Thursday, 30 April 2009

An Umbrella On A Sunny Day?

Western banks are reducing their overseas loans according to the Financial Times today. This comes as no surprise - it had been happening already, so quite why did they go into print today? Simple - the Bank for International Settlements published the "official" figures which showed that some USD4.8billion has been removed from the cross-border market.

What this means, though, is that recovery will slow down even more. Banks, whether you love 'em or hate 'em, provide the financial grease that every economy needs to grow. They provide companies with overdrafts, loans and trade finance facilities. All these go towards enabling companies to pay their employees to manufacture goods or deliver services and receive payment from consumers later. Their staff then spend their salaries (after tax) on other goods and services in their country which in turn pay others' salaries and so on. In other words, you create a "virtuous circle" of economic activity.

Remove the finance, and you remove the employees' ability to receive a salary and therefore to keep that virtuous circle going. Someone has to step in, and this time it will have to be governments, the IMF or the World Bank. At the last G20 meeting, additional funding was pledged to shore up the IMF and to provide trade finance. We now need this funding in place and to be disbursed pronto!

Economies most likely to suffer will be the emerging ones, where financing is coming up for rollover at this time as well (just to add to the problem).

So where does this leave us? Short-term, replacement finance needs to be put in place - IMF to the rescue? Secondly, the governments of those countries which have relied on cross-border finance will need to review their strategies and assess how to attract and retain this finance. With developments at the global level, it is possible that banks may be required to hold additional capital in their overseas locations, rather than in one "pot" centrally to be disbursed as they see fit. This will not appeal to banks and will probably result in pricing changing to reflect the additional cost of holding capital in certain countries, but will discourage withdrawals of the sort we have seen.

We are going through difficult economic times, but by withdrawing support to other countries, banks again risk being accused of being the "fair weather friends" that so many see them as. They need friends right now...


Wednesday, 29 April 2009

Swine Flu - Staff Issues

Every business owner will have responsibilities and indeed liabilities towards their staff in the event of a pandemic. To really understand what these are, consult your GP/company medical adviser and your lawyer. It pays to know now.

Your employees are your most important resource during a pandemic and they will need to be looked after. You will need to plan for absences due to illness, having to look after loved ones who are ill, or to quarantine. You may be able to reduce these absences by taking appropriate hygiene precautions at the workplace, and to reduce the risk of transmission of virus by allowing those who can to work from home. Decide who is essential for the office versus who can work from home. This is your safest way of minimising risk of transmission.

Have a duty roster of those who need to be in, and make sure that they know who should be in and when. If necessary/possible, segregate critical teams (e.g. financial control). You will need to plan for "worst case" scenarios where only a bare minimum of staff can come in.

Communication is vital - make sure your employees know what is happening and why. Get their feedback and buy-in. A good idea would be to have a GP come in and talk to them about precautions to take at home and in the workplace. Have details of employees' phone numbers (home, mobile) and personal email addresses (data protection permitting - they are not obliged to give you this information in the UK). However, it is a good way of sharing information in the event that you have to go into "crisis mode". If they have company mobiles, you will have records of these numbers.

Delegate responsibility for planning and risk assessment to your team (if you have one). Have regular meetings and updates. The more information is shared, the less room there is for rumour and panic.


Swine Flu - Hygeine

You need to have a number of precautions in place to make your workplace as hygienic as possible to reduce the risk of transmission of flu. Medical advice should be taken on what these are, but consider:

Having all members of staff wash their hands with anti-bacterial gel on entering and leaving the premises. Have a stock available at all times at entrances to premises and even departments.

Have them wear face masks (if you decide this is necessary) and again have a stock available at all times.

Encourage them to carry tissues at all times and use them to catch sneezes/coughs. Used tissues should be binned as soon as possible.

Work surfaces should be kept as clear as possible and wiped down at the end of the day with a suitable cleaner (seek medical advice as to what is appropriate).

Door handles, bannisters, railings, work surfaces, computer keboards, telephones and lift buttons are a particular source of infection - wipe them down every hour with a suitable cleaner (again seek medical advice - see above).

