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.

That was week ending 12th October 2012

The merger that never was

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

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

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

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

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

Swann song

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

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

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

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

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

Tesco – a straw in the wind

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

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

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

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

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

Tesco do want the customer to read their adverts 

TESCO OWNS THE PROBLEM, not the customer.

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

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

Shares for rights

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

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

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

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

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

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

That was week ending 20th July 2012

G4 what?

The G4S story was all over the headlines at the beginning of the week, but had faded out almost completely by the weekend. The media had moved on to looking for other potential Olympic disaster stories. Watch out for reports of missing toilets rolls and any other minor shortcomings which the British press will project as a national disgrace that we are somehow all to blame for.

However a question occurred to me about the G4S debacle which I thought worth exploring. That question is did G4S think it was contracted to provide security guards for the Olympics or did it think it was contracted to provide security?

It is still not clear exactly why G4S failed so badly. However there are two factors that appear significant. First following a review of the security requirements by the government they significantly increased the number of security personnel they required from G4S. This was the security requirements driving the numbers of guards to be recruited. Thereafter the recruitment process became entangled in the training process which could not train recruits in sufficient numbers.

Now you may think this does not matter because, at the end of the day G4S failed to recruit enough security staff which means they would not deliver on the security requirements either. However I think it is significant because it could have affected the way G4S approached delivering the contract. If the primary driver of its process was the recruitment of security guards then they would be less likely to anticipate the potential for the need to increase numbers nor the implications of the training that would be required.

I have seen many instances of failure to deliver caused by a supplier not fully understanding what it is the customer really wants as opposed to what it seems they have requested. I would not be surprised if this turns out to be the route cause of G4S failure on their Olympics contract.

Eurozone – the beginning of the end?

A few weeks back I wrote about how none of us could predict what was going to happen in the Eurozone but that the signs were that something was going to happen and it might happen soon. Curiously since then not a lot has happened and there has been very little coverage in the media, until towards the end of last week.

Last week Eurozone finance ministers unanimously approved €100bn bailout for Spain’s banks. In spite of this Madrid’s 10 year bond yield jumped back above 7pc and yields on short term debt are now a fifth higher than 6 weeks ago. The Spanish government introduced austerity measures that are much tougher than the Spanish Prime Minister claimed would be required when the loan agreement was announced. This pattern follows that of Greece, Ireland and Portugal so brings Spain close to the point of needing a full scale sovereign bailout. The Eurozone could rescue Spain but the next in line Italy, is just too big. Last week 10 year yields on Italian bonds climbed sharply, peaking at above 6pc and Sicily became the first Italian region to appeal for government help to prop up its finances.

The Eurozone is fast running out of workable and politically feasible options for saving the Euro. “Fiscal union”, which is the only option really likely to work, is simply not going to happen whatever the IMF says, so that leaves the breakup of the Euro as the increasingly likely outcome. By simultaneously sending their governments on holiday they have ensured that nothing can be decided and therefore nothing can happen (they hope) until the autumn. However we are probably about 3 months away from the “beginning of the end” for the Euro.

Some of the way with UKBA

The proposed strike during the Olympics by UK Border Agency staff has been condemned almost unanimously as everything from unpatriotic to opportunistic. Despite only 10% of staff voting for action the PCS union is to press ahead with the walkout.

Whilst I share the general disapproval I do have some sympathy with the front line staff involved. The standard of leadership in UKBA is so bad that if I had to work there I would be sufficiently hacked off by now to want to take it out on someone. It is not only rubbish in UKBA itself but it is compounded at the political level by Theresa May the home secretary who continues to flounder. The coalition only seems ready to accept removing a minister from their job if they have been involved in something underhand. Incompetence and failure it seems is not a reason to move a minister to where they can do less damage.

Solid Wood

On a more cheerful note and talking of leadership, best wishes to Sir Ian Wood who has retired as Chairman of Wood Group after 48 years with the company. During this time he has guided the company to become a global energy services group employing over 41,000 people in 50 countries. A great example of growing a successful business through engineering, rather than financial engineering.

