4 Tips on Improving Performance

Improving business performance takes strong leadership and immense effort, but neither will have impact if the company’s customers, staff and other stakeholders don’t believe in its future. A good leader will be able to create buy-in from everyone involved and use it to drive change.

When looking to bolster the performance of a company or division, Matthew Tait, Business Restructuring Partner at BDO, emphasises the value of communicating a clear strategy to all involved.

“One risk to recognise about businesses in distress is management’s tendency to lock the doors to the bunker. Despite the evidence, they can believe that no one sees what’s going wrong. Nothing could be further from the truth. Staff, customers, competitors, will know what is happening,” he says.

“A good turnaround plan needs to be agreed by the stakeholders as opposed to being imposed on them. You must understand what you need from each stakeholder – it could be time, funding, or a change in work practices. You also need to understand what the turnaround offers them; if it doesn’t give anything to key stakeholders then the turnaround won’t work.”

Change can be worrying for anyone, but the greatest fear comes from not being informed about where it will lead. As Joe Berwick, Business Development Manager at Criticaleye, highlights: “A clearly communicated strategy is the cornerstone of any successful change programme, and it is the leader’s responsibility to ensure it’s well-received by all stakeholders.”

We spoke to a range of business leaders, each of which have been through a restructuring, to find out how they managed their stakeholders. Here’s what they had to say:

  1. Reassure Your Customers 

When Vanda Murray, Criticaleye Board Mentor and Non-executive Director at Bunzl, led the turnaround of conservatory provider, Ultraframe, where she was UK MD and Group Marketing Director, she knew all key stakeholders had to be involved. “You must engage with them on a meaningful level about what they need, what their issues are and how you will work together,” she says. “The core of the turnaround story should always be the same and it should be based on reality, but you will clearly want different messages for different stakeholder groups.”

One move Vanda made early on in Ultraframe’s turnaround was to reassure customers that the company was reacting positively to market changes.

“The competitor had copied the product and halved the price, the product wasn’t quite as good but it was good enough. Our customers were leaving us in droves; it was a critical situation and action needed to be taken very quickly,”Vanda explains.

“I spent a week on the road speaking with all of the top customers to really understand what was happening. I spoke to most of the senior people in the company and then modelled how it could survive. We made it very clear what we hoped the timeline would be and we told them about our milestones to show we were on track. That was really important for them.”

  1. Build the Right Executive Team

When Andrew Richards took over as Managing Director of Britvic’s newly acquired Irish operations, recession had just hit the country. “We saw a procession of poor numbers, poor productivity and a poor marketplace performance across almost the entire spectrum. The business was failing,” he explains.

Andrew realised that he needed a team fit to take the business through Ireland’s recession; that meant very honest conversations with his executives, culminating in five of the seven leaving the business.

“In my first 90 days, one of my goals was to assess the nature of the loadbearing team,” says Andrew. “When I arrived, the Britvic Group Chief Executive had confidence in the Britvic Ireland executive team we’d inherited, but as we spent time pressure-testing the plan it became apparent that a lot of people weren’t capable of making the journey.

“The first person to exit the executive team, which was within three or four months, was the HRD. He was very well intending but not capable of managing a progressive HR agenda, and he recognised that.”

This process needs to be maintained throughout the change programme – while it’s common to make initial changes to the executive team, continued assessment will ensure the team still carries the skills it needs as the business evolves. “Those who initially feel they’re engaged and involved can begin to lose the energy to continue,” Andrew explains.

  1. Restore Staff Morale 

Low morale will take its toll on any business in decline; it can blight productivity, stain your company culture and lead your best staff towards the door. While emotions are bound to run high, there are ways to improve things – the most important of which are openness and clarity.

“People know when you are being straightforward with them. I talked to the staff in small groups of their own teams, so they felt comfortable enough to ask questions. I was as honest as I could be with them about the changes that would happen,” explains Vanda.

The greatest fear for many employees will be redundancy, so it is important to ensure it is handled properly. “We allowed people to leave with dignity and their heads held high, as much for them as the people left behind,” says Vanda.

It’s also important to understand how cultures vary across regional and international operations. Bryan Marcus, now Chairman of JBR Capital, recalled his experiences while being CEO of Volkswagen’s Latin American financial services division, VWFS.

Tasked with the turnaround of loss-making businesses, Bryan says: “I was a Brit leading a turnaround of German-owned banks in Brazil and Mexico, so the cultural, regulatory and operational challenges were numerous. From my experience, the critical success factors were openness with shareholders, consistency with local stakeholders and to ‘walk the talk’ with the local management teams.

  1. Communicate With the Board

Having led the turnaround of an international division, Bryan is familiar with the complexities of dealing with a distant board, as he explains: “Having worked in a local corporate, one of the challenges I faced was being part of a global corporation with global standards. You need to manage the pressure from headquarters and meet shareholder expectations while creating the time and space for the transformation to take root locally,” he explained.

Andrew faced similar issues at Britvic Ireland and found face-to-face communication was the remedy. “Some of my group executives and board colleagues had less sympathy or understanding of the situation I was in,” he explained.

“One of the ways I tried to work through that was to get the Chairman and a couple of non-execs over to explain what we were grappling with, that’s how I tried to manage my stakeholders back at the group level. Once I’d got them on the ground to see the situation first hand, they started to understand the challenges better.”

Whether you meet your stakeholders in person or build a rapport from afar, it’s imperative that you earn their confidence. As Matthew explains: “You need to have a trusted starting point otherwise people will hear the same messages reiterated but never believe it.”

And as much as you may want it, widespread improvements won’t happen without the belief of others.

Read more on managing your staff through a turnaround and rebuilding a business.

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Creating a Mindset for Fast Growth

The challenge for the leaders of fast-growth companies is to master the art of reinvention. It’s a matter of creating teams that possess both the capability and desire to keep rebuilding and improving the business model in order to gain competitive advantage.

