The Growing Business Handbook: Inspiration and Advice from Successful Entrepreneurs and Fast Growing UK Companies

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THE

Growing BUSINESS HANDBOOK

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THE

Growing BUSINESS HANDBOOK

Inspiration and advice from successful entrepreneurs and fast growing UK companies 10th edition

Adam Jolly

London and Philadelphia

This book has been endorsed by the Institute of Directors. The endorsement is given to selected Kogan Page books which the IoD recognises as being of specific interest to its members and providing them with up-to-date, informative and practical resources for creating business success. Kogan Page books endorsed by the IoD represent the most authoritative guidance available on a wide range of subjects including management, finance, marketing, training and HR. The views expressed in this book are those of the author and are not necessarily the same as those of the Institute of Directors.

Publisher’s note Every possible effort has been made to ensure that the information contained in this book is accurate at the time of going to press, and the publishers and authors cannot accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editor, the publisher or any of the authors. First published by Kogan Page Limited in 1997 as CBI Growing Business Handbook Fourth edition published in 2001 as IOD Growing Business Handbook Seventh edition published in 2004 as The Growing Business Handbook Eigth edition 2006 Ninth edition 2007 Tenth edition 2008 Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licences issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned addresses: 120 Pentonville Road London N1 9JN United Kingdom www.kogan-page.co.uk

525 South 4th Street, #241 Philadelphia PA 19147 USA

© Kogan Page and individual contributors, 1997, 1999, 2000, 2001, 2002, 2003, 2004, 2006, 2007, 2008 The right of Adam Jolly and the individual contributors to be identified as the authors of this work has been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. ISBN 978 0 7494 5055 7 British Library Cataloguing-in-Publication Data A CIP record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data The growing business handbook : inspiration and advice from successful entrepreneurs and fast growing UK companies / [edited by] Adam Jolly. – – 10th ed. p. cm. ISBN 978-0-7494-5055-7 1. Success in business. 2. Management. 3. Small business– –Growth. 4. Entrepreneurship. I. Jolly, Adam. HF5386.G787 2008 658– –dc22 2007037069 Typeset by JS Typesetting Ltd, Porthcawl, Mid Glamorgan Printed and bound in Great Britain by Cambridge University Press

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Contents

Foreword

xxxiii

Part 1: Planning for growth 1.1

Turning points in the growth cycle Philip Verity, Mazars

3

1.2

Prospects for growth Richard Roberts, Barclays Can consumers keep the party going? 7; What about other drivers? 8; And so to 2008 8; Understanding company dynamics 9; Not just growth but super-growth 10

7

1.3

Planning for growth Robin Tidd, CIMA Why plan for growth? 11; How to plan 13; Closing remarks 16

11

1.4

Overlooked skills of entrepreneurial leaders Lesley Hetherington, Hunter Centre for Entrepreneurship, University of Strathclyde What does a successful entrepreneur (entrepreneurial leader) leave behind? 17; The tracks of entrepreneurial leadership 17; Overlooked skills of entrepreneurial leaders 18; In conclusion 20

17

1.5

The challenge of risk management Richard Hall, Ernst & Young

21

 xvi CONTENTS

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Part 2: Exploiting ideas 2.1

Innovation skills Christina Hartshorn, South East England Development Agency (SEEDA) Innovate or fail 29; On the front foot 29; C is for courage 30; View from the top 30; Targets 30; Final word 31

29

2.2

Open innovation and collaborative ventures Robert Sales, Swindell & Pearson Traditional models 32; One plus one may equal more than two 33; Who’s your buddy? 33; Possible problems with cooperative ventures 34; Prenuptial agreements 34; It’s not all gloom 35; Summary 35

32

2.3

Where are all the good ideas? Dean Parry, Patent Seekers The wrong route 36; What are the potential problems? 38; The correct route 38; Final word 39; Useful links 39

36

2.4

IP and commercial strategy Stephen Carter, Mewburn Ellis What to protect 43; How to protect 43; Where to protect 44; When to protect 44; What about rights of others? 44

41

2.5

Stand up for your rights Jacqueline Needle, Beck Greener Obtaining and keeping strong IP rights 48; Cost-effective enforcement of IP rights 49

46

Part 3: Gaining market share 3.1

Taking your brand to the next level John Robson, Sparkler Be bold 54; Look at the big numbers 54; Pricing 55; Iconoclasm 55; Global equine dentistry 55; Urgency 55

53

3.2

Direct mail and online media Andrew Miller, Royal Mail A digital world 57; Direct mail and digital mirror each other’s strengths and weaknesses 60; Together, direct mail and digital are greater than the sum of their parts 61

57

3.3

Market penetration Chris Wright, Skillweb Mobile computing 63; Customer loyalty 66; Outsourcing and virtual companies 66; Conclusion 66

63

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CONTENTS xvii 

3.4

Mobile marketing Nico Köpke, Kodime Mobile has come of age 68; The perfect complement 70; A successful mobile media campaign 70; Getting it done 71; Results 72; Outlook 72

68

3.5

Fulfilment for online sales 74 Andrew Miller, Royal Mail The remote shopper 74; Fulfilling the online promise 75; Resolving the key issues, and keeping customers satisfied 76; Completing the picture 79

3.6

Franchising Deborah Rider, Goodman Derrick Getting ready 83; The franchise agreement 83; Being a franchisor 84; Becoming a franchisee 85

81

3.7

Conferences in the marketing mix Sandy Pearson, Edinburgh International Conference Centre Destination is. . . location, location, location 87; The venue 89; The ‘wow’ factor 89; Make it tasteful 90; Get people mixing 90; Create a theme 90; Content is king 91; Make the format exciting 91; Paint it green – corporate social responsibility 91; Build anticipation – and momentum 91

87

3.8

Exhibitions Duncan Reid, Confex Group Engagement 93; Decent return 95; A new dimension 95; Improving exhibition presence 95; A vibrant return 96; Our own example 96

93

Part 4: People and performance 4.1

Employment law 101 Helen Wyatt, Goodman Derrick Employment contracts: legal requirements 101; Promoting a harmonious workplace 102; Protecting the assets of the employer 102

4.2

Attracting top performers Jamie Mistlin and Anna Taylor, RecruitmentRevolution.com Job analysis 108; Marketing your job 108; The package 108; Advertising the vacancy 109; The interview 109; Time keeping: ‘Time waits for no one’ 110

106

4.3

Growing talent Stephen Gibb, Strathclyde Business School Centre Develop a performance and potential map 114; Fulfil a range of talent development roles 115; Take development conversations beyond the

111

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 xx CONTENTS

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obvious 115; ‘Truth speakers’ wanted: give feedback 115; Check bad habits in talent development 116; Sometimes silence works best 117; Alertness to status shift dynamics 118; Conclusion 118 4.4

Leaders behaving badly Tony Pybus, Team Apogee Controlling or abdicating 120; The success recipe 120; Solo leaders are poor leaders 123

120

4.5

Time to work smarter Ross Feeney, South London Business Employing staff with the right skills 125; Realizing you are not alone 127

125

4.6

Flexible resourcing David Ramsden, Professional Contractors Group How large is the freelance workforce in the United Kingdom? 131; The benefits of engaging freelancers 131; Legal and contractual issues 132

129

4.7

Pensions, employers and the future Joanne Segars, National Association of Pension Funds Using a pension to attract, retain and motivate staff 134; Continuing employer commitment 136; Accentuate the positive 137; Getting the message across 137; Sources of information and help 138

134

Part 5: Space for growth 5.1

Where do we go from here? Paul Stephens, Leeds City Council Big bang versus gradual growth 147; Access to markets is critical to success 147; Who you know can be as important as what you know 148

145

5.2

Property – the wasted billions Paul Bagurst, Royal Institution of Chartered Surveyors To buy or to lease? 152; Which location? 153

151

5.3

Platforms for enterprise Toni Wanklin,UKBI Critical stages 155; Does incubation work? 157; Where are these incubators and how do they operate? 157

155

5.4

Property projects David Higgins, Northcroft Start-up 160; Planning 161; The design process 161; Execution 163; Closing 163

160

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CONTENTS xxi 

Part 6: Cash flow and working capital 6.1

Financing risk Vinit Chandra, Barclays Commercial Bank Financing options 171; Reducing the costs of financing 173; Other core financial risks 173; Looking forward 174

171

6.2

Improving cash flow Mark Standish, Mazars Sources of cash 177; The demands on cash 177; Some tips to improve cash flow 178; Working capital 179; Impacts on working capital 179; How to finance working capital 180

176

6.3

Slow payments Martin Williams, Graydon UK Sign your customer up 184; Do a credit check 184; Is a purchase order required? 184; Avoid excuses 185; Send statements 185; Check on the expected pay date 185; Use the telephone to chase 185; Maximize you bargaining power 185; Monitor your risk portfolio 185; Develop a ‘friend’ 185

182

6.4

Factoring Malcolm Gilbey, Charterhouse Advantages 189; Disadvantages 189; General 190; Factoring worldwide 190

187

6.5

Foreign exchange exposure 193 Mark O’Sullivan, Currencies Direct Looking beyond the banks 195; Fluctuating exchange rates 195; Hedging your exposure 196

6.6

Managing business travel expenditure 197 David Chapple, Business Travel Show Get to grips with your expenditure by determining the benchmark 199; Put a policy in place 199; Use specialist suppliers 199; Make sure you account for the hidden costs 200; Avoid cancellation and rescheduling fees 200; Look to save time and money by adopting an online selfbooking tool 200; Negotiation is a powerful cost saver 201; Think further than chains 201; Take a flexible approach to flights 201; Make sure you have access to a 24/7 helpline service 201

Part 7: Business technology and systems 7.1

From PC to server Marco van Beek, Forget About IT TM Ltd

209

 xxii CONTENTS

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Growing your IT system 209; Alternatives to a full-blown server 210; Buying a server 210; What should a server do? 211; Future proofing your work 211 7.2

Anywhere computing Martin Bond, ADS Flexible systems 213; The blowfish effect 216; In-house or smartsourced 217

213

7.3

Compete online Paul Houston, See 20/20 Access an unlimited warehouse, open 24/7 221

219

7.4

IP telephony Andrew Levey, Toshiba Digital systems 224; Hybrid-IP systems 226; Pure-IP systems 226; Choosing a system 226

224

7.5

Videoconferencing – the business imperative Keith Gyford, First Connections What is videoconferencing? 229; Why use videoconferencing? 231; Why now? 231; Some of the benefits 231; Justification and return on investment 233; The industry 234; The technology 235

229

7.6

Five steps to business continuity 237 Mike Osborne, ICM Developing a business continuity plan 239; 1 Analyse your business 239; 2 Assess the risks 240; 3 Develop your strategy 240; 4 Develop your plan 240; 5 Rehearse your plan 240

Part 8: SME productivity 8.1

The power of resource efficiency Martin Gibson, Envirowise Resource efficiency 246; Practical action 246; Adapting for the future 247

245

8.2

Quality in the 21st century Michael Debenham, Chartered Quality Institute How ‘quality’ is defined by the customer 250; Delivering the organization’s aims and objective 250; Moving towards a learning culture 251; A learning culture 251; What ‘quality’ is inside the organization 251; The small business standard 252; Moving from conforming to requirements to exceeding expectations 252; The Chartered Quality Institute 252

248

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CONTENTS xxiii 

8.3

Supply relationships 254 Roy Ayliffe, Chartered Institute of Purchasing and Supply A key skill 254; Understanding your market 257; A word of caution 257; A case in point 257; The relationship in practice 258

8.4

SMEs and business process outsourcing 259 Rajiv Dey, NIIT Smartserve Customer acquisition and lead generation 260; Out of office hours service 260; Back-office processing 261; Technology cost 261; Ramp up, ramp down and scale 261; Conclusion 262

8.5

Accreditation Jon Murthy, UKAS Certification 266; Inspection 266; Testing and calibration 267; How accreditation works 267

264

Part 9: Managing the growing organization 9.1

Achieving success 273 Jo Causon, Chartered Management Institute Success: the value of aligning goals 274; So what can be done to achieve success? 274; Breaking down the barriers to success 275

9.2

Make change happen Ky Nichol, Pcubed Status quo 277; Fear of the unknown 278; Delusion 278; Approach 278; Vision and context 278; Blueprint 279; Plan and implement 279; Conclusion 279

277

9.3

The ideal board Chris Spencer-Philips, First Flight Placements The chairman 281; Non-executive directors 283; Key tasks for the board 284

281

9.4

Executive search for smaller businesses Alex Steele

286

9.5

Invest in your leadership process June Hawkins, Institute of Leadership and Management, and Tony Robinson, Small Firms Enterprise Development Initiative Owner-centric leadership 289; Leadership skills required 291; Training 291; Advice and support 292

289

 xxiv CONTENTS

9.6

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The new Companies Act Tom Smith, Companies House The ‘e’ way is the easy way 296; Go electronic to beat the corporate identity thieves 297

294

Part 10: International expansion 10.1

International growth for SMEs Frances Trought, London South Bank University A flat world after all 301; Going international checklist 302; Knowledge is power 302; Mode of entry – identifying the right mode for your business 304; Advice from an industry panel 305; Conclusion 306; Bibliography 307

301

10.2

Turning exports into profit David Dinsdale, businesslink.gov.uk Assess the market 308; Develop your export plan 310; Review your export readiness 311

308

10.3

Managing international expansion Liesbeth Staps, Netherlands Foreign Investment Agency Where to start 315; An informed decision to get on the right road 315; You never walk alone 316

313

10.4

Foreign exchange transfers 318 Helen Scott, 4X Currency Understand the terminology – the three different types of exchange rates 318; See what you’re getting and insist on speed 320; Trading your money – not as simple as it may seem? 321; The hidden costs of FX 322; Be careful when accepting financial advice from the dealer 322; Above all, shop around! 322

10.5

Doing business in China Thierry Labarre, Mazars China: key figures 323; China’s allure 324; Speed setting 324; People before profit 324; The sensitive type 325; Ten top tips 325

323

10.6

India – threat or opportunity? Ken Hunt and Julian Stretch, Indo-British Partnership Network

327

Part 11: Acquisitions 11.1

Growth through acquisition Geoff Howles, Howles & Co Acquisitions as a growth strategy 333; The hallmark of a successful acquisition 334; Doing the right deal 334; Generating value 336

333

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 xxvi CONTENTS

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11.2

Acquisitions that work Mike Sweeting, Acquisitions International Issue 1: Lack of overlap 337; Issue 2: Find scope for growth 338; Issue 3: Consider strategic issues 338; Issue 4: The money 339; Issue 5: The people 339; Summary 340

337

11.3

Reaching agreement David Stanning, BP Collins Homework 341; Heads of terms 343; Finance 343; Due diligence 344; Warranties 344; Documentation 345; Costs 345; Summary 345

341

Part 12: Growth capital 12.1

Funding options Kevin Smith, AWS Structured Finance Equity 349; Senior debt 350; Subordinated debt 350; Mezzanine finance 350; Asset finance 350; Trade finance 351; Structured finance 351

349

12.2

Mind the equity gap 353 Anthony Clarke, British Business Angels Association and GLE Growth Capital Who are business angels? 353; Why should you choose a business angel over other more traditional forms of business growth finance? 354; So how does business angel finance differ from venture capital? 354; What do business angels look for? 355; What is the best way to source business angel investment? 355; What is the usual procedure for accessing business angel funding? 356; Are business angels focused on the exit and high returns? 356

12.3

Preparing for admission to AIM Andrew Millington, Mazars The benefits of joining AIM 357; The admission process 358; Preadmission phase 358; Admission process 361; Post-float issues and ongoing requirements 363

12.4

Financial reporting for the growing business 366 Philip Pickles and Jon Sutton, Dixon Wilson Getting the basics right 366; Striking the balance: detail versus focus 368; Striking the balance: timeliness versus quality 368; Statutory financial reporting 369; Coming to grips with acquisitions 369; Choosing the right finance team 369; Conclusion 370

357

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CONTENTS xxvii 

Part 13: Exits and trade sale 13.1

Selling the family business Gary Morley, Mazars Planning – Life is what happens to you while you are making plans for it 380; Price – Value, like beauty, is in the eye of the beholder 381; Tax – It’s not what you earn, it’s how much you keep 382

379

13.2

How much is my business worth? Dave Rebbettes, BCMS Corporate Customer base 385; Dependability 385; Intellectual property rights 385; Entry into foreign markets 386; Summary 386

383

13.3

Selling for maximum value Malcolm Murray, BCMS Corporate Avoid passivity 387; Motives for purchase 387; Creating bidder competition 389; Future potential 390

387

13.4

Legal points in selling a company David Stanning, BP Collins Be prepared! 391; Due diligence 392; Moving forward 392; Heads of terms 393; Documentation 393; Warranties 393; Other issues 393

391

Index of advertisers

395

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Foreword

It takes courage and self-belief to move ahead of the pack. But to keep yourself ahead demands more. After the first inspirational burst of growth, an enterprise can easily fall back. Without a clear plan and a distinctive position, your competitors are going to reel you in. To reach their full potential, enterprises have to take a series of bold decisions. They have to develop new capabilities, choose the right funding and adapt the control of the business. All these decisions are hard enough in isolation. When they are taken in combination and under pressure, they can create tensions and conflicts that can tear a business apart. This book is designed to help enterprises all the way to the line and complete the full cycle of growth. Drawing on a wide range of professional expertise and commercial experience, it gives a comprehensive insight into techniques and solutions for maximising growth and controlling risks. Ultimately, the speed and scale at which an enterprise grows will depend on leadership not just from the founder, but from the management team. Only then is change really going to happen. Even so, achieving high performance within organisations remains complex and elusive. Costs can spiral out of control, cash can run short, customer service can flag, people can lose their way and innovative ideas can be lifted. The way in which each of these challenges is resolved holds the potential for creating or losing lasting value. Many enterprises discover too late that the skills that served them so well at the start are different from the ones required to capitalize on what they have created. This edition of The Growing Business Handbook is designed as a practical guide for entrepreneurs and managers as they confront decisive points in their growth cycle

 xxxiv FOREWORD

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in 2007 and 2008. All told, there are 75 expert contributions: the IoD and Kogan Page are grateful to them all for sharing their experience and knowledge so freely. Miles Templeman Director General Institute of Directors

1

Planning for growth

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1.1

Turning points in the growth cycle

From the few to the many – that can be the hardest lesson of all for the entrepreneurial business, says Philip Verity at Mazars

Everyone is in awe of the entrepreneur these days. Great businesses begin with great ideas, fuelled by boundless enthusiasm and personal passion. Coming up with those ‘eureka’ moments is rare enough. Summoning sufficient resources – emotional as well as material – to actually get those ideas off the ground is even more challenging. But the greatest hurdle of all isn’t starting up, but staying on. Starting a business takes a burst of unbridled energy. Growing a business is a different matter entirely. As more people become involved, newer and more complex structures and hierarchies start to develop. Power shifts from the few to the many, something not all ownermanagers find especially easy to digest. Every business, no matter how unique or distinct, experiences the same basic growing pains as it starts to expand and diversify. So, if we were to ask several successful business owners what the turning points in their growth were, what would they say? I had to develop a core team around me. People with the additional knowledge and skills I need, but don’t have myself. When you’ve got an idea off the ground by yourself, it can be difficult to accept that you need help from others. But it’s essential for any owner to have expert advisers on board, with plenty of personal experience. No entrepreneur is an island. And no single

 4 PLANNING FOR GROWTH

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person, however seasoned in business, has all of the specialist knowledge and skills (not to mention time and energy) to grow a company on their own. I realized I couldn’t do it all myself. Time and again, I got to a point where I knew I could get a better result, solution or decision if I delegated, consulted and – most of all – focused. Entrepreneurs tend to be brilliant multi-taskers, but that can be both a blessing and a curse. In the early, ‘one-man band’ stage of a business, there’s a great deal of juggling to be done. But once a business starts to develop, there are too many issues demanding full-time attention. Delegation becomes a necessity, but it also introduces an essential system of checks and balances into the decision-making process. And more brains mean more innovative solutions. I began to understand where I best fit into the business. In the beginning I used to wear all the hats. I now spend much more of my time with clients and let my team do what they’re good at. Successful entrepreneurs tend to be charming, charismatic people. That’s simply because it takes exactly those kind of qualities to convince people that you’re worth their investment, or have a winning idea. But a lot of owner-managers will admit to having short attention spans, leaping from one idea to the next. Growing, then, means entrusting some of the day-to-day details of the operation to other people on the team, allowing the entrepreneur to focus on the areas where their skills can be best used to drive the business forward. I started to anticipate the barriers to growth. Now, I have growth on my agenda. I try to actively anticipate those things that will prevent the business from growing, and start thinking about what I need to do to overcome them. Sustained, long-term growth takes strategic planning. Obviously the first challenge any business faces is to actually establish itself. But once an organization reaches a certain level, growth is something that needs careful cultivation and coordination. The first step is for entrepreneurs to set clear objectives for the business and for themselves (for example, what role do they see for themselves long term?). Planning ahead enables you to foresee likely problems or barriers and to pre-empt them – or at least be prepared for them. I realized that growth sometimes happened naturally, but mostly I needed to make it happen. In the early stages of a business, growth tends to happen more naturally. After all, if you start with two staff, taking on just two more means you’ve doubled. Or having two big clients, instead of just one. But growth will plateau at a certain level, without an active strategy in place. Taking a business to a new level takes a new, targeted approach.

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TURNING POINTS IN GROWTH 5 

I thought more about balance. Balance between risk and reward – for me as the owner, and for my senior team. Balance between investment and spending, short-term versus longer term. And balance between existing and new customers, activities and markets. There’s a tendency to assume that bigger is better, but growth isn’t the only measure of success. As an owner-manager, for example, having more control over your company might be more important than expanding or diversifying. There’s a crucial point in the life cycle of any business where a decision needs to be made – to go for growth on a large scale, or simply carry on as a ‘lifestyle’ brand. I realized that the systems, processes and organizational structures had to be formalized to enable the business to change and grow. Perceived bureaucracy is the bane of many an entrepreneur. When a handful of people are involved in the day-to-day running of an organization, processes and structures don’t need to be written in stone. Responsibilities overlap, things can happen ad hoc. As the volume of business and number of staff start to rise, a more formalized organization quickly becomes important. Without systems and procedures, urgent issues can become lost, holding back change and progress. I got the right partners and advisers on board. I recognized the value of having partners to help me through the growth process. Partnership is absolutely essential, if you want to grow. Most of the world’s fastestgrowing companies today rely on global partnerships and networks. The successful entrepreneur also knows how to make room for outside opinions. Tapping into the wisdom and experience of others brings inestimable value into any organization. I tried to get the necessary funding in place to achieve the strategy, but ultimately I recognized that I had to match the strategy to the available funding. Understanding the funding and resource requirements of your strategy is important. Ultimately, however, you have to work with what you have. If funding is restricted you must prioritize the key elements of your strategy and investment needs. I realized that time was my most valuable commodity. As the business grew I was pulled in many different directions, and it was hard to stay focused on doing the things that really made a difference. How many times has it been said? Time is money. In fact, it’s even more valuable. Your time needs to be managed, just like any other investment. And that’s exactly what it is – an investment. It needs to be reviewed regularly, and rebalanced to suit your changing needs and priorities.


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There will be turning points like these throughout the life of all businesses. The successful business owner is one who recognizes them and embraces the inevitable changes and challenges they bring.

Philip Verity is a partner at Mazars, the international accounting and business advisory firm. Mazars acts for some of the fastest-growing entrepreneurial companies in the United Kingdom, offering a complete range of accountancy and business advisory services, including audit and assurance, tax advisory and compliance, corporate recovery and insolvency, consulting, forensic and investigations, corporate finance and financial services for private individuals. Tel: 01908 664466 E-mail: [email protected] www.mazars.co.uk

1.2

Prospects for growth

What is the overall outlook for enterprise in the next 18 months? And what are the strategies that can push individual companies into the supergrowth bracket? Dr Richard Roberts at Barclays reports

The performance of the UK economy in 2007 has been resilient in the face of rising interest rates, but what are the prospects for 2008? Which sectors are expected to outperform, and what prospects for growth are there for the UK’s middle-market firms?

Can consumers keep the party going? With five interest rate increases since August 2006, what are the prospects for growth in the United Kingdom next year? Will five interest rate rises prove enough to bring inflation under control and back below the Bank of England’s target of 2.0 per cent? So far, UK economic growth has proved resilient in the face of these increases, running somewhat above-trend at a rate of 3.0 per cent in the year to the first quarter of 2007. Indeed, survey evidence suggests that demand is set to remain strong in the near term. Much depends upon consumers. They have been instrumental in keeping the economy buoyant, but they are now experiencing a squeeze on their disposable incomes due to relatively subdued growth in take-home pay and higher living costs. Up to now, rising residential property and equity market valuations have meant that households have been willing to run down investments or increase borrowing to smooth weaknesses in real incomes. Indeed, the household saving ratio – the proportion of disposable income not spent – has been driven down to its lowest level since the start


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of 1960. With interest rates already at 5.75 per cent as we write, and many households coming to the end of fixed-rate mortgage deals that were taken out when interest rates were significantly lower, the squeeze on household incomes is expected to intensify and consumer spending is likely to moderate during the second half of the year.

What about other drivers? What about prospects for other parts of the economy? Strengthening economic activity has returned pricing power to firms, resulting in a sharp pick-up in profits growth. These benefits have, however, been unevenly distributed. The profitability of nonfinancial service companies has surpassed the previous peak established in the late 1990s, but the return on capital generated by manufacturers has remained weak. With only a limited amount of spare capacity in the economy, this strong profits growth has led to a marked rebound in capital spending. The UK economy has been aided by a strong world economy, with growth of almost 5.0 per cent expected in 2007. While UK exporters have not been helped by the slower US economy (due to the problems in the sub-prime housing market) or the weaker dollar, prospects for the eurozone continued to improve during 2007, helped by the strengthening German economy. As the bulk of UK exports are to countries in the eurozone this, together with the boom in China and India, has provided better prospects for UK exporters. At the time of writing in mid-2007 there are few clear signs that the economy is responding to the progressive rise in interest rates seen since August 2006. Although the first evidence is perhaps just beginning to emerge, from the decline in the number of mortgage approvals for house purchase to the lacklustre performance of interestrate sensitive sectors such as house builders and commercial property on the stock market. These point to a lowering of profit expectations and a more difficult trading environment for these sectors in the year ahead.

And so to 2008 Given the lagged effect of the interest rate increases, the consensus forecast for 2008 is for the economy to slow to just below trend growth. (The consensus forecast for UK economic growth is an average GDP forecast compiled by HM Treasury (June 2007) from a range of independent institutions.) The average forecast is for growth in GDP of 2.4 per cent. Forecasters are therefore expecting the economy to remain generally healthy as other parts of the economy compensate for a slowdown in consumer spending. Those sectors that are reliant upon the consumer are likely to find that growing business becomes a little tougher. The businesses that have the most sensitivity to rising interest rates in the consumer and leisure sectors are likely to find the second half of 2007 and the first half of 2008 the most difficult, particularly as they experienced good rates of growth in the previous two years. An early peak in rates in late 2007 to early 2008 would be good news for these sectors.

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PROSPECTS FOR GROWTH 9 

The manufacturing sector is likely to remain under pressure during this period, but continuing strong world growth and recovery in Europe (important for exporters) should enhance the sector’s prospects. Forecasters are expecting capital spending growth to remain robust, so growth prospects should be decent for anyone in the business-to-business sector. The change to a Gordon Brown-led government is not expected to impact government spending in the short term. Further out however, greater spending restraint will be needed to achieve a reduction in the fiscal deficit.

Understanding company dynamics The macroeconomic picture shows that the outlook for the next 18 months is good, but what about prospects for individual companies? New research by Barclays Commercial Banking into the company dynamics of 50,000 mid-sized corporates found substantial movement of individual firms between predefined size bands. This migration was significant over a short period (both one and two years). Indeed over a one-year period more than 20 per cent of firms either moved a size band or exited the company stock. To anyone involved in business this should not come as a surprise; business is dynamic. Amongst the smallest firms this is strikingly illustrated by the volume of entry to and exit from the business stock over the course of a year. As firms become larger this direct substitution of new firms for old declines in importance. In its place comes a greater emphasis on the dynamics of firm size – the growth and contraction of existing firms – supplemented by the exit of firms through acquisition rather than closure. The results from the Barclays study indicated a number of key points regarding the prospects for growth for small and medium-sized businesses:  A large minority of companies experience substantial change in size in a short period of time. Within one year 20 per cent of the companies had moved from their initial size band; after two years this increased to 30 per cent.  A small number of companies experienced very rapid change, moving two or more size bands in the space of two years.  The balance of company change (rising less declining) is generally negative, reflecting competitive pressure on existing companies from firms entering the market.  On a more positive note, the results also showed the proportion of companies exiting the stock was low – less than 1 per cent over one year. Hence, while overall economic growth may moderate in 2008, corporate sector dynamics play a big role in the prospects for individual firms as well. Even in years of modest economic growth, for many firms business development and expansion is a real option.


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Not just growth but super-growth So what can a company do to ensure that its prospects for growth are bright and that it is one of the companies that moves up to the next size band rather than down? Indeed, what can a company do to increase its chances of being a super-growth company – one of the small number of companies that undergo rapid change, moving from a turnover of say, less than £5 million, to one of more than £25 million in one or two years? A number of strategies that emerge from research studies into what make successful growth companies are:  Having a clear strategic vision, particularly one that prevents the company from diversifying away from its key strengths. The business needs to be clear about the factors that enable it to compete.  Competing on quality and innovation and not always on price.  Building and protecting the company’s advantage over the competition. This might be through patent protection for a product, a licensing agreement or through specific marketing that creates a special image for the company.  Growing and developing people – particularly those at the top of the company who are constantly having to face new challenges as the business grows.  Having a financial strategy so that cash resources are available during the rapid development stages of the company’s growth plan.  Having a close relationship with your bank. Those businesses that do so experience clear benefits. Managements that put such strategies into place should see their businesses’ prospects for growth improve significantly, and potentially see them turned from growth into super-growth companies. Dr Richard Roberts is head of Barclays SME Market Analysis Team. The team examines all aspects of the SME customer base and wider market, including business performance, finance, behaviour and segmentation. The team regularly contributes to Barclays Commercial Bank’s free business club for medium-sized customers, ‘all about business’, which offers:  a range of e-mail bulletins including daily financial news, regulatory change updates, interest and exchange rate information and economic summaries;  a website with business features, articles, management and leadership tips;  networking events which give customers access to top business leaders and the opportunity to meet like-minded peers. If you would like to access more useful business articles, information and ideas please visit our ‘all about business’ website, www.barclaysallaboutbusiness. co.uk. Or alternatively if you would like to speak to somebody about how Barclays can support your business over the coming 18 months please call 0800 015 42 42 to arrange an appointment with one of our relationship managers.

1.3

Planning for growth

To win in practice, you are going have to fail on paper first, says CIMA member Robin Tidd

Why plan for growth? Planning should be an ongoing process for all businesses. In the small and mediumsized business sector, however, there is a range of attitudes towards business planning, even in businesses established for decades.  Some have no faith in planning, feeling that when change happens, the plan is invalidated, and change is always happening, so why plan?  Some feel no need to plan as they are ‘doing very well thank you!’  Some have entrepreneurial cultures which reject formality, routine and discipline as being alien to their natural behaviour. They don’t feel comfortable with it.  Quite often, in an owner-managed business, there comes a time in the life of the shareholder(s) when they want to think about exiting, or handing over, or realizing their wealth, and it causes them to sit back, take a longer-term view and ‘do some sums’. Then they begin to plan.  Many, however, do annual plans and monitor against them, and always have. They take great comfort and motivation from the feeling of perspective, professionalism and control that this gives them. ‘Planning for growth’ is an expression which infers the existence of a clearer vision and determination. This chapter is about why businesses plan and how they plan – with some suggestions on producing excellence in business performance management as a result of planning.


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PLANNING FOR GROWTH 13 

Those who plan effectively will increase their probability of success for several very good reasons:  Something that is thought out better is more likely to work out better. This is very powerful when based on growing experience and observation of the market.  The basis and seed bed of growth (the business environment) is more likely to be researched.  Implementation and management is made easier with a set of reasonably detailed expectations (many formalized into targets) against which the business will be able to review.  Planning gives the business risk management as a by-product.  More people in the organization can get involved in a planning process, thus improving the validity of the plan and gaining their commitment to it.  This is likely to bring about teamwork and cohesion.  Most importantly, planning brings about proactivity. In my experience organizations that achieve things, do so as a result of setting out to achieve those things. They are not proactive by luck, they have a process of taking control of their destiny.

How to plan It is possible to reduce the value of planning by going into too much fine detail, particularly with figures. A good high-level planning model might look like that in Figure 1.3.1. The plan has to be worked through in enough detail to facilitate steps 6 and 7 in the diagram. This means that high-level dashboard targets have to be shown in the oneyear business plan as monthly targets, and the projects must have a timeline across the weeks or months of the year. In this way the review process will be facilitated and the plan will come to life.

1

Aims

These are set down by the owners, often in terms of size, profitability, investment, scope of business, and sometimes exit and timescale for some or all of the owners. KPIs and targets

7. Monitoring and review

1. Business aims

2. Important internal ‘here and now’ strengths and weaknesses 3. External and future opportunities and threats

Figure 1.3.1

4. Three- to five-year Strategy. Products, markets and facilities

5. One-year business plan

Achievement

6. Projects


2

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Assessment of strengths and weaknesses

 Use a cross-section of your own people to suggest strengths and weaknesses. This will bring honesty.  Identify fundamental and deep-rooted ones, not short-term, transient ones.  Test/evaluate the suggestions objectively. It is vital to be honest.  Recognize that most organizations have from two to four real strengths and perhaps between two and six real weaknesses. This should not be an exercise in filling several flipchart sheets with spurious and insignificant views.  The perceived strengths are often outside ones. Organizations can easily kid themselves about the outside (products, markets, customers, images), but not so easily about the inside (culture, systems, people, processes).  Strive for validation/objectivity.

3

Opportunities and threats

These are outside and in the future. They may relate to:     

legal; environmental; economic; physical; commercial/trading elements.

Interpretation of the signs can require some skill but the internet helps tremendously, and so may a good librarian. (You cannot believe all that is written on the web.) Again it’s quality not quantity that is required here.

4

Strategy

This should be developed out of the understanding of the potential interaction of market sectors and product groups. The market is independent because very few SMEs can do other than react to it. The product offering through product or service groups is the response to the reading of the market, given the aims of the business. A good method is to superimpose a summary assessment of products and markets on a matrix with market sectors on one axis and product groups on the other. The assessment evaluates existing and potential product/market cells in terms of:        

current market size; current market share; number of customers; hassle factors; risks; profitability; fit with strengths/weaknesses; opportunities and threats;

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        

5

PLANNING FOR GROWTH 15 

growth prospects; nature of the competitors; strength of the competitors; definition of success; probability of success in achieving targets; consequence of failure; agreed target turnover; agreed target number of customers; margins.

The one-year business plan

Out of this mainly market-based strategy will come a process of iteration, translating three years into the first year in more detail, in order to establish what is reasonably achievable and what would have to be done to meet or exceed the targets. This is where the detail has to be considered at an appropriate level. The elements of the one-year business plan will probably be key measures (key performance indicators, KPIs) and tick-box targets, which look like high level action plans for sales and marketing operations, administration and other departmental numbers, backed up by:    

management and front-line people, the organization structure and numbers; system and procedure changes; facilities changes; finance: forecast results and any funding consequences.

The more knowledge and expertise there is in the team, the easier it will be to commit to what has to be changed (and it almost always does mean change) to allow achievement of the plan. In some cases change means doing more of what you do under each of those headings. This means KPIs need to show better ‘results’.

6

Projects

In other cases projects need to be planned and launched across the time period in order to re-engineer processes.

7

Monitoring and review

This is, we hope, going to ensure achievement of plan via corrective actions. When monitoring against performance improvement targets the medium is KPIs. They are numeric targets which show that the departments are working well from day to day and the horizontal cross-departmental processes are working well in the medium term. KPIs are a subject on their own, but suffice it to say that one set of KPIs will perform both of these monitoring tasks. With projects, the monitoring will be against planned milestones, perhaps on a Gantt chart showing subsets of the project in the vertical and weeks in the horizontal, allowing cost and resource use to be superimposed too.


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The key concept with monitoring and review is frequent and formal monitoring and review of KPIs and projects, because deviations must be spotted and corrected as plans can go very quickly ‘off the beam’. The quicker it is known that the ‘actuals’ are off target, the quicker they can be got back on. It is commonplace to have real-time or daily, even hourly statistics, and to use the Gantt charts daily too.

Closing remarks Moving back to the subject of planning for growth, and planning in general, I believe there are some interesting little maxims I picked up on my travels:  If you can plan it, you can do it.  If you say you can’t plan it, this probably means you haven’t done it before and need some advice.  If you do plan it, others can help you to do it. Teamwork and delegation become easier. Brian Clough once said about an opposing European football team that the team he managed (Nottingham Forest) were about to play, ‘On paper we should beat them, but unfortunately it’s going to be played on grass.’ In business terms good planners have the opportunity to fail on paper several times, as they strive for the winning plan which they will go with in real life.

CIMA, the Chartered Institute of Management Accountants, is the voice of over 158,000 students and members in 161 countries around the world. Our members and students work across all business sectors, at all levels throughout the world. CIMA develops high-quality professionals, whatever the size of your organization, through a combination of skills, knowledge and the most relevant financial qualification for business – driving business forward. Robin has been a consultant for medium sector businesses for over 20 years. He specializes in Business Performance Improvement, KPIs and Sales and Marketing Strategy. Robin is also Contributing Editor for SIFT media on publications such as Accounting Web, Business Zone and Finance Weekly. Robin Tidd MBA, FCMA, MCIM, MIoD Tel: 07973 713574 E-mail: [email protected]

1.4

Overlooked skills of entrepreneurial leaders

Entrepreneurial leaders typically have three key attributes, says Lesley Hetherington at the Hunter Centre for Entrepreneurship at the University of Strathclyde

True leadership is relatively easy to identify – after the event. It leaves evidence of unexpected, even unprecedented, achievement and impact: transformation of organizations, transformation of people’s lives. In this article we look behind the symbols of success to the differentiating behaviours that lead to these results.

What does a successful entrepreneur (entrepreneurial leader) leave behind? Entrepreneurs create value – sustainable value – for their stakeholders, staff, clients and investors. Significantly they create value which continues to be generated, and grow, after the entrepreneur has physically left the scene. They transfer their vision, and its ownership, into the hands of others, and the vision continues to be sustained, maintained and nurtured.

The tracks of entrepreneurial leadership In the path of an entrepreneurial leader we find followers who have been inspired and stretched, who are proud of their achievements. They are achievements often way


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beyond anything the individual imagined, achievements that take them outside their natural boundaries of education, family aspirations and cultural background. Additionally, we find management systems that operate smoothly, with clear purpose and clear boundaries, and teams and organizations which continue to flourish and prosper. The vision and values of entrepreneurial leaders live on, through stories, culture, behaviour and respect after the person has left and moved on.

Overlooked skills of entrepreneurial leaders In order to lead effectively, to capture the hearts and minds of their eventual stakeholders, entrepreneurs need to be able to influence their stakeholders in three key ways. They need to motivate others to follow their vision; they need to attract attention to themselves as potential leaders; they need to inspire ongoing ‘followership’, through stimulating loyalty and respect. Leaders act as catalyst and inspiration, they influence rather than control. Research shows key factors in success include the quality of the expressed vision, self-management and facilitation of growth, and development for their followers. Entrepreneurial leaders set and communicate their vision in ways that stretch the imagination of the audience and inspire action. They describe the future in terms of ambitious vision which is also tangible. Vision goes beyond goal setting. Henry Ford provides an excellent example of this: his vision ‘of creating an affordable automobile for every family in America’ follows our rule of ambitious and tangible. His vision went beyond the existing technology of the time: his engineers did not know how to make such a car, but they could understand the end result. What an American family was like and could afford was tangible to them. Setting the vision of affordable cars for everyone on the planet would simply not have had the same compelling effect. A second overlooked aspect of extraordinary vision is that it is completely forward facing, expressed only in terms of the new desirable consequences. As an example, the creation of wealth inspires different activities, decisions and behaviour from the elimination of poverty, even though logically both are ‘heading in the same direction’. When developing this skill, would-be leaders need to avoid ‘double’ targets; for example Mother Theresa is quoted as saying she would march in a peace rally, but not an anti-war rally, as this would be against her principles. Third, forward vision creates space for creativity by aiming above and beyond history and existing problems, to a new horizon which opens up the imagination. In this new context, historical events and current problems become repositioned – as details to be overcome, rather than barriers and reasons not to proceed, if indeed they are thought of at all. Entrepreneurial leaders inspire respect through their actions and their authenticity.

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OVERLOOKED SKILLS OF ENTREPRENEURIAL LEADERS 19 

While vision can attract and motivate action, attracting followership is about the individual and their ‘worthiness’ as a leader. In the absence of this inspirational vision is as likely to attract competitors as followers. Initial interest is created by the entrepreneur’s ability to recognize their personal strengths and present these in a positive factual manner. Central to this is the ability to express personal success, explaining the context of the success and the actions taken to achieve it. Effective success stories enable the listener to judge the effectiveness achieved or not. A further selling point is their ability to develop new skills and insights as the result of failed ventures and undertakings. Leaders who can articulate their personal values and personal motivation inspire credibility. While the initial impetus behind the vision may have a personal motive of ‘righting a wrong’, the vision itself gains power when stated in only desired results. A father who has lost his son in a road accident has more power when campaigning for safe roads than for clearing the roads of unsafe drivers. People seek trust, and follow leaders they believe in; consistency of motivation and principles are key to this. When inconsistent behaviour appears to occur, it must be clear that the context has changed and that change of context rather than vision has triggered the apparent inconsistency. It is essential for credibility to be retained. Leaders who fail to communicate changes in context, or consistently fail to recognize when the context is likely to change, will soon lose goodwill and credibility. By acting on their own transparent values and strengths, and overtly learning from failure, leaders create a paradigm which offers inspiration to followers and creates a platform for authenticity. Entrepreneurial leaders create contexts which foster creativity and scope for self-actualization, hence leaving extraordinary results and sustainable organizations. The ability to create contexts which support creativity, growth and authenticity is key in entrepreneurial leadership. The nature of the vision and the authenticity of the leader are part of this skill. Another key element is a growth mindset. Entrepreneurial leaders develop a growth mindset. They believe that people can develop new ability. They see failure as an important form of feedback in creating future success. Edison is often quoted as treating his failures as discoveries of yet another way not to create a light bulb. True leaders acknowledge effort, intention and innovation. They leave control and management of results to their managers. Finally, by setting visionary goals, leaders create space for self-actualization and development of their team. The newness of the challenge gives scope for discussion of ‘How can we do this?’ rather than ‘How should we do this?’ This gives scope for individuals to play to their personal strengths and characteristics, and develop new ways of working.

A word of warning The roles of leadership and management are different; as are the roles of leader and operational specialist. While great leaders have the ability and willingness to step in


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and lend an ear or a hand, it is their willingness to do this that creates respect. And limit their involvement to key brief encounters. They do not bypass or undermine their followers by taking over. Smart leaders recognize the difference in these roles and recruit others to manage and create sustainable systems. They give their managers space to ‘get the job done’.

In conclusion Entrepreneurial leaders develop several separate core competencies which underpin their success. These enable them to sustain leadership through changing conditions and take people willingly into new territory.  They develop the ability to communicate future scenarios which inspire others to action.  They create vision, combining appealing possibilities with tangible results, making change both desirable and plausible.  They know and own their core values, and these openly become their operating basis even in the face of criticism.  They create robust relationships based on respect and ongoing learning. This includes a willingness to learn from others regardless of rank or importance. These attributes enable entrepreneurial leaders to create sustainable change. The two core elements are vision and relationship, both of which need to be real and tangible enough to spawn credibility while distant enough to minimize the scope for minor irritations. The leader’s role is to set and maintain direction, maintain personal credibility and enable their followers to get the job done well. Or simply, as Richard Branson says, ‘Everyone needs to keep learning. Everyone needs goals.’ Entrepreneurial leaders do this for themselves and all around them. Great leaders are individuals, and own their vision and values. It is by their vision, their integrity and their attitude and respect of others that you will spot them and become one.

Lesley Hetherington is a teaching fellow and leader of the Postgraduate Technology Entrepreneurship Programme at the Hunter Centre for Entrepreneurship at the University of Strathclyde. Her interests include the application of positive psychology to fostering entrepreneurship, fostering early-stage sustainability, and the fit between individuals and the businesses they create. E-mail: [email protected] Mobile: 07709 722023

1.5

The challenge of risk management

Risk management commands a premium through the growth cycle, says Richard Hall of Ernst & Young

Entrepreneurs and risk are inherently related. Why? Because the journey from start-up to market leadership is achieved by taking risks, whether it’s merging with another business, buying a competitor, going public, expanding overseas – or all of the above. As such, entrepreneurs view risk as an essential element of their business; rather than fear it, they see it as a necessity to accelerate their company’s growth and bring their vision to life. However, the most successful entrepreneurs are not those who take more risk. Rather, successful entrepreneurs are those who understand and manage the risks they take. They are familiar with the most important elements of their ‘risk universe’, and can identify the key financial, compliance, operational and strategic risks likely to affect their business. They anticipate the impact on their business, and take appropriate action to protect themselves. Along the way, they develop robust approaches to corporate governance, and ensure that their leaders operate effectively and communicate with stakeholders. This can be seen in all stages of an entrepreneurial company’s development. As an entrepreneurial business matures, it typically goes through three stages of growth on the path to becoming a market leader. Each stage brings a fresh set of challenges and risks. The first is the emerging or early stage, during which taking risks is essential for growth. Here, exceptional entrepreneurs ensure that they understand the impact of


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THE CHALLENGE OF RISK MANAGEMENT 23 

risk on their business. Companies in this stage establish their ‘unique selling point’ and explain themselves to the market. Often they also must seek initial funding and win investor confidence. As resources tend to be limited, leading companies focus on their most important risks, such as IT security, and protecting valuable assets, such as intellectual property. Then, once the business is established, it experiences a phase of rapid, sustained growth, accompanied by the high level of risk associated with undertaking new ventures. An enterprise may be acquiring its first businesses, forming new strategic alliances, or expanding into different markets for the first time. At this stage, risksavvy entrepreneurs regularly review, monitor and control their risks. The third stage of growth occurs as a business matures and becomes a market leader. Here, successful entrepreneurs aim to establish an enterprise-wide view of risk across their global operations. They also recognize that risk management is not a one-off effort but an integral part of their business strategy. They continue to regularly evaluate their business risks and compliance with changing global regulations. As risk becomes more important to stakeholders, companies may choose to develop dedicated internal audit and communications functions to deliver effective risk management. The most successful entrepreneurs make all this look easy. The reality of course is that effective risk management is an ongoing challenge. But regardless of which stage an entrepreneurial business is in, there are steps that can make the process easier. As with all aspects of a successful organization, the tone from the top is essential. What the leaders of the business think of risk and the importance they attach to risk management permeates throughout the rest of the company. Their attitude also impacts practical considerations, such as how people are measured on managing risk, what encouragement is given for these individuals, the creation of a risk management culture and how much resource is allocated to this, including communication and education. All of these are important prerequisites for successful risk management. According to Investors on Risk: The need for transparency, the first in a series of reports on risk from Ernst & Young, which captures the thinking of 130 investors worldwide, investors too believe strongly that responsibility for risk starts at the top. This was backed up by the second report in the series, Companies on Risk: The benefits of alignment, which presents the views of over 400 global corporate leaders. More than three-quarters of the respondents stated that clear ownership was a critical factor in risk management. (Other reports in the series include Board Members on Risk: Leveraging frameworks for the future and Managing Risk: Stakeholder perspectives. They are all available via www.ey.com/global.) But while the ultimate risk owner may be the CEO or chairman, and they will have a specific role to play, the risk management burden is not their responsibility alone. Risk does not recognize organizational structures, nor does it confine itself to particular departments or functions. Therefore, risk is best mitigated when it is managed in a consistent, integrated, aligned way throughout the entire organization, rather than marginalized into a separate function or limited by a silo mentality. This is achieved by first establishing a clear understanding of the organization’s strategy; the business drivers and the key initiatives behind it, and the strategic, financial, operational and compliance risks that could prevent the company from


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successfully executing on this strategy. Only by doing this can the business be confident that the risk management processes are addressing the real risks that it faces. Moreover, building such an understanding is not an annual exercise but an ongoing initiative that takes into account the evolving environment in which the company operates. Then, while approaches to risk management can be developed to meet specific challenges, what is really needed is a consistent, overall framework that can facilitate a greater understanding of risk throughout the entire organization and help bring together similar risk activities. This shared framework is made up of different ‘lines of defence’, all of which have distinct roles and responsibilities. The first line of defence is in the operational and business units. This is where most risk exists within an organization, so logically, this is where a risk programme should begin. The second line of defence is in the support functions, such as finance, IT and tax. These must be closely aligned with operational and business units to provide effective risk management support. The corporate risk functions, such as internal audit, are next. Independent of the first two lines of defence, these functions have a pivotal role in assessing and monitoring the risk management activities of the operational and business units as well as the support functions. They report on risk activities to the audit committee, the board of directors, executive management and any others with oversight responsibilities. These oversight groups – the audit committee, board and executive management – are the final line of defence. They must develop healthy, functioning safeguards throughout the business, and create and nourish a way of life that serves as the ultimate barrier – a culture of awareness and constructive challenge. These lines of defence ensure that each part of the business has its own role to play, and that each is aware of what the other areas of the company are doing, thus avoiding duplication of effort. In particular, it enables the board and investors to receive regular, transparent, relevant and robust information on risk, and gives them comfort that risk is being managed efficiently within the organization. This integrated process also means that an organization’s key risk management programmes encompass strategy, operations, finance and compliance, and as such, are in line with its key business drivers and initiatives. There are many good reasons to manage risk. In the Benefits of Alignment report, two-thirds of respondents believed that risk levels had risen in the past two years, and will continue to do so. This finding also reflects a lower tolerance for risk now than in the past. Furthermore, today’s business leaders and board members have more personal accountability for risk than ever before, and they have to demonstrate that their decisions take into account not just financial performance but risk performance too. This is driven by investors who are equally aware of the importance of risk management. According to the Investors on Risk report, four out of five investors are willing to pay a premium if there is evidence of good risk management. Conversely, two-thirds of investors said that they would shun companies that could not demonstrate successful risk management. Almost half had de-invested precisely for this reason, and nearly three-quarters of respondents ranked transparency as a top priority when

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THE CHALLENGE OF RISK MANAGEMENT 25 

making investment decisions, ahead of the company’s business model and track record. It is important to note that in this survey, investors did not expect to eradicate risk altogether. They simply wanted companies to manage it efficiently and communicate openly about it. That meant fewer ‘nasty’ surprises – cited by investors as the biggest benefit to come out of a reliable approach to risk management. Clearly risk management has become one of the most important issues for businesses today, forcing companies to focus on their exposure, control and governance. However, that is not the end of the story. Ernst & Young’s experience of working with companies around the world to help them address their risk management issues reveals that the most successful entrepreneurs (and indeed corporates) want to achieve two goals from their risk management activities. Obviously, they want to stay out of trouble and therefore risk mitigation and compliance ambition remains of central importance. But companies today also want to improve their performance. If controls are weak or processes outdated or disconnected, it will undermine the entire company. While it is impossible to eliminate all the risks that an entrepreneurial business will face, it is possible to reduce them significantly, by instilling a strong risk culture and attitude into everything that the business does. Companies that align their goals, risks and risk management activities, including controls, are able to focus on the risks that matter and manage them effectively. They are also better able to act on opportunities to gain competitive advantage, achieve real growth and create value. Alignment also means less waste in terms of time, money and effort. Successful risk management therefore becomes an integral part of the organization’s strategy and operations. Or to put it another way, good risk management simply becomes good management.

Richard Hall is the head of Ernst & Young’s Strategic Growth Markets across Northern Europe, the Middle East, India and Africa. For further information see www.ey.com.


2

Exploiting ideas


2.1

Innovation skills

It takes leadership to embed innovation in a company, says Christina Hartshorn, head of entrepreneurship and leadership at the South East England Development Agency (SEEDA), which is launching a programme to equip leaders for the unknown

Innovate or fail The most impressive knowledge-based companies in the fiercely challenging global economy of the 21st century will be those with the best innovation performance. Innovation – the successful exploitation of new ideas – is the catalyst and fuel that drives productivity growth and wealth creation. According to evidence from a PricewaterhouseCoopers ‘Innovation Survey’, top innovators generate over 75 per cent of revenue from products that were not in existence five years ago. The ability to innovate is therefore intrinsically aligned to both the availability and exploitation of creative skills. The message for business leaders is that investment in skills is pivotal to accelerating business competitiveness and securing a clear commercial advantage.

On the front foot A crucial factor in the success of any company, especially one that is innovating and experiencing explosive growth, is the quality of its management and leadership. Innovative ideas are often the vision of inspired leaders who possess the leadership skills to drive business transformation and can champion the behaviours synonymous with business excellence.

 30 EXPLOITING IDEAS

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In the United Kingdom, around 14 per cent of the workforce has significant management responsibilities (according to the Labour Force Survey), but UK managers are perceived to lag behind those in France, Germany and the United States in terms of experience and competence. For businesses to be competitive, they need managers and leaders who understand the value of and need for skills, and can deploy and utilize skills in support of innovation.

C is for courage It is imperative for business owners and managers to have the self-confidence and robust skills to introduce innovation to their company or organization, whether the innovation is a pioneering new technology or a new emerging marketplace. For companies to compete on the basis of knowledge advantage and to extract the value of that knowledge, SEEDA has a crucial role to play in promoting rigorous leadership skills. Leadership skills are vital to embed innovation as a core company activity. To galvanize greater entrepreneurship, we need business leaders to have the confidence to innovate. For many in business, this can be a journey into the unknown. Business leaders need to have the courage, the desire to take greater risks and the energy to embrace innovation, but the key here is that we have to condition our entrepreneurs to be more confident to harness innovation. If innovation is then seen as permanent strategic renewal, greater productivity gains can be made within organizations.

View from the top In a speech at the end of 2006, the then Chancellor, Gordon Brown, said: Innovation is what is driving the dynamic sectors of the global economy. We are well placed in the fastest growing high value added manufacturing and services from IT and aerospace to pharmaceutical, financial and business services, education and the creative industries, which account for a larger share of our economy than in any other G7 country.

Targets One of the challenging targets in SEEDA’s regional economic strategy is to increase the percentage of total business turnover attributable to new and improved products and services in the South East from 12 per cent to 20 per cent by 2016. One of the ways to achieve this is clearly to improve the capacity and capabilities of business leaders in the region. This will also involve increasing the demand for dedicated leadership skills for innovation across the region.

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INNOVATION SKILLS 31 

Final word To appreciate the importance of innovation in any plans for growth, let me leave you with a quote from Gary Hamel, who is described by Fortune magazine as the world’s leading expert on business strategy. He says: ‘There are no strategies for creating wealth in the long term that are not driven by innovation; when a company runs out of innovation, it runs out of growth.’

The South East England Development Agency is the government-funded agency responsible for the sustainable economic development and regeneration of the South East of England – the driving force of the UK economy. Our aim is to create a prosperous, dynamic and inspirational region by helping businesses compete more effectively, training a highly skilled workforce, supporting and enabling our communities while safeguarding our natural resources and cherishing our rich cultural heritage. SEEDA has channelled significant funding into the South East Leadership Academy. This pioneering initiative is managed by a consortium of internationally renowned institutions: Royal Holloway University, the University of Greenwich, Oxford Brookes University, Henley Management College, the Open University Business School, and led by the University of Surrey. One of the primary objectives of the Academy is to build and cement strong partnerships between regional providers of training and development with knowledge creators, such as higher education institutions, to generate and share original ideas, research results, and exchange expertise and skills. This will enable innovative new products and services to be developed. The Leadership Academy will champion the disciplines of leadership and innovation to business owners through a series of interactive and high-profile workshops over the next two years. For further information, please visit www.seeda.co.uk

2.2

Open innovation and collaborative ventures

Working with partners is usually the best way to fill a gap in the market, says Robert Sales at Swindell & Pearson, but you have to be clear from the beginning about how any IP is divided, otherwise the whole venture will stall

Traditional models The historical model of a UK manufacturing company making all the components for its products, or at least sourcing those that it cannot make from the local area, is almost certainly now reserved for the history books. Similarly, the pattern of a company’s R&D all being carried out in-house to produce a finished product from an initial brief appears to be going the same way, if it hasn’t also already been consigned to history. It is very unusual if not impossible to now find a company with the appropriate personnel to complete the full process of spotting a gap in the market (or even better, identifying an emerging or latent market), then producing a prototypical product or service to satisfy that market, followed by finalizing the design, including appropriate testing and obtaining any necessary authorizations or certification. The product/service has to be costed to be attractive and competitive in the relevant marketplace. A reliable and consistent source of components, accessories or support must be established to ensure demand can be met at an appropriate quality and in an acceptable time frame. Consumer testing may be required, and an appropriate marketing plan needs to be put in place. Adequate supplies of the product/service must

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OPEN INNOVATION AND COLLABORATIVE VENTURES 33 

be put in place to meet anticipated demand. By this time a check will of course have been made of third party’s intellectual property (IP) rights (won’t it?) to ensure that these will not impinge on the plans. Nowadays, few if any SMEs would be able to carry out all of the above within a realistic time frame. If the moment is not seized with a new innovation, it is very likely that the world at its current pace will have moved on by the time the innovation is ready to be launched, such that the market for the innovation no longer exists. Accordingly, to be able to achieve the above in a realistic time frame, strategic partnerships and collaborations are required.

One plus one may equal more than two Working in collaboration with third parties can have a number of advantages. For instance, it may be possible to work with the top person or a very high-calibre person or team in a field: someone it would not be possible to employ, certainly on a full-time basis. Such persons can be worked with as and when necessary. Persons from outside your company can bring details of solutions from other areas and technologies, and may even be able to expand the potential market for your concept. A person from outside your company may have an edge in avoiding the preconceptions, traditions or prejudices that may, albeit unwittingly and innocently, have become ingrained in your organization. An external person will probably also bring a wide range of new contacts. This may mean that even if they cannot answer all the questions, they may well know somebody who can. An outside collaborator may be able to recognize faults, disadvantages or other problems with your existing products.

Who’s your buddy? Once you have decided you need a partner, you need to ask who it might be. There are a wide range of possibilities, and it probably pays at least initially to have as broad a prospective range as possible, as different parties may be able to bring different skills and advantages to the party. Possible partners are universities and research organizations, which may be able to provide very high-calibre personnel for use in particular instances. Similarly, some consultants may fall into this category. Suppliers of components or other items to you should know others who use their products/services in ways that may be related to your proposals, and may provide an entry into markets which otherwise you might not have considered. Customers can also be appropriate partners. They should know of potential uses of your products. As with suppliers, you may well have a good existing relationship with your customers. Your innovations could help your customers to launch a new product, and thereby potentially increase their value to you as customers.


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Possible problems with cooperative ventures If ventures proceed largely as expected, and all parties believe they are receiving a fair reward for their input, there will usually be no particular problems. However, it is very common for one or more parties to believe they are not being adequately rewarded for their input. Also, if the project is less successful than expected, and potentially parties may not recoup their costs, there can be arguments and the potential for demands for the cooperative venture to be renegotiated. One or more parties may want to leave the venture, which could cause considerable damage to its progress. Somewhat surprisingly, problems can also occur when a project exceeds expectations. The sight or smell of large amounts of pounds, dollars, yen or other currencies can often significantly alter people’s behaviour.

Prenuptial agreements It is therefore imperative that all projects are covered by a wide-ranging binding agreement from the outset. Otherwise, if one party is aggrieved this could stall the whole project, especially if this party ends up with too much power, which can be used to disrupt a number of other parties. This is an indication of some of the things that should be covered.

Ownership of rights This can be a particularly thorny question. For instance with patents, the rights to an invention automatically belong to an inventor’s employer if the invention is made in the course of the employee’s normal duties, and it could reasonably be expected that the employee will produce inventions as part of their employment. With patentable inventions this is the first test to be overcome, and that is not always straightforward. A further question may be whether the IP rights owned by the employer cover the full scope of the agreement. Otherwise subsequent patent applications could be made which could hamper use of the invention. With all inventions and developments it is good practice to ensure that the process of arriving at the invention is well recorded and documented, to enable such documentation to be relied upon at a later date, and to ensure that the ownership position has been considered at an early date. Inventions by self-employed consultants will almost certainly belong to them, unless a different agreement has been made. Ownership questions therefore require consideration at the time an agreement is drawn up. This should cover both existing rights, and rights in developments made as part of the venture going forward. The position with IP rights other than patents is different in some circumstances, and it is important that all of this is covered in the initial written agreement. As indicated it is very important to cover the position with rights developed as part of a cooperative venture. It may for instance be appropriate that a separate company is set up to hold the rights, with appropriate licences being granted to the parties to the agreement.

