how an earth could a CEO who has presided over a 37pc drop in profits and been forced into a rights issue to avoid a damaging downgrade of its credit rating qualify for a bonus in the first place? Perhaps the idea is to award your CE a bonus so that they can then turn it down and make themselves and the company look good. Either way it seems that when it comes to reward for work done there is still the real world for most of us and then the unreal world inhabited by senior public company executives and their remuneration committees.

Reality catching up with Google?

In TWb4TW at the end of May I said that the high profile wrestling match between Google and the Parliamentary Accounts Committee over the amount of UK corporation tax it doesn’t pay was changing consumer perceptions of the company. It’s “do no evil” mantra is looking increasingly fragile and at some point customers will find a way of punishing Google.

Well just a month later this is what has started to happen. In 2012’s branding survey from M&C Saatchi Google was named fifth most desirable brand. In 2013’s survey it has fallen out of the top twenty and was the worst performing media brand in the UK, even worse than the BBC after the Savile scandal. A similar survey In Australia reported Google’s brand desirability dropping 20pc, again due to the tax avoidance factor.

So even though we like a lot of what Google offers us we don’t actually like Google as much as we did. This is what happened with Tesco and what Starbucks realised was happening to them. So wake up Mr. Google, maybe reality is about to catch up with you.

Mind you I don’t suppose the name “Saatchi” will be all that desirable either after Charles Saatchi’s treatment of his wife as captured on camera recently.

29 May 2013

Week ending 24th May 2013

Change is coming – but what change?

Either because there really are some positive signs of growth in the economy or because everyone is bored with being miserable the media are beginning to talk about the possibility of better times ahead. However, just in case optimism breaks out our attention is also being drawn to some of the implications of economic recovery.

One of these is interest rates. BoE base rate has been at a record low of 0.5pc for four years now. Should economic activity pick up then how long can this continue? The BoE allowed price inflation to rise as they judged correctly that this was unlikely to produce wage inflation whilst the economy remains subdued. However if the economy really does start to grow then wage increases are likely to be one of the consequences. If this was to happen the BoE would have to increase base rates to dampen demand so as to head off inflation. Even base rates of 2 - 3 pc, previously regarded as low could, on the face of it, have significant implications for many already stretched consumer and business borrowers.

So are we damned if we don’t grow and damned if we do? Well as with many aspects of this recession and its aftermath little is straightforward. Mortgage lending fell for an unprecedented fourth consecutive month in April with householders paying off £241m more than they borrowed. There appears to be a change in mindset amongst consumers resulting in little appetite for borrowing. Similarly with businesses, whilst investment intentions amongst SMEs appear to be on the up this is mainly for replacing older plant rather than for expansion. A combination of lack of confidence about growth prospects plus a lack of trust in their banks appears to have blunted business’ appetite for borrowing as well.

So an increase in interest rates may not have the effect we might expect. Furthermore the actual interest rates being paid by many consumer and business borrowers are much higher than the low base rate would imply and was supposed to bring about. A combination of restricted supply of credit, lenders being more risk averse and attempting to increase their margins has pushed rates up. Of course if base rate rises then lenders will attempt to pass on the increase to borrowers but this may not be so easy to do. RBS alone currently has £20bn of deposits for lending to businesses but can’t find any takers.

What it all adds up to is that some change is coming but what changes and what the effects will be are far from certain and very difficult to forecast. We did not know what the effect of a record low base rate would be or of printing money on the scale we have been. Now we do, but we don’t know what will happen when (and it is when and not if) these measures start to be reversed. We don’t know because we have not been here before.

Now is the time to test your business model against a range of possible change scenarios. Ask what might go up, what might go down, what would the effects be on your business model and could you respond fast enough? The option of just sitting there and waiting to see what happens is now a high risk strategy.

Getting “radical” at M&S

Talking of sitting and then talking and then talking some more but not doing anything, I noted some comments last week from M&S Chairman Robert Swannell in connection with the underwhelming annual results. He declared that the changes being made in the business were “one of the most radical transformations in British retail or indeed in European retail, any European business of scale”. He didn’t quite go on to add “or in the world or even the universe”, but what he did say was “the board has spent the last two and a half years talking about this plan”.

