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.

That was week ending 2nd November 2012

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

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

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

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

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

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

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

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

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

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

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

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

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