THE INVISIBLE HORIZON

I bumped into an old friend today.  He runs what an economist would describe as a small business.  He’s been in business for almost 40 years.  He employs his two sons and a further 20 people, some of them part time.  I wished him a happy new year, as you do in January.  He response was blank.  So I asked him how things were going.  It turns out that he’s requested a meeting with his bank manager for next week. This is the same institution he’s banked with since he started in business, when I was still in short trousers.

“Unless they can give me an overdraft that enables me to run the business, I’ll have no choice but to close it down.  I just can’t face another year like 2011 and all the signs are that this year will be tougher than last.  My health can’t take another year,” he said.  I asked if he expected the bank to give him what he needed.  “They’ve turned down every request I’ve made over the last three years, despite a full business plan by my accountant that shows there’s no risk of the business defaulting.  With their record, I’m not very optimistic”

He then said:  “You’re a communications guy.  What message should I give the staff and how should I tell the staff if that’s what I need to do?”

Over the last three years he has sold most of the assets he’s accumulated over four decades of working 14 hour days, including a holiday home in Spain which he bought for his retirement, and a Winnebago. Everything was sold at considerably less than the market value.  But needs must – suppliers’ bills and salaries had to be paid, including pay packets for his two sons.

It’s not that his business isn’t a good business and potentially very profitable. His problem is that the banks won’t extend any credit.  Without a reasonable overdraft to cover working capital, he needs to use his own cash flow, difficult for a small business and increasingly difficult in the current economic climate.

Because of this, he can’t take advantage of the wholesale prices that would allow him to make a sensible profit margin. He can’t raise his prices because that would make him uncompetitive.  For him, and for thousands of other small and medium size enterprises, economic recovery and a happy new year are invisible horizons.

As taxpayers, we’ve bailed out the banks with considerably more than £65 billion. Our elected officials, who have an irritating habit of forgetting who they actually work for, didn’t seek our agreement in advance.  It turns out they made a much worse investment decision than any bank would be making in giving my friend an overdraft.

Of course, the government put very tough covenants on the banks in return for the bailout.  These included an end to outlandish bankers’ bonuses and a commitment to lend to small businesses, the biggest employers by volume in the country.  Now, we know that the banks, having got the lifeline they needed, are not entirely focused in honouring the commitments they made in their hour of need. Why should they?

The banks hold the upper hand. The Government can’t get our money back at the moment because it’s worth about £35 billion less than we invested.  Calling the debt in would effectively kill any prospect of economic recovery and any chance of a politician being re-elected in just over two years time.  These are the same banks that are primarily, though not solely, responsible for the mess we’re in.

There was a time when we knew our bank managers.  They lived among us, were pillars of our local societies and had discretion in how they ran their businesses.  Today, banks are faceless and centralised and local branch staff have no more authority that the girl on the checkout at Sainsburys.  Negative responses to customers to requests for borrowings are usually accompanied by an explanation that the ‘computer said no’, as if computers programmed themselves.

Lloyds Bank took out adverts to celebrate having lent the amount of money to SMEs that it agreed to under the terms of the bailout, but Royal Bank of Scotland failed in its contribution by £2 billion in three months.  RBS’ woes, we should remember, were entirely of its own making, the result of a Board of Directors that believed their own publicity led by a CEO who was either corrupt or incompetent, or maybe both.  Whoever first thought up the image of the piggy bank had foresight beyond their years.

Vince Cable, our business secretary, regularly threatens to take tough action.  But tough talking is easy.  The banks know there’s very little he can actually do, except perhaps impose an extra tax on the banks. This, if enacted, would serve only to delay any prospect of repaying the taxpayers’ emergency capital investment.

Meanwhile, my old friend, an honest and hard-working businessman who has always paid his tax and religiously paid back his borrowings, can’t sleep at night worrying about the year ahead, fretting about the livelihood of his staff and tormenting himself over the future for his sons and their families.

The only advice I could give him about what to say in the event was to be honest and open.  Let’s hope for all of them, and hundreds of thousands more, that the invisible horizon comes back into view sometime soon.

2012.  Happy new year.

 

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AND THE WINNER IS …

Among the hoards of commuters making their weary way home of an evening in London, you are likely to spot small groups of men in dinner jackets going in what looks like the wrong direction. They’re most likely on their way to an industry awards dinner somewhere, usually on Park Lane.  Every trade association stages at least one awards extravaganza and every industry boasts several every year.  In fact, the awards industry provides sufficient justification for an executive to invest in a black tie.  Female executives don’t do multi-wear outfits.

Most awards ceremonies are organised or supported by the leading trade or technical magazine that covers that industry – the ‘media sponsor’ – and the events themselves follow a tried and well-tested formula.  There’s usually between ten and 15 award categories, few of which would make sense to anyone not intimate with that particular industry (Algorithmic Trading System of the Year, anyone?)  Each category will have between four and six entries short-listed.

The event organisers usually employ the services of a newsreader off the telly as compare for the evening and a comedian or ‘retired politician’ as the entertainment or keynote speaker.  The food served at the dinner is typically secondary, both in importance and quality.

Having extensive shortlists across many categories adds excitement to an awards evening. It also has the benefit of guaranteeing that every table will be sold, just as long as the organisers keep who’s won a secret until the evening itself.  What shortlisted business would risk being named winner and, after the applause has died down, have the newsreader off the telly announce that: “Unfortunately, no one …”

It’s a profitable industry, the awards business. Increasingly, each entry submitted comes with a fee of up to £250, which means you can enter as many times and in as many categories as you like.  The tables, seating 10, usually change hands for between £2,000 and £3,000. Awards evenings represent good business for the venues too, which would otherwise be dark on a school night.

