Thursday, 30 April 2009

Real Superheroes

Gordon Brown once wrote a book about heroism as well as being labelled ‘superman’ for saving the world from economic disaster by using our credit card, so he should know a thing or two about the subject.

The Ghurkas, in their proud history in the British Army, extending back to 1815, have earned no less than 26 Victoria Crosses for their bravery on our behalf. They have been deployed in all major wars since and in many more trivial or other violent sojourns. Each time they have fought with a courage and ferocity which has struck fear into the hearts of our enemies at the mere mention of their name.

In the context of bail outs and billions, the estimated cost of allowing all retired Ghurkas, somewhere near 36,000 of them, to settle in Britain if they all wished, would be around £1.4bn according to Brown’s infallible calculator. Small beer, for a family of people whose pinnacle of motivation was to serve a country whose ruling Government was willing to wave two fingers at them because it cost too much.

By a slim majority and thanks to the courage of a handful of Labour dissenters who defied the strong arm of Brown, Nick Clegg’s motion to allow all Ghurkas to live in Britain was passed. It was victory for people over money, for honour over greed, for people who love us not use us, for true heroes over pretenders.

In a world obsessed with money and preserving the undeserved, Gordon Brown got it right between the eyes. True heroes make sacrifices, true heroes have real values, true heroes have no time for self-interest, true heroes don’t talk, they act.

Today, as Brown reeled in defeat he has asked his own party for humility. It’s a great pity he has only enough to try and save his own neck. True heroes save others.

Can or Should We Choose How Much Tax We Pay?

I got into an argumentative discussion on the IOD Linked In discussion group recently with a tax adviser/accountant who asserted that 'We have the right to choose how much tax we pay.'

Firstly, I was pretty miffed at the use of the royal 'We' as I certainly do not choose how much tax I pay. Secondly, there was not just an implication but a direct argument in the discussion that people have the right to not pay the correct amount of tax they owe. If they want to not pay it, they can. He claimed also that this is perfectly legal under the statutes governing tax.

The Royal 'We'

What the chap meant was that the 'We' he was referring too were those rich enough to afford the fees and special mechanisms in the murky world of 'Tax Mitigation' (heaven forbid we call it 'Avoidance'). As he was using the Linked In IOD Forum he was referring to the 'We' as those who are members of the IOD. This meant me.

He was wrong there on two counts - 1) I cannot afford such fees and suspect mechanisms and 2) I would not want to participate in any of them.

Of course, as much as the next person, I don't want to have to pay all the tax asked of me. I will use up as many allowances as I can like ISA, capital gains, some dividends from my company etc in but I am very opposed to going beyond the statutory allowances - I believe in paying my way fairly. If I don't like it, and I am opposed to the new taxes proposed, I will lobby and vote against it whenever I have the opportunity, but I will pay it if I have to.

A gaggle of directors I overheard this morning were discussing how they could take their earnings above £150k as 'fees' into limited companies thereby enabling them to not draw a salary and pay themselves in dividends which are taxed a great deal less and neither the company nor the 'contractor' pays National Insurance. They were worried about the VAT implications - I would be more worried about explaining to HMRC what their company does and why they only have one client. Of course, there would be an added benefit to the company, as they would not have troublesome Industrial Tribunals if they just terminated their contracts and wouldn't have to pay a bean in any compensation or redundancy money, nor any pension contributions or fringe benefits. Hey, why don't we all do it!?

The royal 'We' here, of course, would get found out by HMRC in an instant. From my perspective, and I have a limited company, I contract to several clients at once and not one occupies my time fully. The specific legislation on IR35, as it is known, is an area fraught with danger. It effectively says any contractor must form a legal limited company and take fees but they should show that over time they are not just working for one client - otherwise it is deemed to be a 'scam' to avoid paying the taxes associated with being an employee. Most contractors will show, even if they have a few long contracts, that over time they work with several different companies on different projects.

The royal 'We' might have a bit of difficulty on all that. What they hadn't considered would be what happened to their stock options and other goodies but as usual they were just focusing on their current pocket.

Dividends vs Salary

It was always a neat scam, even as a contractor, to pay yourself a small salary and then take whacking great dividends and save all the associated employee taxes. Naturally, HMRC became wise to that, as usually the dividends spookily equalled the amount of salary the person would have normally earned and, moreover, seemed to be paid monthly like clockwork, exactly when the client paid their invoice. In fairness, some contractors who get paid agency or commission fees based on the sales they generate can easily justify their small salary and high dividends - they cannot predict when they are going to earn their next cheque. Even so, HMRC is pretty dubious and sceptical on the whole thing and err on the side of stopping the practice even if it is justified.

You see, the ideas my director friends had were the obvious ones that the tax adviser would have paid only a single charge for telling them as there is no ongoing knowledge to impart. What the tax adviser would be doing for the royal, and very royal, 'We' would be to tell about how to pay no tax on very big amounts of money.

The Big Scams

The richer you are, the less tax you pay. That's the simple rule of thumb. It's convenient to marry someone who might be able to claim they are a non-domiciled person. But for good effect, it's best to own a 'primary' residence outside the UK and in a place where there are pretty low personal taxes. Places favoured by the rich are Monaco, the Channel Islands, Isle of Man or Switzerland. To boot, they are all nice places - no riff raff, generally speaking, and one has the advantage of having a decent football team. Having played cricket on Jersey, I can recommend it highly and we even bumped into 'Charlie Hungerford' from Bergerac fame once and gave him an exploding cigar. I digress.

The very rich basically siphon all their money into these domains. But this is for the F1 racing drivers, popstars and big swinging whatevers from business like Stelios or Philip Green. When you have such a set up, you can choose how much tax you can pay, alright. In the case of Philip Green he paid himself a single dividend of £1.2 billion and did not pay a penny of UK tax on any of it. The money wasn't really even earned by his company, it was a bank loan. By paying it to his wife, who was a qualified non-dom, he made doubly sure no-one could chase him. All he makes sure of is that he doesn't spend more than 90 days in the UK in any single tax year - although the days on which he travels either there or back or through, do not count. If you are rich enough, that is not an issue. Mind you, if you own your own budget airline, the last thing you want to do is go on it even if it flies to Nice. It's not exactly a company perk then, is it?

Some years ago, the fashion was to hold the shares in your company in an offshore Trust. These were lovely and expensive to set up and 'administer'. Famously, Lords Sainsbury and Levy operated these for at least a while, which meant that they took zero earnings in the UK but lived off the dividends generated by the shares in the offshore Trust which were miraculously tax free. I am, not sure if that particular avenue has been closed down now, but it was a belter.

Of course, the wise thing to do if you are mega-rich is to register your company offshore. Not the one that generates all the profit mind you - leave that on British soil, just make sure that the entity is owned by another and charges it a management charge exactly equal to the profits made or a few quid less to be on the safe side. Many of these rich fellows don't take much in the way of salary. Between expenses and dividends they are well cared for and most of these will be taken outside of the country and wrapped up as capital gains, carry forwards and other complex 'cheats' to make it look as though they earn nothing taxable but are actually taking millions or billions.

This is the royal 'We' that adviser was on about. Of course, there are some mini-scams for the not so filthy rich which helps make sure that very little of the tax Brown and Darling are aiming to get their hands on will actually be collected and thanks to giving everyone a year's heads up, there is plenty of time to pay the advisers for their advice and get round it. As always, it will be those just getting enough to qualify for the new tax but not enough to afford the advice and complicated instruments of 'avoidance' who will really get hit. Already, HMRC has indicated it will hammer down on 'salary sacrifice' which is the idea of giving up the portion of your salary above £150k and taking it as an employer's contribution to your pension. It means it can't be spent yet but at least you get your tax back. Not anymore - the proposal is a tapering tax which starts at 20% of the employer's contribution for a £150k earner and rises to 30% for those earning above £180k.

HMRC has already indicated it will be watching out for those earning around these thresholds who suddenly elect to 'sacrifice' part of their salary or bonus and take is as a employer pension contribution. But then again, they have a year to sort all this out.