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OPEN INNOVATION AND COLLABORATIVE VENTURES 35 

New markets Working with different people may expose you to new markets and opportunities, which is obviously a positive development. Any agreement needs to cover how such markets will be exploited and how any rewards will be shared.

Disputes The possibility of these needs to be covered, particularly to avoid any one party being able to disrupt the whole venture. The agreement therefore needs a robust, fair, timely and cost-effective dispute resolution procedure.

It’s not all gloom Open innovation and collaborative ventures provides significant potential benefits. To avoid tears, however, these need to be handled carefully. It is suggested that the best approach is always a win–win one, in which all parties can make a potential reasonable gain, rather than one in which one party seeks to make a very large gain, while others perhaps receive little if any reward.

Summary To really move forward and to truly develop innovations, collaboration is regularly now required. This should not be shied away from but should be entered into with all eyes open, all possible boxes ticked, and the intention of seeking to benefit all parties concerned.

Robert Sales is a partner in Swindell & Pearson, Chartered and European Patent and Trade Mark Attorneys. He has extensive experience in providing IP advice for over 20 years to a wide-ranging clientele in many different technical areas. He can be contacted at [email protected]

2.3

Where are all the good ideas?

Dean Parry, Technical Director at Patent Seekers, reports on how to identify truly innovative products

If you are interested in developing and protecting new products, this article will show you how prior art searching can be used to avoid losing large amounts of money on wasted patents, designs, research and development. You will be shown how the most successful companies rapidly identify truly innovative products.

The wrong route Some businesses develop products without any consideration of whether they have been devised before or are currently protected by a patent and/or design right. The most common explanations for this are:  I haven’t seen the product for sale on the internet, in the shops or at trade shows, so no one has come up with this idea before.  I have worked for many years in this particular industry and have never seen my idea before, therefore it is unique.  Our company is the most innovative in its field and therefore no one will have developed anything like this.  I don’t know if anyone has come up with my idea before but I’ll just make my patent and design application and see what happens.



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 I don’t care whether anyone has come up with my idea before and/or protected it. What I don’t know can’t hurt me (what’s known as the ‘head in the sand approach’). All these attitudes are incorrect, and if you follow any of these lines you may be throwing away a significant amount of money and/or at worst risking your whole business.

What are the potential problems? There are good reasons why you may not be aware of a product. First of all, it doesn’t matter how much internet searching you do or how experienced you are in a particular field, no one can be aware of every product available worldwide. Why does this matter? Well, as an example a company in Japan may have already developed a similar or more advanced version of your product and is about to launch it in Europe. This could potentially devastate your future sales and mean that your investment in R&D has been completely wasted. If you decide to just make a patent and/or design application with no thought to the novelty of your product, you could be throwing away thousands of pounds on drafting and patent office fees. The head in the sand approach is the most reckless and dangerous to use. If you manufacture, sell, import and/or export a product that is protected by a patent and/or design right, you risk being taken to court for infringement. This could mean that you have to pay compensation and stop all future operations relating to the product. Basically, ignorance is no defence.

The correct route The most successful companies and entrepreneurs know the value of prior art searching. They know that the best way to identify or develop an innovative product is first to make sure they have a good idea of what the competition is doing in that area. A prior art search will cover patents, research papers and internet sources. The best way to start a free prior art search is to do the following: 1. Have a quick look at patents by logging on to Espacenet and carrying out a keyword search (using logical combinations of the most relevant words to describe your product) and/or carry out a search based on company and inventor names (if you know any in the field; or just use the names from the patents found from your keyword search). 2. Carry out a product search on Google and any other search engines you know (Google doesn’t have everything). Again try different combinations of keywords. 3. If your product is technical in nature, also have a look through research papers via Google Scholar or Dialog Open Access. 4. If design protection is relevant to your type of product, carry out a design search on, for example, UK designs and Community Designs.

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WHERE ARE ALL THE GOOD IDEAS? 39 

All of the above techniques are used frequently by successful companies and entrepreneurs. They also use the expertise of professional search companies, which can access more information from commercial patent, design and research paper databases.

Final word Companies and entrepreneurs that regularly keep an eye on prior art, in their area of technology, automatically have a big advantage over their competitors. They are able to see areas lacking in development, and may even be able to identify where the next innovation should be. So the best advice, for anyone developing a product, would be to know your market, the patents that control it and the patents that will control it in the future.

Useful links Free patent and research databases Espacenet: http://ep.espacenet.com/ Software for Intellectual Property (SIP): www.patentfamily.de US Patent Office search facility: http://www.uspto.gov/patft/index.html GoogleScholar: http://scholar.google.com/

Commercial patent databases PatBase covers full-text on GB, EP, WO, DE, FR and US documents and covers more than 75 countries: www.patbase.com Delphion covers full-text on WO, EP, DE and US documents and covers INPADOC: www.delphion.com Dialog provides extensive worldwide information on patents and research papers: www.dialog.com

Classification information http://ep.espacenet.com/ http://www.wipo.int/classifications/fulltext/new_ipc/ipc7/eindex.htm

Dean Parry is the Technical Director of Patent Seekers Ltd, which he co-founded with Timothy Parry in 2005. He is an expert patent analyst and gives advice on technical research to small businesses and companies worldwide. He has helped build technical defences for some of the highest-profile patent disputes in both Europe and the United States. He is a former cybernetics researcher and UK Patent Office examiner who specialized in the patentability of software.


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Patent Seekers Ltd is now one of the leading suppliers of prior art search and analysis in the United Kingdom, supplying patent attorneys and multinational companies worldwide. It specializes in validity and infringement searching, and regularly works on high-profile cases to help companies defend against infringement action in European and US markets. Further details: Patent Seekers Ltd, Suite 53 Imperial House, Imperial Park, Celtic Lakes, Newport NP10 8UH Tel: 01633 816601 E-mail: [email protected] www.patentseekers.com

2.4

IP and commercial strategy

IP rights can become a white elephant, says Stephen Carter at Mewburn Ellis, unless you focus on what makes you exclusive in the market

In today’s global economy, knowledge capital, more than physical capital, will drive the success of the UK economy. Against this backdrop, IP rights, which protect the value of creative ideas, are more vital than ever. Andrew Gowers, 2006 They say that imitation is the sincerest form of flattery. It is also often the cheapest way for a new competitor to enter the market, and while competition might generally be considered a good thing, this form of (arguably unfair) competition is almost certainly not good for the original innovator, whose efforts the imitator benefits from for free. This is one reason why, as Andrew Gowers concluded in his recent Review of Intellectual Property (IP) commissioned by the UK government, IP rights are vital to underpin the success of UK businesses, and more generally the UK economy as a whole. This is especially the case for small and rapidly growing businesses that must look to outside sources for funds to support their growth, as adequate IP protection is more often than not a prerequisite for such investments. At the same time, it must be appreciated that there can be significant costs associated with obtaining IP protection, so any IP strategy must strike a balance between these costs and the commercial value of owning the IP. Without an appropriate IP strategy, closely aligned to the overall commercial goals of a business, the danger is that IP rights rapidly become an expensive white elephant.


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IP AND COMMERCIAL STRATEGY 43 

What to protect A key question that must be addressed in any IP strategy is what to protect. Businesses are creating an ever-increasing amount of ‘knowledge capital’, much of which in principle could be afforded protection by IP rights. In the real world, however, there are limited resources available. A business must decide which of its creations to protect, while leaving others unprotected. This is not an easy decision to make. A starting point is to consider what features of a creation a competitor could best use to provide it with a ‘springboard’ into the marketplace. If you can prevent competitors from taking too many shortcuts in their own creative process, you can maximize the period of time in which you have exclusivity in the marketplace. Consider also whether there are key features of your creation to which the commercial value can be primarily attributed. These features are likely to be a good focus for the protection you seek. It is important to appreciate, however, that IP rights can play a varied role in the overall commercial strategy of a business. The traditional role that people tend to think of is the offensive one; actively using your IP to exclude others, preserving a market for you or those authorized by you to exploit exclusively. Another role is use of an IP right itself to generate revenue, through either licensing or selling it. Also very relevant, particularly for growing businesses, is the role that IP rights, and more generally a good IP strategy, play in attracting investors. In my experience in the technology sector, while investors are generally attracted to good science rather than good patents, the absence of an appropriate strategy for protecting the good science can often be a deal breaker. An IP portfolio can also have a defensive role to play. It can deter competitors from enforcing their rights against you (for fear of retaliation), and any dispute might be settled by way of a cross-license.

How to protect Once you have decided what to protect, thought needs to be given to how best to protect it. Some IP rights come into existence automatically. One example is copyright. Stronger, ‘registered’ IP rights, including patents, registered trade marks and registered designs, need to be actively sought. Patents protect technical innovations. They relate to the technical concepts embodied in a product and/or in the processes for manufacturing the product, so they can provide protection that is broader than the specific product or products that have been developed. Patents are infringed by a competitor’s product that employs the technical innovation covered by the patent (as defined by the patent’s claims), irrespective of whether or not the products look alike. A trade mark is something (eg a word or sign) that enables customers to identify goods or services as coming from a particular source. Marks can be very valuable and important if properly developed by advertising, promotion and correct use on quality products or services. Thus, it is vitally important for the mark’s repute and the producer’s repute to protect the mark. A trade mark registration generally gives the proprietor the right to stop others from using confusingly similar marks in relation to similar goods or services. In some circumstances the owner of a registered mark can


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even stop others from using a mark for goods or services that are not similar to those for which it is registered. Registered designs give protection for the appearance of a product. A registered design will be infringed by a competitor’s product that has the same or a closely similar appearance (whether it is ‘technically’ the same or not). So registered designs provide useful protection where the appearance or look of a product is important to the end user and therefore adds value to the product.

Where to protect Registered IP rights are territorial rights: that is, they are limited to the specific territories in which you seek protection. The more territories you choose to cover, the more applications are needed and the higher the costs. Typical strategies include seeking protection in key (large or strategically important) markets and, where they are well defined, countries where competitors operate (for instance, manufacture). Systems exist that enable you to avoid the ‘big bang’ approach of seeking protection in all territories of interest at one time, allowing you to postpone the associated costs without harming the available protection. There are also some regional registrations (in particular Community Registered Designs and Trade Marks, and European Patents) that provide cost-effective routes to obtaining protection in multiple countries within a region. For all of these registered IP rights it is possible to file a single application in one country to start with and to later file applications covering the other countries of interest, which claim ‘priority’ from the first filed application. The priority-claiming applications are treated as if they had been filed on the same day as the first-filed application.

When to protect For patent and registered design protection it is very important that the first applications are filed before the invention or design you are seeking to protect has been disclosed publicly. This is because the question of whether you will be granted protection is, in most countries, judged against what was in the public domain at the filing date of the application, including any disclosures you have made yourself. It is also important to appreciate that in most countries registered IP rights are granted on a first come, first served basis. So, particularly if you are in a competitive field, it can be important to file an application sooner rather than later. On the other hand, the sooner you file an application the sooner you are committed to the potentially high costs of following the application through, and this factor may mean delay is appropriate in some cases.

What about rights of others? In all of this it must not be forgotten that your competitors may well have their own IP rights. It is important to be aware of the impact that rights of others could have: at

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IP AND COMMERCIAL STRATEGY 45 

worst, they could halt your activities completely. Prudent businesses will have in place strategies for dealing with this. Such strategies might include watching the IP filing activity of known competitors. This may allow a business to work around competitors’ patents or other rights, and/or to consider whether they might be vulnerable to attack. Watching a competitor’s IP filing activity can also provide useful intelligence about its development work. And, as already inferred above, sometimes the best defence can be possession of your own portfolio of IP rights.

Stephen Carter is a partner in Mewburn Ellis LLP, one of Europe’s premier IP firms, with over 60 patent and trade mark attorneys and technical specialists, covering the full range of IP issues: patents, trade marks, designs, industrial copyright and related matters. Stephen has a degree and MPhil in Mechanical Engineering from the University of Bath. He joined Mewburn Ellis in 1994 and became a Chartered Patent Attorney and European Patent Attorney in 1998. He worked for a law firm from 2000 to 2004, gaining experience in IP litigation and due diligence work for corporate transactions and IPOs, before rejoining Mewburn Ellis as a partner in 2004. Stephen’s work is mainly in the engineering and software fields. Further details: Mewburn Ellis LLP, York House, 23 Kingsway, London WC2B 6HP Tel: 020 7240 4405 E-mail: [email protected] www.mewburn.com

2.5

Stand up for your rights

Jacqueline Needle at Beck Greener looks at IP in its offensive and defensive roles

The best football teams have players who, while on the team sheet as attackers, will also defend effectively. It is also expected that their defenders will score goals. Similarly, intellectual property (IP) can be used both offensively and defensively and a small company should ensure it has the IP offensive weapons to defend itself if required. It is no longer a realistic option for an innovative company, no matter how small, to ignore IP. Any company putting a new service or product onto the market risks coming into conflict with the rights of others. For example, the new product may infringe registered designs or patents, or the marketing may use trade marks or brands that are similar to existing rights. The defence against such risks is to make searches to establish what relevant rights exist and then, if necessary, to adapt the product or service and its marketing to ensure there is no risk of infringement. But what if the owner of those rights still takes the view that there is infringement and calls ‘foul’? The fully defensive option is to walk away from the product and absorb the resulting losses. It is also an option to proceed, and to risk infringement proceedings with their consequent expense. The attacking option could be to obtain relevant IP rights for your new product and for its trade mark. These rights might be used in negotiating a deal with the competitor, or might even be used offensively to initiate proceedings in the event that the original complaints are not withdrawn. Of course, the attacking option also has the massive benefit that the IP provides protection for the new product against all comers, even if it is not needed to break into the market.



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Obtaining and keeping strong IP rights A company using IP effectively will:  have a person in authority who has adequate knowledge of IP issues;  have routines in place to safeguard rights;  seek professional assistance when required.

A person in authority with knowledge of IP issues A knowledgeable owner or executive can identify, and then avoid, any risk of conflict by undertaking searches. During any project the executive can also decide whether any of the ideas are so commercially valuable that protection should be sought.

Routines in place to safeguard rights Any proprietary information of commercial value should be identified and kept confidential. Employees should be made aware that such confidential information must not be divulged. Measures may be taken to restrict the availability of confidential information within a company. The recipe for Coca-Cola is still known to only a handful of people, and the courts recently underlined its value when they jailed an exemployee who was trying to sell some of the secret to the competition. Other IP rights, such as copyright and unregistered design right, also arise automatically. Such rights protect original logos, software, literary documents such as business information, and the appearance and design of manufactured products. A company can stop others copying the form of the information or copying the products, but to do that it is necessary to show that the rights exist and that there has been copying. Proving that the rights exist just requires a systematic approach. All original documents need to be retained together with their date of creation, and information identifying the author or creator needs to be kept. The company also needs to ensure that it owns the rights. For example, a company commissioning a logo design will not automatically own the copyright in the resulting logo. A specific agreement will be required to transfer the copyright from the designer to the company.

Professional assistance A majority of those made rich with the assistance of IP, such as James Dyson and Ron Hickman, have had ideas or inventions that have been patented. A patent can only help if it is valid, and a valid patent can only be obtained if the patent application is filed before there has been any public disclosure of the invention. It is essential that any new idea of potential worth is kept totally confidential to the company until after the first patent application has been filed. It is important to get the patenting decision correct, especially if a project is thought to have commercial value. Many inventors wrongly define the final result of their labours as obvious, and therefore, unpatentable. The inexperienced often cry

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STAND UP FOR YOUR RIGHTS 49 

‘you can’t patent that’. If the invention has taken time and money to develop, will take further resources to get into the market, and is forecast to have a future, take professional advice. There is a very high chance that the invention will be patentable, if not in Europe, then in the United States. Alternative forms of protection, such as a Community Registered Design, may also be available and might be commercially useful.

Cost-effective enforcement of IP rights It is commonly said that obtaining IP rights is a waste of time because the company will not be able to afford to enforce those rights. However, less than 1 per cent of all patents are involved in any dispute, and it is the existence of the patent, rather than of the invention, that provides the wealth-generating opportunities. If a product newly on the market is successful it will soon attract the attention of competitors. They will want to provide their own versions and thereby share in the potential profits. If the product is not patented, the competitors are free to use the idea, although they cannot make a slavish copy. If the new product is patented, or is the subject of a patent application, the majority of businesses will pause before rushing to develop rival versions. Even large businesses are reluctant to get involved in patent litigation without good commercial reasons. When Xerox introduced the first generation of copying machines, it had a worldwide monopoly for the 20 years for which their patents existed without having to take action for patent infringement. The competition is attracted by success, and so infringement actions are generally about inventions that make money. The profit stream alone might be enough to enable a patent action to be funded. It is also possible to take out legal expenses insurance to fund such actions. The European Union has recently considered making such insurance compulsory, and many insurers that are new to this market are considering offering plans. Of all patent actions started in the United Kingdom, only one-sixth go all the way to trial. This is because the initial actions are often successful in achieving a settlement. For example, on establishing that a competitor is planning to put a competing product on the market that infringes various rights, a company may apply to the court for an injunction to stop the launch. The hearing will come to court urgently and will probably last less than half a day. If, as a result, the competitor is prevented from going forward with the product, a commercial settlement with the product off the market permanently can result. Alternatively, if the competitor faces huge losses because it has been stopped from selling the product, it may be amenable to a settlement providing royalties to the rights owner. The professionals who act for business in protecting their ideas and innovations are Chartered Patent Attorneys (CPAs). A number of patent attorneys are also Patent Attorney Litigators (PALs) and able to litigate IP actions before the courts. The traditional way to conduct IP litigation in the English courts was to use a highly expensive team of a patent attorney, a solicitor and a barrister. A PAL can make it


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unnecessary to use a solicitor and thereby reduce the costs. All UK patent attorneys also have full rights, including rights of audience, in the Patents County Court. A costeffective solution to litigation can be obtained by an informed choice of court and professional.

Jacqueline Needle is one of the select group of patent attorneys in the United Kingdom with a Litigator’s Certificate which gives her the right to conduct litigation in IP matters in all English courts. Jacqueline has extensive experience of patent drafting and prosecution both in the United Kingdom and in other countries. She is a partner of Beck Greener in London and can be contacted at: Tel: 020 7693 5600 E-mail: [email protected] www.beckgreener.com

3

Gaining market share


3.1

Taking your brand to the next level

Smaller companies wishing to build their brands up to the next level often don’t know where to look to achieve that step-change. John Robson, of brand strategy consultancy Sparkler, provides some helpful direction

There are thousands of brands in hundreds of markets, happily trundling along in the bus lane, hoping for a few percentage point year-on-year increases in the next financial year. There is nothing wrong with that, if that is what you want to achieve. Usually this sort of brand growth is of the good old-fashioned organic variety: several satisfied customers pass the word on to their friends and sales increase a bit. Directors and marketing departments looking for this sort of happily organic growth should focus on gentle encouragement of this natural word-of-mouth phenomenon. Ensure that your product or service is excellent, make sure availability is not a problem, then look after your most loyal customers, perhaps with a loving CRM programme. Organic growth requires careful tending, pruning and fertilizing. It is about keeping a successful and natural equilibrium intact. But what about directors and marketing departments for whom an Alan Titchmarsh approach is simply not enough? Perhaps you are looking for explosive growth in a youthful, unpredictable market. Maybe you are the rising star in your company, tasked with doubling sales of the rising star brand in your portfolio. Or you might be managing a brand that is sailing into a nasty storm, rudderless and sinking fast. If you need this kind of explosive step-change for your brand, then how to go about it?

 54 GAINING MARKET SHARE

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Be bold Organic growth is often associated with compromise behaviour – the natural internal eco-system of the sales team, production, finance and marketing must be kept in balance at all times. If you are looking for step-change, then delicate compromises will likely need to be swept aside. You will need to make some bold calls, and follow it up with some bold conversations. There is a reason for this. In the outside world of the marketplace your brand has probably settled into a nice, cosy position. All your customers think they know everything about it. You need to change all that – make it stand out, jiggle it about a bit, wave and shout and make new customers notice you. The only way you are going to make your brand stand out again in the marketplace is by changing something that, internally, seems radical.

Look at the big numbers We often encounter directors and managers who obsess about small increases in small numbers – has brand awareness gone from 62 per cent to 64 per cent this quarter? Are our retention figures higher than last year? How can we squeeze more out of our strike rates? This is understandable – they are the metrics of organic growth and directors are evaluated on such measures. But they don’t help with brand step-change. You will never create brand step-change without stepping back and observing the bigger numbers. Here are some suggested things you can do. It’s macro numbers time!  When was the last time you looked at your basic, headline sales figures? Graphed over the last 10 years, by volume, and by value? Notice anything blindingly obvious?  Now do the same again, split by sub-brand or product variant.  Now look at the figures split by large geographical markets (globally split by market perhaps, or nationally, north versus south).  If you had to split your entire customer universe into three groups, what would those groups be? Which of those three is getting bigger? Which is getting richer or more influential?  At what level is awareness of your brand? Just because everyone in your private circle of friends has heard of it, don’t assume everyone in the country has. You might be surprised at how low spontaneous and prompted brand awareness levels can be for seemingly big national brands  What do your best customers think of your brand? Why do other people reject your brand? If you have no brand rejectors, this is probably a bad sign. Good brands have lovers and haters. Why haven’t you got any brand haters?  Are there any macro cultural or economic dynamics affecting your marketplace? Do interest rates or the state of the housing market impact on your sales? Or perhaps macro health or green issues? Or even the ubiquitous appeal of reality TV shows?

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TAKING YOUR BRAND TO THE NEXT LEVEL 55 

Having answered those questions you will probably now know, in your heart of hearts where the step-change might perhaps come from. No? Oh yes – we forgot one thing:

Pricing What is the true elasticity of pricing in your marketplace? How do you know? Ask the unaskable questions, just quietly to yourself. What would happen if you doubled the price of your product? What would you need to change to be able to justify that premium? Are there any customer segments that have a strong need for that kind of product or service? And could they afford the new price? Does that help open any new step-change doors? Perhaps; perhaps not. But these are exactly the kind of questions that can begin to show you a route through to massive brand growth.

Iconoclasm In searching for step-change you will likely come across false idols and received wisdoms that you will be aching to question. It might be that ‘Under no circumstances can the production line make round ones, only square ones’, or ‘You’ll never sell a healthy product in this marketplace’, or ‘The trade will never buy that argument’. In our experience it is only when those false idols are shattered that step-change actually happens. And the best corporate cultures not only allow iconoclasm, they actively encourage it. If you a director tasked with brand step-change, then you have been chosen for a reason. Perhaps your fellow directors already know what needs to be done, and know you have the right iconoclastic spirit?!

Global equine dentistry The day before writing this guide, I was driving down the A1 and saw a van at a service station. On the side of the van was written ‘Global Equine Dentistry’. Wow! Are there that many horses’ teeth in the world to sustain a global equine dentistry industry? Seems like it. The point is this – in developing your brand, you cannot be too specific in defining your speciality or product niche. You are much more likely to create a step-change if you keep narrowing and narrowing the definition of what you do. You have to, to create impact and be noticed. How many Bloggs & Smith removals vans passed me by unnoticed on the A1 yesterday?

Urgency OK, so you’ve got your step-change plan in your heart of hearts. You’ve looked at the data. You’ve talked to your customers. You’ve smashed a few false idols. How and when to go about it? Prevarication never helped create step-change. The best way is to start putting your plan into action right now. Today. Why spend any money tomorrow


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on activity that is, at best, going to have an ‘organic’ effect on your brand? Press on urgently and boldly to create that step-change.

John Robson is a founding partner at Sparkler, a brand strategy consultancy which specializes in media brands. Established six years ago, Sparkler has developed brand strategies for clients such as the BBC, Emap, Sky, Nokia and Microsoft. Further details from Sparkler, 58–60 Berners Street, London W1T 3NQ Tel: 0207 079 9555 www.sparkler.co.uk

3.2

Direct mail and online media

Direct mail and e-mail are natural partners, argues Andrew Miller, New Business Marketing Manager at Royal Mail. In combination, they complement each other’s strengths and weaknesses.

A digital world In the United Kingdom today, 29.8 million people are regularly logging on to the internet. Over 80 per cent of the United Kingdom has access to interactivity, with 50 per cent of these people being online every day. To reach this audience UK digital marketing spend will hit £2 billion in 2007. Interactivity and digital sophistication continue to grow as consumers enjoy a richer online experience. With broadband becoming the connection of choice, consumers no longer have to ‘click and wait’, they benefit from a more immediate experience and increased sharing of information on company services via websites. Many are more willing to search for information online than make a telephone call. We wanted to find out how businesses could achieve this ‘big win’:  What is the relationship between online media and traditional mail?  How do consumers engage with a range of digital media – e-mail, online?  What role does direct mail play in this? So we asked customers. Focusing on attitudes to e-mail, web advertising and direct mail, we wanted to find out how consumers engage with, and respond to, different


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DIRECT MAIL AND ONLINE MEDIA 59 

media. We interviewed 781 consumers in total (639 online users and 252 nationally representative individuals) during February 2007. The consumers told us they:  see a clear role for direct mail and digital – used on their own and in conjunction with one another;  have clear views on how and when they want to be contacted;  relate to the different channels in quite different ways;  think both channels are useful for different purposes. Even those already confident on the web welcome direct mail:  Of extremely confident web users, 66 per cent would like at least some contact by post, 11 per cent would prefer to be contacted by direct mail only, and 55 per cent would prefer to be contacted by a combination of direct mail and online.  Of confident web users, 69 per cent would like at least some contact by post, 13 per cent would prefer to be contacted by direct mail only, and 55 per cent would prefer to be contacted by a combination of direct mail and online.  Of less confident web users, 73 per cent would like at least some contact by post, 9 per cent would prefer to be contacted by direct mail only, and 64 per cent would prefer to be contacted by a combination of post and online. Consumers see a clear role for direct mail and email on their own and together: 84 per cent agree that there’s a place for post and e-mail from companies.

They relate to mail and digital channels differently Direct Mail % Gives me better impression of the company More professional means of communication Easy to take in information Likely to really grab my attention I’m likely to spend a lot of time reading it It makes me feel more valued I am more likely to do something as a result Appropriate if I’m not already a customer I enjoy receiving and reading it Better for sending reminders More appropriate if a customer already Easy to file so I can go back to it later Better for confirmation / follow-up messages Easier to respond to Better at communicating brief messages

E-Mail % 53 49 48 47 46 43 43 41 37 37 36 30

20 15 6

8 14 20 19 14 7 17 20 12 43 32 53 64 68 82

Source: Quadrangle: DM & Email 2007, DM & Online 2007

Figure 3.2.1


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Direct mail and digital mirror each other’s strengths and weaknesses Working together, direct mail and digital support each other, and messages deliver most when the media are used together. Web users think that direct mail and online make each other more effective: ‘I am more likely to remember something if it is communicated to me by post and online’ – 69 per cent agree. ‘I am more likely to read mail from a company if I have already seen advertising for the company online’ – 56 per cent agree. The combination of online and post creates real cut-through.

Digital: speed, response, control Good aspects of digital communications were seen as being:      

share information with others; ease of response; appears sophisticated; is convenient; sends messages quickly; confirmation.

Not so good aspects were:  cut-through easy to ignore;  it doesn’t make the recipient feel valued;  it feels or appears ‘premium’ – not physical/tangible.

Direct mail: impact, value and action Good aspects of direct mail were seen as being:        

sensory, tangible; makes recipient feel valued; grabs attention; creates a good impression; retains information; provokes action; delivers detail; engages for longer.

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DIRECT MAIL AND ONLINE MEDIA 61 

Not so good aspects were:  its lack of immediacy;  less appropriate for brief messages;  cost implications.

Together, direct mail and digital are greater than the sum of their parts Direct mail and digital are different, but are from the same species. They augment each other:    

Communications are more effective. Messages cut through and hit home. Direct mail supports and clarifies online. Direct mail provides physicality, relationship and depth to digital’s speed and convenience.

Business goals of finding new customers, growing and retaining existing customers can be achieved through an mixture of mail and e-mail.

We want to find new customers (acquisition) This includes generating prospects, converting enquiries and contacting previous enquirers.  Cold acquisition – when approaching customers for the first time e-mail is considered inappropriate.  Spam is a growing problem.  60 per cent have started ignoring e-mail.  Consumers consider mail more appropriate for carrying detailed and important information on brands.  E-mail does have an important role to play in the acquisition process – particularly around follow-up activity (converting enquirers).

We want to hold onto our existing customers (retention) The issues here are staying in touch and managing problems.  Mail is up to eight times more likely than email to make customers feel valued, although it does cost more.  A segmented approach to customer communication is appropriate – based on not only channel preference but also profitability and potential.  Arguably both e-mail and mail should be used to handle complaints.


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 E-mail provides an opportunity to confirm receipt/explain the complaints handling process without delay.  Mail is perhaps more appropriate for more important/sensitive messaging.

We want to get more from our existing customers (development) This involves the welcome phase, second purchase, getting to know you and up-sell/ cross-sell activities.  E-mail is perfect for confirmations, eg that an order has been received or is being processed.  Mail is also valuable to consumers at this stage in the journey for thanking and welcoming, encouraging future business.  Getting to know customers is key – including their channel preference.  Surveys can be conducted via mail and/or e-mail. Mail marketing doesn’t always work best alone, and the internet, for all its strengths, will struggle to break out of its ‘spam’ niche, as quality online targeting remains an enigma. Put physical and electronic media together and you can achieve great results.

What services can Royal Mail offer a growing business?  Delivery services. Learn more about options available for sending and receiving letters and packets quickly and easily.  Marketing services. With our expertise and tools, we’ll help you get the most out of your direct marketing campaigns.  Logistics services. With a distribution network that’s second to none and some of the country’s leading logistics experts, your supply chain is in safe hands.  Discounts and payment. Get the best possible deal for our services and find a way to pay that suits your business. To find out more call 0845 7 950 950 or visit www.royalmail.com/smart.

3.3

Market penetration

Want to penetrate your market and build a brand? Then there are three areas on which to concentrate as an SME, argues Chris Wright at Skillweb

Seven years ago I set up Skillweb with my business partner Paul Ridden. It was based on an idea for tracking individual consignments through the supply chain. With hindsight, despite our success, there is one particular area where I feel we could have been more effective: market penetration. We should have sought a more effective way of establishing our brand in the marketplace. Businesses today have even greater opportunities to establish a powerful presence. There are three key ways in which small and medium-sized enterprises (SMEs) can now achieve even greater penetration in their chosen market sector:  using mobile computing and increasing bandwidths to gain a more powerful and sustainable competitive edge;  boosting customer loyalty by taking greater care of clients, particularly during the fulfilment process;  outsourcing, the evolution of virtual companies, and the development of agile techniques for remote workers.

Mobile computing Companies need to start exploiting the potential of mobile computing with the aim of gaining more business. As phone technology merges with business processes, new ideas will change the ways in which we conduct our business.


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MARKET PENETRATION 65 

Mobile phone technology is developing rapidly, with one of the latest advances being the march towards real-time video distribution. As little as three years ago no one had a video phone; today, the numbers are still small but growing, and it’s likely that in five years, almost everyone will have one. Although video phones won’t be the answer to your business challenges (unless you’re a phone provider or a video salesman!), the corresponding growth of bandwidth will make a significant difference. Today, most people are aware of Blackberry devices, which keep upwardly mobile office workers in touch with their e-mails and phone messages. Similarly, everyone is aware of text messages, and some readers will be familiar with XDA devices, which run cut-down versions of desktop applications. However, the critical advantage that bandwidth will provide is central services for everyone, at all times. Let’s look at two examples of how bandwidth will help businesses:

Field workers If a support engineer is at a customer’s house fixing the central heating, they can simply refer to online manuals from their phone. If they get into difficulty, they can share a direct video link with an office-based expert (who could be anywhere in the world). Any spare parts used can be logged into an online inventory management system, and invoices can be generated instantly and electronic payments taken. Some companies have already developed these types of solution, using laptops, standard mobile phones and shared services. The really interesting part is that soon all of this will be possible from a mobile phone.

Home shopping This is changing the nation’s buying habits: in some cases, the only point of contact with online ‘e-tailers’ is the delivery. Home shopping has doubled every year for the past six years. If you’re a manufacturer or an importer/reseller, it’s therefore essential to have a web-based catalogue that displays your wares, and to advise potential buyers where to find your shop and/or how to buy online. Fulfilment will dominate our buying experience. Companies that can solve the challenges relating to delivery will win increased customer loyalty and therefore more business. It’s estimated that about 2 per cent of all home deliveries go wrong, but modern technology now allows a mobile phone to be used to track the precise status of a delivery. Why not use satellite geo-tracking, RFID asset tracking, route scheduling and online traffic monitoring to know exactly when your delivery will be made? So far the key limitation has been bandwidth and its cost, but this is all about to change. In summary, the availability of broadband on mobile phones is coming rapidly, and at an affordable cost. Businesses need to start planning how they can exploit the very real opportunities associated with unlimited bandwidth.


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Customer loyalty Today’s customers are increasingly more demanding, less loyal and always trying to get a good deal. In contrast, my father’s generation would be loyal to a single brand. If the product wasn’t immediately available, they would understand and return at a later date. My generation retains some brand loyalty, but will be prepared to look around if there is no availability from the preferred supplier. My children’s generation simply move on. Their next purchase is only a click away, and if one shop doesn’t deliver, the next one surely will. At the same time, we all tend to complain more, we expect better service and we want it sooner, so order fulfilment becomes a critical element of a sale. For businesses to be successful, they must focus on delivery, and customer satisfaction at the point of delivery. Businesses therefore need to determine how well they are meeting their delivery promises so that they can satisfy their customers’ demands. They must start to investigate how technology could give them a more competitive edge.

Outsourcing and virtual companies The final key to success involves the opportunities and challenges posed by outsourcing, the creation of and migration towards virtual companies, and the prospect of home working. In relation to outsourcing, a business must balance the loss of benefits such as internal team building and creating value against the lower costs and greater convenience of outsourcing. There are increasingly real problems (time, environment, cost) of actually getting to work, but there are also real benefits associated with bonding with colleagues to create a winning team. Technology is already helping to facilitate home working, and is also making collaboration with remote workers easier. The solution is to improve your agility. Pick and mix, invest in the tools, and do what is best for your business.

Conclusion The next two or three years will see significant changes in the ways in which SMEs run their operations. We are about to see new methods of getting to new marketplaces. Three key factors – technology, customer expectations and the growth of virtual businesses – will be the catalyst for these changes. The opportunity is here right now. The solution is not far away. Don’t miss out.

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MARKET PENETRATION 67 

Chris Wright is the managing director and co-founder of Skillweb, which specializes in mobile computing solutions that focus on remote worker management, specialized proof of delivery solutions and the provision of managed services. Contact details E-mail: [email protected] www.skillweb.co.uk

3.4

Mobile marketing

With 4.4 billion SMSs sent in the United Kingdom in March 2007 alone, and 15.5 million active mobile internet users, mobile media marketing is now undergoing the same degree of transformation that the internet has seen over the last decade, says Nico Köpke at Kodime

While traditional web marketing is increasingly becoming a specialized art, compartmentalized into various functions (search engine optimization, pay per click, email marketing, etc), many marketers in businesses both small and large continue to struggle with the highly dynamic mobile channel, or choose to ignore it. This powerful digital medium is typically considered a stand-alone channel that, from a marketing communications perspective, is still in its early infancy. This is a misconception.

Mobile has come of age As marketers and entrepreneurs, we need to look at where the target audience is, and wishes to be. And there is no doubt the mobile lifestyle is now the most actively embraced digital channel. With handset penetration at 121 per cent in the UK (m: metrics), and most consumers having their mobile phone close with them not only during business hours, but from early morning until bedtime, the opportunity to engage in dialogue across this one channel is substantial. With the most recent handset releases featuring MP3 players, better-quality screens, easy access to the mobile internet and more, the active use of mobile multimedia will widen those possibilities even further. However, as consumer surveys show, the mobile is also a very personal, almost intimate part of the digital lifestyle, and any unauthorized contact can not only cause



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irritation at the recipient end, but damage a brand. This is why mobile marketing has seen its greatest success to date as a pull medium, used to generate instant response, anywhere, at any time.

The perfect complement Mobile response marketing is a perfect complement to other, already existing and budgeted channels. From the simple flyer at a trade show to the award-winning television commercial, from the marketing website to outdoor media, mobile is the ideal tool to generate additional enquiries, leads, contacts, website traffic and subscribers. Using a call to action that combines a short number and a memorable keyword, any marketing collateral is instantly converted into a digital response medium, bridging the offline and web world with the dynamic mobile channel. Offering consumers the option to find out more about your company or product through their mobile has strong benefits:  instant gratification of any enquiry, 24/7, ensuring your key messages are delivered reliably in a pull-push scenario;  capturing of consumer data such as mobile number, and where appropriate more details such as name and postal address;  instant traffic to your mobile site (formerly WAP), providing more comprehensive information including multimedia such as mobile video and contact forms;  positioning of your company or product as consumer-friendly, and digitally aware, ready to service consumer enquiries on demand;  cost-effective, fully automated and personalized digital communication. Here are some of statements by consumers when questioned why they chose a mobile response option over say a voice call or visiting the website: I did not want to speak to someone at this stage. I was on the move and thought I’ll try that. It was after 8 pm, and I assumed no one was available to speak to. It’s cheaper to text than call and end up in some voice system. Just wanted to see more details straightaway.

A successful mobile media campaign So what is required to get the most out the mobile response marketing opportunity? Let’s start with the concept. Does your campaign include response options? Are the objective and return on investment (ROI) criteria to generate as many qualified responses as possible? Then adding mobile is the right choice. Define a memorable call to action and keyword, and add to your marketing collateral. In the creative, position the mobile response option as equal to any other, such as url or hotline number – it’s all about consumer choice. Give a clear reason

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MOBILE MARKETING 71 

why to use mobile: ‘text for more info’, ‘view the video on your mobile now’, ‘browse the full catalogue now’, ‘request our brochure now’, ‘view more images of the resort on your mobile now’. Also state that ‘standard network charges apply’ to avoid any consumer misconception that a premium cost might apply. Check your media and marketing plan, and assign unique keywords (often via a suffix) to each call to action. This allows the campaign to be evaluated by response media. For example ‘Brandname Metro’ identifies all mobile responses from the London commuter paper, whereas ‘Brandname info’ identifies the direct mail campaign. The response content delivered for each enquiry needs to fulfil some key criteria:  Be relevant for the here and now. Provide up-to-date info, and that means even on a daily or hourly basis for some campaigns. In the case of residential property marketing, it is appropriate to advise a consumer texting in about a special show house viewing on the coming Sunday – but not after the fact! For a music festival, offering the live audience SMS updates for on-stage times, linking with a dynamic schedule, is the better choice.  Offer a direct link to the corresponding mobile site. This site should contain images and text, and be dynamically optimized for the thousands of different handsets available, ensuring brand and user experience are the best possible, whether viewed on an old Nokia with a black and white screen or the latest Blackberry.  Do not repeat content. For example, when generating mobile response from a print advertisement, do not repeat the key visual as the first large image on your mobile campaign site. Mobile browsing sessions are short, for further information, here and now.  Offer registration and contact forms. Use to qualify any mobile leads further, for subsequent marketing.

Getting it done As with all digital channels, technology can make or break a campaign. While it is relatively easy to send and receive basic SMS messages, you should look for the following features: easy management and control of all content and campaign elements; automatic optimization of all content, by handset; detailed reporting of response rates, click-through to mobile sites; efficient data capture of numbers, e-mails, postal addresses and any other such consumer data your campaign requires;  easy integration with other systems, for example CRM;  reliable, fast and scaleable delivery across all mobile operators.    


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Results Once you have implemented a mobile response campaign, you will have consumers identified and registered via their mobile number (much more unique than an e-mail address, with most consumers now having several and changing them with the job and provider). Depending on the options, you may also have other consumer data such as postcode. You will know from which campaign entry point each consumer responded (print ad, direct mail, etc). You can also have technology reporting on the clickthrough rate to the mobile site, and which content items were accessed, using which handsets – a powerful set of CRM data for subsequent marketing and profiling, via call centre, text, e-mail and even surface mailing.

Outlook One of the key factors now needed to make the mobile internet a true mass market channel, up from the currently estimated 25 per cent of UK mobile users that already regularly use it to review news, content and information, is the introduction of flatrate pricing for data usage on mobiles. Several UK operators have already introduced such packages, named ‘web’n surf’ or ‘online access’, and all are expected to provide such services at competitive price by the end of 2007. Combined with the increasing penetration of 3G networks, the next stage of mobile will be as powerful as when internet access jumped from modems at 56k to unlimited broadband, and the impact on consumer behaviour and subsequently digital marketing at least as great. Now is the time to start using mobile media marketing as a highly effective direct response, acquisition and CRM tool, and to start actively developing a mobile internet strategy, ensuring marketers do not miss the mobile opportunity.

Nico Köpke is Kodime’s founder and CEO. Kodime is a leading mobile media enabler, providing software as a service to businesses wishing to engage and transact with a mobile target audience. He is a renowned speaker and creative thinker on the convergence of digital media, music and technology. As a senior vice president of Sony Music he pioneered and managed the company’s developments of its online network, community marketing, mobile marketing, B2bB, digital music distribution and new content services. Previously, Nico was account director for agency Burson-Marsteller, developing and implementing marketing and communication programmes for clients such as Barclays, Deutsche Telekom and Vobis. He began his career as technical writer for Sietec, a Siemens subsidiary, and started in the music business as composer and producer for film and television. Nico holds an MA in Media and Information Sciences from the Technical University of Berlin, Germany.

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MOBILE MARKETING 73 

Further details: Tel: (+44 0) 208 547 2800 E-mail: [email protected] www.kodime.com The figures used in this chapter are from m:metrics. For further details, please see: http://www.mmetrics.com/

3.5

Fulfilment for online sales

Growing sales directly on the web is an option for all kinds of business, but make sure you fulfil customers’ expectations, says Andrew Miller, New Business Marketing Manager at Royal Mail

The remote shopper In the distance-selling marketplace we can see growth beyond traditional mail order/ home delivery companies, and the emergence of a new breed of e-retail businesses – so new that industry classifications don’t exist to categorize them. Manufacturers, wholesales and production businesses are all getting in on the action: it is rare to find a ‘branded product’ business that will not sell you their goods and deliver them to you (even if the fulfilment is actually provided elsewhere). For businesses the e-commerce benefits are clear:       

24-hour, 365-day opening; lower costs; efficiency gains; extended market reach; quick adjustments to market conditions; influence customer purchases; improved customer service.

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FULFILMENT FOR ONLINE SALES 75 

However, we must offset against these the disadvantages:  The largest is the lack of physical contact.  Communication is different (one way).  It is difficult to capture visitors’ attention. For customers, the e-commerce payback is:        

convenience; control; information; fewer hassles; low procurement costs; streamlined process; private shopping; the transaction can be instant. The winners in ‘clicks and order’ retailing, like their predecessors in ‘bricks and mortar’ retailing, will be those who know how to take care of the customer better than competitors, and provide better solutions than were available to consumers in the past. (Blackwell et al, 2001: 147)

Fulfilling the online promise The easiest online business is one that has products that can be transported online – everyone else needs fulfilment. For effective customer fulfilment, companies must provide an online shopper with several things.

Delivery    

Details before your order; convenient delivery options; clear indication of any limitations; achieving the delivery stated.

Information  Order progress;  clear returns process.

Support  ‘Helpful’ support in the event of failed or late delivery.


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Costs  Charges that are clear and easy to understand.

Resolving the key issues, and keeping customers satisfied In the online delivery market there are key areas that require careful consideration. Manage them well and customer satisfaction ensues. Neglect them at your peril.

We want convenience Issues are:  The speed of transaction and order is immediate – delivery needs to reflect this speed.  The order process must be fast, intuitive, simple, easy and safe. Customer services must be ready to assist.  Delivery is viewed by the customer as an extension of the retailer’s service, even if delivered via a third party.  Delivery timing is key to minimize waiting time and complete the experience.  A location for delivery that is convenient to the customer home or elsewhere.  Customers want the delivery to arrive first time.  Customers have high expectations, and problems will impact on future orders or drive them to competition. The solutions involve:  effective and well-tested ordering systems;  understanding the supply chains to increase response and flexibility;  fully integrated end-to-end supply systems from ordering, fulfilment, warehousing and packaging to delivery (and returns).  transactional websites available for customers 24/7, and similarly 24-hour (or late evening) call centres;  online order tracking that keeps customers informed, notified of delays and stock shortages;  flexible local delivery options, such as timed delivery slots, to maximize customer convenience;  deliveries that can be made to collection points, such as post offices, to be picked up at a convenient time. The implications are that:  A good shopping experience is vital for loyal retailer customers.  Growth in e-retail creates opportunities for fulfilment companies to cater for new clients. Delivery companies must be flexible in delivery options.

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 It is important that the partner maintains the retail brand and enhances it through its performance.

Give me cheaper prices The issues are:  High delivery charges are a barrier to buying.  If the purchase is based on cheap prices, delivery must be cheap too. Solutions are:  Offer free or low-price delivery, offsetting the costs against efficiency savings through third parties or by increased customer demand.  Reward multiple purchases with free delivery, to drive lower overall delivery cost and increased product sales. Implications of this are:  Online access makes it easy to search multiple sites – delivery costs can be a strong differentiator.  A low-cost delivery may impact on the quality of customer experience by reducing flexibility and timings.

Home delivery is inconvenient The issues are:  The customer desire is for delivery appointments at times convenient to them – this is difficult and expensive.  Options must be offered when the customer is not at home. Solutions are:  a selection of timed delivery options;  particularly for flexible evening and weekend deliveries;  raising awareness about non-home delivery options such as local collect. Implications of this are:  The greater convenience comes at a cost, though this can be offset if the customer remains loyal and repurchases.  Fulfilment companies must innovate or adapt to offer services aligned to customer experience rather than operational cost.


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It’s difficult to make returns The issues are:  When ordering online, customers perceive that it will be inconvenient and difficult to return unwanted items. Solutions are:  ideally access to national shops for returns, but most do not have this flexibility;  to offer free returns and flexible return solutions such as postage paid. Implications of this are:  The problems associated with the return of goods are a strong factor against consumer purchase. They are also the most difficult to overcome.  Over-promoting effective returns would be counterproductive.

The costs are too high The issues are:  The cost of delivery and returns charges are a barrier to purchasing.  Including ‘postage & packing’ increases the selling price. The solutions/responses are:  Value retailers can consider free or low-price delivery.  Free/lower-cost delivery can be offered for purchases over a specific number of items, encouraging customers to purchase more. Implications of this are:  Delivery costs are an important form of differentiation between retailers.  The level charged to the consumer does not have to reflect the actual cost of delivery.

What about bulky goods? The issues are:  The favourite method of ordering is in-store. The customer is able to inspect goods personally and discuss their attributes. This means higher service levels are required, therefore there is the cost of trained staff.  There is a growing internet market for bulky goods such as DIY and electricals – particularly branded.

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 Consumers can easily search detailed product information, customer reviews and comparable costs.  The delivery may require technical expertise, if there is a need for installation. Solutions are:  Dedicated delivery, through specialist vehicles and trained personnel, providing much more control over fulfilment.  Skilled workers are required to install products such as white goods appliances. Implications of this are that:  interaction between delivery workers and customers will dominate the customer experience;  focusing on a good delivery service will gain customer loyalty;  managing third-party installation services is important to preserve retail brand credibility.

Using the internet The issues are that:  it is an important channel for information, options and convenience – not necessarily providing unbiased, accurate advice;  brand purchases are not tied to any one retailer. Solutions are:  offering transactional services through the web to join up the shop/mail order/ internet presence;  integrated accounts/shopping lists with customers online. Implications of this are:  the development of multi-channel retailing;  pressure from competitors and substitutes, but also suppliers and even buyers.

Completing the picture If consumer satisfaction is key, businesses need to ask:  why customers buy a range of products/services from a particular business;  what satisfies the customer question – is this product for me?  if buyers tend to be more sensitive to a loss than a gain, what will it cost?


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So the fulfilment goals are simple. To obtain happy customers, provide convenience, cheaper prices, delivery options, simple returns, an easy to use website, offer the best reputation products better than every one else, and you’ll success as the new breed of ‘e-retail’ business that is unrecognizable by traditional industry standards.

Reference Blackwell, R D, Miniard, P W and Engel, J F (2001) Consumer Behavior, 9th edn, Harcourt College, Orlando, FL

What services can Royal Mail offer a growing business?  Delivery services. Learn more about options available for sending and receiving letters and packets quickly and easily.  Marketing services. With our expertise and tools, we’ll help you get the most out of your direct marketing campaigns.  Logistics services. With a distribution network that’s second to none and some of the country’s leading logistics experts, your supply chain is in safe hands.  Discounts and payment. Get the best possible deal for our services and find a way to pay that suits your business. To find out more call 0845 7 950 950 or visit www.royalmail.com/smart

3.6

Franchising

Franchising can gives you a formula for growing your business quickly without major capital outlay. Deborah Rider at Goodman Derrick sets out the terms on which it works

You might not be thinking of world domination just yet, but now that you have a thriving business, what can you do to grow your business quickly and without major capital outlay? By granting a franchise, you can increase the size of your business by adding new outlets and/or expanding your geographical coverage without incurring the capital cost (those costs will be borne by the franchisee). What’s more, since the franchisees will be responsible for their own premises and staff, you will not have the added burden of the franchisees’ outlet/offices or personnel. In essence, granting a franchise to run a business is the grant of a bundle of rights by you (the ‘franchisor’) to someone else (the ‘franchisee’) in return for a fee. The franchisee uses those rights to run their business in a specific area or ‘territory’ along set lines dictated by you, and pays you ongoing management fees (sometimes known as ‘royalties’) which are usually a percentage of the turnover of their business. As a result both you and the franchisee have a joint interest in the franchisee’s business succeeding. You will want to choose your franchisee carefully so that they uphold your standards and operate their business effectively, allowing you to profit from a healthy continuing fee stream.


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Getting ready Step 1: Protect your brand Regardless of whether you are thinking of franchising or not, it is always wise to do this. If your business has a reasonably distinctive name, register this as a trade mark. If your business name is too general, seek to register a particular logo that incorporates your name instead. A registered trade mark will give you much better protection and will assist you if you need to take steps to stop ‘pirates’ who might try to copy your business and use your brand and/or business reputation. In addition a franchisee is entitled, in return for the money that they are giving you, to require you to take action to protect the business’s trade mark if pirates have muscled in on their territory.

Step 2: Get your operating system down in writing This system or manual will set out all of the relevant information about your business and the exact procedures which are to be followed carefully by each franchisee. You should ensure that at first glance the consumer will not be able to tell the difference between your original operation and a franchised one. The branding, quality of products/services, shop décor, uniform, advertising, livery on vans, etc (as appropriate) should all be the same as yours. If you control the franchised business in this way, the public should associate the quality and standards of your business with that of the new franchise.

Step 3: Talk to a specialist At this point, we’d suggest talking to a specialist British Franchise Association (BFA) affiliated consultant who can assist you in preparing your prospectus and advise you about the core terms of the franchise offering that you will use to attract interested franchisees.

Step 4: Contact a BFA affiliated lawyer This is so that you can get advice about your franchise agreement.

The franchise agreement These can be somewhat long but they deal with a wide variety of terms and eventualities. The agreement will address all relevant issues and will endeavour to minimize the scope for disputes between you and your franchisees. The agreement sets out the precise terms upon which you are granting rights to your franchisees. You can specify details of the relevant territory for which you are granting the franchise and thereby give yourself the freedom to operate or grant franchises elsewhere.


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The franchise agreement should set out what is included in the initial fee you will charge for the franchise. Such items might typically include the stock, plant, machinery, stationery and so on which the franchisee will need to set up the business. The initial fee will also include the costs of the training that you will provide. You should be clear about what you will offer. It is true to say that the better the training, the better the franchise. As regards the continuing management fees, there is no set amount for these. They can vary from 2 per cent (eg for a grocery franchise) to 20 per cent in a services franchise (eg an employment agency). What is reasonable depends on the type of business, your sector and the amount of ongoing support given. Specialist advice will guide you here, but you need to ensure that you are getting an acceptable level of income while at the same time leaving the franchisee happy by allowing them a sufficient profit for their business. There are other ways to obtain income from franchisees on an ongoing basis. If you are supplying products to your franchisees, you could charge a mark-up on the unit price to cover your own administration costs, and this might include a small element of profit. However, you will need to ensure that you do not push up the unit price too much, or else the franchisees will not be competitive in their own market and this will then have a knock-on effect on your revenue from them. In addition, if you are going to conduct national marketing and advertising campaigns for your business, it is standard to require your franchisees to make a contribution towards this. The franchise agreement can set out the relevant amounts or percentages for this advertising levy, but it is generally around 1–2 per cent of turnover. The initial term of a franchise agreement is usually five years, but of course you will want the right to terminate if the franchisee is in breach of their obligations or failing to perform adequately. A well-drafted agreement will allow for this. Usually, where things are going well, the agreement will also allow for the franchise term to be renewable by the parties at the end of the period. In addition, the franchise should be saleable. In this way the franchisee can reap the reward of their efforts during the course of the franchise relationship, which makes the prospect more appealing. The agreement should carry a proviso that you have the right to approve any purchaser of the franchise: that is, you vet them first.

Being a franchisor Once you become a franchisor, you acquire new business roles, namely that of manager and enforcer. Even where there is a good relationship of trust between you and the franchisee, you will still have to check and monitor your franchisee’s business to ensure that your system is being operated properly. You will also want to check that the franchisee is reporting their turnover to you accurately, since this impacts on the level of continuing fees that they pay to you.

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Becoming a franchisee On the other side of the fence, there are advantages to taking a franchise and becoming a franchisee in order to grow your business. In return for the up-front fee that you pay to the franchisor, you are getting a business concept which should already be a proven success. You will also be getting training, advice and assistance from the franchisor in respect of the operation of the business. In addition to the franchise fee, you will have all the same set-up costs as any new business, but the advantage is that you should be treading a fairly well-worn path by following the original business in your particular territory. The banks also view franchises favourably owing to the high success rate, so in some cases you may be able to borrow up to 70 per cent of the capital required (usually subject to the provision of adequate security). As a franchisee, you will not have the same control over your business as if you were running your own business since you must follow the franchisor’s system. Your profits may also be lower than if the business was entirely your own, given that you must pay a percentage of your turnover to the franchisor. However, the advantage of choosing a business that is already established is sufficient compensation for many franchisees. If you are considering taking a franchise, aim to find out what you are actually letting yourself in for. Ask if the franchisor is a member of the BFA or intending to be. If not, why not? If you are not the first franchisee for this particular operation, talk to the present franchisees and learn what it’s really like to run this business. It’s a good sign if a franchisor will give you free access to their existing franchisees, and you should be cautious if the franchisor is reticent about this. The key is to conduct your own due diligence on the franchisor. Ask the franchisees what the franchisor is like to deal with, find out about the quality of the training provided and get an opinion about whether the franchise fees are reasonable. Above all, try to ascertain whether the franchisor’s profit forecasts are realistic, since these figures are fundamental to your own business plan. As before, it pays to get advice from an industry specialist at an early stage when you are considering the terms of the franchise contract. It is also helpful to enlist help from your accountant and/or bank manager. Even though you might expect us to say this as specialists in the field, it really is the case that taking specialist advice is a worthwhile investment when you are about to commit a large sum to a franchise business.

Deborah Rider is a solicitor and member of the franchise law team at Goodman Derrick LLP in London. As the result of the firm’s association with David Bigmore & Co, Goodman Derrick LLP is one of the leading firms in the franchising law sector. The firm has a broadly based commercial practice, representing both UK and international clients. Goodman Derrick LLP also has developed an


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acknowledged expertise in the areas of media law, corporate & commercial law, litigation, property, employment and private client law. Deborah can be contacted by telephone: 0207 404 0606 or e-mail: drider@gdlaw. co.uk. www.gdlaw.co.uk

3.7

Conferences in the marketing mix

Sandy Pearson at the Edinburgh International Conference Centre (EICC) discusses the rules for creating a conference and inspiring an audience

Whether your goal is to increase product knowledge or brand awareness, improve company image or clarify customer needs, the role of the conference is a growing and successful component of the marketing mix. It sits firmly as a significant element of the direct marketing channel to complement other activities, or be used as a central strategy in its own right as a means of attracting or retaining customers. You have decided on budget and your timing is right. Your reputation is now in the public arena, and you are eager to get it right. You want to engage your audience by capturing their imagination, create inspiration and leave them feeling privileged to be a part of your company as either an employee or customer. So, what do you need to do first?

Destination is. . . location, location, location Ensure you choose a destination that will capture your audience’s imagination. A genuinely intriguing host city with character and appeal will create a tangible buzz around the event. Use the city’s attractions to your advantage and build social and networking opportunities around them. People love cosmopolitan cities with great shops, restaurants, nightlife and a good range of hotels. Culture and history are also big draws. Make it a feature of your conference programme. For many, it can determine


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whether or not your meeting is a success. Access is also important. Attendees will want a destination that is easy to get to, so consider the rail, road and air links, including low-cost airline services. And finally, consider safety. Your delegates will want to be able to wander around the host city without feeling they are at risk.

The venue A great destination is no good without a world-class venue and a team of experienced professionals dedicated to making your event as successful as possible. Scout your venues carefully. Look for testimonials and professional awards demonstrating the commitment and expertise of the venue’s staff and management – a good service will significantly reduce the burden on you. It’s worth remembering that at a purpose-built conference centre, you are often the sole client using that venue at any one time and so the attention you receive will be second to none. Ensure the venue can support the ethical and religious needs of your guests in terms of diet, prayer rooms and other facilities. Ask the venue about additional services they can provide for you; you will need all of the help you can get. Can the staff organize online bookings and registration perhaps? Finally, check the location. There’s little point being in a great city if you’re stuck out in the suburbs or on some peripheral business park.

The ‘wow’ factor Long gone are the days of technical mediocrity so don’t limit your ambitions. Remember you are doing this to enhance your reputation and increase your visibility. The leading venues will provide you with technology ranging from simple overhead projectors to world-class audiovisual equipment such as you would expect at the Academy Awards. If you have the budget, look at ways of delivering a genuine ‘wow’ factor. For instance, can the venue provide the Barco Encore system? The Encore presentation system provides the ability to screen six different moving image frames simultaneously using live and pre-recorded video and data against a high-resolution backdrop. If the answer is yes, request a demonstration – it will open up inspiring ideas you perhaps had never thought of. The venue should also be able to receive presentation files from your speakers online and test them fully well in advance. In addition, ask if it can arrange options such as interactive digi-voting and internet café facilities. Spotme is also rapidly becoming established as a ‘must have’ of the modern events package. It helps people network and introduces a personal element to the mass event. Ask your potential venue for advice, and ask the staff what else they can provide in terms of in-house technical production. You can quite often make considerable savings on costs if you take the venue’s production service from the outset, and the staff’s knowledge of the building’s strengths is invariably a huge advantage.


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Make it tasteful Visitors to conference centre events often expect the food to be bland and unimaginative, with predictable menus and pre-cooked meals. Defy those expectations and give your event an edge by using a centre that prepares fresh, imaginative food from locally sourced ingredients. The best venues will listen to what you want and provide sample menus to match your needs – everything from a sandwich platter to a three-course banquet. It should also have creative ideas for themed menus and be able to provide fun, healthy options such as fruit stalls and smoothie bars, to include in the usual tea and coffee at break times. Ask for advice on the format of your catering. A seated meal may be best for comfort, but if there is a big desire among delegates to network, a standing buffet could be an effective alternative. And whatever you do, ask for a menu tasting and don’t accept average.

Get people mixing Don’t overlook this, since a good social programme is invariably integral to an event’s success. Managed well, social events will generate excitement and create a relaxed environment for colleagues and customers alike. For some, this part of the event will be not only the most fun but the most fruitful in terms of sharing information and contact details. Ask the venue for good ideas, and use the destination city to its best effect by giving people the opportunity to get out and about, and mingle in landmark locations. If you are looking for an alternative to a gala dinner setting, why not think about a ‘dine around’ using a number of different well-known restaurants in the city. Arrange day trips and nights out. Engineer meetings between people you think will have interests in common. And keep people entertained.