Two and half years “talking” about this plan! I know that oil tankers can take a while to turn round but if you spend two and a half years talking about the plan to turn it round you will likely discover that when you come to turn the wheel you are already stuck on the rocks. When competitors like Zara can get new lines into their stores in two and half weeks, how on earth can the M&S board think it has the luxury of two and half years to talk about its plan for change! If that’s”radical"”, then I am a left handed teacup! Change is coming, get ready now.

Yahoo promises not to screw up

Talking of “radical” in an unprecedented statement on the acquisition of blogging website Tumblr for $1.1bn, Yahoo’s (latest) CE Marissa Mayer promised “not to screw it up”. By this she meant Tumblr would be operated independently, founder David Karp would remain as CEO and generally they would be left to get on with what has made Tumblr successful to date. That success however does not include making anything much in the way of profit.

Yahoo’s problem is that they don’t any longer have an audience. Their strategy now is to buy other peoples’ audiences, which in addition to Tumblr has included Astrid, described as a “get it done” app (or diary to you and me) for an “undisclosed sum” and of course Summly, the mobile news app for $30m. However Ms Mayer’s promise not to “screw it up” refers to Yahoo’s previous acquisitions which include Flickr, Delicious, Broadcast.com and Geocities. Remember them, probably not.

The real challenge for a corporate such as Yahoo is that it is not so much will it screw up the business but will it screw up the people? Tumblr especially is all about David Karp and his team. Ms Mayer has already upset many Yahoo employees by banning working from home. With $250m in his bank account how long before Mr. Karp gets fed up with being required to be “in the office” whenever Ms Mayer wants him there? Saying one thing and then doing something which is completely at odds with what you say will screw up the people faster than anything else you can think of.

He saw it coming, but wasn't watching

Talking of screw ups last week saw the departure of Nick Buckles, CE of G4S. In spite of the botched attempt to acquire ISS and the Olympics fiasco, Mr. Buckles had retained the backing of shareholders. However a recent profits warning that took 15pc off the share price was one “misfortune” too many and he realised he had to go. He went so fast (his successor has only been in the business seven weeks!) that I think he had been expecting that his time at G4S did not have long to go in any case.

The curious thing about Mr. Buckles track record at G4S is that overall it is not bad. The share price has outperformed the FTSE by 174pc during his tenure. So what went wrong?

My take on this is that he did not know when to get involved in the detail to make sure a robust process was in place and working to get the intended result. I know he was the boss of a very big company but there are times when you have to get more closely involved in the ball game in order to win. On the Olympics I find it staggering that on such a high profile project with huge risk both financially and to reputation if it went wrong that Mr. Buckles was not monitoring it closely day by day. It is clear that the failings were as big a surprise to him as to anyone.

This is not about doing other people’s job for them but it is about making sure they are doing the job you expect them to do.

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.

21 May 2013

Week ending 17th May 2013

I know best

The National Audit Office’s (NAO) job is to monitor government spending on behalf of MPs. It does this rather well, producing robust, well researched reports which in many instances highlight government mismanagement and waste. The NAO maintains its independence from government and tells it like it is. So the NAO is a really good thing or least you would think so. Well it would be if governments took any notice, but they don’t. They just receive the reports and completely ignore them.

Last week the NAO produced a report on HS2 which casts serious doubt on whether any of the benefits claimed for this £37bn project would ever be achieved and on whether the project can be delivered within the time frames that have been set.

It also criticised the DfT for basing the business case for HS2 on data more than ten years old. Previously my concern was that by the time it was built, the basis on which the investment decision was made could be ten years out of date. It now appears it already is 10 years out of date.

The response from Patrick McLoughlin, the Transport Secretary was to accuse the NAO of depending “too much on out of date analysis”, so you can see how much notice he is going to take. The message to the voters and tax payers is that HS2 is good for you so that is what you are going to get (and pay for).

Not listening by politicians and business leaders is starting to stir up forces that could have unexpected consequences, for example.

Who likes the EU?

The EU has once again moved to centre stage in British politics. However a survey published last week indicated that UK voters are not alone in having doubts about the benefits of EU membership. This revealed that the proportion of Europeans with a favourable view of the EU has fallen from 60pc to 41pc. The French are now more Eurosceptic than us Brits with backing for the EU falling to 41pc compared to 43pc in Britain.