It is those who earn around these threshold levels who I actually feel sorry for and it is where Darling is aiming. Just as the majority of law abiding citizens, who do not cause accidents or kill people on the roads, are the ones targeted by police with speed cameras as they are the ones who will pay however much they may not like it. The people who kill or have accidents are usually the ones who don't bother paying or can afford fancy lawyers to get them off on technicalities. The same is true of tax. Morally, it is corrupt.

The Government has blown a lot of money in the last year on this whole financial crisis and we are going to be paying for it for an awful long time - out until 2032 is the estimate on some £1.3 trillion of borrowing. The one thing you can be very sure of is that these will not be the only unpopular taxes introduced. You can also be sure that it will not just be the rich who get fleeced - ordinary, middle grounders and lower paid people will be disproportionately targeted through things like fuel tax or alcohol duty and will collectively pay more. Why? Because we will pay as we have no choice.

Tax 'Mitigation' or 'Avoidance' is one of the luxuries of being rich.

Aviva Who?

Being right doesn’t mean you’re clever. That’s my theory but I blogged some time ago about Aviva’s stupid wastage in rebranding Norwich Union to the Aviva brand – the cost has been revealed as being £80 million for the current campaign and some £37 million from last year.

The stupidity is coupled with shame. As Ringo Starr, Elle McPherson and Bruce Willis told us they wanted to be treated like real people, Aviva’s results meant that 1,900 real people are being made redundant and the share price collapsed.

Defending the indefensible, Lord Sharman, Chairman, said that brand awareness had gone up from 35% to 80%. Yes, we will certainly remember it alright. It was in the heart of a recession, when everyone should be watching every penny. Besides, no one knew who Aviva was but everyone knew Norwich Union – this could have waited and those jobs could have been saved.

I got into a heated argument with marketing people about this. The brand still needs to be promoted and so forth. I agree – but £80 million is just dumb and it justifies every CEOs decision to slash the marketing budget in a recession because you simply cannot trust the judgement of people like that.

But stupidity isn’t a lonely creature. As I sit on my 5:25 Eurostar to Paris, I see a gaggle of 5 executives from the same company reviewing the agenda and information pack of the company they are going to see – a Board meeting or similar. Laughing and joking about the Board’s comments, I wonder why it takes 3 people to work things like this out. Each of them arrived at the station by private car to make sure they feel important enough. Then one of them says he is off to the re-launch of Hastings Insurance tonight who will be launching a new brand, Hastings Direct with a 1066 theme. The invites arrived in a scroll and with a seal, superb marketing idea blah, blah, blah. So a bunch of financiers will be lauding it the event and back slapping one another. I dare say they may join the Aviva shareholders shortly.

Aviva’s angry shareholders were aghast at their investment’s wanton waste of money. ‘Who needs to see Ringo Starr telling us about name changes? You seem to think you can squander our money how you want’, said one very irate person. ‘These grand ideas sound alright, but if you’d saved money we might have been better off.’

Indeed. The CEO tried to justify all this by saying they actually saved money due to the fact that media prices were cheaper during a recession. Why didn’t he actually use programs between midnight and 3am if he really wanted to save money on the media? In a microcosm, this sums up UK management – executives with over inflated opinions of themselves and non-executives who just read what it says on the piece of paper.

At the sharp end, 1,900 leave the company due to this ego-mania and shareholders are out of pocket. It should not have been the minions sacked – the whole management should be cleared out.

Tuesday, 28 April 2009

Paying Bonuses In a Downturn? The Thorny Question

We have heard so much about bonuses for the wrong reasons lately as banks seemed to think that high-flying employees had to be paid them even though the banks in question have lost, quite literally, billions of pounds. These cases may be clear cut to us, but in the real world, when should we hold back on paying bonuses?

Part of the problem relates to the fact that many firms have just incorporated bonuses into their employment contracts without a great deal of thought and certainly none relating to a catastrophic failure in markets. I mean, if you are writing your employment contracts for the first time in the middle of a recession, bonuses may not actually enter into the whole equation and if they do, you can bet your life they would be crafted in such a way that if performance was not good then there would be less or none paid.

The trouble is, most companies write bonuses into their contracts when the going is good and while the gurus in HR and management have their rose-tinted specs on, the contracts tend to be sloppy.

There is a further complication. Many firms, particularly American-owned ones, have very deliberately changed contracts to put an element of earnings for all staff 'at risk', as they put it. Often this can be done at review time and it could mean an employee in a function other than sales or marketing, where personal performance can be more easily measured, actually sacrifices part of their basic salary to make it 'at risk' but with the potential of some upside. The complication here, if that has been done correctly and within the law, is that it previously was part of the basic remuneration and so is assumed in the employees' minds to be a 'given' or virtually 'guaranteed'. Naturally, in good times, there are few cases where that would not be true but in a downturn or recession, the employee may still expect the bonus and the company does not want to pay it.

Good Compensation Governance

It comes down to a process of good compensation governance. Very often, in administrative or back office functions, the targets can be less meaningful in terms of overall company performance although just as important - for instance, cash collection targets - and many managers simply use Management By Objective (MBOs) targets which are very subjective in most cases. So when the company performance goes down and the Board are looking for savings, too often the bonus bill remains static in general staff despite the under performance of the business as a whole. It easy to see how sales or even management might lose their bonuses as measures can be personal and direct but for others it may not be easily so.

In the banking crisis, much of the bonuses at lower levels were based around such woolly targets or MBOs and so became very difficult not to pay. As much as we all got exasperated, it wasn't always the big-earning executives who were getting the money. People manning the tills or answering the phones or passing payments were the people getting the money - and why should they sacrifice what they would normally just get even if the top earners were earning £millions or not? They still did their part, as asked - so why should they be penalised? And this is where bonus schemes can go awry

Good compensation governance is the art of crafting bonus packages and commissions for all staff, fairly and contractually so that there are no surprises - but far more importantly, so that the whole business is aligned.

Companies who ask employees to take sacrifices of basic and put some on risk, often by force rather than consensus, are risking their staff. The reality is that there is always another high-flier but the guy who knows the logistics back to front is worth a great deal should they become disgruntled enough and leave, as often they have many of the secrets that save money in terms of cost and accuracy.

Backroom and administrative staff get the grubby end of the stick on bonuses anyway and so hitting them when the downturn comes, is only going to cheese them off. And some represent the lifeblood and backbone of the organisation - losing them could cost you more then its worth by not paying them what they deserve.

Handling The Bonus Question

I don't have much sympathy for salespeople, managers and executives when it comes to bonus. Pretty much, we know the score - if the company does not perform than we are used to 'at risk' compensation. I was always very hard on the Reps who would come into my office and say that can't live on no or low commission as they have mortgages to pay - so the targets are too high or whatever their excuse was. I had a ruse of pointing outside the office and asking hypothetically, 'Point me out the person you would like me to sack in order to pay you what you don't deserve. And if you can do that, you can have the job of telling the person.'

Obviously, it's an illustrative thing and needs to be done in that spirit but salespeople and managers do not often understand the word 'accountability' and so believe they are owed their money no matter what. On their performance, others are at risk - sometimes they need to be reminded of that.

But not so backroom or administration or shop floor. These are the engine room of the organisation - while parts may be replaced, each part has a specific function and is trained to do it. Every time you have to replace a part there is incremental cost in acquiring talent, suffering while the part is not there, training time etc. These people are often easier to motivate via bonus but it needs to be incremental - merely putting part of their existing earnings at risk is pretty stupid in the long run.

Also, in my opinion, as costs are looked at line by line, make sure that these sorts of bonuses are the last to go. My advice always, when faced with such hard decisions which could affect goodwill and motivation profoundly, is to communicate the problems widely, allow consultation and allow staff to make suggestions on how to save equivalent amounts of money before just cutting a swathe through it. More importantly, I would be more inclined to ask permission to 'defer' bonuses and pay them later if there was a question over whether they were earned or not.