Create a theme Why not create a theme that gives your event (or part of it) a truly distinctive flair and encourages everyone to get talking? It can create as a lasting memory. You could incorporate interactive sessions based on television programmes such as The Apprentice or The Weakest Link. They may seem frivolous but it’s often in environments such as these, where people are stimulated but relaxed, where great ideas and innovations emerge. The Dragon’s Den model is another good example. Why not invite five people to present their great innovations within your particular field, and have a panel of experts providing feedback. This can make great viewing and spark further innovation. In the social programme, you can also create themes for dinners or networking events. For instance, you could embrace the culture of a nation. In Scotland, Burns suppers in full Highland dress with pipers and dancing create a magical flavour to night-time events. Again, it’s all about thinking outside the box and grabbing people’s imagination.

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Content is king For all the attractions of the setting, outstanding content is essential. This requires careful planning. If you are appointing speakers, it’s a good idea to choose some people to whom the delegates would never normally have access. A moderator drawn from the world of television or radio is a good way of adding panache and professionalism to an event – and ensuring that speaker panels and other contributors are kept on their toes. Ask the venue for a list of agents. Whoever is involved, ensure that the material to be discussed is as stimulating as possible – and maybe even ground-breaking. Conferences can be perfect for launching new company directions, product launches, and as a stimulant and conduit for development and innovation.

Make the format exciting Put yourself in the delegates’ shoes. What would they hope to get out of the event? Encourage creativity. Consider ideas such as speed-networking, role play with actors, filmed events, interactive breakout sessions and discussion forums. A daily conference ‘newspaper’ produced on the premises is also a great addition for events that run for two or more days. And remember – the conference programme is like a movie script, it needs a good beginning, compelling content with action-packed set pieces and a strong ending. It also needs moments of respite – but don’t let it flag in terms of interest and momentum. Crucial to these factors are timings and, again, a good venue should offer you a wealth of advice.

Paint it green – corporate social responsibility CSR is rapidly changing from being a ‘would like’ to a ‘must have’ feature of business. Sustainability is concerned not just with environmental issues but also with the social, economic and cultural development of society. Considering the environmental credentials of the venue: ask for proof of best practices. What is it doing to reduce energy use? How far is food transported? Can the staff suggest practical and imaginative ways for delegates to offset the carbon footprint of your event? There are lots of small ideas that can be built into the mix. For instance, why not minimize transport use around the event by using shuttle bus services, and have some fun by encouraging exercise with creative walking tours of the city? Instead of buying in hundreds of plastic bags for delegates, why not use hand-made, recyclable bags ethically produced in third-world countries and transported to the UK by sea?

Build anticipation – and momentum You have chosen a great destination and a superb venue. You have sorted out a truly imaginative programme with first-rate speakers, great interactivity and a diverse mix of team-building social events. Now you need to market it. The average European is bombarded with an ever-increasing number of advertising messages, and the battle is


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to attract and hold attention so that the advertising has the opportunity to generate the desired effect. Different people react to different types of media, so incorporate all methods of the marketing mix into your programme. Make use of newspapers, trade journals, ezines, websites, trade and technical journals, and other events, to stimulate interest in what you have organized. Ask the venue for suggestions, and get professional marketing support on board to come up with eye-catching ideas. There is a lot of ‘white noise’ in the marketplace; there are hundreds of organizations trying to get their messages to the same people you are, so stand out and look for the differentiator. Does the event end when the last delegate leaves? Absolutely not! The success of any event is measured by the activity and feedback it generates, and the momentum it creates for follow-up events. Evaluation is perhaps the most critical part of the whole campaign process. This stage exists not only to assess the effectiveness but to also to provide valuable learning for the future. You may want to stimulate that process by sending participants a link to your website for highlights from the event, with video coverage, photography, speaker’s notes and blogs. Your imagination is your only limitation. The conference can be anything and everything you and your audience want it to be; ensure you get the right professional partners and don’t be afraid to ask.

Edinburgh International Conference Centre (EICC) is one of the world’s leading congress venues, winner of Europe’s business excellence award for quality management and the world’s first purpose built meeting space to secure a global environmental management standard on behalf of its clients. Since opening in 1995 EICC has hosted almost 700,000 delegates including 150,000 from overseas, counted almost 1.5 million delegate days and delivered an economic impact for Edinburgh and Scotland of approximately £200 million. Edinburgh is the most popular UK city after London for hosting international association meetings. Further details: The Edinburgh International Conference Centre Ltd, The Exchange, Edinburgh EH3 8EE Tel: 0131 519 4066 E-mail: [email protected] www.eicc.co.uk

3.8

Exhibitions

You will bring your brand to life when you exhibit, says Duncan Reid, a director at Confex Group, who explains how exhibitions are becoming a resurgent part of the marketing mix

These days when it comes to exhibitions that reward businesses the most, the ones leading the pack do so because they have created an exhibition experience that is far more beneficial and rewarding for visitors and exhibitors. The modern exhibition has more than just an air of carnival in the atmosphere, and the result is an enhanced business opportunity.

Engagement But the true value of an exhibition stand is the opportunity to truly engage with your customers on a one-to-one, face-to-face basis. It’s an informal, light-hearted atmosphere where they are relaxed and receptive to new ideas; they are on the lookout for new suppliers and they want to learn what’s available. It’s the reason most people attend an exhibition. Those that are in touch with their company or product’s brand values recognize that exhibitions enable them to express their brand across the audience’s five senses. An exhibition stand is just about the only place where business-to-business marketers can use food, drinks, smells, sounds and graphics to represent their brand, and if they do so, the effect is all that bit more intense. It hits on so many different levels that it becomes totally memorable and emphatic.

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Decent return An ever-important presence in business within any industry these days is the need to measure a good return on investment. And increasingly business leaders are realizing that an exhibition strategy can be measured with almost pinpoint accuracy. Your initial investment is your stand, decorations and livery. This is measured against the contacts you make, which are broken down into sales appointments and calls and then into confirmed business. You know exactly who the new contacts are as a result of your presence at the exhibition, and you know exactly which of those turned into real business.

A new dimension Many times has it been said that the web will cause the decline and possibly even the end of exhibitions. The prediction claimed that as the web develops and access to it reaches saturation point, browsing the web to find a product or supplier will become the preferred choice for buyers. It’s a prediction that has not come to fruition. Indeed, recent years have seen an increase in the number of exhibitions, and visitor numbers are healthy. Ironically, the reason for the resurgence of the exhibition is the very tool that was originally tipped as its downfall: the internet. Exhibition organizers realized early on that by harnessing the web, they could promote their exhibition and exhibitors more effectively. Value has been added to the exhibition package, by the use of floor plans, online registration, automated appointment making, exciting imagery, special online promotions and other innovative tactics. Essentially, by using the web, the lifespan of an exhibition that lasts two days can be expanded over several months. This extra exposure is a major bonus to exhibitors, and an additional selling point to organizers. Because more generic information about a company’s offering can be found online, exhibitors no longer need to focus all their efforts on getting this basic message across. The web has freed them of this, so they can now take a far more targeted approach and make their stand more lively, interactive and generally more appealing to visitors. It’s another reason there’s a ‘show’ atmosphere at exhibitions these days, with food, drink, costume and music all being used to entice visitors. The buyers win too. With information on all exhibitors and seminars collected in one space, and details of stand numbers, floor plans and special promotions, they can plan a far more structured visit to the exhibition they are attending, making the time out of the office far more worthwhile.

Improving exhibition presence  Make it interactive. Don’t just hand out leaflets, use your imagination and get your visitors involved. You can use demonstrations, sampling, quirky attractions such as massages or palm reading or anything else you can think of.


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 Use technology such as live web portals, large plasma screens and presentations to bring your brand to life on your stand.  Take responsibility for your stand, don’t leave it to the junior members of your sales team. An exhibition stand is a massive opportunity to meet with many of your industry’s best prospects; you ought to be there in person.  Have a strategy for your stand, don’t just turn up and hope for the best. Think about what you want to achieve beforehand and devise a plan that will ensure it happens.  Most importantly, make sure the right amount of information is available. Treat every visit as a potential sales meeting and act accordingly.

A vibrant return Essentially, the exhibition industry is returning to its roots in the vibrant marketplaces that were once the lifeblood of town centres and city squares. Those markets are making a comeback up and down the country, as people realize the importance of meeting the people they do business with face to face, knowing where the products they are buying originate and how they are produced. The same phenomenon, coupled with advances in technology, greater creativity and the growing importance of brand marketing, is what is driving the success of the exhibition as a fundamental marketing communications tool.

Our own example One of the events industry’s own shows, International Confex, has been trail-blazing new ideas, challenging the visitor experience, in order to lift its product to a new level. The changes to International Confex in 2007 began with a new creative that was designed to give the show a contemporary, inspirational look and feel, reflective of the events industry. The creative was used in an extensive marketing campaign in the lead-up to the show and then carried through to the entrance and onto the show floor. To make Confex more of an ‘event’, the visitor experience had to be broadened. New features were added including a spa area and crèche; the show hours were changed to incorporate more post-show networking events. The aim was to create the optimum environment within which to do business. To do this we needed to be sympathetic to visitors as well as exhibitors, and provide not just business opportunities, but places to relax, eat and drink. This kept them engaged with the show for longer. Exhibition attendance is not just about learning, but also continued professional development. Confex expanded its in-show educational programme to a 12-month calendar with the launch of ‘Confex Knowledge’. The programme included 40 free seminars at the show, as well as periodic educational seminars planned throughout the year. Seminars were also made available via download and podcast. The net result of the changes to Confex in 2007 was a 16 per cent increase in visitor numbers and an 11 per cent increase in total attendance, showing the biggest rise in seven years. The success strategy operated at International Confex is soon to be replicated at the National Venue Show.

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Confex Group, part of CMP Information Ltd, is the leading provider of information, inspiration and education for the conference and events industry, bringing people together who organize any kind of event both in the UK and internationally. The group comprises International Confex, National Venue Show, Conference Blue & Green and venuefinder.com. With International Confex and the National Venue Show, Confex Group creates forums for networking, debate and the sharing of ideas between those within the industry, those supplying goods and services to it, and its buyers and end users. International Confex is the leading UK event exhibition, bringing people who organize any kind of event together with providers of venues, destinations and event support services both in the United Kingdom and internationally. Located in the heart of the country (Birmingham), the National Venue Show is the only place to find the venue that fits ideally with your next event. From the extraordinary to the conventional, large or small, discover the most exquisite, cost-effective or unique venues and destinations throughout the United Kingdom.


4

People and performance


4.1

Employment law

Although often seen as a secondary consideration, contracts are essential for any growing business, says Helen Wyatt of Goodman Derrick

In the excitement and chaos of creation of a new business, its creators may not have given thought to contracts of employment. These are often overlooked in the early stages, despite the fact that a statement of initial employment particulars is a legal requirement, and a written employment contract is a useful tool which assists in regulating the employer’s relationship with employees, consequently contributing to a more harmonious workplace, and can contain terms which protect valuable assets of the business itself. Failure to provide an appropriate contract could result in the employer facing a claim in an employment tribunal. The employer will also have lost an excellent opportunity to control and protect the growing business.

Employment contracts: legal requirements All employees are legally entitled to receive a statement of initial particulars of employment, in most cases within two months of commencement. The statement is not a contract of employment in itself, the effect of it being to provide evidence of the terms on which the employee is employed, not an agreed or full representation. The particulars that must appear in the statement are prescribed by the Employment Rights Act 1996. It includes items such as the identity of employer and employee, start date, salary and payment details, hours of work, holidays and pay, sick pay arrangements, pension schemes, notice, place of work, and grievance and disciplinary processes. The statement should contain sufficient information for the employee and

 102 PEOPLE AND PERFORMANCE

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employer to have a clear, if somewhat basic, understanding of what their relationship entails and how it is to function. It should be updated whenever there is a material change to the terms which it contains. A failure to provide a statement entitles an employee to bring a claim to an employment tribunal, although the remedies available are not substantial. They are a declaration of what the statement should contain and/or in special circumstances, an award of between two and four weeks’ pay. A ‘week’s pay’ is defined by law annually, and as at 1 February 2007 was £310. While such a claim will not be particularly remunerative for the employee, it will be an irritation to the employer. It is therefore wise to guard against the waste of time and money involved in defending such claims, by providing a properly drafted statement at the outset of employment.

Promoting a harmonious workplace The proper use of contracts of employment can promote better working relations between employer and employee. If the employer uses standard terms of employment across its workforce and is consistent in its pay scales and remuneration policies generally, there is less likelihood of perceived unfairness or disparity between employees, which may cause unrest. Furthermore, the physical contract document may also contain short policy statements (as opposed to terms of employment) designed to act as rules of behaviour intended to promote a harmonious workplace. Alternatively, such policies in more detailed form could accompany the contract, as a ‘staff handbook’. Being clear about the standards of behaviour required from employees from the outset of employment gives less scope for misunderstandings in the relationship at a later date.

Protecting the assets of the employer An employer benefits from a number of implied contractual terms of employment which assist in protecting the business during the period of employment, even where no written contract is agreed. These include the following:  Every contract of employment contains an implied term that the employee will serve the employer with good faith and fidelity. Case law shows that the duty of fidelity can protect businesses in many ways. It has been found to be unlawful for an employee to ‘work to rule’ if the aim is wilfully to obstruct the business of the employer. Engaging in active competition with the employer during employment would also breach the duty of fidelity (although an employee is able to take preparatory steps to compete and this would not be a breach). This duty prevents solicitation of the employer’s customers, and prevents the employee from enticing colleagues to leave their employment. It also protects the confidential information and trade secrets of the employer.  It is also implied that employees are obliged to obey the reasonable and lawful instructions of the employer.



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 An employer can also expect its employees to exercise reasonable skill and care in the performance of their duties. An employer can seek an indemnity or contribution from an employee if the employer suffers loss as a result of the employee’s negligence. Each of these implied contractual obligations clearly assists the employer in protecting the business, but it is important to note that generally, the implied duties only benefit the employer during the course of employment. Employers are often surprised to learn that in the absence of carefully drafted written contract terms which are enforceable after termination of employment, it is entirely possible for an employee to set up in competition next door and to approach the ex-employer’s clients and staff in order to do so. A growing business could therefore benefit from a contract of employment, if it included some of the following provisions:  A garden leave clause: this can require an employee who is serving notice of termination to remain at home during the notice period or to carry out different duties. The protection that this affords is that it gives the employer a period in which to keep the employee away from client or contacts in the hope that the employee’s business relationships will be weakened or their knowledge become outdated. It may also give time for the employee’s replacement to start to build relationships with clients/contacts.  A confidentiality clause: this can restrict the use or disclosure of trade secrets or other information that the employer considers to be confidential. Employers should note that information is not generally confidential, if it is within the public domain or information within the general skill and knowledge of the employee.  Post-termination restrictive covenants: these are contractual terms restricting an employee’s activities after termination of employment. These are often difficult to use, as restraint of trade is contrary to public policy. However, if the employer has a legitimate business interest to protect and the restriction is carefully tailored so that the protection sought is no more than is reasonable (for example, in respect of duration or geographical extent) having regard to the parties’ interests and the public interest, it could be a valuable protection for an employer. The business interests that an employer can generally protect are its trade connections (with suppliers or customers), its goodwill and the stability of its workforce. It can protect these interests with contractual clauses restricting posttermination solicitation of or dealing with customers or suppliers, or the poaching of employees whose departure would damage the business. If an employer has the right contractual clauses in place, in the event that an employee leaves and tries to make use of the employer’s business interests or confidential information, the employer could fight back with legal proceedings. In such proceedings it could seek an injunction preventing further breach of contract by the ex-employee, and damages (that is, compensation for financial losses caused by the employee’s breach).

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If the employee has joined a competitor and is acting on its behalf, the employer could sue the competitor directly, for inducing the employee to breach the contract. The potential remedies are powerful. The presence in an employment contract of welldrafted confidentiality clauses and post-termination restrictions may in themselves deter a departing employee and their new employer from attempting to capitalize on protected business interests. If a growing business has not yet had time to think about the terms on which it employs its employees, perhaps it is time that it should.

Helen Wyatt is a partner and head of the Employment Department at Goodman Derrick LLP in London. Goodman Derrick LLP is a dynamic law firm with a broadly based commercial practice, representing both UK and international clients. The firm has developed an acknowledged expertise in the areas of media law, corporate & commercial law, litigation, property, employment, franchising and private client law. Helen can be contacted by telephone: 0207 421 7946 or e-mail: hwyatt@gdlaw. co.uk www.gdlaw.co.uk

4.2

Attracting top performers

Make sure you recruit the right people first time round or count the cost, say Jamie Mistlin and Anna Taylor at RecruitmentRevolution.com

Attracting and retaining the right candidate is vital to any business, but it is particularly important to the growing enterprise. Failing to recruit effectively first time can have serious consequences on your business: additional recruitment costs will be incurred and depending on the recruitment method used, this cost can vary from a few hundred pounds to well into the four-figure bracket. Skills shortages in the market can seriously affect the time taken to find the right talent. This will inevitably constrain the company’s growth and ultimately determine the company’s financial position. Companies also need to consider the time and resources needed to train new staff. You could potentially find yourself falsely economizing by taking on Candidate A for £17,000 in preference to Candidate B at £20,000. If Candidate A struggles to grasp the company’s business model and the duties of the role, the development time could cost the company more than the £3,000, money that could have been spent on securing Candidate B. Furthermore, if Candidate A were to leave or did not pass the probation period, you would find yourself back at square one. To ensure you recruit effectively and efficiently we recommend that you fully consider the following:



   

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job analysis; the package; the interview; time keeping.

Job analysis Before determining whom to attract and select, it is imperative that you have a clear idea about what the job requires and the attributes of the person who will best meet these requirements. Recruiting new talent is a perfect opportunity to revise old job specifications, or if it is a new role, to consider how the recruit will fit into the organization. You might also consider the need for a permanent member of staff. Can busy periods be dealt with by using temporary or contract staff? Employment is a mutual commitment. Staff are committing to you: can you commit to them, and contribute to their personal and career development?

Marketing your job A well-written and informative job description will tell prospective employees that your organization knows what it wants, where it is going; and what part the successful candidate will play in this journey. A lot of emphasis is placed on the award-winning CV; however, too many companies fail to understand that they also need to create an effective marketing specification. This includes adverts that are free from spelling errors and are grammatically correct. Tell job seekers who you are, where you came from, your vision, your achievements, and if you are not constrained by confidentiality agreements, you might wish to name-drop clients. If you put the effort into your job advert, it has a good chance of fulfilling its objective, which is to attract a good response from suitably qualified people, discourage those people who would be unsuitable, and promote a positive image of your organization.

The package Ensure that you are marketing a job with an accurate and realistic remuneration package. Skills shortages in the job market will inevitably mean that you will be competing for the attention of job seekers. If your competitors are offering a £20,000 salary and you are offering £17,000 you might struggle to fill the position. You therefore have two options: either offer a more competitive salary or consider applications from those who show as yet unrealized potential. The longer you market your job the more it will cost you, unless you are using an agency. If this is the case and budgets are tight, then it could be worth opting for the DIY route (job boards, press and the like), as the money you would otherwise spend on the traditionally high agency fee could be used to boost the salary. Ultimately, consider the business you may have to turn away as a result of not having the resources to fulfil the requirements.

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ATTRACTING TOP PERFORMERS 109 

Advertising the vacancy There are many ways promote your vacancy. Essentially, the nature of your role and budget will determine the route taken. The three main choices you might wish to consider are:  newspapers and specialist press/magazines;  online recruitment;  recruitment agencies.

Newspapers and specialist press/magazines Newspapers and specialist media are frequently used. However, they can be expensive and it is therefore important to consider carefully the target audience. For example, national newspapers will probably be used for professional (directors and managers) or specialist appointments, whereas the regional press favours administrative and sales-related vacancies. Specialist publications such as People Management and Marketing Week, can be advantageous when recruiting for specific professions. Using this type of publication can ensure that the advertisement attracts those from within a precise profession or particular group.

Online recruitment The online recruitment market has experienced rapid growth in recent years, notably at the expense of the more traditional newspaper advertising, as job seekers can access job adverts around the clock and at no cost. The main benefit of online advertising is that job adverts can be accessed on a national or global scale, meaning that your position has the potential to reach a very wide and varied audience. In addition, online advertising is more cost-effective than traditional print, as there is no page limit and your advert can also enjoy a longer period of exposure.

Recruitment agencies Recruitment agencies may be useful to a company if it does not have adequate recruitment resources in-house or is looking for a particular type of person. With most agencies charging between 15 and 20 per cent of the candidate’s starting salary, using agencies is definitely not a cheap option. The function of the agency is to source candidates by advertising on behalf of their clients and then levying a fee upon successful placement of the candidate. The agency will also verify the candidate’s identity, check references and if required, provide a preliminary assessment of the candidate.

The interview Despite too much emphasis being put on the presentation of the candidate, a company must acknowledge the way in which the company presents itself. It would be wrong


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for employers to assume that the candidate needs the job. In general this is true, but in some markets or during skills shortages, companies need to raise their game in order to attract scarce talent. In summary, it might be an idea to consider what you would need to do if you were going to an important business meeting to pitch your service or product, or what you would do prior to selling property. Creating the right impression is key, more so if you are unable to compete with competitors’ salaries. Ask yourself, would you want to work in your company?

Time keeping: ‘Time waits for no one’ Our final word is perhaps one of the most important bits of advice that we can offer. We see too many companies lose good candidates by not moving quickly enough. For this reason we would recommend that applications are looked at upon arrival and either rejected or invited for an interview. The CVs and online portfolios belong to real people, and therefore it imperative that candidates are treated in a courteous manner. It is also important to act in a timely fashion after you have interviewed candidates. If possible, contact candidates within a two-week period. Otherwise you might just find yourself having to repeat the whole recruitment process.

This guide has been supplied by Jamie Mistlin and Anna Taylor, founders of RecruitmentRevolution.com, a unique online recruitment concept/agency that allows companies to source, test and interview candidates at no cost, only paying a £575 fee upon successful placement. The innovative business model works by operating an agency service on a job board platform, meaning that for the first time companies are able to receive the benefits of both an online job board and recruitment agency. Further details: www.recruitmentrevolution.com

4.3

Growing talent

Talent can transform your business, but do not leave it to chance, says Stephen Gibb, director of executive education at the Strathclyde Business School Centre

Talent development and management is about initiatives aimed at improving the calibre, availability and flexible utilization of exceptionally capable, high-potential employees who can have a disproportionate impact on business performance. In growing organizations it often falls to senior managers to take this up. Developing the talents of those who are contributing to the growth and success of your business is something all successful leaders think about and work at. Those who do it well tend to focus on identifying and extending the person’s ‘dreams’ and strengths rather than ‘gap analysis’ of weaknesses. Whether on short or long programmes or in everyday conversations, we are all responsible for helping talented people process their experiences, encourage reflection, release strengths and overcome obstacles to development. Here are seven top tips for how that is done in good executive education, and can be done in any organization by insightful leaders working with their talent:       

Develop a performance and potential map. Fulfil a range of talent development roles. Take conversations beyond the obvious. ‘Truth speakers’ wanted: give feedback. Check bad habits in key talent. Give good attention. Be alert to status shift dynamics.




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Develop a performance and potential map Be able to place people on the performance and potential grid (see below). Put the stars in the most critical jobs, and keep developing them. Don’t neglect the others, and also be able to change your mind as the company grows and changes. Highly effective

High

Performance

Less than effective

Hi-Pro

Utility Hi-Pro

Future HiPro

Experienced professional

Low performer

Inconsistent

Low

Consistent star

Future star

Diamond in the rough

Potential

High More learning agility

Less learning agility

Figure 4.3.1

High

Judgement Compromise

Analytical rationality

Creative dialogue

Disciplined debate

Inspiration Sense-making

Dehydrated talk Empty Ritual

Intimate exchange Trust building Empathy

Low Emotional authenticity

Figure 4.3.2

High

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GROWING TALENT 115 

Fulfil a range of talent development roles Once you have identified the priority individuals for talent development, deal with them as individuals who will respond to different kinds of working alliance. As you personally take on talent development responsibilities you will become aware that different people are comfortable with different approaches. What you can offer, and where others might need to be involved, can include, by analogy, some or all of the following classic working alliances:  Master–apprentice, dealing with practical issues and offering direct, meaningful responses.  Doctor–patient, allowing people to turn themselves ‘inside out’, revealing uncertainties and emotions – to be interpreted and resolved.  Midwife–mother, helping to anticipate problems and provide the strength to tackle them.  Peer review, looking together at day-to-day practice. This is a mutually critical approach, insight-focused.  ‘Old boys’, being a sparring partner to exchange and try out ideas.

Take development conversations beyond the obvious In any form of working alliance the balance between the rational and the emotional will fluctuate. Watch out, though, for becoming imbalanced and either too ‘analytical’ or too ‘emotional’ in the conversations you have with your talent. The ideal is to combine high levels of analysis and emotion, to inspire people and progress their sense-making about themselves and their performance.

‘Truth speakers’ wanted: give feedback A critical part of sustaining effective talent development over time, over several conversations, is giving good feedback. If your talented people are going to develop and learn the most from their practical experience, you need to give feedback. There are well-known emotional barriers to giving and receiving feedback: fear of causing hurt, disrupting relationships, embarrassment, rejection of the feedback or conflict arising from it, the difficulty of re-evaluating self-image, and the need to follow through and change behaviour. That is why people can ‘beat around the bush’, instead of getting to the point. To get to the point, focus on behaviour, stick to what you see and the effects that has on you, and look for solutions through doing things differently.  Set ground rules in advance; agree what feedback will be focused upon.  Consider its value for the receiver before offering any feedback. If there is none, keep quiet.  Select relevant priorities; you may see a lot of things, but identify and concentrate on the most important few first.


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 Try to ask questions rather than make statements. Open up issues by asking, for example, ‘How else could you have reacted when …?’ rather than ‘You should have …’. When giving direct feedback:  Stick to observed behaviour, not inferred attitudes: ‘You were gripping a pencil so tightly your knuckles were white’ rather than ‘You seemed to be stressed in that meeting.’  Describe what you see, and don’t give it second-hand or as a judgement: ‘When you responded so quickly to questions I felt you were rushing things’ rather than ‘It is a bad idea to answer questions without thinking.’  Talk about specifics: ‘I liked the way you kept good eye contact and a relaxed posture during the negotiation’ rather than ‘You created a friendly atmosphere.’  Observe limits and do not overload; offering too much can be as unhelpful as offering too little.  People sometimes ‘see’ it better than they hear it, so make notes about what they say and do, lay them out and let the person ask questions.

Check bad habits in talent development Even the most talented of ‘smart executives’ can begin to fail to properly perceive reality for their companies, fail to face up to reality, let information and control systems in organizations be mismanaged, and adopt spectacularly unsuccessful habits. Talented people with strong egos can simply act like any human, but more so: they get defensive, don’t face reality, have difficulty dealing with change, and sometimes choose not to respond even when they know they should. Talent development savvy can mean spotting this and dealing with this, both in your talent and in yourself. Otherwise leadership behaviour in organizations can rapidly bring the company to the brink of failure. Development of talent sometimes promotes the following, which become part of the problem:  Perceiving themselves and their companies dominating their environment. – Keep a sense of perspective.  They identify completely with the company. – Keep a clear boundary with personal interests.  They seem to have all the answers, speedily and decisively dealing with issues. – Take time to reflect.  They make sure everyone is behind them, eliminating anyone who might undermine them. – Encourage different views.  They are consummate company spokespeople, devoting efforts to developing the company image. – Be careful about buying your own PR.

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 They underestimate major obstacles. – Be realistic.  They do not hesitate to return to strategies and tactics that made them successful. – Avoid trying to repeat past fixes in different times. The underlying challenge is to sustain confidence but avoid an ‘illusion of personal pre-eminence’, people believing that personally they know more than others and as a result dominating others in their decision making, thinking and behaviour. If things do start to go wrong, many of the talented people with these habits unchecked may truly believe they have all the answers, and impose their perspective on others with the result that the organization ends up with inferior decision making.

Sometimes silence works best It’s not just about finding a quite time and place to dedicate space for talent development, though that is the baseline. It is also about giving the person your full attention, and offering an environment for them to think. To achieve this is to let go of some deeply ingrained habits about conversational control, and trust to the intelligence of your talent. Start a conversation with an initial question: ‘What do you want to look at today?’ The only other input thereafter from you is ‘What more do you think, feel or want to say about that?’ Do not intervene otherwise or respond, even if you feel they have ‘dried up’. They need to know they won’t be interrupted, and the conversation won’t be taken over, allowing things to develop. They will be thinking, so do not shred the silence – work is done in the silence! If you can have a go at doing this, think about what you have noticed about:

Giving attention  How you kept their thinking going.  What it’s like to give permission for them to be smarter than you, rather than adopting a ‘wait until I can speak’ role.

Sustaining stillness  Being respectful and unhurried when so much is quick and quicker.  What it is like to try to be internally at ease.

Not interrupting  Where and why did you want to interrupt? To be ‘helpful’? To take control?  Where silence happened, did you welcome silence?  Not fearing being wrong-footed, proved wrong.


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Alertness to status shift dynamics Finally, if you have identified the potential, and are developing working alliances in which good feedback is provided, but there are still problems with moving talent on to higher and better performance as part of the management team, there may be a status shift block happening. Part of talent development can be about managing shifts in status: from the status and mindset of being an employee to being a manager, from being a professional to being a manager, and from junior roles to senior roles in general. A person’s appetite for having their talent developed can be understood with reference to their status group affiliation. It may be that you want them to develop but they are:  Cool aspirationals: ready to change, looking to the higher-status destination group but still feeling like an ‘outsider’.  Uncertain acquiescents: they are in between commitments to their old ‘in-group’ and its norms and behaviour, and the talent management destination group norms and behaviours you have in mind.  Masked antagonists: they are resistant to change, seeing the destination group as an ‘out-group’ they do not really want to join. Think about how the following might be used to heat up their aspirations, remove uncertainties or reveal and deal with antagonisms:  Advocacy: offering positional resource, networking and promoting the person to achieve and consolidate development.  Skills: offering aptitudinal resource to encourage and coax in skills needed to make the change and develop.  Direction setting: offering cognitive resource, choices and decisions to make the change and develop.  Affective contacts: emotional resource, hand of friendship, support feeling different to make the change and develop.

Conclusion Growth brings talent management challenges for leaders and all members of their team. Identifying critical talent development targets and opportunities means taking the trouble to develop a performance and potential map. It involves also developing flexibility in your approach to helping your talented people, and how others can become involved. The challenge is to have and take conversations beyond the obvious, providing immediate, useful feedback. Doing that can be challenging, since it means working with strong egos, building confidence but not unchecked illusions of personal pre-eminence. Sometimes that can be more effective where good attention is given to the person, and sometimes it calls for alertness to status shift dynamics blocking development. Either way, looking more closely at the person or at the social side

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of their talent development, the result should be the same: growth and improved performance.

Stephen Gibb is director of the Strathclyde Business School Centre for Executive Education (CEE). He is the author of a popular textbook Human Resource Development, and is an active researcher into how to improve and develop systems for talent development throughout the workplace. Contact Tel: 0141 548 3846 E-mail: [email protected]

4.4

Leaders behaving badly

For any problems in a business, look no further than one of two behaviours at the top, says Tony Pybus at Team Apogee

Controlling or abdicating In my 30-odd years in leadership I have learnt that no matter what the issue or difficulty within a company – the low sales figure, the low productivity, programme over-runs low morale and so on – the leader is perpetuating it through bad behaviour. I can also guarantee that the bad behaviour will fall into one of two categories: they will be either ‘controlling’ (the leader dominating or manipulating) or ‘abdicating’ (the leader neglecting or pacifying) in their role as leader. Before you get smug and deny ever doing either of these, please note that I have yet to meet anyone who does not, myself included. Some will do it when under stress, others will do it because they know no different. Leaders who are controlling generate environments that stifle creativity, imagination and inspiration. Leaders who abdicate their leadership responsibilities create fuzzy environments with insufficient controls or direction, which leads to inconsistency and creates uncertainty for those being led. Does any of this sound familiar?

The success recipe I know that when I have no clear purpose and vision I will very quickly get to operate either in a controlling or abdicating mode. I am not going to go into the reasons why; I believe it is more helpful to look at a way I minimize my bad behaviour: I use the



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acronym SUCCESS, which I learnt from David Templer at the Kiaros Foundation. It is key to establishing my purpose and vision and steering me in good leadership. Success stands for:       

S – sourcing; U – unattached; C – creative; C – connecting; E – enrolling; S – supportive (and supported); S – self-acknowledging.

Sourcing Sourcing is put into motion by one act: the act of commitment to accomplish a specific result. It requires a powerful purpose and a clear vision. Through this we bring into being activities, results and attitudes that previously did not exist. It is the act of creation. If you cannot connect with a powerful purpose and vision you will not lead it. If this is the case you must move to self-acknowledgement (see below).

Unattached As leaders we will undertake things that are difficult, and at times there is no certainty whether the object will be or even can be achieved. While we may fail to achieve the goal it does not make us failures! Being unattached is not about not caring what or how something will happen; it refers to our ability to not attach our personal worth/self-esteem to the outcome. Being unattached also enables us to commit to releasing the responsibility for individual tasks to the team. This includes dropping any preconceived ideas of how a job should or should not be done; allowing the team to be creative and to realize its own purpose in carrying out the task within the agreed boundaries, the capabilities of the team, the individuals and common sense.

Creative Creativity is about being open to new ideas and possibilities, and not attaching to ‘the way we have always done it’ or the way that ‘it should be done’. Creativity requires a willingness to allow the initial idea to become bigger if necessary, and not restrict it to early limitations. Creativity is important when there is a ‘dislocation of expectation’. As a leader it is important to drop the ‘it should not be this way’ mindset. We must recognize that ‘it is what it is’, and see it as an opportunity to learn and grow. Blaming and pointing the finger is as bad as avoiding the issue; neither are creative.

Connecting Connecting is an act of complete communication. It requires active listening, eye contact, ‘I’ contact, acceptance and understanding to establish what you and the

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LEADERS BEHAVING BADLY 123 

team want for themselves. Connectivity requires courage, vulnerability, bravery, compassion, openness, and a willingness and foresight to acknowledge the unique qualities the individual will bring to the project, and those that will be created by the fact that they are part of a team.

Enrolling The object of all leaders is to create a team that is willing to do what it takes and will not bale out if things get tough. Enrolling can be likened to the sales process. Unless we can ‘sell’ our vision to each individual, the likelihood is that one or more of the team will not be fully committed. In enrolment we need to be contractual with each individual on the actions needed, and the way they and we will be (and not be).

Supportive (and supported) Support is providing what is appropriate to the individual and or the team, from guidance and coaching to physical resources and acknowledgement. However as Jon R Katzenbach points out in The Wisdom of Teams, ‘you can only support people on what they have already chosen to do’. We can only do this if we have fully enrolled our people into our purpose and vision, and have their commitment to it. Support is not about doing the job for someone when they find a hurdle or flogging them when they do something wrong. It has everything to do with empowering them to find the solution. The danger here is to forget ourselves. On familiar territory where you know the team, you can rely on the team to support you. Where you are the outsider or where the team does not have the ability to give you support, you need to utilize your network. How will you get your support?

Self-acknowledging Abraham Maslow tells us that we all need to be acknowledged. However, leaders rarely receive acknowledgement, especially if they are the senior person in the organization. We are often quick to criticize ourselves when we ‘under-performing’, but we rarely remember the qualities that were drawn out in ourselves to achieve the goal. Selfacknowledgement is not vanity. It is about getting in touch with ourselves, recognizing who we are, what we have achieved and what personal qualities it took. It helps us be self-sufficient in our self-esteem. I utilize the Success model in three ways. The first is to cover all bases when I am thinking of starting something new in leadership. It helps me establish my commitment to the project. Second, I use it when things are going off the rails, to examine where I have been weak. Last, I regularly (usually daily) check where I can improve. I regularly find I haven’t done any self-acknowledgement.

Solo leaders are poor leaders It is often said that leadership is a lonely role, and it is even more so when you are the senior person in the organization. Most solo leaders are poor leaders, and their


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improvement when they have appropriate support is because they are no longer solo! We all get into reactive behaviour, and it is at these most critical times that we need support. Find support wherever you can, but preferably find yourself a mentor and/or a coach: someone who will help you grow, get you to look at what you are doing, how you are being, and most importantly hold you to account when you don’t do what you say you want to do.

Reference Katzenbach, Jon R (2007) The Wisdom of Teams, McGraw-Hill, Maidenhead

Since the early 1990s, Tony Pybus has run several small companies including a small manufacturing company, a quality consultancy and a marketing and branding consultancy. His clients have included many blue-chip companies and the main political parties. In 2003 he started Team Apogee, specializing in leadership on two fronts. First, it helps leaders through teaching, coaching and mentoring on three levels:  helping experienced leaders resolve business issues;  helping entrepreneurs with growing companies to change their role;  helping professionals taking the first steps into leadership. Second, Team Apogee walks its talk and leads by example. Its staff will take up a project, role modelling leadership while standing alongside you.

4.5

Time to work smarter

If a business is expanding it will also be changing. The one constant will be its employees, says Ross Feeney, director of communications and business representation, South London Business

Whenever I hear the phrase ‘growing pains’, I am always reminded of the fictional character Adrian Mole and the diaries that chronicled his passage through adolescence. But of course, it is not just teenagers that experience growing pains. Growth within a business, and particularly a small business, can also be a painful and nerve-racking experience. Business growth is usually the result of an increase in demand for a product or service (reactive growth) or the result of a strategic decision to expand a company to prepare for the predicted growth in a market. Irrespective of what prompted the decision to grow, a number of factors will have an impact on how easily the organization can grow.

Employing staff with the right skills If a business is expanding it will also be changing, with new products, new services and in all likelihood new customers. The one constant the business will have is its employees. As a business grows the demands placed on those employees will change, and new skills are likely to be required. Smart businesses keep ahead of the competition and grow because they recognize the value of their staff to their business performance. By assessing the skills necessary to move forward, a successful business can plan ahead and equip its people to do their jobs effectively and efficiently. Analysing what training is required can take time, and training can cost money. Indeed for many


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TIME TO WORK SMARTER 127 

businesses without a dedicated personnel resource, this can be a major challenge. If your business is going through this growth it is not unreasonable to question whether you will see a return on the investment you make in training your staff. I firmly believe you will. Staff training can be anything from a 90-minute ‘top-up’ session to one- or twoday training courses or full NVQ qualifications. The type and length of training will depend on your requirements; the training provider can also be selected to fit your needs and budget. However, in many areas there will be grants or subsidies available to help cover these training costs. There are plenty of private training providers who can assist you, but don’t forget to ask your local college what it can offer. It is often the case that companies won’t even ask their local college what courses and training options they have available, dismissing the college because of the perceived stigma of sending staff ‘back to school’ or the idea that going back to college will take them out of the business at inconvenient times. This is not the case.

Realizing you are not alone Wherever your business is located there will be a business support network to help you grow, and effectively manage that growth. Every area of the country has a regional development agency and Business Link advisory service to provide information, advice and guidance on all aspects of business growth, including time management, employment law, negotiation skills, team building, marketing and communication techniques, stress management, presentation skills and understanding e-business. This business support and advisory network can help your business identify the skills you need to take your company forward, and draw up a training or development plan to help you manage your growth. These networks can also provide you with information and advice on training, and help you find the most appropriate solutions for your business. However, you don’t have to rely on publicly funded advice to grow your business. Every town across the country will have a Chamber of Commerce or private business networking group that can help. In years gone by, before globalization and the concept of national and international trade, the local Chamber of Commerce played a significant role. The owners of a town’s local businesses would invariably meet up every Friday and agree the business transactions for the next week. Times have clearly changed, and most businesses now trade over a far larger area, so there is a perception that the significance of the local chamber has receded. However, chambers have responded to the marketplace, and the services that they can offer have also changed. Many now offer more than just networking opportunities; training seminars, workshops and targeted advice are all product packages most chambers now offer. Indeed, many chambers offer publicly funded free or subsidized business support services to their members and the wider business community. This support is easy to source, and chambers often have a team of experienced advisors on hand to assist. Furthermore, a Chamber of Commerce or other local business networking groups’ ability to integrate you into a useful local network of your


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commercial peers should not be dismissed. And don’t forget, you don’t just have to join your local chamber, there are many breakfast and evening networking groups that meet weekly. Working smarter is understanding that you are not alone, but it is also more than just making the most of free advice and taking advantage of networking opportunities. Working smarter is also understanding that it is not a weakness to ask for help, and nor is it a weakness not to know what you don’t know. There are many specialist consultancy firms who can provide you detailed advice and guidance on how your business can grow, analysing the barriers to your growth and suggesting solutions to help you move the company forward. Today’s economic environment is constantly changing. Growing your business as painlessly as possible involves thinking beyond the conventions of what you can and can’t do to grow your company.

South London Business is an organization that exists to represent and promote the business community south of the Thames. Our aim is to support and encourage business in south London, and we can help you grow your business by providing access to markets and information on new business opportunities. We are also the voice of business, providing political and practical support to companies of all sizes and sectors. For further information please visit www.southlondonbusiness.co.uk.

4.6

Flexible resourcing

Smaller companies can stay agile and versatile by engaging freelancers, say David Ramsden, chairman of the Professional Contractors Group

The word ‘freelance’ comes from the Middle Ages and literally means a mercenary soldier who is not attached to any master. His modern counterparts are far removed from their predecessors; they bring experience, knowledge and flexibility to a business world that is now based less on manufacturing and more on knowledge and service, and needs to be able to react quickly to fast-changing markets. Freelancing experienced a period of significant growth in the 1990s, but increased regulation and competition from abroad has slowed this growth since 2000. Without a legal definition, freelancers inhabit the gap between external suppliers and employees. In the United Kingdom and the European Union, governments have sought to deal with this by legislating that freelancers are more closely aligned with traditional employees. This approach ignores the fact that most freelancers have turned their backs on traditional employment models. Freelancing used to be the only option available to those who could not find permanent employment, but has now become the preferred way of working for the very best talent in all sectors, people endowed with precisely the skills, capabilities and attitudes most in demand from employers. For many, the choice of freelancing as their preferred way of working is driven by lifestyle considerations – wanting more time for family, friends and hobbies, being able to work from home perhaps, shunning corporate culture and politics, and rejecting the rigours of commuting.


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FLEXIBLE RESOURCING 131 

How large is the freelance workforce in the United Kingdom? One UK worker in seven chooses to work for themselves, rather than for any fixed employer. Some are ‘temps’, and some have taken a career decision to operate as longterm freelancers. There are an estimated 1 million people in this latter category. They include many of the country’s most experienced and knowledgeable workers, and this highly skilled, highly mobile and highly flexible 21st-century workforce is growing – a trend that is likely to continue. As the only one of its kind in the developed world, the United Kingdom’s freelancing model represents one of the country’s greatest economic assets. Derek Wreay, former chair of the Association of Technology Staffing Companies, says: A vibrant, highly skilled and committed freelance workforce is one of the cornerstones of UK plc’s success. It is an area in which the United Kingdom leads in Europe, and this is a tribute to the competence of our freelancing community, and to the firms whose far-sightedness allows them to benefit from these freelancers’ world-class skills.

The benefits of engaging freelancers Large corporations discovered the benefits of engaging freelance contractors for specific projects a long time ago. With a growing number of freelancers, many of whom find some or all of their work through local networks and referrals rather than through agencies, it has become easier for smaller businesses to follow suit. Small and medium enterprises (SMEs) are in an ideal position to take advantage of the many skills and services offered by freelancers, allowing their businesses to be agile and versatile in an increasingly competitive world, as well as leveraging the extensive industry contacts that freelancers accumulate. As the burdens of employment legislation, which weigh disproportionately on the small business, become heavier, freelancing offers a pragmatic and flexible resourcing model to take on specific projects, help cope with peaks in demand and provide valuable advice and expertise. Making a strategic decision to deploy freelance talent gives businesses access to high-calibre professionals. Compared with larger, more traditional consultancies, freelancers offer excellent value for money and a welcome focus on understanding and working in the client’s business, rather than just executing their own internal processes. An independent freelancer is only ever as good as their last assignment, and this motivation is a real driver for quality. When meeting project deadlines is of paramount importance, engaging freelancers can make the difference between success and failure. They usually have the experience, knowledge and expertise to be able to contribute and add value from the outset, and are free to focus solely on the task in hand, without being distracted by internal political considerations. Utilizing freelance resources generally makes good sense for those businesses that:


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 are subject to peaks and troughs in demand;  have defined projects that need to be completed within set time frames;  are undergoing a transformation and require specialists to drive organizational change;  experience difficulty in finding sufficient expertise, talent or knowledge in key areas of the organization;  want access to better or more suitable skills, experience or contacts;  need an injection of fresh thinking and creativity to increase productivity or profitability. Headcount considerations aside, freelancers offer a cost-effective deployment solution. Many operate from their own premises or homes, attending client sites only when necessary. Freelancers are project-focused, charging only for the time it takes or for performance of the agreed project. They generally charge hourly or daily rates based upon their skills, experience and expertise, and take care of their own tax and NI payments, pensions, holiday pay and the like. Most freelancers do not wish to be viewed as employees or ‘temps’, nor do they hanker after the benefits and trappings of employment.

Legal and contractual issues Organizations wanting to take advantage of the flexibility, expertise and knowledge on offer from freelancers need to understand some basic employment status and tax issues that influence contractual matters. Recent court cases serve to emphasize the risk of a relationship initially viewed as one of self-employment by all parties later being deemed to be one of employment, with the concomitant rights and costs issues. To avoid these risks, it is crucial that freelancers are engaged on the right terms and conditions, through a business-to-business contract for services, rather than an employment-style contract of service. The contract for services must include:  a substitution clause allowing the work to be performed by another person provided by the freelance business;  a clause specifying that there is no ‘mutuality of obligation’ between the parties; in other words, there is no ‘obligation, on the one hand, to work and, on the other, to remunerate’;  a clause stating that the freelance personnel will not be subject to supervision, direction or control as to the manner in which they render the agreed services. The Professional Contractors Group (PCG), which is the not-for-profit trade association representing freelancers in the United Kingdom, provides its members with draft contracts that have been vetted by experts in employment status, tax and commercial law. The benefit to an SME client of entering into such an agreement is that it removes all potential ambiguity about the employment status of the freelance contractor,

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FLEXIBLE RESOURCING 133 

eliminating any possibility of employment rights being claimed – holiday and sickness pay, redundancy and so forth. The termination clauses in these contracts typically allow the client to end the agreement with little or no notice.

The Professional Contractors Group (PCG) was formed in May 1999 to provide independent contractors and consultants with a representative voice in opposition to the original IR35 proposals. Since then, it has evolved from being a singleissue campaign group to being a fully fledged, not-for-profit professional body representing knowledge workers who choose to be self-employed. PCG members work in a wide variety of sectors including oil and gas, engineering, information technology, finance, management consultancy, marketing, telecommunications, construction and pharmaceuticals. David Ramsden is a freelance contractor who specializes in political and parliamentary affairs, where he serves a number of blue-chip companies. He came into freelancing following a successful career in senior management with high-profile companies such as Marley Tile and Kingfisher plc. He was executive vice chairman of the Shopping Hours Reform Council and one of the principal architects of the 1994 Sunday Shopping Act. He is an active member of the Federation of Small Businesses and chairs its South West of England Policy Unit. David is a corporate fellow of the Industry and Parliament Trust and an adviser on small business matters. He is also chairman of Deregulate Ltd, EuroShop (EC) Ltd, and chairs a board of school governors in Bournemouth. For further information, see www.pcg.org.uk E-mail: [email protected]

4.7

Pensions, employers and the future

From 2012, all employers in the United Kingdom will be required to automatically enrol their employees into a pension scheme. Many businesses will find themselves providing – and contributing to – pensions for the first time. Those firms already offering a pension scheme will need to choose between auto-enrolling their employees into their existing scheme or into the new system of Personal Accounts. National Association of Pension Funds (NAPF) chief executive Joanne Segars explains how offering good pensions can benefit business

Using a pension to attract, retain and motivate staff In a competitive labour market, a company’s pension provision, in addition to pay and other benefits, should help the employer attract and retain the quality of staff needed to run its business effectively. And the attraction of a company pension scheme should not be underestimated. A recent survey by Populus for the NAPF revealed that 75 per cent of people think that having a workplace pension is important. Perhaps more impressively, two-thirds said they would take a lower salary today in return for a pension tomorrow. Our consumer survey examined attitudes to workplace pensions and their future prospects. The results showed very clearly that people are beginning to put much greater value on having a good workplace pension scheme. And, as people become increasingly aware of the need to save for their old age, so prospective and existing



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employees will increasingly see employer contributions as important part of the pay and benefits package. Highlighting the importance of pensions and emphasizing them as a key factor in their benefits package can have a positive effect on staff recruitment, retention and motivation – 78 per cent of respondents to the CBI’s 2006 pensions survey agreed that a company pension scheme assists in the recruitment and retention of staff.

Continuing employer commitment A quick glance at the newspapers over the last couple of years might lead one to the conclusion that occupational pension schemes – and defined benefit (DB) schemes in particular – are a busted flush. As with so many things, it is important to get behind the headlines to understand what’s really going on. It is certainly the case that many occupational schemes have closed to new members as employers have understandably sought to better contain and manage the growing costs associated with providing pensions. The principal drivers of cost increases have been an increasing regulatory burden, such as the decision to require mandatory indexation of pensions in payment and pensions in deferment, and increasing longevity. In 1950, a man aged 65 could expect to live for an extra 12 years. Today, the figure is closer to 20 years. In fact, every day our life expectancy increases by another five hours. This is, of course, good news. But it does add costs to pensions, which will have to be paid for longer. But rather than abandon pensions wholesale, as has been suggested in some quarters, employers of all sizes remain remarkably committed to pensions. Faced with these challenges, scheme sponsors have opted for a wide variety of reform solutions, including reducing the costs of their DB schemes, creating new hybrid solutions, or switching to defined contribution schemes. In some cases these changes have been for new employees, while for others they have been for all employees, existing and new. Typical changes have included increasing member contributions, raising normal retirement ages, reducing accrual rates, reducing pensionable earnings and narrowing the opportunities for early retirement. Examples of how employers have altered their benefit structures can be found in the NAPF’s research report All Change! Case studies from the changing world of occupational pensions, available from www.napf. co.uk. The world of workplace pensions is set to go through one of its most radical shakeups in years when, in 2012, Personal Accounts come on stream. Aimed at the 7 million working people not currently saving in a pension in workplaces – many of them small businesses – that do not have workplace pensions or an employer contribution, Personal Accounts will be a low-cost, defined contribution saving scheme. Their introduction will also place new burdens on employers of all sizes. From 2012 employers will have to:  Automatically enrol all employers earning over £5,000 into either a Personal Accounts or the employer’s existing pension arrangement.

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PENSIONS, EMPLOYERS AND THE FUTURE 137 

 Contribute at least 3 per cent of employees’ pay between £5,000 and £33,500 to a scheme. The employer contribution will be phased in over three years. (Employees will be required to contribute 4 per cent of pay, with another 1 per cent coming in the form of tax relief.)  There will be a three-month waiting period for new employees. Employers will be able to avoid paying into Personal Accounts provided their own company arrangement meets certain standards. So there is a widening variety of pension arrangements available by employers to their staff which will provide valuable benefits to workers when they stop working, and with the arrival of Personal Accounts the range will grow still further. But whatever the type of pension, there is a continuing need to ensure workers value the pension that is on offer to them, and that employers feel the benefit of that employee appreciation in return.

Accentuate the positive One way of ensuring that employees and potential employees know about the benefits of the pension on offer is through the Good Pension Quality Mark, which has been proposed by the NAPF and is currently under development. The Quality Mark will help employers demonstrate that there is a good scheme on offer. Too often, employers report that their staff do not value a pension, and the valuable employer contributions that go with it, highly enough, so the Quality Mark will ensure that employers got ‘bang for their buck’ and the credit they deserve from contributing to a pension. The Quality Mark – a simple way of demonstrating a good scheme is on offer – is popular with employees too. An overwhelming 87 per cent of respondents to the NAPF/Populus survey said that the Quality Mark would help them decide whether a pension which comes with a job is a good one. The government also backs the Quality Mark, saying ‘the Quality Mark … could help members to appreciate the value of their employers’ pension schemes’.

Getting the message across There is also a role for employers to play in providing access to information about pensions so that people understand the need to save for old age in the first place (and the risks of not doing so). To help individuals and their employers, the NAPF launched PENSIONSFORCE. This free and independent service is delivered through specially appointed volunteers who provide group presentations at the workplace in works’ time. PENSIONSFORCE provides generic support and information using interactive methods. It:    

is free and independent; increases appreciation of the need to plan for retirement; ensures that people are better able to make informed choices; shows people where to go for more information.


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To date, PENSIONSFORCE has held over 90 meetings and spoken to over 1,000 individuals at their place of work. Feedback is positive and employers report an increase in scheme take-up and awareness.

Sources of information and help NAPF: http://www.napf.co.uk/index.cfm Financial advice: http://www.aifa.net/ Financial Services Authority: www.fsa.gov.uk The Pensions Regulator – employers’ section: http://www.thepensionsregulator.gov. uk/employers/index.aspx

The National Association of Pension Funds (NAPF) is the leading voice of workplace pensions in the United Kingdom. Its 1,300 members are responsible for the retirement incomes of over 15 million people and together own assets of around £800 billion. Any organization providing a pension to its employees can join the NAPF. Its members already include all types of employer, large or small, public or private sector, and it speaks up for all types of pension scheme, including defined benefit, defined contribution, group personal pension and stakeholder schemes. Its role is to:  lobby government, regulators and others to improve the operating and investment environment for workplace pension schemes;  influence the future direction of UK retirement policy;  act as a thought-leader by undertaking research on key pensions issues;  speak for the whole pensions market;  raise standards by helping pensions managers, administrators and trustees in their day-to-day job, for example through the provision of seminars and training.

Pensions: working with the regulator

Pensions have been hitting the headlines with increasing regularity in recent years. As well as the ongoing debate about future pension provision, there has been a regular stream of news stories about deficits and the fate of scheme members following merger and acquisition activity. Why have pensions become such a critical issue? What’s the role of the Pensions Regulator in this changing landscape? And what are your responsibilities as an employer?

The regulator: who we are and what we do The Pensions Regulator is the UK regulator of work-based pension schemes. We were created in April 2005, along with the Pension Protection Fund (PPF), and the legislation gave us a clear set of objectives: to protect scheme members’ benefits, to promote high standards of administration, and to reduce the risk of claims on the PPF. We take a proactive, risk-focused approach to regulation, not a ‘tickbox’ approach. This means actively gathering information about schemes and employers, assessing risks, and taking action to keep schemes on the right track. It’s not our job to tell companies what sort of pension provision they should offer, or to tell trustees how they should invest scheme assets. Our role is to make sure that schemes are run properly and that all those involved comply with the law, ultimately helping to rebuild confidence in work-based pensions. Some of the ways in which this involves you, as an employer, are summarized below.

Working with trustees If you offer any form of trust-based scheme – not simply personal pension arrangements contracted out to a provider – you need to liaise with trustees in a number of areas. Where trustees are also your employees, they need to have sufficient paid time off to carry out their duties and undertake training. For most


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schemes except the smallest, at least one-third of trustees must be membernominated. Trustees are now legally required to possess a level of knowledge and understanding appropriate to their role. Many smaller schemes struggle to find the money or facilities for training, and with this in mind the regulator has developed free online learning (the ‘Trustee toolkit’ at www.trusteetoolkit.com) covering all the relevant topics. The training is modular, allowing trustees to dip in and out, working at their own pace.

Communications with the regulator Employers, like trustees and others, are required to report any significant breaches of pensions law to the regulator – for example, if you become aware that trustees are authorizing loans from the scheme to an associate. As an employer, you must also be aware of which events are ‘notifiable’, as set out in our code of practice: you may need to notify us, for example, if there’s a change in your credit rating, and you certainly have to notify us if you cease trading in the United Kingdom.

DC and stakeholder pensions: the basics If you employ more than five people, you will generally need to offer employees access to a stakeholder pension – a flexible, low-cost DC (defined contribution) scheme – unless you already have an occupational scheme. DC schemes are not risk-free. Members may lose out, for example, if administrative errors are made, or if charges are unduly high. It’s the duty of trustees to guard against these risks, but the employer should also be aware of them, and should take part in regular reviews of the scheme and its performance. In particular, HR should ensure that all changes to staff details are communicated efficiently to the scheme’s administrators. Even in contract-based arrangements, where there are no trustees, many employers carry out a regular formal review to satisfy themselves that the company and its employees are using the scheme effectively and getting value for money.

DB: is your scheme underfunded? Scheme specific funding rules for DB (defined benefit) schemes are now in force, replacing the old Minimum Funding Requirement. Schemes must now make a realistic, prudent assessment of their liabilities, and where necessary, produce a concrete, affordable recovery plan to eliminate their deficits. The new arrangements have brought challenges to all involved. Trustees are now responsible for consulting the scheme actuary and establishing, in agreement with the employer, an appropriate funding level. This means taking into account considerations such as the maturity of the membership, and assumptions about mortality and investment returns.

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PROFILE: THE PENSIONS REGULATOR 141 

Employers, for their part, have to be much more open with trustees than in the past; trustees need information about the company’s financial position and plans if they are to reach a prudent decision on the appropriate funding level. Policies for handling conflicts of interest – for example, where the finance director is on the board of trustees – must be followed rigorously. The circumstances of each scheme and employer are different, and it is not the regulator’s role to interfere in funding negotiations. Our task is to assess funding plans – for example, checking that the recovery period is not overlong, and that projected investment returns are not over-optimistic – and to investigate further if we believe members’ benefits are at risk. However, we must be informed if trustees and employers fail to reach agreement, or if the scheme actuary refuses to certify the funding calculations. As a last resort, we can impose funding measures, but our first response will always be to encourage effective negotiation, involving independent advisers if necessary.

Clearance: getting a fair deal for the pension scheme Problems with funding come sharply into focus when corporate transactions or restructuring are planned. If a scheme is already underfunded, it may be placed seriously at risk by any transaction which pushes it down the list of creditors, reduces the funds available to pay off the deficit, or weakens the employer’s ability to fund the scheme. The regulator has significant powers to deal with deliberate avoidance of pension liabilities. We can issue a contribution notice requiring payment of a specific sum into the scheme, or a financial support direction requiring a connected party to take responsibility for a scheme where the sponsoring employer is a service company or insufficiently resourced. However, we have no intention of interfering with normal business activity, and for over two years we have successfully been operating a clearance process. This means that those who are planning corporate transactions can, optionally, apply to us for confirmation that we will not use our anti-avoidance powers following the proposed transaction. When we receive an application for clearance we don’t make a judgement on the merits of the transaction – and, contrary to some press reports, we certainly can’t ‘block’ transactions. Our focus is purely on the potential impact on the pension scheme. We want to see that trustees have been consulted, that conflicts of interest have been addressed, and above all, that adequate mitigation is being offered to the scheme in recognition of the additional risks posed by the planned transaction. We welcome enquiries, on a ‘no-names’ basis if necessary, prior to a formal application. In our experience, applications can be processed much more quickly if we have been involved in initial discussions. Typically, we handle around 20 clearance applications every month. In virtually all cases, those involved have negotiated a fair, affordable deal for scheme members, and we have been able


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to grant clearance: in fact, since April 2005 we have refused clearance in only three cases.

Find out more about the regulator  Call customer support on 0870 606 3636 for information on any aspect of our work. If necessary, the team will put you through to specialists to discuss issues of funding, corporate transactions or clearance.  Visit www.thepensionsregulator.gov.uk to see our codes of practice, guidance and news updates. Select ‘Information for employers’ for specific guidance on the topics discussed in this article.

5

Space for growth


5.1

Where do we go from here?

Paul Stephens, chief economic services officer at Leeds City Council, describes the key factors shaping the location decisions for growing businesses

In practical terms, any company looking to expand its operations into a new geographic region has to ask itself the obvious questions. They are questions about the scope for growth and the likely sources of competition, about location and the ability to recruit. Who would you be competing against for business – is there a gap in the market or is there already fierce competition? Is the new location easy to get to and are your customers or suppliers within easy reach? What kind of business premises are available, and can you recruit locally or would you have to relocate staff? None of this is rocket science, although finding the answers might prove harder than asking the questions. A lot depends on the size of the company and the market it is operating in. Our experience in Leeds is that large-scale relocation and business expansions are few and far between. Investment from overseas tends to be channelled through London and – like the majority of inward investment from elsewhere in the United Kingdom – it comes into Leeds either by the merger and acquisition route or through companies setting up a small regional office and then growing the business organically. It’s the route many of the financial, legal and professional services companies have taken in expanding their operations to Leeds.