This indicates that we are all members of a club that the majority of us now don’t much like. However with a few exceptions the political and civil service classes (hard to tell the difference these days) throughout the EU still seem as keen as ever on the “European Project”. Even in the UK whilst the Tory party is clearly split, Labour and the Lib Dems are adamant that our future is within the EU.

Politicians often accuse each other of “being out of touch”. However is it more that the political classes as a whole are now out of touch with the rest of us? The tensions between voters and politicians are growing and could produce very different kinds of election results as voters seek to punish politicians who they feel no longer represent their interests and don’t listen to their concerns. This could produce a very different political landscape to that we have been used to with the current coalition government being just the first taste.

Google play on words

A sign that someone is having difficulty maintaining an argument that they had thought previously was cast iron is when they start to fall back on semantics to justify their position.

Last week Matt Brittin, VP of Google’s northern Europe operations was back in front of the Public Accounts Committee having his soft bits squeezed yet again on how much tax Google does not pay. Since his last visit a number of whistleblowers have come forward claiming that Google does carry out sales activities in the UK. This is contrary to the company’s claims that all its European advertising sales are routed through its European HQ in Ireland. Mr. Brittin acknowledged that “clients may well feel that we are selling [in the UK]. But what is very clear is that no one in the UK can execute a transaction”. He refused to admit that an earlier statement that “nobody is selling” had been misleading. He said “The UK team are selling, but they are not closing”.

Oh dear Mr. Brittin, you really are getting desperate. If it wasn’t for the politicians on the PAC not understanding what the terms “selling” and “closing” mean and HMRC being completely out of its depth when dealing with big multinational corporations you would be dead meat by now. It is not just the politicians that are out of touch and not listening, it is business leaders like Mr. Brittin as well. Watch out Google because the rest of us will eventually find a way of punishing you, even if we can’t think how to do that right now.

And if anyone was wondering what happened to the £20m voluntary contribution to the Exchequer from Starbucks, well it hasn’t been paid yet but according to a Starbucks spokesman they are “on track” to make the payments.

Rising Sun

A few weeks ago I mentioned the huge monetary easing ($75bn a month!) launched in Japan as the strategy for finally defeating more than 20 years of economic stagnation. At that time no one could predict what would happen as nothing on this scale has been attempted before.

Now we know a bit more as the first thing that has happened is the Japanese have repatriated funds to enjoy a boom at home rather than investing in foreign bonds, but this may be about to change or it may not. It is early days and anything could happen. What else has happened is that Japan’s economy grew by 3.5pc in the first quarter, the Nikkei Index is up by 70pc since October and the yen has devalued by over 30pc against the dollar, yuan and euro. This is causing concern for other Asian exporting economies, especially for China and if the Germans aren’t worried yet then they should be. So not only do we not know what is going to happen, when it does we have no idea what the consequences will be.

And finally

Burning issues

The French have come up with a new economic indicator, burning vehicles. Whenever the French express dissatisfaction with the EU or anything else it often involves setting fire to vehicles. I saw a report last week that they manage to burn between 42,000 and 60,000 vehicles annually. I don’t know how we do by comparison but I am pretty sure we don’t match (no pun intended) “l’incendie francais”.

Apparently, as the French economy deteriorates the rate of vehicle burning is increasing, with nearly 1,200 vehicles reported burned over News Year’s Eve and New Year’s Day alone. It is feared that growing social unrest could hamper the French government’s ability to push through the economic reforms that are required. However as President Hollande’s entire political philosophy is based on not doing what is required in this respect this is hardly relevant. On the other hand if they burn enough vehicles then this could spark (again no pun intended) a revival in French car manufacturing leading to economic recovery. Aux barricades citoyens!

A facetious conclusion perhaps and not to be taken seriously? Well I hope I have illustrated above that there are economic and political forces stirring that we have not experienced for many years, if at all. Stranger things than burning your way back to economic growth could happen with unexpected consequences that we will have to respond to. Changeability for businesses and business people has never been more significant for determining who will be the winners and who the losers.