Legal Issues

There is a legal issue at the heart of all this. If bonuses are in contracts and are to be given against certain criteria and if the criteria is more subjective than objective, then you HAVE to seek agreement either directly or 'implied' in order to make a change - you cannot simply not pay it. The former is obvious but the latter is more risky as it is by 'stealth', i.e. you may rescind bonuses but no one says anything and so it is 'implied' that agreement was given. This can be argued in law and can easily become an issue in an unfair dismissal case.

Commissions are different as ofter they are paid at the discretion of the company and are subject to change as and when. It's the nature of the job.

Obviously, it pays to have good compensation governance and to have thought through the issues of a downturn beforehand and sought wide agreement from the workforce. However, it is a fair assumption that as firms are hit hard in this recession, managers just reach for any old cost line and assume they can slash it because the problems are obvious to them. Very often, because of the non-inclusive way in which companies are managed when it comes to overall performance and how each department and individual contributes beyond the 'elites' in the salesforce who are revered with their 'Chairman's Clubs' etc, staff not in sales can feel very much unconnected from overall performance and so have trouble seeing what they had to do with bad performance.

It would be easy to think, 'If the salespeople get all the credit, applause and big bucks for the upside and we get none of that, why is it that I have to pay on the downside?'
It's a good question.

Moral Questions

It can come down to a moral question. If you hit all staff at the same time after poor performance instead of the high-fliers first, then it is easy for the 'non-elite' to become disillusion and unmotivated.

My advice is, in the absence of good compensation governance and in a downturn, think long and hard about how you tackle the bonus issue in the same way as you should about redundancies. At the extreme end, you can land yourself in legal trouble with claims for 'unfair dismissals' while at the better end you still can achieve upsetting and demotivating your staff.

Good, open and honest communication as early as possible, joining people into the issues is the best way of tackling this thorny subject. Don't put the baby out with the bath water.

Let it Fail, Let it Fail, Let it Fail

Sing the title of this entry to the tune of the Christmas song, 'Let it Snow' and we have a natty little anthem for the day.

I was pondering, at the beginning of all this banking fiasco, that had the Government stepped in at Northern Rock and just picked up the mortgage book and guaranteed all depositors, just what might have happened.

This was not my idea, no less an economist as Nobel Laureate, Joseph Stiglitz, suggested this some time ago. He was fixed on the fact that a contract for a Credit Default Swap or Collateralized Debt Obligation was in fact a two way contract or bargain jointly entered into by two companies fully aware of the consequences if something went wrong like part of the debt was toxic. Indeed, if they had had any sense, just prior to signing the deal they might have embarked on a bit of 'Due Diligence', that long lost phrase which went out of the window during the Enron scandal to have avoided such a calamity.

Stiglitz was of the opinion that if we had allowed the consequences of that failure to play out, only then could we have teased out what the true underlying liabilities were - not just at Northern Rock but in the entire banking system. True, many banks would have failed but he claimed that we could have used the shell of those old banks to build new ones with more secure procedures and tighter regulations to focus them on their core functions of providing credit and capital.

Further, Stiglitz asserted that the overall cost to the taxpayers would have been less in the long run as at least we would have known exactly what we were paying out for. His claim is that in the current scenario, we are propping up an already failed system, that part of the guarantees and loans that we have paid for will actually underwrite part of the 'good books' because no one is encouraged to itemise the toxic debt as it is being all paid for so why not ask for more and cover current good debt.
Sound wrong? Just look at the Enterprise Loan Guarantee Scheme from the Government meant to cover and encourage new lending - banks are taking existing loans, handing out small increments to qualify for the scheme and then getting 75% of the original debt covered. The amount of net new lending is trivial.

My view, which is with Stiglitz, is that banks should have played this all out. I dare say there would have been more sad cases like Mr. Kellerman in the US as bank executives were troubled with the terrible burdens of their greed, but I doubt it would have troubled them that much. There would have been a terrible loss of confidence in the banking system, have no doubt. That is what has been most protected in all this - banks must never fail, according to all Governments. The fact is that some banks do fail. Lehmans were left to fall and the repercussions were not that huge.

The problem we have bought for ourselves, as Stiglitz has pointed out, is that if all we do is reset the sail to catch the wind again, then all we have done is hidden the problems to manifest themselves again in the future. He now predicts we have set ourselves a course which will commit us to ever shortening cycles of peaks and terrible troughs in our economies with no chance of any kind of sustainable stability. There is no doubt that the alternative would have meant a period of recession possibly depression but we are in a different age now. No more the '30s where people could not eat, the majority would still have had some way of providing for themselves. It would have been a different kind of austerity that would have curtailed our wanton materialism - and would that have been such a bad thing? Besides, it could argued that this is exactly what we are going to get anyway.

As Stiglitz does, I think we have missed a massive opportunity to put this all right and start again, properly.

Crash Analysis

I watched the second part of Will Hutton's Dispatches Report entitled 'Crash - How long will it last?' last night and was more angered than informed.

It didn't really tell us anything that we did not know or that I haven't blogged about but what it did was put it all in chronological order and summarise the events as seen by the key players. There were a number of quotes and events that are worth remembering from it and Will Hutton's summary was chilling enough that we had feted and lauded the bankers too much in the Labour Government's terms, for what reason it is not entirely clear, but what we have ended up with is the scenario that there is one industry in the world that can create as much wealth as it likes in any way it sees fit and if it fails, having rewarded itself stupendously, then the losses will be redistributed to taxpayers.

Life will then resume for these people - and to a large extent and with few notable exceptions, it will be the very same people who will be allowed to do it all again.


It's difficult to know where to start but Alistair Darling's 'little boy confused' look is wearing thin but he claims that mistakes have been made in this business over thousands of years and so we must be 'Older and wiser' for the future. The clue was in the fact that the same mistakes had been made before - so we just repeated them on a grander, more complex scale with more catastrophic results.

What came across from just about everyone was the bewilderment on how the events unfolded and how little idea anyone has of how and when we will get back to normal. The one thing we can agree upon is that a whole generation will pick up the tab. Professor Buiter of the LSE was very pessimistic reckoning unemployment will rise over the next 4 years reaching over 10%, businesses will fail on a catastrophic level and there will be a great deal of austerity - he also was dismayed that taxpayers are left footing the bill for all this.

The one person who foresaw the recession that Gordon Brown denied could happen to us was Danny Blanchflower (not the former footballer but he was on the Bank of England's Monetary Committee). Blanchflower had persistently voted for interest rate cuts long before the crisis unfolded as he felt the Committee's obsession with inflation was masking the wider economic problems which were manifesting themselves - growth was slowing, unemployment was rising. He was publicly shouted down by his boss Mervyn King who has tried to shape himself as a bit of hero in all this but in fact was just another idiot who believed money can create more money, forever.

The most powerful image was of Gordon Brown addressing the City in June 2007 and thanking them for their work in creating a new era of prosperity in the City. Within months Northern Rock would have collapsed and the whole pack of cards began to fall. The enormous hubris and smug self-knowledge was the epitome of Brown for all those years yet as Buiter said, it was Brown who created the conditions for this collapse, it was his policies on regulation and taxation that created the feeding frenzy in the City that he allowed to go unchecked because he really did not consider that it was all built on nothing more than sand.

Sir John Gieve, intimately involved in the Government's handling of the deals with the banks described the crisis as a series of 'drunken lurches' - just when you thought you had got a hold of it, another thing knocked you off your balance. In fact, it was more the Government responses which have been an extended series of knee-jerk reactions from which no-one really knows what the full liabilities are - we have lost count of the billions and billions of our money we have committed in cash, loans, guarantees. We can only assume that the top end figure of £1.3 trillion is the sum of it.

The bank executives held up in front of the Treasury Committee were seen to eat humble pie. The bigwigs surrounded the baby faced former Asda Marketing manager, Andy Hornby, who as CEO of HBOS blew the market leading position of the UK's largest mortgage provider. He should have been sent back to stack the shelves. Fred Goodwin, the arrogant head of RBS, had the last laugh when the Government sent one of his kin in Lord Myners, a professional Non Executive Director who had no idea what he was supposed to do or let himself in for, and so agreed with the other NXDs to allow Goodwin to walk away on his own terms. What an idiot, and he's still there as the City Minister.

