Thatt was week ending 27th July 2012

The good news is that there will be good news

As the Olympics approached an irresistible tide of optimism began to take hold on the British media. Sports pages were filled with rank upon rank of British athletes with the potential to win medals. If they all fulfil the media’s expectations then no other nation is going to get a look in!

Optimism prevails in spite of poor GDP figures which showed that we remain “mired” in a double dip recession, with the economy shrinking by a whole 0.7pc in June. Given how wet it was the economy wasn’t the only thing to shrink in June. For example I am certain the Queen is smaller now that before the jubilee celebrations. However in economic terms it means a boom in umbrella sales does not make up for no one being in the mood to buy summer frocks.

Such is the mood of optimism however that most people including the ONS think that things are better than these figures show and anecdotal evidence from our own clients and contacts supports this view. There is so much good news about that the Daily Telegraph is actually launching an initiative to focus on the positive news from the business world under the slogan Good News Britain.  Here are just a few of those good news stories from last week.

Manufacturing – what us!

A few weeks ago BMW announced new investment for Mini production and its engine plant at Hams Hall.  Last week Jaguar Landrover announced investment in new Jaguar models that will create over 1,100 jobs at its Castle Bromwich plant.  Hitachi will build a new train factory in the Northeast creating 730 jobs. At this rate we may have to grudgingly admit that we do still make things in Britain.

Making money.

Rolls Royce (our leading high value manufacturer) drove sales and profits up by 7pc in its first half. They are expanding capacity with a new turbine casting plant in Rotherham. BSKYB announced profits up 17pc and that it would be returning £500m to shareholders. Unilever shares went to an all time high when it beat City expectations on sales and profit increases.

Long term at long last

Apart from being good news one other characteristic of these success stories is that they are all the result of long-term vision, strategy, planning and execution. It is interesting that they should all come out in the week that the economist Professor John Kay published his report on short-termism in UK equity markets.

One of his recommendations is to put an end to mandatory quarterly reporting. In 2010 Unilever stopped reporting full financial results quarterly, only reporting on sales performance. In spite of protests from people in the City who get paid to comment on quarterly results this move has clearly done no harm to Unilever itself. This may be something to do with management having more time to concentrate on managing the business rather than managing the city.

A key proposal in Prof Kay’s report is that bonuses should only be paid in shares and that executives should be prevented from cashing in their holdings until at least they have retired from the business. Given that currently the average tenure of a FTSE100 CEO is 5 years the experts in what cannot be done will be all over this one.

However John Rose, who retired as Chief Exec of Rolls Royce last year, spent 27 years with the company and 15 years as its Chief Executive. Last week I highlighted the career of Sir Ian Wood who has retired as Chairman of Wood Group after 48 years with the company, building it into a global leader. These two business leaders did very well for themselves but also built a sustainable legacy into the business for others to take forward. Prof Kay’s proposals on bonuses would ensure that we have more leaders like John Rose and Ian Wood running British business.

Back to unreality

In spite of all this good cheer the end game for the Eurozone appeared to gather pace with inspectors from the EU arriving in Athens to see how the Greeks are getting on with their austerity programme. Markets around the world sagged as they know what the answer to this question is but would rather not hear it. Then on Thursday Mario Draghi the ECB President said he “would do whatever it takes” to save the Euro, adding “believe me it will be enough”. The inference appeared to be that if you did not believe him then he would see you out in the car park with your jacket off. The markets decided they would rather believe him and bounced back in response.

Well you can’t get much more short-term than that!

I know central bankers are supposed to be able to move markets with their utterances but this latest episode has taken unreality into new territory in my view. It is fortunate that we have companies like Rolls, Unilever and the Wood Group. Their long term vision and leadership will take them through whatever happens in the Eurozone and they will still be around long after Super Mario is forgotten.

Regional No Growth Fund

A couple of weeks back I wrote about a client that had been turned down for a grant for the Regional Growth Fund on the grounds that they were too good a risk. The Institute of Chartered Accountants (ICAEW) last week produced an assessment of this scheme, describing it as being undermined by a catalogue of errors, lost documents, bureaucracy and misunderstandings. ICAEW cites a lack of understanding amongst officials at BIS which is a cost to taxpayers and to growth. In other words they don’t know what they are doing. It is not much compensation for our client to discover that the most likely reason their grant application was refused was due to incompetence at BIS.