Not every company will make the journey. Criticaleye looks at some of the common barriers that need to be overcome when scaling-up a business at pace:

Attitude is everything

The priority for any leader of a fast-growth business is to bring in people who can cope with the demands of ongoing change. Jim Macdonald, CEO at Calvin Capital, says: “We altered our recruitment policy. We had always recruited on a skills and capability basis but changed our first priority to recruiting on the character of the individual and whether we believed they could lead us to growth.”

For Joanne Thompson, CEO of Penrillian, a shift in mindset has been crucial as the software company moves from providing clients with one-off technology solutions, to rolling out its own white-label products.

“The most critical barriers for us to overcome are the ones we set for ourselves through our own lack of imagination, or by too readily accepting the constraints imposed by our current environment,” she says. “By accepting a limit on what’s possible, you make it more difficult to innovate and impossible to completely re-envision an environment in which you’re able to grow rapidly.”

Matthew Blagg, CEO of Criticaleye, agrees that leaders must promote a shift towards a forward-thinking approach. “A business going into growth needs to unlock inhibitors and ensure it is not wedded to the things of the past. It must create an adaptive culture, recognise the potential it has and speed up all elements of the business,” he says.

Stay on top of the numbers 

Many promising businesses have strayed off course due to poor financial management. As Jim notes: “One of the common barriers is not having the funds; there’s no point having a strategy for growth if you don’t have the finance behind it.”

This is something Jay Patel, whose experience covers numerous rapid-growth businesses from publishing to online retail, has learnt first-hand.

Jay, who is now CEO of IMImobile Europe, a software and solutions provider for mobile communications, explains: “A lot of entrepreneurial companies misunderstand revenue growth for success. They typically over service clients and don’t make any money. They then tend to struggle when it comes to funding future growth.

“Anyone looking at growth initiatives should make sure they measure it properly − revenue can be a crude measure.”

Walking the M&A tightrope

An acquisition can rapidly change the fortunes of a business, for better or worse. This is why plenty of thought and planning must go into deciding whether the target company is the right fit.

It’s something that Steve Richards, CEO of Casual Dining Group, knows all about. The multi-branded restaurant company, with subsidiaries including Café Rouge and Bella Italia, acquired the chains La Tasca and Las Iguanas last year.

In the case of Las Iguanas, Casual Dining Group set up a devolved structure. Steve explains: “Anything to do with the consumer, people or brand, we left within the business. The Managing Director of Las Iguanas is continuing to run it with his team. We’ve integrated his IT and finance but haven’t gotten in the way of his business. Getting that balance right is at the heart of the matter.

“Whenever you buy a business you have to remember that you’re doing so because you admire it. We loved lots about Las Iguanas and the fact it’s so scalable. The worst thing you can do when you buy a business is to homogenise it and turn it into your own. So many companies do that through M&A, but that certainly doesn’t work for a consumer-facing business.”

The tactics for combining two businesses will vary by sector, but in no case should the newly acquired entity become a distraction. Stuart Lisle, Tax Partner at professional services firm BDO, comments: “One of the big problems is not planning for integration ahead of doing the deal – a lot of companies focus on the deal first and then think about integration. Issues can build quickly when the two businesses are working on different systems or have different cultures.”

Build capability in your team

Questions on talent, capability and resources will dominate the thoughts of a CEO leading a business through rapid growth. Among the many questions, they will want to think about how much to spend on training and development, how you raise professional standards and improve processes, and whether the senior leadership team is capable of stepping up to the next level.

Joanne explains that she will need to build the company’s workforce in order to match its growth trajectory: “What I am doing at Penrillian, as well as ramping up our permanent resources quickly, is looking to work with partners and contractors while in the process of achieving critical scale. That enables you to recruit in slower time the right people who are able to stay with you on your journey.”

For Jay of IMImobile, an individual and collective sense of responsibility is important. “The one thing I always ask when a business is entering a period of growth is which one of my team is going to handle it? If you don’t have that individual who has put their hand up it’s very difficult to sustain growth, or even believe that you’ll succeed,” he says.

“We have people in 15 territories and operations in about 70, and the one characteristic in people across all those areas is that they are entrepreneurial self-starters that we’ve built trust in.”

Matthew notes that the qualities and skills of the team you require are likely to change over time. “Rapid growth doesn’t go on forever. You can have a team in which the executives are great for growth but not consolidation and the converse is true. A team can evolve if the appetite is there but you’ve got to invest in them as you’re going along,” he concludes.

By Mary-Anne Baldwin, Editor, Corporate

Do you have a view on this subject? If you have an opinion that you’d like to share, please email Mary-Anne at: maryanne@criticaleye.com

Interested in reading more? Find out how to stay calm in an overheated M&A market,
Or, discover the six steps to unlocking performance.

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The Physical Attraction of Retail

Comm update_11 June3Traditional retailers are working hard to make customers fall in love with stores all over again. If affections are to be won back, it will entail providing a more blended, personalised experience, whereby mobile presents the opportunity to send tailored offers and discounts, while the store itself becomes a place for shoppers to evaluate products with their own eyes, consult experts and socialise.

Stephen Smith, Chief Customer Officer at supermarket chain Asda, says: “The work we are doing around reinventing our large store formats is important for long-term growth. People are making fewer visits to large stores so we’ve got to continue to invest in the physical space and give people reasons to shop in store… [which means] making that physical space work as hard as possible for us. After all, it’s still what drives the bulk of our sales and profits.”

Customers will choose to visit a physical store if it means they can have an experience, either service or product led, which is not available to them online. Gary Favell, CEO of retail concern Bathstore, comments: “In our sector, customers want support, advice and guidance. We offer a personalised, full service solution through ‘service by design’, which can only truly come to life face-to-face. Our website educates customers about [this service], then signposts customers into the store.”

Naomi Wells, Head of Future Planning and Sustainable Development at Waitrose, part of the John Lewis Partnership, says: “You’ve got to make sure you are constantly introducing new experiences for your customers. For example, in our York branch of John Lewis, we’ve partnered with Hotel Chocolat to open a cocoa bar café in the store. Then there’s our tie-up with [luxury travel operator] Kuoni, which offers concessions inside our Oxford Street department store… we’ve also introduced a dry cleaning service in our Waitrose branches and extended our click-and-collect service so that it operates between both John Lewis and Waitrose stores.