13 May 2013

Week ending 10th May 2013

Feeling flat

Looking back on last week, apart from Leicester Tigers beating Harlequins to go through to the Aviva Premiership final I found little to get excited about. We had the Queen’s speech at the state opening of parliament but this was so uninspiring that now I can’t remember what was in it. We discovered that we did not after all have a double dip recession and were therefore never in danger of having a triple dip. However I can’t feel inspired or even relieved about something that didn’t happen, even if this means something else isn’t going to happen. The FTSE 100 climbed back over 6600 for the first time since October 2007, but so what, after all we have been here before. We might or we might not have a referendum on our membership of the EU and we had yet another report, this time from the Transport Select Committee on what to do or not do about a third runway at Heathrow. Wouldn’t it make a change if just for once someone produced a report on what to do and we just got on and did it!

So, from what for me was a week that I have already almost forgotten, here are a few items that I believe do merit some attention.

It’s the productivity stupid!

Politicians and the media do seem to get excited over 0.1pc differences in GDP, one way or the other. However what really matters is the actual growth potential in the UK economy. Currently that growth potential is only about 2pc per year. Anything over this, whilst it can feel good in the short term, risks overheating, which manifests itself in inflation and/or some form of bubble, such as in property or the financial sector. This is because we just don’t have the economic “competitive strength” to sustain growth much above this level, because our national productivity is not increasing sufficiently to underpin higher growth levels.

So 0.1pc is a whole twentieth of our current growth potential, which is or should be a bit alarming if you think about it. Even if we could achieve and sustain growth of just 2pc per year this would still mean a steady long term decline in living standards, so the productivity issue really matters. For government improving productivity would mean that instead of just producing reports on a third runway we would actually build one. For the individual business it means continuously improving everything you do – people, processes, customer satisfaction to deliver long term sustainable growth in financial returns. Now that would be a bit more exciting!

Delicate China

Still on the growth theme reports last week indicated that China’s economic growth is beginning to falter again. Everything is relative so even though the economy grew by 7.7pc in the first quarter which may look a lot to us this was lower than expected. Lead indicators point to further slowing of growth which could take GDP down towards just 6pc. This is the point at which the Chinese economy would struggle to deliver the rate of growth in living standards that the Chinese Communist Party (CCP) sees as being essential to its own long term survival.

Not so long ago most economic experts believed the question was not if but when the Chinese economy overtakes the US to become the biggest in the world. That view is now changing to maybe never. Loss making and inefficient state owned enterprises continue to dominate key sectors and have grown fourfold since 2003. The ageing population means that the workforce actually contracted by 3.5m last year. The growth from “catch up growth” based on cheap exports and imported technology is fast running out of steam.

Huge cultural and structural changes in the economy and politics will be needed to counter these headwinds. Whether these will be achieved will depend on the outcome of a power struggle between reformists and anti- reform hardliners in the CCP. We may well need to revisit the China factor. It is not just the economics, the politics really matter, much more so than in our own economy.

Be careful what you wish for

More than 20 years ago when I was working as a management consultant I had a meeting with a senior director of Co-operative Insurance (CIS). He believed the organisation needed to change but was not hopeful that it ever would. The huge inflow of premiums on millions of small policies from millions of policy holders had created a highly complacent culture. “What we need” he told me “is one really bad year”.

Well it has taken over 20 years but last week we learnt that they finally achieved this. It may have taken a long time but they really have tried hard. First they merged CIS with the Co-op bank for no apparent good reason and then in 2009 acquired Britannia Building Society, again for no apparent good reason. Finally they went for the 632 Lloyds branches under Project Verde.

Two weeks ago Co-op pulled out of Project Verde citing the worsening growth prospects in the UK. Last week it had to admit to problems of its own mainly with the Britannia commercial property portfolio, resulting in impairment provisions of £469m. There was also the little matter of £250m spent on a new IT system. So finally they achieved their “really bad year”.

Unfortunately this was such a bad year that the Co-op has gone from “challenger bank” to a bank with a big hole in its capital base and “definitely not needing a government bailout” in just 2 weeks. It may be that the only solution for the Co-op will be to sell off the bank, but with rather a lot of banking businesses (around 10) likely to come into play over the next year, the prospects for a sale are not encouraging.