With Sir Ian stepping down there is some speculation that the company could now become a bid target. No one could blame Sir Ian and the Wood family who still own s substantial share of the business from thinking about realising at least some of the value of this shareholding. However I hope that if the company is sold that the new owners will recognise the skills and culture of the people in the business that have been crucial to its success and build on this. It would be a great shame if the value created by Sir Ian and his team were be squandered as a consequence of a change of ownership.

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 13th July 2012

The elephant in the report

Last week the Office for Budget Responsibility’s (OBR) published its Fiscal Sustainability Report, its annual assessment of the UK’s overall financial health. The OBR reports that measures to cut the deficit together with others such as reforming public sector pensions have improved Britain’s long-term economic prospects. This will help maintain market confidence in the UK and keep government borrowing costs down.

So this year’s report is actually more encouraging than last year’s but only in the sense of comparing “we’re all doomed” to “we should all be very worried”. What the OBR thinks we should worry about next is the challenge of supporting the ageing population through healthcare and the state pension. They estimate that by 2061/2062 changing demographics will add £65bn to the budget deficit in today’s money, unwinding half the current round of austerity. This says the OBR will require further spending cuts and increases in taxation to stop public debt spiralling to nearly 90%.

Now 50 years is a long time. Perhaps advances in technology and productivity across the economy will offset some of the financial consequences of this demographic time bomb. However the OBR warned that unless productivity in the NHS picks up then government will have to make a further £68bn of cuts elsewhere.

The coalition promised to protect spending on the NHS. However at the same time the service is attempting to save £20bn by 2015 to ensure there are sufficient funds to cope with the rising demands of an ageing population. Hospitals have cut their headcount with the consequence that the number of shifts filled by temporary workers rose by more than half in a year. For a general nurse this comes at a price of up to £1,400 per shift compared to about £212 per shift for a nurse on the NHS payroll.

When you impose cost cutting on an unproductive organisation, it just gets more costly and unproductive. By contrast Toyota continuously improves productivity in order to achieve the means and opportunity to reduce costs. Of course sometimes you just have to cut costs, but unless your productivity improves the benefits are short lived and you have to cut again.

The stark but unspoken conclusion lurking in the OBR’s report is that, unless productivity in government and public services improve significantly we face decades of spending cuts and tax increases just to stand still. There is little sign that this government or any of our politicians actually understand what “improving productivity” actually means and why it is different to “cost cutting”.

The “do nothing” growth plan

The signs that anything is about to change are not encouraging. Last November the government announced a plan to boost the economy with investment in infrastructure with 500 potential projects worth about £250bn.  40 projects were identified as priority but 8 months on not a single project has been started. In the meantime it is reported that one in four public sector organisations will cancel construction projects over the next 4 months.

Last week we had the launch of the “funding for lending” scheme and announcements of major investments in rail including Midland Mainline electrification. We in the East Midlands have been pushing for this for what feels like most of our lives. However we also know that there is only one technical team left in the country with the expertise to handle this and that capacity is already fully committed.

Improving government productivity means not just announcing projects and schemes to boost economic growth but actually making them happen and delivering results. As I said the signs are not encouraging.

Surprise, surprise!

Bob Diamond told us he did not know that some of his Barclays Capital traders and been fixing the Libor rate. However last week we also learned that when Russia defaulted in 1998 BarCap traders were found to have breached the country limits imposed by the bank. This was never made public at the time but guess who the boss was at BarCap and did not know what had been going on? Yes, Bob Diamond no less. What was that Oscar Wilde line, something like “once is unfortunate, twice sounds like carelessness”!

We seem to be getting a steady flow of Chief Execs who don’t know what is going on in their businesses. The latest is Nick Buckles of G4S who only found out “8 or 9 days ago” that they were way short of the number of guards they needed to recruit for the Olympics. Now I have never run a FTSE business but if I had and the business had won a contract to supply security guarding for the Olympics I think the following equation would have occurred to me, “high profile + high risk = potential catastrophe”. You really wonder what these big company Chief Execs do all day!


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.