Make sure that corridors are mopped/vacuumed daily - particlarly in "high traffic" areas.

You will need to get medical advice on the most suitable products for the above activities, and to keep sufficient stocks available. Remember, in the event of a real pandemic, these may be difficult to obtain, so work out how much you need and acquire stocks while the going is good.

Have a local GP come in to speak to your staff on hygiene precautions. This shows that you are a responsible employer and may also be a legal obligation.


Swine Flu - Who Gets In?

I started recently asking the question about how you run your business in the event of a pandemic hitting. My previous post raised the basic questions that you should ask about staffing and the vital areas of your business. This post covers access.

Most businesses do not operate in isolation. There is a constant stream of visitors - buyers, suppliers, bankers, contractors, inspectors, staff, supply deliveries, interviewees, etc. Under "normal" circumstances, this is part-and-parcel of day-to-day-business. If you have to "button down" your facility to reduce the risk of contamination from outside, you need to decide who gets in. Obviously, the staff necessary to run the business are a given, but who else?

You will not be able to bar access to the outside world completely. Something will break down and will need to be fixed, so decide now what is vital to the business and make allowances for the appropriate outside contractors to visit. Remember that your contractor may also have staff who are sick or otherwise impacted, so they may not be able to service you immediately (if at all). What equipment is vital? When was it last serviced/inspected? If it is not serviced/inspected regularly, does that mean that your business cannot function? What will be the impact on your customers? What actions do you need to take?

Similarly, who will you let your staff interact with? On the smallest scale, will certain departments or teams need to be kept isolated (can they be kept isolated) from each other? A moratorium on travel abroad makes sense, and only essential visits to other organisations should be allowed (you don't know what precautions, if any, they are taking and whether they are as thorough as you are).

Staff should also be encouraged to minimise visiting family, friends and crowded places. This is easier said than done, but make them aware of the risk of transmission if they maintain a high level of exposure to the outside world at a time when the threat of contamination is higher.

Check your child's school to see what precautions they are taking - children are very good at passing on "bugs" and schools are being closed. Does the school have plans to close if certain events occur? If so, what will this mean for you? Will you need to arrange child care (or look after the child yourself)? Will this impact your ability to go to work? What about your staff?

For those who do have to visit your business, have a set of hygiene precautions. Your GP can help here, but this can be what you want. You may want to include questions about whether they have recently met anyone who has/might have been exposed to the flu and/or whether they have recently been quarantined for suspected flu symptoms. Obtain contact details and an undertaking to inform you immediately if they should contract the flu. Have them wash their hands with an anti-bacterial gel (get medical advice on the most suitable one to use) and if you feel so inclined, make them wear a mask. You should have a stock of these and of hand wash at the entrance to the premises, along with your questionnaire. Make sure that they have contact only with those whom they have come to visit and record these details. You may decide to use one designated area only for meetings to help minimise the risk of transmission to others. Ideally, this should be a room with good ventilation that can be cleaned easily.

For essential deliveries of office supplies, etc, can they be delivered outside? Make arrangements with the supplier and explain why. It is for their protection as well as your own.

Where your business relies on a flow of customers (e.g. supermarket, restaurant), what can you do? What health advice is there from your GP? Will you have to change the way you operate, and if so, what is the impact?


Swine Flu

It's still too early to know whether we have a genuine pandemic on our hands or whether we are seeing the usual media storm in a teacup with swine flu. Yes, some people have become infected, and tragically there have been deaths, but not all attributable to swine flu (yet). A sense of perspective is needed here and also some planning in case things get out of hand. The last time I did a plan for a pandemic was during the bird flu scare of 2006, and much of what I did there is relevant here.

You have a duty as a responsible business partner and employer. Get this right, and your business will benefit from your foresight. Get medical and legal advice as to your obligations.

The first thing is to know your enemy - so understand what Swine Flu is, how it spreads, what the current situation is and what precations to take. Wikipedia gives a good start here, as well as the UK government where you can find up to date information. The NHS also provides useful advice and answers to questions.