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WHERE DO WE GO FROM HERE? 147 

Big bang versus gradual growth Belgium’s KBC Bank, for example, was looking to grow its UK business outside London and the Midlands when it established its branch office at Thorpe Park Leeds, a business park on the outskirts of the city, close to the M1 motorway. The bank is one of Belgium’s largest, with a network of over 2,000 branches in 30 countries and a market capitalization in excess of €22 billion. Operating from serviced offices at the Regus business centre provided the company with the perfect base from which to grow its operations in the region. ‘Leeds, as the leading financial centre in the north, was the logical choice for us, and Thorpe Park Leeds gave us the perfect combination of modern offices and direct motorway access,’ explains the bank’s regional director Nigel Barker. ‘In the space of just 18 months the volume and value of business has grown exponentially and we are now looking for permanent premises in the city.’ Some companies do make a bigger bang, establishing themselves quickly and prominently within the market. Newcastle-based law firm Watson Burton recruited locally before opening its Leeds office just over two years ago. Starting with a staff of just 40, the Leeds office now has a workforce approaching 100. But the majority of firms have expanded by combining organic growth with a series of strategic acquisitions and mergers. Cobbetts, which now has over 200 staff in Leeds, recently moved to prestigious new offices in the city’s rapidly developing West End. A central location and a striking, modern building were crucial for the firm, which needed to be close to the rest of the professional and business community in Leeds. ‘Service and speed of response is critical to our clients,’ explains Guy Jackson, managing partner at Cobbetts in Leeds. In what was clearly a serious statement of intent and anticipating further growth, the firm signed a 20-year lease on new premises overlooking the Leeds waterfront – 51,500 sq ft of prime office space over three floors, with the third floor available for future expansion. ‘Having significantly outgrown our previous offices, there was a limited period in which we could wait for the completion of a development,’ says Jackson. ‘Number 1 Whitehall Riverside was clearly the best on the market. It was close to the railway station and motorway network and was located at the heart of the business and professional services community in Leeds.’

Access to markets is critical to success Of course, some would say that in the age of globalization and the internet, location simply doesn’t matter any more. In the case of high-volume products and processes that can be replicated easily, this is undoubtedly true. But high-value, knowledgebased sectors such as professional and legal services demonstrate that proximity to and the ability to service your customer base is essential. According to the Euro Cities Monitor by global commercial property consultants Cushman & Wakefield, ‘access to markets, customers and clients’ is the single most important issue for companies to consider when deciding where to locate their

 148 SPACE FOR GROWTH

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business. In their survey of over 500 senior executives from companies across Europe, nearly two-thirds cited easy access to markets as their number one priority, followed by the availability of qualified staff and then transport links, either with other cities or internationally. In comparison with our European counterparts, UK cities perform well against all three measures. London, of course, remains the number one business location in the United Kingdom and in Europe. However, four other cities – Birmingham, Manchester, Glasgow and Leeds – feature among the top 30 ‘best cities to locate a business today’. Significantly, they outperform or are in direct competition with major European cities and capitals – such as Rome, Copenhagen, Geneva, Athens and Oslo.

Who you know can be as important as what you know The ability to recruit and retain highly skilled employees is particularly important for manufacturing companies, which rely on specialized skills and knowledgeintensive processes to stay ahead of overseas competition. However much we hear about the death of manufacturing in the United Kingdom and the relocation of most labour-intensive production processes to low-cost economies in eastern Europe and Asia-Pacific countries, the fact remains that manufacturing companies account for a significant part of the business base in UK cities such as Leeds and Birmingham. Supply chain relationships are also critical for engineering companies such as Sulzer and Cameron, some of the largest manufacturing employers in Leeds, which are prospering from the boom in oil exploration. Sulzer has just signed a massive deal to supply oil pumping technology to oil producers in the Far East. As well as its own highly skilled workforce of specialized engineers and designers, the company relies heavily on a supply chain of smaller engineering companies within the region that are able to produce and deliver high-specification components to meet demanding deadlines. Relationships of this kind are not something that can be developed overnight. An extended network of business support services can therefore make a big difference to companies relocating or expanding their operations into new territories. It’s the difference between, on the one hand starting from scratch and doing it all yourself, and on the other hand being able to plug the business directly into the existing supply chain, networks and potential customers. Strong sector support networks can open doors that would otherwise remain closed, and tell you a lot about the business culture of a city. An open and welcoming business culture, in which companies aren’t afraid of the competition and are actively looking for opportunities to do business with one another, is a healthy business culture, And at the end of the day, for many small companies, deciding where to do business is as much a decision about the kind of place you want to do business in. If the business succeeds, you are going to be there for a long time, and there’s no point being in a place you don’t want to be.

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WHERE DO WE GO FROM HERE? 149 

Leeds City Council’s business and enterprise team offers a wide range of support for companies looking to expand or relocate their operations. For further information call 0113 220 6350, e-mail: [email protected] or view www. locateinleeds.co.uk.


5.2

Property – the wasted billions

UK businesses are throwing away up to £18 billion a year through inefficiency in their use of property, reports Paul Bagurst at the Royal Institute of Chartered Surveyors

Given that property is often the second highest business cost after wages, it is surprising that many businesses do not have an accurate assessment of the property costs they face, or take professional advice when making decisions relating to finding and managing their premises. Tenants tend to monitor their property costs far more than owner-occupiers. A major obstacle to a business achieving savings is the lack of information it has about its property. Often a company doesn’t even have an accurate asset register or current market value of its property. Analysing information, for example by looking at property costs per business unit and per employee, or by introducing benchmarking schemes or internal rent charging, means property can be related to business strategy as a whole. Ownership structure has an impact on efficient property usage. In the United Kingdom, two-thirds of business property is owner occupied. Owner-occupied office space is less densely occupied than leased space, possibly because owner-occupiers consider the property to be ‘free’. In fact it is estimated that if owner-occupiers were to use space more efficiently, for example by implementing new working practices such as hot-desking, the business sector would save up to £9.5 billion per year.


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To buy or to lease? The decision whether to buy or lease your premises is one of the most important decisions a business will face. Sometimes you may not have the choice, but it is an important decision which will affect the future development and profitability of a business. So how do you go about deciding what to do? Start with your business itself. Is it a mature business already? Is it a young business which you expect to remain roughly at its present size? Or do you expect, if all goes well, that it will expand significantly in the years ahead? Try to build a picture of where you expect the business to be in five years’ time. Leasing is generally more flexible than buying, at least in the case of a short lease. If your business is currently small but you expect it to grow, leasing might be the preferred option. You can take a lease or even a licence on premises that satisfy your present space requirements. As your space needs increase, you can move on to a larger building. With industrial buildings in particular, design trends change quite a lot, and if the building you lease becomes obsolescent you can move to one that meets current requirements. However, there is always the possibility of buying a building which can be extended or adapted if you find you need more space in future. Some types of business require a large amount of plant and equipment in the building, with high installation costs. As you will want to write off these costs over many years, you will not want to change premises at frequent intervals. In this case, buying may make more sense than leasing. If you do take a lease, it will need to be a long one. Aside from the question of moving premises, you will generally have more freedom of action as an owner than a tenant. You would not need to obtain a landlord’s approval (with the attendant time delays and costs) for changes that you want to make. It is more likely that you would be able to extend the building. You will not be faced with the administrative inconvenience of negotiating rent reviews, of renewing your lease or of arguing dilapidation claims if you move out. On the other hand, many of the same restrictions will apply whether you own or lease. You will still need to maintain and insure the building, whether it is for yourself or a landlord. You will still be subject to the same external constraints, like the need for planning permission when the occasion arises. It is arguable which option makes more sense financially. Many larger businesses consider nowadays that their capital is better employed in the business itself than if it is tied up in the company’s properties. They may tend to lease their buildings rather than own them, and even dispose of existing buildings that they do own via a sale and leaseback. The decision depends partly on the way you expect the property market to move. If you expect the level of rents to move up rapidly, as a tenant you could face big increases when the rent reviews occur. And if you do not own your property it is the owner, not you, who will benefit from any future increase in its capital value. If you own your property, you will get the benefit of any capital appreciation and will own an asset at the end of the day. If the building increases substantially in value, you might be able to borrow against the increased value in future, which could

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PROPERTY – THE WASTED BILLIONS 153 

extend your financing options. You will not have to worry about big increases in your occupation costs following rent reviews. If you do decide to lease you should understand that a lease is a binding contract in law which sets out the terms and conditions of the tenancy agreement between landlord and tenant. It thus defines the rights and obligations of both parties. It is therefore enforceable – you cannot simply walk away from a lease. Before entering into negotiations for a lease you should consult the Code for Leasing Business Premises, which provides a framework within which a tenant can expect a landlord to operate. This can be downloaded from www.leasingbusinesspremises. co.uk. Certain aspects of the relationship between landlords and tenants are also defined by law. A first draft of the lease will usually be drawn up by the landlord’s solicitor as a basis for discussion between the parties. The pattern of property tenure may be complex – it is not always a simple matter of a tenant taking a lease direct from the property owner. A prospective tenant may be negotiating a lease from the freeholder, or taking an assignment of an existing lease or perhaps even a sub-lease.

Which location? The most important part of the process is finding the right premises for your business. Think the process through logically. The best sequence may be:  Decide on location. If you get this wrong there is no way of correcting your mistake. If your business is in manufacturing, ease of access to sources of raw materials and to your markets may be essential. If you are running a shop, it should clearly be in a location where the public will notice it and find it easy to visit. For cost reasons you may have to accept some compromise.  You need to consider your business strategy, the number of people you will be employing, the processes used in the business and the plant/machinery required. Consider also your ongoing plans. Should you ensure at the outset that there is space for expansion, or will you rely on a move to larger premises at a later date as the business expands? Think about the quality of the workspace environment and how this may impact on staff productivity.  Next, prepare a specification of the premises you want. Sketch out a plan. From this you can calculate the floor area you need. Do not forget car parking and loading and unloading facilities. And remember your utilities requirements.  Calculate how much you can afford to pay in outgoings on the premises. In addition to rent or mortgage repayments you will need to allow for general rates, water rates, service charge for maintenance and cleaning of common areas, and insurance of the building. These complexities emphasize the need for professional advice from a chartered surveyor before making any decisions about your property needs and business strategy.


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An RICS surveyor:     

provides you with clear, impartial and expert advice; acts solely on your behalf; works to strict codes of conduct; will be fully insured; has up-to-date skills and knowledge.

To find a chartered surveyor firm in your area visit www.ricsfirms.com or call 0870 333 1600. For more information about how an RICS member can help provide advice on your business property matters, visit www.propertyinbusiness. co.uk or contact RICS to request a free copy of the CD ROM Getting Serious about Your Business Premises, an invaluable resource for businesses looking to move, improve, sub-let or run their premises more efficiently.

5.3

Platforms for enterprise

The hit rate for enterprises and innovations in incubators is much higher than for the economy as a whole. Toni Wanklin at UKBI explains why

Business incubators provide SMEs and start-ups with the ideal location to develop and grow their businesses, offering everything from rent-a-desk through to state of the art laboratories and everything in between. But its not just accommodation that’s on offer – they provide direct access to hands-on intensive business support, access to finance and experts and to other entrepreneurs and suppliers to really make your business grow.

Critical stages Starting any business is fraught with uncertainty, financial burdens and resource issues, but more so with innovative and entrepreneurial businesses due to the complexity of the products and services being developed and the sheer length of time it takes to fully develop the product. Incubators are ideally placed to remove some of the hurdles and to negotiate a path to the all-important finance and mentoring all entrepreneurs need. Business incubation provides a nurturing, instructive and supportive environment for entrepreneurs during the critical stages of starting up a new business. The goal of incubators is to increase the chance that a start-up will succeed, and shorten the time and reduce the cost of establishing and growing the business. If successful, business incubators can help to nurture the companies that will form the true creators of a region’s or nation’s future wealth and employment. Currently, there are approximately 300 incubators in the United Kingdom, supporting in excess of 20,000 dynamic, creative and innovative businesses. They support all sectors, including ICT, science,


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technology, creative industries, social enterprises and all manner of entrepreneurs. There is no age limit, gender or physical discrimination – ultimately, if you have a world-class idea or innovation, business incubation is there to support you. It is important to put incubators into perspective. Rather than being the last hope for failing companies, incubators serve as a launching pad for young and small businesses. Start-ups, which are innately dynamic entities, need access to support, and incubators are a means of providing this. Whether located in urban or rural areas, most incubators are distinguished by the specialist services that they offer in addition to a physical home for a budding company.

Does incubation work? Incubators have been used to achieve a wide range of objectives, primarily those that small businesses are good at: creating jobs, developing innovative ideas, diversifying the local economy, and broadly generating activity and wealth by creating a vibrant small business sector. Incubators have an important role to play in supporting local and regional businesses, but entrepreneurs may ask whether they actually work. Over the last nine years, UK Business Incubation (the international membership and best-practice body) has measured the impact that incubators have on the local economy and workforce. The research proves that an incubator’s client businesses provided an average of 167 jobs (full-time equivalents) per incubator and are home to an average of 30 client businesses. Most (60 per cent) incubators also operate ‘outreach’ services, helping and advising companies outside the incubator. Those operating outreach activities support an average of 150 additional businesses. Across the sample, an average of 75 per cent of client companies had a turnover up to £500,000, but only 1.5 per cent had a turnover of over £5 million. Most importantly, incubators have an average success rate of 98 per cent of businesses succeeding while in the incubator (compared with a national average of less than 50 per cent of all SMEs registered) and 87 per cent surviving five years after starting.

Where are these incubators and how do they operate? Business incubators can be found in all regions and locations: on university campuses, in city centre settings and even within large corporate settings. Essentially, they are located where the market needs them. This is based upon the needs of the entrepreneur and the sector focus of the incubator: close proximity to research, technical support and equipment or a dynamic business cluster. For example, where a university has a strong bioscience offering, it is usual to find a business incubator dedicated to commercializing bio businesses or innovations. Similarly, incubators can be used to drive forward the development of a strong cluster of businesses such as IT, creative industries, and environmental technologies, which then act as a magnet to other innovative start-ups or entrepreneurs who want a slice of the action.


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A business incubator is established to support and nurture the next generations of SMEs, and in order to do that, it needs to respond to the needs of the entrepreneur or business. As such, flexibility is key. Incubators come with or without ‘walls’. Most incubators provide property on a flexible basis, offering easy-entry and easy-exit tenancy terms and some common facilities and services. The level of provision depends on the individual incubator and the types of business it targets, but frequently it will include a central reception area, communal areas (eg meeting rooms, cafe/restaurant, kitchens), access to telecommunications, and in most cases shared secretarial services. These services alleviate the administrative burden on the tenant companies, reducing the need for equipment and personnel. However, there are a growing number of ‘virtual’ incubators that deliver a similar package of business support and development services, but without the physical property element. While any business starting out or growing needs the right accommodation, a building has never grown a business. Most clients of business incubators are attracted by the easy-in/easy-out terms, but once through the doors, it’s the access to business support that keeps them there. Imagine the scenario – you have developed a truly innovative product or service and know that there is a market for it, but how do you protect the innovation and market it while also building a business around it? This is where business incubation holds the trump card. It will have access to IP specialists that you probably couldn’t afford, access to experts in the field who can help to market the product or service, overseas partners to help you establish in international markets and even linkages into major corporates who can either help you to develop it further or who may want to license it from you. Alongside this, the incubator will help to grow you as an entrepreneur through tailored workshops and training, support in book-keeping and finance, and assistance with the dreaded tax returns and legislation. It will also offer you a shoulder to cry on if times are hard, or will raise a glass in celebration with you when you get that much-needed order. On average, clients tend to stay within the incubation environment for up to three years, but there are incubators that specialize in accelerating the growth of your business which operate on six-month terms. It really depends on the nature of your business, the sector you are operating in and the demands of the product or service you have developed. Added to that is the advantage of different unit sizes, so the incubator can fit to the needs of your business as it expands. You can start by renting a hot-desk (usually by the hour) while you test your idea, or take a small workshop or office unit for yourself to start growing in. As the demand for space for staff, equipment and stock grows, an incubator can flex with you, offering a range of unit sizes to meet your needs. Really innovative incubators have removable walls that can be taken down or extended to create the space you need. Business incubation is truly flexible to meet the needs of the entrepreneur or innovation, and with success rates of 98 per cent, it holds the key to your success in growing your business.

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UK Business Incubation is the leading authority on the development and support of business incubation, innovation and entrepreneurship support environments. We see a future where substantial and high-quality business incubation brings wealth, opportunity, employment and regeneration to local, regional and national economies. This will be achieved through the successful creation of thousands of bright and sustainable new companies with exciting, valuable and innovative ideas. Further details: Toni Wanklin, marketing and development manager, UK Business Incubation Tel: +44 (0) 121 250 3538 E-mail: [email protected] / [email protected] www.ukbi.co.uk

5.4

Property projects

Lack of definition is the most common failing during relocations or refurbishments, warns David Higgins at Northcroft

After wages, your premises are likely to be the second largest cost to your business, and to get a relocation or refurbishment wrong can cost you more than money. The most common failings in any property or construction project occur when the occupier hasn’t clearly defined what it wants or hasn’t allocated someone in the company to be responsible for or empowered to make crucial decisions about the project. Another failing is in not taking professional advice.

Start-up Once you have made the decision that your business requires new premises or a refurbishment of existing space, it is then down to the often daunting process of implementing, managing and carrying out this project. It is fundamental when embarking on such a project that there is a clear understanding of what your business needs are and how these are communicated to your stakeholders and staff. Both parties will have different interests that will have to be considered as they may not be in harmony with each other. The establishment of a clear and precise brief at the beginning of a project, which is understood by all parties, is one of the main keys to achieving a successful outcome. A typical brief is made up of a series of responses to the needs and aspirations of the business which also take into account the need to produce a building that:  is aligned to the business’s needs;

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is in keeping with the company’s image; is efficient in terms of floorspace; is flexible; provides value for money; can be completed in time for an orderly occupation; produces a high-quality working environment.

Once agreed the brief will form the grounds upon which any design input will be based, and the construction budget will be aligned with it. Although your business needs may change over time, variations can subsequently be agreed against a background of knowing what the effects on cost and time are likely to be. The key objectives for any client should include:  achieve your project within the allocated budget allowance and timescales;  maximize the value of your investment;  minimize your risks.

Planning It is easy to underestimate how much time managing a refurbishment or fit-out of new premises can take. In order to allow you to concentrate on your business it is fundamental that a strong professional team is appointed. You can directly appoint individual specialists, or appoint a sole consultancy to manage the project on your behalf, which in turn will appoint a team of specialists. The selection of a project team is important. Team members should be selected on the quality of their reputation, their track record for similar projects, their capacity to do the work and the size of their fees. You must feel comfortable with the way the professionals appointed will handle the desired strategy that your business has agreed, as the project team will be guided by the brief. This forms the basis of certainty upon which the development and fit-out can proceed. The most successful projects are where the team adopts a collaborative partnering method, whereby each organization within the team is closely aligned with overall project objective. Communication is of paramount importance to the promotion of collaborative working. It helps create and sustain a culture of partnership and solutionfocus, but also helps provide early warnings on project issues. Solutions can only be found when problems are identified and discussed.

The design process The agreed project brief will be distributed to the design team, and workshops held to ensure that they fully understand what is required. They will translate both the aspirational and physical accommodation requirements into the building design and the standard of fit-out. Generic floor plans will be prepared, which although based upon open-plan floor layouts will incorporate areas that can be zoned for filing,


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meeting rooms, cellular and other office functions. Flexibility is therefore maintained, and this will, within parameters, satisfy the majority of individual business needs. Establishing a procurement strategy at the outset of the project is also key to ensuring a successful outcome. The procurement strategy developed should balance risks against project objectives at an early stage. The key criteria listed below are interdependent and often in tension:  time (speed or certainty of completion date);  cost (price level or cost certainty);  quality (functionality and performance). Emphasis on only one of the key criteria will almost certainly have a negative effect upon the others. There are two main procurement strategies.

The traditional procurement process This provides certainty of cost and time for a design developed by an architect employed by the client. However, this is a sequential and consequently slow process. This is a low-risk option for clients who wish to minimize their exposure to the risks of overspend, delays or design failure. This is typically not suitable for fast-track projects.

Design and build This provides relative speed and cost certainty but involves the contractor being responsible for the design as well as construction. This approach gives the client a single point of contact, as the main contractor takes full responsibility for project delivery. However, the client commits to the cost of construction, as well as the cost of design, much earlier as the risk is shifted to the contractor. Subsequent changes made by the client can be expensive as they affect the whole of the design-build contract. This is typically not suitable for an uncertain or developing brief, or complex buildings.

Summary The procurement system to be adopted on any project is one of the most important factors governing the way in which the project will be undertaken, purchased, administered and delivered. It reflects fundamental differences in the allocation of risk and responsibilities between you and the contractors. The suitability of the different approaches needs to be considered in relation to the specific nature of individual projects, as there is no one procurement route suitable for all circumstances.

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Execution An early review of the procurement strategy will ensure that it closely meets the client’s needs. The strategy for design and construction can then be developed based upon the chosen procurement route. Each consultant will develop a detailed schedule for the execution of their own work within the time frames given in the master programme, together with a full list of drawings and issue dates. The arrangement of regular design team meetings will enable each member of the design team to produce a design that is fully integrated with other disciplines. We believe that it is important that a client representative is present at these meetings in order to ensure that the client is fully involved in the development of the design. In addition, the cost manager will be fully involved in the design process so that the emerging design can be developed in an informed way to ensure cost control is active and not passive. The tender period should be adequate to allow full assessment of the requirements and to obtain detailed pricing information. Contractors will be required to follow a rigorous two-stage assessment process before being invited to tender. In this way, you ensure that only contractors with the requisite financial standing, experience and personnel will be considered. The tender review process will identify the contractor offering the best value for money in relation to capital cost, management capability, quality and methodology. In our experience the most effective way of managing contractors is characterized by a firm but fair, hands-on type approach. This allows the establishment of a close and non-adversarial working relationship with contractors, based upon a mutual understanding of both parties’ reasonable expectations. Closely monitoring the contractors’ progress against the master programme will ensure that appropriate measures are implemented to recover any delays that occur during the construction process.

Closing Effective handover procedures should be developed ahead of the completion of the project to ensure that the handover from construction into operation is seamless and defect-free. The handover procedures will cover approval of samples, inspection of completed works, early and continued involvement of the maintenance staff to ensure their clear understanding of the project, procedures for witnessing of tests and commissioning, and the completion of the operation and maintenance manuals and health and safety file. In addition, you may want to carry out post-project reviews to capture knowledge in order to learn and improve from the experience, and to measure performance against the success criteria, not only of the facility but also of the people and processes adopted and developed during the execution and planning states of the project. This is particularly useful if future projects are planned, or where stakeholders have not been directly involved with the project during its development.


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David Higgins is managing director of UK Project Management at Northcroft, a leading international construction consultancy firm offering tailored solutions to clients investing in construction, property and infrastructure. For further details about Northcroft and the services we provide please contact Gemma Medland, head of marketing. Contact details: Northcroft, One Horse Guards Avenue, London SW1A 2HU Tel: 020 7839 7858 www.northcroft.com

The business of becoming a powerful region

Choosing the right location – and the right accommodation – can have a critical bearing on the success of a growing business. Richard Vincent, head of the Alliance North Midlands Investment Team, explains how public and private sector investment of more than £1 billion in infrastructure and business support services, including a growing network of state-of-the-art business innovation centres, is helping the area emerge as a powerful prospect for businesses on the move.

Location, connection, innovation, expansion Until the end of the 20th century, growing businesses looking to relocate would traditionally focus on sites close to allied industries and markets. Today the key is less about ensuring physical proximity to associated markets and more about ‘connectivity’ – bringing accessibility to clients on a national and international scale. As a result, businesses have the freedom to be increasingly mobile, with advanced technology offering much greater choice of location. And with rising costs, increasing congestion and the pressing need to reduce carbon footprints, city centres and major conurbations are no longer automatic first choice. Emerging as priorities for developing entrepreneurial businesses are factors such as the accessibility of support and advice, and the flexibility of having space to ‘grow into’ – thus avoiding the logistical problems of having to up sticks again when business takes off. All of these considerations make North Nottinghamshire and North Derbyshire a hugely attractive prospect for mobile, aspiring businesses. In fact, the time has never been better to consider the merits of an area right at the heart of the United Kingdom, close to major provincial cities and with a superb network of road, rail and air connections to national and international destinations.


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The North Midlands area extends from the northern edges of Nottingham and Derby to the southern edges of Sheffield and Doncaster, and from the Lincolnshire Wolds in the east to the Peak District in the west. The M1 motorway and the A1 run north to south through the area and provide excellent links with the east-coast ports and the North West and West Midlands. Air links are strong, with East Midlands Airport and Robin Hood Doncaster Sheffield Airport offering business and freight connections to international destinations. Emerging from the days of dependency on a handful of major employers in traditional industries, the North Midlands is primed for a new era of prosperity. Major investment in support for new and growing businesses is part of a longterm strategy for economic regeneration in the area. Much of this work is coordinated and funded by the Alliance Sub-Strategic Partnership (SSP), the team charged with driving forward economic prosperity across the area. Flexible accommodation and access to expert support and advice both act as catalysts for innovation. In order to exploit this, it’s essential to have the right staff and skills – completing the ingredients for growth. A strong public/private sector partnership with the common aim of welcoming and nurturing a new, high-quality business culture is also developing an effective support infrastructure, enabling local people to take advantage of the employment opportunities offered in the 21st-century economy.

Space to grow – the right accommodation A growing business needs space to accommodate that growth, along with facilities to respond to new opportunities quickly – without the expense of maintaining workspace that is not already generating income. Business innovation centres (BICs) help fulfil such a need, offering flexible, state-of-the-art facilities without the financial or time demands of running them, thus leaving the growing concern free to concentrate full time on its core business. The North Midlands is becoming a hotbed for growth, with 11 innovation/ incubation facilities now operating across the region. If accreditation plans are realized, it will have a higher concentration of BICs with European accreditation than any other area of the United Kingdom. The area is also increasing the provision of secondary premises, where a growing business, no longer in need of the centre’s core services, can move on to develop with the knowledge that support is there if needed. Two centres, the Mansfield i-Centre and Westthorpe Innovation Centre near Chesterfield, are developing Phase 2 centres to allow for follow-on support.

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Case studies Cassy Marketing This video and multi-media production company’s original Nottingham citycentre base – on the face of it a prime location for a growing marketing company, set in the heart of a thriving economy – presented a major disadvantage for staff and clients faced with congestion and parking problems. The company took the decision to relocate to Tapton Park Innovation Centre in Chesterfield where, with a new focus on video and multi-media production, it offered easy access for visiting clients from across the country. With the emphasis on electronic technology, geographical position had minimal impact on the way work was produced and delivered, and the company had the benefit of ad-hoc access to extra meeting rooms and facilities for staging exhibitions. Due to the success of the business, Cassy needed to move to larger premises. It found a new base close by, allowing the business to grow without the disruption and expense of a costly relocation programme. And as Richard Cassy explained, ‘It also means that our contacts at Tapton Park are still close to hand and we are still able to use the facilities if and when we need them.’

BPR BPR, medical suppliers of oxygen and medical gas control products to the NHS, moved into the i-Centre in Mansfield five years ago, when the lease on its base ran out. Early reservations about moving into an incubation centre were quickly dispelled, and one of the major benefits of the move was that all the day-to-day running of the building and associated issues was taken from the staff’s shoulders. Freed of concerns about maintenance, health and safety issues, insurance and bills (with all bills incorporated into one monthly payment), the company was able to concentrate fully on its core business. Now BPR is preparing to move to bigger premises and has selected a new base, tailored to its needs, which lies within walking distance of the icentre, where it retains links with support businesses. According to MD Richard Radford, the decision to relocate was much easier with the knowledge that the company has the flexibility to accommodate its growth and yet remain local.

Support agency Alliance SSP The Alliance SSP brings together local people with the single-minded ambition of using the area’s strengths to raise prosperity and employment for the benefit of everyone. Its vision is to achieve three strategic objectives: to develop a highly skilled, adaptable workforce attuned to the needs of the modern economy; to develop a more competitive and dynamic business base; and to develop a larger and more diverse economy.


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Contact details: Units H1B, Mill 3, Pleasley Vale Business Park, Pleasley Vale, Mansfield, Nottinghamshire NG19 8RL Tel: Richard Vincent, 01623 819814 E-mail: [email protected] www.alliancessp.co.uk

6

Cash flow and working capital


6.1

Financing risk

Without risks, there is no growth, so make sure you find the best way to incorporate risk into your financial planning, says Vinit Chandra at Barclays Commercial Bank

Progress always involves risk; you can’t steal second base and keep your foot on first. Frederick Wilcox We all know that business gain usually involves a degree of risk. The trick is not to pursue a strategy of risk avoidance nor to bury your head in the sand, but to be aware of the risks, assess their likely impact and look for proactive ways to manage them. When growing your business there are certain risks that you open yourself up to, and from a finance point of view there are three key areas you need to consider:  What are your financing options?  How do you reduce the cost of financing and protect yourself from the risk of increasing costs?  What other costs do you need to consider?

Financing options One of the key roles of a banker – and the one where the earliest possible engagement is always appreciated – is in the exploration of options for financing. This is where the banker should come into their own by offering detailed advice and suggestions on alternatives and options, through a thorough knowledge of the various ways to help the customer, whose need may just be ‘to borrow some money’.

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There are five broad financing options for traditional bank finance.

Short-term working capital Most commonly known as the ‘in case of need’ overdraft facility, this provides peace of mind and accommodates unforeseen peaks and troughs in cashflow. Agreed on the basis of expected cash flow over a defined future term, these facilities are now available on an ongoing ‘automatic roll-over’ basis where circumstances are unchanged. Overdrafts are best suited to occasional use (say for a few days each month, or seasonally in some industries) rather than for a build-up of solid longer-term debt.

Sales ledger and stock finance Often the overdraft is not the most efficient way of using the maximum value within a business’s current assets. Sales and stock finance facilities are provided by those banks with a more specialist understanding of the processes and underlying commercial risks within sales ledgers and stock inventories. As a result, these facilities will almost always enable businesses, particularly in a growth phase, to maximize the funding available.

Longer-term working capital A term loan, which is flexible in respect of duration and repayment terms, is often preferable to an overdraft when there is a clear need for a longer-term injection of funds to support working capital. This is mainly because all of the administration and any set-up costs occur once and once only. Again, as this type of arrangement is agreed against the business’s financial forecasts and plans, it can provide cost-effective longer-term support.

Defined fixed asset purchase Moving away from cashflow finance to the question of purchasing fixed assets, a range of term loans are available for the finance of longer-term capital expenditure. This might involve the purchase of operating premises, investment assets or plant and machinery. Getting the right structure – linked not only to the asset but to the cashflow outlook of the business – is an important consideration. The banker will offer support and advice on a range of topics such as repayment holidays to reduce initial cash outflow, matching the repayment programme to the life of the asset, and the longer-term plans of the business and its owners.

Leasing and asset finance For plant and machinery, including IT and vehicles, specialist leasing and asset finance can be the most efficient structure – again because these specialist lenders are more experienced at understanding these assets and because they may offer the most taxefficient solutions.

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Finally, think about the intangibles. If you are moving premises there are health and safety considerations. If your business is expanding there may be potential HR considerations. There might even be environmental angles which are worth considering, particularly as cash-back financing schemes are available to support. The best bankers can offer advice and support across the board.

Reducing the costs of financing So now we have outlined the main different types of finance, what can a business do if it wants to reduce the costs of finance as well as protect itself from the risk of increasing interest rates? First of all it is worth considering that payment of interest on debt is tax deductible, therefore the optimal level of debt will increase returns on equity. Firms should think about opting for long-term debt to ensure continued access to capital over the growth cycle. A range of proactive solutions is available and the most appropriate for you will certainly depend on your individual needs.  Fixed-rate debt – gives certainty of cash flow as the interest rate repayment is fixed at an agreed level but is likely to have higher credit spread.  Cancellable fixed-rate loan – allows businesses a chance to refinance borrowing at a lower level if interest rates drop.  Floating-rate debt – tends to have a lower credit spread, offers the benefit of falling interest rates but expense increases during rate hikes, therefore there is increased volatility of cash flow. For a marginal fee, a cap allows the unlimited benefit of falling interest rates while limiting the maximum interest paid to a predetermined rate.  Collared loan – allows businesses to maintain interest expenses within a predefined upper and lower band for zero additional cost, thus offering risk management and opportunities dependent on market movements. A good business bank will be able to advise you on all of these options, bringing in a breadth and depth of expertise from across the bank. For example, in the case of Barclays Commercial Banking, introductions can be made to Barclays Capital to support you as required.

Other core financial risks Clearly an increase in interest rates is just one of a range of financial risks that a business faces and there is a lot of merit in considering a broader risk management strategy. One core risk for companies involved in international trade is fluctuating foreign exchange rates. Many firms either import raw material or export value-added products, thus acquiring significant exposure to foreign exchange (FX). For example, a strong sterling–US dollar exchange rate brings a lot of benefit to importers, whereas exporters see reduced demand for their goods. There are a number of solutions available to help manage the risks of fluctuating currency rates.


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An FX forward contract allows a firm to buy or sell FX at predetermined levels and lock in the value of their goods in sterling terms. If a firm wants to lock in a guaranteed FX rate and also benefit from any favourable movement in FX, it can purchase an FX options contract at the desired exchange rate. Again, a good business bank will be able to advise on all the available solutions, bringing in experts in international trade as needed.

Looking forward Thus far we have covered the traditional financial risks that a bank would discuss with a business, but these boundaries are broadening, and in the not too distant future companies may be able to take a much broader view of their risk management strategy. For example, businesses use a variety of volatile inputs such as electricity, labour and fuel. Copper prices jumped 60 per cent in the first six months of 2007, while significant changes in electricity prices are also common. Such volatility can wipe out the profitability of a business. Looking forward, businesses must go beyond negotiating tiny changes in loan pricing and address real risks to growth. One good example is the price of diesel, which is a key cost driver for firms in transport and logistics. Prices of diesel have been rising and volatile for many years. Businesses would benefit from being able to enter into a fixed-price contract with their bank or fuel provider to ensure predictable operating costs. This and similar protection against other volatile inputs such as electricity and metals are all possible risk management solutions in the near future. Regulatory changes often change industry profitability dramatically. For example, the European Union is implementing the Kyoto protocol, which mandates a reduction in carbon dioxide emissions in Europe. Firms, such as coal power plants, will have to reduce their emissions or proactively buy the right to emissions from the market, or face heavy fines. On the other hand, more energy-efficient firms which reduce their emissions may be able to sell their emission rights to generate cash. Firms must understand the threats and opportunities opened up by such regulations. The key message here is that a business must be aware of the risks it faces in the widest sense, and have access to a range of management solutions and strategies. Your bank is a good place to start for advice and support.

Vinit Chandra is the Managing Director, Global Commercial Products for Barclays Commercial Bank, which works with businesses with a turnover of £1 million upwards and has relationships with 75 per cent of the FTSE 350. It is the leading bank for offering industry specialism, with a team of experts in over 50 industry sectors ranging from hotels to healthcare. Their relationship directors and managers have an average of 20 years financial experience each, and invest time in developing in-depth relationships with their customers so that they understand their individual needs and can

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develop bespoke financial solutions. Customers also benefit from access to the expertise of the wider Barclays group, including the International Trade and Cash Solutions team who are specialists in risk, lending, trade and cash and treasury management. If you would like to find out more about what Barclays has to offer please call 0800 015 4242 to arrange an appointment with one of our relationship managers or visit www.barclays.co.uk/commercial

6.2

Improving cash flow

Short of cash? It can happen even when you are making a profit. Mark Standish at Mazars reports on how to keep on top of your payments

It is a sad fact of life that businesses fail when they run out of cash. Even profitable businesses can fail. We measure the success of a business by its profitability, so the concept of a successful business going under defies logic. Once you understand how this can happen, the importance of cash management becomes startlingly clear. A business runs into trouble when there is insufficient cash to meet payments as they fall due. This is, ironically, one of the key tests of whether a business is considered to be a ‘going concern’. The symptoms are familiar: loan covenants are breached; terms to suppliers are stretched; rent payments are delayed; deferred terms on tax payments are sought; the bank is asked to extend credit lines; even payments to staff may be affected. While these symptoms are usually associated with a failing business, they can also affect profit-making businesses. Sales are used as a measure of profit, but receipts generate cash. Sales can actually create demands on cash (eg payment of the workforce, raw material suppliers, VAT charges). Until invoices are paid, the business can have a cash shortfall, and if creditors remain unpaid for too long, the business will be brought down. We shall now consider in more detail the sources of and demands on cash, and provide some tips to help manage them.

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Sources of cash Trading receipts Trading receipts are the mainstay of a business’s cash flow. Sales of products and services, correctly delivered, invoiced and collected, will provide the underlying income stream of the business. In spite of the importance of trading receipts, it is an area of the business that is often neglected. Invoices are issued late or incorrectly, statements are not sent in a timely fashion, and too much credit is extended to the wrong debtors. Investment in credit control is not often a priority.

Sale of assets In many businesses, asset sales form an important part of the cash-flow cycle. This typically involves those with vehicle fleets, such as coach companies, hauliers or companies with a large sales force. When the vehicles are replaced, usually on some form of finance arrangement, the residual values may exceed any outstanding finance, and also the book value of the assets. This creates both a cash-flow boost and an enhancement to the profit figures. Printing and engineering machines may also produce this effect where they have strong residual value. However, selling assets to meet a short-term cash problem is simply buying time; the underlying cause must be addressed.

Equity This is the cash invested by the shareholders at the outset, and from time to time, fresh funds can be injected by way of equity. It is committed money that can only be realized on sale or restructure, and in small companies this figure is usually quite modest. Often funds are injected when new shareholders or investors join the company.

Loans Loans are a flexible way of introducing cash to a business. Shareholders or directors can assist cash flow by making a loan, without tying up equity. Banks and finance companies also provide loans to a business, although these generally are for asset purchases or to finance growth of the business. It is very difficult to raise loans from financial institutions if the business is in difficulty. Loans usually have strict repayment terms which incur penalties in default, so if the underlying business is not generating cash, loans are also only a short-term solution.

The demands on cash Overheads Overheads are the fixed costs of business: they include premises, utilities, admin, wages and a host of other general items that do not vary with sales. Close scrutiny


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of these costs usually enables savings to be made. The key to success is flexibility and a quick response to underlying trading conditions. However, remember to build overhead costs slowly and carefully, because they cannot be shed so quickly. This is one reason that outsourcing has become prevalent in larger businesses.

Fixed asset purchases These should be reviewed critically at the outset. Will new plant improve productivity and thus reduce cost of sales? Will changing a car reduce servicing and running costs? Will new premises improve capacity? Many businesses struggle after major capital purchases.

Tax Tax should not be overlooked. Businesses in trouble tend to use VAT collected for ‘more pressing’ needs, but this is a very short-term solution, and soon the payment of VAT will itself become a ‘pressing’ need. The timing of many taxes is also a challenge, since they tend to be payable in arrears after a period of success. If the fruits of that success have not been set aside, the bill may arrive when there is no cash available. Corporation tax can also be burdensome, with the demands for cash often falling long after the profits were generated.

Dividends As a tax-efficient method of providing remuneration for shareholders, dividends are very popular. It is tempting to take dividends after a successful trading period, but they should be balanced against the trading needs of the business and the competing demands for cash. Again, a recurring theme among failed businesses is the overextraction of cash in good times, leaving too little in the pot should trading become difficult.

Working capital This is perhaps the most important area, and the least understood. The issue is discussed in more detail below.

Some tips to improve cash flow     

Invoice promptly and regularly. Send interim invoices for long jobs. Consider factoring or invoice discounting to accelerate invoice receipts. Sell redundant assets when the price is good, not when you need the money. Take loans out when the business is prospering, and negotiate the best terms. Build flexibility into the fixed cost base, such as shorter leases, outsourcing, dual supply.  Buy fixed assets on finance to preserve cash. Negotiate best terms.  Review and plan tax management twice yearly with your adviser.

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 Declare but don’t pay dividends. This will preserve the tax benefit, but aid cash flow.

Working capital What is working capital? A simple illustration may help. A business starts up buying £150,000 worth of stock on credit from a supplier. The stock can be sold for twice the cost price, so £50,000 worth of stock is then sold on credit to a customer for £100,000. The trading statement looks like this: Table 6.2.1 £000 Sales Opening stock Purchases Less closing stock Cost of sales Gross profit

£000 100

Nil 150 100 50 50

There are debtors of £100,000, creditors of £150,000 and stock of £100,000. Working capital (WC) is defined as: WC = Debtors + Stock – Creditors or in this case, = £100,000 + £100,000 – £150,000 = £50,000 This figure of £50,0000 is the amount of working capital that the business has to finance. In other words, once the debtor has paid up, the business still has to find another £50,000 to settle the bill with the supplier, and may need to sell more stock to create enough cash. In addition, if the supplier needs payment before the debtor has settled, the cash shortfall is as much as £150,000. This simplistic example demonstrates all of the key concepts of working capital management. In a business where debtors take longer to pay than the terms granted by suppliers, there is a permanent and sometimes increasing cash need.

Impacts on working capital There are only three key variables: debtors, stock and creditors.

Debtors Control and management of debtors is critical to good cash management. Debtor days can be influenced by effective invoicing, monitoring and collection. Remember also


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to set payment terms with customers that your business can afford, and be prepared to walk away from sales if necessary. Non-payment is a hazard of business life, but can be mitigated with good management strategies:  Don’t extend significant credit (if any) to new customers who are not known to you.  Set appropriate credit limits and monitor closely.  Consider insuring the debts.

Stock Stock absorbs huge amounts of cash in many businesses – overstocking is not a sensible business strategy. While debtors can be used to raise finance, stock invariably cannot, so it should be treated more cautiously:  Look for ‘just in time’ suppliers where possible.  Be ruthless with obsolescence. Promote it, discount it, or if necessary, scrap it.  Carefully balance discounts received with the cash-flow benefits of extended terms.  Be creative with suppliers. Negotiate terms: sale or return, commission sales, etc.  Beware of holding high-value, slow-moving stock. Many customers will adapt to longer lead times.

Creditors Creditors are a key source of finance for any business, but they must not be abused, or the consequences may be severe:    

Synchronize order dates to maximize the credit period. Review purchasing regularly. Review overhead suppliers and service providers as well as raw material suppliers. Maintain good communication if terms need to be stretched temporarily.

How to finance working capital Debtor finance Businesses can use the collateral of book debts to raise finance. It is a popular funding source, available from a large number of banks and finance houses, keeping the market competitive. Factoring is a method whereby the debts are assigned to a finance house, which takes over the management of the debt collection function. It is appropriate for smaller businesses, and can assist a credit control function. It is notified to the customers of the business.

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Invoice discounting (ID) is similar, in that funds are advanced against book debts, but ID is more ‘light touch’ in terms of the management of the facility, and does not substitute for any of the credit control function in the business. It may also be confidential (CID), where the customers are not aware that their debts have been assigned. It is suitable for larger or more sophisticated businesses. In both cases, credit insurance is often available, and many providers also lend against export sales. Many of these facilities are linked to turnover, so as the business grows, so does the level of available facility. This is very useful for a growing business.

Stock finance Stock finance is often combined with debtor finance, as stock is not regarded as good security. There are exceptions in certain industries, for example the motor trade and some commodity businesses. Trade finance and discounted bills are also useful tools to help importers finance stock purchases, but often require an order from a customer to complete the financing chain. Bank overdrafts are used to finance all forms of working capital requirement, but they are an unsophisticated tool that can be withdrawn on demand, usually at the worst time for a business. In summary, the management of cash in a business, in particular the working capital cycle, is the most critical area of business management. Remember, businesses go bust through lack of cash, not necessarily lack of profit.

Mark Standish spent more than 25 years in corporate banking and structured finance before becoming head of corporate finance in Mazars’ Chilterns region. He has managed the financial affairs of hundreds of SME clients, through success and recovery, with a focus on good cash management. Mazars acts for some of the fastest-growing entrepreneurial companies in the United Kingdom, offering a complete range of accountancy and business advisory services including audit and assurance, tax advisory and compliance, corporate recovery and insolvency, consulting, forensic and investigations, corporate finance and financial services for private individuals. Tel: 01908 664466 E-mail: [email protected] www.mazars.co.uk

6.3

Slow payments

Do not suffer in silence. There are a series of simple, positive steps you can take to get the cash flowing, says Martin Williams, managing director of Graydon UK

No matter what size your business is, a sale is only a sale when the invoice is paid. Cash flow is an essential ingredient for business continuity and success, so it is vital that a business does everything it can to collect cash from customers on time. Since it is estimated that around half of all UK trade invoices are paid late, it is fair to assume most businesses will experience issues relating to delayed payments from clients. Unfortunately, it’s also true that smaller businesses will probably suffer most from this affliction. That’s because many bigger organizations ‘bully’ smaller suppliers into accepting slower payments, in the knowledge that the smaller supplier is so grateful for the business, it will turn a blind eye to tardy invoice settlements. Second, most growing companies cannot afford to employ a professional credit manager, who would normally have a range of tricks and skills to get the cash in on time. It’s not all gloom and doom, however. If you are a small and growing business, a number of positive steps can be taken to minimize the impact of late payments, even avoid them altogether, without going to the expense of hiring a credit management professional. For a start, recognize that cash flow is the lifeblood of your business. Don’t just take excuses for delayed payments with a submissive acceptance speech. The British in particular can be too darned polite and accommodating in these situations; like being too reticent in complaining about poor food or service in restaurants. Anything but make a fuss, eh!



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Take note: any perceived lack of interest or urgency by a supplier in getting paid will be seen as weakness by the slow payer, and that will mean your outstanding invoice going to the bottom of the finance department’s in tray. So be polite but assertive in asking for what you want. Second, spread your risk. As a small business, be careful about having too many eggs in one basket with regard to commercial trade debt. There are countless tales of smaller companies going to the wall because a large customer accounting for a disproportionate amount of sales turnover did not pay up on time. Pareto’s law is a good indicator as to what customer mix should be aimed for (80 per cent of turnover should come from the top 20 per cent of your client base). Here are 10 more ways to improve cash collection.

Sign your customer up Ensure your company has a signed contract with the customer that clearly states your payment terms. These terms should also be clearly described on your application forms and the invoices you subsequently send out. Be sure customers know what the credit terms are, whether you offer discounts for prompt payments or bulk purchases, whether additional costs are payable (eg VAT or carriage costs), and whether you charge interest on overdue accounts (all businesses are legally entitled to do this).

Do a credit check Buy a credit report from a recognized credit reference agency, especially one that collects trade payment information on how large companies pay their bills (eg Graydon, Experian, and Dun & Bradstreet). Don’t rely totally on the taking up of two references given to you by the potential client. They may be cultivated! Don’t be taken in either by a great looking set of accounts to determine whether you will get paid on time; a healthy-looking balance sheet might mean that your potential customer is very proficient in getting its suppliers to finance its business. Set a credit limit for each new client, and don’t allow customers to exceed limits without your permission. After all, they are set for a good reason, as you have assessed the creditworthiness of the customer and how much your business can afford to wait for (or lose, should the worst scenario occur).

Is a purchase order required? As part of their internal control procedures, large companies often require signed purchase orders (PO) before paying invoices. Ask the manager/department placing the order whether they need to raise an internal PO, and if so, whether they have done so covering the value of the order. Ask for a copy of the PO. (Note that some large companies require invoices from suppliers to quote the PO number before they are paid.)

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SLOW PAYMENTS 185 

Avoid excuses Prevent your customers from giving excuses for delayed payment. After dispatching goods, ensure that your customer has received them and that there are no problems with quantity or quality.

Send statements Send statements at different times in the month from your invoices. Sometimes this tactic can provoke questions, particularly when original invoices have been lost, not received or mislaid.

Check on the expected pay date Confirm with your client when your bill is expected to be paid, remembering to ask whether they have specific cheque run dates.

Use the telephone to chase If payment is delayed, chase your money by telephone rather than letter. Some experts in this field say that the telephone method can be 80 per cent more effective! Always prioritize your cash collection activity, making sure you chase the oldest and largest debts first. Be friendly but firm when speaking with customers, and don’t forget to remind them that you charge interest on all late payments.

Maximize you bargaining power Maximize your leverage. Try to establish how valuable the product you are selling is to your client. It may be a vital component in a manufacturing process, especially if it has been developed to the client’s own specifications.

Monitor your risk portfolio Keep abreast of news that may affect the creditworthiness of your key clients. Put their names on a low-cost monitoring service with a credit reference agency (Graydon’s service is called CreditWatch). There is nothing worse than being the last to know when something has happened to one of your key customers.

Develop a ‘friend’ Try to establish a personal rapport with one or two people in your client’s accounts department. The personal touch never fails! The message could not be clearer. If smaller businesses follow this advice, they will find that cash-flow difficulties will ease. This course of action will be far better than


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doing nothing about slow payments, particularly from large organizations (apparently half of small businesses continue to suffer slow payments in silence for fear of losing ‘valuable accounts’), or doing the extreme opposite, by closing the account. Two things are certain – large companies are not going to change their bullying payment habits overnight, and there will always be clients with genuine cash-flow difficulties that cannot pay up on time. It is time for small businesses to take positive action for themselves.

Martin Williams has spent the last 30 years in the credit information industry. For the first nine years he held a number of management positions with Dun & Bradstreet UK, but transferred in 1984 to Dun & Bradstreet Europe, as part of a high-level team employed to help Dun & Bradstreet companies in Europe computerize their operations. In 1987 Martin moved to Graydon, which is now one of the top five players in the United Kingdom, becoming a director of Graydon UK in 1989 and managing director in 2001. Martin is currently the president of Eurogate, a network of European credit information agencies, of which Graydon is a part. He has also been a member of the Institute of Credit Management since 1991, and is a regular presenter and speaker at credit management forums. Graydon UK is one of the leading database information providers specializing in credit risk management. The company helps clients reduce the uncertainty of commercial risk by providing a high-quality package of credit scoring, credit rating and credit risk management services. Graydon UK provides access to credit information and reports on more than 68 million companies in more than 130 countries worldwide. The Graydon group is owned by Atradius, Coface and Euler Hermes, three of Europe’s leading credit insurance organizations. For more information: Graydon UK Ltd: www.graydon.co.uk Federation of Small Businesses: www.fsb.org.uk The Better Payment Practice Group: www.payontime.co.uk

6.4

Factoring

Malcolm Gilbey at Charterhouse explains how factoring in all its forms has become the leading source of finance for Britain’s SMEs

First let us define factoring itself, which is the sale and purchase of debts. This covers numerous products on the marketplace, to suit businesses large and small. In this article the word ‘factoring’ is being used as a generic covering all types of products. This includes full factoring, invoice discounting and debt securitization, but there are many variations of these main services. The use of these services has grown dramatically over the course of the last five years. Factoring has become the largest provider of finance to SME businesses. The Asset Based Finance Association (ABFA, formerly known as the FDA), which represents the majority of factors in the United Kingdom, reported recently that factors handle £173 billion of sales and have in excess of £13 billon funds in use out with their clients. Some of the growth can be contributed to two legal cases, Agnew vs Commissioners of Inland Revenue (known as Brumark) (2001) and Natwest plc vs Spectrum Plus Ltd (2004). The judgments cast doubt on bank security as regards book debts and stock. The judgments overturned previous perceptions that the banks’ security included a fixed charge on stock and book debts. This has lead to reluctance by banks to provide funding against these assets. Also, the growth of the industry can be attributed to a change of attitude of businesses as new generations of business people come through and are more aware of the advantages of factoring. It has become the preferred method of financing their cash-flow requirements.


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FACTORING 189 

Advantages Factoring provides working capital directly related to the business’s sales. This is usually the reason most businesses look to it. Small business has always had difficulty in raising finance, and this was made more difficult when the banks changed their attitude to providing finance against debts. With factoring, the finance grows with the sales. This means a business can plan its future cash-flow requirements without having to continually renegotiate facilities. Factoring provides business cash-flow finance, and if used correctly eliminates or reduces cash-flow problems. In fact, factoring is only a tool. Used wisely, it can benefit a company’s expansion, but used unwisely will hasten the demise of that company. After all, nobody would consider using a plugged-in, switched-on electric drill as a hammer to knock in a nail. Or would they? Likewise, monies received from factors for invoices factored should be used to pay trade and preferential creditors and not for capital purchases such as machinery and vehicles. One of the main advantages is the provision of funding which is not reliant on the business having an appealing balance sheet or a substantial net worth. Factors are more concerned with the debts that they are purchasing. Factors can relieve the business of the burden of maintaining a sales ledger and credit control functions, depending on the service selected. This also helps with costing, as these functions become fixed costs rather than variable costs. The chasing of debts is left to expert credit controllers employed by the factor. This service includes sending out regular statements to the debtors. They chase the debts very professionally and, as it is the factor’s core business, they usually achieve better debt returns. In turn, these improve the cash flow of the business. It can be seen that by turning a credit sale into a cash sale a business can improve its cash flow. This enables businesses to pay for their purchases more quickly, which will enhance their credit rating. Another advantage businesses can enjoy is the ability to negotiate discounts for early payments on their purchases. These discounts can offset the charges of the factoring. Businesses can also make bulk purchases for cheaper prices. The factor pays an agreed percentage of the invoice within 24 hours of receiving the invoice for a completed sale.

Disadvantages These, from experience, are more perceived than actual.

Costs It is normal for there to be two charges. The first is similar to a trade discount (known as an administration charge, service charge or commission). This is usually expressed as a percentage of the total debts offered for sale, and is deducted from the sale price immediately. On occasion this may be charged as a monthly flat fee, or a combination of the percentage and a flat fee.


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The second discount is like a cash discount (known as discounting or a discount charge). This is calculated on the amount of money prepaid to the business before the factor receives payment from the ultimate debtor. The calculation of this discount is based on an interest formula, and the cost is usually quoted as a rate over a bank base rate. The seller can control the value of this charge by controlling its cash-flow requirements. Both of these must be looked at, taking into consideration the advantages of factoring: that staff costs are reduced, or staff are released from collecting debts and can put their efforts into more profitable functions of the business. The discounting rate is equivalent to overdraft rates.

Loss of control Many businesses are apprehensive over what they see as the loss of control of their sales ledger. However, over the last 10 years nearly all factors have provided access through the internet, so the business can keep in touch with its sales ledger. This has now dispelled this disadvantage, but potential users are not always aware that they can stay in touch 24 hours a day. It is just like having your ledger in the next office.

Image This is a legacy left over from the 1960s, as factoring was associated with the label ‘financiers of the last resort’. However, more recently, the use of the facility has grown to such an extent that today it is the largest provider of cash-flow finance in the United Kingdom.

General Over the last decade factoring has gradually become recognized. It has received support from the Bank of England, the former Department of Trade and Industry and the Confederation of British Industry. There has also been a study carried out for the European Union on factoring throughout the Union. This can be found on http:// ec.europa.eu/enterprise/entrepreneurship/financing/docs/factoring_en.pdf The support from these important bodies has helped to improve the image of the product. All the major banks now own their own factoring companies. The factoring industry moves with the times and is constantly developing products to assist their clients’ growth, including cash-flow loans, stock finance and confirming.

Factoring worldwide There is no continent that does not have a factoring industry. Information on the worldwide market can be found in The World Factoring Yearbook published by BCR Publishing. The value of trade (that is, transactions that were carried out worldwide) during 2006 was €1,134,288,000. Full statistics can be found on the Factors Chain

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FACTORING 191 

How factoring works You receive an order You deliver the product or complete the service You produce an invoice and send a copy to the factor

If you require the funds, the factor sends them electronically into your account within 24 hours of receipt of the invoice by either BACS or CHAPS The factor sends out the statements to your customer The factor collects the payment from your customer The factor then pays the balance of the value of the debt minus its fees.

Figure 6.4.1

International website: www.factors-chain.com/?p=ich&uli=AMGATE_71012_1_ TICH_L1252232160 This is the only financial product where the funds available to the business are directly related to the sales of the company, thus removing one of the constraints that businesses have traditionally suffered, lack of cash flow.

Malcolm Gilbey, a member of the Institute of Credit Management and chairman of Charterhouse Commercial Finance plc, has over 40 years of experience. In 2002/3, his international reputation resulted in his becoming a key member of the European Commission’s team reporting on the Analysis of use of Factoring in the European Union. A copy of the report can be found on http://ec.europa. eu/enterprise/entrepreneurship/financing/docs/factoring_en.pdf


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Contact details: Tel: 01444 446901 E-mail: [email protected] www.charterhousefactoring.com

6.5

Foreign exchange exposure

Today, SMEs are sourcing from everywhere, which exposes them to the cost and complication of dealing in international currencies, says Mark O’Sullivan, head of trading at Currencies Direct

As globalization becomes an increasing reality, more and more companies find themselves trading overseas. Even relatively small companies find they are receiving goods from a number of different countries and having to find methods of settling invoices in several different currencies. There are also companies exporting goods from the United Kingdom to other countries that are in receipt of funds in currencies other than sterling. Ensuring that invoices are paid on time, and that received funds clear as quickly as possible, is a major headache for SMEs which want to focus their attention on their core business activities. Part of the problem is that many SMEs still use their traditional banking arrangements to service all their business requirements: including the purchase of foreign exchange and the making of international payments. This is often not the most financially viable option, as the margins the banks impose and the extra charges levied when using their facilities to make international payments are unacceptable in today’s business environment. However, by using the services of a foreign exchange specialist, these risks can be managed and the costs of international payments can be dramatically reduced.


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FOREIGN EXCHANGE EXPOSURE 195 

Looking beyond the banks Using the services of a foreign exchange specialist makes great sense for SMEs. There is no need to change any other aspect of the current banking relationship – all facilities, including loans, remain with the bank. All that is moved is the foreign exchange element, which is then dealt with by a specialist who focuses on nothing else. Those SMEs that do switch find their profits protected, or even increased, and their risk diminished. This is because they are working with a company that is able to assess the market and assist them to buy the right currency at the right time, or to hedge against future fluctuations. These strategies have made a major impact to the bottom line of thousands of SMEs, as foreign exchange specialists offer them far better margins and significantly reduced charges. Additionally, foreign exchange specialists have an in-depth understanding of how payments are made, and the often convoluted routing that payments need to make to arrive in the beneficiary’s bank account. They know the safest and quickest way to get a payment to a beneficiary on time. After all, the fastest way to sour a relationship with a supplier is to have payments go missing or arrive late. The new system for European banking, which involves a unique IBAN number for every account, can be a headache if it’s not something you are familiar with and deal with every day. There are so many risks involved with the ever-fluctuating currency market that SMEs are advised to look closely at alternatives to traditional banks and assess the benefits of having a specialist provider execute their international payments and devise a strategy to minimize the risk of trading overseas.

Fluctuating exchange rates Any business that makes international payments needs to be aware of currency fluctuations. Unfortunately, it is all too common for the profitability of an overseas deal to be negatively affected by unexpected movements in the currency market. All the careful planning in the world is worth nothing if one vital element of the process is overlooked, and that’s making sure that you buy and sell at the best rate possible. Currency movements are an accepted risk when making international payments, and can have a real and significant impact on profitability and cash flow. The risks created need proactive management, which in turn requires a certain level of expertise. The largest institutions have the scale to employ their own economists, analysts and dealers, and the resources to invest heavily in market information, data and risk management systems. However, it is unrealistic to expect SMEs to have access to such resources, and this is where the knowledge and expertise of a foreign exchange specialist comes in to play – allowing SMEs to concentrate on their core business. The traditional route many SMEs take to execute their international payments often involves dealing with local banks (which have dealt with the company since the inception of the business). However, many banks still do not place enough importance on attending to, listening to and understanding the individual client’s foreign exchange requirements. Then, when they do price them, there is often a hefty margin involved, which again can detrimentally affect a business’s bottom line.


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The potential effects of currency fluctuation on a business can be demonstrated if you look back at the currency markets between April 2006 and April 2007. A company receiving US dollars as payment would have witnessed the value of the dollar fall from 1.7250 to 2.01 – a move of 16.1 per cent. These fluctuations are plain to see. However, the impact can be greatly reduced with a proactive service, something that traditional banks just do not offer.