Meanwhile Goodwin described the Government's offer for RBS as a 'Drive by shooting,' showing his ignorance. If that had been the case, then surely he would have been dead. As it is, he is far from dead unlike the thousands who lost their jobs and the taxpayers who underwrite his incompetence. It has now been found that around 25% of his bank's lending had been insecure. It's like in our own businesses having to write off 25% of our revenue because our customers would not pay - we would be out of business and never trusted again.

Then there was the brainy Lord Adair Turner, another serial NXD, who sits on more committees than God. As Chair of the FSA he sat by and did nothing and then has been allowed to write the new constitution of the same body when he should have been out on his ear. We paid in excess of £250,000 a year for his part time role and he sits on Boards and other bodies earning an absolute fortune for giving wisdom in hindsight.

Why do we allow incompetence to re-root and grow again? Just because he has a nice accent and went to the right University.

Even in his hours of 'superman' status in rescuing the banks, Brown got the basics wrong which allowed the banks to continue to run themselves, restructure as they wish, reward themselves as they pleased, lend when they wanted to, and give failed executives bumper pay offs in their pensions or lucrative consultancy packages. Brown may claim that he cannot watch every detail but this is precisely the issue. It was the detail that eluded him the last time round. If he had bothered to check he would have understood that lack of diligence and attention was driving the whole financial system to a point that it simply had to implode.

You cannot keep getting something for nothing.

Lessons To Learn

When the last Conservative Government was turfed out, there was much criticism of the way the country had been run, the decisions taken and particularly of fiscal policy (let's not go down the sleaze route for now). What has happened is that New Labour sold its traditional values to a bunch of spivs in the City who took over the reins. With tax breaks and a free passage to do as they please, they created a scam so obvious yet intricate that they made money out of nothing.

The rise of the Private Equity House and Hedge Fund and the emphasis on buying and selling businesses for vast profits through leverage and minor tinkerings overrode the investment in technology, innovation and the future. It was all about the here and now and how rich you can get. Tony Blair could not get away fast enough and is so busy doing meaningless City jobs earning £ millions that you can see what was on people's minds. The old values were gone - 'Champagne Socialism' was here. Peter Mandelson led the charge claiming that the Government would be delighted if people got fabulously wealthy, as he has done curiously as a career politician.

The lesson we have all learnt is that if you allow greed to run the country then ultimately it will cost the rest of the citizens. For while we may like it, but when the cloak is pulled away we just find out we have been robbed.

But now we have had a taste of it, no one wants it taken away. So all the money that will be spent will be to try and preserve the status quo for a few more years before the next big crash. Boom and Bust is here to stay - Gordon's credo was is his own modus operandum.

Monday, 27 April 2009

Quick, Give Me A Policy - Any Policy!

Government policy seems to be descending into farce - well more farce than usual, anyway.

True to the trusted formula employed by the Campbell-Blair regime, Gordon Brown reacted swiftly to the expenses scandal which saw several of his minsters with their heads so far in the trough that all that could be seen was their backsides, which was only part of what was being seen by Jaqui Smith's husband, courtesy of the taxpayer. First he called for reform but that did not quell the criticism of the drama of Smith's husband's possible self-abuse problem or Tony McNulty's inability to join in with the daily hundreds of thousands of commuters who travel a good deal more than 11 miles to their work in London for far less than he was claiming for his second home - that wasn't even his. So our superhero then came up with an idea of scrapping the second home allowance that seemed to be the issue (not withstanding porn films or employing family to not even turn up and work) and instead give MPs a daily fixed sum just for turning up to work.

It's a novel idea which some might term as 'salary' or doing what they were elected for but the rather sumptuous £60,000 is for actually not guaranteeing that they turn up at all. In fact, Sinn Fein MPs have never taken their seats, but claimed their salary and still clocked up massive expenses. As they don't need second homes, you have to ask how they did that - but our minds can boggle.

The PM's plan has now backfired as he failed to get enough support for the idea and so there will not even be a vote on it. Of course, it shows the PM is pretty out of touch with the whole issue but that seems to be par for the course on most things at the moment. He eagerly awaits the Standards Committee's report as he desperately needs inspiration on what to do next and it shelves the issue for a while.

That is, until the next Minister with his/her snout deep in the trough is uncovered. That wouldn't be '3 home' Brown or Hoon would it? You know the fellas with 'Grace & Favour' accommodation, a prime home and claiming for a second home they shouldn't be using? Perish the thought.

Plague, Earthquakes - What Next Mexico?

Mexico isn't having much luck. Nearly 150 people are known to have died from the outbreak of swine flu and Mexico City, the largest city in the world, has been described as a 'ghost town' as transport services and shops have shut down.

Just as you might turn up a dodgy 'Chance' card on your Monopoly Board, airline stocks have crashed on fears that people may stop travelling due to fear of catching the virus.

Cases have now been identified in the US and two have been confirmed in returning holidaymakers in Airdrie, in the UK, as well as other countries. What is the only scrap of comfort so far is that all cases outside of Mexico have not resulted in any fatalities. There are several theories on this - perhaps the virus mutates as it passes from person to person, perhaps it is a less virulent strain to certain types of people, maybe a higher percentage of us get flu vaccines or maybe it is the fact that the Mexican health service is really not handling this too well. Who knows.

More Bad News

As I write, an earthquake measuring 6.0 on the Richter Scale has rocked Mexico City and buildings have shook causing a good deal of panic. I am pretty sure the people of Mexico are beginning to think what have they done to deserve these 'manifestations' - and if they come in three's, what next?

It is not a nice subject and those who have been afflicted by the swine flu have described it as totally debilitating. As one who had thought that every nasty cold I ever had was flu, I got the real thing over Christmas in 1999, going down on Christmas Day and rose again, like Lazarus, on New Year's Eve to watch a firework display and sip a champagne before going back to bed. I couldn't sleep because every time my head went from the upright position, I couldn't breath and I did not have the energy to get out of bed - it lasted over a week and I honestly thought at one point that even if the flu did not get me, then I would put myself out of my misery but did not have the strength to even do that.

It sounds as if swine flu will hit just as hard. Be wary, as although Britain is well prepared according to Alan Johnson, I just hope we haven't spent all our money saving the skins of bankers in preference to real people.

Top up on your Lemsip - it won't do any good but at least you can say you're prepared.

Private Pensions - Darling Loses The Plot

It is estimated that only 4% of the working population reaching the age of retirement will earn anywhere near two thirds of their final income and that includes civil servants, MPs, NHS, teachers, emergency service employees et al who are on fantastic schemes and reach their full entitlement.

So it is very clear that there is simply a massive issue about the amount being saved for retirement. The Government initially attempted to try and plug the looming holes for the future by attempting to incentivise people to take up private pensions via the stakeholder scheme and force employers to contribute into them on their behalf. It was a pitiful attempt to cover the cracks and most of the schemes are pretty laughable. One of the points about the credit crunch and recession was that while we were all leveraging our assets to borrow more money to bolster our actually diminishing wages, savings were going negative.

The facts are simple - nobody is putting enough away for the future.

Changing Thinking

Again, one of the features of the boom of the last 12 years is that we have lived the 'here & now' and forfeited much of our future planning and specifically on pensions. For some odd reason many believe that their property portfolio will sort this out but we have had a stark reminder of 'what goes up up must come down' lately. Plus, Mr. Darling has suddenly got very hard on second homes which for many was seen as wise investing for the future.

At some point, society in general will have to turn its thoughts to how it is going to keep itself in the same standard of living in retirement. I can safely say that it is a matter about which I am very concerned for my family. Despite prudent savings and pension planning, it is nowhere near enough to get me anything like two thirds of my current earnings.

So it came as some surprise that Darling would start to throw cold water on those that change part of their salary and bonus to pension contributions.

Government View

True to the 'here & now' Darling has seen that those around the £150,000 total salary and bonus will be keen to sacrifice some of the salary to get below the threshold for 51.5% (maximum rate plus NI increase) and take the missing part as an employer's contribution on which no tax is currently paid. But Darling is looking at stopping that with a tapering tax system on employer contributions to be paid by the employee that will, for those on £180,000 or more, be up to 30%.

