Week ending 5th April 2013

Just imagine …

You are the finance director of a large conglomerate.  You joined the business over 2 years ago as part of a new senior team to turn the business round.  It has proved a mammoth task and although the business is stable it is showing little sign of getting back on to a growth track.  This has been reflected in the share price with two recent downgrades.

This was an old fashioned conglomerate with everything controlled from the centre by a large, bureaucratic and very expensive head office.  Managers running the trading businesses felt all they were there for was to feed this monster and just did what they thought they were being told to do.  You have made some progress in reducing the size and scope of the head office. Along with your CEO and Chairman you have been telling the managers that you want them to be freed up to run their business units with as little interference from head office as possible.

Your Chief Accountant who you inherited from the previous FD’s team has put forward a proposal for a major new “enterprise wide” IT system.  He has proved to be competent which is why you kept him on and his proposal appears to have a solid business case behind it.  He is confident the system will produce major savings at head office at the same time as providing up to date and accurate information on all the trading divisions.

The business logic seems to add up but it will require big changes in all the trading divisions which will take a lot of management time to implement.  Right now you want those managers to concentrate on increasing sales and profits in the businesses they lead.  They are showing signs of responding positively to the new freedoms they have been given.  However you are concerned that they may not have yet developed enough “changeability” to take on this new IT system as well and you feel it may send the wrong message, more control from the centre rather than less.  After careful thought you take the brave decision not to go ahead with the IT project but to focus on supporting the trading units in growing their businesses.

Meanwhile back in the real world …

Last week HMRC implemented the biggest change to PAYE for decades when the new “Real Time Information” (RTI) regime was launched.  Instead of reporting on wages and salaries and tax and NI deducted annually businesses are now required to report every time they run a payroll. This will be a minimum of 12 times a year but for many businesses it will be more often than this.  Failure to comply will result in fines.  HMRC claim they will make big savings in their costs and from increasing the tax they collect.

Now this may be true and I don’t argue that our tax system and regime need bringing up to date.  However given the extremely challenging business and economic climate and the exhortations from government to grow, export and all that good stuff is this really the right time to be introducing something like RTI?  Especially as this government has been banging on about how it is backing business and cutting red tape.  How does that rhetoric match with the requirement to do at least 12 times as much work complying with a PAYE regulation as there used to be?

Did I say something about back in the real world?

Going against the accepted wisdom

Recent readers of these articles will be familiar with my view that what really matters is getting the “business model” right.  I came across a good example of this last week in an unexpected business sector.

Currently about 18 pubs are closing each week, the victims of successive recessions, cheap alcohol from supermarkets and high beer duties.  The majority are those that only served drinks.  The accepted wisdom is that you cannot make money in pubs on drink sales alone and certainly you need a food offering if you are to grow.  Food is the “engine” for driving sales.

However a pub group called Amber Taverns set up in 2005 and which now has a portfolio of more than 80 pubs only sells drinks.  They don’t allow children in their establishments either which goes against that part of the accepted wisdom that says you have to attract families to make money.

There have been plenty of pubs coming on the market which is part of the business model logic so Amber can be picky.  They look for pubs within easy walking distance for a good number of people, with plenty of footfall and passing trade.  They refit the pub with good modern fittings and an array of TV sets tuned to the sports channels.  They offer their beer at competitive prices, nearly half price or less than a “gastro pub” and their managers know their regulars by name.  So you have what Amber owners describe as the modern social club for the 21^st century.

A time of change always offers opportunities and the growth of Amber taverns is an example.  However it is not just based on being able to acquire pubs at a good price.  It is based on a solid business model that delivers what a certain kind of customer wants and makes it easy for them to get it.  The right business model is a key component of “competitive strength”.

I wonder if there is an opportunity for a pub chain that does not allow children AND doesn’t have TV sets either!

Eastern promise

It’s worth paying some attention to what is going on in Japan.  This is a country whose economy, despite being one of the largest in the world, has been going nowhere for years in terms of growth.  Well if the bank of Japan (BoJ) has anything to do with it that’s about to change as it plans a massive hike in the country’s monetary base from 29% to 56% of GDP by 2014.  To show what an upside down world it is one the BoJ’s targets is to get inflation “up to” 2% in 2 years.

Monetary easing on this scale is so huge and unprecedented that none of the experts can really say what the consequences might be so I am not even going to try.  However one effect already has been that the yen has depreciated 32% against the euro since last July.  Is anyone going to buy a Peugeot ever again?

And finally

Nearly another 3 weeks gone and Italy still doesn’t have a government!