Hedging your exposure This is where specialist products such as a forward contract can protect against a company’s exposure. The forward contract ensures that a rate is agreed at the time of the contract for a delivery date in the future, as stipulated by the client. This effectively protects the company against fluctuations that could seriously impinge on the profitability of an otherwise successful overseas deal. While it is possible to agree a rate option with your bank to fix an exchange rate, it can be a costly service, with charges of anything up to £20,000 being the norm. For example, one high-street bank charges 2 per cent of the transfer sum for threemonth currency protection and lets customers choose between the guaranteed rate and the daily rate. However, most exchange specialists do not charge a fee to fix a rate, meaning that huge savings can be driven straight back to the company bottom line.

Mark O’Sullivan is head of trading at Currencies Direct, foreign exchange specialists for businesses making international payments. Contact details: Tel: 0845 389 0910 E-mail: [email protected] www.currenciesdirect.com

6.6

Managing business travel expenditure

Travel costs can creep up on you unnoticed, says David Chapple at the Business Travel Show, who sets out the ways of trimming your costs by 20 per cent

When you own and run your own business and pay all of the bills, business travel takes on new meaning. Unlike corporate business travellers who are backed by expense accounts and expect upgrades and perks, you are clearly fixed on the bottom line. Unfortunately, the reality is business travel costs have been steadily rising for the last few years, and industry commentators suspect they will continue to rise. Recent research by HRS has shown that the average increase in travel expenditure over the last two years has been 9 per cent. The prediction is a further growth of 4 per cent in 2007. It is also likely that these travel costs have risen by stealth. Previously you had the time to plan, surf for the best deals and book travel itineraries, but now your time is taken up with more important business activities. As a result, your hotel accommodation is in the wrong location so taxi fares are higher, or in the right location for meetings but expensive, and your cheap flight turns out to be a waste of money because your meeting ran late and your ticket wasn’t flexible. You’re travelling at inconvenient times to get cheaper fares, when you should be home tucking in the kids and reading them a bedtime story. You’re stressed, alone in a hotel in the middle of nowhere, wondering where it all went wrong.


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MANAGING BUSINESS TRAVEL EXPENDITURE 199 

Perhaps this sounds a little over the top, but it’s these kind of situations that you will encounter as your business grows. Travel becomes more and more frequent and travel costs creep up on you unnoticed. It’s not until you take stock of where you are spending, who you are spending with, and when, that you start to realize that travel is costing your company a small fortune. The good news is that even in these times of rising travel prices, there are still plenty of opportunities to trim travel costs by up to 20 per cent and save time. The points below provide invaluable advice on how to reduce and manage rising travel costs, and how to put structures in place so you and other company travellers arrive fresh and ready to grow your business.

Get to grips with your expenditure by determining the benchmark To do this, undertake an audit of your business travel expenditure to find out how much is being spent, by whom and with which suppliers. As well as flights, hotels, rail and car hire, don’t forget to include all relevant business travel data, such as cash transactions like taxis, parking, mobile phones and hotel space booked for conferences or meetings. This information will identify spending patterns and demand drivers that could put you in a position of negotiation with suppliers and help you refine the company booking process.

Put a policy in place The goal of an effective travel policy is twofold: it should help you control business travel costs, and it provides your employees with clear guidelines about the types and amounts of allowable expenses. A travel management company (TMC) can help you set some clear guidelines, but simple rules like class of flight, specific price or grade of hotel, when to use air, rail or car hire, and acceptable levels of subsistence are a good place to start.

Use specialist suppliers Common wisdom is: use a specialist and you are more likely to get what you paid for. But when it comes to buying travel, why is it that everyone believes they can do it themselves? We have all booked low-cost airlines and the odd weekend break away. But when it comes to a more expensive or important holiday we often consult the specialist because we trust that they have checked it out, that it adheres to a certain standard, and that if anything goes wrong, we have someone to call. The same reasoning should be applied to business trips. Specialists such as travel management companies (TMCs) and hotel booking agents (HBAs) know what they are doing, are aware of the pitfalls, are likely to get you better deals and will ultimately take the stress out of travelling away from home.


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When choosing your suppliers make sure you get the right fit for your company. Think about the type of business travel you undertake – are most of your trips simple itineraries that can easily be booked using the right technology, or are you undertaking complicated trips where a more personal approach would be more appropriate? Do you mainly book international chain hotels or are you also interested in booking independent properties? Specialists can make life easier and potentially save you money on the cost of flights, accommodation and so on. But take care that these savings are not swallowed up in fees. To keep costs down look for a flexible service where you only pay for the actual services you use. Similarly, check whether you can continue to use any preferred suppliers that you may have already.

Make sure you account for the hidden costs When selecting hotels, ensure extra costs are taken into consideration, such as tax on the rate, transport to the hotel via a taxi, service and breakfast.

Avoid cancellation and rescheduling fees Frequently, the cheapest rates can turn out to be a false economy, particularly if you need flexibility. If you think there is a chance of your meeting being rescheduled, book a hotel that isn’t going to charge you an expensive cancellation or rescheduling fee. Some hotels charge as much as 50 per cent or more of the cost of the room if you cancel or change your booking within 24 hours of the date booked. Also, try to avoid hotels, sites and agents that insist on pre-payment in full. These are generally aimed at leisure travellers, and once you’ve paid the fee, you’ll struggle to get your money back if you need to reschedule and often will be charged administrative costs.

Look to save time and money by adopting an online self-booking tool A user-friendly, online booking tool can be integrated easily with a company’s own technology and can dramatically cut down the time needed to make a hotel, flight or rail booking. Booking tools work by searching for the best available prices, including those offered on the internet and special promotions, and offering you the best available rates. If you use a lot of no-frills airlines, make sure the booking tool you choose allows you to book these without charging a transaction fee. Self-booking tools are offered by most TMCs and HBAs, and can often be free to use with minimal set-up and ongoing running costs. Some agents will allow you to have a personalized booking tool which incorporates your own preferred suppliers, so you can book everything through one channel and maintain better control of your costs. You can also use self-booking tools to enforce a staff booking policy and generate vital management information including employee tracking.

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MANAGING BUSINESS TRAVEL EXPENDITURE 201 

Negotiation is a powerful cost saver If your business has regular travel needs at particular destinations, don’t overlook the power of direct negotiation with specific suppliers. You might be able to secure a specific room allocation, agree last-minute room availability rates, or reduce incidental costs by securing added value such as inclusive breakfast or complementary use of the internet. Always be aware of what rates and services the competitors are offering. This will help with any negotiations and help you focus on what’s important.

Think further than chains If much of your business travel is within the United Kingdom and Europe, you should consider using independent hotels, which account for 70 per cent of the market and are frequently competitively priced, offer a high standard of service and are often conveniently located. Most travel agents won’t offer you the option of booking with independents as these hotels are generally not linked in to the expensive booking systems that these agents use and can’t afford to pay their high commissions. By looking at providers that offer a broader choice of hotels, including independents, you can get an informed overview of what accommodation is available in the area to which you are travelling.

Take a flexible approach to flights The no-frills airlines have helped to make air travel much more affordable, but take care not to be taken in by what appears to be a very attractive fare. Here again it is advisable to look at the hidden costs. Are you going to land at an airport miles away from the city centre, resulting in an expensive taxi ride? And consider the travel time – is this costing you more than you are saving on the airfare? It is also worth bearing in mind that no-frills airlines do not offer you any flexibility if you have to change your flight, which can result in you having to write off the cost of the flight and rebook another. If you need flexibility, the scheduled airlines may actually offer you a better deal. For business trips that run over a weekend, see if you are able to take advantage of the very attractive leisure rates that many hotels offer. Experienced business travel consultants will know when this is the better option.

Make sure you have access to a 24/7 helpline service In an ideal world all your business travel will go without a hitch. But it is always worth having the reassurance of a back-up service which will be able to help you if things go wrong or if you need to make last-minute changes. Here the TMCs can come to your rescue as they will be on hand 24 hours a day. Another key factor worth considering is the impact that terrorist activity can have on business travel. Sadly, terrorist alerts and the disruption caused by possible


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terrorist activity are now a part of daily life. When such events happen there are many implications for a company. First, there is the simple fact that travel arrangements could be thrown into disarray. A TMC can become your very helpful partner in taking care of rearranging itineraries. More significantly, TMCs can help you to locate your staff when a crisis hits. They can help you fulfil your obligation as a good employer by being able to tell you instantly where all your employees are, ensuring they are safe, and where necessary, arranging alternative means for them to get home.

The Business Travel Show is an annual event, held in February at Earls Court, London, where owners of growing companies can meet with over 200 specialist business travel suppliers and attend educational seminars to help save valuable time and costs. For details and to register www.businesstravelshow.com. HRS (Hotel Reservation Service) offers free online booking of over 200,000 hotels worldwide, including independents. For more information on how we can make your budget travel further, or a free online demo, call 0800 328 4328 or visit www.hrs.com/corporate. Business Travel Direct is a leading independent travel management company which has been arranging business travel for over 30 years. The company offers a flexible, one-stop-shop service for clients, which range from small businesses to large corporations. For more details visit www.businesstraveldirect.com. Contact: Kieron McGuinness, director of sales, tel: 01895 450743

Connect to the bank that’s going places

People may claim that one bank is much like another, but when it comes to supporting business throughout the United Kingdom, Clydesdale and Yorkshire Banks, part of the National Australia Bank Group, have a unique proposition that puts them ahead of other financial institutions. This is a style of banking that offers the benefits of traditional values along with modern services such as upto-the-minute technology and purpose-built premises at customers’ disposal.

Mike Williams, General Manager


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Mike Williams, General Manager, summarizes the bank’s approach in a nutshell. ‘We offer business and private customers a one-stop shop,’ he explains. Where other banks may put customers through various anonymous contacts, or pass them on to an expert on some financial matter – in an associate or even completely separate company – we provide one point of contact, a Relationship Partner. They will look after our customers – or members as we prefer to call them – through all their business transactions with us. We have our own experts on hand to talk through the different aspects of Asset Finance, Invoice Finance, Treasury Solutions or Specialist & Acquisition Finance, and they are part of Clydesdale and Yorkshire Bank, on the premises and instantly available. We go out to see our members, not the other way round. There are 78 Financial Solutions Centres (FSCs) throughout the United Kingdom, each headed by a Managing Partner. Within the Centres, financial experts and specialist partners report to the Managing Partner. There are also Private Partners who look after a members’ private banking and they too, can call on help from the ‘inhouse’ experts at each FSC. We work on the basis of the relationship and added value. When a solution is recommended to a member it will be the right one for that particular client, chosen because it will do what they need at that time. And because we build up a relationship with our members we can look for opportunities for them. Making connections and adding value is a key part of our proposition. We are always looking for opportunities to introduce clients or professionals where we think there will be some mutual interest between them. People are responding positively to this and numerous new relationships have developed as a result of our networking efforts. Another benefit we can offer our members is access to meeting facilities at our FSCs. All our FSCs are constructed and decorated to a corporate level, and members can use any FSC across the United Kingdom free of charge, either for conference facilities or for smaller meeting rooms. This means that someone, say from Aberdeen, can make use of our facilities in London, Birmingham or Edinburgh. With approximately 80 centres across the United Kingdom, they are spoilt for choice. It is convenient, saves money and also offers a safe environment where confidential meetings will not be overheard. For those members requiring leveraged finance solutions, Clydesdale and Yorkshire Banks have a dedicated Specialist & Acquisition Finance team who can deliver an innovative solution that suits your individual business, from public to private transactions to MBOs. Working alongside the Specialist &

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Acquisition Finance team is your Relationship Partner, who will be there from the outset and is a central point of contact. Mike says: Our Financial Solutions Centres are complemented by our network of retail branches. Within our retail network we have a number of flagship branches in which a Business Manager is based. Our Business Managers offer the same personal service to our clients, at a level which is tailored to their needs. We also offer our members preferential rates for joining the Forum of Private Business, which gives invaluable support in areas such as employment law, health and safety, access to grants and dealing with business rates. Building long-term partnerships is key at Clydesdale and Yorkshire Banks, and as a concept, reviving the idea of a dedicated all-round Bank Manager with 21stcentury technology, seems to be working very well.

Connect to the Bank that’s going places Clydesdale and Yorkshire Banks have outperformed their competitors, to be named two of the UK’s best business banks in Britain’s leading survey into how smaller businesses view their banks, conducted by the Forum of Private Business (FPB).

David Thorburn, Clydesdale and Yorkshire Banks’ Chief Operating Officer, said: It’s great that Clydesdale is the best in Scotland – it is a fantastic result and one we are immensely proud of. We have created a unique model


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with our network of Financial Solution Centres across the United Kingdom, delivering a first-class ‘one-stop shop’ for all of our business customers. Yorkshire Bank has also shown that it is number one for business, winning the title of ‘The UK’s Best Business Bank’. Commenting on the result, Len Collinson, Executive Chairman of the FPB, said: Clydesdale and Yorkshire Banks have again outperformed their competition in demonstrating high levels of performance in a wide range of key areas, according to their small and medium-sized business customers. It shows that they have continued to improve the services that they provide to SMEs. Clydesdale and Yorkshire Banks have consistently performed well in recent years, developing stronger customer relationships and improving their offerings. They are to be congratulated. David Thorburn went on to say: This is an authoritative and comprehensive survey, so we are delighted to have been rated as the best by our customers. It is a real testament to the enthusiasm, expertise and commitment shown by our staff in delivering highquality services and products to our customers over the past two years. The biennial survey, Private Businesses and their Banks 2006, was conducted by the FPB and involved more than 3,700 firms from across the United Kingdom. Analysed by Nottingham University Business School, the results revealed that, once again, the Glasgow-headquartered banks’ rating had risen across a wide range of performance indicators, such as the focus on customer relationships performance and the range and speed of service delivery. Firms were asked to rate their bank across 18 factors, ranging from charges and convenience of location to friendliness and quality of advice. To find out more contact your local Managing Partner and team on 08457 034567 or www.CBonline.co.uk, www.YBonline.co.uk Clydesdale Bank plc, Registered in Scotland (No. SC001111). Registered Office: 30 St Vincent Place, Glasgow G1 2HL C4193 EXP MAY 08

7

Business technology and systems


7.1

From PC to server

Your prospects for growth heavily depend on building the right IT infrastructure, says Marco van Beek at Forget About IT TM Ltd

So you struck out on your own, and after working on a laptop out of a back room at home for a while, you land the first big one. You need to hire a couple of staff, get an office and grow your IT system. Fast.

Growing your IT system The single biggest step in the growth of a business’s IT system is the step from a single computer to a proper network. It doesn’t matter how long you struggle along with interim solutions, sharing files by e-mail, backing up onto memory sticks: the sooner you move to a proper server solution, the quicker you benefit from a proper infrastructure. The problem with being a small business is that the big IT support companies are not interested, or do not really understand what you want. At the other end of the scale, it is all too easy to accept the suggestions of a relative or acquaintance due to the lack of a clear solution. There are many ways of solving an IT requirement. Some of them simple, some of them complex. The simplest network will often consist of a couple of workstations and a broadband router. The router performs the basic network management, and usually one of the workstations will act as a print and file server, storing files and allowing the other workstations to print. Using a workstation in this way is a compromise. In hardware terms, workstations are optimized in different ways from servers. A workstation needs high-quality graphics, whereas a server needs fast hard drives, two

 210 BUSINESS TECHNOLOGY AND SYSTEMS

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to three times the cost of the ones in workstations. A workstation is designed for a twoto three-year life cycle, a server should last five years. In software terms, a workstation is optimized for the applications run by the user, whereas a server is optimized for the services it provides to the network. Because there are so many ways to solve the same problem, it rapidly becomes confusing trying to work out which is best for your particular situation. However, the bottom line is that a proper server is the best way to provide a robust, reliable and dependable network.

Alternatives to a full-blown server There are a number of alternatives to going the whole hog. Some options include using one of the workstations to store the shared files, perhaps even run some shared applications such as a database. You can also get network-based hard drives, called Network Attached Storage (NAS), and you can get network devices which carry out very specific tasks, such as virtual private networks (VPN) or print servers. In the long run these will cost you more money to buy and maintain than a proper server, but they may be suitable in the short term. Remember that no matter what you get, you need to be able to back it up. If you do not, one of the biggest advantages of having a network, sharing data, becomes your biggest nightmare. Losing your business overnight because of a catastrophic data loss is something your insurance company is unlikely to pay out on.

Buying a server Buying a server is not a simple task. Too cheap and it will not perform well. Too expensive and you have wasted your money. Undoubtedly though, the two most important issues are how well it is made and how well it is supported. The cost of a fast-response warranty can double the price of a low-cost server, and the cost of thoroughly tested hardware is higher than that of a cheap DIY job. It’s your business, but I would rather buy a lower-specification server with a better fault-tolerant hard drive system (RAID) and a good warranty. After the choice of hardware comes the choice of software. There are two main choices, GNU/Linux and Microsoft. Despite the lack of marketing, GNU/Linux is very well established in the server market, with a history that can be traced back over 20 years. It is estimated that over 58 per cent of web servers are running GNU/Linux, versus 31 per cent running Microsoft (source: Netcraft, April 2007), and only 21 per cent of mail servers run Microsoft (source: Security Space, March 2007). So do not assume that the only choice is Microsoft. The problem with GNU/Linux is the perceived lack of technical support, but in fact rather than pay for the software and get free support, with GNU/Linux you get free software and pay for the support. And finally, you need someone to install and configure the server. Hopefully they will also be in a position to provide ongoing support. You need to be happy that they will advise you appropriately, and help your business grow. However, how your system is configured is often down to the information you supply to the installer.

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FROM PC TO SERVER 211 

Never assume they understand your business. Never, never, never say ‘Oh, you know what we want’, because they don’t. Not really. Nowhere near as well as you do.

What should a server do? First of all a server should be a single point of storage, which also makes it a single point of failure. This is why servers often have multiple power supplies and multiple hard drives. It also provides a single source of data, which makes it much easier to perform reliable back-ups, and it means the document you are working on is the latest, most up-to-date version, because it is the only copy. A server should perform all the basic network management tasks. It can ensure that you get the best use out of your internet connection by caching web pages, it can ensure that all your computers can find their way around the network by automatically issuing configuration data (using protocols called DHCP and BOOTP) and providing services to map computer names to IP addresses (DNS and WINS). It can provide timing information to allow you to synchronize all the clocks on all the computers (NTP and NET TIME), as well as remote access using virtual private network technology such as OpenVPN and IPSec, and even using a humble modem for emergencies. These basic housekeeping tasks seem simple and routine. But the difference between a properly configured network and a poorly configured one can be as long as 60 seconds when accessing or printing a file on another computer. That is the length of time it can take trying each method in turn, finally using a network broadcast to find another network device it has not talked to recently. All server applications are trying to do the same basic task: provide you with access to a resource, be that a file or a printer, a web page or an e-mail, or countless other services. So when choosing what applications you want to run on your server, it is easy to confuse what your client computer does and what a server can do. For example, only recent versions of Outlook can actually share calendars without extra software, but if you use an iCal compatible calendaring program, and save the iCal file on the server, then everyone in the office can get access to it. E-mail can also be a confusing application. Most small businesses will be accustomed to using a POP e-mail server, but this is designed to get rid of the e-mail from the server as quickly as possible. The data is downloaded to your workstation, where it becomes difficult to back up, and no one else can gain access. An IMAP email server, on the other hand, is a superior solution where the e-mails stay on the server and only a copy is downloaded to your workstation. It can also be configured to allow you access to other people’s inboxes, and also offers shared folders, which could be set up for each client or project, just as you would save word processing documents and spreadsheets into separate subfolders.

Future proofing your work There is a growing trend towards using open formats. Some open formats are well known, such as e-mails and web pages. Others are split so that newer versions are


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proprietary, but older versions are public domain, such as Adobe’s PDF. Best of all there is now an open standard for office documents, known as the open document format (ODF). Ratified by the International Organization for Standardization and issued with a proper number (ISO/IEC 26300), it is rapidly becoming the format of choice for many large organizations worried about how they will access historical information in the future, especially those affected by the Freedom of Information Act. This matters to small businesses because if you use open formats, you avoid getting caught in the endless upgrade treadmill. You can switch software vendors if they become too expensive or if their service declines. Realistically, most small businesses have to support whatever format their clients impose on them, but that does not mean you have to use the same software. You would never normally lock yourself into a single vendor situation, so why do it for software?

Marco van Beek has been working with computers since 1984, while working for the world’s most advanced automated lighting company, Vari-Lite Inc. He first started using e-mail in 1987 but stopped when it was superseded by fax machines (and yes, you did read that right). In 1998 he set up his own consultancy business, Supporting Role Ltd, which specialized in IT support for the events industry. In 2005 he took a server project that had been developed internally and set it up as a separate venture, called Forget About IT™. Forget About IT™ is a unique service for small and micro businesses that need a server, offering a fixed-price solution which includes the server hardware, support and applications for a fixed monthly price. Marco’s attitude towards computers is that they are only tools, and you should always buy the right tool for the job. There is no one size fits all in IT. Further details: Tel: 0870 757 2924 E-mail: [email protected] www.forgetaboutit.net

7.2

Anywhere computing

The first generation of flexible working had its limitations. Martin Bond at ADS looks at how enterprises can now meet the demands on their technological infrastructure

In the past, having a business IT solution that allowed users to carry on working while away from the office simply involved providing them with a laptop. Although this approach does introduce a measure of flexibility to where staff can work from, there are a number of compromises with this simple approach, and it introduces its own set of issues. Laptops have a tendency to be lost or stolen, and if a password and/or data encryption have not been set up, this can potentially lead to commercially sensitive data being leaked from the business. There is also the real danger of lost productivity caused by documents that have not been backed up being lost along with the laptop.

Flexible systems It’s better, then, to give users location independence while keeping the company sensitive data secure in the data centre. A way of achieving this is by utilizing the ‘Terminal Services’ capability of Microsoft Windows Server, and perhaps enhancing it with Citrix MetaFrame. Using these technologies it is possible to create a secure business IT computing environment that is accessible from virtually any internet-connected PC or laptop. All software applications are installed and run from servers,. Office-based users directly connect to the ‘hosted’ applications, whereas home or remote workers connect across the internet via a web page. For added security the web page should be protected by ‘two-factor’ authentication – a small keyfob-sized device carried by the users that generates a unique user access code each time they want to connect. Using




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‘two-factor’ authentication (something they have, the keyfob, and something they know, their username and password) ensures that the person accessing the systems is an authorized user and not someone who has simply guessed or discovered a username and password. Creating an anywhere computing environment allows staff to work from home, a hotel business centre, an internet café or anywhere else that they can connect to the internet, and the experience is exactly the same as if they were sitting at their desk in the office. The users get the same fully functional software applications, access to the same shared data, and they can even choose to print either to the office printers or the locally attached printer. Granular security restrictions can be applied if needed. So for example, from a ‘trusted’ location, the user’s home office, they could be given access rights to everything, but from an internet café it might be deemed that access to the finance or HR applications should be restricted. This approach not only creates the opportunity to introduce a flexible working policy that will promote staff retention and generally provide employees with a better work/life balance, but also can be used to build business continuity into your IT systems. With the supporting infrastructure mirrored or balanced across multiple data centres, continuity of service can be maintained should one location suffer a ‘disaster’ such as a power failure, network outage or worse. And of course a train strike or pandemic scare may mean your staff cannot get into the office, but that does not have to stop them from working as if they were there. Adding the right voice over IP (VoIP) telephone system elevates the level of flexibility further. Not only can users work anywhere they can get an internet connection, but when someone phones their DDI or internal extension they can answer it as if they were in the office. Colleagues can see if a remote worker is logged onto the phone system and whether or not they are currently speaking to someone. If they are available, calls can be transferred through to them in exactly the same way as if they were sitting at the next desk.

The blowfish effect With a converged anywhere computing and telephony solution, growing businesses can benefit from a ‘blowfish effect’, appearing to be much bigger than they really are. Staff can work from anywhere, and are still able to share data, transfer calls and give the illusion of either all being in one central location, or if desired located in a number of regional offices. A flexible centralized computing solution also has a number of spin-off benefits that can help reduce ongoing running costs. Because the software applications are all processed on the servers rather than the users’ individual PCs or laptops, when a new version requires more processing power the upgrade is carried out just on the server; the PCs and laptops don’t need any changes. When software versions are changed they are available to everyone at the same instant, so there is no need to visit each computer and battle the incompatibilities that inevitably occur. Support is also centralized, and the support technician can (with permission of the user) see exactly what the user has on their screen, even if they are on the other side of the world.

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In-house or smart-sourced So if it’s such a great solution why doesn’t everyone have it already? It comes down to two factors, cost and skills. An in-house flexible centralized computing solution does come at a high initial cost, although it has been proved time and again that the running costs work out less than a traditional approach. Skills are the other barrier. It takes a wide range of skills to implement such a solution and keep it maintained. Generally it requires a depth of skill in so many areas that no single individual could possibly be expected to master them all on their own. Cost may not be an issue to a large business, and if it does not have an IT team that is sufficiently skilled it can always engage a specialist IT supplier to put it all together and provide support services. Smaller or growing businesses just may not have the available budget to either purchase the required hardware and software, or the skills to build manage and maintain complex IT solutions. So the alternative option is to smartsource. Application service providers (ASP) are a type of business that specializes in hosting IT systems. They generally work on a per-user per-month cost model. More recently the term that is being used for this kind of arrangement is ‘software as a service’ (SAAS), but essentially it is the same thing. These service providers maintain complex computing infrastructures in secure data centres, and take responsibility for ensuring that the hosted software applications are running correctly and all data is backed up and kept safe. They effectively become the IT department, leaving their customers to focus on developing their businesses while having predictable costs for a very flexible IT system that provides features normally only available to enterprisesized organizations. Growing businesses that choose to use the services of an ASP also benefit from the ease of scalability, with the planning for growth made easier by the linear costs. Selecting the right ASP is essential. You are handing over the safekeeping of your company’s critical data, so you need to be absolutely certain that your chosen partner has a proven history of delivering a secure dependable service. In the last 12 to 18 months a number of ASPs have started up, offering a range of services. First, you need to make sure that the services on offer matches your company needs. Some ASPs only provide a fixed suite of applications, whereas others will create a bespoke environment that mimics your current set-up, or the set-up that you would like to have. When carrying out due diligence on a potential partner it is very important to look beyond their website.  Check the company financials. They may not have published accounts but should always have audited accounts available for inspection.  Look into the background of the key people running the business to see how successful they have been in the past.  See how long they have been providing application hosting services rather than just when the company was first formed.  Speak to existing customers. And when taking references don’t limit yourself to one, speak to as many as you can.


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 Visit their data centre. OK, so you may only see a lot of equipment with flashing lights sitting behind smoked glass doors. But at least you will be able to judge the physical security of the systems.  If they cannot prove that their systems are distributed between two or more data centres, consider what may happen if they have a power or network outage – it does happen.  Unless remote access is protected by two-factor authentication are they really taking the security of your data seriously? Cost is not everything. Ensure that you insist on:  Real-time mirroring of your data. This ensures a short recovery time should there be a problem with the storage area network.  Daily back-ups with secure offsite storage of tapes.  Multiple layers of anti-virus protection.  A load-balanced environment with resilient systems to provide high availability.  A service level agreement that gives you credits if the systems are not available. Leveraging technology to create a flexible working culture that improves productivity is something that is available to all. But small or fast-growing companies that would rather focus on their core business may prefer to smart-source their IT and gain the benefits of an enterprise-scale solution for a fixed monthly subscription cost.

ADS Portal provides subscription-based (per user, per month) computing and telephony services through its OnlineDesktop, OnlineVoice and OnlineOffice solutions. Privately held, ADS Portal was established in 2004. OnlineDesktop has been in use since 2002 and is used by a wide variety of organizations, whose size varies from just a few users to multiple hundreds. Tel: 08700 671 671 www.adsportal.net

7.3

Compete online

It’s not just supermarkets who can offer choice at a low price. Enterprises can too, argues Paul Houston, sales and marketing director of optical practice management software specialist, See20/20

Like it or loathe it, the internet is everywhere in our lives, whether it’s shopping, banking, booking holidays, doing homework with the kids or running a business. Some still look on it as nothing more than a search tool, a place to chat or download music, but this view is dangerously outdated. For many businesses the internet is a vital technology which is rapidly being incorporated into their core strategies. Already a robust business tool, the increasing trend for collaboration and knowledge sharing means we are about to see the internet develop faster than any technology seen before. Quite simply, businesses that fail to recognize this are in danger of being left in the dark ages. For proof of the power of the internet, Amazon opened its virtual doors to the web in 1995 and in just over a decade has successfully carved a place for itself on the Fortune 500 list with global sales exceeding $9 billion. Similarly, the iPod arrived a mere five years ago and internet music downloading was born, revolutionizing the music industry and creating a household name out of iTunes. Now, as any teenager will tell you, the ‘Download Chart’ is the only chart that counts. Clearly, the internet is here to stay – the world has already voted and given it a resounding thumbs up. To ignore this fact could mean formulating the wrong strategy with catastrophic consequences. In my own industry a lively debate is currently raging over the pros and cons of providing spectacles and contact lenses online, and the damage this may cause to high-street opticians. Clearly a threat in the eyes of many traditionalists, this has helped create a negative view of the internet within the industry. But just because we


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may not approve of one particular application, why condemn all applications? Here I am focusing on one that is rapidly emerging. Business to business, or B2B, refers to the process of trading directly online between businesses via the internet. We have already seen an explosion in internet trade between virtually all types of businesses and their customers. The internet provides a new route to market for most commercial organizations as a straightforward link between the user and the organization’s website for the purpose of trading, and it’s growing rapidly. I doubt anyone reading this article has avoided banking, booking tickets or making retail purchases this way.

Access an unlimited warehouse, open 24/7 So B2B is a further extension to the supply chain model – but why is this so important? The answer is that it provides a direct link between the consumer and the supplier’s products, opening the doors to their warehouse whenever we feel like it. Suddenly we can browse, select and order from home, and from a massive inventory. We can then track our orders and pay online. For businesses, the impact of this is huge. For example:  Being able to increase your inventory infinitely without holding any more stock – effectively accessing an unlimited warehouse but with zero investment.  Having customers ordering online means no need to raise paperwork, reducing administration. Ordering online also removes human error, bringing a further cost saving along with the ability to track orders online.  For the supplier it represents a highly cost-effective route to market. Many human processes are removed, creating savings which could be passed on to the customer. For those willing to embrace the internet, it’s a win–win situation as products become cheaper to source while internal supply chain costs drop. This gives the user a competitive advantage, further increased by the wider product portfolio being offered. Conversely, organizations that ignore the internet may find themselves at a competitive disadvantage and simply disappear. Like many sectors, the optical industry is coming under increasing pressure from the major supermarket chains. Old hands at leveraging the latest technology to reduce costs, these retail leviathans are used to exploiting their economies of scale to offer fiercely competitive prices and wide product choice to eradicate the competition. And as we know from online shopping with home delivery, the internet has already been incorporated into the supermarkets’ standard route to market. With twothirds of UK homes now having internet access, the public is beginning to cut out intermediaries and shop online for food, holidays and even homes. Industry analysts are already predicting that, by the end of the decade, businesses will need to offer webbased content and applications just to survive, as customers demand to be able to log on from home to browse before they buy. The older among us may well prefer to pay a premium for personal service, but the younger generation will simply expect these facilities to be available. With a ceiling on profitability imposed by market forces,


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the only way for traditional firms to improve cash flow and profitability is to increase turnover and reduce costs. So with traditional markets in decline and a new generation of internet-savvy customers coming on stream, what can traditional organizations do to protect their businesses? Burying your head in the sand is clearly not an option, as a walk down any high street will testify. Countless businesses have gone to the wall by doing nothing. Look at how Direct Line changed the face of the traditional insurance broker business and how the subsequent widespread adoption of cost-effective call centres has infiltrated most corporate businesses. One option is to fight fire with fire by embracing the latest IT technology, but the solution need not be particularly complicated or require major investment in computer hardware. In fact, internet-based systems are simpler to install and run than traditional systems. Most of us bank online without giving a second thought to the massive global IT infrastructures in place supporting the service. Why, then, be reluctant to adopt the same strategy for running your business? While embracing the internet may be critical to survival, it can also bring a number of incidental benefits, to both the business and individual productivity. An internet system can be accessed from virtually anywhere, and with ever-increasing broadband speeds come new and exciting services, allowing remote access not only from home but also from hand-held devices. The next generation of 3G technology will allow hand-held devices to run internetbased business applications as effectively as if you were in the office, but whether you see this as an aid to productivity or a means to spend more time with your family is up to you. From the Spinning Jenny through to digital photography, the history books are littered with examples of entire industries that disappeared overnight by failing to move with the times. Many organizations are at that point right now – caught between internet-based low-cost operations and the supermarket giants – and there is no time to waste. The major IT companies are frantically developing specifically for the internet, and the telecommunications companies aren’t far behind. Recent developments mean we no longer need to lose contact with our IT systems, and more importantly customer information, when we shut the practice door at night. Nikesh Arora, Google’s head of European Operations, recently warned that British and European businesses need to focus more on building their online operations to meet consumer demand. While the internet is rapidly changing the face of commerce, Europe has been reluctant to embrace it as wholeheartedly as the United States and we can expect to see a step change in the near future as we play catch-up with the United States. It is inevitable that the internet will change our marketplace. My advice would be to seize the opportunity and ask your suppliers what B2B offerings they have or intend to provide in the future, and how these might link into your current IT systems – then plan your future strategy around this.

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Paul Houston is sales and marketing director for See20/20, the UK’s leading online practice management software company, founded in the West Midlands in 2003. Paul’s forward-thinking approach recently helped attract just over £1 million cash injection from Catapult Venture Managers and private investors, allowing the company to accelerate its international expansion plans. The company recently launched its industry-leading See20/20 practice management software in Australia, while mainland Europe and Russia are currently being evaluated. www.see2020.co.uk

7.4

IP telephony

What is it, what can it do for you and what do you need to think about? Toshiba’s Andrew Levey explains

Telephony is currently undergoing its biggest evolution since Alexander Graham Bell constructed the first prototype telephone in 1875. The development of the World Wide Web has made internet protocol (IP) a familiar term, and the ability to control and prioritize voice ‘packets’ across an IP network is enabling IP telephony, or voice over IP (VoIP). VoIP can today offer tangible business benefits including reduced operating costs, due to the fact that voice can ‘ride for free’ across a single, converged network which requires a single set of cabling. VoIP also offers flexibility, removing restrictions of where your employees work and easing the addition of new lines or extensions, and making it quick and easy to integrate new or temporary offices. It is important to acknowledge, however, that an IP solution is not appropriate for every business. Some organizations will find greater benefits in a hybrid, or even purely digital telephone system.

Digital systems Because of the maturity of the technology, time-division multiplexing (TDM) systems that are based on circuit-switched technology often require less capital investment than IP. Calls are made over the public switched telephone network (PSTN), which means that TDM systems are most suited to single-site companies with office-based staff where cost savings through eliminating call charges between offices and remote/home workers aren’t applicable. TDM systems do also benefit from a guaranteed quality of service (QoS) due to them using a separate internal voice network.



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Hybrid-IP systems As the term suggests, these systems combine both TDM and IP technology in one solution. Hybrid systems can often be a stepping stone towards deploying pure-IP, delivering only where initially required. Using a separate voice network at the headoffice and IP end-points to connect remote workers and branch offices combines the benefits of eliminating call charges between sites, while delivering guaranteed QoS at head office.

Pure-IP systems As you might expect, pure-IP systems utilize only an IP-enabled network and push IP end-points out to all employees. Pure-IP systems that feature peer-to-peer technology ensure the best possible QoS for IP telephone systems, and also ensure efficient use of bandwidth between branch offices, as voice packets travel directly between end-points rather than back through the switch in the head office. Some pure-IP systems also feature an entirely software-based system, with the user’s PC/laptop being used to manage the call for the user. Software-based systems can present a very attractive price-point due to the fact that they are software-only, but this can also raise questions around reliability and the installation of security/ enhancement patches from organizations such as Microsoft.

Choosing a system Previously, businesses had to choose between the types of solutions and replace them entirely if they wanted to migrate from one to another. Today, however, some vendors provide an ‘all in one’ system that can be installed as a TDM, hybrid-IP or pureIP solution, and seamlessly and cost-effectively reconfigured as required, without needing to completely replace the system. This means businesses can invest in one platform which will support their changing communications requirements, enabling them to migrate as and when it suits them and protect their initial investment. For organizations that do see benefits in VoIP systems, three core concerns tend to exist:  Quality. As long as your network has been configured correctly and has been optimized for voice traffic, the service quality offered by an IP telephony system can be as good as an analogue switch. If voice traffic is delayed (often due to network congestion) it can create a stuttering effect where syllables and words get broken up and become garbled.  Reliability. IP telephony systems are developed and tested against stringent industry standards to offer appropriate reliability. However, it is essential that you make sure your existing data network is robust enough to handle additional voice traffic. Losing telephony services as well as access to data because of network failure could be costly. The standard benchmark for telecoms network availability is 99.999 per

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cent (known as ‘five 9s’), which equates to less than 315 seconds of downtime a year.  Security. Since voice calls are being transmitted as data they are potentially more vulnerable to eavesdropping, and IP telephony systems could be at risk of virus and hacking attacks. The communication platform should sit in the safe part of the network behind a suitable firewall, with only the required elements of the system being exposed to the internet. Some IP systems do provide a built-in firewall or virtual private network (VPN) technology, which may sound like they increase security for your communications. However, this moves the system to the edge of the network, which exposes the core switch to the internet and can increase the risk of attack. If you have decided that VoIP will offer tangible benefits for your organization, there are then a number of elements that you need to consider when moving forward with an IP telephony system. Your chosen telephony provider will be able to help you with these considerations.

Examine your network You will need to perform a full test of your network to ensure that it will support VoIP, but as a guideline your network needs to be running at less than 70 per cent capacity to be able to implement VoIP.

Examine your current infrastructure and telephony usage Identify the volume of calls that your network will need to handle now and in the future. This will help you identify where you would like to make improvements when moving to VoIP.

Research available systems Once you know that your network will be able to handle VoIP, you will need to research the type of system that you require. When choosing a vendor, ensure that you consider flexibility, functionality, stability and security.

Choose a telephony provider Many telephony systems manufacturers, like Toshiba, provide their systems through a network of authorized partners. Ensure that the company you choose is an accredited partner for the system you are looking at, authorized to install, maintain, support and configure your new telephony system.

Test the performance of your network Ensure that you are monitoring the performance characteristics of the network including packet loss and delay, latency or jitter. Testing will help you discover vital


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information such as the number and quality of calls that can be supported, the effect of VoIP on other applications and vice versa. You should also look at potential single points of failure which may result in bottlenecks or network downtime.

Test the security of your network Ensure that your network is sufficiently secured, but also that your firewall will allow the voice packets through.

Resolve any performance or security issues This could include a network upgrade, or a change in some of the settings for your firewall. Once these changes have been implemented, you should retest the performance and security to ensure that satisfactory levels have been attained.

Identify and document your full requirements Work with your chosen telephony system provider to ensure that you purchase the equipment you need.

Ensure that your employees have the functionality they need Just because someone will be using an IP or softphone, it doesn’t mean that they need to sacrifice functionality. Make sure that everyone has the functionality they need on the device that’s right for them.

Plan and execute the implementation Your chosen service provider will help you plan the best implementation to ensure minimum disruption to your business.

Train your employees Ensure that your employees are fully trained in using the new functions of your IP telephony system.

Continue to test and monitor your network Remember your network is a dynamic environment, and that any new applications or equipment can have an adverse effect on voice quality unless you perform an impact analysis prior to any network changes, or deployments of new business applications.

For more information on Toshiba’s IP telephony solutions, or for a full version of our guide to IP telephony, please visit www.telecoms.toshiba.co.uk/iod.aspx

7.5

Videoconferencing – the business imperative

Smarter? Faster? Further? It is time to take another look at videoconferencing, says Keith Gyford at First Connections

Why use terms such as business imperative? Well, if you have not seen videoconferencing (VC) within the past six months it is time to look again:  VC is now as good as it needs to be: up to HD (high definition) video and MP3 quality audio.  The cost savings can be huge: a trip up the M6 is expensive, time-consuming and frustrating.  It is applicable to all business sizes: if you pay mileage allowances you should look at VC.  It helps you to grow: new offices, outreach to clients and partners, home working. The VC market is at is fastest growth point since its inception.

What is videoconferencing? VC offers a very natural communication experience of a face-to-face meeting in ways that other technologies cannot. It allows you to talk, see and present information as if you were actually there. The VC system collects the audio, video and presentation information and transmits it to one or more remote systems over standard network


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connections. Today’s systems allow this to happen easily and seamlessly, not just between two sites, but between multiple sites by having multipoint or ‘bridged’ conferences.

Why use videoconferencing? It is as good as being there; arguably it’s better as it saves time, money and carbon footprint. However sometimes you still need to meet face to face and even socialize: that’s the enjoyable part of business and business travel. One major benefit from VC is in that it lets you have regular meetings or ad-hoc meetings whenever they are needed. For those meetings that would benefit from faceto-face contact, it lets you plan your travel and do it when it suits you. Plus, when you get there you have time to talk about the important issues, not spend half the meeting following up action points and immediate issues.

Why now? Videoconferencing is now as good as it needs to be Video and audio quality is now better than people expect. We used to cheat! VC systems sent less than what we were used to at home. It was less than television quality, typically a quarter of what you had on your home television. We used a standard called CIF (common interchange format) that had a quarter as many pixels (dots) as a television picture, or even QCIF with 1/16th. We then enlarged these to fit a full screen, which made the picture look grainy if not positively blocky.

Videoconferencing is ready for prime time The internet revolution has made connectivity more practical. Historically we used the ISDN (digital telephone network). This meant we needed lots of phone lines (meaning high rental costs) and made lots of costly phone calls, typically six telephone calls (call costs) bundled together to make a single (384 K) video call. (What could go wrong?) Today, we have broadband internet services that are fast, reliable and always on (available 24 hours a day with no call costs). So forget six telephone calls for a 384 Kbps connection, today’s broadband services are 2, 4 and 20 Mbps speeds, enabling us to do high-quality VC at a fraction of the network costs, plus with greater reliability.

Some of the benefits The benefits of using VC can be split into two main categories.

Cost savings: the easiest to justify There are hard costs, travel and subsistence, plus a whole range of softer costs that are more difficult to justify. Soft costs can include reduced carbon footprint, less stress on employees and much more.


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 Hard costs: – travel costs: road, rail, air; – associated travel costs: hotels, subsistence; – time lost while travelling: in trains, planes and automobiles; – ecological savings: there are carbon calculators that translate to hard savings.  Softer costs: – productivity: individuals’ productivity over what might have been travel time; – improved management: faster to respond and act; – flexibility: the ability to move from scheduled to more ad-hoc meetings; – effectiveness: we can have phone conferences but attention span can be an issue; – reduced stress and even ill-health from over-stretching ourselves and employees; – green issues: not just carbon emissions but reducing congestion, waste, etc; – business re-engineering: delivering new ways of doing business. The second benefit area is the exciting area where we move away from cost reduction to wealth creation. How can we work smarter, faster, further than we do today?

Business drivers  We are only as good as our people: how do we get a key person in two places at one time?  Differentiating your company: using VC wisely can give you an advantage.  Access to skills, using remote experts to deliver information and training.  Globalization: even if your company is not global, how can it extend its reach? If it doesn’t, will competitors?  New markets: how do you put a toe in the water? Often VC offers a low-cost option.  Customer loyalty: being able to advise and be involved with your clients daily.  Remote working: staff in remote or partner locations still need management and support.  Home working: with the right tools staff can work more effectively and flexibly at home.

Industry-specific drivers  Time to market/supply chain management: these are big motivators for VC.  The education, government and healthcare sectors have for many years been key users of VC.  Finance: legislative issues. VC enables qualified staff to deliver finance options to more clients.  Legal: legislative issues. VC gets qualified information to the end recipient.  SMEs: perhaps you will open a US office. VC reduces travel, maintains client faceto-face contact, plus you can use it for training your US staff.

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Justification and return on investment For companies to truly benefit from VC they need to deploy a VC service, not just invest in some whizzy equipment. Too often we have seen VC systems that just sit in a cupboard. They were almost certainly bought with good intent, however, they were bought without a business plan. Return on investment (ROI) for VC is only one part of the business justification. You should ensure you have a documented business plan for using VC that answers some fundamental questions.

The business statement: delivering ‘the meeting experience’ We are deploying a VC service in order to …

The management commitment  The project needs to be sponsored high up in the organization.  The commitment needs to engendered down through the organization.  Its adoption and use needs to be encouraged: – by stick: reduced travel budgets, needing sign-off for certain travel; – by carrot: rewards, which may be by user group or even ‘chair miles’.

Project plan  In addition to clear objectives you also need milestones.  Measurement is critical to proving the value of the investment.  You will need education, training, documentation and processes to make this a service that works. Then you need to understand the costs:  Cost of equipment: capital or financed, you need a clear budget. Allow for hardware, network, installation, support services.  People costs – internal staff time to run and support the service.  Ongoing costs – network, maintenance, support.

ROI calculations This is actually the easy part. If you look at the manufacturers’ sites (www.tandberg. com, www.polycom.com and so on) you will find various ROI calculators that will give you a good basis for ensuring you have covered the basic savings. Typical ROI periods are measured in a few months. In the shortest I have seen, the payback was on its first use. Our own calculator is at www.firstconnections.co.uk/roi and is a simple spreadsheet to which you enter your figures. Also, remember the softer cost savings are often significant: not just green issues, but staff productivity, relieving stress and business re-engineering benefits.


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The industry The VC market is in a real growth phase at present, with the manufacturers all posting impressive growth figures. Within the industry there are some dominant players. Specifically for VC systems Tandberg and Polycom are the world leaders with 30 to 40 per cent market share each of the group VC systems market, followed by Aethra and Sony at up to 10 per cent each. For current figures and information on the market we suggest you look at Wainhouse Research (www.wainhouse.com). This is an US-based organization that analyses market trends, technologies and products. China is an interesting country in the VC market. As a nation it is one of the largest users of VC, with much of government being conducted over VC. Therefore, a number of local companies have manufactured products, so ‘China’ is a grouping for a number of smaller manufacturers. In addition to the VC endpoints there are infrastructure products and technologies that pull all this together and allow us to manage and grow our VC investments: to grow from just point-to-point meetings to multipoint meetings, and to integrate other systems such as normal telephones or even 3G mobile video. But before making substantial investments in these infrastructure products, make sure there is a real business case for them, and that you understand the total costs, not just of the equipment but the skills, people and management processes required to deliver a scalable VC service. There are several options for outsourcing the more complex parts of a VC service.

Managed services This is an umbrella term for a whole range of services that you can use as an outsourced extension to your VC investment in end points.

Multipoint calls Multipoint calls or ‘bridging’ is the commonest outsourced service. A company such as First Connections (or many others) has equipment that can connect multiple video systems and/or telephones together in a single seamless conference. Using a service provider for bridging calls, gateway calls to other networks (IP to ISDN or 3G) and so on is a low-cost way to prove the value. Then at a later date you can look at buying equipment and moving this in-house once you understand the value of the service and more importantly the service you want to provide. Beware the person trying to sell you lots of equipment that you have to run and support.

Outsourcing options These are many and varied. As well as straightforward services like bridging, some organizations partly or even completely outsource their VC systems. Even if you are running the system on your own company network, remote access and secure log-ins mean that much of the running, configuration, address book maintenance, software

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upgrading, management reporting and problem resolution can be run by an external party.

The technology While the technology has been around for decades, we have just moved through a point in time where technology has reached expectation. Hence the statement ‘Videoconferencing is now as good as it needs to be.’ Audio carries about 80 per cent of the conveyed information in a video call, and therefore good audio is critical for a successful conference call. Normal telephone audio is very ‘narrow’ in the frequencies it carries (the telephone network sends 3KHz – from 300 to 3400 Hz). This results in a telephone call being low quality, with no real feeling for the distant person’s emotions, and very boring when it is a long conference call. VC systems have built on this over the years, and have moved to 7Khz, 14Khz and even 20Khz audio channels. This is widely due to the growth in internet music and the development of MP3 and even more recent compression standards being developed, which deliver music-quality stereo using a small amount of network capacity (bandwidth). All the high-end VC systems now deliver an audio experience that is 20Khz or above and in stereo. But beware: going between different manufacturers’ systems may result in older, lower-quality standards being used. Video has now moved forward a long way, and while older standards of video compression are still supported – these are now referred to as standard definition (SD) – the newest systems claim to be high definition (HD). These HD systems show far clearer images that we are used to. This is due partly to the fact that they are transmitting a far more detailed picture (HD), and also because the camera technology has moved on, giving better focus and clarity. There is a lot of debate about what HD really means, but to simplify things, true HD adopts a standard called 1080p. If you go to buy a new flat-panel television today you will often see the term ‘HD ready’, which seems to mean it will support HD 720p but not 1080p. High-quality VC systems today tend to support 720p, which in rough terms mean you are seeing a 10 times better picture than the CIF systems of yesterday, and 40 times better than QCIF. So now we are at a point where ‘Videoconferencing is now as good as it needs to be.’

The ‘got yous’ You never get something for nothing, and while processor power and camera technology have moved on greatly, it is still true that to transmit more information requires more bandwidth. For an HD 720p videoconferencing call you will need to make a 1 to 1.5 Mbps call. In the future it is conceivable that an HD 1080p call may need 3Mbps. However, even at lower speeds (384K) these new, more powerful systems deliver a much better image, better focal depth (the person, the foreground and the background


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are all in focus), and better quality (typically at television resolution of 4CIF, rather than the old CIF grainy image).

Network choice If you need bandwidth, what are your networking choices? ISDN is a waning technology. BT has already withdrawn its ISDN service for home users (BT Home Highway), and while ISDN will be around for many years to come, it is in decline for use within the VC network. As well as rental and call costs, ISDN is not an ideal service for the future. An HD call would require 16 or more calls to be joined together, and this becomes unmanageable, unreliable and unfeasible as we go forward. IP and Broadband is the only way forward. IP (internet protocol) is the standard networking technology for both the world wide web and companies’ local networks. The internet is global in its reach, and the explosion in its delivery, with high-speed broadband connections, makes it an ideal network for VC. Company networks, SDSL and ADSL broadband links to offices or homes can carry business-quality VC today. My own SME company uses it every day. It is how we communicate with our remote offices and home workers, plus the calls are free!

Keith Gyford of First Connections Ltd has a long history in the telecommunications and videoconferencing industry. Having spent his initial working career in BT and then IBM, in 1995 Keith formed First Connections as an independent resale company focused on the videoconferencing industry. Tel: 01256 301700 www.firstconnections.co.uk

7.6

Five steps to business continuity

When customers expect you to be ‘always on’, any danger of interruption or loss is going to be damaging, particularly in smaller companies, says Mike Osborne, managing director of business continuity services at ICM

In a 24/7 trading environment, in which successful modern businesses demand evergreater availability of data and IT systems, the need to minimize service downtime and its inherent risks has never been more acute. The demand for business to be ‘always on’ consequently means a reluctance to tolerate outages or downtime of any sort, even for routine back-ups and maintenance. The pressures to meet this demand are manifold and complex, with businesses being increasingly required to demonstrate what they are doing to safeguard business stakeholders, including their investors, their staff, their customers and their suppliers, against unforeseen events which may cause an interruption to the service or product they provide. Ensuring business continuity is therefore a vital part of the modern business psyche, and is now underpinned by key governance responsibilities and regulation at both governmental and industry level. A common belief is that business continuity is about being able to react to an incident; this is not the case. Rather it is a proactive, business-owned activity that can provide the strategic and operational framework to review the way your organization provides its products and services, and increase its resilience to disruption, interruption or loss. Ultimately for the business it’s about quality of service and visibility of performance; for the stakeholders it’s about ironing out the risk.


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FIVE STEPS TO BUSINESS CONTINUITY 239 

While larger organizations could be assumed to have more to lose and more ways to lose it, the impact of a disaster is proportionally far greater for smaller organizations or new enterprises, than would be the case in a larger or more established organization. Smaller/start-up operations simply don’t have the numbers of support staff and mature/ resilient infrastructure that can often mitigate the impact on the business. The launch in November 2006 of the BS25999 code of practice for business continuity demonstrates the proliferation of the business continuity discipline, and its development is already having an impact on UK businesses. Smaller organizations are feeling the pressure from major clients to adopt and comply with the standard, as business continuity professionals within larger organizations are now looking to propagate business continuity through their supply chain, using the new standard as a benchmark. Many have already likened its impact to the uptake in quality standards such as BS5750 and ISO9000, where more than a decade ago businesses began to be excluded from retaining or bidding for large contracts with corporate clients if they were without the ISO quality standard.

Developing a business continuity plan While many organizations seem overwhelmed by the subject, there are five simple steps that should be followed when first developing a business continuity plan: 1. 2. 3. 4. 5.

Analyse your business. Assess the risks. Develop your strategy. Develop your plan. Rehearse the plan.

Due to the rapidly changing nature of businesses and business conditions, the process of developing a business continuity plan is not static, moreover it is organic and cyclical. Any external or internal changes to your business may make aspects of the plan redundant, so to be successful, the plan needs to grow and develop along with your business. Constant reassessment of the plan is vital to ensure it is relevant and up to date, therefore once you have worked through the steps it is necessary to go back to the beginning and review the whole process again. The secret is not to try to cover all the detail; high-level information is a good starting point for the beginner.

1

Analyse your business

This is the first stage of the business continuity management life cycle, as it is necessary to understand exactly where your business is vulnerable. You will need the broadest possible understanding of the important processes within your organization and between you, your customers and suppliers.


2

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Assess the risks

A business continuity plan will provide a framework for assessing the impact of every risk to your organization. Each risk always has two aspects: how likely is it that the risk will occur, and what effect will it have on your business? Organizations often define their assessment in terms of how much could you afford to lose if an emergency prevented you from doing business for days, weeks or months (financial risk), or how you would respond to lost customers or adverse publicity following an incident for which you were unprepared (reputational risk).

3

Develop your strategy

Most organizations generally choose one of the following strategies:  Accept the risks and change nothing.  Accept the risks, but make arrangements to ensure they have help after an incident.  Attempt to reduce the risks.  Attempt to reduce the risks and make arrangements for help after an incident.  Reduce all risks to the point where they should not need outside help. An organization’s attitude to risk will be partly based on the overhead of delivering effective business continuity. Companies want to match the level of risk they are able to absorb against the cost of maintaining that level, so they can make an informed judgement about sustainable levels of downtime and how much they are prepared to pay to achieve that.

4

Develop your plan

Once your strategy has been agreed, the plan can be put in place. Business continuity plans will vary between different organizations. However, most good continuity plans share key features:    

Make it clear who needs to do what, and who takes responsibility for what. Use checklists and communication trees that people can follow easily. Include clear, short instructions for the crucial first hour after an incident. Include a list of things that do not need to be thought about until after the first hour.  Agree how often the plan will be checked to ensure it is always up to date.

5

Rehearse your plan

As already stated, a business continuity plan is a living document, and weaknesses in it are often only uncovered when it is put into practice. Regular rehearsals help confirm that the plan will work if it is ever called upon.

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As business continuity becomes increasingly seen as best practice, third parties such as insurers, auditors, banks and customers will request to see evidence not only that a plan exists in paper form, but also that it has been regularly tested and improved. All of the five basic steps seek to establish commonsense policies and procedures that all organizations would adopt if only they had the time. How often in business and in life would things be changed with the benefit of implementing common sense as a result of the benefit of hindsight? Many business continuity professionals would argue that is exactly what they seek to achieve.

ICM delivers Business Availability through two key elements: Managed Availability and Business Continuity. When combined, these provide a unique portfolio of IT services to help you achieve maximum value and maximum uptime. To find out more: Tel: freephone 0800 27 2000 E-mail: [email protected] www.icm-computer.co.uk


8

SME productivity


8.1

The power of resource efficiency

Better use of energy, water and raw materials will boost the bottom line – and keep you ahead of environmental legislation, says Martin Gibson, programme director at Envirowise

So far, 2007 has seen environmental issues hitting both the news headlines and the business agenda. At this year’s Institute of Directors (IoD) Annual Conference, John Madjeski received spontaneous applause when he said we need to sort out the environmental problems of the planet. Other speakers at the conference made it clear that business not only had a role to play but was likely to have more effect than governments in taking action on the environment. The feelings at the Annual Conference were echoed in a new UK-wide survey of small to medium-sized companies conducted by Envirowise. This confirmed that 81 per cent of companies interviewed view the environment as a ‘quite’ or ‘very’ important issue. Despite this, only 33 per cent were actually taking any practical action. Perhaps part of the reason for this is that it isn’t always clear what actions to take. There is a lot of interest in reducing carbon emissions that lead to global climate change, and most companies start by looking at the energy they use directly. Improving energy efficiency and moving to renewable energy supplies are good places to start. However, carbon emissions are made throughout the supply chain of products. So each product a company uses or produces has an associated carbon ‘footprint’ or contains

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‘embedded carbon’. By reducing the use of materials and water, companies can reduce their indirect carbon emissions. Techniques for minimizing the use of materials, water and energy are now well developed. Adopting these techniques may become paramount for many smaller businesses, allowing them to start seriously considering the value of resource efficiency as a potential management tool.

Resource efficiency One way organizations can begin this process is by adopting resource efficiency as a robust business strategy and a significant opportunity for cost savings. Companies have started to identify ways to eliminate or reduce the resources they use in all areas of their activity, including raw material, water and energy use. Reduced costs, better performance and improved working conditions could all be welcome side-effects of taking action. Those who are prepared to implement a systematic approach to reducing resource use will also find it can pay dividends as part of their sales and marketing activities. Many influential clients, particularly in the public sector, now require minimum environmental standards to be specified when taking on new suppliers and contractors. And the building blocks to a greener, more profitable business need not be as complex or time-consuming as some may anticipate.

Practical action So what actions can small businesses take? In the commercial sector in particular there is a range of quick wins with long-term benefits that can be identified in areas such as paper, energy and water use. Considering a single office worker can get through up to 100 sheets of paper every day, reducing the amount of paper used in the first place is crucial. After all, for most companies paper purchase is far more costly than disposal. A good place to start could be by implementing a double-sided print policy or ‘think before you print’ campaign for office e-mails. Alternatively, businesses could start placing a limit on paper use by specifying a monthly quota per employee or department. However, the largest controllable outgoing in an office is often energy consumption. Experience shows that simple good-practice measures can not only reduce environmental impact, but can easily reduce office energy bills by up to 50 per cent. Water is another finite resource that is too often squandered. However, a business that implements simple and effective water management measures could cut its water and effluent bills by around 30 per cent – helping protect itself against both rising costs and dwindling supplies. Online water tools available at www.envirowise.gov.uk/water allow businesses to record and keep track of how much water is being used, benchmark themselves against competitors and find practical guidance on reducing consumption. Plus, businesses can also benefit from the online Water Technology List (WTL). The WTL offers a

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real incentive for businesses to invest in technologies that promote the efficient use of water by offering tax relief through the Enhanced Capital Allowance scheme.

Adapting for the future Finally, new environmental legislation will inevitably drive forward this culture change within the business community. The Waste Electrical and Electronic Equipment (WEEE) Directive makes producers of electrical and electronic items responsible for financing the collection and treatment of their products at their ‘end of life’ to reduce the amount of waste going to landfill. For manufacturing firms, these Directives will provide motivation to investigate the benefits of investing in cleaner and more efficient product design. And the case for improving product design is strong, according to Envirowise, with 80 per cent of products being discarded after a single use. So a better-designed product means less waste from the outset, and real cost efficiencies for the business in the longer term. Surprisingly, businesses often underestimate how much unused materials cost them. They must take into account the cost of buying materials, or the value of any waste materials, packaging, and other resources that eventually get thrown away. The true cost is often as much as 10 times the disposal charge. Those who have already seen the early benefits of working towards a more resourceefficient workplace should also consider implementing an environmental management system (EMS). This is a practical framework within which all environmental issues can be managed. This can be either an internal management tool or alternatively a way of working towards external recognition of environmental standards.