The Co-op’s “ethical banking” positioning appealed to a lot of customers and there is no doubt it achieved a high standards of customer service which are valued by its customers. In spite of this the bank did not achieve the level of “Changeability” it needed to make a success of the projects it embarked upon. Lloyd’s staff and regulators working on Project Verde found that the integration of Britannia had barely begun and there was no concept of what had to be done to fix the business. Thus proving once again that whilst it is right to be “doing the right thing” in banking as in any other business you have to do it really well if it is to pay off.

BT’s sporting bet.

Last week BT announced that it would be offering its 3 new sports channels “free” to BT broadband customers. In spite of losing a little ground on fears of a price war with Sky, BT’s shares are at a 5 and half year high.

The bet they are placing is that in return for making little or no profit from its TV business it will attract large number of customers to its broadband service. Whilst not perfect, the BT broadband service is better than most and certainly as good as any so the platform is there.

Also like Sky they understand that if you attach football to a media offer for some reason it seems to work. BT will show 38 Premier League matches a season, the first time these games will have been available free since the foundation of the Premier League. So this is a game changer and it remains to be seen how Sky will respond.

What is a first in my view is that BT has actually finally come up with a commercial proposition that could make real sense to a lot of customers. This really is about winning and keeping customers not just about managing a decline in its customer base. So has the giant finally awoken? Well there are still those call centres to sort out!

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.

7 May 2013

Week ending 3rd May 2013

The purpose of TWb4TW is to comment on business related stories from the previous week so as to highlight the lessons these contain for the rest of us, before the stories and the lessons are gone and forgotten. Here’s a few from last week.

City Link decoupled (finally!)

Last week Rentokil finally got rid of its loss making parcels delivery business City Link, selling it for £1 to Jon Moulton’s private equity group Better Capital. Rentokil took a further £40m loss on the deal, taking total losses and write downs to over £300m since it acquired City Link in 1993.

The problems with City Link really started in 2006 when Rentokil acquired Target Express for £210m and attempted to combine the two businesses. However whilst both delivered parcels, the two businesses were very different. For a start City Link was a franchise business, so the franchises needed to be all brought in-house. Then it had to integrate 70 different IT systems with the Target systems and then rationalise the depot structure as many depots were not suited to handling the volumes needed to make the acquisition work.

Chief Exec Alan Brown arrived in 2008 to turn round Rentokil and has been predicting a return to profit at City Link since 2009. However this was not to be and recently the company were forced to admit that losses would continue in 2013.

However at least Brown and his team managed to get City Link into a state where it could be sold, even if it was for £1. They are to be congratulated on recognising the reality that they had to get rid of this business and focus on what they are much better at. Having done all the hard work it is tempting to carry on to reap a reward that looks within reach, but in reality is unlikely to be achieved.

The biggest lesson from all this is why did Rentokil ever get into the parcels delivery business in the first place? Their main businesses are in pest control, hygiene services and work wear, all of which are services, using people with vehicles to deliver the service to customers. So on the face of parcels delivery is pretty similar. However Rentokil’s other businesses are based on a contract model. For the most part they know what they have to do, who for and where and when they are required to do it. The parcels business is different. The customers could be anyone. The parcels could be all shapes and sizes, to be picked from and delivered to almost anywhere. Even contract customers’ business involves significant variables to cope with.

When you have made a mistake (or your predecessors have) and you have managed to extricate yourself from the consequences it is not enough just to say “we won’t do that again”. It is well worth looking at exactly what you did, how you did it and why. Hindsight, as they say, is a wonderful thing, so don’t ignore the lessons it provides.

I didn’t expect that!

The most astonishing news from the Eurozone that I came across last week was that the Germans are drinking less beer. Beer sales slumped to their lowest level in 20 years in the first quarter of 2013. What is even more astonishing is that this is not due to German consumers choosing to spend less, but that they are switching to alcopops instead, despite a tax aimed at curbing sales.

It just goes to show you cannot rely on anything in this world. Who would have thought that German drinkers would switch from beer to alcopops of all things? The picture of buxom frauleins with two fists full of Bacardi Breezers just does not work somehow.

What is actually happening is a combination of an ageing population and younger drinkers changing their drinking habits. Quite simply beer is going out of fashion and if that can happen in Germany then something similarly unthinkable can happen anywhere. What this illustrates is that change is going on all the time and that nothing is for ever. Changes often manifest themselves some time after the forces that brought them about actually came into play. So ask yourself these three questions

Why do the customers you have today buy from you and why would they still buy from you tomorrow?
Who might tomorrow’s customers be and what will they want to buy?
Have you got the Changeability to respond?