“It’s about those extra offers you can deliver that encourage the customer [to shop in a physical store]… They can get everything on the web, so when they come into a shop they are looking for an experience, rather than a transaction.”

Pushing the boundaries

It’s clearly in traditional retailers’ best interests to find new ways to drive footfall in stores as part of their multichannel offering. After all, according to research from EY, online sales still make up just 12 per cent of total retail sales in the UK.

Julie Carlyle, Partner and Head of Retail at EY, says: “The question has moved on from asking ‘is the high street dead?’ to ‘what will the high street look like in the future and what purpose will it serve?’. Whether that’s showcasing products in stores, using space to click and collect… [it’s whatever] supports the current retail model.”

Cross-sector partnerships are becoming more important as is the ability to maximise the in-store experience through digital and the use of customer intelligence. Julie continues: “If you look at the fight for the pound spend [in retail], some of that’s coming from hospitality, some from what you would call old-fashioned retail and some from media. And I think there’s a real blurring of the lines between what is actually retail and what are other subsectors, so thinking about who your competition is has become more tricky.”

As new technology becomes available, that all important customer experience can be enriched. Take Apple’s iBeacon app, which goes beyond tracking a smartphone user’s location to estimating their proximity to, for example, a display or checkout counter in a store, in order to offer personalised discounts and special offers to customers.

Peter Williams, Chairman of online-only fashion retailer boohoo.com and former CEO of department store Selfridges, says: “There is no doubt that people like a bargain. And actually, if they’re being given the opportunity to buy something that’s 10 per cent off and the store they’re in just tips them, they may well take it up. So, if you can get the technology right and persuade the consumer that [in-store smartphone tracking] is accepted behaviour, then it might just have some mileage in it.”

Other companies moving in this direction include European property developer Hammersons, which introduced the Kudos loyalty app last year to enhance the multichannel experience for the retailers it houses. Steve Muylle, Professor and Partner at Vlerick Business School, and a Criticaleye Thought Leader, explains: “[Kudos] fires discounts for a meal or a coffee at customers after they were in the store for a while, making them rest and enjoy the break, so that they can continue shopping afterwards. The app also tracks their movement.”

Of course, the use of this technology needs to be carefully judged. Julie comments: “Retailers need to strike a balance between being able to find out data about their customers and guide them in the right direction without inundating them with offers or getting to the stage where customers are actually a bit worried about… [the retailer] knowing everything about them and following them around.”

Hayley Tatum, Senior Vice-President for People at retailer Asda, comments: “Customers just want convenience, which means shopping on their terms, in their way, however it suits them. It’s vital to make sure that physical stores remain relevant to what customers are interested in… whether that’s to browse or meet friends, so it provides a hub, a meeting centre and a purpose for people to visit.”

Ultimately, this is what creates loyalty. As Steve puts it: “Retailers that support the consumer decision journey with the right offline-online combo will certainly have the competitive advantage.”

I hope to see you soon.

Matthew

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Growing Pains for Private Equity

Comm update_12 Nov1

With growth resolutely back on the agenda, many financial sponsors are rethinking how they should be supporting portfolio companies in an increasingly complex, global landscape. For attendees at Criticaleye’s recent Private Equity Retreat, assistance in the form of new contacts and forging a route to market are to be welcomed, but there was a strong push-back on firms interfering with how management teams look to execute on strategy.

Ian Stuart, Chairman of four mid-market PE-backed companies, including manufacturing concern Aspen Pumps, says: “The job of private equity is to back management and every so often intelligently challenge. But the point where PE sets out the strategy for growth, even though they are not the ones actually running the business is, I think, dangerous.”

While a fine line needs to be walked, there is an aspect to this which is cyclical. Keith Holdt, Investment Director at LDC, comments that over the past two years the firm has used more generalist managers to assist management teams, but “the ideal investment is one where the management is not only competent but knows what it needs to do to grow the business”.

Carl Harring, MD of HIG Capital, makes the point that as a company looks to evolve and develop, new personnel may well need to be brought in. “We always look at a portfolio company and ask: ‘What will the business look like when we’ve gone through a period of change with it?’

“A different style… [and] new blood may be needed in the management team as a business changes focus from cost saving to pursuing a growth agenda.”

Brighter outlook

The mood among attendees at the Retreat was noticeably upbeat in terms of businesses investing for growth and increased exit opportunities, not only via trade and secondaries but also through IPOs.

Glen Moreno, Chairman of media company Pearson and Non-executive Director of Fidelity International, says: “[There are] record levels of unrealised returns; many LPs are at their asset allocation levels and will want to see distributed gains in their portfolios…

“The exit potential is improving… The underlying demand is there for corporates to buy PE-backed companies. Secondaries remain important but don’t have the same positive impact as trade sales and IPOs on the PE environment.”

According to Thomas Kalaris, Distinguished Executive in Residence at the University of Chicago Booth School of Business, sponsors and businesses are emerging from the “mess of 2008” but there are also wider adjustments that need to be made. “Changes in demographics, geography and technology are fundamentally reshaping the global economy and financial markets,” he observes.

Understandably, if companies are to flourish in such an environment then the executive team must be able to candidly evaluate the skill-mix within an organisation and, particularly in a PE-backed entity, be focused on succession so that the next tier of leaders is seen to be coming through.

Bill Ronald, Chairman of ComplEat Food Group, a supplier of chilled foods, says: “Senior executives must regularly take time out to get together and debate where the business is in relation to its marketplace. You need to get to the stage where the strategy is simple enough that everyone around the table can explain it in two minutes…

“Never be complacent about people. You need to be rigorous about filling the roles that are required to develop the business for the next three to five years.”

A similar point is made by Tania Howarth, COO of frozen foods company Iglo: “Incentivising the ‘mighty middle’ is a key challenge because they effectively do most of the work in the business without the pay-off at exit, and the last thing you want is divisiveness in this group.”