Businesses interested in finding out more can contact the confidential Envirowise helpline on 0800 585 794. A series of free publications, step-by-step guidance and case studies are also available at www.envirowise.gov.uk. More information specifically on energy use is available through the Carbon Trust, website www. thecarbontrust.co.uk With acknowledgements to Co-operative Bank and Forum for the Future, http:// business.guardian.co.uk/story/0,,1957687,00.html

8.2

Quality in the 21st century

For growing companies, quality makes most sense when you think about it in terms of innovation and customer care, says Michael Debenham, professional affairs manager at the Chartered Quality Institute

Quality does not have a glamorous reputation: quite the opposite, in fact. It is usually thought of as synonymous with mountains of paperwork, bureaucratic red tape and people in white coats with clipboards taking measurements and asking awkward questions. In boardrooms across the United Kingdom, it is grudgingly accepted that quality is a bolt-on cost to satisfy demanding customers with a certificate on the wall, and that the auditing certification company will inflict occasional, stress-ridden visits. Fortunately, this could not be further from the truth. Quality has become essential for business success and survival. Indeed consumer demand for quality means that businesses now distinguish themselves in terms of quality rather than price. The CQI encourages organizations to think of quality in terms of innovation and care. Innovation in relation to products and services is all about recognizing who your customers are and what they expect from you both now and in the future, then fulfilling these expectations. It is about identifying potential customers and markets, and how they might be persuaded to use your products or services. Care is about how you deliver your service or product to your customers in accordance with their expectations of quality, delivery and budget. Not forgetting, of course, that you have to make a profit and plan to meet the expectations of tomorrow’s customers.



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But perhaps most importantly, managing for quality is about performance improvement. This means improving the quality, delivery schedule and price of your product or service; improving the systems and processes that deliver them, and all the resources that support these processes – which include not only the methods, the infrastructure, machinery and materials, but also human resources. Put another way, it’s about innovation.

How ‘quality’ is defined by the customer          

Reliability. Accuracy. Consistency. Responsiveness. Competence. Courtesy. Security. Access. Communication. Understanding the customer.

Or in summary, quality is care for the customer. Everyone in an organization, from senior management to customer-facing personnel, can contribute either directly or indirectly to the quality of the product or service. Indeed the first task of management is to define the organization’s quality policy, objectives and values, then to ensure that everyone is not only aware of them, but understands their importance. If we cannot satisfy our customers’ requirements and meet their expectations they will simply walk away from us. Without customers no organization can exist.

Delivering the organization’s aims and objectives First and foremost quality must provide a structure to deliver an organization’s aims and objectives. This will not only include improving performance but also making efficiencies in the cost of operating business processes. An organization can expect to see fewer problems caused by lack of consistency or understanding, a reduction in non-value-added activities, the more efficient utilization of staff and fewer qualityrelated issues and customer complaints. However, the organization should not simply be satisfied with these benefits. Areas where the overall performance of the organization may have an impact include:    

customer loyalty, repeat business and referral; operational results such as an increase in revenue and market share; flexible and fast responses to market opportunities; reduction in costs and cycle times through effective and efficient use of resources;

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 understanding and motivation of people towards the organization’s goals and objectives, as well as participation in continual improvement;  an increase in confidence of stakeholders in the effectiveness and efficiency of the organization;  improved agreements with partners through an increase in confidence to deliver on commitments to each other.

Moving towards a learning culture Finally, we can expect our management system to provide a structured platform for establishing a learning culture (or a culture for opportunity) within the organization and, if applicable, across the partnering arrangements established by the organization.

A learning culture Defining a learning culture is not easy. The following examples are not exhaustive, but they give a sense of the kind of environment required as the basis of a learning culture. It is one that:  recognizes the importance of customers and suppliers, both internal and external;  recognizes the importance of communication both vertically within the organization and horizontally through the business processes;  recognizes the importance and value of people to the organization;  recognizes the potentially huge resource within the totality of personnel employed;  encourages personnel to submit opportunities to improve performance and prevent incidence of failure in performance;  provides recognition for the individual who was the source of successfully implemented initiatives;  establishes a ‘system-to-blame’ environment, sometimes referred to as ‘no-blame’;  ensures that mistakes never happen twice;  ensures that both ‘solutions’ and, equally importantly, lessons learnt from ‘mistakes’ are shared across an organization. So what does an effective integrated management system mean for personnel within the organization, and what should they expect it to deliver for them?

What ‘quality’ is inside the organization Quality means:    

effective communication and sharing of best practice; teamwork and support; a thorough understanding of the requirements for each task; less wasted time and effort;


    

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less pressure on individuals; work carried out as required by the management team; work controlled when supervision is not present; clarity for new starters or temporary personnel; change captured within the system requirements.

So how should we advise the overworked executive who is trying to deliver orders to customers, find and develop new markets, manage a diverse organization and still make a profit? First, an organization should design a management system to deliver its business aims and objectives and to ensure that customer expectations are met. It should then use the most appropriate system model to support the process of implementation and to measure the effectiveness of its system.

The small business standard The ‘entry level’ standard is, so to speak, a stepping stone on the way to one of the more detailed standards such as ISO 9001:2000. But it is not a standard that is intended for third-party certification and the associated costs. Indeed the standard is freely downloadable from the CQI’s website (www.thecqi.org) as is the self-assessment evaluator. It is intended to be a standard that can be addressed without necessarily employing the help of a consultant and can be implemented without resorting to volumes of paperwork or the rigours of internal audit.

Moving from conforming to requirements to exceeding expectations We can now consider the organization that has established a system and business processes that consistently deliver products and services that meet customer requirements in full, and has embarked on a programme to become world class and compete with the best in its sector. There are, of course, a number of models and tools available for such an organization: the EQFM Excellence Model, Six Sigma and the Balanced Scorecard to name but a few of the products on the market. It is not possible here to comment on all of the alternatives available. Each has its merits, and organizations should use those that are best suited to their own circumstances and culture. Information and support can be obtained from the CQI via its website, company membership network, special interest groups and growing website forums.

The Chartered Quality Institute So how is the CQI helping organizations across the United Kingdom to manage for quality and improve performance? Not aligned to any single quality theory or practice, the CQI offers impartial advice and guidance on the best ways to improve organizational performance. It supports individuals who are serious about helping

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their companies succeed, enabling them to develop their own skills so they can make a greater contribution to the success of the organization. Quality is everybody’s business, and it is people with the appropriate knowledge, skills and energies who make the difference and can effect change. In fact, the CQI can support just about everyone in the organization. The CQI offers training in most quality-related subjects, on either public or inhouse courses. Further support for members of the CQI is provided through the branch network, Qualityworld (a monthly magazine featuring the latest quality news and job vacancies), an online academic journal, the Journal of Quality, and a variety of special interest groups.

CQI’s Company Membership Scheme The CQI’s support for UK plc is not limited to supporting the individual. Joining CQI’s Company Membership scheme demonstrates an organization’s ‘Commitment to Quality’. And it opens up a network for mutual support and the exchange of ideas. The CQI also operates a management consultants’ register and a referral service which supplies enquirers with the names of three consultants with the appropriate skills and sector experience. As all the consultants are qualified by the CQI against specific criteria, you can use their services with confidence.

Michael Debenham, CEng FCQI, is the CQI’s professional affairs manager. He is the focal point for all professional and technical matters within the institute and in the exchange of ideas and issues. Contact: [email protected] General enquiries contact: Ms Ambica Mehta, CQI marketing manager, e-mail: [email protected]

8.3

Supply relationships

In a global, outsourced economy, soft skills in managing relationships with suppliers are at a premium, says Roy Ayliffe, director, professional practice, at the Chartered Institute of Purchasing and Supply

Relationships are all around us, whether it’s of a personal nature or in a business context. Some of us are better at managing them than others (especially the personal ones) and some hold them in a higher esteem than others – but the problem with relationships is that no two are the same. Given that, they suddenly become much harder to manage. In the procurement profession, creating, managing and developing relationships with suppliers is critical, and can be the make or break of a good purchasing strategy. This is also applicable to smaller, growing organizations who may not have a procurement team in place. Smaller organizations still need to ensure they choose their suppliers in an appropriate way and work with them to ensure they get the best possible outcome from the relationship.

A key skill Increasingly, relationship management is being seen as a softer skill. After all, it’s about dealing with people, communication and interaction. The purpose of investing time in a relationship with a supplier is to ensure that supplier always operates to the best of its ability, or perhaps if it hasn’t been performing as desired, to try to improve the performance. Performance management and managing changes are therefore integral.



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Just like any relationship, supplier relationships will vary in intimacy, all depending on what is deemed necessary for the relationship to work, the people involved and perhaps even the history of the relationship. A relationship, for example, could be deliberately kept at arm’s length but still remain very cordial – this could be because it is deemed that there will be no immediate business benefit for it to be any different. This may be the case when the items being supplied are relatively low value, infrequently required and pose very little risk to the organization should the security of that supply ever break down. Moving to the other extreme is the long-term close relationships that may be operated as a partnership. This will often be the case when items are high risk, high value and integral to organizational operation. Balance in the relationship is a hard thing to measure – especially for smaller businesses. Having a formal contract in place may sometimes seem a little restrictive, but it can also offer protection against things like unexpected price rises, especially if SMEs are heavily reliant on the supplier. One key word of advice is to understand where you position your supplier in terms of importance, but also to understand where they position you. Professor Lynette Ryals says many organizations often suffer from ‘supplier delusion’, as they may believe they are in a partnership arrangement with a customer, when the buying organization has a very different picture. Suppliers will often spend a great deal of time, money and effort into relationships with their customers when all that relationship will ever be is arm’s length. The cooperative buyer-supplier relationship can create strategic value but also strategic concerns. Having a crucial supplier, however large, means you need to ensure the relationship is built on cooperative ground without any opportunistic behaviour from the larger player. SMEs have much to gain from cooperation with their large suppliers while remaining realistic about the vulnerability it also poses. SMEs may often find themselves at the receiving end of larger suppliers’ cooperative strategies and tactics, but they can also manage relationships themselves and put in place their own strategies. Communicating clearly with your suppliers and reaching mutually beneficial agreements will ensure both parties know what is expected of them. In the same way, it’s important to understand why you as an organization are attractive to suppliers. Factors such as strong brand links, a good reputation for having high corporate social responsibility (CSR) credentials, or offering suppliers the opportunities to get in to new markets and industries, will make you more attractive to larger suppliers. If larger suppliers want to work with you they are more likely to value the relationship and invest time in making it stronger. It is always advisable whatever size of organization you work for to map your supply chain. Examine all the tiers of your suppliers and identify where you feel there may be both strengths and weaknesses. If you have a key supplier that is fundamental to your business, examine not only the strength of the relationship but also its own supply networks. Are you happy that the supplier has a handle on its supply chain and that it won’t be let down by its key suppliers, thus letting you down in turn?

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Understanding your market Understanding the market within which you operate is crucial. It’s a business fundamental to understand what your competitors are up to – but how many organizations really understand the supplier market as well? For growing businesses this may mean you need to start expanding your boundaries and using suppliers who are not on the doorstep, or even UK based. Global sourcing is no longer just for the large corporates but can be a viable option for smaller organization. It may just help you get the competitive edge over your competitors. One key word of advice when working with your suppliers is to never lose sight of the fact that your suppliers have a direct influence on your profit, costs and innovation. Realizing they can impact heavily on your bottom line is a massive step forward in a positive working relationship.

A word of caution When issues occur in your supply chain it will often be the secure and strong relationships that can help get the organization through. It is scarcity of some raw materials such as steel, which is currently a situation faced by many manufacturers, that can potentially change the dynamics of a relationship and put the suppliers in the driving seat. This was the situation Japanese car manufacturer Nissan found itself in recently, when it had to close three of its Japanese car plants for five days because it ran out of steel. This meant Nissan, which is Japan’s second largest car manufacturer, lost production of 25,000 cars. The knock-on effect was that other car manufacturers had to assure stock markets their own production was not at risk because of the shortage of steel. Although this may be an extreme case, steel is a major commodity and it does highlight the need to keep such issues at the forefront of your minds when working with suppliers – especially for high-risk items. It also highlights the need for flexibility within supplier relationships. The key issue is to try to ensure that key suppliers don’t send scarce goods elsewhere. Working with a supplier to try to mitigate these issues will become even more relevant in years to come, especially when you look at the current issues with, say, the price of oil, copper, cement and energy, which are just some of the areas that have seen dramatic price increases in recent months. Organizations need to ensure that the relationship with their suppliers is strong enough to secure their supply chain, and not leave themselves open to any risk should key raw materials be in short supply.

A case in point Supplier reliability and high-quality output are crucial to any organization operating in a competitive environment. Eliminating defects, hitting delivery deadlines, reducing lead times and cutting costs are all elements that will impact on customer satisfaction.


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These are some of the issue that motivated CIPS/SM Awards winners Gillette UK to improve the relationship it had with it core supplier, Crown Cork & Seal. Issues with the manufacturing process were leading to a decline in quality and delays in delivery, which in turn were having an impact on the margins of both companies. Following a strategic sourcing initiative, Gillette opted for one supplier (CC&S) with which it could concentrate on fixing the problems. Through crossfunctional working and a complete overhaul of current processes and practice, they managed to turn around the issues. This included redefining materials, specifications and processes, design amendments and implementing a new working relationship. With a lot of hard work and determination both organizations worked together in partnership to overcome was what was essentially a set of manufacturing problems. Quality levels improved 97 per cent between 1999 and 2003, which allowed for reduced inventories and saved millions of dollars. This partnership led them to win the 2004 CIPS/SM Award for the best purchaser-supplier relationship.

The relationship in practice Getting the relationship off the ground in the first place can be a major hurdle. Keeping the relationship going can be a challenge, and does require time and investment on behalf of the purchaser and the supplier. There are certain methods that can be employed to ease the process:  Supplier support and development programmes – these can stress continuous improvement in the supplier’s processes, product and service quality and delivery performance.  During initial meetings with suppliers, top management should attend, showing commitment to the programme.  Suppliers must also benefit from the alliance (no relationship works if it is onesided). The agreed benefits that the suppliers expect from the relationship need to be monitored to ensure they are met or even exceeded.  Purchasers can help suppliers improve their operations – dedicating some time to work with supplier associates at the suppliers site.  Cost savings can be shared equally after the supplier has met the purchaser’s target costing.  Implementing supplier performance reporting will help suppliers analyse and measure their productivity. This can track statistics on quality and delivery. Even the best relationship management techniques are not enough alone to survive in a global competitive economy, but they are now an integral part of business success.

For further information about CIPS visit our website at www.cips.org or call 01780 756777

8.4

SMEs and business process outsourcing

By outsourcing offshore, says Rajiv Dey of NIIT Smartserve, smaller companies can pack more punch in their market without the risk of making a fixed investment

Outsourcing as a means of increasing productivity and efficiency has been practiced by organizations since the early 1970s. The more traditional aspects have been outsourcing of facilities management, office canteens, security, payroll processing and similar activities. In recent years the trends has widened to include a whole range of new services like call centre activities, back-office processing, finance and accounting, and technology. Since 2000 the concept of outsourcing has been extended to offshoring, where services are increasingly outsourced to distant locations like India, China and the Philippines. The early adopters were multinational banks and insurance companies, followed by fast-moving consumer goods (FMCG) companies and technology service providers. These large organizations set up operations in countries like India, which offered significant cost savings, an abundant pool of skilled resources and high productivity levels. The successful offshore operations set up by these early adopters have enabled them to significantly reduce their operating costs and improve shareholder values in a highly competitive marketplace. The broader market has watched these developments with keen interest, and as the benefits of offshoring have become more evident, more and more mid-sized companies have joined the bandwagon and started using offshoring as part of their long-term strategy.


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While the large and medium-sized companies have been outsourcing aggressively, the SME sector has lagged behind with this initiative. One of the main reasons is that SME firms commonly believe that outsourcing requires a minimum scale of operation to make it viable, particularly offshore outsourcing. Other reasons include the perceived loss of control, the lack of project management skills to manage offshore operations, and the lack of knowledge of what services outsource vendors can provide. Some of the typical challenges that SMEs face in the market today, particularly when competing with larger organizations, are:  extreme margin pressure when competing with larger companies that are using low-cost offshore bases for service delivery;  difficulty in offering round the clock 24/7 operations;  inability to ramp up/down to meet seasonal variations in demand;  inability to hire and retain skilled resources;  inability to scale quickly. Outsourcing or offshoring provides solutions to address these situations, and if implemented successfully, it can provide SMEs with the scale and muscle to compete with larger organizations in the market. Some of the key areas where an outsourced or offshore vendor can support an SME business are listed below.

Customer acquisition and lead generation Sales and business development activity requires substantial up-front investment in sales people with no guaranteed return on the investment. Investing in people is different from investing in stock as there is no resale value and hence it is highly risky. In order to derive maximum productivity out of sales force investment, an SME company can use an outsourced call centre to do cold calling and lead generation at a fraction of the cost. Leads generated through this process can then be closed by the business development team, making the high-cost sales team far more productive as they focus only on closing hot leads instead of cold calling. This works very well in the business-to-business (B2B) area. In the business-to-consumer (B2C) area, telecom distributors have been selling fixed lines and mobile phones very successfully using offshore call centres. The low cost allows them to do that much more cold calling with a limited budget.

Out of office hours service SME businesses can extend their hours of operation beyond the normal 9 am to 5 pm by using an offshore call centre which can receive calls on the customer service and sales lines outside normal office hours.

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Back-office processing Every business has a range of back-office processes which are related to order processing, customer service, transaction processing for service delivery, finance and accounting, payroll and so on. Quite often these processes are not revenue enhancing and so they need to be managed efficiently and productively at the minimum cost. These could easily be outsourced to specialized vendors who would be able to deliver the service with a high quality and low cost.

Technology cost Most business today rely heavily on technology. Technology brings down the cost of service delivery and makes processes more customer friendly. Through enabling customer self-service it cuts down the number of people the firm needs to employ. However, technology has its own cost. First there is the cost of developing a software program. Then there is the fixed cost of investing in hardware that depreciates very quickly. There is the cost of technology becoming obsolete and requiring to be updated constantly. There is also the cost of employing people to manage the networks and technology environment. Hiring people for developing software applications in-house can be expensive unless there is an ongoing need for development. Providing a 24/7 user support technical helpdesk can prove to be a challenge for an SME which does not have adequate scale. There are specialized IT firms that can provide this service, and an SME can chose to outsource/offshore the entire IT management. These vendors are scale players that have made massive investments in building specialized technology platforms, which allows them to offer low prices and high service levels. Of particular interest in this category are vendors that offer a pay as you go option for transaction processing or technology helpdesks.

Ramp up, ramp down and scale SMEs are limited by their size and scale of operations, and tend to work with a small team of permanent employees. So what happens when seasonal opportunities arise and they need to ramp up for short periods of time? Outsource vendors can provide a useful service here as they have the scale and the people to manage such spikes in demand. Leveraging this capability can help an SME to grow much more quickly by augmenting its temporary staff strength at short notice using outsourced service providers. A typical example is handling direct response calls after an advertisement campaign. In effect, outsourcing or offshoring allows an SME to pack much more punch in the market than its size warrants, and without the associated risks of fixed investment, since it is the vendor that invests in the infrastructure and resources, and the SME just pays for what it uses. The vendor shares the benefits of scale with the SME, as a result of which the cost of the service is well below what the SME would incur on its own. It is a win–win situation.


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Outsourcing and offshoring works with as little as a 5- to 10-people commitment, so there is no scale threshold to be overcome. Most outsource vendors are highly specialized professional organizations, and contracts and pricing are based on a range of service level agreements ( SLAs) covering productivity, quality, turnaround time, efficiency and system uptime. Contracts can be structured to ensure that SMEs only pay for guaranteed service levels, and penalty clauses can be agreed to penalize vendors for non-performance on agreed SLAs.

Conclusion To summarize, using outsourcing can greatly enhance the ability of an SME to respond to market opportunities by providing flexibility, scalability and resources on a need to use basis. By using offshore outsourcing an SME can dramatically reduce its cost base and compete with the bigger players. The SME can benefit from the scale and expertise of an outsource vendor, and the risks in service delivery can be reduced through the use of SLAs. By eliminating the need to make risky capital investments in technology and people through a pay as you go service, SMEs can channel their limited capital to more productive uses. Outsourcing allows an SME to function as a virtual enterprise with a small core team of people focused on the value-enhancing elements of the business while the rest of the non-core activities are contracted out.

Rajiv Dey is senior vice president and head of business development of NIIT Smartserve. His experience in the business process outsourcing (BPO)/call centre business spans both offshore operations and business development in the United Kingdom, and he has worked across a wide range of verticals including financial services, insurance, direct marketing and telecoms. He has extensive international experience in sales, marketing, delivery and general management across many industries. Prior to his current role he set up the operations and business development for a new call centre operation in India. Rajiv joined NIIT soon after its BPO business was set up, and has played a major role in building the UK business, which currently accounts for a significant part of the BPO/call centre revenues. Projects currently running at NIIT Smartserve include closed books life insurance processing, FSA regulatory compliance, consumer lifestyle surveys, B2B directory cleanse, telesales, airline ticketing and customer service, finance and accounting. Having worked extensively in both India and the United Kingdom, Rajiv has a strong understanding of the fundamental issues involved in offshoring to India, and has proactively worked with UK companies to leverage the cost and quality potential that India has to offer western companies.

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Further details: NIIT Smartserve, Westfields, London Road, High Wycombe, HP11 1HP Tel: 01494 539 333 Mobile: 07812 097 433 E-mail: [email protected] www.niitsmartserve.com, www.niit.com

8.5

Accreditation

If you want to step up to better-quality contracts, then build confidence in your marketplace by accrediting your products and using accredited services, says Jon Murthy, marketing manager at UKAS

If you are busy running a business, sourcing the right people and organizations to carry out your certification, inspection, testing or calibration work can be time-consuming and fraught with ‘unknowns’. There is an answer. Decide to use properly accredited evaluation services and you will find that finding the right supplier is made easier, saving your business time and money in a whole host of ways. Doors to new markets will also open up, whether they are public service organizations, or customers in overseas markets. Businesses need to have confidence in the goods and services that they procure. There is a means of building trust in the marketplace in the supply of goods and services. Companies big and small buy independent evaluations either through choice (to reduce the risk of product failure, for example) or as a consequence of legal requirements (such as health and safety regulations). Most commonly these evaluations are calibration of equipment, product testing, inspection of equipment and certification systems. It is the ability to distinguish between a proven, competent evaluator that ensures that the selection is an informed choice and not a gamble. Too many of Britain’s companies run the risk of undermining their long-term success by purchasing independent evaluations that are not properly accredited. Examples of such risks are product failure caused by invalid test results, increased costs caused by inaccurate measurement, legal action arising from inadequately inspected equipment resulting in accidents, and rejected tenders and orders.



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Barry Denton, operations director for Pasta Reale, comments: Accredited certification to the BRC global standard demonstrates to our customers that we operate to a required standard. This gives us a point of difference over our rivals. Food safety is essential. We see product recalls and food scares in the press all the time. Accredited certification to the BRC standard builds in food safety processes to our business, and is a prerequisite to trade with most of the major retailers. Without accredited certification, we would not be able to service many of the customers we supply, and that would have a significant impact on the size and success of our business.

Certification You may spend considerable time, effort and resource in the certification process because you have been persuaded of its importance as a business tool and because of the business benefits it can bring. But unless you have used a properly accredited certification body, the benefits of certification could fall short of your expectations and prospective customers may be unsure of the credibility of your certification. While quality management system certification (the ISO 9000 series) accounts for the bulk of work undertaken by certification bodies, there are other equally important areas of work:       

product certification; personnel certification; certification of information security management systems; certification of environmental management systems; certification of IT service management systems; certification of food safety management systems; certification of occupational health and safety management systems.

Many of the accredited certification bodies specialize in just one of these areas. Others may have specialist teams working in several or all the areas listed.

Inspection Typically, inspections will cover product design, products, materials and equipment, installations, plant, processes and services. Some of these areas will be covered by legislation that demands that regular inspection is undertaken. The competence of any inspection body you appoint may be crucial in maintaining your reputation as a responsible organization. You will want to make sure that the organization you pay to undertake inspections on your behalf has the people, facilities, technical expertise, management systems and track record to undertake the inspection professionally and competently.

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ACCREDITATION 267 

Testing and calibration Product testing is used to show a product meets a specification. This may be a customer requirement, a legal obligation or part of your own product development regime. You need to be absolutely sure that the laboratory carrying out your testing for you has the people, facilities and track record to produce valid and accurate data and results each and every time. The same must be true of any laboratory carrying out calibrations on your behalf.

How accreditation works Accreditation is an ongoing business process rather than a one-off achievement. An assessment is carried out to establish that:     

the evaluator is impartial; the evaluator is technically competent to do the work in question; the resources and facilities are appropriate and sufficient for the work; the evaluator’s actual performance is to the required standard; the evaluator is capable of sustaining the required level of performance.

Once an organization is accredited, an assessment is carried out annually at the customer’s premises by a team of experienced assessment managers supported, where required, by independent assessors with specialist technical expertise. Assessors should act on behalf of the customer’s industry sector but they are also conscious of the customer’s business objectives. The assessors check that the customer is achieving what it claims to be achieving, and they provide constructive criticism and will advise on best practice. An assessment should be a comprehensive and transparent health check on a business by a respected and independent third party. Once accredited, businesses are monitored annually and reassessed every four years. This continuous assessment cycle ensures that evaluators adopt and develop practices that are consistent with the demands of the sectors in which they operate. As an accredited supplier, you can:  reduce paperwork and increase efficiency by reducing the necessity to re-audit your business or re-test your products for new markets;  reduce risk in your procurement by taking the guesswork out of choosing an evaluation body and by giving you confidence that you will get the service that best fulfils your requirements;  win new business, particularly since the use of accredited services is increasingly a stipulation of specifiers, most notably in the public sector;  facilitate access to international markets since UKAS-accredited certificates have global recognition;  be helped in the adoption of best practice since your evaluating body is required to have appropriate knowledge of your business sector;


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 control costs because accurate testing, calibration and other evaluation services along with the adoption of best practice can limit product failure and down time;  be helped with knowledge transfer and product development since accredited evaluation bodies can be a good source of impartial advice;  offer market differentiation and leadership by showing to others credible evidence of good practice, for instance in your environmental management systems;  demonstrate due diligence in the event of legal action. Glenn Turner, head of the Scientific Service, Hampshire County Council, says: Our supplier selection policy stipulates that a business must demonstrate financial viability, health and safety competence and UKAS accreditation. As a purchaser, it is essential that we get what we ask for. UKAS accreditation is a prerequisite whenever we are choosing an organization to work with to help us manage asbestos. We do not, however, look for UKAS accreditation in one area of asbestos management. We would look for it in all areas – for example for testing, surveying and air testing. The reasons for using a UKASaccredited company are manifold. First, it is a way of ensuring the quality of the work. However, it is not just about the quality, as we are dealing with the management of asbestos in schools and offices, and so there are clearly reputational issues at stake as well. Using a UKAS-accredited organization is not going to necessarily increase the price of procuring a particular service. A UKAS accredited organization will offer value for money. The cost of getting it wrong and reworking is phenomenally expensive. This would not be the best use of ratepayers’ money. It is much cheaper to get it right first time.

The United Kingdom Accreditation Service (UKAS) is the sole body recognized by the government to carry out accreditation of businesses offering conformity assessment services such as certification, inspection, testing and calibration. It assesses these bodies against internationally agreed standards. Accreditation by UKAS is the key to ensuring that suppliers, purchasers and specifiers can have confidence in the quality of goods and in the provision of services throughout the supply chain. By choosing a UKAS-accredited supplier, not only can you be assured that you are receiving the best and most appropriate service for your needs, you will also discover that the UKAS ‘mark’ on your documentation brings with it national and international recognition and credibility for your business. To locate a UKAS-accredited evaluation body in your area or one that provides a particular specialist service, help is at hand. Visit www.ukas.com for full details of all UKAS-accredited organizations. Alternatively, further information about UKAS and its accreditation role can be obtained by:

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Tel: +44 (0)20 8917 8400 Fax: +44 (0)20 8917 8500 E-mail: [email protected]

ACCREDITATION 269 


9

Managing the growing organization


9.1

Achieving success

Success is an elusive goal, reports Jo Causon, director, marketing and corporate affairs at the Chartered Management Institute. Too often, it has different meanings for employers and employees, which can leave both with a sense of unfulfilled potential

Success is not any easy concept to define. For one individual it could mean exceeding business plan targets, but for another, success might simply relate to balancing the books. In an increasingly dynamic business environment so much depends on the changing circumstances that individuals and organizations find themselves in. For example, research conducted by the Chartered Management Institute shows that 89 per cent of managers claim to have undergone at least one form of major change in the past 18 months. It is clear from this that the world in which individuals and their employers now operate is becoming ever-more complex. One hundred years ago the idea that businesses could operate, with ease, across the world was more of an ideal. Yet today, it is accepted – sometimes even expected – that organizations cross borders to grow and develop. The phenomenon of globalization means that success, for many businesses, has a whole new level. Within this context, organizations also have to contend with the competition for talent. Individuals are more mobile and increasingly will opt to work for employers offering remuneration packages that meet their needs. It’s certainly clear, from Institute research exploring managers’ motivations, that pay alone is no longer sufficient to keep them. And this brings further complications because, in an environment where only one in five managers is professionally qualified, the suggestion is that success means the attraction and retention of the best talent.

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Recent surveys by the Chartered Management Institute show that many individuals define success by the delivery of results. Others are motivated by their impact within the organization, recognizing and wanting to take personal responsibility for continued development which will allow them to stand out from their colleagues.

Success: the value of aligning goals Clearly then, success means different things to different people. For individuals and the organizations they work for, this means the criteria for success are also evolving. The difficulty lies in aligning the goals of individuals and organizations because, without a common understanding, targets will be missed. That’s why it’s worrying to note huge disparities between employer and employee definitions. The Institute’s findings show that the majority of individuals believe ‘enjoying work’ is crucial to success, yet only a small minority (6 per cent) believe that their employers share this view. Forty-eight per cent of individuals claimed to judge success by the extent to which they develop their teams, but felt that only 38 per cent of organizations mark this as a priority. These stark differences raise concerns not only in view of the growing recognition of skills shortages in the United Kingdom, but also for the lack of communication within organizations. But even with such a disparity of definitions one thing is clear. However it is defined, success does not only benefit the individual. It can also have a direct impact on organizations. For example, as an owner-manager of one of the UK’s 4.3 million SMEs, providing excellent customer service might be your mark of success, yet achieving it can be a defining factor in job satisfaction, fulfilment and ensuring your business is an ongoing concern.

So what can be done to achieve success? It isn’t an easy question to answer in today’s environment, where increasing pressure to deliver better, and faster, results than the competition plays a major role in dayto-day activities and tasks. The Institute’s research shows that although mangers are exerting significant efforts to achieve their goals and objectives, they do not feel they are reaching their true potential. The problem is that while more than half suggest they would go the extra mile to achieve success, only a minority believe they are fully using their skills. These figures imply that the ability to achieve potential is clearly at the forefront of people’s minds, but organizations are failing to get the best from their employees. Of course, if this situation is allowed to continue, the impact on performance, productivity and morale could well be negative. It may seem obvious, but the ideal solution would be to align the various definitions of success to ensure both organizations and individuals are achieving their full potential.

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Table 9.1.1 Achieving success checklist     

Clearly define your organizational goals from the outset. Recognize that today’s business environment is fluid and that goals can change. Align individual and organizational goals. Manage the ‘war for talent’ to retain your best staff. Provide staff with development opportunities and link training to business needs.

Breaking down the barriers to success Wider research shows that one in four managers is looking to be promoted within the next three years, but flat organizational structures present a lack of opportunity. Particularly prevalent in the SME environment, this is rapidly becoming a source of frustration. Left unchallenged managers’ frustrations will demotivate them, and may lead individuals to seek challenges elsewhere. To avoid this, organizations need to consider how they manage the ‘war for talent’. Rash salary increases are neither practical for the SME marketplace, nor do they have a long-term value. Employee interest may be maintained, and skills developed, through creating cross-functional working or in-company job rotation. What matters are the challenges presented to individuals – the opportunity for them to see and develop a sense of purpose in the work they, and their organization, undertake.

Table 9.1.2 Defining success – differing views  60 per cent of individuals think enjoying work is important. Only 6 per cent think their employers agree.  48 per cent judge success by the way they develop their teams. Only 38 per cent think their organization shares this view.  28 per cent believe success is achieving a flexible lifestyle. Only 6 per cent suggest their employer agrees. Figures from ‘Achieving your Potential’, Chartered Management Institute research, October 2006.

It’s no easy task. Even having a sense of direction does not guarantee success. Managers still move on, but increasingly they are doing so with a sense of ‘unfulfilled potential’ and ‘regret’. Nearly one in five questioned by the Institute said that developing experience within one organization would help them achieve success, 14 per cent looked to the achievement of professional qualifications and 13 per cent valued the support derived from networking and mentoring. Surely, then, it is in the interests of employers to harness this drive for success by providing opportunities that help


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managers achieve their potential? The evidence suggests that employees benefiting from training and development will go on to provide return on investment (ROI) for their employer through better performance and loyalty. It might not be a case of winning ‘the war’, but perhaps, for SMEs, this is one way to ‘battle for’ talent. And if budget is a cause for concern, development can still be achieved through informal mentoring or the creation of project teams, for example. The answer may also lie in providing support through empowerment. In terms of motivation levels, it is certainly an option to consider because managers are seeking to be stretched. Some even claim they would welcome the challenge of special assignments. Whatever the method, companies should explore what motivates their staff and give them the power and autonomy to help achieve their own definition of success. At the very least it would achieve employee engagement. It is more likely to drive performance, at first for the individual and then for the organization. Ultimately, success will always mean different things to different people. The skill is drawing these disparate definitions together to create one cohesive vision. Repeatedly delivering success, as a result, is the science.

The Chartered Management Institute is the only chartered professional body that is dedicated to management and leadership. It is committed to raising the performance of business by championing management. We do this through supporting and advising individuals and organizations and through engaging policy makers and key influencers in government and the management profession. Jo Causon is director, marketing and corporate affairs, at the Chartered Management Institute, responsible for the strategic development of the Institute’s brand and for building partnerships and networks that influence policy development and address the issues that matter to employers and individual managers. Further information: www.managers.org.uk

9.2

Make change happen

Avoid the dip, warns Ky Nichol at Pcubed, by watching out for the three most cumbersome obstacles to continued growth

In fast-growing companies, the key challenge is how to deliver continued growth, while avoiding stalling. One of the important considerations when delivering continued growth is in taking risks and making change happen to seize opportunities. Yet sometimes growth can blind us to the things we could do better – it can breed hubris and dull the organization’s appetite for risk taking. The approach proposed here is based upon overcoming the three most cumbersome obstacles to doing something new in organizations today. These are ‘the frozen status quo’, ‘the fear of the unknown’ and ‘delusion’. The first two are encountered as enormous resistance to change and the latter confuses us into thinking we don’t need to change at all.

Status quo We all aim to pack our organizations full of talented people and to empower them with responsibility to deliver operational excellence. It should not come as a surprise, then, that these people are diligent in maintaining their positions of power. The natural momentum of the organization is to maintain the status quo; the natural momentum is to reject the ‘new’. To change the status quo, we must provide our new initiatives with the power to engage those affected and to disarm any rejection.


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Fear of the unknown We all have experiences of falling flat on our faces in new circumstances; it is not so common that our business culture also promotes helping us back onto our feet again and considers it a learning experience. The more usual pattern is that we are perceived as having failed, and consequently we learn that the best approach is to ‘stick to the knitting’, play it safe and not to take the risk of trying something new. To overcome the fear of the unknown, we must provide a compelling and credible vision to encourage a move in that direction. We also need to avoid losing momentum through early failures in our change initiatives, by building options into our plans to make them flexible to adapt to changes in external circumstances.

Delusion Success naturally breeds failure. This may appear a counter-intuitive statement – after all, we are introduced at an early age to the mantra of ‘success breeds success’. However, without care and attention, success can lead to over-confidence, because achieving great results without refocusing our teams can encourage to sit on their laurels and continue to do what was successful. Without a check on our hubris, bad news from the marketplace can be dismissed as invalid – our successes are showing that it isn’t affecting us – and our culture can become disconnected from reality. This is a slippery slope which can quickly neutralize any justification for change, as the internal perception is that things are fine and all we have to do is continue to crank the handle of our operations. Preventing our organization from succumbing to its own ‘group-think’ requires a self-imposed directive to take a reality check by gulping in the fresh air of regular conversation with customers.

Approach So how do we put together an approach that avoids the pitfalls and adopts the tactics for success? By asking this very question of a number of our clients, we put together the following three-step approach: 1. Vision and context – where we are going and its validation. 2. Blueprint – what to put in place and by the right ‘who’. 3. Plan and implement – how to put it in place, and then put it in place.

Vision and context We need some form of statement of where we want to go. We want to avoid fooling ourselves with hubris and setting things in stone, but some direction is needed. Together with the vision, we need some form of basic scenario planning to set out the boundary conditions of the next few years – what might happen, what will be our boundaries.

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We need to provide our vision with flexibility to cope with the frequent changes in our marketplace and to avoid implementing an outdated strategy. To keep our vision and boundaries valid, we need to maintain frequent checks on our business context, employing a facts-based reality check on where we are. Rather than doing a rear-view mirror financial assessment, the greater value is obtained through the regular, frank conversations we have with our customers, our only true leading indicator. Through the vision and its communication, we can convey a compelling image to our people to calm the fear of the unknown. Through scenario planning we provide the flexibility necessary to avoid any early failure through external circumstances changing.

Blueprint Given our vision, what capabilities do we need to put in place to be successful? Furthermore, how will these need to change across our scenarios? To answer these questions, we need to provide a blueprint of options for each of the likely scenarios. Through this we are effectively building our maps to success under different external conditions.

Plan and implement Making change happen requires careful surgery on current operations. You will have a series of operations that are committed to strategies playing out over the next six months to a year, and those strategies will have to be changed in a relevant way in order to be successful under your blueprint. Plans need to be drawn up to exercise the right options and to take into consideration the context of the area of operations to change. To implement effectively we also need to assign our change plans to the right people with the right amount of power to drive the change home. Once set up, the implementation of our plans is a case of careful project management while running the portfolio of options, exercising those whose scenarios remain sufficiently plausible and abandoning those whose scenarios become irrelevant.

Conclusion Making change happen in growing companies is a tough challenge. Overcoming organizational resistance and avoiding deluding ourselves is no easy task. This approach outlines how to build a toolkit to encourage the right appetite for risk taking, trying something new and delivering continued growth through the following steps:  Build a compelling vision to allow us to overcome the fear of the unknown.  Set up the most likely and flexible plan for success to avoid early change failure.  Assign the right amount of power behind the change to overcome the status quo.


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 Regularly check our vision and status with the marketplace to ensure that our delusion is held in check. Remember the words of Machiavelli: ‘There is nothing so difficult as to try to change the order of things.’

Ky Nichol is a managing consultant at the multi-award winning Program Planning Professionals Ltd (Pcubed), the global leaders in helping organizations deliver their most complex programmes. Pcubed works with most of the world’s leading organizations, particularly in the manufacturing, financial services and public sector areas, in ensuring their most complex programmes, portfolios and projects are delivered successfully. Contact: Tel: +44(0)207 462 0100 E-mail: [email protected] www.pcubed.com

9.3

The ideal board

Success is 85 per cent management, 15 per cent idea. So get your board organized, says Chris Spencer-Philips of First Flight Placements

The ‘ideal’ board should be simultaneously entrepreneurial and drive the business forward while keeping it under prudent control. It needs to be sufficiently knowledgeable about the workings of the company to be answerable for its actions, yet to be able to stand back from the day-to-day management of the company and retain an objective long-term view. In other words, it has to be sensitive to the pressures of short-term issues and yet be informed about broader long-term trends. Although its prime focus has to be on the commercial needs of the business, directors still want to act responsibly towards its employees, business partners and society as a whole. If the board is going to function effectively and to fulfil the expectations for taking the company forward, then three conditions must be met. It needs:  a chairman to lead the board;  non-executive directors to review company strategy and identify risks;  proper accountability for pay, audit, key appointments and governance.

The chairman A company’s chairman should lead the board. That means setting the agenda and taking the time to resolve contentious issues. It is down to this person to ensure that any board decisions are effectively implemented and clearly communicated to shareholders.


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The relationship with the managing director is a particularly important one. It should be close, but challenging where necessary. The chairman should aim to build good relations between all the directors, and in particular to maximize the contribution of non-executives. It is then the chairman’s job to undertake a formal and rigorous annual evaluation of the board’s own performance. Any weaknesses should be identified and remedied. Gaps in the knowledge of directors should be filled and potential successors identified.

Non-executive directors Although non-executive directors have not been widely used by SMEs, they have a key part to play in an owner-managed business, and provides a resource that such companies would not otherwise be able to afford, particularly in comparison with consultants and professional advisors. More often than not early-stage companies struggle to gain funding because of the lack of credibility in their management team. More often than not, successful companies are 85 per cent good management and 15 per cent good idea, but the entrepreneur often sees it the other way round. In the boardroom, the role of nonexecutive director is partly to question and review the development of a company’s strategy and its systems for managing risk. Drawing on their own knowledge and expertise, they probe and question the information used and the assumptions made. Government-led reviews in the last three years, like the Higgs Report produced by Sir Derek Higgs, were the precursor of the Combined Code on Corporate Governance, which has as one of its main stipulations the recruitment of at least one non-executive director for every board. The Higgs Report is often misunderstood, and it is important to understand that he was only asked to address corporate governance in the UK listed sector. Of course smaller, owner-managed businesses will derive huge benefit from having a non-exec if they have ambitions to grow, and furthermore, non-execs will have a more direct influence on strategy on the boards of privately owned companies than they do with listed companies. This is why it is a more attractive option on both counts. The mid-size sector is estimated to comprise 4,300 private companies, of which less than 20 per cent have to date recruited non-executive directors. There is a clear opportunity to actively address this market, working to supply both new and replacement non-execs. The ‘ideal’ non-executive director should be able to bring these qualities:  strengthen the management team and the balance sheet (when they become a shareholder);  be involved in the creation of the company’s robust and defensible business plan, policies and strategy;  possess substantial and successful business experience ideally in a similar business sector;


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 possess vision and be able to apply creative thought to the business;  review plans and budgets, which will implement policy and strategy;  be a confidential sounding board for the MD/CEO and keep the focus of the MD/ CEO;  provide an independent assessment of the management structure;  objectively assess the company’s overall performance;  provide outside experience of the workings of other companies and industries;  provide contacts with third parties such as financial sources, grant availability, potential clients, etc;  support the MD, acting as a mentor and ‘Wise Owl’ while remaining independent;  given sufficient credibility, provide comfort to a company’s suppliers, bankers and funders;  act as an effective referee on the board;  bring specialist and invaluable knowledge at critical stages of a company’s growth through similar experience in other businesses;  have the experience to determine appropriate remuneration levels for the directors;  have beneficial sector contacts that have been acquired in previous businesses;  possess sharp analytical skills.

Key tasks for the board There should be a formal and transparent procedure for developing policy on executive remuneration. No director should be responsible for deciding their own remuneration. An audit committee should present a balanced and understandable assessment of the company’s position and prospects based on sound systems of internal control. Regular monitoring should take place of financial information and controls. A nomination committee should lead the process for board appointments and make recommendations to the board. Majority members should be independent nonexecutive directors, who should review the size and strength of the board. In respect to shareholders, it is the role of the chairman, managing director, finance director and non-executive directors to get involved in regular dialogue and meetings. The chairman is responsible for ensuring that the board are aware of shareholder views.

First Flight (Placements) Ltd has acquired a reputation for offering clients a first-class service with their specialist and innovative ‘Wise Owl’ non-executive director service and management buy-in (MBI) resource when a business owner wishes to retire and a new management team is required. Chris Spencer-Philips has considerable experience in recruiting at board level, placing chairmen, managing directors, finance directors and many nonexecutive directors. He pioneered the concept of ‘Wise Owl’ non-executive directors for start-ups, early-stage and mature companies. He has a background in publishing and an involvement with start-ups, venture capital firms and MBOs.

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First Flight Placements has conducted a survey on the role of non executive directors in unquoted companies, which is being widely circulated in the City among AIM and small cap companies, as well as those backed by private equity and venture capital. Many NED roles in larger, more mature businesses are expected as a result. Further details Tel: 01797 270920 E-mail: [email protected] For non-executive directors – whether you are one, need one or want to be one – go to: www.ffplacements.co.uk

9.4

Executive search for smaller businesses

Alex Steele has 10 ways of finding the best candidates in executive searches

There are a number of services available in the recruitment market, and by far the most common is contingency, in which agencies supply CVs to a company and are only paid a fee if an individual is hired (that is, the fee is contingent on a hiring being made). Agencies will maintain a database of candidates and/or will advertise your requirement in a composite ad in either the trade or national press. Depending on the strength of relationship with the agency, this method is low risk financially, but could potentially be time-consuming in people-hours spent wading through inappropriate CVs if the agency is not familiar with your business. In addition, you may have no control or guarantee that candidates sourced will be screened or, in extreme cases, interviewed. Some businesses might enter into a preferred supplier relationship in which they commit to giving that supplier all their requirements but at a reduced hiring fee. It is important in those circumstances to ensure that the best candidates are not being supplied elsewhere at a better rate. At the other end of the spectrum there is executive search which, contrary to the general view, is not solely the province of large businesses with equally large budgets. It can be tailored to suit the needs of any business that wishes to benefit from a bespoke and dedicated recruitment service. Smaller businesses can be deterred from considering executive search services by the misconception that a retained search is an expensive alternative to the success-based contingency process. While it is true that

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the overall fee for search services can be higher than those charged in the contingency market, the smaller business decision maker, may well take the view that the extra cost is justified in terms of return on investment (ROI) by the bespoke and manageable service that they will receive in return. Once you have made the decision to invest in the services of a search consultancy you might wish to brief a number of firms and ask them to pitch. Firms can be selected on the basis of reputation, particularly if they are specialists in any given market, by word of mouth or by reference to any number of trade directories. There are a number of risk management and comfort criteria that should be met before signing on the dotted line. The following are the key issues:  Insist on meeting all the people likely to be involved in the conduct of the assignment: not only the consultant who would lead the assignment but anyone likely to be representing the business in the marketplace. Would you be inspired to join your business if you met these people?  Feel confident that these individuals would add value to the process by projecting a professional image through their understanding of the business, its products, its management ethos and its potential. Do they have a feel for your business? Do they share the passion? Can they sell it?  Feel comfortable that you could work with the lead consultant and that you are prepared to be guided by them, and will be able to accept constructive comment on how the assignment should proceed. The consultant might tell you that the company needs to project itself differently at interview stage, or that the impression that candidates are gaining from the interview process is not as originally planned and needs to be altered. However, you must also feel comfortable that the lead consultant is similarly mature and reasonable enough to act upon any constructive comment that you may feel it necessary to make. Be flexible and open to new ideas but you are buying their expertise, so make it work for you.  Ensure that all candidates, particularly those who are unsuccessful, will be treated professionally and courteously so that they retain a positive view of your business to take back to the marketplace. The recruitment process, particularly search, is a PR/marketing opportunity, so take full advantage.  Ensure that regular, at least weekly, updates on progress timeline would be available throughout the assignment. Be aware of your responsibility to process candidates at an appropriate rate as well as the need for candidates to be presented for consideration within the timelines agreed.  Read the terms of business thoroughly and be absolutely clear on those terms that relate to when retainers and stage payments would be payable and what criteria would have to be met in order that those payments are due. Generally speaking, retainers are payable at commencement of the assignment (on your signing of the agreement/contact). Shortlist fees, where appropriate, are payable upon your acceptance of the shortlist. Shortlist definitions may vary but this is usually on either your acceptance of the proposed shortlist or your completion of the shortlist interviews. Completion fees are payable upon completion of the assignment: that is, a written offer, acceptance of it, and confirmation of start date. However, in


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the case of long lead times (extended notice periods and/or covenants leading to ‘garden leave’ periods), there may be some flexibility. Read the terms of business and proposal document carefully, and query any issues that are not clear. Most search businesses will have reasonable clauses to protect their commercial exposure during an assignment, so again you must be clear on what is expected of you and what is deemed reasonable by either party. Those clauses are usually included to cover costs should an assignment not reach completion which, for the search firm, is not only a financial issue but potentially one of reputation. Therefore it is imperative to ensure that both parties agree specific and reasonable terms that cover such an eventuality. Ensure that an agreement is reached to cover the way forward in the, albeit unlikely, event that the successful candidate leaves your employ in the short-term (typically before 6 or 12 months). Each case should be judged by you and your search firm on its merits, and the strength of your ongoing relationship and the mutual trust that you develop are key in reaching a workable agreement. Understand in advance what your likely expenses exposure would be. In most circumstances a search firm seeks recompense for candidate expenses incurred during the course of the assignment, and this normally covers reasonable travel/ accommodation expenses within the United Kingdom. If the search criteria include overseas candidates then clearly the travel expenses would be higher. Make sure you fully understand your exposure prior to signing any agreement. The relationship between you and your search service provider should be a mutually beneficial business partnership, with both parties concerned not only with hiring the best candidate available, but also with enhancing your reputation and standing in your marketplace.

A Steele Associates was established in June 1998 and offers 25 years’ experience in the conduct of search assignments across a wide range of general and senior management disciplines in sales, marketing, risk/credit management, treasury, operations, support and technology. Our expertise has developed particularly in the identification of individuals for start-ups or reorganizations and the subsequent culture development and change processes. Contact Alex Steele on: Tel: 01758 815 996 or 07767 784 246 E-mail: [email protected] www.asteelassociates.com.

9.5

Invest in your leadership process

Small businesses are a crucial part of the UK economy, representing nearly 40 per cent of total company turnover. But often the entrepreneurs who drive these companies face particular challenges when it comes to leadership skills, report June Hawkins, director of qualifications and learning support at the Institute of Leadership and Management (ILM), and Tony Robinson, chair of SFEDI (the Small Firms Enterprise Development Initiative)

Owner-centric leadership While the image of the small business owner as needing to control everything and finding it almost impossible to delegate is a stereotype, it contains a grain of truth. After all, having built up the business themselves, entrepreneurs have had to become selfreliant. The entrepreneur often works very much on gut feeling and can find it difficult to delegate. Others agree that difficulties in delegation can be a problem, but that wanting to control key aspects of the business is almost inevitable for an entrepreneur. People start their own business because they want to control their destiny, so they have almost made a choice not to delegate. But skills such as delegation can be important, particularly when it comes to succession issues when an entrepreneur is looking to hand over the reins. There is also evidence that owner-managers are often the least qualified people in their company,


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although they may value qualifications when recruiting others. An entrepreneur who values experience over learning may be less open to new ways of doing things, and this can limit innovation. In the last 20 years we have seen the management trends of empowerment and delegation gain weight, yet many owner-managers want to control everything because they don’t see the boundaries between themselves and the business. But it is important that training for owners of small companies is presented as a practical solution to a business problem. Training organizations need to address owner-managers through a particular issue. For example, it’s not about telling them they need training in delegation, but rather asking them what would happen to their business if they were off sick for a couple of months.

Leadership skills required So what kind of leadership skills might small business owners need? There is a variety of opinions on the most important leadership skills, but key areas are around control, leading networks and taking a strategic approach to the business. Many argue that the kind of leadership skills needed by small business owners are different from those required in larger companies. For example, a small business entrepreneur will be used to leading a network that includes suppliers and customers, rather than simply a group of staff. HR people sometimes don’t see that the small business owner is like a project leader. This project leader role means that interactive skills, such as communication and presentation, are particularly useful. Another key area in effective leadership is around trust – both being trusted by one’s team and trusting them in turn. This trust is built on a number of behaviours, such as honesty and consistency, and underlying these are skills like effective decision making, identifying opportunities and assessing information. This means that if a small business owner can further develop these skills they can also engender trust in their staff, and ideally become more trusting themselves and so more willing to delegate. Inspiring trust can make it easier for entrepreneurs to take people with them. Small business owners are prone to heading off into uncharted territory but don’t always look behind them to see who is following. Finally, strategic skills that enable the entrepreneur to take a step back from the day-to-day business and look at broader challenges are regarded as extremely valuable. It’s important to step off the treadmill and get new ideas. The owner-manager is often focused on dealing with the latest urgent problem, rather than taking an overview. But as the business grows it becomes more clear that this fire-fighting role is not enough. Once a business gets to a certain size many owner-managers realize they can’t just focus on the present but must also think about the future.

Training When it comes to the kind of training that owner-managers are seeking, the focus is on informality, networks and a practical approach. Research produced in 2002 by a


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government taskforce, the Council for Excellence in Management and Leadership (CEML), stressed the importance of informal learning for small business owners. It also argued strongly that the kind of training available should be led by demand. Entrepreneurs want training that takes a problem-solving approach and is delivered in short, bite-sized chunks because these people have so little time. The report adds that the training must also be seen as highly relevant to the business. Others agree that small business owners often don’t have the time for courses and so favour flexible learning that is not regarded as academic. They must see it as having a direct impact on the business. As a response to this need, ILM announced that from September 2007 its leadership and management qualifications will be unitized. This means that businesses will have the flexibility to put together units to tailor their own courses, or simply choose to take units on a stand-alone basis. This move means we are bringing learning into more tightly focused topics that can be built up into a qualification bit by bit, if that is what the customer wants.

Advice and support Informal mentoring from an accountant or solicitor is one way small business owners get advice and support. Although some people question how valuable such advisers are in giving wider business advice, they can often play an important role. Ownermanagers take a lot of care in choosing their accountant because they know that the individual can be useful in other matters as well. For ongoing advice and support, owner-managers can turn to a number of resources. These range from informal trusted advisers, such as the owner-manager’s accountant, to SFEDI-accredited advisers and ILM networks. These two organizations work closely together, with ILM providing the qualifications that certify the SFEDI advisers’ competence.

The ILM and SFEDI have teamed up to explore how the leadership process in a growing business can be improved. The ILM is the largest provider of management education qualifications in Europe. It strives to ensure that its membership services provide the kind of support and advice that owner-managers need, making sure that the ILM is a place where people can get answers to their questions on training and development. It puts on many networking events for its members, at which owner-managers can meet their peers and exchange experiences.

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Further details: ILM, Stowe House, Netherstowe, Lichfield, Staffordshire WS13 6TJ Tel: 01543 266 867 E-mail: [email protected] www.i-l-m.com Established in 1995, SFEDI aims to continually raise the standard of learning, training, coaching and business support available to prospective and existing small and home-business owners. It has a wide-ranging network of accredited business advisers, who offer guidance and support to small companies and can be found at the SFEDI website or at the many centres licensed by the organization across the country. Further details: Tony Robinson OBE, SFEDI Ltd, PO Box 159, Newton Aycliffe DL5 6WE Tel: 01723 368557 E-mail: [email protected] www.sfedi.co.uk

9.6

The new Companies Act

Changes are happening to how a company and its directors officially account for themselves. Tom Smith, customer delivery director at Companies House, explains

The Companies Act 2006 will come into force in stages between now and October 2008. This is not the place to go through the new Act section by section, but it is worth picking up on some key ways in which dealing with Companies House will change.  We will have a UK-wide system with the application of GB company law to Northern Ireland.  There will be a new and simpler incorporation process.  The rules on company names will change: we will apply new and tougher rules regarding whether a proposed name is the ‘same as’ an existing name. Changes of name will be easier.  There will be changes relating to directors and secretaries. A private company will not need a secretary but if it does appoint one, the details of that secretary must continue to be filed with us. This takes effect in April 2008. In terms of the transition, we shall assume that all existing company secretaries remain in post unless we are told otherwise – so a company that is retaining its secretary need not file anything.  We shall be enforcing the new rules on directors to make sure that all companies have at least one director who is a ‘natural person’ (ie not a corporate director) and that all directors are over the age of 16.  In another major change, all directors will be allowed to keep their home address off the public record without needing to show that they are at risk. So we shall



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be keeping two registers of directors’ addresses: service addresses for the public record; home addresses for law enforcement and credit reference agencies.  In terms of filing obligations, the most significant change will be the reduction in filing deadlines for annual accounts. Private companies will have 9, not 10 months after the end of their reporting year; PLCs will have 6 months, not 7.  Finally, the Act says a lot about the role and powers of the Registrar of Companies. Some of this consists of restating in law our existing practice (such as the power to reject filings that are not in the right format to appear on the public record). But there will be good news for anyone who has ever been told by us that only a court can amend the register. In certain cases where a filing is obviously false, we will be able to put it right. In certain cases where a company has been struck off and obviously should not have been, there will be a system of administrative restoration.

The ‘e’ way is the easy way Companies House has long been committed to harnessing the power of technology and of the internet to improve our service to our customers. Eighty-five per cent of all filing transactions by volume can now be sent to us electronically. With our recent launch of the electronic filing of accounts, the majority of companies need never send us a piece of paper from one year to the next. Our research tells us that, of our customers who have tried electronic filing, the majority love it and would not want to go back to paper. We know that we also have many customers who have no particular problem with electronic filing but who stick with paper because they are familiar with it and because it works well enough. For these customers, the impending new Act is the perfect opportunity to explore electronic filing. Our systems will change in any case – new forms, new requirements and new possibilities. Our electronic customers will be guided through all of this on their computer screen and will find it difficult to go wrong. As well as continuing to develop a high-class web portal, we will work closely with the key company software providers to make sure that their customers enjoy a seamless transition. It is difficult to see, under these conditions, why anyone would want to go to the trouble of learning about a new set of paper forms. It is worth mentioning also that the Act gives the Secretary of State the power to specify that certain transactions involving Companies House can only be performed electronically. While we have no immediate plans to mandate electronic filing, we are clear that our future is that of a fully electronic information exchange. As we invest in the future, our electronic systems will continue to get better, cheaper, easier to use and more secure; paper will struggle to keep up. In addition, when you file electronically you are able to join our Protected Online Filing scheme (PROOF), part of our three-point plan to help prevent identity fraud.

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THE NEW COMPANIES ACT 297 

Go electronic to beat the corporate identity thieves Identity theft is becoming a major concern. Less well known, but just as serious, is the problem of ‘company identity theft’, which affects both companies and their suppliers. There have been cases where criminals have falsified the public register of companies in order to ‘hijack’ a company and trade off its credit rating. This is a challenge that we at Companies House were determined to respond to. But there are limits to how far we can protect you if you deal with us on paper. We are therefore urging our customers to sign up for a simple three point plan:  Electronic filing. In other words, you give us the information about your company electronically. We issue you with a password, which ensures that any changes only come from you.  Protected online filing (PROOF). Sign up to the PROOF scheme, thus telling us that you will only deal with us electronically. So we reject any paper filing which claims to come from you.  Monitor. Sign up to the Monitor scheme and then for added reassurance, you will receive an e-mail every time your company details change on our records. You can also use Monitor to keep an eye on any other company you nominate. There are many other advantages in doing business with us electronically. We send you an e-mail to confirm that your information has arrived – no more documents getting lost in the post. We check your information on the screen when you type it in – no more documents getting sent back to you because you made a small mistake. We charge you a lot less to file electronically, because it costs us a lot less to work that way. We don’t want to alarm our customers unduly. But we cannot deny that company identity fraud does happen and that some criminals have managed to exploit our paper handling systems in the past. That is why we urge you to follow this simple plan to protect yourself. For more information on electronic filing and on PROOF and Monitor, visit our website at www.companieshouse.gov.uk. (This advice by Companies House is endorsed by the Metropolitan Police.)

For Companies House, implementing the new Act is its single biggest challenge between now and October 2008. As an executive agency of the Department for Business, Enterprise and Regulatory Reform, it was involved in working very closely with BERR (previously DTI) colleagues when the legislation was going through Parliament. It will continue to work with them to make sure that it gets the detailed implementation – the rules and regulations – right. It is also working to make sure that its IT systems and internal processes work without a hitch from day one. Finally, Companies House has a priority to make sure that its customers


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– especially the vast majority of its customers that are small companies – know what they have to do and find it easy to do. Contact us at: www.companieshouse.gov.uk/

10

International expansion


10.1

International growth for SMEs

The world really can be your oyster, says Frances Trought at London South Bank University, as long as you take some precautions before launching yourself

This article focuses on key areas for small and medium enterprises (SMEs) to consider before they commence trading overseas. The importance of research is stressed at each stage, as this underpins the success of the SMEs in both selecting their target market and identifying the mode of entry. Lessons are also highlighted from those with experience of entering international markets.