Supermarket King

When Justin King took over as Chief Exec of Sainsbury’s in 2003 a city analyst sniffily remarked “King has good retail experience but whether he has the credentials for a more radical task is open to question”. An odd remark considering that Peter Davis, King’s predecessor as CE who had no retail experience spent £3bn on new distribution centres and IT whilst letting the retailing basics deteriorate to the point where Sainsbury’s lost their number two position to Asda. Last week it was reported that King will announce sales up 1.8pc and profits 5pc when he reveals annual results this week. This is nine consecutive years of rising profits.

It’s the word “radical” in the above remark that interests me. I am not sure what was “radical” about King focusing Sainsbury’s on “great quality food at fair prices” or listening to customers, or simplifying the supply chain or offering bonuses to staff for high store standards, or cutting prices and improving stock availability. These seem to me (with no retail experience) to be what you need to do to be successful as a mass market retailer. However what was radical, within Sainsbury’s anyway at the time, was that King helped the business learn how to execute effectively, how to actually deliver what it needed to and what it said it would do.

This didn’t just fix the problems the business had created for itself but it also helped it acquire the Changeability to deliver effectively on “radical” opportunities like convenience stores, online selling and introducing general merchandise and clothing which is growing at three times the rate of food sales.

So the lesson I draw from Sainsbury’s and Justin King is that if you can identify the simple things that will lead to success and get really good at doing them this will also set you up to tackle the “radical” challenges effectively.

UKIP – tipping point?

In the end UKIP’s success in the local government election last week came as no surprise. However what we may have forgotten is that just a few months ago, especially before the Eastleigh by-election, it would have been considered a surprise.

Sudden and significant change like this can be a long time coming. The first signs of this emerged in 2010 when the electorate decided not to give a mandate to any one party to form a government, resulting in a coalition. For the ordinary voter UK politicians have continued to behave as they always do and give the impression that it was the voters who got it wrong. The excesses and nonsense coming out of the EU, especially from their politicians have become more and more frustrating and alarming. We have seen similar behaviour from shareholders where after years of acquiescence they have now started to punish directors for failure.

So I don’t see the success of UKIP as a “protest vote” in the conventional sense which is then expected to right itself at a general election. It is more an indication that more and more of us are getting so hacked off with our leaders that we have started to hit them where it hurts to get them to take notice.

What this will actually mean for UK politics is impossible to predict at this stage and we will probably only discover what this is to be at the election in 2015. The only certainty is that there is more change coming and we will all need high Changeability to respond to what it brings with it.

29 April 2013

Week ending 26th April 2013

A year ago it looked as though the end game was in sight for the euro, then things quietened down. The general view was that somehow the Eurozone would muddle its way through to a solution over time. However the Eurozone reappeared last week in the business, economic and political sections of the media and it seems nothing much has changed or is likely to and the slide continues.

Mrs. Merkel mentions the war

Spain’s unemployment has continued to rise and hit a new record of 27% with 57% of under 25s out of work. Italy has finally cobbled together a government which includes Silvio Berlusconi’s party so not much change there.

Stern Auntie Angela is once again pushing for stricter Europe-wide control over national budgets, still pursuing the idea that if only everyone could be more like the Germans then all would be well. This is diametrically opposed to the French position that wants banking union or in other words if only everyone could be more like the French then …. Well you get the picture.

The ability of the Eurozone politicians to come up with policies and proposals that effectively cancel each other out is not altogether surprising if you look at European history. Differences like this arose regularly sometimes leading to war which would sort it out one way or the other. Now that option is not available (thankfully) but the Eurozone doesn’t seem to have found an alternative that works so the differences and the problems they cause rumble on.

Of course this is what the euro was supposed to be all about. A common currency leading to “ever closer union” would be the mechanism by which all differences would be resolved. Indeed Auntie Angela has warned sternly of the risk of a return to conflict between European countries if the euro fails. However it is clear from a number of developments from last week that the pressure on the euro is building.