You should also speak to your local GP or company medical adviser. Basically if you have any doubts, get checked up, particularly if you have recently been abroad or in contact with someone who has. The good news at the moment is that we are only seeing mild discomfort occurring and that this can be treated successfully if caught early enough.

The problem with pandemics is that transmission of the disease often occurs before the carrier manifests any visible symptoms. They are thus likely to have infected others before they realise that they themselves are infected.

If things get serious, then you need to think about how this impacts your business and will need to develop plans. Remember that not only your staff will be impacted, but also your suppliers, buyers and others with whom you have to interact on a daily basis. This includes cleaning, maintenance, electrical contractors and even the forces of law and order and the health services. Will those on whom you depend have planned as well as you? If they haven't, what does this mean for you? Which vital services/supplies do you need to secure?

Be ready to lose staff who either contract the flu, who have to quarantine themselves because they may have been exposed to others with the flu, or who have to care for family members (children, partners, parents, etc). What are the vital areas that have to be manned? What is the minimum number of staff you need? Can people cover for each other? Which key staff need to be covered? Which staff are single parents and therefore possibly more at risk of being absent for longer? How long will they have to be out before they are "safe" again? Your GP/company medical advisor should be able to help here.

Can your business be shut down for up to two weeks without loss? If you are self-employed and need to work, will your clients want you to delay projects whilst they develop plans (or indeed, shut down themselves or ban all non-essential outsiders)? How much cash do you need to survive for two weeks (and how much do you have)? Assume that you will need to pay salaries, VAT, taxes, rent, etc as normal. Does your business rely on customers coming in to buy (e.g. supermarkets, department stores, restaurants)? How will you cope and what will you do to minimise risk? Again, speak to your GP. You may have to consider being forcibly shut down if the health authorities feel this is necessary - can you survive?

I will be writing more about how to look at the other parts of your business and basic hygiene precautions.


Friday, 24 April 2009

A Budget To Die For?

There has been more analysis of Alastair Darling's latest budget than I care to examine in-depth. I do not usually comment on economic affairs, but thought I would put my ten pence worth in here...

These are extraordinary times, and to expect an extraordinary budget would have been perhaps asking too much. The Chancellor had little room to manoeuvre - falling markets, nothing left in the government coffers, and a need to support Britain in getting back on its feet. What he seems to have done is produced a budget that sort of encourages businesses, but disincentivises those who run them. I am focussing here on the proposed tax increases and allowance removals/decreases for those earning over GBP150,000 and GBP100,000 a year. Whilst hitting these would appeal to the majority (and indeed, the Times Populus Poll already suggests that this is the case), does the Chancellor really want to antagonise those who will (one hopes) drive Britain's recovery? He annouced an increase from 40% to 45% only last November, and now he has lumped another 5% on top within six months. This is going to produce a lot of uncertainty for our entrepreneurs and those who might have invested in/moved to Britain - is this a wise idea at this critical time? William Rees-Mogg doesn't think so...

Whatever the Chancellor thinks he will get in increased tax revenues from high earners, this will not happen. They will either leave, or re-structure their compensation. As for reducing allowances on their pension contributions, this seems to be a way of taxing those who save for their retirement (when they will then spend it!).

As for those who were looking to invest in Britain, they will now be turned off until at least the next general election.

Of course, the higher taxes appeal to the vast majority - only the top 1% of earners will pay them, so this is a cheap and populist way of garnering support. As businesses and/or wealth-creators relocate and take jobs with them, will people be so pleased?

We needed a budget to help us get out of recession. This needed to include support for businesses, wealth creators and cuts in some of our highly unnecessary public spending. We have support for businesses and cuts in public spending, but those who drive the future are being penalised in the name of short-term populism. Let's hope that they can re-structure their own packages to keep themselves where we need them!


Tuesday, 14 April 2009

Whither Risk & Regulation?

I attended an interesting seminar last week on regulation by FRS Global. It turned into a bit of an advert for the company's product (well, they were sponsoring it and their staff were the speakers!), but some very interesting stuff came out of it.

