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 3rd August 2012

A lesson from the Olympics

The Olympics just cannot be ignored this week; the greatest show on earth really is the greatest show on earth. The challenge is what to write that hasn’t been or will be written.

The event from last week that got me thinking was the expulsion of the Chinese, Indonesian and South Korean badminton players for trying to lose in an attempt to manipulate the draw for the knock out stage. The Chinese and South Koreans were actually playing each other. When both teams are trying to lose just who actually did win is an interesting question.

Also last week we learnt of further eye watering provisions from RBS and HSBC for mis-selling PPI and interest rate swaps. This is on top of the fine for HSBC for money laundering. Barclays and Lloyds have already increased their provisions and many experts predict that even these will prove to be insufficient. The Libor scandal has further to run as well.

So what do banks and expelled badminton players have in common?

I suggest it is about winning. Not what you win but HOW you win.  Regrettably the culture within the banking sector transformed over time into one where it became all about the banks winning and it did not matter how that was achieved. The bonus culture reinforced this by enabling a small number of people to win disproportionately to nearly everyone else.

Winning in sport is on the face of it a clearer proposition. Most of us accept that top sports people must really want to win and this means they must beat their competitors, who by definition, lose. However what we also expect is that there will actually be a real contest, because sport, especially at top level, is massively devalued without it.

This is where the badminton players crossed the line. They abused the core value of sporting competition to enhance their own chances of winning. The spectators spotted this and quickly expressed their disapproval, soon followed by the umpire and then the Olympic authorities.

However there are no actual rules in badminton that expressly prohibit players from trying to lose. What the Olympic authorities enforced was the “spirit” of competition which is about HOW you win. I fear that just introducing more rules and regulations on our banking sector is not going to be the answer to restoring the “spirit” of fair dealing and sound business practice that we really need.

Sharp shooting

Congratulations to Peter Wilson, our gold medallist in the shooting double trap. However at one point it looked doubtful that he could even continue with his sport, never mind actually compete in the Olympics.

Following the lack of shooting medals in 2008 Games his funding from Sport England was withdrawn. With some real “out of the box” thinking Wilson approached Ahmad Mohammed Hasher Al Maktoum, a member of the ruling family of Dubai and the 2004 Olympics gold medallist in the double trap. He did not ask for nor did he receive financial support from Maktoum but he did persuade him to become his coach. With his coaching secured Wilson then managed to raise enough funding himself to get into the British team for the Olympics and then to become the first British shooting medal winner since the 2000 Games.
This was an outstanding example of “where there’s a will there’s a way”. Get really clear about what you want to achieve and that you really want it and then tackle the problems and challenges that must be overcome to make it happen. In particular be ready to think differently about what the solution might be. It would have been so easy for Peter Wilson to see his Sport England funding as the only route to a place in the Olympics and to give up when this was no longer available. There is always a way, we just have to find it.

Falling off.

Congratulations also to our men’s gymnastic team for winning a bronze medal, our first medal in this event for 100 years. At one point they were awarded silver before a protest from the Japanese team secured an extra 0.5 points for the pommel horse gymnast, which gave them the silver.
Now here is a bit of rant from me about this. I watched this part of the contest and whilst I am no expert that Japanese bloke “fell off” the pommel horse at the end of his routine, he did not “dismount”. The fact that his falling off coincided with his dismount does not change my view on this. The Japanese maintained he should be awarded some points for his dismount as he had landed on his feet. Well you would expect a top athlete to land on their feet in most situations. I have seen jockeys “dismounting” at Beechers Brook in the Grand National in a similar fashion to this Japanese gymnast.
A case of applying the letter of the rules rather than the spirit in my view. However given the avalanche of medals that British athletes have collected so far, I guess I don’t have that much to complain about.

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 22nd June 2012

Carr crash

The story that attracted a great deal of the attention last week was Jimmy Carr’s tax avoidance scheme. Left to itself this story would not have had made so much of a stir.  However the Prime Minister chose to single out Carr, calling his perfectly legal tax avoidance scheme “morally wrong”.

Trust me - I'm in business

I don’t intend to add anything more to the debate on this but it connected in my mind to the results from an Ipsos Mori poll published last week. This indicated that fewer than one in twenty British people think “business” is a reason to be proud of the country. The connection is that a number of prominent UK businesses (i.e. Vodaphone) and business people (i.e. Lord Ashcroft, Philip Green etc.) don’t appear to pay the taxes the rest of us think they should be paying.

At a time when UK government and business are banging on about the need to “rebalance” our economy from public to private sector it is of some concern that most of us don’t appear to think much of  business or business people. The Ipsos Mori poll is just the latest indication of a widespread mistrust of business and of business people in general.

Now you might think a general mistrust of business is hardly surprising given the effect of the credit crunch and subsequent recession on people’s lives. However the Edelman Trust Barometer which assesses levels of trust in business across the world shows that the British public are becoming more distrustful of business. This is in contrast to the global trend which shows trust in business rising overall.

Ultimately business will pay a price if customers, employees and the wider population perceive business as some form of parasite rather than as a valued member of the society in which it operates. In particular politicians become tempted or even compelled by public pressure to intervene. This invariably results in higher costs, disruption and unintended consequences. For example the government announced its proposals last week to separate investment banking and retail banking. This will make life more difficult and costly for the banking sector but taxpayers just cannot trust the banks not to screw up again.

Trust matters

"Trust” does matter and what's more it works. The Edelman research shows that people are far more likely to believe good news about a company they trust and far more likely to disbelieve good news about a company they distrust. The implications for the long term sustainability and success of any enterprise are both obvious and significant and last week saw a particularly outstanding example of this.

In 2007 Stefano Pessina took Alliance Boots private with a £11.1bn leveraged buyout, the largest ever in Europe. The deal was done at the top of the market and could easily have to come to grief as many others have in the subsequent financial crisis and recession. Boots was and is one of the most trusted brands in UK retail. Pessina did not muck about with what he could clearly see was working and in particular made sure that any changes he did make enhanced the trust factor. Profits have shot up by 88% since the buyout. Last week they announced an agreement to sell a 45% stake to Walgreens the largest pharmacy chain in the US, representing a 2.7 times return for the investors in the buyout and huge new opportunities for the company.

Building Trust

So how do you build, maintain and enhance trust to drive levels of business performance and success to these standards? Based on experience and research I believe it’s about always “doing the right thing” by shareholders, employees, customers, suppliers and society. No business, including Alliance Boots is perfect in every respect on this but those business that stand out as highly trusted do seem to constantly strive to do “the right thing”. When my wife was in Boots recently she had forgotten to bring a money off voucher with her, but without hesitation the assistant gave her the discount anyway. A small but significant sign of how this business tries to think and behave.

However there is one other factor that in my view is crucial. You must do the right thing but you must do it ”really well”. Attempting to do the right thing but not doing it well invariably results in compromise, short cuts, short term thinking and before you know it you are not doing any of the right things. What this means is that doing the right thing may be simple as a concept but it definitely is not easy to do.

Carr repair

Back to Jimmy Carr, did he do the “right thing” by apologising and cancelling his tax avoidance arrangements? Well he was certainly at risk of losing the “trust” of his fans and with a high risk of damage to his reputation and his livelihood.  He also did the apologising rather well at his first live show after the story broke and it looks like he has pulled things back for himself.

And finally

I had a small chuckle to myself about the downgrades for some UK banks announced by the “Big Three” credit rating agencies last week. RBS criticised the decision by Moodys to downgrade its credit rating, saying the agency was “backward looking”. I am sure the response from many small business owners would be “now you know what it feels like”! Oh yes and then came the IT failure.


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.