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 4th May 2012

Mervyn swervin’

In his BBC lecture last week Mervyn King, Governor of the Bank of England inferred that he had seen the banking crisis coming but had been unable to convince the government to take action.  “In hindsight … we should have shouted from the rooftops … we should have tried harder”.

I have seen Mervyn King speak and he comes across as logical and capable with considerable brain power throbbing away under that urbane and calm exterior. However when you reflect on what he says not all of it hangs together quite as neatly as it first sounds.

In particular, given that the BoE is to have a central role in regulation of the financial sector in future, he continues to duck the issue of an inquiry into the part played by the BoE itself in the financial crisis. Mervyn King has neatly side stepped any suggestions of this mainly on the grounds that the bank had no direct role in regulating the financial sector at the time.

For us this is just another indication that we have not really got to the core of what went wrong to cause the global financial crisis and subsequent recession.  Various proposed changes such as BoE becoming the key regulator and separation of retail from investment banking sound as though they might work. However they seem rather more “knee jerk” than based on thorough analysis and assessment of cause and effect. In particular we don’t think the “people factor” has been examined thoroughly.

The flaw in the machine

There is a widely held but flawed belief that organisations can be operated like machines. Operate them according to the manual, pull the right levers and they will produce the results you expect. However there is one highly unreliable and unpredictable component in these machines – people. People have emotions so they do not always behave or respond as you expect.

Two of the most powerful of human emotions are fear and greed and it has long been acknowledged that these are powerful drivers of financial markets. They don’t just influence the bankers, investors and so on; they also influence politicians and governments. Politicians were more than happy to let the credit dance go on because they believed voters would give them the credit for choosing the music.

We believe a more thorough study of the behaviours, both within BoE and elsewhere is needed before a really robust solution for preventing or at least containing future financial crises can be devised.

Shareholders – even more revolting

After a third of Barclay’s shareholders refused to support the company’s remuneration report, 59% of Aviva shareholders voted against theirs, in spite of last minute concessions over directors’ pay. At Immarsat 61% of shareholders refused to back its report. Now Sly Bailey, CE of Trinity Mirror Group will step down at the end of the year. Ms Bailey has received around £14m in the nine years she has been in the job whilst Trinity’s share price dropped over 90% in the same period.

It is beginning to look as though shareholders big and small are starting to demand better performance from their directors. Perhaps now is the time for Vince Cable to nip smartly through the gap that is opening up and touch down with some legislation for binding shareholder votes on directors’ pay. Or even better if companies get ahead of the game and do this themselves.

Effective government.

The coalition government managed to go a whole week without tripping over its own feet. However that’s mostly politics. We are more concerned about government’s inability to deliver effectively for UK citizens. Here are just a few examples.

HMRC sent out thousands of letters fining taxpayers for not submitting tax returns who did not need to submit tax returns. It was also reported that HMRC's response time to phone calls has increased to an average of 4 mins compared 1.5 min in 2010. In our experience anyone who gets through to HMRC in 4 minutes is on such a winning streak they should make serious investments in lottery tickets. The odds of winning are better than getting through to HMRC in 4 mins. As for the person who got through in 1.5 mins in 2010, well we'd like to meet them!

UK Border Force seems to think that the only way to prevent illegal or unwelcome visitors to the UK is to make life miserable for all travellers. We were told last week of a hospital paying £200 for a computer cable that you can buy almost anywhere for £29 and being charged £800 for moving 2 computers.  There are now 33 different schemes for helping unemployed teenagers. Soon there will be enough schemes to employ all the unemployed teenagers to help each other, job done!

It seems that just “doing something”, rather than delivering effective outcomes is seen as the primary purpose for their existence by too many government departments and agencies. Ministers talk about “efficiency” (and “efficiency savings” whatever those are). We would like to hear them using and understanding “effective”.

Got no satisfaction

Yet another study from CIPD, showing that whilst 80% of managers thought their staff were satisfied or very satisfied with them as a manager only 58% of their staff returned the compliment. CIPD, as you would expect puts this down to inadequate management training.

The word “satisfied” caught our attention. Our message to managers is never be satisfied with “satisfied”, “OK”, “not bad” and so on. Seek out dissatisfied; find out what could be better and what would be really, really good if it could be made to happen. This is the way to find those golden nuggets of opportunities to improve that will pay off for you, your staff and your business.

Any sympathy for ...?

Mark Zuckerberg founder of Facebook who will sell part of his shareholding when the company goes public and collect $1bn in the process. However it is reported he will have to pay most of this in tax. So he may be an internet genius but don't ask him for tax advice.

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.