Firstly, there is no doubt that we will have more requirement to manage risk, and can expect more regulation. The question is, will it all be better? Regulation should consist of three points of focus: assessment (where is our risk?), measurement (how much risk do we have and how much capital do we have?) and policies (how much risk and of what sort do we actually want and how much capital is needed?). It also needs to be "cycle-proof" (i.e. be capable of covering good times as well as bad). Raghuran Rajan in The Economist points out that we feel most need to regulate in times of crisis (witness Gramm-Rudmann and Sarbanes-Oxley), and this tends to result in more problems in the long run.

"Old" regulation consisted of the balance sheet ratios that we saw up until the 1980s, Risk Weighted Assets and Minimum Capital Requirements. Then along came Basel II which was meant to improve things with more sophisticated risk-weighting and taking guarantees and concentration risk into account. The shouting hasn't stopped on this...

The problem with all of this was that it was backward-looking - i.e. focusing on past performance. It was also book-value oriented, slow, expensive and inflexible. Regulators have also been accused of taking a too light touch approach in good times when things were already starting to go wrong.

The "New" regulation needs to encompass better coverage of risk exposure, the acquisition of better and higher quality capital, higher liquidity buffers, stronger risk management, more transparency of risk portfolios and stress-testing. It also needs to be enforced by regulators who are respected in markets and governments.

Interestingly, there was general agreement that we need to have more focus on system-wide supervision to include hedge funds, rating agencies and compensation for top executives as well as limiting the size of financial players. Rajan also argues for a system of capital infusion when institutions or the system are in trouble and for systemically important and leveraged firms to buy insurance (fully collateralised) to capitalise themselves when the system is in trouble.

In all, the "New" regulation has to be forward-looking and this will require comprehensive reform, but not reform that is overly burdensome and inflexible. In theory, we would have an ideal situation where there is no difference between regulation and risk management. We would have new rules which are simpler and more effectively enforced. I would also expect to see better cooperation on the international front, given the scope of the current crisis.

Will this come to pass? Who can say. There are any number of barriers, including sectoral self-interest, national self-interest and inevitably the argument of how much this will all cost to put in place. Even if it does happen, my greatest concern is that once the good times roll around again, those with wiser and more cautious heads will be ignored again as the sun shines....


Wednesday, 8 April 2009

And Now For Something Completely Different...

All work and no play makes Jack a dull boy, as the saying goes. As a result, I felt I should let you in on a little secret for those on budgets. There are two sets of self-catering cottages that I have visited and can thoroughly recommend.

You will find them at La Croix in France and at Broadway.

They are run by my brother and a long-standing school friend respectively. La Croix is well-situated 2 hours from Bordeax or 45 minutes from Limoges. Broadway Manor Cottages are (as you would guess) in the Cotswolds. You will get a warm welcome from both and a great choice of activities. I will not, of course, guarantee the weather at either!


Tuesday, 7 April 2009

Maintain, Deepen and Niche

This is worth a read for small businesses (and perhaps some of the not-so-small). I have been banging on about what to do during the recession. The attached link to briquesetclics makes great and easy reading.

The author - Richard Martin - is my brother. He has been in the consulting game for most of his life, has crossed China and Russia on the trans-Siberian armed only with a Swiss Army knife (the only management tool I ever lent him!) flies his own plane and rents out holiday cottages in France whilst looking after his family and assorted domestic pets.



Will You Miss The Boat?

It is still too early to say whether we have reached the trough of the current recession. The rate of layoffs seems to have slowed (despite RBS' recent efforts), the G20 have committed USD1.3trillion to re-boot the world economy, and there seems to be less bad news on the property front.

We can't expect industry to re-hire everyone who has been laid off immediately. My view is that now is the time for companies to start thinking (see my posting What Next? on 16 March) about their talent pool. Many will have pared staff down to the bare minimum to survive, but need to think about the future now. Some have offered reduced working weeks (on lower pay) or sabbaticals to staff, rather than incur the cost of firing and then re-hiring. These are the sensible ones.

The ones who risk oblivion are those who currently turn away people enquiring about opportunities, saying that there is a "hiring freeze" in place. By turning people away, these companies are putting themselves in a position where they will be at a fundamental hiring and cost disadvantage when the economy or their businesses turn.