It puts pressures on leaders to create a long-term vision through which staff and investors alike can identify. Rob Crossland, CEO of employment services company Optionis, says: “There’s always an equalising pressure on short-term results in PE, but having a business centred on a goal and incentivising the workforce and other stakeholders to achieve it is something that I’ve found PE will buy into.

“We’ve been fortunate in that our investors have allowed us to try different things in order to move the business forward… [and] that relative freedom to experiment has created a positive environment within the management team.”

Unquestionably, the real problem facing both PE firms and management teams is around international expansion and globalisation. For PE, it’s a case of developing the know-how and reach to be able to make a difference as executives are faced with the need to form partnerships, make acquisitions, develop distribution channels and obtain licenses, on top of getting to grips with the regulatory and cultural unknowns (indeed, it was suggested that PE firms themselves may need to start looking to a more diverse pool of talent to meet these needs).

Building scale remains imperative for a company heading towards an exit.Glen says: “The key challenge for all of us [in business] is growth, both in economies and customer revenues. Management teams that can shift the business into high-growth markets, and new customer groups, will be rewarded.”

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeuk

Is the Feel-Good Factor Back for Boards?

Image

Reading tea leaves may prove more useful than relying on official measurements of how the economy is faring. There’s staggering national debt, real fear of inflation and overwhelming frustration at the short-termism of politicians, but this needs to be counterbalanced by the fact that, from a business perspective, confidence is picking-up in the boardroom today and it can’t all be due to a new royal baby.

Growth, and how to drive it in a sustainable fashion, is what’s on the agenda. Criticaleye spoke to a range of business leaders to get their take on the economic fix we find ourselves in, looking at it from both a local and global perspective. Here’s what they had to say…

1) Things are Getting Better

Optimism is returning and the vital signs – for the UK at least – are stronger than they have been for some time. In July, for example, the IMF upped its forecast of UK growth for 2013 to 0.9 per cent from 0.7 per cent in April. It’s positive news but with the national debt at 75 per cent of GDP and concerns about cheap money and subsidised credit, no-one’s getting carried away…

It’s more meaningful to talk about ‘optimism’ in the context of business performance and in this sense there are certainly some reasons to be cheerful. Brendan Walsh, Senior Vice-President of American Express’s Global Corporate Payments division in Europe, says: “At a macro level there are definite signs of improvement. When I look at my business month by month, over the last nine months, I can point to, at the aggregate level, total improvement, although the pace of improvement differs country by country.”

There are signs of a recovery in recruitment too. Stephen Barter, Chairman of KPMG’s Real Estate Advisory practice, comments: “We’ve seen quite significant job growth over the last nine months. Our recent Report on Jobs has shown the highest rate of growth in vacancies in the last three years, the fastest acceleration in permanent jobs being created for the last two years and the beginning of a movement in wages… The sectors that show the strongest growth have been engineering, IT and healthcare, but in recent months we’ve also started to see executive professional posts picking up too.”

Naturally, your view on whether things are improving will depend on the space you’re in. David Harding, who sits on the boards of two smaller UK companies, says they’ve both had diametrically opposing experiences: “The consumer business has been caught between rising input prices and an inability to increase prices in the supermarket. As a consequence, growth has been limited to trying to focus on specific segments where we have a strong USP, and give them a more direct service via the web. Conversely, the B2B business has just enjoyed a record year as cash-rich corporates unlock capex spending.”

2) Danger Signs

So, to come back to the big ‘E’, what’s currently weighing on the minds of business leaders?

“I keep my eyes on what’s happening to public spending and waiting for inflation to explode – and it will do,” insists Jon Moulton, Chairman of turnaround specialist Better Capital. “There is no means out of this deficit and debt position for the government other than inflation… We have reduced the amount of government debt in real terms and I’m sure we’re going to see a lot of inflation come through in the next few years.”

According to Jon, the situation at present is divorced from reality. “We’re in a very peculiar economy where the free market really doesn’t dominate any more… To a very large extent the economy is dominated by the behaviour of central banks, and the effect of low interest rates is, of course, to have very odd effects on asset allocation because people are perfectly happy to pile them into low-yielding assets, property and the like.

“People are not looking for an economic return, they are looking to preserve the value of their money. Higher interest rates would mean that people wouldn’t pursue hopeless business strategies because they couldn’t afford to.”

David Turner, CEO of outsourced contact centre company Webhelp TSC, comments: “Confidence and the economy remain fragile. My belief is that consumer spending will lead us out of recession but my worry is that we are beginning to see some levels of inflation coming through which could cause an upward trend on interest rates. We have to keep hold of inflation but higher interest rates will take away consumer confidence to spend and business opportunities to invest in the future.”

For Dominic Swords, economist at Henley Business School and a Criticaleye Thought Leader, the main cause for concern over inflation is that it could spark a hike in import prices. “Whether that’s around energy and commodity prices or a weakening of the exchange rate, it would mean that we have to pay more for our imports, which would all spell bad news because it would increase input or raw material costs for companies,” he says.

As for Europe, there continues to be lots of uncertainty. Mark Spelman, Global Head of Strategy at Accenture, comments: “In the UK and most European countries, with the exception of Germany, there’s going to be a debt drag that will last most of this decade, so you’ve either got to find the underlining fast-growth segments or find new geographic markets…

“Politically, too, the next two years are going to be quite turbulent because we’ve got the European Parliamentary elections, the Scottish referendum and the UK General Election. British business is going to have to navigate some quite choppy political waters.”

3) Supply and Demand

Deep concerns over food and energy prices persist, creating intense pressure for businesses and consumers. There has, however, been excitement over the implications of the shale gas boom, particularly in the US (albeit mixed with some genuine environmental concerns).

Lady Barbara Judge, Chairman of UCL Energy Institute and former Chair of the UK Atomic Energy Authority, comments: “I keep a close eye on the price and availability of energy. The greater availability of energy across the world is driving optimism with respect to manufacturing, so it’s having a clear economic impact. In the US, the discovery of shale gas and the economic revitalisation of shale technology have made America feel more optimistic, because the price of energy has gone down which is bringing manufacturing back to the US.