It is seen as stopping tax avoidance as not only is the tax relief saved but the employer pays no NI on the contribution. But it is a false economy - we really need to be pushed to save more for pensions and decrease burdens on the state. If people can maintain their living standards in retirement then there is a fair chance that the strain on the NHS will be less as more people will afford private healthcare as an example plus we will pay more tax (again). It's more than that - society needs to look forward and make sure it is putting aside more - we need to get that discipline in us all.

The tax relief is seen as being unfairly biased to top earners - that's rubbish as all that is happening is that tax already paid is being claimed back. If this were to be widened to all pension contributions then people will have to start thinking about how they can mitigate costs in retirement and that will almost certainly mean that retired people will look to countries like Cyprus where tax is 20% and pensions are portable. I know I have looked at Cyprus and other places like Malta to find a good alternative as this may just be the difference between being above or below the 'two thirds' earning level in retirement. Even if it is not that close, it is now a serious consideration.

While everyone seems to be fixated on the current top earners fleeing the coop, there is more of a danger that middle earners will leave the country in retirement and it is just as barmy as they will be tax payers.

Short Termism

What we are seeing from the Government is a number of short term moves to try and stimulate the 'here & now' again and try to get people to start spending while grabbing money off the top earners which they seem to believe will be popular amongst most earners. After all there are not that many people in Britain that earn over £150,000 a year, and many of those will only be just above it as normal employees and not Directors who may get supplementary goodies.

This may be a precursor to the phasing out of tax relief on pension contributions for PAYE taxpayers and the fall of the employer contributions as part of people's packages. I think it's opening up a gaping problem for the future.

Time For Pay Back?

Just when we thought it was one way traffic and all the money was flying out of our pockets, the news is that Northern Rock will probably be sold later this year and we can get some of those £ billions paid back committed on our behalf.

Well, it won't actually work like that. You see, Northern Rock will be split into two before such a sale occurs. One half will be a pristine looking, well financed company with lots of new customers going to it and probably sold for around £2 billion which will constitute a net loss to the taxpayer of around £1 billion (oh, and that's a good thing, by the way, as the original forecast was to lose £1.3 billion).

The other half of the bank will be the 'Bad Bank' full of those stinky toxic debts and our erstwhile investment company, UKFI, who manage our portfolio of failed banks, are busily headhunting for a CEO for 'Bad Bank'. What a job that will be - doesn't matter how they do because the losses are so huge they surely cannot get any worse. Sure fire winner - I hear Fred Goodwin is available.

This suits the Government nicely as they can validly claim there is a way to exit all this manifest stupidity of buying into all the banks to save them. The fact that we make a 33% loss on the deal is neither here nor there, at least there was an end date.

Possible buyers for the 'Good Bank' are Virgin Money and National Australia Bank. You may remember that Virgin One had been one of the bidders at the time of NR's glorious failure but the Government rebuffed the idea to handle matters themselves. £90k per month later for Ron Sandler, £ millions on armies of consultants and several bonuses for staff for repaying some of the vast amount of money they owe and the very same company can buy the cleared up balance sheet for a song with no vast liabilities tied around their necks. We are left with all of those as we would hate to get rid of them.

So in summary - we buy a failed bank, pay millions in fees to do the obvious, sell the best part for way below what we paid for the whole lot, then be saddled with the real toxic debt worth £ billions. Super plan, must have been worth all the £ millions of advice paid to the investment back advisers for that one - I could have come up with it for the price a beer and packet of salt & vinegar.

It about sums up Alistair Darling - grade A pillock.

Sunday, 26 April 2009

Small Businesses - What The Budget Meant

I think most people would agree that the budget speech made by Alistair Darling this week was pretty depressing. It is hard to dress up what is a very serious situation that Britain is in but I cannot help feeling this was an opportunity missed to focus on some key areas that matter to small businesses.

It's a very important point. Small businesses employ over 13 million people and constitute around 95% of all companies in Britain. We are, in reality, the engine room of the UK economy as by proportion of our size, we pay more tax into the system than any other part. However, the figures for small companies failing right now are staggering - literally hundreds per week fail.

Most small businesses are failing on two counts - a lack of new orders and a lack of cash. It is very difficult in a downturn for the Government to conjure up more orders, although there were some things they could have done, but they can give access to more cash. After all they have given £ billions of it to the banking sector which had caused much of the problems.

That said - here are some highlights of the budget and business generally worth noting from this week.

The Budget Highlights

- Corporation Tax

The first big area is that any company making losses will have the ability to claim more of the tax back that they have paid over the last 3 years. This is an important consideration when filing this year's accounts and how much loss has been accrued.

- Capital Allowance

The main business capital allowance has now risen from 20% to 40%. This is a big concession for those businesses who have invested in machinery or new technology and is also a good incentive to think about capital vs. overheads.

- Strategic Investment

£750 million has been ear-marked for strategic investments in emerging technologies. It is well worth getting up to speed on this as your business may qualify particularly if you are working in the arena of more carbon or environmental friendly technology.

- Credit Insurance

Up to £5 billion of extra cash has been committed to cover trade credit for those businesses who have experienced a reduction in the level of cover. I think there is an opportunity missed here as we have seen from the Enterprise Loan Guarantee scheme that banks have abused the system and I think credit insurers will also. I think insurers will use this extra cover to merely cover their existing book more. The issue for many companies is that they are having to find new clients and they will need new cover in order to deal with them and this has not been forthcoming. Once again I think this is putting money into the wrong area and all it is doing is maintaining existing sales.

- Safeguarding Jobs

I have to admit I thought this was just a soundbite with not a scrap of credible detail to tell us how 500,000 jobs will be saved. I think most small businesses would like to know where they can apply today in order to avoid redundancies they may be making but somehow I don't think either the Chancellor or PM has thought this through, but it was carefully designed to sound as if they were doing something.

- Work Experience

Some £250 million is set aside to help people in certain industries to get job experience. Precious little detail has been given but this could be of real importance in the coming months as this can help provide business with a helping hand on staff levels without having to hire or pay contractors.

- Statutory Redundancy Payments

The minimum payment per week of service is now £380, up from £350, and this is an important factor when costing out job cuts. Also, the maximum pay out is now moved up from £10,500 to £11,400. Unions had fought to get this higher as redundancy is actually a very cheap option in the current business climate and not enough thought is going into the process by managers.

- Environmental Initiatives

If you are a low carbon industry, then there is good news. The Government has pledged a further £1 billion to be invested in low carbon businesses. A further £405 million is available to support low carbon manufacturers and if you are into offshore wind projects, you have hit the jackpot as £525 million will be spent on them.

An interesting little extra is that £525 million will be spent on energy efficient projects in homes, firms and public buildings. For all builders reading this blog, I would get up to speed on this as this could be a lucrative new business opportunity in the coming year.

- Childcare For Workers

Many firms encounter the difficulty of childcare for employees. While the new initiative to compensate grandparents in their pension for caring for grandchildren does not seem much, it actually may filter down. Hopefully more grandparents will get involved as their sacrifice of time may be compensated and this may take the strain financially off some workers who have to pay significant sums in order to provide nanny services. It may also ease pressure on working hours as grandparents tend to be more flexible. I have real hope that this may help.

- Government Savings

Tax loopholes are closing and there is an aim to raise £1 billion via this. For those firms and individuals who have been using such loopholes, I dare say this may up your fees to your clever accountants and lawyers to find the next 'loophole'. If the Government hits anywhere near this figure I will be very surprised.

Public spending is coming down in 2011 from 1.1% to 0.7%. The figure seems innocuous but if you have a business depending on this spend, then find something new to do.

£9 billion in efficiencies are planned - I assume this will mean clearing out dross in vast new departments like Dept. of Business Secretary and the Office of the Deputy Prime Minister but how the stupid policies of increasing bureaucracy and Government via Assemblies have backfired just as everyone thought they would. So much money is absorbed by all this, it is a tragedy that we have to go back and save it. If only they would completely overhaul public sector expenses then I am sure we could save a ton more.