It’s easy to be cynical about awards.  During a recent board meeting, we were discussing the challenges of improving operational delivery and reducing costs.  Then he spoke up:  “You’d think we were terrible at delivery.  Have you all forgotten that we’re the best in the world at what we do … we have the award to prove it!”  The CEO shrugged.  “We won that award because ‘he’, pointing at yours truly, wrote a fantastic entry.” Like I said, it’s easy to be cynical about awards.

I’ve managed processes that have secured dozens of awards over the years.  Some were genuinely prestigious; others were less so. But the sales team always gets bragging rights and an opportunity to tell their customers the great news.  The CEO gets a new engraved acrylic plaque to decorate their office and the website gets a new logo.  Competitors also get to debate among themselves what made our entry superior after their CEO’s invitation to up their game next year. That’s a curious thing – CEOs can view awards as trivial when they’re won but not when they’re not.

But the major benefit of winning an award is always the positive impact it can have on employee morale.  Employees at a business that can boast award-winning products and services are prepared to concede that their efforts, innovation and commitment sway judging panels.  They accept at face value that they’ve been compared to the rest and came out best.

So were any of the awards secured because the comms department produced the best written entry? A compellingly entry certainly helps but unless the business has real merit that can be reflected in the right words, you’ll come away empty handed.

Employees can grow six inches after an award.  It puts a renewed spring in their step and rock and roll in their hearts.  So why do so many businesses not make more of an effort?

 

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CAN ONE PLUS ONE EQUAL THREE?

 

New Zealand has the landmass of Great Britain inhabited by a population smaller than Scotland, yet it’s a nation that likes to punch above its weight.  As anyone who has seen the haka performed before the All Blacks play rugby will know, the Kiwis like to make a bit of a noise too.

This week, Telecom New Zealand, the incumbent carrier, completed the demerger of its domestic access and regulated wholesale business from the rest of its operations. Whilst other operators, including BT, have created dedicated access divisions to concentrate regulatory scrutiny, Telecom New Zealand (TNZ) is the world’s first incumbent operator to separate fully.  Both new businesses are now listed independently on the New Zealand stock exchange.  The financial upside of the split to date has been such that shareholders and the boards of incumbents around the world should be reaching for their calculators.

One of the two new businesses is Chorus, responsible for the country’s broadband access network and the regulated element of its domestic wholesale business. The other, which retains the Telecom New Zealand brand, does the rest, including mobile.  Chorus was created as an access-only unit within the TNZ Group in 2008. It has had ample time to complete the organisational gymnastics required to align its resources and processes.  Furthermore, the demerger should do away with any residual accusations that the national incumbent isn’t playing fair with competitors over access.

Shareholders voted 99.8% in favour of the split, which gave them one new share in Chorus for every five shares held in Telecom. This shareholder support has been rewarded with an aggregate increase of around 35% in the value of the shares since the beginning of 2011 when the demerger plan was first muted.  This increase in value materially outstrips the capital appreciation of any mainstream telco index over the same period.  A basket of telecoms shares in the UK shows an increase of less than 3.5% over the same period time.  Early indications are that the aggregate dividend from Telecom and Chorus will remain agreeable to shareholders too.

In addition, both Standard and Poors and Moodys, the credit ratings agencies, have allocated healthy and stable investment grade credit ratings to both businesses, important considerations for the interest rates they will incur on borrowings.  Chorus, with EBITDA of almost NZ$0.6bn per year, has taken on NZ$1.7bn, or two thirds, of Telecom’s original debts, leaving the ‘New Telecom’ with debts of less than NZ$1.0bn. It also offers shareholders the prospect of rising capital returns from improving trends in cash generation.

The demerger was in part driven by an agreement with the New Zealand Government which in return will provide Chorus with NZ$929 million of cash and attractively priced, long term financing to help bring subsidised, fibre-based broadband to 75% of New Zealand’s residents and businesses by the end of the decade.  A condition of the cash injection is that the Chorus network and services must be ‘competition-ready’ and open to all on an equal, wholesale basis.

The architect behind the demerger within the business is Paul Reynolds, the Group CEO and former boss of BT’s Wholesale arm in the UK.  When he took the helm in 2007, Telecom New Zealand had a well-publicised, troubled relationship with the national Government in Wellington.  Customers and shareholders weren’t great fans either.  Since Reynolds’ arrival, the business has improved its network, products and productivity, radically improved customer service, built what it claims is one of the best 3G mobile networks in the world, begun to rollout broadband over fibre and reduced costs.  The NZ Government’s investment in Chorus is testament to the business’ improving relationship.

While a similar upside can never be guaranteed, boards of directors have an obligation to continually review what’s in the best interests of their shareholders.  As BT’s creation of Openreach has also shown, separating an access business from the core retail business can improve service and reduce costs for customers by encouraging market-based competition.

If the New Zealand demerger experience is any indication, there’s genuine reason for some urgent modelling to be done, particularly among incumbents that remain stubbornly wedded to a fully integrated business model.  If the shares in both Telecom and Chorus continue to perform strongly, it can’t be too long before questions are asked elsewhere.  The investment banking fraternity, untroubled much by a largely inactive market for transactions in the current economic climate, might take an interest too.

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