“But there is a dichotomy between price and availability. In the US, energy prices are going down and economic activity is going up, while in the UK and Europe, energy prices are going up because renewables are expensive and unreliable. So, in Europe, the economic vibrancy attributed to energy is less obvious and is not happening as fast.”

4) The Race for Growth

Plenty of CEOs actively dismiss pessimism over the economy. They prefer to concentrate on the positives of winning contracts, doing deals and seizing opportunities. In 2013, blaming the economy for poor performance can sound like a well-worn excuse.

Dominic says: “I see a lot of evidence from a number of businesses in a range of sectors that well positioned products can pick up on some quite high growth trends. For example, if you think of the healthcare and nutrition markets and the concerns that we as consumers have around obesity, well-being and healthy living standards, then you’re hitting a hot spot for a high growth market…

“For a well-positioned product in a company that understands its consumer markets, there are plenty of growth opportunities both in established Western markets and those in the BRIC economies.”

David says: “We’ve now got to the stage where everyone is looking for growth… [and] the same conversations are happening at the macroeconomic level, saying: ‘Yes, we have to control our debt and pay off our loans, but the more pressing need is what we are going to do to invest in the future?’

“It’s taken quite a long time for people to understand what being in a recession means and what you need to do to manage your way through it. What I’m now starting to see is senior managers coming back to the table feeling much more confident about taking a decision… which means the leadership can push on and assess what needs to be done.”

Any good strategy that’s decided on will contain a healthy respect for risk. Jon says: “We’ve been adopting such sophisticated planning scenarios as flat lines, assuming that we won’t have following tides of economic prosperity and therefore we run the companies in our portfolio along that basis. It’s very different to a fast-growing economy, where you would be doing new product developments at pace, so it’s made us adopt a safer strategy than we would do in more buoyant times.”

5) Relationships Matter

Following on from David Turner’s point about what it means to do business through a recession, it’s become increasingly important to communicate with stakeholders, manage uncertainty and build strong relationships with existing and prospective clients to understand exactly what they’re looking for.

Duane Lawrence, CEO of InferMed, which provides software solutions and technical services to the healthcare industry, says: “A good portion of our business is related to public spending on health and, with the NHS cutbacks, we’ve had to look not just at selling the clinical advantages of our software, but also at proving how it can take costs out of the system… the manner in which we go about talking to individuals about what we’ve got has changed pretty significantly.

“[Previously] we could just go in and talk about how we could make a difference in people’s lives by helping doctors treat patients better. That’s just not enough anymore because there has to be an economic benefit associated with it.”

***

Questions around how to solve the GDP/debt burden remain largely unresolved, with governments refusing to tackle austerity head-on or have a meaningful plan for recovery. Be that as it may, many businesses have identified where the growth spots lie for them and, as a result, they are a whole lot more optimistic than they have been for some time.

Given the systemic economic problems we face, it may be premature to say the ‘feel-good factor’ has come back to the boardroom, but there is a sense of direction and focus that’s been absent for way too long.

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeuk

Five Steps to Achieve High Growth

Comm-update-26.02.13

No-one succeeds in isolation which is why high-growth companies need access to a clear network of support, encouragement and advice. It’s frustrating when you see that a fantastic business with huge potential has faltered in that journey from toddler to titan because management lacked that crucial bit of experience, or didn’t quite know where to turn in order to get the finances right.

It is a risk for the founder of a successful private company, which provides a secure and comfortable lifestyle, to raise the stakes and go for high growth. Here are five of the most common barriers which need to be overcome:

1) Working capital and finance

Richard Barley, Director of Deal Origination at private equity firm LDC, comments: “You don’t want to be overtrading, especially as a business starts to grow quickly. In past recessions, what’s been found is that as economic conditions improve there is a spike of businesses going under because of a lack of working capital.”

It’s easy to be overwhelmed by success. David Soskin, Chairman of SEO specialist Smart Traffic, says: “If sales appear to be going up, then everyone is feeling good and that is a danger because you have to be paranoid when sales are rising quickly. You have to watch your finances even more closely than you would in a company that’s growing stably as obviously there are huge implications on cashflow and, in many cases, the quality of the debtors.”

As important as it is for a growing company to remain agile, it’s easy for CEOs to become distracted and dazzled by opportunities. “It’s tremendously challenging for SMEs to turn down business and this is why overtrading is such a problem,” says John Williams, Head of the Breakthrough programme at Santander.

Terry Stannard, Chairman of interior furnishings group Walker Greenbank, says: “If you’re in a start-up phase and you’ve got some initial funding, even if that’s pretty small, the key thing is to plan ahead with cash in mind. You don’t want to get carried away by all the opportunities… as you need to understand that when that first round of funding is exhausted, you must have a pretty good story to attract some more.”

2) Listening to the customer

Customer-centricity should be a priority for any business, but early-stage companies can be naïve about how vital it is to interact with customers and shape innovation accordingly.

Jay Patel, CEO of mobile data provider IMImobile, says: “The single biggest danger I’ve seen is that people get preoccupied with a product rather than focusing laser-like on what the customer wants. It is something that needs to be watched as the customer needs change and you will never get it right by producing a product in the abstract.”

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3) Evolving management & culture

For many CEOs, this is the number one challenge because as a company shifts through the various stages of growth, the skills and expertise required to make the business successful will be different. David says: “The faster a company grows, the more pressure it puts on the top team. There are some people who thrive in a very demanding environment – others don’t.”

Henri Winand, CEO of fuel cell business Intelligent Energy, comments: “When I came in, I set the expectation that every 12 to 18 months we would have a major organisational change. You need to be able to work out how to execute that without breaking the business, because if you change too quickly or too slowly it can [cause problems].

“But you have to constantly think where you are going to be in two years’ time and the reason for that is because any change we implement can take between 12 to 18 months to stick, and then a few more months to basically operate and ripple through the business.”