- Housing

Some good news for the building industry as more stopped housing projects will be restarted as £500 million will be ploughed into these but it does include £100 million for local authorities to build energy efficient homes. For those with businesses around armed forces camps, £50 million has been specifically set aside to upgrades of their homes.

- Property

Lots of mixed messages here on holiday or second homes and the detail needs to be gone through, but for many who had bought second homes and hoped to get some rental income then they are going to be sadly disappointed about how that will get treated for tax. Also, there is more of a potential hit when selling. What this does on the buy-to-let side needs to be teased out. For many who bought their second homes and planning the financials based on existing legislation, this will be a major blow and some would argue a very unfair one. I can see a need for sound advice from agents and accountants here and for all second property owners I would go back and look at the Terms and Conditions from your advisers at the time of purchase particularly if you were lured in by some 'glossy' adverts and sales speak offering 'guaranteed returns'. The industry, sadly, is not noted for it.

- Duty Increases

Travel is once again targeted with an increase on fuel duty of 2p per litre from September and I have to say this is once again a very hard tax. The cost of travel is heavy enough as it is and public transport is so overly expensive in Britain that people have no choice but to use cars. This is a big cost to individuals and to business as this cost will be passed on to customers. Via staff mileage allowances or cost of delivery, costs rise and have to be absorbed or passed on. This really is a stupid extra cost at this time as it will penalise business and individuals.

Naturally the perennial duty rises on alcohol and tobacco are high. I got lost as to why this is done - either this is a problem area in society, draining the NHS, or it is a good thing, either way the tax is neither punitive nor helpful.

- The Car Industry

Good news at last for the beleaguered car makers and their dealers who have suffered a greater than 30% drop in sales. The Government announced a £2,000 scrappage scheme for cars over 10 years old to be given as a credit against a new car. Already 8 out of 10 leading car makers have committed to the scheme which extends only to the first 300,000 cars bought under the scheme. The caveat is that the industry has to provide £1,000 of the £2,000. I cannot help feeling that again an opportunity has been missed as scrappage has worked well on the continent to support sales - dealer discounts are already heavy so will we end up paying more because the dealers will withdraw the discounts to favour this scheme? I wonder.

- Personal Tax

For those earning above £100,000 a year, their personal allowance will be halved while those earning above £150,000 a year will have their allowance removed and see all earnings above that taxed at 50% - together with NI changes this constitutes over 60% tax for some earners. It will mean that firms may well look at alternative ways of rewarding their top earners with greater dividends offered or stock options or deferred bonuses. There has been much howling about this as 'manifesto reneging' and even Tony Blair believes it is folly. Some are concerned it will cause a new drain on top talent. Who knows, but it is something that I think all companies will get 'creative' about and I don't think it will raise as much tax as Ministers think as those around the various marks will simply take the offending portion as something new.

A nasty piece of work is the scrapping of the top rate tax relief on pension contributions. I would suspect that most companies who care about this will simply put it as an employer contribution instead and take it off the salary bill. I just think it sends all the wrong messages about savings.

With this, at least the ISA limit has gone up for personal annual tax free savings to £10,200 (for over 50s this year and everyone else next year - why wait?). For the clever minded there are OIC schemes which allow you to use Capital Gains allowances in the same year to maximise tax free investment. Get good advice from your IFA on all this as my wife (who is an IFA) has just done the same for me.

There is also going to be a reform on tax on profits earned abroad - watch out for this one.

I recently got into an argument on the Linked In IOD Forum with an accountant who asserted that we should 'Choose how much tax we pay' and the statute allows this. He defended the likes of Philip Green saying he had done nothing against the law.

That's as maybe but I think that those wealthy people who deliberately go out to avoid paying a fair tax on what they earn are morally corrupt. So much so, I have opted out of that discussion group and it's the last reason I needed to opt out of the IOD which seems to be a knocking shop for such people.

That said I still believe that people should use their allowances and the tax system allows you to be sensible about your future. So those high earners earning around the £100,000 and £150,000 thresholds can take a 'salary sacrifice' and put the offending part of their salary into their pensions. Of course, that means it cannot be spent but it is about time that we had a good reason to save for retirement. Also, this needs to be clarified as new tax rules may frown on such an option - which I cannot see any wrong in doing.

Another scheme I have seen is deliberate tax avoidance which is setting up a limited company and taking the earnings as dividends and so tax is lower and using non-earning spouses and children's allowances. I think, again, this is wrong but according to the IOD accountant, perfectly legal.


There has been much uproar that this was budget against entrepreneurs, in that it discourages people from taking risks. I don't see the logic in this - The Sunday Times Rich List has JK Rowling worth over £400 million yet she pays full tax and lives in Scotland. For the person willing to get up and work hard on their ideas, you will still be rich at the end of it. Maybe a bit less so, but rich.

Here's my logic. An entrepreneur in the UK starts here not initially to get rich but to make an idea work. For that they need market conditions, customers, access to markets and an environment ripe for their product or services' success. If they went to Cyprus to make that happen I would assert that they have less chance of success. If they went to the US, probably the same unless you have experience of the US markets. The simple fact is, entrepreneurs use the markets they are in to create their success - no market, no success.

Peter Hargreaves, the Financial Advice magnate, says he is going to Monaco or the Isle of Man - fine, go there. To get that rich on the back of financial advice then he probably gave interesting advice and I wonder if the majority of his clients are as rich as him to be able to make the same choice. But he has made his millions and he could not have made it without his customers who are here in the UK. No market, no success. So what does he want? To live in the Isle of Man and then start up another high earning business? He couldn't do it without having his customers at his doorstep, unless he was creative enough to know how to do it - and then he wouldn't be bleating about it.

So it seems that these people want more than being rich despite the fact it is normal, honest, tax paying people like you and I who have made them rich by buying their products and services. Perhaps if they had told us that before they touched us up for our money we would not have bought from them. Stelios is a prime example of this, always bemoaning 'Fat Cats' like Barclaycard who took a percentage of his take or the airport charging for things. He made millions and declares himself non-dom to avoid paying tax. So who exactly is the fat cat?

It is infuriating to think that such rich people think the country owes them more than they deserve and the customers they sell to. Makes you wonder why we buy their products with that kind of disdainful attitude. Remember that the next time you want a pension or walk into an Arkadia store like TopShop.

Saturday, 25 April 2009

Office Speak 101

I am still chuckling at the BBC Magazine article in which readers have contributed annoying 'Office Speak' jargon. Some of the new words and phrases which have crept into the office are great, annoying and confusing - all in one go.

I remember the film with Henry Fonda about a jury considering a verdict on a young guy and an advertising executive said he an idea and wanted, 'To run it up the flagpole and see who saluted', and then I heard that repeated on a visit to a company in the US and burst out laughing which seemed to upset the chap I was meeting. Mind you, he was quick to 'internalise' my mirth and 'open his kimono' before coming up with more 'blue sky thinking' and 'walking me through' his plans.

Doesn't 'That's sales 101' really wind you up? I used to get that brought up so often by US colleagues so I tried giving them some of my own back by saying 'You're batting on a sticky wicket here' to which they often replied, 'The bases are loaded,' 'Lock and load', 'let's burn some rubber' and 'hit the deck running'.

One day when someone was running through their figures and trying to sound 'upbeat' on a 'customer-challenged scenario', an American colleague leaned to me and said, 'You can't put lipstick on a pig.' Since then Barack Obama had tried using it and it got him in tepid water with the Governor of Alaska.

Those are more old classics, some of the newer ones are terribly annoying. 'We can't lowball this one', 'See what's under the hood', 'We're behind the 8 ball', 'I'll give you a factoid' are all creepy new ones. Some of the really daft ones are, 'Let's do some 360 degree thinking', 'Get some granularity here', 'I don't have visibility of this', 'Thanks for sharing this with me', 'Thanks for reaching out', 'Let's live the values', 'We need to downsize'.

I am sure someone has a glossary for all these because some are baffling. The wonderful thing about people using them is that often you have to slow them down and ask what they are talking about which defeats the point of saying it - if people don't understand then it's bad communication.