A flat world after all With the recent advances in technology, transportation, communications and the opening of markets (China, Eastern Europe, Russia, India), Friedman (2005) argues that ‘the world is flat’. He argues that these changes have ‘created a global, web enabled playing field that allows for multiple forms of collaboration on research and work in real time, without regard to geography, distance or… even language’. This levelling of the playing field has benefited SMEs’ ability to compete internationally. SMEs account for over 90 per cent of all UK exports, despite the fact that larger organizations account for 63 per cent of the value (Harris and Li, 2006). This picture is similar across the globe. Size is not the key determinant of success on the international playing field. ‘The size of a business does not determine its ability to

 302 INTERNATIONAL EXPANSION

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enter global markets, but it may influence the number and scale of markets a business can enter’ (Hatten, 2006). SMEs often find themselves competing with international companies within their domestic market. As a result, it is not a company’s size which determines its ability to compete, as ‘size doesn’t matter’, it is in actual fact the ability of the company to plan its mode of entry into the international arena. It comes back to old adage that behind most successful small businesses is a solid business plan, and this is no different for companies interested in competing on an international level.

Going international checklist 1. Are you ready? It is unlikely that you will succeed on an international basis if you have not yet clearly defined your competitive advantage within your domestic market and identified whether this is transferable to an international domain. 2. Flexibility. Can your product be easily modified to comply with international regulations and conditions? 3. Cultural difference. Do your product, company name and logo travel well? Check their meaning and connotation in your potential market. 4. Identify an opportunity. On what basis do you think there is a potential international marketing opportunity for your business? 5. Can you afford it? Do you have sufficient resources, both tangible and intangible, to develop your international strategy? Operating internationally can have a significant impact financially in the initial stages, and also on the company resources. 6. Patience is a virtue. Do you have the level of commitment and patience needed to commence trading overseas? It is not an overnight process and can be very timeconsuming in the beginning to ensure all regulations are met. 7. Do you have control issues? What level of control are you willing to relinquish in order to establish your product overseas? This will impact on the mode of entry adopted.

Knowledge is power It goes without saying that the more information you have about potential markets, the more informed your decisions will be. Doole and Lowe (2004) have developed the 12 C framework for analysing international markets to ensure that SMEs gather sufficient information about specific areas when making their decision. In order to make a full assessment of a potential market opportunity SMEs need to be able to address the following areas. Burca et al (2004) highlight the common errors made with international research:  The importance of understanding the culture of the target market is ignored and is often not an integral part of the research.  The research is insufficient and so the conclusions drawn lead to a misguided understanding of the market.

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INTERNATIONAL GROWTH FOR SMES 303 

Table 10.1.1 12 C framework for analysing international markets Country

Concentration

• • • • • •

General country information PESTEL(*) and industry analysis The size of the market segments

Commitment

• Trade incentives • and barriers • Customs and tariffs

Channels

• Physical • distribution and • cost • infrastructure • • • • • • •

What media are available to promote the product? Pricing Conditions of payment

Currency

•

Stability

Caveats

• Factors to beware • of

Culture/ consumer behaviour

• Understand the • culture of the • country

Communication

Choices

• • • • • • • • • • •

Capacity to pay

Consumption

Contractual obligations

Characteristics of competitors Competitive strengths and weaknesses Market share by demand Growth patterns of sectors Business practices Legal obligations

* PESTEL: Political, Economical, Technical, Social, Environmental, Legal. Source: adapted from Doole and Lowe (2004).

 The need for research is ignored and so companies have no prior knowledge about the market.

Related websites to conduct research analysis on international markets UK Trade and Investment: www.uktradeinvest.gov.uk World Trade Organization: http://www.wto.org/ British Chambers of Commerce: http:///www.chamberonline.co.uk/exportzone Trade show information: http://directory.tradeshowweek.com/directory/index.asp


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Mode of entry – identifying the right mode for your business Lu and Beamish (2001) found that the success of SMEs operating overseas was dependent upon the mode of entry adopted. Therefore the need to match the firm’s resources and capabilities with the mode of entry is essential to devising a successful strategy. There are various options available, with varying levels of control, commitment and risk, from exporting goods overseas to full production of the product within the foreign market.

Factors affecting the mode of entry The factors are:         

level of experience; risk; control needs; learning curve; firm’s size; firm’s marketing objectives; market information; level of commitment; financial implications.

(Source: Burca et al, 2004.)

Exporting Exporting is the most common form of market entry adopted by SMEs due to the low level of risk and investment required. Often SMEs become exporters by accident, merely accepting an overseas order and subsequently recognizing the opportunity for further sales. There are two forms of exporting direct and indirect. Direct exporting is where the SME either sells directly to the end user or hires the services of agents or distributors in the target market. With the introduction of the internet this is also proving a viable means for small businesses to trade directly with overseas customers. (Burca et al, 2004). Direct exporting allows the SME to maintain a degree of control, with the added value of local market information if they enlist the services of an agent. Indirect marketing differs from direct marketing as SMEs enlist the services of export agents within their domestic market, either on the basis of commission or with the export merchant purchasing the goods for export. With this method of exportation, although the SME gains the experience of the agent/merchant, it has less control over the process. Exporting presents many benefits to an SME, but it is important to be aware of some of initial costs and often delays in payment and how this will affect your organization. Below is a list of possible costs, which SME must research to ensure that a trade on an international basis is profitable:

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UK's Top 10 Export Trading Partners 2006

Country

Sweden Spain

Series1

Netherlands Germany USA 0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

£ Millions

Source: HM Revenue & Customs overseas trade statistics (2006).

Source: HM Revenue and Customs overseas Trade statistics (2006).

Figure 10.1.1

      

product modifications, packaging and labelling; agents’ fees or commissions; distribution costs and the effects on the pricing and profit margin; custom documentation; insurance; payment – delay of receiving payment despite incurring shipping fees; cash flow, which is always an issue for SMEs: long delays in receiving payments can have a significant effects on small organizations.

Advice from an industry panel The Innocent founders – Richard, Jon and Adam  Keep the main thing the main thing: that is, understand why you’re different and don’t let that slip. Take every opportunity to communicate it and extend that difference.  Pay attention to the details – everything matters, especially when you’re small. People notice things. Make sure they notice you for the right things – from the way you answer the phone to the tone you use in your website.  Everything takes longer than you think. Obvious, but it is easy to get over-optimistic and carried away thinking things will happen instantly; they don’t.  Try before you buy. Don’t commit too much to something new without checking it first – this is really easy to forget, especially when in a rush.


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Mike Southon, The Beermat Entrepreneur    

Distance from home market (closer the better). Size of target market (must be worth the effort). Language issues (will they accept products/services in your language first?). Likelihood of getting friendly first customer in local market (you can use them as reference customer/leverage).  Political stability and economic outlook in target market.

Carol Rene, Business Hub founder  English is a great language, but consider translating your website into more than one language.  If selling online, consider the currency variations in different markets and how these will be managed.  Ensure that your website terms and conditions state quite clearly how and where legal disputes will be handled and what law governs these.  Culture, language and terminology are important factors – take the time to do your research.  Use your site as an informal means to assess overseas opportunities, where unsolicited orders are placed by overseas customers.

Craig Pym, head of world trade, London Chamber of Commerce and Industry  Research – it’s shocking how little research some companies do when entering a new market. Obviously chances of success are vastly improved if you understand the market dynamics.  Local expertise – you will never understand a market as well as someone who lives there and works in marketing.  Tailoring the product – not just to local specifications, but also to make it more attractive to local tastes and to fit in with local systems.  Local partners – consider tie-ups with existing manufacturers/distributors to take advantage of their marketing and distribution channels.  Terms of reference – express the offering in terms that local businesses/consumers understand.

Conclusion The world is your oyster as an SME operating in today’s market. The barriers that existed for SMEs have been reduced and this has provided them with the ability to seize opportunities presented in overseas markets. The key obstacle they face is their own inability to see the benefit in planning. Therefore, it is essential to ensure that before any investment is made in trading overseas the SME has conducted significant research in the target market.

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Bibliography Bradley, F (2005) International Marketing Strategy, 5th edn, Pearson Education, Harlow Burca, S, Fletcher, R and Brown, L (2004) International Marketing: An SME perspective, Pearson Education, Harlow Doole, I and Lowe, R (2004) International Marketing Strategy Analysis, Development and Implementation, 4th edn, Thomson Learning, London DTI (2006) Economics Paper No 18: International Trade and Investment Economic Rationale for Government Support, July, p 12 Friedman, T (2005) [online] http://www.nytimes.com/2005/04/03/magazine/ 03DOMINANCE.html?ei=5090&en=cc2a003cd936d374&ex=1270267200 (accessed 5 June 2007) Harris, R I D and Li, Q C (2006) Establishment Level Empirical Study of Links between Exporting, Innovation and Productivity – CIS4, Interim Report to UK Trade and Investment, May Hatten, T (2006) Small Business Management Entrepreneurship and Beyond, Houghton Mifflin, Boston, MA HM Revenue & Customs (2006) Overseas trade statistics [online] http://www.uktradeinfo.com/index.cfm?task=summaryTrade (accessed 5 June 2007) Lu, J W and Beamish, P W (2001) The internationalization and performance of SMEs, Strategic Management Journal, 22, pp 565–86

Frances Trought is currently a senior lecturer at London South Bank University, specializing in enterprise and small business development. She is currently the course director for the Foundation Degree in Enterprise and Small Business Development, which aims to provide the practical skills needed to start or develop your business. Frances also teaches on short courses organized for organizations in the public and private sector. E-mail: [email protected]

10.2

Turning exports into profits

Exporting adds a whole new dimension to your business, says David Dinsdale, director, businesslink.gov.uk

Although your business may have an established UK market, there’s often no reason why it couldn’t successfully compete overseas too, growing your revenue and profit. Exporting can extend your market, boost your turnover and prevent your having too great a dependence on your UK-based customers. But it isn’t always an easy option. Starting to export poses a whole new set of challenges, from identifying promising markets and customers to ensuring that you can fulfil your export contracts. It’s important to remember that developing new export markets takes time and money.

Assess the market Before you commit to exporting you need to objectively assess your export potential –in terms of both the readiness of your business and your product or service. You need to have sound knowledge of your target markets. You also need to consider whether your products are right for each target market and whether you have the necessary resources. It’s essential to carry out detailed market research to identify and evaluate the target market. Examine:  the industry structure;  the predicted demand for your product or service;



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 competition and how you plan to fit into that marketplace;  any modifications required to make your product or service saleable, eg modifying packaging to meet local regulations and standards.

Develop your export plan Exporting isn’t simply an add-on to your existing business. It should be part of an overall strategy to develop the business. After completing your market research, you should draw up an export plan defining how you will enter the new market, considering all the costs and risks involved.

A marketing strategy that incorporates international trade development Exporting presents all the normal challenges of marketing in the United Kingdom – it’s up to you to find customers and convince them to buy from you. Understanding what customers want and how the overseas market operates is vital.

An understanding of export payment mechanisms and export procedures You need to cope with extra logistical problems, contractual issues and paperwork. You’ll probably want a contract drawn up using internationally recognized terms and conditions and standard commercial practices to make it clear what your responsibilities are. There’s also a range of paperwork for sorting out transport, customs clearance and payments.

The right people to develop the new export markets You will need to devote extra resources to handling your exporting business. Exporting needs special skills, such as organizing international transport and handling customs clearance. Many businesses find that the best way to get started is to buy in the services they need, and build in-house skills and resources later. For example, you might use a local agent to sell, and a freight forwarder to handle deliveries.

Adequate knowledge of the requirements of your chosen market You need to comply with regulations in both the United Kingdom and overseas. Some goods that are allowed in the United Kingdom might not satisfy another country’s standards or even be legal there.

The necessary financial resources Exporting can also be financially demanding. Customers often want credit from the time they receive the goods. For a long-distance shipment, this could be weeks after you produced and shipped the goods, so you get paid later than you would by a

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TURNING EXPORTS INTO PROFIT 311 

customer in the United Kingdom. At the same time, you may have to meet extra costs like transport and insurance. The more successful you are, the greater the demands placed on your business will be. It’s worth planning ahead to be sure you have the capacity to handle the extra production, selling and after-sales support. With the additional costs, such as international transport, you may find you simply can’t compete with local suppliers. If the market only offers low margins, or you haven’t got the resources you need, you may decide that exporting isn’t for you. But if you have a good product to offer and a well-run business, the chances are there are opportunities out there. If the rewards you expect justify the investment and the risks, you should commit to your export plan and make it happen.

Review your export readiness You can use these points to help you decide whether you are ready to start exporting or what else you need to do to prepare.

Planning and strategy  Do you have a well-defined export strategy and a thorough plan? How will you start exporting, and how will you develop your export business?  Do you have the resources you need to carry out your plan, eg finances, personnel, production?  How will you build your export skills?  How much do you expect to invest, and what return do you expect?  Are you committed to exporting? Have all the key people in your business agreed?

Marketing  Do you know what markets you will target?  How much research have you done into your target market? Do you understand the business culture and legal environment?  What is the market for your product? Who are the competition and what do they offer?  Will your product need to be modified to meet local regulations or customer requirements?  How will you position your product? What price will you charge?  How will you market and promote your product? What distribution channels will you use?

Export procedures  What contracts will you aim to negotiate? What are your preferred Incoterms and will these suit your customers?  What payment method and terms will you offer? Do you have the skills to handle any specialist methods such as letters of credit?


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 How will you transport your products? Will you use a freight forwarder?  Have you identified all the costs, such as transport, insurance, duties and taxes? Will your export business be profitable after taking these into account?

Export support services Businesslink.gov.uk has recently developed a series of practical ‘how to’ guides on international trade, to help UK businesses grow through importing and exporting. The guides have been developed in partnership with the key government departments and agencies involved in international trade, with the aim of bringing information about regulation and compliance from across government to the one place. The full set of guides is available at www. businesslink.gov.uk/internationaltrade. In addition to 80 practical guides on importing and exporting, businesslink. gov.uk has launched an interactive online tool that can help you identify export opportunities in your target country. The site also has interactive tools covering Duty and VAT liabilities when importing; Customs reliefs and procedures; and Incoterms. UK Trade & Investment offers a range of services for UK exporters including the Passport to Export programme, which offers a free export health check, mentoring and ongoing advice, subsidized training and market visits. UK Trade & Investment enquiry line: 020 7215 8000 www.uktradeinvest.gov.uk You may decide that you want to work with a local partner, using their expertise and contacts. UK Trade & Investment’s Overseas Market Introduction Service (OMIS) can help you trace appropriate agents, distributors, etc. The service can also help you assess whether there is a market for your goods, for a charge. SITPRO offers a range of information to make international trade easier. Find trade briefings on its website, www.sitpro.org.uk. You can also take advantage of their free advisory service by calling the SITPRO Helpdesk on Tel: 020 7215 8150. The British Chambers of Commerce also offer export services such as export training and help with export documentation. www.chamberonline.co.uk/ exportzone. You may also want help in several other areas:  An experienced lawyer can help with contract negotiation.  Your bank can advise you on payment methods, financing and handling foreign exchange.  You may want to use a broker to find the right insurance. www.businesslink.gov.uk/internationaltrade

10.3

Managing international expansion

Expanding your business across the UK border represents many challenges, especially for SMEs with limited resources for risk-taking ventures. Knowing your way through the maze will make your decisions and implementation easier. Liesbeth Staps, deputy director of the Netherlands Foreign Investment Agency in London, provides some directions

In this increasingly global economy, the large UK market is sometimes not large enough. If it does not support your need for growth, you need to expand beyond the United Kingdom. Companies with ambition wish to grow across the Channel, where opportunities lay ahead. An international strategy can increase sales and geographical market coverage. Expanding your business in Europe is easier than, for example, in the United States or Asia, due to distance and culture. Moreover, with the single market in the European Union there are no more duties and legal issues related to trading. The euro makes international trade between the eurozone countries even easier, and limits costs and risks by currency conversion. And with the European market being the largest consumer and industrial market in the world, it is worthwhile considering taking this road. Exporting your products overseas requires building commercial relationships with your clients, suppliers and partners in those particular markets in order to be successful. At one point, the international business might demand local presence and support to existing customers as well as increased local capacity to develop new


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MANAGING INTERNATIONAL EXPANSION 315 

relationships. Setting off for expansion outside the United Kingdom can be a rather challenging way to success, though.

Where to start A good start is half the battle, so focus on a clear business plan with clear and feasible objectives. Be prepared to take one step at a time, and have a strategy ready in case of a disappointing scenario. Knowing your market is key, thus investing in good market research is justified for the investment in a foreign operation. Furthermore, a company on the verge of setting up abroad should consider all legal and financial issues. Countries have different jurisdictions. This applies to all aspects of doing business, such as legal structure of the company, leasing property, labour legislation, accounting and invoicing. On-the-spot investigation is indispensable. But where to locate and what to consider? When setting up abroad, your company should capitalize on the location of your existing customers. Take advantage of the already established relationships, as they are ‘the low hanging fruit’ for your future sales increase. They will need local customer services and support. But there is more to it; while the current most successful market looks the best location at first instinct, this location might not be enough to support your business five years from now. Your new facility is not only to serve the current market base, but has to be viable in some years ahead as well. Factors critical to your success can change considerably as the geographic scope of your business expands. Therefore, with thinking ahead, you create not only a good first step on the Continent, but an even better stepping stone for further European expansion and avoiding the cost and disruption of having to move later.

An informed decision to get on the right road Hence proximity to your enlarged customer base and accessibility to additional markets is crucial. Additionally, other factors determine the best location for your business in the long run. Obviously these factors and the importance of each of them heavily depend on the nature of your business and the type of operation you want to set up. Infrastructure, labour, and business environment vary significantly throughout Europe and should be examined carefully when comparing potential locations to take an informed decision. The geographical location and infrastructure largely determine the cost and delivery times for your products and the accessibility of your people to serve your customers and develop additional markets.  A good airport with many direct connections to major European cities and your own UK office provides time-efficient and convenient sales travel.  High-speed passenger rail services link major European cities connecting including London. Easy access to roads provides flexibility in reaching your customers.


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 The availability of affordable office space (eg with flexible serviced offices) minimizes risks, costs and up-front investments.  And last but not least, in today’s digital age, an excellent IT infrastructure with high-speed internet access is essential for effective communication within your international organization and with your customers. Furthermore, the availability of qualified staff is a very important factor. In developing the market across Europe, with many languages and cultures, local knowledge combined with international experience and preferably multilingual skills is crucial. With respect to the labour force, the labour regulations are worth considering too; the possibility for flexible contracts might permit you to manage workloads more easily, and respond faster to peak situations. Also, temporary contracts or open dismissal laws enable you to minimize the risk in case of poor results. The general business environment determines the long-term success of your international operation. If you choose a region with political and economic stability, a reliable banking system and consistent regulations, your company is less likely to be disrupted by factors beyond your control. A region with an international outlook cannot only facilitate you as a foreign company but also benefit you in your drive to get access to markets and potential customers across Europe. The tax climate provides the basis for your results below the line, for your current trade and future expansion – either by setting up on your own or by acquisition. Following the Netherlands, many countries are reviewing their fiscal regimes to be more competitive in the European marketplace, so differences are well worth exploring.

You never walk alone Setting up in a new country can be tough, costly and time-consuming, and your company’s success is at stake. It pays to have high-quality service and support. There are many advisors out there, and often even at low cost. Do not hesitate to contact inward investment agencies. The Netherlands Foreign Investment Agency was one of the first to be set up, but now almost every country has a national government agency for providing you with information, advice and practical assistance to facilitate your international expansion strategy. From the early stages of considering a foreign establishment, through the decision on a country and a specific location, they can provide you with the data for your business plan, introduce you to their network and find available property. They often employ skilled business professionals who have assisted many companies before yours and leverage that experience to your benefit. They know the way through the maze and how to address the right people to facilitate your smooth landing. You do not need to look far as most have an office in the United Kingdom or a representative at the economic department of the embassy. Through them, you can also contact their regional counterparts, regional development agencies, which are specialized in specific knowledge on a particular city or region and can introduce you to local contacts getting you started quickly. Other good local sources are the chambers of commerce.

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MANAGING INTERNATIONAL EXPANSION 317 

And for all the necessary internal arrangements, do not forget your own lawyer and accountant; they know the consequences for your company of an international operation and might have already established relationships with their counterparts abroad to facilitate the set-up. Likewise your bank can advise you on international banking and the financial resources. So any way you can save money, time and trouble, go down that road to make your first international venture a success.

The Netherlands Foreign Investment Agency provides companies with assistance and advice regarding establishing, expanding or reorganizing their pan-European operations in the Netherlands. The NFIA can assist you at every stage of your strategic decision making, with information, advice and practical help. Services are confidential, without obligation and free of charge. Netherlands Foreign Investment Agency, 38 Hyde Park Gate, London SW7 5DP Tel: +44 20 7225 1074 E-mail: info@nfia.co.uk www.nfia.co.uk

10.4

Foreign exchange transfers

Helen Scott, managing director of 4X Currency, sets out a comprehensive check list for foreign exchange transactions

With the pound at a 15-year high against the dollar, offering rates not seen since 1992, everyone – from individuals to blue-chip companies – is looking to purchase foreign currency, and the number of transactions is rising. Yet most of us don’t fully understand how foreign exchange (FX) works, and as a result we might not be getting the best possible deal, losing money in the process. Added to this, banks don’t always provide consumers with the most competitive rates, which has led to the rise of a growing number of specialist exchanges that are handled by expert FX brokers. So how can you ensure that you are getting the best market rate with the plethora of options that are currently available?

Understand the terminology – the three different types of exchange rates Interbank rates This is the rate that banks and big financial organizations deal at among themselves, and is not a rate for companies or individuals. Interbank rates are effectively ‘wholesale’ trading prices that are used where large quantities of money are being exchanged.



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Ceefax and the BBC websites display interbank rates but you can’t deal at them. The interbank rate changes continuously, often exceeding half a million times per day.

Indication rates When a company quotes indication rates these are effectively meaningless. This is because an indication rate is simply an approximation based on the interbank rate at the time in question. A company is not legally bound to provide a deal at this rate, and it may be used simply to entice a customer to register with it. A good bank or specialist FX provider will offer an indication rate that is fairly close to the dealing rate; however, it can never be guaranteed.

Dealing rates This is the rate at which all foreign exchanges are dealt. Generally speaking, a prospective customer won’t be quoted this rate unless it becomes registered with either a bank or an FX company. In order to find the best dealing rate, it is recommended that you register with about five different providers. When registering you will go through a number of anti-money laundering checks, and only then will you be able to receive an accurate dealing rate quote. 4X tip: When purchasing foreign currency and approaching different FX providers, be aware that the rates quoted will almost always be interbank or indication rates. Even though it might appear to be a very attractive rate, it is not an accurate price and you might end up paying something completely different. When looking to buy foreign currencies, ensure you register with banks or FX dealing companies first – this way you can ensure the quoted price is the one you end up paying.

See what you’re getting and insist on speed Currency rates change constantly, sometimes up to half a million times a day, yet banks routinely provide their customers with just one exchange rate for the day, causing them to miss out on beneficial rate movements. Worse, some banks don’t even reveal the rate that the currency has been bought at until several days later. In addition, payments can sometimes take from three to five days, leaving you without the use of your money and your supplier paid late. 4X tip: Always make sure you are being quoted dealing rates in real time and that you have full transparency of the rate you are going to deal at before you agree to the trade. The best way to ensure you are trading at the most up-tothe-second prices is to use an online system that shows live rates as they are changing, then you are in control of the rate you choose. Make sure your provider operates same day international wire payments – they are making plenty of money out of your deal and they shouldn’t also be making interest on your money.

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Trading your money – not as simple as it may seem? Being FX knowledgeable involves having an understanding about the different types of trades available. A spot trade is a transaction based on the current market rate, which is paid for straight away. It is suitable for anyone wishing to purchase currency and pay for it all immediately. A forward trade is where you fix the exchange rate now for a specific date in the future (up to two years ahead). In other words you are ‘buying now, paying later’. To lock into a guaranteed exchange rate, private clients and small businesses will have to pay around 10 per cent of the value straight away (a margin deposit) and the balance on or before the maturity of the contract. 4X tip: Different trades can work well in different circumstances. For example, while a spot trade will enable a quick and efficient transfer you cannot always guarantee that the rates will not change to a more favourable one. Forward trades are usually not as cost-effective as spot trades but may be beneficial if you don’t want to risk a fluctuation in the currency movement. You must however remember that currencies do fluctuate, and even if you buy it at a fixed rate, you cannot guarantee that rates will not change for the better. For companies needing to minimize the risk of exchange rates movements, a forward trade could be the best option, but many are afraid to do so because they don’t fully understand the implications or benefits. It is an agreement initiated by you to buy or sell a specific amount of foreign currency at a certain rate, on or before a certain date. Forward foreign exchange contracts are a secure and simple way of hedging when you are confident your deal will go ahead and the currency will be required. Imagine you will need to purchase components worth €100,000 from a German supplier in 12 months’ time. One euro might currently be worth 60 pence, meaning the supplies would theoretically cost £60,000. However, if the euro increases in value to 67 pence over the year, they would cost you £67,000. If the euro is expected to increase in value, you might agree a forward foreign exchange contract to buy €100,000 for £62,000 on a specified date. Of course, you will lose out if the euro falls in value. This option suits businesses that trade in a volatile market or to tight margins, and require large amounts of currency in relation to turnover. The advantages are that you are protected against any adverse movements in the exchange rate, and you can set budgets knowing exactly how much the transaction costs. The disadvantages are that you have to go ahead with the contract once you have arranged it, regardless of whether your circumstances change, and because the rate is fixed, you can’t benefit from any favourable movement in the exchange rate.


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The hidden costs of FX Most, if not all, FX transfers incur hidden costs, and if you are transferring less than £5,000, overheads do become quite significant. Banks will charge on average £20 for sending the currency to an overseas account. Some banks and FX companies also charge administration and commission costs, although these are often incorporated into their dealing rates. Commission is charged at a percentage of what you are buying – often up to 2 per cent of the total amount being transferred. 4X tip: Always make sure you are aware of any hidden costs before going ahead with a transaction. Remember to factor these costs in to the overall decision to go with a particular FX company.

Be careful when accepting financial advice from the dealer The Financial Services Authority does not regulate the currency industry in the same way that it monitors derivatives or mortgage lending companies. Because of this, many FX companies are not legally allowed to give advice to their customers, and are not in a position to predict which way the market is heading or what the conversion rates will be in the future.

Above all, shop around! You wouldn’t buy car insurance without researching the different options first, but it’s surprising just how many people – large companies included – agree to the first foreign exchange rates they come across. This is mainly because of a lack of understanding of the terminology and the options that are available. Since registration is normally free, it makes sense to take your time and consider various options, because ultimately this could save you considerable amounts of money.

Helen Scott is founder and managing director of 4X Currency. She is an ex-City trader and fund manager with key roles at Société Générale, Daiwa Securities and Seymour Pierce. 4X Currency is the United Kingdom’s leading online provider of foreign currency exchange services, and is the first company in the world to offer live online foreign exchange rates to individuals, taking in up to half a million real-time exchange rates a day from the London market. For more information visit www.4xcurrency.com

10.5

Doing business in China

China’s economy is a phenomenon, says Thierry Labarre at Mazars in China, but it is one that moves at its own pace

China: key figures      

China’s economy grew 10.7 per cent in 2006. China’s GDP is US$2,279 billion – the world’s fourth largest. Foreign direct investment (FDI) – US$60.3 billion. Foreign trade volume – US$1,422 billion. Foreign currency reserves – US$1.07 trillion. Total household savings in banks – US$1,838 billion.

Some interesting facts  There are now over 160 Chinese cities with a population over 1 million.  New power capacity in 2006 = 102 Gigawatts.  In 2004, there were just 4 US dollar billionaires in China. In 2005 this number rose to 7, and in 2006 it reached 15.  Beijing Bentley has sold more stretch limos priced over US$1.2 million than any other dealership in the world.  China is the second largest carbon emitter after the United States (but only 0.65 tons per person, ie one-fifth of the OECD average).  Food-borne diseases affect 300 million Chinese per year, causing up to US$14 billion in lost productivity and medical expenses (source: ADB November 2006 report).


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Everybody’s talking about China, and it’s not hard to see why. It is destined to be this century’s great economic success story (albeit with strong competition from its neighbours on the subcontinent). Unsurprisingly, low labour and manufacturing costs are a big part of the attraction, but they are no longer the main motivating factors for doing business in China, as they once were.

China’s allure Recently, there was a survey of 1,410 CEOs from 45 countries. They were asked to project overseas investment from 2006 to 2009. Fifty-five per cent said they planned to invest in China, ahead of both India (36 per cent) and Brazil (33 per cent). Fortyeight per cent were attracted by low manufacturing costs, but far more, a whopping 75 per cent, were excited about business opportunities in China’s own domestic markets. It’s not just about consumers, either. With a population of 1.3 billion, China’s talent pool is the deepest in the world. Naturally, as the economy continues to skyrocket, salaries are steadily rising too, by roughly 10 per cent every year (as measured in 2005). But comparatively, the costs are still incredibly low. Predictably, costs are lower in the interior than they are in the booming cities on the coast. In 2005, the average annual salary for a manual labourer was US$2,979 in coastal Shanghai, compared with US$1,489 in Chengdu.

Speed setting China’s economy, and population for that matter, are growing at a phenomenal rate. But therein lies the rub. That seeming speed has misled many a foreign business. Business in China doesn’t, and shouldn’t, happen quickly. It is a distinctly different approach from the way business happens in the West, where ‘time is money’ and the dotted line is signed by the end of the day.

People before profit Everything revolves around personal relationships. True, businesses in the West are also putting more emphasis on relationships, but it’s an idea that runs even more deeply in China. It’s virtually unheard of to make a cold call, for example. Businesses are introduced by mutual contacts instead. It often takes a series of meetings, sometimes entirely social, to establish the right relationship as a precursor to a deal. But once you have earned the trust and respect of your business partner, you have won a long-term commitment. The point is, you can’t rush blindly in and expect to make a fast buck. There is a complex unspoken code of conduct, a kind of business etiquette, that is absolutely essential. Impressions count for a great deal, but in no superficial way. A kind of selfeffacing modesty for example, is much preferred to the hard sell, or elevator pitch.

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The sensitive type Essentially, you have to be the culturally sensitive type to succeed in China. The kind who will graciously take part in ceremonies, or try unusual foods. The kind who spends time experiencing the country and its ancient cultures, and modern life for themselves. Taking time to learn about China isn’t a frivolity, it’s a necessity. Despite millions of similarities, there is a subtle, but fundamental difference in the way we see business. If you are not interested enough to invest time in these kinds of things, few businesses will feel like working with you.

Ten top tips Nothing can substitute for visiting China yourself. But as a primer, before you start booking your flights, here are our top 10 nuggets of gleaned wisdom about doing business in China.

Who you know You need to make local friends, before you can do business with anyone. It’s networking, but in a much less ‘matter-of-fact’ way than we know it. It takes time to earn trust – socializing, sharing meals, exchanging gifts. Personal relationships are paramount.

Pecking orders China is still a Communist country at heart, despite the glitzy commercialism of its major cities. The good of the group is extremely important, and hierarchies and personal status are too. That often means negotiations move slowly, while all parties are consulted. Rank is highly respected.

Patience pays off Lengthy negotiations put many people off. They mistake delays for lack of interest, because that’s how things work in the West. You can’t expect things to happen quickly. Be prepared to invest lots of time and goodwill in any venture.

Eye-to-eye You won’t win anyone’s confidence without spending time with them personally. Don’t expect deals to happen all by themselves. There’s a whole process of socialization that goes along with doing business. Eye contact is also key to earning someone’s trust.

Face-to-face The idea of ‘face’ is something that matters in China – as in ‘saving face’. Personal dignity and the good opinion of one’s peers are both things that are held quite dear.


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Refusing a gift, or declining an invitation, can cause a great deal of embarrassment to your host. Paying a compliment can also be a boost to their ‘face’.

The power of understatement Showiness doesn’t go down well in China. Neither does over familiarity. It’s quite simple, really – just be genuine. Know that there are times to talk business, and times not to. Concentrate on building real trust, not talking a good game.

Blinkers off Cultural sensitivity is important, but at the same time, don’t be wrong-footed by it. As much as your character is being judged, it’s also up to you to exercise your good judgement. China isn’t any more or less utopian than anywhere else.

Right on time Punctuality, though it sounds trivial, is more important than you might think. Not showing up on time is considered disrespectful, not just discourteous. Good manners generally go a long way (but don’t just assume your ideas about manners are the same as your host’s).

Less haste Learn something from the Chinese – don’t make big decisions in a hurry. They don’t sign until they’re absolutely certain, and neither should you. China’s boom is set to continue for the foreseeable future. Don’t allow yourself to be driven by deadlines, or worry about ‘getting in on the ground floor’.

Keep your cool Anger and conflict won’t help you in your negotiations. Keep your cards close, and don’t give your emotions away. Finger pointing or shouting can lead to a major breakdown in your relationship. Stand firm, but stay calm. Thierry Labarre is the managing partner of Mazars’ offices in mainland China. Having opened the firm’s first office in Beijing in 1997, Thierry has spent more than 10 years in the country. Mazars now has four offices in China (Hong Kong, Beijing, Shanghai and Guangzhou), with over 400 staff providing audit, tax, accounting and business advisory services to firms investing there. Mazars clients in China include major foreign multinationals as well as owner-managed businesses. Tel: + 86 (0) 10 85 18 97 80 E-mail: [email protected] www.mazars.com

10.6

India – threat or opportunity?

India’s transformation and growth are bringing it within the compass of SMEs, report Ken Hunt and Julian Stretch at the Indo-British Partnership Network

The Indian economy is the second fastest growing major economy in the world. By 2045 it is forecast to surpass that of the United States, to become second only to China. Can you afford to ignore it? Lord Karan Bilimoria, the chairman of the Indo-British Partnership, sums it up by describing the ‘momentum’ of a population of 1.1 billion in a market growing by 8.5 per cent a year, which gives rise to a market that just has to be looked at by UK companies. It is no longer a market just for larger British companies. More and more of our SMEs are successfully entering this market. In recent years India has gained in confidence and has now become a major global player. To illustrate this, investment from India in mergers and acquisitions overseas more than doubled from US$4.3 billion in 2005 to US$9.9 billion in 2006. India is now the second largest investor in the United Kingdom! Today’s India is a far cry from the licensed ‘Raj’ that typified it until the early 1990s. It has deregulated, demolished its harsh import licensing regime, and as part of a continuing process allows full foreign ownership in a growing number of sectors. It welcomes foreign goods, technology and investment. Its currency – the rupee – has been convertible on trade account for many years. The growth in the economy is underpinned by a booming private sector and a rapidly growing consumer class of 300 million.


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More than half of the population is under 25. India produces around 3 million graduates a year. And the workforce is forecast to grow by no less than 263 million by 2050, compared with only 94 million in China and 11 million in the United States. There is a strong cultural heritage between our two countries and we have much in common – including a love of cricket! English is the language of commerce, and our legal systems are substantially the same. Indeed the way we go about our daily work is very similar. We feel very much at home therefore as we visit and do business in India. And it doesn’t stop at just doing business in India. An increasing number of UK companies are finding that the economics of a base or a partnership in India enables them to access third-country markets that they might not otherwise have been able to do. India’s growth today is being driven by a booming private sector and strong consumerism. Much of the initial growth over the last few years has come from the service sector, where a number of India’s IT companies are world renowned. But more recently manufacturing has started to make a major contribution, growing at 12.4 per cent in the last year on rising consumption from a rapidly growing middle class. Across the piece therefore opportunities abound for UK companies to either do business in this strategically important market or source services or products from India – or better still do both! But while India has changed, it still remains bureaucratic and its infrastructure leaves a lot to be desired – to put it mildly! The environment can be demanding, and Indian business people are among the world’s smartest negotiators. It takes time, patience and persistence to do business – often longer than the initial forecast. But the rewards can be considerable. So how do you prepare to do business in India?  Research the market before you go. Understand the size, potential and price dynamics (import and other duties are reducing but can still be significant in some cases) – and how and where you want to enter it. Is your product or service right for the Indian markets? Indian conditions can be very demanding. Remember that branding is very important. Be flexible in your approach as you may be surprised by what you see when you actually visit the market. Use organizations like UK Trade & Investment to help you.  Make sure that you have top management commitment and adequate resources to manage a business relationship in India. Send the most senior person you can from your organization – they are likely to be dealing at CEO and MD level in the Indian companies, and these people will expect to meet someone who can take decisions.  Visit the market and take time to build personal relationships – and be prepared to make follow-up visits. Go on a trade mission if you can on your first visit. This will help you to understand how business works in India – and you will learn a lot from your fellow missioners. Follow up on your return.  Consider how you want enter and do business. You may want to start by appointing an agent or distributor, or you may want to enter by licensing an Indian company to make and sell your product or service. You may finally decide to go it alone and form a wholly owned subsidiary. Of course, there are pros and cons to each. But

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in all cases look carefully at how you are going to get paid and extract profit, and make sure you have checked the Reserve Bank policies and regulations. Have a look to at the growing number of special economic zones (SEZs) as you decide where to locate. Choose your partner with care – do thorough due diligence and take independent advice. Consider what kind of agreement you need – use a lawyer with experience in the Indian market. Don’t give away too much information in advance of finalizing any agreement. And don’t be surprised if you find that your Indian partner wants to take a controlling share in your UK business! Allow plenty of time for meetings and travelling around the market. Build some slack time into your schedule to allow for unplanned meetings or others to overrun. Don’t be patronizing or under-estimate how quickly India is developing. Be prepared to sell your latest technology – but think about protecting your intellectual property rights (IPR) and what kind of agreement you need with your local partner. Understand the business culture and do not be aggressive. Business in India is relationship driven. Building and maintaining relationships with your key Indian business associates is hugely important. Often it is the quality of the relationship that will resolve a disagreement or dispute rather than the quality of the agreement. So above all, take time to establish and build those relationships. Use every opportunity for personal introductions – the British High Commission can often help to open doors which would otherwise remain closed. Don’t assume anything – but find a way of checking progress without causing the other party to ‘lose face’. Be patient – it always takes longer than you think! Do not underestimate the competition. Most countries are now active in India, and you must expect competition from the Germans, French, Japanese and Australians, to name but a few.

Some useful websites www.uktradeinvest.gov.uk www.ibpn.co.uk www.dipp.gov.in www.fco.gov.uk www.hcilondon.net www.ibef.org www.ciionline.org www.ficci.com And finally some suggestions to make your first visit trouble free. Really plan your visit carefully. And don’t forget you will need a visit visa. You can download the application from www.hcilondon.net. Try to be sure you are meeting the decision makers in the companies you want to visit – not always as easy as it sounds. Check whether there are any national or local holidays during your visit, and


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be sure to leave enough time between meetings to get from one to the other. Crossing some of India’s big cities can literally take hours. Taxis are safe but can, and do, get lost. Better to ask for a hotel car. There is a wide range of hotel accommodation in India, including some of the world’s best. The big travel season is October to March, and during this time hotels are often fully booked. So book your hotels as soon as you can – and ask the hotel to arrange to meet you at the airport as you arrive. That can save a lot of hassle. Internal air travel is good and plentiful. Overnight trains are fun, and show you parts of India you would not otherwise see.

Ken Hunt and Julian Stretch have both worked in India in the private sector and are now business advisers retained by the Indo-British Partnership Network (see www.ibpn.co.uk). This is a centre of excellence for British companies wishing to enter India, which delivers help and assistance on behalf of UK Trade & Invest to those companies.

11

Acquisitions


11.1

Growth through acquisition

Acquisitions are a powerful stimulant, so make sure you know what you are doing, advises Geoff Howles, an acquisitions specialist at Howles & Co

Acquisitions as a growth strategy There are two ways to grow your business – from within or by going outside. Most companies start by growing from within, maximizing internal resources to expand their business. And this can result in very impressive gains in performance, as a glance at any ‘Hot 100 Companies’ list each year will show. Sooner or later, however, continued growth invariably requires an external boost. This can take many forms, including:      

specialist/team recruitment; asset swaps; strategic partnerships; joint ventures; mergers; acquisitions of assets or companies.

But whatever the form, going outside implies:

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 obtaining something you do not have;  which, for various reasons, you either cannot or do not want to produce yourself. This can include, for example, a product, distribution network, geographical presence, production facility, market share or R&D. Reasons for not doing it yourself might be that it would be too expensive, take too long or be too uncertain of outcome. If it works, going outside can transform your business – as with Vodafone for example, which has grown in only 20 years from a humble beginning to a worldwide organization with some 60,000 employees and 130 million subscribers, largely through acquisitions. If it doesn’t work, however, the results can be disastrous. You only have to think of GEC Marconi, whose move into telecommunications at the time of the Dot.com bubble resulted in what has been described as the biggest destruction of shareholder value ever witnessed by a FTSE 100 company.

The hallmark of a successful acquisition The ultimate purpose of an acquisition is to increase the value of the business. Its benefits should outweigh its costs (including any opportunity costs of doing the deal). And the benefits must be real, resulting in improvements in the performance of the business and ultimately, increased returns to its owners. A successful acquisition therefore has two elements: the deal itself, and the generation of value from it.

Doing the right deal The objective here is to buy the right things, for the right reasons, on the right terms and in the most efficient, cost-effective manner possible.

Concept endorsement Acquisitions involve cost, divert resources and disrupt your business. Before proceeding with one, therefore, it is a good idea to carry out a reality check first. A little quiet reflection beforehand could save you much grief later on. Issues to consider include: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

What is the business need you are trying to address? Is this need in line with your corporate strategy? What exactly do you require to meet this need? Is an acquisition the best means of doing so or can you meet it by other (better) means? Is there a suitable target and what are the chances of successfully acquiring it? Will the benefits (in cash terms) outweigh the costs? What are the downsides and risks associated with the deal? Do you have the means (money, people, time, etc) to make the acquisition? Are there any regulatory or legal issues involved? How are you going to deliver improved performance post-acquisition?

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Internal preparation Acquisitions do not just happen – they require time, effort and money. You need therefore to ensure that sufficient resources are allocated to the deal and that you control the process.  Acquisitions are projects. The first rule is to adopt a formal project management structure with proper organization and reporting.  Allocate sufficient resource. You not only need to consider how you are going to pay for the deal but also how you are going to staff the project team needed to bring it to fruition. This will usually involve a combination of your own employees and outside advisers who can provide technical input where necessary.  Commitment. Not only must your staff be freed from their normal duties to work on the deal but you yourself must be fully committed to it and prepared to devote sufficient attention to it to ensure completion (all the while continuing to run your existing business).  Disruption happens. By definition, acquisitions are disruptive. Your staff will be distracted and your customers unsettled. You need to plan how to deal with this.

Buy what you think you are buying A famous example of where this appears not to have been the case is VW’s acquisition of Rolls-Royce in 1998, where it turned out that the rights to the Rolls-Royce name were not part of the deal. The end result was that VW, having set out to acquire RollsRoyce, ended up with only part of the group (Bentley) while its rival BMW got RollsRoyce itself. In order to be sure you are buying what you think you are buying, therefore, be clear on what you are after, and check that this is what you are in fact getting. Two ways to do so are to verify exactly what you are getting (‘due diligence’) and have good legal documentation that reflects the deal you have agreed and which gives you remedies/protection if this should not be the case.

Buy for the right reasons An acquisition made for the sake of it is unlikely to succeed. To stand the greatest chance of success, an acquisition should be driven by a clearly defined and well thought-out strategy designed to deliver improved performance. Strategy by itself, however, will not guarantee success (GEC Marconi’s strategy was, for example, clearly defined and well thought-out and might have succeeded in different circumstances).

Buy on the right terms To quote Warren Buffet, ‘price is what you pay, value is what you get’. The two are not the same, and you need to be clear what the value of the deal is to you in order to be able to calculate your maximum price. Nor is ‘price’ the only ‘term’ you need to think about. Deal structure, representations and warranties or ongoing commercial arrangements all have to be factored into the equation.


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Generating value It is easy to forget in the heat of the moment that doing the deal is just the means to an end. You can make the best acquisition in the world but if you do not manage the new business properly, you will not generate value. The real work starts once the deal is signed.

The post-acquisition plan First of all you should plan exactly what you are going to do, and when, once the deal is signed. The post-acquisition plan should be started at the outset of the process and updated throughout as you get more familiar with your target.

Integration Integration is the most vital part of the process. If the post-acquisition plan is the roadmap of what you are going to do, ‘integration’ is putting it into effect in order to achieve the promised benefits. The acquisition will therefore need to be incorporated into your existing business and reflected in your budget and strategic planning processes. Particularly difficult issues to deal with in integration are the merging of different cultures and the managing of people issues. Both need to be handled with great care in order to minimize the risk of destroying what it is that made you want to make the acquisition in the first place. If managed correctly, acquisitions can be a valuable part of your growth strategy and can add greatly to the value of your business. To do so however, you need to do the right deal and generate value from it.

Geoff Howles is a specialist in corporate finance with 30 years’ experience of working in the City of London, in industry and as an independent consultant. He set up Howles & Company in 1996, specializing in acquisitions and mergers, strategic planning and change management. Howles & Company is authorized and regulated by the Financial Services Authority and offers practical, comprehensive advice and help, with a committed, personal service. Tel: 020 8731 7182 Fax: 020 8731 7633 E-mail: [email protected] www.howles.co.uk

11.2

Acquisitions that work

Strategic acquisitions can be an unbeatable route to growth, says Dr Mike Sweeting at Acquisitions International, but there are five main ways in which they can go wrong

Every time acquisition is discussed around a boadroom table, a few simple issues jump out and bite straight away. These issues all have something to do with a lack of clarity about what an acquisition can really deliver. Here are the issues, followed by some remedies.

Issue 1: Lack of overlap Today, there are around 40,000 businesses for sale in the United Kingdom. In 12 months’ time most will remain unbought. Meanwhile, during the same time period, 60 per cent of acquirers will not have found a business to buy! This points to the incredible lack of overlap between what people want to buy and what people have to sell. Unless you wish to buy a printer or a subcontract engineer, you are unlikely to find for sale a business that will deliver you any real growth at all.

Solution 1 Look at the firms that fit best, not the ones that are being touted to you. Of course, most will not be ‘for sale’. That need be no hindrance. In our own work we habitually approach shareholders of companies just getting on with life being modestly successful. When the dust has settled, 82 per cent will have spoken to us. Those who sell have been paid on average 10 per cent less than the going rate on a trade sale. The received


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wisdom that approaching companies results in higher prices is a fallacy – if the approach has been done the right way.

Issue 2: Find scope for growth Even synergistic purchases do not necessarily produce growth. A new client told me recently that the company was the offspring of a corporate reshuffle. Its £20 million turnover firm bought a £60 million turnover firm and managed to turn the whole into a £40 million turnover firm! That’s not the kind of growth we are all looking for. Sixtythree per cent of the companies interviewed by Harvard Business School in 2004 indicated that their deals did not deliver to the level they had planned. Nobody decided ‘Let’s go out and buy a firm that looks good but is useless really!’ At the time of purchase the team thought otherwise. The advisor may have had private reservations, but hey, they needed the deal in order to get paid.

Solution 2 Establish a true choice of both purchases and possible homes for your money. Look at other routes to growth, and run a budget on them. If acquisition is more cost-effective than opening another office, then do it. If acquisition gives you a better return on investment than doubling manufacturing capacity, then do it. If acquisition is a more cost-effective and reliable route to new product or service development, then do it. The failed acquirers have typically looked at eight or fewer companies during the notional 12 months. They have usually only looked at companies ‘for sale’. They have not thoroughly investigated their alternatives. Use advisors that do not entirely depend on a deal being done for their remuneration. Use ones that have a vested interest in your repeat business.

Issue 3: Consider strategic issues Because most purchases are either of what is offered or out of administration, strategic issues are often not discussed by the board prior to purchase. Everything is seen through a tactical ‘set of spectacles’ – ‘Wow, that’s cheap.’ ‘I like their client list.’ ‘Jim would be a great asset on the technical side.’ All of this may be accurate, but it is just rationalizing what you want to do. Strategy is something you decide on before you commence, not during the process. D-Day was not planned halfway through the Battle of Normandy. Both were planned a year beforehand.

Solution 3 Plan before you start! Look at the up and down side of acquisition in principle. Has it worked for others in your sector, for your competitors, for your peers? Then look at acquisition in comparison with your other options for growth, as mentioned above. Finally, look at what you want a specific acquisition to deliver in specifics for your business. Resolve not to progress talks with firms that are less than a 80 per cent match with what you identify as crucial.

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Issue 4: The money There are always far more deals that could get done than do get done. The human factor is always important (see below), but I think it is fair to say that money is the single quickest way to bring out that factor. Research in late 2006 showed private equity (PE) winning 74 per cent of bids in competitive situations against trade buyers. Not only does this reflect a willingness to pay around 10 per cent more, it also derives from the fact that the PE firm has typically raised its fund, while the trade buyer so often expects to borrow on the target and can’t get everything done in time. The issue is even more stark when we look at management buy-outs (MBOs) and buy-ins (MBIs). These are normally teams of individuals, who are putting themselves on the line – resulting in deals that are 10 per cent less than trade sales. I find it fascinating that those who are unlikely to gain from amalgamating functions and other related savings are prepared to pay more. This is because they think entirely strategically. It is potential they are seeking to unlock, as a route to value. The trade buyer, who has most to gain immediately, is usually slow to make decisions and poor on the money management side. The MBO/MBIs are treated by sellers as poor relations.

Solution 4 Always secure your line of finance before making a firm offer. It’s fine to make an indicative offer prior to funds being secured, but there is still the risk of your offer being accepted! There is nothing more detrimental to your credibility than not being able to progress a deal because funds are held up. Most trade buyers want to borrow on the target. Most lenders want to lend on the buyer! If your bank will not consider lending to you on your own assets, cash flow or profit, I would argue that you are in too marginal a situation to afford the right buy. Of course, there is always an exception to the rule. Why are you it? If you are a MBI team, build credibility. Lenders lend on the proposal, the people and the purchase. Are all three equally credible, or does one let you down? The same principles apply for an form of leveraged deal.

Issue 5: The people I am afraid that we are now on ground where no statistic helps and no pattern can be relied upon. What can be said is that if yours is a people business, there is no more risk in buying a people business than in using normal recruitment practices. In fact, observationally, there is often less risk since you are buying a proven functioning team, not a ragbag of individuals. Costwise, acquisition can usually also be well justified in comparison to recruitment fees and the rest. If you do not see yourself as being in a people business, then you are wrong! Even the most techie IT firm has a human face which we neglect at our peril. For instance, if you are buying a division or subsidiary off a large group, ask yourself why it has


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not been offered to its own management. Maybe it is already under offer from the very same people you expect to work well for you after the shareholders have exited. Maybe they have been turned down in your favour. How workable is the business after purchase in such circumstances?

Solution 5 Put as much time into checking out the people as you do into valuing the assets, analysing the cash flow or computing the tax. Remember, your target is also supplied by people, discussed by people and supplies people. So there you go. I feel like an agony aunt now! By now you can spot that I regard strategic acquisitions as an excellent route to growth, with much evidence, and perceive tactical buys to be all very well, but unlikely to deliver what you really want. There are cheaper, less risky ways to organic growth than bolt-on acquisitions. There is only one other route to substantial ‘step-change’ growth beside a strategic acquisition – marketing something new that everybody wants at a reasonable price.

Summary Good acquisitions:      

perform as investments; give a ‘step change’; further strategic goals; add value to your shares; help you diversify; give you ‘critical mass’.

Dr Mike Sweeting is the managing director of Acquisitions International, which head-hunts companies for its clients to buy. It is part of the BCMS Corporate group of companies which in June 2007 won a Coutts Bank Family Business of the Year Award for its innovation, effectiveness, people and charitable giving. He likes rock climbing, poetry, military history and shooting – none of which are as stimulating as getting a deal done! E-mail: [email protected] www.acquisitionsinternational.com

11.3

Reaching agreement

Hardened by 30 years of completing acquisitions in the Thames Valley, David Stanning at BP Collins writes a letter of advice to a first-time buyer on where to focus energy and how to avoid frustration

Dear John, Many thanks for your recent e-mail – I am sure you won’t mind me saying that it would have been great to have rather more warning of your plans in this connection! However, bearing in mind that you are about to shoot off again and will need to leave behind instructions for your team, may I just put forward the following pointers in the hope that they will assist making this acquisition less stressful for all concerned.

Homework If I put aside my lawyer’s hat for a moment, I am concerned that you are relying a bit too much on what you refer to as ‘gut feel’ in making your offer for this company without having done any investigation as to what lies behind the figures and, perhaps more importantly, what the culture of the business is. Also have regard to the changes you intend to make following completion – in terms of rationalization and harmonization of contracts. It is very important that you find out as soon as possible whether there are any particular challenges and tensions, all of which may be exacerbated following a takeover. In particular you mentioned that this opportunity to purchase arose because of a failed management buyout – this rings all sorts of warning bells because there is every possibility that there will be a disenchanted management team still in post and for some time to come resentful of the fact that they are not running their own business.


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But to revert to my legal hat, my greatest concern is that not only does your purchase offer appear to be in the form of an unconditional and open offer, but also you have not gained yourself any exclusivity over negotiations, by which I mean that you should surely have obtained the seller’s agreement to deal with you and you alone over a period sufficient to enable you to complete the matter without the distraction of competing offers. We need to put that right without delay.

Heads of terms In my experience it is an essential part of buying and selling companies or businesses to set out at the beginning the respective expectations and intentions of the parties, incorporating the same in formal heads of terms that go somewhat beyond simply setting out details of buyer and seller, price and target completion date. Accompanying this letter is a sample of what I have in mind. The letter is expressed to be not legally binding in most respects, save in respect of exclusivity, confidentiality and the matter of costs contribution from a party withdrawing from the transaction for no good reason. You will note that there is considerable focus on the issue of warranties and indemnities. For reasons that I mention below, this is a key aspect in any transaction, effectively giving the buyer the right to claim back part or all of the purchase price if things turn out not to be as expected. I strongly recommend that the levels of claim, and identities and relationships of those accepting liability, are set out in detail, to avoid wrangles at a later date that invariably give rise to allegations of moving goalposts. It is much better to be up-front about all of this. Signing up to heads of terms, including an exclusivity period, is therefore very much a first move and alongside this I anticipate that the seller will be looking to secure from you a non-disclosure agreement to ensure not only that details of the transaction are kept confidential but, more importantly from the seller’s point of view, that if for whatever reason the transaction fails then you will not be in a position to misuse information that you have obtained from and about the target.

Finance When we spoke, you did not go into any detail about how you were proposing to finance the purchase, restricting your comment to the fact that you did not think there would be any problem, not least because the target had plenty of assets. I have to remind you here that, as the law currently stands (it is changing in October next year for private companies), it is unlawful for a company to provide financial assistance in connection with the purchase of its own shares. In short and in this case, this translates into the fact that the target will not be able to put up its assets as security for any loan made to you for the purpose buying its shares unless you go through what is commonly referred to as a ‘whitewash’ procedure. This is a mechanism set out in the Companies Act that relaxes the rules for private companies, permitting the giving of financial assistance in certain circumstances provided they follow the set process. I mention this at this stage because those funding you will obviously be looking for as much


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security as possible, and it would almost undoubtedly involve financial assistance and a whitewash process, all adding to the time this transaction is likely to take. It follows that we need to discuss funding at an early stage, particularly if financial assistance is to be involved and also if you are proposing to defer payment of some of the consideration, in terms of an earn-out with associated loan notes perhaps guaranteed by the bank.

Due diligence The next step in the process will be for you and your advisers to carry out a thorough due diligence exercise, by which I mean finding out as much as possible about the target, usually by means of submitting detailed questionnaires and then reviewing the responses. This can be a lengthy process and, in the knowledge that it will be appreciated by those acting for the target if your questions are therefore tailored to the particular circumstances and do not raise a host of irrelevant enquiries, I enclose our standard questionnaire for you to go through carefully, striking out only those areas that you are certain have no relevance to this transaction. You will note that the questionnaire is in a specific and perhaps apparently illogical order. However, this is done for a purpose in that it reflects the order in which the numerous warranties are set out in our typical share sale and purchase agreement (SPA). This means that it will be much easier for us to marry up replies to these enquiries with any disclosures made against these warranties.

Warranties In conjunction with reviewing information provided as part of the due diligence exercise, you will also glean much information about the target from disclosures made against the warranties, which form a key part of the SPA. This is because the buyer of a company, and perhaps more importantly those funding the purchase, will want to have as much detailed and unqualified assurance as possible about all aspects of the company’s life to date, to ensure there are no surprises to undermine the value of the company. Typically, a standard SPA sets out the operational detail of the transaction in the main body of the agreement, to which are then attached numerous schedules, some simply detailing specific information relating to the sellers, the target group, properties, intellectual property rights and the like, but the main one containing many pages of warranties to be given by the seller covering all aspects of the company’s life to date. These warranties are invariably written in absolute terms (for example, that the target has never been a tenant or occupier of any premises other than its present building) designed to elicit responses from the seller that set out (in legal parlance, in a ‘full, fair and complete’ manner) the actual history of the company in each particular context (eg constitution, accounting and financial, commercial, employment, property, environmental, intellectual property).

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These responses are known as disclosures, and are set out in a disclosure letter that is to be read in parallel with the warranties, such that the buyer should thereby obtain a complete and clear picture of the company in all its glory. To the extent that the disclosure letter refers to documents, these are included in a disclosure bundle, such that by the end of the process you should end up with probably several ring binders containing copies of all the documents crucial to the company’s business life. I have to warn you that this whole process of due diligence and disclosure can be extremely time-consuming (if it is any consolation the task is more onerous for the seller, who is at risk if anything is missed out), and it is of great importance that this exercise is started early on in order to avoid a last-minute rush, and worse, last-minute disclosures that can raise questions as to whether or not you should continue with the transaction. In my experience, there is nothing worse than unexpected disclosures of difficult issues (asbestos in the office building for example) being made at the last minute. This simply should not happen, and if it does, it can often lead to a prolonged completion exercise at best and a deal going off at worst.

Documentation There are other documents likely to be involved but I do not think I need to concern you with these at this stage except to raise the issue of tax advice. We will need to work closely with your tax advisers, and once again, it is always helpful if professional advisers can get together at the outset of a transaction so that each understands the roles the others will play. The success of this whole process very much depends on a team effort, and I look forward to hearing from you who else will be involved, certainly on the tax side and also presumably on the property side in terms of surveys and the like.

Costs Finally, there is the question of costs. While I can and will in a separate letter give you our current best estimate in this respect, I have to warn you that much will depend on the speed with which the transaction goes through, and in particular on the quality of professional advice being given to the other side. Recent experience has shown that if inadequate resource is provided in this respect, a transaction can be extended for days and even weeks, either because of inexperience or simply lack of people dealing on behalf of the seller. This becomes not only extremely frustrating for you but also very time-consuming for us, and therefore adds substantially to costs. It may be that there is nothing you can do to persuade the seller to appoint advisers of relevant experience, but I think you should at least try to persuade them!

Summary To sum up, my experience over many years of dealing with such transactions suggests that you focus on the following points to minimize the challenges that lie ahead:


   

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Do your homework on the target. Get your funding in order – make sure that it will be available. Agree comprehensive heads of terms – avoid points of principle emerging later. Appoint experienced and pragmatic professional advisers who will work as a team.

Yours, etc © drstanning May 2007

David Stanning is a partner in B P Collins, Solicitors, where he heads up the Corporate and Commercial team of 10 lawyers. Having spent more than three years in Sydney with one of Australia’s leading law firms, he returned in the mid1970s to build one of the Thames Valley’s strongest corporate and commercial teams. He can be contacted at [email protected] or, with the rest of his team, on 01753 279022.

12

Growth capital


12.1

Funding options

There is more choice than you might think in structuring a finance package for any particular growth plan, says Kevin Smith at AWS Structured Finance

It is all too easy for the owners or management of smaller businesses to think that funding for their growing operations comes only in the form of equity or debt, and that debt can only be in the form of a term loan or an overdraft. This perception is often caused by the unimaginative approach of many banks, and sadly many of the banks’ small business advisors don’t seem to know terribly much more than the businesses that they are meant to be advising. The reality is, of course, rather different, with a whole range of different products available from banks and other more specialized providers of funding. What is the perfect solution for one company may not work at all for a very similar company, and structuring the most efficient, cost-effective financing package can make all the difference between success and failure of the company. This is particularly true for growing businesses, and at the very least the wrong financing package can hamper growth.

Equity There are many different types of equity. As well as ‘normal’ equity there can be different classes of shares with different voting rights, preference shares which rank ahead of ‘normal’ equity in the payment of dividends and many other variations on the theme. It is also worth remembering that ownership of shares in a company and control of the company can easily be varied by using a shareholders agreement, so that

 350 GROWTH CAPITAL

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ownership of the majority of shares does not necessarily translate into control. This structure is often used when equity is injected by a venture capital firm that only seeks to own a minority stake but needs to be able to exercise control in order to limit the risks on its investment.

