'Banks are in a dangerous frame of mind: they feel isolated, the whole system of mutual support and syndication has broken down and they are not doing what the government tells them to do.'
The words of Lord James of Blackheath, or to you and I, David James the renowned Company Doctor. Interviewed in this month's Director Magazine from the IOD he insists that in over 55 years in business he has been through 8 recessions and has seen nothing like this one.
At Christmas, a good friend of mine had a very good business, growth was good year on year, his customers seemed buoyant and he was very dismissive of how the recession could affect his business. We talked about diversification and protecting customers by offering them extended deals early but he dismissed this as he 'had never offered a discount in his life'. In February he made 5 people redundant justifying it on the grounds that the chosen people were poor performers. By the end of this month he will have made a further 7 people redundant - in total nearly half his workforce has gone in a single quarter.
Here's the rub. He isn't short of cash - he's short of sales. In a single quarter, his major customer indicated he was no longer in the market for his services and then a few more hit with the same message. Of course, he had reviewed the pipeline and tried to reason that each deal was good but he had failed to talk to his customers early and address the issue of those who might actually not continue to buy. By the time he had realised what was happening, a massive drop in sales left him with no course other than to cut costs radically.
Economic Shock
I have blogged before on the extreme speed at which this recession has hit. But there are survivors, there are losers and there are winners in the tumult. While Sainsburys reported a recent rise in sales, Marks and Spencers have just announced a 4% like for like drop - they have already announced the closure of many of their smaller outlets which had so much captured the public's eye at service stations and the like.
David James asserts that anyone who tries to expand through bank borrowing is likely to find their funding withdrawn - and this echoes concerns I raised yesterday that many small businesses are not getting access to the Enterprise Finance Guarantee (EFG) scheme as put up by the Business Secretary which made sure banks were only liable for 25% of any loss on lending. Yet little of that money has been released to businesses while banks are busy converting current lending to the scheme by offering small top ups and then getting 75% of previous borrowing covered.
It's a blatant scam and as usual the Government's implementation of what on the face of it was a decent idea has been incompetent to say the least.
The emphasis from senior business luminaries (and not people like Ruth Badger) is to look at cash-based rather than sales-and-margin-based sales. This will put a pressure on the social cycle we all want like suppliers paying on time, which has been an exaggerated problem in the last few months for many, but the advice is that we should also pay our suppliers on longer terms and conserve our cash while offering incentives for sales which bring cash in quickly. In the same breath we are advised to cut capital spend, cut people, take no risks, do nothing novel and batten down the hatches or go bankrupt. This is the advice of Jon Moulton, founder and Managing Partner at private equity firm Alchemy.
As he puts it, 'When there are seven of you and only five seats in the lifeboat, what else do you do?'
Risk in A Recession
No one could argue that Moulton's advice is not sound. In the teeth of the worst economic recession since the 1930s, it would be suicidal to start taking daft risks. However, that does not mean that there are not opportunities out there. Yesterday, I gave the example of Richard Branson seizing the opportunity to sponsor the new F1 Team Brawn who had formed from the ashes of the Toyota Team. With two decent drivers and a team, Ross Brawn has developed a car that is not only competitive at the first time of asking, but actually qualified in positions 1 and 2 on the grid and finished the race in the same order. Branson, not even an F1 geek like some sponsors, seized on the fact that there was not a single logo on the car and signed a hastily put together, tentative deal by his standards, to sponsor the Brawn cars. It could not have been a more spectacular coup for a man known as the master PR expert.
Virgin will be in pride of place at the next race, at the top of the driver and constructor tables and feted as the saviour of the team. Such bold risk taking in hard times is a priceless gift.
Business Myopia
The car industry is an example of a tragic crash in the heart of this recession. Hit by the dual cosh of lack of credit and lack of sales, production has slumped dramatically and this means that the car makers are quite literally in survival mode. Promised a £2.3bn package of rescue by the Business Secretary, none of that money has yet flowed to the companies, and across the UK it is estimated that over 800,000 jobs are directly or indirectly dependent on the industry. In the '80s, Sir John Egan epitomised Margaret Thatcher's industry boot-boy who got out and kicked the unions and slammed Jaguar back into shape after years of fattening under state control. He improved productivity by some 70%, slashed the workforce by 40% and exceeded the cash targets set.
As Egan said recently, 'For all but the grandest companies, cash will be more important than profit right now.'
John Mumford, a former BP executive and now at risk of my haranguing for being on the board of several companies, claims that companies he has worked with, large and small, suffer from what he describes as 'business myopia' - a lack of empathy with introversion regarding what is going on in the real world. I can only agree - too many companies I have spoken to recently who poo-poo'd the recession and claimed that they were having a record year, had a recession-proof business and thought people like me were 'talking up the recession', have had to lay off staff at minimum and, in some cases, tried to get emergency loans.
Mumford believes there is a 'high level of dysfunction in terms of talking to outsiders and seeing problems coming.'
Mumford also believes that in larger companies there is a level of 'group think' and that those who do not share the collective view are cast aside politically. In the past IBM suffered from what was called internally as managers giving 'Good slide' - a vernacular that described their ability to dress up the issues and results. In the aftermath of massive failure, it took a breakfast cereal executive to rescue the company and bring it back to leadership again, though never with the same dominance. Many would suggest that Microsoft could be going through the same problems, Apple did some years ago until Steve Jobs was brought back and more recently, Dell has recalled their CEO, Michael Dell, in the face of business problems.
Too often management just ignore the real world in favour of looking politically good and agreeing. Dissenters are seen as whistle blowers, pariahs or unnecessarily negative.
Company Politics Can Kill
The issue highlighted above does not have to be a large company. Medium and even small sized businesses suffer from inertia due to internal politics. There is an element of group think that suggests that no one should tell the Board or owner that he/she 'has no clothes on' and is out of touch with reality like the fabled emperor.
Sometimes it takes guts to challenge management views and get a taste of reality.
The best way I have seen this work is by staff actually talking to customers and feeding back their views. If you can combine that with some simple research about each customer, an informed report about the actual state of each customer and therefore the dependencies of deals becomes more fact than supposition.
This is vital in seeing the issues companies face.
There is no tried and trusted method as to who should do this. Sales Directors and managers who dare talk to customers about the potential of their orders arriving and state of their company are seen as 'making excuses' for poor performance often but if they can combine that with a realistic action plan then they may be able to be seen as forward thinking.
However it is done, Board Directors and executives need to take a longer, closer and more realistic view of their position and make sure that they clearly understand the implications to their future. The worst that can happen in any business, large or small, is that warning signs are ignored. Face them, act on them, communicate with everyone and tackle them.
After all, you don't want to be branded a real politician, do you?
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