Anyway, let's put a wrapper on this subject, get a 35,000ft view, strategize our next steps, then put the pedal to the metal, after all its business 2.0 we are in now, so we need to all step up to the plate, upscale our bandwidth, think out of the box, take it to the bank, get all our ducks in a row, work out what our secret sauce is, pick the low hanging fruit, and get a holistic view before we can engage the organisation, share our thoughts, take the feedback offline, and create idea showers to verbalize our thinking.

From there we should have a roadmap to go forward and create a top down view from a bottom up perspective, so have a set of wide ranging options and then we can energize the organisation to face new challenges, seek new goals to remobilise our resources and monetise this sucker.

After all you can't be all-in if you don't up the ante, so let's use the Louisville Slugger to break the nut and get everyone onboard and singing from the same hymn sheet before we start from the get-go. So everyone go check your status, give me an update, tweet the results, get a call to action and then go make a paradigm shift before it's web 4.0 before you know it. The we can all google it and have a webex.

After all, it's Sales 101 (Office Speak for Mornington Crescent).

Friday, 24 April 2009

Recession Hits Microsoft?

Microsoft has announced a 32% slide in quarterly profits but the shock is that for the first time since 1986, their quarterly sales slid - and by 6% at that.

We can all point to the recession as surely less PCs are being bought and therefore not requiring as much of the core operating system supplied by Microsoft - this, along with core Office applications, is where Microsoft makes most of its money. It's solid, repeatable business, with a long upgrade path.

However, can we really apportion this rather profound aberration down to the recession alone? After all, Microsoft has gone through recessions before and the overall dip in PC sales is actually not massive. While businesses are indeed making cuts, it has not adversely affected Microsoft's sales before?

The Licencing Business

I don't pretend to be a professor of how Microsoft prices it products and sells them to Corporates but I have had enough of a whiff to know that it isn't actually as clear and helpful as it should be. I also know that there was a revenue time bomb looming and in the last year Microsoft people were not talking so much about new licence sales as a phenomenon called 'Deployment'.

The issue stems from that fact that many corporates purchase 'Enterprise Licences' which cover an entire suite of Microsoft applications for all employees. It is priced in a way to tackle all needs of all people and it also includes within the suites, products which may not currently be used but are delivered as part of the package. Good examples of this may be collaborative products like Groove or another example maybe that within a business that has a call-centre function which by and large runs bespoke systems, the staff may not actually use things like Outlook or other applications but the licence is notionally paid for.

Upgrades are part of this too. Many companies choose to stay at certain levels of the applications and operating system because their IT teams have settled at a level which harmonises applications across the business and is more easy to support. Yet large customers will be paying for the upgrades which helps Microsoft pay for the development in advance.

The real problems come when customers either do not deploy all the licences they pay for generally or do not utilise all the applications included in the licence cost or do not upgrade to the new versions. What it means is that the negotiations for the annual renewals become progressively harder.

They have been made harder still by new waves of rival or ancillary technology which are leading customers down different pathways. New operating systems, browsers, search engines, applications, messaging platforms and even 'The Cloud' have come into play and eroded part of Microsoft's hitherto impregnable position. For the first time in its history, the pressure is on.

Pushing The Accelerator

Microsoft has missed out on some of the more lucrative new waves of technology and one obvious one was Search. In reality, Microsoft had killed off Netscape as a rival and had a clear run of owning the entry to the internet via the browser. From there it should have controlled the rest. Google changed that by coming from exactly the opposite way, believing it was not the entry point that was crucial but the content and how it was accessed. Google's land-grab and technological advantages have made it a serious rival to Microsoft and they own 90% of the search market and with it, a large portion of the online advertising market.

Google is now advancing ambitiously down the pathway of applications with its own approach which makes it operating system agnostic by placing all the resources on the web, within 'The Cloud'. We are perhaps seeing the first major wobble of the mighty Microsoft and to some extent, Google has yet to even get a real grip of the market - the next 2-3 years could be crucial for both companies.

An added problem for Microsoft is that it is a company that has avoided the 'hard-nosed' sales types within its business. They have a mixture of evangelising people who just get so absorbed in the technology that they cannot see beyond their noses, and commercial people who just milk the base they have at corporations. Life has been very easy for them as you only have to show a product, make the client pay for it in the 'Stack' in advance, wait for them to upgrade, then hit them again. And again, ad nauseum.

Life has been so easy that there has never been a commission or heavy bonus culture at Microsoft. Stock options were plenty enough to reward the long servers and today Microsoft still has the highest proportion of millionaire employees than any other company in the world. That could change fairly soon but what that has arguably done is that everyone has been convinced by their own Bull. Like IBM in the 80's, managers are rated by who 'gives good slide' and bad news is not coped with well as no one has had to deal with it before, so generally it is not given. Positive attitudes in the face of issues are the order of the day - say it enough times and the customer will agree and everything will be ok.

The Steve Ballmer mantra is always, 'Microsoft is right - now what was the question?'.

The world is changing for everyone and even Microsoft. The recession is playing its part to exaggerate what may be underlying issues, but there was always a hole in the revenue just one step ahead on their way of working. Some day, someone would wake up and ask, 'Why are we paying for that if we do not use it?' or 'If I do not upgrade, why do I still pay?'

For Microsoft's sycophantic salesforce, reality may well bite. The question is, will the management have the fortitude to change?

Flying By The Pound

Fast on the back of ‘Whacky’ O’Leary’s proposal to charge Ryan Air customers for using the toilet, he is now considering charging passengers by their weight.

Don’t blame him, blame his customers’, is the message as this suggestion was put forward by 29% of the passengers who took part in an online survey organised by Ryan Air. Quite apart from the obvious ramifications legally about discrimination or human rights, there is also an implication of how this would be fairly implemented as surely height or age would have to taken into consideration.

However, I have yet to think all the possibilities through but there could be a way to mitigate charges. If a large person were charged heftily due to their weight, they might then invest some of their money in using the toilet facilities and then claim a refund as they weigh less after. In fact, if they were to use purgatives or induce sickness, then they could probably easily offset the toilet charge and get a good refund on arrival at the other end.

Conversely, for those who choose to drink excessively or eat on the plane, could they not be further charged, in addition to the costs of food and drink, for the additional weight they put on?
I have already registered a company which will trade in ‘Weight Offsets’ which will allow weight-challenged people to buy offsets and credits off less weight-challenged people and redeem them as vouchers to Ryan Air. It is already rumoured that there will be a Futures Market opened up on this which will be trading in actual weights vs forecast as, if someone buys a ticket in advance and weighs a particular weight, when they get to the check-in they may actually weigh more or less than the ticket they bought says. This way city traders can actually make a fortune gambling on the differences with all sorts of derivative products to trade ‘packages of weight’ and shorting those who are on diets but cheating, even 'spread betting' has a new meaning.

The possibilities are endless – particularly when Whacky O’Leary and his Ryan Air gurus are around.

Thursday, 23 April 2009

How To Avoid Tax - Get Rich

At last a credible figure in the world of celebrity has come out and identified the need for greater transparency in the tax system (should have mentioned public servants' expense accounts but maybe that's for next week). None other than Dragon Den's star, Duncan Bannatyne, in his column in Today's Telegraph identifies that super rich people are the ones who most easily avoid paying tax in this country - sometimes none at all.

Lord Levy and Lord Sainsbury famously paid naff all tax at least one year and then became Government Ministers. Now we have the raft of bankers, and board directors of conglomerates who either award themselves large tax free entitlements like pensions or some other form of cleverness. At least two people knighted by this Government use the 'non-dom' status to avoid paying huge sums in tax - Easyjet's Stelios and Arkadia's Philip Green are the culprits. Green sets a bit of a record having one single bank loan converted into a £1.2 billion dividend which was paid to his wife, who happens to qualify as 'non-dom'. Neither paid a penny of tax on it, and he is so proud of himself.