More reasons to be cheerful

But the good news does not go away as, apart from one miserable old git of a Tory MP, Danny Boyle’s Olympic opening ceremony was judged to be a triumph by most that watched it. You might quibble with some of the content (but why would you want to?) but the execution was flawless. Furthermore visitors to Olympics and competitors are using words like “so well organised” and “everyone is so helpful and friendly”. If we are not careful we will have to admit that we can now run big successful public events AND make things in Britain.

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 6th July 2012

Too big to ...?

There is a perverse streak in me that means when everyone is talking or writing about a particular story I feel compelled to write about something else. This makes it difficult for me this week because last week the Barclay's story dominated the airwaves and column inches to the exclusion of almost anything else.

However it reminded me of the “too big to fail” problem we have with all our banks. The government has said it will introduce reforms so that in future a failing bank can be wound up without the need for taxpayer support. Not much sign so far of anything actually being done about this.

This made me to think more about the “too big” thing and about organisations that become “too big to work”.  There is emerging evidence of disconnects between different levels of management in Barclays creating a situation where the manipulation of Libor by traders was perceived by them as the thing to do. Those disconnects are a symptom of an organisation that has become “too big to work”.

By definition becoming big means a business has grown and growth we are told is a “good thing”. However you can have too much of a good thing. Growth that is the outcome of sound values and continuously building organisational competence and capability is sustainable and delivers value. Growth that is achieved through temporary market advantage, merger, acquisition, financial engineering etc., but without sound values and which outstrips growth in organisational competence and capability usually ends in tears. You may think you need to be big “in order to compete in a global market”, but if you are just not good enough then just being big doesn’t do it. Which brings me to …

Aviva

Apart from spending zillions rebranding with a name that means absolutely nothing at all, Aviva is a classic example of becoming too big to work. Ask any independent financial advisor and they will tell you they are complete nightmare to try to work with. A sure sign of a business that has become “too big to work” is when, like Aviva they come up with one new strategy after another. Each time they convince themselves that this next one is going to work. These strategies always have fancy strap lines like “one Aviva, twice the value”. Under former Aviva CE Andrew Moss this became “one Aviva half the value”, as the share price fell by 60pc.

New Chairman John Macfarlane pronounced last week that the business was a mess and he was going to clear up the mess (though he didn’t use the M-word). Central to his strategy is making the business smaller by selling or winding down 16 of its 58 businesses. However demonstrating that Aviva has not lost its preference for fanciful sound bites the man leading the restructuring, David McMillan, will become “director of group transformation”. In my experience anyone accepting such a title is either very brave or very foolish, possibly both. But, we shall see.

Whose side are they on?

I end this week with a story from one of our clients, a £5m t/o construction services business. In spite of being in a very tough market they have continued to grow and create jobs. However they have to carefully manage their cashflow to support their working capital requirements. Their bank has been supportive but not generous in this respect.

So when the opportunity came to receive a grant from the Regional Growth Fund to help them fund the deposit for some capital investment they were considering they decided to apply. A grant would make it possible for them to make the investment earlier than would otherwise be prudent and create a few more jobs in the process.

In spite of being informed they were exactly the type of company this was designed for our client’s grant application has been refused. The reason given is that the underwriters have calculated that our client can service the borrowing at the funding level required and does not need the 10% deposit support. In other words because the bank felt they could make the repayments there was no grant available.
If they had demonstrated an inability to service the debt payments then they would have qualified for the grant. This means that you have to be a bad risk before you qualify for support. Our client now has to reapply for higher funding up to a level (which they don’t need) at which the risk calculation confirms they can’t service the debt without the 10% funding.
This is just nuts and shows how the people administering these schemes have no idea at all how businesses, especially small businesses, perceive and manage their risks. Lack of confidence is cited as the reason why so many businesses are not investing. A scheme like this can help business mitigate risk and therefore encourage them to invest sooner rather than later. In my client’s case it would have meant that they reduced the risk of having to dip into their cashflow which they need to service their working capital requirements.
Mr Cable this is a serious disincentive for businesses like our clients to apply for so called assistance like the RGF. At this rate the management time they will spend on this is likely to outstrip the value of any grant. No wonder small businesses wonder just whose side the bizarrely named Department of Business, Innovation & Skills is actually on!