Senior debt All banks offer senior debt and many branches in practice only offer senior debt. This is debt that is backed by some form of security (often a first fixed and floating charge on the assets of the company) and ranks before almost every other creditor. The standard term loans and working capital or overdraft facilities invariably fall into this category.

Subordinated debt Subordinated debt, as the name implies, ranks behind senior debt. This type of debt is often only available to larger companies, and strange as it may seem, is often part of a package of debt that includes senior debt. Larger syndicated loans may offer both types of debt, with the subordinated debt tranche paying a higher interest rate to reflect the higher risks being taken by the funder. Despite the fact that subordinated debt ranks behind senior debt, it often has some form of security attached to it, and so still ranks ahead of unsecured creditors.

Mezzanine finance Mezzanine finance is a form of subordinated debt but is actually midway between debt and equity (hence the name mezzanine). It is typically structured as debt but has options, warrants, equity kickers or some similar structure to provide some of the potential upside normally enjoyed only by holders of equity. These may be linked to various performance criteria or events such as flotation or takeover of the company. As with subordinated debt, the risks for the funder are higher so the cost of this type of finance is higher. Nevertheless, providers of mezzanine finance are prepared to accept levels of risk not acceptable with standard bank facilities.

Asset finance Leasing is the most common form of asset finance. The major difference with asset finance is that it looks primarily to the value of the asset as security rather than to the strength of the balance sheet. This can be particularly useful for smaller companies with only limited balance sheets, or for companies that operate in asset-intensive sectors. Leases can be either on balance sheet (finance leases) or off balance sheet (operating leases), and depending on the equipment being leased, 100 per cent of the cost can be financed.

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FUNDING OPTIONS 351 

Factoring or invoice discounting is another form of asset finance, as the lender looks towards the quality of the trade debtors and outstanding invoices as security rather than the balance sheet. Again this can be useful for smaller companies, especially during periods of rapid growth, as the facility advances a percentage of outstanding invoices (typically up to 80 per cent of eligible invoices) and as such is more flexible. The funding is also available more quickly than a bank overdraft facility, which looks back in time rather than forward, and is far more reliant on the balance sheet. Because it is trade-related with predetermined repayments of advances, higher gearing is possible than with a working capital overdraft facility.

Trade finance The term ‘trade finance’ is normally applied to companies that are exporting, as financing trade within the same country can easily be achieved using general bank facilities. There are many different forms of trade finance (letters of credit, bills of exchange, forfaiting, tolling, pre-export, countertrade, project finance, to name just a few), and many of these can either be with or without recourse to the company seeking the facility. Trade finance can be just as useful to small and large companies, as not only is it a way of passing a lot of the risks on to a bank but again it can often be done without particular reference to the size or strength of the company’s own balance sheet. Many foreign banks specialize in this type of finance, and are more than happy to provide facilities alongside a company’s other bank relationships.

Structured finance Structured finance as a term is normally applied to large complicated transactions where a whole range of different financing techniques are employed in order to put together a package that provides a workable solution that would not be possible using more conventional lending methods. However, the principle is just as valid for smaller companies. By using a little more imagination and identifying the strengths of the growing business’s financial structure, it is possible to mitigate risks more effectively, and by playing to these strengths it is possible to structure a financing package that is larger, more flexible and more cost-effective than traditional lending. Remember that as a company grows its funding requirements will increase and change over time, and a good relationship with flexible, enlightened funders will help to ensure that suitable funding keeps pace with the growing company. Finding such a funder (or indeed a combination of funders) is not necessarily easy, but it will always be worth the effort. © Kevin R Smith 2006


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Contact details: Kevin R Smith, managing director, AWS Structured Finance Ltd Chairman, Aspen Waite Chartered Accountants Tel: 01892 667891 Fax: 01892 610891 E-mail: [email protected] www.awsconsult.co.uk www.aspenwaite.co.uk

12.2

Mind the equity gap

For high-growth enterprises looking for capital of £50,000 to £750,000, business angels are becoming a prime source of investment. But how do you access them? And on what terms? Anthony Clarke, chair of the British Business Angels Association and managing director of GLE Growth Capital, explains

Business Angel investment is a growing source of finance for high-growth small businesses. Currently, US$26 billion of business angel finance is invested in over 50,000 businesses per annum in the United States. Within the United Kingdom this market is not quite so developed. However, from what we know, up to £1 billion is invested by up to 20,000 Business Angels in the United Kingdom on an annual basis, with most of this investment advantageous taxbreaks for the investors under the Government’s centrepiece Investments Scheme (E15).

Who are business angels? Business angels are high net-worth individuals looking to invest their personal funds into small, early-stage businesses with high growth potential. One of the main differences of angel investing from most other kinds of investment is that angels bring not only finance to the early-stage business, but can also help build the business they invest into, providing industry and market knowledge and contacts to their investee business. Traditionally, business angel investors have been retired individuals, who have often worked in finance or created wealth by selling their own businesses, and are looking to make interesting and rewarding investments from retirement income.


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More recently, angel investing is also attracting a new generation of business angel investors who are younger, with current or recent experience of running and selling their own businesses, or are involved in financial markets or professions. At the same time angel investing is also appealing to more women, and a more culturally diverse group of investors who have all recognized the interesting opportunities available in this marketplace.

Why should you choose a business angel over other more traditional forms of business growth finance? There are many benefits of using business angel funding. However, at the same time there are some disadvantages. Some of the key advantages are the fact that business angel funding is a long-term source of funding, since there are no requirements to repay and no personal security to provide. Most business angels will look to make their money through the business exit: that is, a trade sale or a business float. However, these benefits must be weighted against the fact that in return for the investment, business angels will dilute the ownership of your business, and it should be noted that this may be diluted further by successive funding rounds. Business angels will also dilute the control over your business, since generally they will wish to be involved with you and your management team in key strategic and financial issues. This obviously requires serious consideration. In general, though, business angel finance is not an alternative to other forms of finance. It is more part of the continuum of finance that a business needs across its life cycle. Business angel funding is also a means to lever other sources of funding. Often a business will be able to access finance from banks through a Small Firms Loan Guarantee or other sources of loans or grants using the angel finance as leverage. Typically the amount of capital available through business angels is £50,000 to £750,000. This can either be through an individual investor, or where larger amounts are invested in a business, it may be as part of a syndicate. Today, the majority of business angels prefer to invest in syndicates, thereby effectively reducing their individual risk. A lead angel will be selected, often representing a higher level of investment or bringing specific experience. The lead angel will typically join the board of the investee company and represent the interests of the syndicate. Business angels invest across most industry sectors and stages of business development, but especially in early and expansion-stage businesses. The main criterion for any business angel looking to invest in a business is that the business has high growth potential and is not life style. A business angel is looking for a business which has the potential to achieve an exit within five to seven years and looks to be able to make a return of 10 times their investment.

So how does business angel finance differ from venture capital? The answer is very simple: business angels are investing their own money and time in a business, whereas a venture capitalist is investing the money from a fund raised from

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external sources. In short, business angels are investing their own money whereas a venture capitalist is investing others’ money. On a practical side the differences are that business angels tend to take larger risks than venture capitalists, and often at an earlier stage. Overall it should also be recognized that the majority of venture capital funds do not invest in early-stage businesses and are interested investing at second or third-stage funding rounds. Most venture capital funds in the United Kingdom do not invest at a level of less that £2 million. Nevertheless, there is increasing evidence that Business Angels are working closely with venture capital funds in order to ensure the ongoing g funding of a growing company, and so you may be in a position to access a combination of business angel finance in developing the funding package for your company. A syndicate may well include, for example, business angel, co-investment funds and early-stage venture capital funds. Venture capital funds can be particularly important in relation to financing the ongoing growth of your company. You may be looking to bring in venture capital funding at second- and third-stage funding rounds. You should be collaborating with your angel investors to identify potential venture capital sources to support your further growth stages. You will find that, with a well-planned funding strategy, many of your angel investors will continue on through further funding rounds

What do business angels look for? The methods used by business angels to decide which businesses to invest in vary greatly. However, the following issues are all taken into consideration: the expertise and track record of the founders and management; a clear and concise business plan; the business’s competitive edge or unique selling point; the characteristics and growth potential of the market – the business must be scalable;  validation of customers or potential customers;  compatibility between business proposal and the business angel’s skills and investment preferences;  the financial commitment of the entrepreneur.    

What is the best way to source business angel investment? It is widely known that business angels can be very elusive. One approach can be through a personal or industry contact as a means to reach an individual investor. However, the best approach is to go through a business angel network. These networks comprise of groups of angels all looking to invest in small high-growth businesses. The networks offer the entrepreneur support with preparation and investment readiness, and most importantly act as a key source to access business angel investors.


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Business angel networks are mainly regional (with a few distinct exceptions), and the best way to get in contact with them is through the British Business Angels Association (BBAA). Through the BBAA members you can gain details of all the main networks and angel groupings. These networks have all signed a code of conduct which ensures that the investment process is transparent, and they act as the introducers for selected entrepreneurs to their angel investment community.

What is the usual procedure for accessing business angel funding? A typical approach to accessing angel investment is for the entrepreneur to submit a short business plan to the relevant business angel network. This is then reviewed by the ‘gatekeeper’ of the network to assess whether it meets the core requirements of the angel investors. Selected businesses are then put forward to the next stage, where they are interviewed by the gatekeepers. If selected, they are typically offered support with investment readiness, including preparation for presentation to investors. Often this is through a company presentation event where between 20 and 100 angels come to hear a selected group of companies ‘pitch’ for 10–15 minutes, followed by questions. After the introduction the process is very much up to the angels and the entrepreneur, who need to agree heads of terms and complete the deal. You should also ensure that the business angel willing to invest in your business is right for your company. Before signing an agreement you should ensure that the management team and the business angel are compatible and will be able to work together; that the business angel’s skills and interests match your company’s needs, and that you think you would find the contribution of the investor(s) useful. Notably you are likely to have at least one of your angel investors sitting on your board.

Are business angels focused on the exit and high returns? Business angels, while looking for a high return, tend to be flexible in terms of the exit strategy on offer. Business angels will mostly get involved in the business they have invested in at differing levels to help the business achieve the planned exit strategy with a healthy return. This is often referred to as ‘patient capital’, in comparison with venture capitalists, who want exits and clear returns within three years. Business angels will generally be looking for an exit via a trade sale or floatation. Generally, business angel investors will want to get closely involved in the exit strategy, and will want to ensure that you as the business owner do not have unrealistic expectations about an exit or have not planned this event at all. Visit www.bbaa.org.uk to find further information on raising business angel funding as well as all of the contact details for business angel networks in the United Kingdom.

12.3

Preparing for admission to AIM

Andrew Millington at Mazars sets out the steps for floating on the growth market

Since its launch in 1995, the Alternative Investment Market (AIM) has established itself as one of the world’s most successful markets for small and medium-sized growth companies. In that time, over 2,000 companies from more than 30 business sectors have joined the market, in the process raising more than £20 billion.

The benefits of joining AIM Often, companies view listing on a public market as a way of raising funds for investment in further growth. However, there are many other reasons that companies should consider AIM as an attractive market These include to:      

improve the ability to make acquisitions using shares; determine an objective market value for the company’s shares; gain a partial realization of value for some shareholders; enhance the company’s status with customers and suppliers; raise the company’s profile; enable greater employee participation and commitment.


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AIM is particularly attractive compared with other stock markets for the following reasons:  simplified regulatory regime;  criteria for entry are focused on meeting the requirements of smaller companies, eg no track record is required, no minimum market capitalization;  tax advantages for both the company and investors;  fewer requirements for shareholder approvals, eg when making acquisitions.

The admission process Once you have taken the decision to seek an admission to AIM, the process requires careful planning, and is often considered in three distinct phases:  pre-admission phase;  admission process;  post-admission issues and ongoing requirements. Each phase requires different considerations, information requirements and outputs.

Pre-admission phase As company owners/directors may not have previously been through an AIM admission or other stock market flotation, they often look to advisers to assist them in a number of areas during the pre-admission phase. As much as anything the admission requires very careful organization of internal resources, the gathering of information and overall planning of the project. A highly structured approach can also help to save both time and cost. Each company should give careful consideration to key issues well in advance of the run-up to admission. This allows the company time to put into place any significant pre-admission objectives. The key areas that should be considered in detail include the following.

Corporate and financing structure It is important that personal and corporate objectives are aligned. This includes a detailed review of the corporate and financing structures of the business, and consideration of issues such as:  simplifying the financing structure and reviewing the likely ongoing post-admission finance requirements;  cleaning up the ownership structure by consolidating and simplifying shareholdings;  deciding whether to use an existing holding company (in the case of a group) or to establish a new holding company to undertake the admission;

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 reviewing post-admission dividend requirements and removing dividend blocks in the existing structure;  ensuring that the float company is a public limited company.

Tax planning Effective and careful tax planning should ensure that all those affected by the float process gain maximum tax advantage. This includes considering the tax position of:  the company – impact of any pre-admission reorganizations;  the shareholders – considering taxable gains on disposals and reliefs available under the Enterprise Investment Scheme (EIS) or venture capital trusts (VCT) to individuals or venture capital trusts;  the management and key employees – taxing of share-based payment schemes.

Financial reporting Information included in the admission documents needs to show a ‘true and fair’ view. If companies have previously not been subject to an audit, the reporting accountants will need to perform their own procedures to audit standard. This can be difficult if financial information from prior years is not readily available. The information also needs to be presented in a form that is consistent with that which the company will use when preparing its next set of published accounts. Any changes to accounting standards, policies and legislation should be borne in mind. Other key considerations include:  in group situations, the preparation of consolidated accounts is required;  whether accounts have been prepared under UK, US or international financial reporting standards and, if not, an assessment of the procedures required to convert to one of these generally accepted accounting procedures – from 1 January 2007, all AIM companies will need to prepare accounts that conform to IFRS;  a review of existing accounting policies to ensure they are in line with industry best practice;  looking at changes in the group structure, particularly as a result of acquisitions and disposals;  considering the impact of any qualifications made to auditor’s reports.

Control systems Management must be able to demonstrate that the appropriate control systems are in place to monitor the key business activities. This should also cover significant ITbased systems. Assessment at an early stage should identify any systems deficiencies that need to be rectified before the admission process starts. In particular, investors will want to be reassured that systems in operation are sufficiently robust to enable the accurate reporting of data to management, while also safeguarding against the occurrence of fraud and error.


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Management and governance A stock market listing frequently requires the ‘beefing-up’ of the board. In particular, corporate governance good practice requires the appointment of non-executive directors. Non-execs often bring a great wealth of experience through having worked in the market in which the business operates, or through their experience of dealing with the stock markets’ rules and meeting with institutional investors. The role of each of the directors should be clearly defined. At the same time a strong management team should be built around the core directors. This will help to inspire investor confidence and provide an element of continuity to the team should any of the key directors decide to exit the business shortly after the admission.

Marketing Prior to the admission, the directors and advisers will seek to determine who may be the target investors as well as the likely market appetite for their flotation. This may involve discussions with professional advisers, including Nominated Advisers for AIM. These discussions should also help to determine the timing, nature and extent of financing. For example, it will be necessary to consider what proportion of the company’s shares should be floated. There is no minimum for companies listed on AIM. However, a lower float percentage can affect the liquidity and turnover in trading of a company’s shares. This is also a good time to consider the operating structure of the business and evaluate any non-core activities. These may ultimately be sold prior to the listing to assist with raising funds for investment in core activities, or to simplify the business for presentation to investors. The directors should also consider how best to build the business’s corporate image, and review its relations with the media.

Appointment of advisers The appointment of good advisers should help to maximize the likelihood of the admission being successful. The principal advisers for an AIM listing are:  Nominated Adviser (NOMAD). Each company needs to appoint a NOMAD who is required to confirm to the London Stock Exchange that the company is complying with AIM rules on entry and that the directors are aware of their obligations and responsibilities. The NOMAD coordinates and leads the admission process.  Broker. The broker is responsible for attracting funds and the placing of the shares. AIM rules require that a company retains a broker at all times.  Reporting accountant. The role of reporting accountant is principally focused on reviewing and reporting on historical and forecast financial information, together with performing detailed due diligence on the business.  Lawyers. The lawyers are responsible for performing due diligence on the company’s position and for reviewing significant contracts that the company needs to disclose as part of the admission process. They are also involved in ensuring that statements in the AIM admission document are properly supported and verified.

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 Public relations. The appointment of a public relations company is made principally to assist with raising the profile of the business within the marketplace. All of the advisers work closely with the management team to ensure that information is collated in a structured way and in line with the admission timetable.

Admission process The process of listing on AIM usually takes a minimum of three to four months. This is often a period of high activity, and requires significant involvement from the board, key management and the company’s advisers. The admission process itself follows a fairly well-set pattern, with the requirements being largely similar from one admission to another.

Stage 1: Planning Stage 1 of the admission process involves the NOMAD taking an initial view as to the company’s suitability for admission. During this phase the NOMAD will perform a number of tasks including:  drawing up an initial timetable based on the quality and availability of historic figures and reliability of forecasts;  appointing the advisers – reporting accountant, lawyer and public relations company;  agreeing engagement terms;  outline of all documents required;  preparing a list of all parties involved in the process.

Stage 2: Due diligence The due diligence phase involves work by the reporting accountant and lawyers to assess the suitability of the company to proceed towards admission. The reports prepared by the advisers follow a set pattern and include the following:  long form report – includes an overview of the company’s business, its history, and review of financials, including review of internal controls and accounting policies/ procedures;  short form report – summary of the audited accounts for the last three years, for inclusion in the admission document;  working capital report – review of profit forecasts to be included in the admission document for supporting the future working capital adequacy statement made in the admission document. Once complete, the NOMAD assesses the results from the reports and considers any areas that need to be addressed, such as deficiencies in internal controls. When satisfied with the due diligence work, the NOMAD will confirm to prospective investors that


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due diligence has not indicated factors that would question the suitability of the company for admission.

Stage 3: Broker research The next stage of the process involves the broker’s analyst performing an assessment of the state of the market in which the company operates and the overall prospects of the company. The research is carried out independently from the company and all the parties involved in the due diligence process. This ensures that elements of potential bias are eliminated. The research is performed to high professional standards, and often makes or breaks the fundraising.

Stage 4: Drafting process The admission document is a public document, and the responsibility for its preparation rests with directors. The document explains in detail:        

reasons for seeking admission and details of the fundraising; the business; its prospects; details of the board and management, remuneration arrangements and corporate governance procedures; financial information – historic and projections; risk factors; ‘lock in’ arrangements – requirements for key existing shareholders not to sell their shares within a specified period after flotation; other information to support the admission or as required by the AIM rules in order to comply with selected parts of the admission document rules.

The drafting process is controlled by the NOMAD, and frequent meetings are held with all advisers to discuss content and presentation of information. A detailed verification of information in the admission document is conducted by the lawyers. This represents the ability of the company to support all statements made in the admission document.

Stage 5: Marketing The broker arranges for management to meet with potential investors in ‘road shows’. These meetings are usually attended by the managing director and finance director, and are based around pre-prepared presentations and the draft admission document (‘pathfinder’). The meetings may need to be arranged at several locations if the company has overseas operations. This is common for international companies seeking admission to AIM. The marketing process frequently involves significant activity over a short time frame, typically two weeks. As there are many back-to-back meetings, management need to be energetic and highly motivated.

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Stage 6: Placing and placing agreement Following the presentations with potential investors, the sales team of the broker assesses feedback from investor meetings. The broker then builds a ‘book’ of shares that investors would be willing to buy. On completion of this process, the final share price is set and shares are allocated to investors. Placing letters confirming allocations are distributed to investors, and the broker considers whether it needs to underwrite any shares not placed or reduce the level of funds to be raised. Finally, the placing agreement is signed between the brokers, directors and the company.

Stage 7: Admission to AIM In the run-up to admission, letters sent to investors are signed and returned to the broker. This is followed by ‘impact’ day when the:    

flotation is made public; admission document is issued in final form; placing agreement is signed by respective parties; application is made for admission.

Funds are collected by the broker from investors, and after three days trading in shares commences and net proceeds of funds raised are paid to the company. Finally, the shareholders register is updated to reflect all new shareholders.

Post-float issues and ongoing requirements Once the admission process is complete and the business starts to float on AIM, there are many ongoing requirements that the company and the directors need to fulfil.

Financial and other information Companies trading on AIM have to provide regular updates on financial performance and developments to shareholders and other stakeholders. It is therefore important that companies continue to have robust and reliable accounting systems and internal controls. In particular it is important to monitor performance against budget and market expectations.

Ownership The ownership structure of the company will have been considered in detail as part of the pre-admission process. However, circumstances may change following flotation, and this could require careful monitoring of shareholdings: for example, if there are signs of share sell-offs or unusual trading activity. Being a listed company also increases the risk of potentially hostile activity from predators or key competitors. It is helpful to build action plans which consider how the directors will react to such situations should they arise.


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Investors will often look towards growth in share price and dividend distributions as key indicators of success for the business. It is important to review the dividend policy, to balance the demands of returning funds to shareholders with retaining funds within the business to assist with future growth opportunities.

Strategic plans Funds raised from the admission are frequently used to invest in future growth strategies for the business. These strategies should be focused on building and sustaining the performance of the company, thereby increasing enterprise and shareholder value. They should also be closely aligned with tax planning opportunities available to the company. At the same time as refining the business’s strategies for growth, these strategies should also be communicated clearly to shareholders. This will help to improve market perception.

Management and governance The structure of the management team following admission requires careful consideration. While much thought is put into the structure of boards pre-admission, often the structure will only be finalized shortly before the admission process starts. Allowance must be made for such issues as the evolution of the board and making best use of the non-executive directors’ contacts and experience. In addition, the remuneration and audit committees require implementation to comply with bestpractice corporate governance requirements.

Marketing and communication The ongoing marketing of the business takes on further significance once a company is listed. It is helpful to have a person or team responsible for investor relations, to answer questions and queries from shareholders as well as to send out key information, such as annual reports and interim statements of financial performance. In addition, the increased scrutiny placed on the company means that relations with the media need to be handled carefully. Building the corporate image and enhancing market perception can best be achieved through a well-constructed PR programme.

Regulatory issues Being listed on AIM brings many more regulatory considerations and requirements. For example, companies must comply with the AIM Rules, which provide detailed guidance on the requirements for disclosure and other continuing obligations, at all times. Certain aspects of the Companies Act and EU Directives also increase the regulatory burden placed on listed companies and their directors.

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Andrew Millington is a corporate finance partner with Mazars, the international accountancy and advisory firm. He has more than 15 years’ experience and has led a large number of merger and acquisition and management buy-out transactions for companies of varying size in a wide range of industry sectors. Andrew is in charge of UK Corporate Finance. Prior to joining Mazars, he was an investment director at Barclays Private Equity. Before that he was a senior manager in Corporate Finance at Coopers & Lybrand. Mazars acts for some of the fastest-growing entrepreneurial companies in the United Kingdom, offering a complete range of accountancy and business advisory services including audit and assurance, tax advice and compliance, corporate recovery and insolvency, consulting, forensic and investigations, corporate finance and financial services for private individuals. Further details: Tel: 0121 212 4579 E-mail: [email protected]

12.4

Financial reporting for the growing business

Don’t just leave it to the accountants, say Philip Pickles and Jon Sutton at Dixon Wilson. Make sure you are capturing any challenges and risks to growth in your flow of management information

The directors of a growing company should rightly focus their attention on strategies to expand the business. They will also be aware of the importance of sound financial reporting as an essential tool for good management of the business as it expands. What may be less evident is that, just as it is necessary to make operational changes as a business grows, so it is also necessary to ensure that the company’s financial reporting is developed to match the needs created by the growth of the business.

Getting the basics right Where a business is expanding, the existing accounting systems need to be able to cope with the increased volume of transactions in order to avoid delay and increased risk of mistakes if pressure is put on the existing systems or established internal controls break down. Attention is needed to the number and calibre of staff dealing with the accounting function, as well as the paper or electronic information systems in place. It may even be necessary to introduce more comprehensive management information systems in anticipation of growth rather than delay until the point where the business cannot service its turnover without them.



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One advantage of growth is that the business is likely to become increasingly self-sufficient in administrative resources. In its early stages, the business may have outsourced some of its accounting and financial administration tasks, such as management accounting, VAT or payroll. As additional staff are recruited, the point will be reached where it is more economic to deal with these matters in-house.

Striking the balance: detail versus focus There is a natural tendency for the amount of management accounting information to increase over time; this will happen even more when a business is growing, giving rise to new streams of data. An expanding business brings with it new reporting requirements, including:  Analysis of the profitability of the business in order to identify those areas where greatest effort and the often limited resources of the business should be invested, for instance to develop a product of proven profitability, or to take remedial action where part of the business appears to be struggling.  Monitoring cash generation – is the business managing to generate the cash it will need in order to finance growth, or is it over-trading, with revenue absorbed by the need to fund increasing amounts of working capital? Could the company cope financially with a substantial increase in orders for one of its product lines? This is arguably the single most important function of the accounting system for a growing business with limited resources. The board may wish to see information in addition to that normally contained in the accounting records, including the order book, and results of product quality control testing (as an increase in the number of rejected items may be an indication that the productive facilities are not coping well with increased volume). As the amount of available data increases, it is important to focus the mind by identifying key indicators and benchmarks against which to evaluate performance. In addition to sales, profit margin and cash-flow targets, the directors of an expanding business should be aware of the level of sales or advance orders at which trading volumes may begin to stretch the company’s physical capacity or its ability to finance the additional working capital required. It is essential for projections to include sensitivity analysis for varying volumes.

Striking the balance: timeliness versus quality In order to serve their purpose, management accounts must be ready soon after the period ends, so that the board can identify potential problems and opportunities in good time. In order to achieve this, it may be appropriate for a smaller company with limited resources to work with a fairly broad brush. A likely consequence of growth is a greater interest on the part of various stakeholders in the company’s management information. Shareholders may require

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FINANCIAL REPORTING 369 

interim profit statements, and lenders may wish to monitor compliance with financial covenants at various times in the financial year. This will require a greater degree of accuracy than hitherto, especially in respect of the balance sheet (whereas previously a company’s management accounting may have focused largely on the operating result and cash flow). It will also be more important to ensure that accounting policies are appropriate, and kept up to date at all times in the year rather than as part of the yearend reporting exercise. A growing company will also at some point reach the level of profitability at which corporation tax must be paid in instalments, and it will need accurate figures in order to avoid either paying too much tax or incurring interest on late payment.

Statutory financial reporting The burden of compliance with the statutory financial reporting regime becomes more onerous as a company grows. This can be dealt with in the course of the year-end work, but to leave it until then may result in delays while the accounts department compiles additional information, or unwelcome surprises following the introduction of new accounting policies. Additional requirements will also be imposed if a company’s shares are admitted to full listing or to the Unlisted Securities Market. Good channels of communication with the company’s auditors can help to ensure that changes in statutory accounting requirements are addressed in good time. This communication needs to be two-way, with the auditors briefing on new accounting requirements, and themselves being kept up to date with significant changes in the business.

Coming to grips with acquisitions If new subsidiaries or businesses have been acquired, their accounting arrangements must be reviewed to ensure that they are:  capable of producing timely and accurate management information;  protected by robust systems of internal control;  compatible with the parent company’s systems in terms of accounting policies and presentation. Care may also be needed to ensure that the reporting of results is appropriate for group purposes, so that, for example, consolidated figures are produced where these will aid understanding of the financial position, and shared costs are appropriately allocated between operations carried on by different companies in the group.

Choosing the right finance team A business that is growing rapidly will place greater demands on its finance team than a business that is ticking over at the same level. The senior members of the


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team will need to be able not only to manage the existing accounting function, but to be proactive in identifying changes that will be needed as the business grows, and manage the implementation of these changes. Choice of the correct personnel is critically important, as members of the board may not themselves possess the requisite skills.

Conclusion The accounting function of a business is important not only to enable it to comply with external reporting requirements, but to enable it to carry on its business in a wellorganized manner and to allow the directors to be well informed about the state of the company’s financial health. The needs of a business in this respect change over time, and may change quickly in a period of rapid growth. The directors must to be aware of this, and be confident that the arrangements in place will be sufficient to address the status quo.

Philip Pickles and Jon Sutton are partners in Dixon Wilson, a London-based firm of Chartered Accountants which has a long experience of providing a wide range of services to entrepreneurs and growing businesses. They would be pleased to hear from readers, and may be contacted at [email protected] or [email protected].

PLUS Markets Group

Overview PLUS Markets Group plc owns and operates the PLUS market, an independent equity market based in the City of London. It is regulated by the UK Financial Services Authority and is applying for Recognized Investment Exchange status. By the end of 2006, PLUS traded over 850 small and mid-cap company shares, including just under 200 quoted companies, representing a combined market capitalization of over £150 billion. During 2006 over half a million trades, worth a total of nearly £3 billion, representing over 5.75 billion shares took place on PLUS. The secondary market trading platform is based on a quote-driven model, the most efficient and effective system for trading shares in small and mid-cap companies. Market markers commit their own capital to the market, playing a key role in providing both price formation and liquidity. Nearly 50 brokers and seven market makers are active on PLUS. Transaction data and current bid-offer information are shown electronically and distributed to the market via 10 data vendors. PLUS is committed to providing investors with a market dedicated to offering quality investment opportunities. Investor are assured that PLUS is a select listing destination offering the best investment value due to stringent regulatory control and a particular focus on investor protection, which has played a strong role in the company’s business model. PLUS competes directly with traditional exchanges with its offering of both listing and trading market services. Companies can access PLUS by having their shares traded on the PLUS quote-driven trading platform while listed or quoted elsewhere, or by being quoted on the PLUS primary market.

Floating on a public market The most frequently named benefits of coming to a public market are the ability to raise equity finance and raise a company’s profile. PLUS has proven to be a successful source of equity finance for growing companies, and offers profile in a dedicated smaller companies marketplace. Most importantly, the success of a


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public market is measured on the ability for existing issuers to be able to tap into the pool of capital and raise further funds to finance their growth. A PLUS quotation can:  provide the wider market with the confidence that a company has gone through a rigorous scrutiny process;  provide an independent valuation for the business, allowing traded companies to use shares as an acquisition currency;  help existing shareholders to realize the value of their investment by providing a trading facility in the company’s shares;  support employee share schemes and share option schemes to incentivize, retain and motivate employees and to attract new employees.

Is PLUS the right market? PLUS offers profile, liquidity, an audience receptive to growth and an environment where management can devote as much energy as possible to doing what their shareholders want them to do – to run the business. More importantly, the PLUS team are experts in understanding the needs of companies, their advisers and their investors. PLUS is a disclosure-based market which is dedicated to the needs of small and medium-sized companies, especially when it comes to regulation. There is a clear and straightforward admission process, which means that there are no specific eligibility criteria, but companies are required to satisfy certain standards. Key benefits of PLUS are:  The ability to raise funds from a deep capital pool of institutional and private investors. Tap into the world’s deepest pool of liquidity and the home of specialist small and mid-cap investors.  It increases a company’s ability to punch above its weight and enhances a company’s profile, improving visibility and impact, in particular with potential new customers who may become aware of the company for the first time.  Greater access to UK retail investors who drive liquidity via the leading broker dealer members of PLUS.  A robust but less onerous due diligence process; clear and straightforward admissions process where the PLUS Regulation team works with the company’s advisers during floatation.  Focus on investor protection through high regulatory standards but with a straightforward approach, leaving the company to grow the business.  Cost-effective access to the public markets, offering better value to companies and investors.  Tax benefits for investors including capital gains tax and inheritance tax reliefs, eligibility for venture capital trusts and enterprise investment schemes. As a result of the Chancellor’s increasing restriction on qualifying criteria for

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PROFILE: PLUS MARKETS GROUP 373 

these schemes many investors, including VCT funds, are investing in the kind of companies that would typically come to PLUS. PLUS-quoted securities are also eligible for inclusion in self-invested pension plans (SIPPs).

Are you ready for PLUS? The decision to be admitted to trading on any public market should be based on whether the objectives of a flotation will help achieve the company’s business goals. A cost–benefit analysis might be undertaken, and in addition, the directors must also make an objective assessment of the company. This might include a review of its business plan and growth prospects, its stage of development, the management team and its internal procedures.

Admission criteria for PLUS Companies seeking to become a PLUS-quoted company need to fulfil the PLUS admission criteria and adhere to the PLUS Rules for Issuers before being admitted to the market. A company will need to:  appoint and retain at all times a PLUS Corporate Adviser;  although there is no requirement to retain a broker, any company that is committed to investor relations and that is likely to use the market for further fund raising is encouraged to do so;  demonstrate appropriate levels of corporate governance: in practice, this means that a company should have at least one independent non-executive director;  have published audited reports and accounts no more than nine months prior to the date of admission to trading;  have adequate working capital;  have no restrictions on the transferability of shares;  have shares which are eligible for electronic settlement. Depending on the flotation objectives, a company can access the market via a number of different routes.

Introduction without raising funds  This is the most straightforward way of joining the market.  Suitable for companies not raising any funds but looking to raise their profile or obtain an independent valuation of their business.  The PLUS Corporate Adviser files an admission announcement with completed application forms and supporting documentation.  No admission document or formal prospectus required.

Private placement  The next most cost-effective way of become PLUS-quoted.


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 Suitable for companies raising funds from a select number of potential investors (max 100 people).  The PLUS Corporate Adviser files a private placement memorandum.  The memorandum is not for public release as it does not have to go into as much detail as an admission document or full prospectus.

Initial public offering (IPO) A more costly and time-consuming way of becoming a PLUS-quoted company due to the detail and verification work that goes into producing a full prospectus.  Suitable for a company raising money from the widest pool of investors available.  Full prospectus required (unless the offering is less than €2.5 million).  For an IPO of less than €2.5 million, a PLUS admission document is required. Admission costs depend on the ‘readiness’ of the company for a public market. Companies should speak to a number of PLUS Corporate Advisers to obtain an accurate cost estimate.

The PLUS advisory team The PLUS Corporate Adviser is a regulated member of PLUS, authorized to bring companies to the market and provide advice on continuing obligations. They have an obligation to ensure that a company is suitable for the market, providing advice on the eligibility and disclosure obligations of the PLUS Rules for Issuers. The Solicitor will advice on preparing the terms of engagement for the advisory team and advising on the preparation of the prospectus, admission document or private placement memorandum. They may also advise on any necessary constitutional changes and on any changes that need to be made to the Board. The Reporting Accountant is responsible to both the company and the PLUS Corporate Adviser, and will carry out the financial due diligence on the company. They will prepare are the working capital report, long form report and possibly a pro forma statement of net assets. The Registrar will have input into the application section of the prospectus, and establishes the share register. During the fundraising the registrar will also receive applications and monies submitted. The registrar maintains a record of the share register on an ongoing basis.

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PROFILE: PLUS MARKETS GROUP 375 

The Financial PR/IR firm should have an excellent understanding of the growth company arena, your business model and ambitions, as well as having key media and City contacts UK-wide.

Continuing obligations Companies quoted on PLUS must comply with the PLUS Rules for Issuers and ensure that the market is kept informed of developments or information that may impact on the financial situation of the company. All information must be disseminated via Newstrack PLUS, the in-house regulatory news service. The company’s directors, in conjunction with the PLUS Corporate Adviser, are responsible for ensuring that the company complies with its continuing obligations. Once admitted to the market, a company’s shares are traded on PLUS and are visible to the market through leading data vendors, allowing investors to access a consolidated view of all UK trading activity.

Conclusion PLUS is a market designed for small and mid-cap companies. It offers a gateway to the London-based investment community, a pool of liquidity in which a rapidly growing number of shares are traded, and a regulatory environment suited to the needs of smaller quoted companies.


13

Exits and trade sale


13.1

Selling the family business

Life is what happens to you while you are making plans for it, says Gary Morley at Mazars

Think long and hard about what you want to achieve from selling your business. It is worth spending time on this. You may want to discuss it over several months with your spouse, fellow directors and minority shareholders. You are facing the biggest financial decision of your life. You need to plan it. You need to know what you will do with the money. You need to know what you will do afterwards; even perhaps what your spouse is going to do. Only then can you be properly advised on how to achieve it. Once you have established your criteria, you can then start doing what is necessary. Probably the very first step to achieve what you want from the sale of your business is to appoint a seasoned adviser. There are many professionals who claim to offer expertise in this area, ranging from country solicitors through to fully-fledged City merchant banks, and not all of them can always deliver the service you might expect. One common method of trying to sell a business is by approaching the company’s auditors or (even worse) the family solicitor. Most professional firms with under 100 staff do not have corporate finance specialists. This, however, will not stop them from eagerly undertaking the assignment, as they believe it is relatively easy and it is their last chance to earn significant fees from a departing client!

 380 EXITS AND TRADE SALE

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Without a corporate finance specialist, the partner or manager undertaking the work will not have the experience either to market the business or to negotiate the best terms on your behalf. They will do some research into the obvious buyers of the business, and if that comes to nought (as it usually does), they flounder: they are trying to learn how to sell a business on the back of your fees. One of the biggest obstacles for corporate finance specialists in being appointed is receiving complaints from vendors that they have already spent considerable amounts of money using their own accountant or solicitor, and have got nowhere. Unless you enjoy paying large professional fees, never appoint anyone to act on the sale of your business who charges on a time basis. It is only in their interest to procrastinate, create unnecessary meetings and attend necessary meetings unnecessarily. ‘It’s all good chargeable time’ is a well-known professional phrase.

Planning – Life is what happens to you while you are making plans for it With only a little foresight you can change some of the things that you do or don’t do within your business, and thereby enhance its value. Longer-term planning can enhance its value still further. A number of possible courses of action are set out below. Of course, you don’t have to do any of the things suggested – it’s your business, and your money! The quickest way to improve profitability is to stop any ‘private’ expenditure. This could be your private plane, your mother-in-law’s Mercedes (or Mini), the gardener, ‘business’ trips or dining out. It is possible to explain all these things to a prospective purchaser, but then they will have to be itemized and agreed upon. It also means ‘washing your dirty linen in public’. The sooner you stop the perks, the better. There have been cases where the former owners of a business were sued to pay back expenditure of this kind as they are not true business expenses. You should pay yourself as if you were an employee, at a rate commensurate with your position. This does not mean you have to lower your standard of living – you can simply switch to paying monthly dividends. The tax differential between salary and dividends is now fairly minimal, but this will boost the reported profits of your company. The viability of paying dividends will depend on who owns the shares. If you (and your spouse) don’t own them all you will need the minority shareholders to agree to waive their rights to these extra dividends that are being paid, to increase the value of their shares. You should use the audited accounts as a showcase for your business. Don’t take advantage of any of the reduced reporting requirements. Include a chairman’s statement – expand the definition of principal activity in the directors’ report – boast about what you have achieved and where the company is going. Freehold property (and other significant fixed assets) should be revalued, if appropriate, to reflect their enhanced value. Sell any redundant assets. The accounting policies should be reviewed to report maximum profits. This is often the opposite of what a family company tries to achieve to mitigate tax.

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SELLING THE FAMILY BUSINESS 381 

You should also at an early stage remove any dead wood, including poorly performing staff. Apart from the obvious benefit to the company, a new owner will do it anyway, and it may affect earn-out calculations. You may feel it is better for all concerned for you to come to an arrangement now with staff that the company has outgrown, rather than leaving them to be dismissed by the new owner with minimum compensation. Give staff proper titles for the jobs they are doing. Have meetings and decisions minuted. This shows that there is management, structure and control in the business. As with most things in life, presentation can be more important than content. How your company is presented can have an inordinate effect on how much purchasers will pay for it.

Price – Value, like beauty, is in the eye of the beholder The valuation of a business works on imperfect information. It is not like selling a house in a street of similar houses, in which case you know what the one down the road sold for a couple of months ago. There is no other business the same as yours in the same location and of similar size. Even if there were, how would you know its value? There are no rules to tell you what your business is worth. There is no such thing as a ‘correct’ price. A business can be worth twice as much to one person as to another – and neither will be wrong, or necessarily right for you. There are in fact a number of different indicators used by the investment community for the purposes of valuation, as further referred to below, but remember that the purchaser is likely to have their own unique approach to valuing your business, which will take into account their own preferences rather than any objective measure of valuation. It is also worth noting that even the experts can get it wrong. There are many examples of quoted companies paying too much for acquisitions. In the final analysis, however, risk is what the price is all about. A purchaser could put the money in a building society, earn interest on it and know it is guaranteed by the Bank of England. What makes an acquisition more viable is that it should produce a much better overall rate of return. The more risky a venture, the higher the rate of return that is required – otherwise no one would take on the additional risk. The corollary is that the higher the rate of return required, the lower the price will be. It is the assessment of the risk that will value your business. This assessment is not a science; it is an art. At the end of the day it all boils down to a question of earnings, and the purchaser’s required rate of return on capital invested in your business – and, of course, the premium they are prepared to pay (for whatever reason) for the privilege. The major comfort factor for any purchaser will be the quality of future financial projections of the business and the robustness of the assumptions used to make the projections. It is after all the future of the business that is being purchased – not the past performance. The historic results are only useful for putting into context what the business had previously achieved.


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Tax – It’s not what you earn, it’s how much you keep Basically, for most trading businesses, the effective capital gains tax rate on their sale after two years of ownership will be a maximum of 10 per cent. This is an amount that most sellers of businesses are happy to pay. Unfortunately, HM Revenue & Customs is not happy to receive it, and has introduced many hurdles and prerequisites in order to increase the amount of tax payable. Hence we have a complex tax. Undoubtedly the biggest ‘elephant trap’ to be aware of is having a surplus of non-business assets within your business. Non-business assets could be investment property, stocks and shares, or they could be cash. Too much of any of these may increase the rate of tax payable. Fortunately the Revenue has given a little guidance, and stated that 20 per cent is the threshold below which non-business assets would normally be ignored. Unfortunately, it is vague as to 20 per cent of what – assets, net assets, turnover, profits, directors’ time? Several wily business people who have heard of the 10 per cent tax rate have stopped paying themselves dividends, which attract higher-rate income tax, and therefore built up a healthy cash surplus in their company, only to be advised on deciding to sell that because of the amount of cash in the company capital gains tax is payable at 40 per cent on the whole business. The legislation is such that once a business fails to qualify at any one time for the 10 per cent rate, it takes a further 10 years before it becomes available again.

Gary Morley is a partner at Mazars, the international accounting and business advisory firm. He specializes in advising owners of family companies, and has previously been the financial director of two highly acquisitive quoted companies. Gary qualified as a Chartered Accountant in 1982, and has been a member of ICAEW Corporate Finance Faculty since 1994. He is also a member of the Securities Institute. Mazars acts for some of the fastest-growing entrepreneurial companies in the United Kingdom, offering a complete range of accountancy and business advisory services including audit and assurance, tax advisory and compliance, corporate recovery and insolvency, consulting, forensic and investigations, corporate finance and financial services for private individuals. Tel: 07973 334391 E-mail: [email protected] www.mazars.co.uk

13.2

How much is my business worth?

There is a huge difference between strategic and financial buyers, says Dave Rebbettes at BCMS Corporate

Valuing a business can be a complex and difficult task. The traditional approach to valuing companies is to apply a multiple to average historic profits after adjustments have been made and after the costs incurred by current owners’ remuneration and policies have been added back. The most commonly applied multiple for private companies is seven times adjusted earnings after corporation tax. At BCMS Corporate we have come to strongly contend with this mindset, for this reason. The driving motive behind any acquisition is not short-term investment but long-term strategy. Of course there must be thought given to return on investment (ROI), but ROI is not based on historic performance but future performance under new ownership. Nothing demonstrates this more clearly than our 220 per cent rule. At BCMS Corporate we hold negotiative dialogue with an average of 230 potential purchasers to sell just one company. Over a period of several intense months of qualification we typically invite only six companies to put in competitive bids. The average difference between the lowest offer and the highest offer is 220 per cent, with remaining bidders spread relatively evenly between the two. If value was all about multiples of historic profit, all bids would be similar, but we very rarely see this. Here are some statistics for one of the most recent companies that we have sold:


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   

No. of buyers identified No. of companies that made an offer Lowest offer Price paid

HOW MUCH IS MY BUSINESS WORTH? 385 

276 8 £3 million £19.1 million

Interestingly, the company that purchased the company for £19.1 million was the very same company that put in the lowest offer of £3 million. We could list hundreds of similar examples. The two driving motives behind an acquisition are quality of client base and future potential for growth. To restrict value to simply multiples of historic profit is simplistic and expensive for the vendor. Value is much more to do with the motive of the purchaser than multiples of profit. It is much more to do with what the business will look like under new ownership. What will the business look like when the new owner has applied their sales activity, their investment, their resources and their clients? At BCMS Corporate we produce a ‘synergy business plan’ which considers the prospects for the business under new ownership. We find this to be the most important document that we ever produce. We have also noticed that there is significant benefit to be gained in acquiring a complimentary business. In the majority of cases the acquirer’s and the vendor’s customer bases are very similar. The acquirer can now sell their products to the purchased company’s client base and vice versa. Instantly there is the opportunity to increase revenues in both companies significantly. Although these areas are the most prominent for a strategic buyer, there are many others that will also be considered, including the following.

Customer base Successful companies are reliant on a high-quality customer base. Many will have long-standing customers and/or blue-chip customers. Long-standing customers provide a degree of financial security for the business, while blue-chip clients can generate larger income streams due to their size and requirements. The quality, longevity and loyalty of a client base can be the greatest driving force in any company sale.

Dependability If a company has a dependable income, perceived risk is reduced, which will influence the price paid. This may be from ongoing maintenance contracts, licence arrangements or simply regular business from reliable clients.

Intellectual property rights In business areas at the cutting edge of technology or product development, companies may have intellectual property rights which could be of significant value once the acquirer is able to apply its own resources.


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Entry into foreign markets Entry into the UK marketplace by overseas companies can be achieved in one of three ways. Appointing agents and distributors is a common strategy. However, the Institute of Exports confirms that 12 out of 13 companies that use this strategy fail in the short term. Alternatively, developing and growing organically in the United Kingdom is even more difficult, and today less than 3 per cent of foreign companies attempt to use this strategy. By far the most successful route into foreign markets is through acquisition, and it is for this reason that foreign investors may make highly competitive offers for businesses. Consider this also. Even if your buyer is a UK company, the fact that it is competing with overseas bidders trying to get in may have a significant impact on the bid of a local buyer. To fail to look overseas for a purchaser is a grave error.

Summary In this chapter the differences between strategic and purely financially motivated acquirers are made clear. Financially motivated acquirers rely heavily on accountants to determine the price they are prepared to pay. Strategically motivated acquirers consider all aspects of the business, from the customer base and product line through to brand strengths and, most importantly, synergies with their existing business. Because of this, strategically motivated buyers are considerably more likely to offer an asking price which exceeds the basic ROI-calculated value. Given that a strategic acquirer will consider all aspects of a potential acquisition, it is absolutely vital that the vendor’s business is marketed carefully to ensure that all the positive aspects and synergies are communicated. Most business owners sell a business only once in their lifetime; it is vital to get it right.

Dave Rebbettes is a founding director of BCMS Corporate and a regular speaker at over 70 venues across Europe and the United States annually. BCMS Corporate is the UK market leader in the sale of privately owned companies, and now employs over 125 personnel, with four offices in the United Kingdom and further offices in Europe, the Middle East and the United States. In June 2007 BCMS Corporate won the ‘Best family business of the year’ award from Coutts Bank in the £5–25 million turnover category. For further details about BCMS Corporate visit www.bcmscorporate.com

13.3

Selling for maximum value

Malcolm Murray at BCMS Corporate on the four key factors that influence a sale

To ensure that the offers for a vendor’s business are maximized, the business must follow four critical steps in the sale process. These four steps are as follows.

Avoid passivity A significant number of potential acquirers are often not considering an acquisition. Because of this the only method of locating these acquirers is through proactive searching. All businesses sell their own products by actively generating sales leads so why shouldn’t the sale of the business itself follow the same process? Traditional methods for selling privately owned companies involve appallingly low levels of selling activity and enquiry generation. If this stage is not completed thoroughly and comprehensively it will have a profound effect on the ultimate success of the sale. Indeed, failure at this stage is the main reason that the vast majority of privately owned companies fail to sell.

Motives for purchase Potential strategic acquirers’ motives for buying a business can be diverse. However, of all the motives, the two that remain the most important are, first, the quality, stability

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SELLING FOR MAXIMUM VALUE 389 

and longevity of the customer base and the ability to cross-sell existing products to each business’s customer bases, and second, growth potential. Growth potential should be seen not only in terms of the cross-selling, but also in terms of generating a wider range of products or ‘full service’ offering to potential new customers, thus improving competitiveness and the ability to grow the businesses at an increased rate. A strategic buyer may also carefully consider some or all of the following:    

the acquisition of key people and/or technologies within the company; brand/reputation of the business; implications of an existing competitor acquiring the vendor’s business; access to the UK market (for overseas acquirers).

It is worthy of note that while the quality of a client base and potential for growth are the major reasons that a premium price is paid, return on investment (ROI) is the least mentioned reason. That raises a valid question: why do business owners so often take this, the least important aspect of the buying criteria, and make that the basis of their business valuation? The reason for this is that the value of a business is about the motives of the purchaser and not simply multiples of profit. If the value of a business could simply be calculated as multiples of profit, all bids would be almost identical. However, in reality this almost never happens.

Creating bidder competition This factor influences the sale price more than any other! Generating a choice of buyers creates, effectively, a ‘market’ for the vendor’s business. Potential acquirers forming the ‘market’ must be strategically motivated and financially strong. Competition for a vendor’s business influences:  The speed of the sale. In a competitive environment potential acquirers become less concerned with minor issues regarding the business because of the ‘pressure’, perceived or otherwise, from competing acquirers. Businesses sold using a competitive bidding environment carry far greater momentum than typical ‘noncompetitive’ sales. Additionally, when a potential acquirer knows that the vendor can walk away at any point in the process and that deadlock is not an enemy but an ally to them, the sale process is far less likely to encounter problems.  The price achieved. Of all of the factors that will influence price upwardly the greatest is, as stated above, generation of a competitive bidding environment. While this is true of any negotiation it remains the most compromised element of traditional sales.  The terms of the deal. The decisions whether a vendor sells for shares or cash, whether 100 per cent, 80 per cent or 50 per cent of cash is received up-front, and whether the vendor leaves the business immediately or after a specified period, are all influenced by choice more than any other factor.


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It is fair to say that by establishing choice the vendor is able to control negotiations. Without it the vendor will always have to concede first. The ability to walk away from a deal can sometimes be a vendor’s greatest asset.

Future potential Business acquirers buy future potential, not past history. This may seem perfectly logical, and indeed it is. However, despite this many business ‘valuations’ (those made using traditional methods) are entrenched in calculating ROI figures using historic accounts. As any business owner knows only too well, past performance is never a guarantee of future performance. A business plan, produced by the vendor and detailing how the company could perform in three years’ time under new ownership, will be the most essential document in the sale process. The business plan should show the performance of the company once the acquirer has applied its resources, finances, sales activity, and brought its client base to bear on the vendor’s products and services.

BCMS Corporate was founded in 1987 by the current owners Brian, David and Stephen Rebbettes. Over the past decade, BCMS Corporate has evolved into the UK market leader for selling privately owned companies. This success, based on a unique, proactive approach to the selling process, has generated average sale prices 220 per cent higher than the initial bid. BCMS Corporate employs over 125 personnel directly, with offices in the United Kingdom and representation in Europe, the Middle East and the United States. In 2007 it won the ‘Best family business of the year’ award from Coutts Bank in the £5–25m t/o category. For more details about BCMS Corporate please visit www.bcmscorporate.com.

13.4

Legal points in selling a company

David Stanning at BP Collins discusses how to make sure a sale goes smoothly

In some ways, selling a company or business should be considerably less stressful for the seller than for the buyer, not least because a well-organized seller will have been prepared for the transaction whereas for the buyer it might simply be an unexpected opportunity. Two years before the proposed transaction is good time to start!

Be prepared! The seller’s first move should be to select and appoint a team of professional advisers to assist it through the process. In this respect, the seller should assure itself that members of the chosen professional team are not only of high competency and experienced in transactional work of this nature, but almost more importantly that they work together confidently and happily. Furthermore, it should be recognized that fee levels are not everything by a long chalk – you rarely get what you don’t pay for and tight purse strings often lead to inadequate resourcing and therefore delays, if not total failure. The advisers will then be able to assist in advising on the best structure for a disposal, in this context reviewing not only tax implications but also anticipating a buyer’s requirements – assets or share sale? – and will also be better placed to help in the preparation process.


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Any tax planning should be done at an early stage. A lawyer’s nightmare is to be told three weeks before completion that a well-meaning shareholder has decided to benefit his numerous nephews and nieces by distributing to them shares in the company just before it is sold. Another factor to sort out early on, which has recently become popular in certain business sectors, is the question of rewarding employees in the target company, usually by including them in earn-out arrangements. In order to avoid considerable tax complications, thought should be given to this at an early stage. In particular it should look at the possibility of setting up either an EMI options scheme and/or an employee benefit trust into which a proportion of the earn-out payment can be made, to be distributed to deserving employees who have stayed on during the post-completion era. If your company is a PLC (albeit unlisted) be aware that the City Code on Takeovers will apply, unless a Code Waiver is obtained. Unless there are compelling marketing reasons, I would strongly suggest in most circumstances that consideration be given to re-registering as a private company.

Due diligence In terms of preparation, there really should be no excuse for a seller not getting its ducks lined up in this respect. Good corporate governance combined with legislation these days encourages frequent review of a company’s constituent elements, so it should not be that much of an unfamiliar exercise for those planning to sell a company to ensure as far as possible that everything is in order. A logical approach to this exercise is to work through a ‘standard’ due diligence enquiry document, putting together the relevant documents and working to eliminate as far as possible any areas of uncertainty and/or possible concern to a buyer. In this category, I would include issues relating to property (ongoing liability under earlier tenancies, asbestos, rights of access, dilapidations liability), employment (all employment contracts issued and up to date, pension issues), intellectual property (ownership secured and protected?) and contracts (all in writing, do any contain change of control clauses and the like?). In particular, double-check filings at Company’s House, paying particular attention to any share buy-backs in the past. Buyers’ lawyers have eagle eyes for these things. In this context, it is far better for a seller to discover skeletons before a potential buyer does so (and then uses that to depress the price offered).

Moving forward As soon as a potential purchaser appears, it should be asked to sign up to a nondisclosure agreement, both to maintain confidentiality about the transaction and to ensure as far as possible that any information passed over is not misused at a later date should the transaction not proceed. This step is an absolute must.

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LEGAL POINTS IN SELLING A COMPANY 393 

The next step should then be to investigate the quality of the buyer’s credentials, particularly in terms of the availability of finance. There is nothing more embarrassing when acting for a buyer, or more irritating when acting for a seller, than to be told virtually at the last minute that funds are not available either immediately or in the manner anticipated. Such unnecessary hiccups lead to bad faith and suspicion, as well as wasting time and therefore money on everyone’s part.

Heads of terms The next step should be to agree and sign off on heads of terms, in which the detail of the proposed transaction is summarized, with the parties’ expectations in respect of all crucial matters being clearly set out. Do not avoid going into detail on the issue of warranties and indemnities. The heads of terms should make it clear who will be giving these warranties and indemnities, any claims thresholds below which claims may not be brought, time limits for bringing claims, caps on claims and the like. All too often one sees a simple one-line expression to the effect that ‘the usual warranties and indemnities will be given’ unqualified by any further statement. By my book that is a mistake because it leaves open for subsequent debate all of the questions raised above. That debate can lead to allegations of moving goalposts and a general breakdown in relationships, as well as proving incredibly time-consuming.

Documentation With the heads of terms signed off, the way is now open for the transaction to move into top gear, initially by dealing with the due diligence exercise and providing the buyer’s lawyers with the information and documents requested. If the preparatory work has been done properly, this should be a relatively straightforward exercise. A first draft of the sale and purchase agreement (SPA) will then arrive, to be trawled through initially by the seller’s lawyers to make sure that the front end of the document accurately reflects the heads of terms, and in particular that adequate and appropriate vendor protection provisions are included in order to minimize the impact of any warranty claims. At this time it may also be important to seek tax clearances from HM Revenue & Customs (HMRC), particularly in circumstances where some sort of deferred payment or earn-out is anticipated, to ensure that HMRC agree that all payments received will be capital payments (and thus subject to the current business taper relief regime) rather than income, with its attendant much higher rates of tax. Clearance applications can take up to 30 days to obtain, so timing is important here.

Warranties Inevitably, the main focus under the SPA will be on the warranties, of which there will doubtless be many pages. It will be for the seller and its advisers to go through these


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word by word to make sure that proper disclosures are made against each relevant warranty. This is a time-consuming and possibly tedious process but it must be gone through with extreme care if subsequent warranty claims are to be avoided. It is a question of checking and double-checking every response to ensure that full, fair and complete disclosure has been made. Internally, if there is more than one seller, it will be of considerable importance to sellers to agree how they deal, as between themselves, with any warranty claims, recognizing that no venture capital (VC) investor (and possibly no outside investor of any type) will be prepared to give warranties. A contribution agreement should be put in place covering how claims will be handled and the respective contributions between the sellers. A buyer will not normally be interested in where the money comes from to meet a warranty claim but will simply go for the easiest target.

Other issues If the transaction includes deferred payment terms, the provisions in this respect must be checked carefully to ensure that the parameters by which the earn-out is measured are clearly and unambiguously defined, to ensure that the seller is given every chance of achieving targets (with no interference from the buyer) and to secure as far as possible the payment of the earn-out. If loan notes are to be issued, then the issue of whether they should be qualifying or non-qualifying corporate bonds must be considered (the tax impact could be considerable). The heads of terms should have addressed the issue of whether they are bank guaranteed or not. Finally, post-termination restrictions on business activities may also be of importance, particularly for those not staying on under the new ownership (or for those ‘terminated’ early by the new owners). Restrictive covenants are easier to enforce in the context of share sales, but they should nevertheless be fair, and only imposed to the extent that they are reasonably necessary to protect the legitimate business interests of the buyer. © drstanning May 2007

David Stanning is a partner in B P Collins, Solicitors, where he heads up the Corporate and Commercial team of 10 lawyers. Having spent more than three years in Sydney with one of Australia’s leading law firms, he returned in the mid1970s to build one of the Thames Valley’s strongest corporate and commercial teams. He can be contacted at [email protected] or, with the rest of his team, on 01753 279022.

Index of advertisers

4X Currency Corporation PLC 319 A Steele Associates ii ADS Portal Ltd 214–15 Alliance North Midlands (Aura PR) xxv Allsave ii Barclays Bank Ltd PLC xviii–xix BCMS Corporate 384 Beck Greener 47 B P Collins Solicitors 342 Buckinghamshire County Council 150 Business Link 309 The Business Travel Show 198 The Chartered Institute of Purchasing & Supply 255 The Chartered Quality Institute 249 Chartered Management Institute 272 Charterhouse Commercial Finance PLC 188 CIMA 12 Companies House 295 Currencies Direct Ltd 194 Department of Trade & Industry xxx Disaster Cover Direct 238 Dixon Wilson Entrepreneurs 367

Edinburgh International Conference Centre 88 Envirowise 244 Ernst & Young 22 First Connections 230 First Flight Placements 282 Forget About IT Ltd 208 Goodman Derrick LLP 82 Graydon UK Ltd 183 Institute of Leadership & Management 290 KODIME Ltd

69

Leeds City Council 146 London South Bank University Mazars vi–vii Mewburn Ellis LLP 42 National Association of Pensions Funds 135 Netherlands Foreign Investment Agency 314 NIIT Smartserve Ltd xxxi

xii

 396 INDEX OF ADVERTISERS

Northcroft

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v

Patent Seekers Ltd 37 Pcubed xxviii–xxix The Pensions Regulator 103 PLUS Markets Group viii Professional Contractors Group Ltd 130 Recruitment Revolution 107 RICS Communications ix Royal Mail 58 See 20/20 Practice Management Services Ltd 220 Skills For Business x Skillweb 64

South East England Development Agency 28 South London Business 126 Strathclyde Business School 112–13 Swindell & Pearson xi Team Apogee Ltd 121 Thomas Fattorini Ltd xiv Toshiba 225 UK Business Incubation 156 UK Intellectual Property Office (The Patent Office) xiii UKAS 265 Yorkshire Bank

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The Growing Business Handbook: Inspiration and Advice from Successful Entrepreneurs and Fast Growing UK Companies

The Growing Business Handbook: Inspiration and Advice from Successful Entrepreneurs and Fast Growing UK Companies

The Growing Business Handbook: Inspiration & Advice from Successful Entrepeneurs & Fast Growing UK Companies