This is where the CEO and senior management team earn their stripes (and the introduction of experienced non-executives can add significant value) as they address conflict and tension within a changing business. Maria Pinelli, Global Vice Chair for Strategic Growth Markets at professional services firm Ernst & Young, says: “You start out as an entrepreneurial, innovative, fast growth company and you want to sustain that growth, but what’s difficult is that you need to do that while building infrastructure, systems, processes and controls.”

4) The case for partnerships

Joining forces with another company may have its dangers, but it can be an effective way to gain new business. Rob Wirszycz, Non-executive Chairman at technology consultancy Portal, comments: “You’ve got to deconstruct your routes to market through all stages of the buying and selling cycle, and you’ll then be able to work out where you may be able to benefit from a partnership.”

Bill Payne, General Manager of Customer Experience and Industries at IBM, says: “Many business leaders have a sales strategy that overlooks the opportunity to use partners as an indirect sales channel. It’s easy to be overly focused on organic growth from your own direct sales team, but young dynamic businesses cannot afford the luxury of time to grow and so using a partner channel becomes second nature to them. In particular, SMEs have a significant opportunity to expand their selling if they understand how to sell through a larger enterprise or specialist partner.”

5) International expansion

Headaches and heartbreak, that’s what international expansion can bring to a business if done in haste. The added cost, bureaucracy and problems around staff recruitment can be a massive drain on what domestically may be a very successful business.

Terry says: “It’s usually better to establish the business profitably in the UK and start to properly do due diligence and find out the opportunities overseas in terms of the best model for expanding, whether it be agents; distributors; joint ventures; acquisitions – for the very biggest companies; where your priority countries are; what product is likely to succeed; and whereabouts the competition is not so entrenched. But all of that needs to be done at the appropriate stage of growth.”

There has to be significant commitment and planning. Steve Jones, CEO of pharmaceutical company Special Products, says that attention must be given to recruitment and that, although an international strategy is often necessary, you can’t underestimate the time and investment it requires, along with the knowledge that there is no guarantee of success. “It always takes longer than you think it’s going to, so if you’re in any way half-hearted you’ll do your profit lines all kinds of damage.”

However, an international strategy, executed properly, will take a business to the next level. John says: “Fast growth businesses are obviously not all international businesses, but they should be thinking internationally, either in terms of their own growth outwardly or a consciousness that international competitors will be entering this market.”

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There will be those who scoff at the idea of year-on-year double-digit growth presenting a “problem”. But it is necessary to have an eco-system whereby real entrepreneurs feel confident about maximising the potential of their business, so they can go on to conduct an IPO, find backing from private equity or some other heavyweight private investors.

Any attempt to back ambitious businesses should be welcomed, such as the recent move by the London Stock Exchange to bring in a High Growth Segment which will help niche companies wishing to transition to the Main Market. “It’s part of a longer term and wider dialogue about how to make equity aspirational for investors and management teams again,” says Marcus Stuttard, Head of UK Primary Markets at the London Stock Exchange.

Whatever the path taken, it’s all about ensuring businesses don’t lose momentum. John says: “If there is a single biggest barrier to growth, it is finding a willingness within the management team to drive for growth as opposed to settling for business as usual.”

And who wants that?

Certainly not Henri at Intelligent Energy: “Without a shadow of a doubt, this is going to be a huge business. The reason for that is we have excellent technology and it is proprietary. This, combined with the demand for [energy] efficiency… all points to our technology being a significant player.”

Getting Management Ready for an IPO

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Dismiss the public markets at your peril. Institutional investors have significant funds at their disposal and companies are increasingly confident about raising capital and accelerating growth through a listing. The challenge for senior management teams is to be clear about why they want to IPO and whether they have the breadth of experience to handle the pressures of being in the public spotlight.

An IPO presents a rigorous examination of a business and its personnel. For any management team preparing to float, the following are essential:

  • Ensure the performance of the business doesn’t suffer during the IPO process
  • Give yourself a 12 to 24 month run-up 
  • Bring in a chairman as soon as you can
  • Identify and address weaknesses in the senior team 
  • Understand the key messages to deliver to the market.

As ever, this is easier said than done but complacency over any of these points can prove disastrous. Anthony Fry, Chairman of Dairy Crest Group, says: “It is not just the burden of the process which is time consuming, it’s this combined with making sure that the strategy for the listing and the appropriate shareholder profile is thought through properly and that the IPO team of advisors has been selected with great care… Above everything else, people sometimes forget that there is also a business to run – more forecasts are missed because management has taken its eye off the ball than any other single factor.”

Mike Tye, CEO of Spirit Pub Company, which listed on the London Stock Exchange after a demerger from Punch Taverns in 2011, comments: “The business has to perform brilliantly as you’re only as good as your first set of numbers; if you blow that it’s a hard recovery path. We brought in somebody to work with all of our external advisors, so the vast majority of the management team just did not get involved in the IPO. I would absolutely recommend it as it’s so easy to get distracted… when the critical thing is to serve customers and keep the team motivated. Without that, the rest is gone.”

Naturally, how early you start planning will depend on the composition of the board you already have as a private entity, but the general view is that the earlier you start acting like a public company, the better prepared you’ll be for crossing over to the other side.

Mike McTighe, Chairman of electrical cable maker Volex, comments: “For me, one of the critical steps for every director is to give personal warranties as part of the IPO prospectus as many boards don’t ensure early enough that they’ve a board that’s fit and compliant to conduct an IPO. Take private company boards, for instance, most have directors who are not independent because you have shareholders or founders around the table. You need to start early in order to hire the right people and get them up to speed so that when you put the prospectus together they all understand the business and can sign their representations off.”

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Good governance

Don’t underestimate what a well-respected and seasoned chairman will provide a business as it goes on the IPO journey. Alastair Walmsley, Head of Primary Markets at the London Stock Exchange, says: “Bringing in the right chairman can introduce a degree of rigour, both operationally and in terms of risk management, which will help that business be more successful in the long term. You need to do that as early as possible to get the chairman fully immersed in the business so they have run the board meetings and understand both the dynamics of the existing shareholder base and management team.”