When things do move again, the reaction of organisations will be to hire. Those who have continued to talk to candidates (and they are out here - I know) will have a pipeline of CVs and contact details, with the potential to proceed immediately to second-round interviews and hire at reasonable salaries. The others will be delaying their recovery and giving an advantage to competitors by playing catch-up in a market where demand for candidates is increasing and where they may have to pay more to attract good applicants.

It is early days yet, but you know what they say about the bird...

Monday, 6 April 2009

The New Two-Speed Financial System?

Governments have moved to take control of banks deemed "too important to fail". What is this actually going to mean?

Essentially, we are seeing banks being nationalised in order to save them (and economies) from tumbling even further. Some banks, however have chosen not to rely on government stakeholdings to shore themselves up, preferring instead to raise new capital (HSBC) from investors or to sell assets (Barclays) to strengthen their capital base. This is likely to result (for the next few years anyway) in two different types of bank operating alongside each other: state-owned and private, with pros and cons for both sides. For the "state-owned" banks, the advantages will be:

* Implicit government guarantees;

* Access to further capital if needed (this may be politically unacceptable to taxpayers);

* Possible "first bite" at any lucrative government contracts (unlevel playing field?);

The disadvantages will be:

* The "stigma" of being nationalised;

* Possibly not being able to attract top talent needed to turn them around;

* Uncertainty over how overt government influence on management will be (potential for being asked to make loans to "politically sensitive" but economically unviable industries;

* Potential for increased bureaucracy;

* Potential for reduced innovation;

* Potential for compensation to be set at unrealistic levels.

The advantages for those banks that remain outside government hands will be the opposite of the disadvantages listed above. Similarly, the disadvantages will be the opposite of the advantages above. History tells us that non-government-owned banks generally fare better and can attract better management. Nationalisation or majority ownership should only be seen as a temporary solution and governments should rid themselves of their shareholdings as fast as possible to reimburse taxpayers who will have enough burden to carry for the foreseeable future. Equally, if the effect of nationalising is to stifle innovation and competition, this will ultimately harm consumers.

The secret in not letting such a problem arise again is firstly more effective regulation by regulators who understand the risks, are properly staffed by those with industry knowledge (who are paid accordingly), and are respected by those regulated and by government. This will cost more, and it is only fair that the institutions regulated pay the bulk of this. To make it fairer, institutions or those parts of their businesses classified as "higher risk" should pay more. If this risks making the UK market less attractive as a financial centre, then the taxpayer should be willing to shoulder a higher proportion of the regulator's cost as we have seen that the consequences of failure of regulation are much higher.

Secondly, we need to see a return to the concept of fiduciary duty imposed on those at the head of banks and other large financial institutions. There will still be a need to take higher risks, and for these the financial services industry needs to be properly re-structured and ring-fenced to prevent one bad apple spoiling the whole barrel. If capitalisation becomes an issue here, then either a new system of risk mitigation is needed, or riskier industries must be financed at government level. Until then, expect a two-speed system.


Friday, 3 April 2009

Frameworks For The Future?

The Financial Stability Forum has, we are told, come up with a framework for the future to minimise the impact of crises in future. What does it mean for us?

The Financial Times reported that central banks and regulators are to draw up detailed plans for dealing with large international banks that get into trouble in an effort to limit the fallout from future crises. So far, only general details have been reported, but they include:

* The FSF meeting once/year to discuss what to do in the event of a large international bank getting into trouble;

* Revamping capital requirements to require banks to put away larger amounts during good times to draw down on in bad;

* More focus on risk;

* Global coordination amongst regulators;

* An overhaul of bonus systems to encourage longer-term thinking;

* A process on bailing out insolvent international banks.

Cynics would say "so what?" - this is merely shutting the stable door after the proverbial horses have bolted. I wrote a piece last month about regulation, and still want to see more detail. We do need a more robust global regulatory system to acknowledge that the financial system is now global. However, the trick will be to get countries to put national interests aside for global ones. Is it fair that a taxpayer in France, for example, should be expected to pay for the demise of an American bank?