Austerity light

With GDP throughout the Eurozone falling and even the German economy feeling the pinch it seems everyone (apart from stern Auntie Angela) is questioning whether austerity has gone too far. Almost any country that cares to ask is being granted an extension to deficit reduction targets. The IMF came out with a strange argument that George Osborne was “playing with fire” by pursuing the current rate of deficit reduction in the UK and that there is the “fiscal space” in the UK to indulge in a bit of “fiscal loosening”. The mood appears to be swinging towards the idea that some sort of “light touch” austerity is the answer because austerity itself has become the problem.

All this is a classic and big scale example of tackling symptoms rather than the core problem which is the euro itself. In fact it’s worse than that. When you tackle symptoms and this produces consequences you don’t much like this causes you to tackle these symptoms as well, so you get further and further away from the core problem.

No FTT no €30bn

An example of the Eurozone focusing on symptoms and not the problem is the attempt by Germany and 10 other countries to introduce a Financial Transactions Tax (FTT). As the tax will apply to trades across the world if they originate in one of these 11 countries it is not surprising that many other countries including the US and UK are against it. A Swedish minister has warned that it will be a disaster and will not work. He should know as he actually introduced it in Sweden and found it was a disaster and didn’t work.

Last week Jens Weidman President of the Bundesbank no less announced that “From a monetary policy point of view, the FTT in its current form is to be viewed critically”. He also warned that it could raise the costs of government borrowing and outweigh the revenues raised by the tax. I think we can take that as a “nein”.

The only argument I have found in favour of the FTT is that it could raise up to €30bn which would be used to …lower government deficits! Well perhaps, but if it raises borrowing costs then once again the EU will have cancelled itself out and long since lost sight of the real problem.

George Osborne has taken to matter to the European courts. It would be rather good if he could get the European Court of Human Rights to rule against FTT. Would be almost worth putting up with Abu Qatada to win that one.

Whatever it takes or whatever it costs?

One of the moves that kept the lid on the whole mess for a while was the European Central Bank (ECB) becoming in effect the lender of last resort in the Eurozone. Last summer it launched its emergency rescue strategy, Outright Monetary Transactions (OMT), buying up the bonds of countries like Spain and Italy and bringing about a spectacular fall in their borrowing costs. This followed Mario Draghi’s statement that he would do “whatever it takes” to deal with the Eurozone’s sovereign debt problems.

However he omitted to mention that his plan required the German taxpayer to “pay whatever it takes”. Last week the Bundesbank having poo pooed the FTT did the same to OMT, taking it apart point by point. Germany’s constitutional court is due to rule on the legality of OMT in June. If it rules against OMT it pretty much means the end of the euro. With stakes that high the markets seem confident the court will find some formula to avert that kind of crisis. However it does show just how close run this is all getting.

Italian job

Now that we have a new Italian government perhaps we will see some action to stop the Italian economy choking to death. However be careful what you wish for. Strangely Italy is not fundamentally a basket case, its problem being lack of competitiveness brought about by letting its labour costs race 30pc ahead of Germany’s. In particular it has a primary surplus of 2.5pc of GDP (something George Osborne can only dream about currently). This means Italy could leave the EMU and regain competitiveness without facing a funding crisis.

So why doesn’t Italy do just that? Mainly because its political leaders have not so far been prepared to play rough. The latest PM Enrico Letta does not look like the man to change that and the government he now heads is unlikely to last long enough to achieve anything meaningful. But even with a PM who was very nearly named after a cup of weak coffee, you never know.

Why does all this matter

You may be wondering why I am boring you all to death with this stuff. Last week the UK GDP figures were published and apparently we managed a whole 0.3pc growth in the last quarter, avoiding the triple dip, which sounds more like the latest offer from KFC than a meaningful economic concept. Also it was reported that many businesses are sitting on mountains of cash and are reluctant to invest and even more reluctant to borrow to invest. Behind the flat economy and reluctance to invest is uncertainty and that uncertainty is all about what’s going to happen in the Eurozone. Even when nothing does happen what might happen is scary enough to keep most CEs and FDs awake at night and holding on to their cash cushions.

So the crisis and the uncertainty are set to continue. The UK’s and indeed the world economy cannot recover properly until the EU faces up to the fact that the euro in its current form just cannot work.

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.