Paul Staples, Head of Corporate Finance at BNP Paribas, comments: “The appointment of a chairman is a pivotal decision and forms an important dynamic within the IPO preparation process. He or she will exert influence on the shape and profile of this in the boardroom, together with achieving an appropriate balance between executive management and non-executive directors. Institutional investors will pay close attention to the reputation and track record of the chairman when considering the intrinsic appeal of any public offering during a pre-marketing exercise.”

Mike McTighe comments: “The key is always to ask whether you have a strong independent chairman. That would be the first person to hire and many businesses don’t… Really, you’re looking at planning an IPO at least 12 months in advance, but it’s more like 18 months because the chairman will have to assess the composition of the board, hire some independent non-executive directors and agree with others around the table when and how they will step down if they are not compliant, which is always the tricky bit.”

It’s crazy to think that companies rush this appointment. Linda Main, Head of UK Capital Markets at KPMG, comments: “It’s fairly common for a chairman to be brought on board quite close to an IPO date. That’s usually because companies underestimate how long it takes to find the right chairman. You need to allow upwards of six months to get someone.

“You need someone who’s got the right experience and is going to bring real benefit to the company whether the IPO goes ahead or not. That could be someone who’s an experienced executive or who has particular industry experience… essentially it’s someone who is used to chairing a board with strong personalities, which is often one of the main challenges.”

The question of whether or not industry expertise is required remains somewhat open. Mike Tye comments: “The critical thing is having the right reputation…The chairman we chose to appoint had no experience of the direct industry but had indirect experience and was well-known and regarded in the City. That is the critical thing. You are hiring reputation and experience, especially for a reasonably sized IPO.”

Anthony has a similar view. “Too often people think that the best chairs come from their own industry – sometimes it’s helpful but there are plenty of examples of chairs and CEOs clashing precisely because they both think they know ‘their’ industry better. The best chairs are sounding boards for their CEOs with long experience across managing businesses, running boards, mentoring executives and being independent of judgement and advice, which are worthwhile attributes for any business.”

In focus

The higher profile and ever increasing legal responsibilities of being a director will take newcomers by surprise. Bob Garratt, Criticaleye Associate and an advisor on board effectiveness and corporate governance, argues that management teams routinely fail to recognise the extra duties and liabilities that come with being a director as opposed to a private company manager.

He explains: “In preparing to become a public company, board directors must learn the seven statutory duties as required by the Companies Act and recognise that being a director as defined by the Act is markedly different from the recommendations of the Combined Code. The Act makes it quite clear that you are either a statutory director or not, and that there’s no such thing as a NED or Executive Director.

According to Bob, directors can have a hazy view of their role. He recommends that before embarking on an IPO, the directors, chairman and company secretary “get together for a long chat to really understand what it means to be a director of a publicly listed company”.

Dealing with investors, employees, analysts, brokers, advisors and the media requires a set of skills that won’t perhaps come easily to those who are familiar with running a private company. The Financial Director will certainly need to make the grade, as they will be working closely with the analysts and institutions, not to mention getting the accounts in order and fully compliant with IFRS.

Mike Tye recommends that directors are well rehearsed and drilled about what’s expected. “It doesn’t matter how much you describe to people what it’s going to be like, there’s no better reality than trying to create it ahead of time. For us, a number of people had the chance to stand up in front of investors and analysts and, in effect, knowing they were going to be at the front of the business, be judged as such.

“If they had not been in the spotlight in that way, they wouldn’t have known what hit them. You have to simulate it as much as you can. Explain to them, no matter what their expectations are, that they are underestimating it so you have to put them through the mincer.”

Neil Matthews, Partner & Head of Equity Capital Markets at law firm Eversheds, observes: “The management team must be comfortable in a public environment with all the scrutiny that it brings, and with the additional time spent with external shareholders and reporting requirements. It’s a great thing for companies to be able to raise capital, get a public profile and grow… but you have to be wary of the downsides and potential challenges associated with a listing.”

Alastair says that “the big difference from a management team perspective is clearly going to be the level of disclosure that you are required to make and ultimately the much greater emphasis on communication than you ever had in a private company context”.

Hit those targets

Executives must go into the IPO process with their eyes open. They’ve got to be able to explain why it is they want to list, what type of shareholder mix they need, how funds will be raised to develop the business, and to have given plenty of thought as to why another route of financing, such as private equity, isn’t appropriate for their business.

If management can’t tell the right story in a convincing and confident fashion, investors will walk. And calling off an IPO at the last minute will be expensive and acrimonious.

They also have to be realistic about ongoing questions around liquidity on the public markets and the consequences of missing the numbers once a float is away. There are, as Linda says, “plenty of examples of companies missing market expectations and getting their price absolutely hammered as a result”.

Being a public company today is all about operational delivery and balancing short and long term interests. Provided companies execute well, the rewards for being listed are there. Andy Pomfret, CEO of investment management firm Rathbone Brothers, comments: “A lot of people would say it’s costly and there’s a lot of bureaucracy with a plc. It is difficult, that’s true, but I think a lot of those things encourage good business practice and you do have a whole range of shareholders who are supportive of what you are trying do and, therefore, if you want to raise money and convince them of your story, it’s quite easy to get that level of support.”

Is 2013 going to herald a great return of the IPO? The answer is probably not as there continues to be too much economic uncertainty in the eurozone, the US and beyond. However, this has been going on for a while and for the right businesses, with well-prepared and seriously talented management teams who understand and believe in their business models, there will be more IPOs over the coming year than we’ve seen for some time.

Finding the Upside in PE

Driving growth requires management teams to combine ruthless focus with an agile response to both challenges and opportunities. Ernst & Young’s private equity specialist, Harry Nicholson, explains why CEOs of PE-backed businesses should be doing more to create fresh exit options

The total number of exits of private equity-owned businesses across Europe rose to 83 in 2011, according to Ernst & Young’s research of European businesses worth more than €150 million at the time of PE investment. This was the highest recorded number of exits since the peak years of 2006/7.