It's frankly disgusting. Why on earth we allow it is beyond the wit of sane individuals but, as always, the richer you are the less tax you will pay because you can afford to find ways not to pay your fair share. It has to be stopped - the burden of tax is getting heavier and much of it is thanks to the greed and senseless actions of the richest people in the world who caused this financial meltdown.

Yet they seem to treat Britain as a slot machine with a fault - it always pays out for every go, tax free.

Bannatyne makes a very important point from a business perspective also. Such super rich, tax free people have a competitive advantage over those who cannot claim 'non-dom' status and who pay their fair share of taxes as these people have more of their profits taken by the Government which cannot be re-invested in their businesses. The super rich use this competitive advantage to leverage even greater amounts of money from banks and funds to acquire more businesses and make even more money - and at each turn they cover their tracks carefully.

This Government has granted special tax status to such people and we must stop it. In particular, private equity people are doing more harm than good and the argument they are saving businesses and jobs does not stack up. Every business attempts to do the same thing and has to pay taxes. They have special status for doing so and making vast profits - and in many of the cases their gains are short term as the companies they buy and sell are left to whither.

Yesterday was a chance missed yet again by Brown and Darling. When will we make sure that everyone who makes profits in doing business in this country in whatever form pays the same level of tax as everyone else?

Cost Savings Actions in Isolation

I read a recent snippet by an academic, Mitchell Lee Marks of the San Francisco State University, who said of the vogue policy by US CEOs in the face of the recession to enforce pay cuts rather than redundancies on staff that, 'Initially, this sounds good to people because we're all chipping in. There's a sense of loyalty. But what if you don't win the war?'

It's a great point. It was illustrated recently by US giant, FedEx, who, in December, asked senior Executives to take a 7.5% pay reduction and US based salaried workers a 5% cut in salaries. It affected 36,000 staff in all and CEO, Fred Smith, promised that it would see them through the bad times. By April, things had got worse and sure enough, FedEx let go 1,000 staff this month.

Fred Smith was dutifully trying to save jobs by avoiding making redundancies. He stripped out a good portion of the payroll cost and still it was not enough to save the jobs. In fact, Mitchell Lee Marks would argue that this actually has a bigger destabilising and demoralising effect on the company. It leaves staff with the rightful feeling, 'Why did we make that sacrifice? What did it achieve? Do management know what they are doing?' Further, studies have shown that while salary cuts are termed as short term measures, too often the money is not given back at a later date.

Cost Cutting in Isolation

It's a noble thing to join staff into the problems that business face particularly in the recession. It is also a noble thing to avoid redundancies if at all possible and asking or even forcing staff to take a pay cut is better than losing jobs.
Or is it?

The problem here is what is trying to be achieved. When executives abdicate responsibility for their actions to accountants and cost-cutters, then only numbers hold any credence. The role of the cost cutter is to 'cut the cloth to fit' and that's exactly what they do. But there is a problem here. If all that you do is cut cost and do not adjust or re-align your business then you are only risking prolonging the inevitable - either you sink or you have to make bigger cost reductions or the dreaded 'death by a thousand cuts'.

What I mean is, if you do not change the goals of your business, then all you are doing is reducing your capabilities which becomes a self-fulfilling spiral downwards in terms of the business. There is a real risk that you bring on more bad news rather than avoid it.

Aligning Your Business in a Recession

There is a risk of repeating myself from past blogs but there is a lesson to be learned even from a clever giant like FedEx of how to do things poorly.

The very first step you need to make before you make decisions on costs is to know your business thoroughly and that means to have a handle on every deal, every customer and to properly understand how your market is performing, what the salespeople are doing, what the marketing effort is achieving and where it is targeting, and how the business is set up to support it. You need to be clearly aware of what your Value Proposition is to every client in a recession and why they should buy form you.

The biggest competitor to any sale in a recession is NO DECISION and this arrives when either your Value Proposition is weak or the way you articulate it is.

There is zero point in having a salesperson selling into a batch of clients where, say, over 50% of them are struggling in the face of recession and the Value Proposition does not deliver instant impact to their business, preferably to the bottom line. Think about it - if you are asking someone to pay incrementally for something it has to have a positive and instant impact to the business.

You would not try to sell a Ferrari to person laying off staff.

The very first thing that will come out of a detailed analysis of your business is that you can instantly see if the current forecast pipeline of customers are going to buy from you or not - you will see if they are open to the Value Proposition - talk to them personally to reassure yourself. You need to understand who is buying from you and when, then clone that success in more clients who match their profile. Make sure your salespeople are ACTIVELY changing their focus away from clients you have identified will not buy and refocus their efforts on the profile you know that will.

Make sure that your marketing effort is 100% aligned to the goal of the salespeople. The PR, collateral and lead generation engines need to be targeting the customers you believe are open to your Value Proposition so that there is a ready supply of warm leads - and shut down all ancillary marketing efforts which do not support these goals.

Changing Strategy

Sometimes a recession will smack you straight in the face and your realise that the good times are over.
'What we are selling is simply not what the market wants'.

I remember back in the late 90's a company that had made a fortune on the back of detecting issues relating to the mythed 'Millennium Bug' issue of embedded dates in software. They did extremely well. But after the date changed, they simply did not have a business. It seemed pretty obvious to me but they honestly thought that major problems would still exist and their clever software would continue to sell in the same volumes. The senior executives were really surprised when it didn't.

Kudos to them. They recalled all their key executive staff from all over the globe, they shut down their marketing machines and kept a skeleton salesforce and then sat in a building and quite literally re-invented the company with a new set of products, a new set of problems they could solve and an entirely new strategy. They had accrued enough reserves to get by while they did this but then they took their new plan to their VCs and because they had delivered previously, they got more money and started again. Utilising pretty much the same people with a few attritions from those not used to having to sacrifice commissions because of no sales, they not only started sales up again but they actually became a profitably, fast growing company again.

It's an extreme example but when markets change, there is no point in trying to keep doing what you have always done if it is no longer as compelling to clients. It's why many old businesses who fail to adapt to changing markets quite literally Hit the Wall and whither or get bought, if they are lucky.

As I blogged yesterday, recessions can be rewarding in that they can force change, make people think, cause innovation and creativity and can set a business on a new, more lucrative and sustainable pathway. That takes courage and determination and what many businesses will find in such times is that their management are simply not capable of thinking that way and taking those sorts of risks.

For them, cost cutting is simply the only option - batten down the hatches, survive the storm and all will be ok.

New Recession, New Opportunities

It comes as no surprise that many clever start ups arise in the middle of a recession - Facebook, Cisco and my own client, Theorem Inc, did so. Jay Kulkarni, CEO at Theorem, will tell you that the Value Proposition he trades on was honed during a recession. His business supports online marketing and guess what, it is one of the few areas of the Hi Tech market enjoying real growth during this recession. Theorem, because they were born with a recession in mind, are thriving because their Value Proposition resonates with every major business in their market right now.

There are plenty of examples of how companies have re-invented themselves in the rocky grounds of downturns and you do not have to look for to see Apple. Here was a company stuck in a war with Microsoft and Intel and had only a clique of marketshare at around 9% for arguably the best computers in the world. But they were addressing specific needs best and not the broad market where harmony of applications and cost were the vital selling factors. Steve Jobs, on his return to the company, set a new course and looked at how the whole market for mobile media was going to change and bet everything on it. The iPod and iPhone are now almost history but Apple could not be doing better as their strategy has changed to support the whole market.

Strong Message

So the message is clear - do not cut costs just for the sake of it whether that is just switching off lights to salary cuts to jobs. Make sure you are addressing your customers and that your Value Proposition stands the test with clients before you go down that path. If nothing else, you owe it to your employees.

If you do not have the internal creativity, innovation, skills, courage or appetite to do this then it should be your management that suffers first but get help in fast. All that I blog about depends on your understanding of your customers - how and why they buy, how they have changed and their new needs - then aligning your resources to servicing these needs or to find new clients where your products and services resonate.

For those with the courage and energy to do this, cuts will be the last resort while re-aligning your strategy and resources will set you fair for the future. Further, for those with the strength to do this, there is more than enough cash in the market to support you. You just have to know where to look.