The overhaul of risk monitoring also needs thought. So far, neither regulators nor senior bank management have covered themselves with glory here as Nouriel Roubini pointed out - what will change? Yes, set aside more capital in good times, but will bankers start to find ways round this after a few good years? How much needs to be set aside, and will there be a mechanism to release it to shareholders? What will be the impact on performance ratios? We have just seen that US banks are being given more flexibility on fair value accounting, the effect of which will be to allow them to re-state the value of certain assets. European banks, however, will not benefit, so what happens now?

Equally, the bonus system (as I wrote in March) will keep lawyers and compensation consultants busy for months (if not years). At least someone stands to make money out of this, if not the bankers themselves!


Thursday, 2 April 2009

Tools For The Job

Been watching some interesting debates on the sort of person needed for these turbulent times. Whilst individual views differ, the same broad trends emerge (in no particular order).

Adaptability: you must be able to think and move on your feet. Jacks-of-all-trade are likely to be more in demand as these people show flexibility and can react quickly to changing circumstances.

Thinking outside the box: specialists may not be able to "see the wood for the trees". What are needed now are solutions and "blue sky thinkers".

Leadership: people with a "can do" and "take charge" attitude.

Ruthlessness: well, not sure about this. Do you want someone who will alienate the workforce and/or customers? I would describe this more as "focus".

Revenue/Cost-Consciousness: you must have an eye on the bottom line. Will a proposed action make or save money?

Focus on Customer Satisfaction: if you depend on others buying your goods/services, you had better make sure you know what they want and deliver it immaculately. Unless you are a monopoly service provider, there's too much competition out there. Staying close and preserving that annuity income is probably more important than generating new sales (which will come of themselves anyway if you stay close enough). Have a look at what Michael Heppell has to say on the art of brilliant service.

Ability To Plan For Alternatives: many companies are having trouble forecasting what will happen in the next quarter, let alone year. Some have (sensibly) decided that the only way is to plan for different scenarios and to devise actions for each. Takes more time, but if it saves you...

Attention to Detail: it's no good having great plans if you can't work out how to implement them. Have the ability to delve into detail, or get someone on the team who can.

You won't necessarily find all the above in one person, but if you have these skills in the senior management team, you're off to a good start.

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Wednesday, 1 April 2009

Divide And Be Conquered

As businesses look to deliver service, the approach is often to break the process into its component elements and farm them out to different specialist divisions. This is fine, as long as all divisions talk to each other. This episode shows how getting this wrong can destroy value very quickly.

Since we moved into our new home in September 2007, we have been using a particular supplier for telephone and broadband. It took us three months of effort and stress to get things set up. We were cut off during conversations with them, every time we rang we dealt with a different person, the different people didn't seem to have access to notes on previous conversations, conflicting instructions were given. When we finally did get set up, part of the service still didn't work, but we were so pleased to have most of it in operation, that we decided not to push our luck (or our sanity).

Fast-forward to March 2009 with one month to go before our contract expired. As you can guess, I looked for deals and found one that would save me GBP276/year on what I was paying. I rang current supplier to request a MAC code (a code to transfer the service to the new supplier). Of course, they asked if there was anything they could to to keep us, so I asked if they could match the new price. They could, but I said that I wanted a particular aspect of the service (the bit that didn't work) checked. I was assured that I would receive a call within "24 working hours" from the technical team. No call came, so I called up again to ask for my MAC code. Same process started, I asked them to refer to their notes - none available.... I asked for (and got) the code.

If they had managed the last little check on what I had asked, and called me back when they had said they would, they would have kept business worth GBP382/year. Less than before, but better than zero which is what they have now. Ironically, I wanted to stay with this supplier, but despite my best efforts, they practically drove me away.

By dividing up the service provision, my supplier is destroying shareholder value thanks to lack of connectivity within the divisions. No one connects with each other, no notes can be found, no one can safely say that something will happen when it is meant to. I took business worth GBP660/year away. Not much, but assuming that I am not the only one in this position, this adds up. Of course, legislation may be preventing them from offering a more "seamless" service if different legal entities are involved, but then this is an organisational issue that management need to review.

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