Harry Nicholson, Partner at E&Y, who has been advising on PE deals for more than two decades, provides a snapshot of European deal activity in the mid and large buyout sectors of the market.

What drives a successful sale in the current market?

Quite simply, it has to be a very good business. Remember, the majority of buyers of PE-backed businesses at present are other PE firms. While there are plenty of PE buyers around with cash to spend, they are selecting only the very best assets. To continue to generate attractive returns, PE firms must seek out the investments with the most potential, then work actively with those companies to achieve that potential.

However, secondaries are not going to clear the overhang of unrealised PE investments, so the piece that needs more thinking about is the hook for trade buyers. Therefore, as the interested seller, what more can you do to really think about who might be interested and why?

In practice, what can vendors do to attract trade buyers?

It’s harder to sell a business today unless you have demonstrated a scalable, often international model for driving growth. Trade buyers from the US and Asia-Pacific are clearly showing more interest in the mid to large end of the market in Europe. So as a potential seller, you’ve got to broaden your horizons and think creatively about who might be interested, particularly on the international stage, and why they might be interested in your business. Sometimes the trade buyers, and their investment rationale, may be obvious. But there are evidently benefits to be gained from management teams challenging their own thinking. It is something that, to date, too few private equity owned businesses have undertaken.

It’s then a case of helping to make it happen. Wear out some shoe leather and get out there and spread the word. Remember, there’s a huge backlog in the market, all hoping that it happens to them too. There are simply too many sellers and not enough buyers. With buyers more circumspect and with the focus, as ever, on business fundamentals, achieving any exit in today’s context means more effort is required all round.

Does the PE model need to change in order to create new opportunities for an exit?

It’s about rekindling the intensity of the original investment case, looking for new drivers of value that others haven’t seen, the pooling of great minds, intelligence and expertise. It’s about returning to the mentality of ‘this is what we’re going for and why’.

It’s always a big challenge. I’ve seen examples of where a business will almost hit the wall but manage to limp along. There’s a great temptation to just survive when you’re in such a position and the macro market looks unkind for years ahead, but that’s not enough.

This is a challenge of leadership. Can CEOs find the inspiration and decisiveness needed for change, which will increase cash flows and create fresh exit options? Waiting for the tide to rise just doesn’t feel like the right thing to do. Business leaders should be asking, ‘How do I make something happen to create value?’

What’s the mood among PE firms?

For the PE guys, they’re thinking: ‘I really want to crystallise my best deals, which will help me raise funds, but for the rest of my portfolio, as long as they don’t mess up, we’ll wait and see…’ That’s why it’s beholden on management in some of these companies to rattle the cage and create the urgency, because there won’t be that intensity coming down from the GPs [general partners] to force that in many cases.

Is the financing landscape for deals improving?

Deals are getting done and leverage hasn’t gone away. There’s still finance for a performing business that’s shown some ability to absorb external shocks and has some resilience to its earnings and cash flow. Sure, the leverage ratios are off their peaks, but it’s not a reformatting of the financing model and there’s still a significant leverage arbitrage built into the PE model. For the right deals, the money’s still there.

What about refinancing the existing portfolio?

That’s the bigger question because there is a raft of businesses struggling under the capital structures that were taken on in 2005 to 2007. The data we’ve looked at shows that in the biggest buy-outs, close to one-in-five may still be facing financial distress. Few are acting recklessly. So, as a PE firm faced with a business that is still making some money but which can’t refinance then, actually, you don’t want to sell it in today’s market because you won’t get top dollar. If it’s still meeting its interest repayments, you’ll keep it running. The LPs [limited partners] could kick up a fuss and get a consortium together to try and put a bit of pressure on the GP, but if they ask them to act fast and crystallise those investments to release cash, are they going to get the right value for those assets selling in today’s tough market?

Has the dynamic between management and sponsor changed?

In the largest deals, the boom years of the early noughties where PE backing was a one-way street to riches are over. For great management, they’re now asking: ‘Is PE the path to fame and fortune or not?’ Therefore, the opportunities have become more of a hard sell for PE to get management engaged and interested.

For incumbent management teams, incentive structures that looked good in 2006/7 don’t look very exciting in 2013. The model for me has always been a combination of carrot and stick: the stick being the financial leverage and the discipline that brings, with the carrot being the alignment of objectives, so if you can make it work we’re all going to do very well.

But the crash meant it ended up being just a stick for management teams. As a result, some management teams have been changed, while others have reacted to the challenge and opportunity of the ‘new normal’. Often, this has been followed by a rebasing of management incentives to re-create equity upside (for management, the prize of creating the new plan). It’s been a major trend in the last few years and it is still working its way through the PE environment.

Incentive structures that looked good in 2006/7 don’t look very exciting in 2013

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Harry-Nicholson-webHarry Nicholson, Partner, Ernst & Young

Harry Nicholson is a Partner at Ernst & Young, the global professional services firm. He heads the Commercial Advisory practice which provides market, customer, industry and business advice to clients engaged in transactions and strategy development. Harry advised on his first PE deal in 1992, and has been actively engaged in the industry since then on new investments, realisations, re-financings and restructurings. He leads Ernst & Young’s annual global research programme, ‘How do private equity investors create value?’, and is a member of the British Venture Capital Association’s Research Advisory Board.

Contact Harry through www.criticaleye.net

Navigating the Euro Crisis

As Italy, Portugal and Spain get downgraded by credit-rating agency Moody’s and leaders from the EU go cap-in-hand to Beijing, it’s understandable that businesses remain confused about how to navigate the euro crisis. That said, executive teams cannot fall into a state of paralysis and must recognise there will be opportunities amid the ongoing chaos.

Mark Spelman, Global Head of Strategy at Accenture, says: “Chief executives should continue to focus on how they can protect their market share in their core markets, especially in Europe, while at the same time seeking out those hotspots of growth elsewhere. Events are going to be more uncertain and one has to live with that, but it doesn’t mean that one should be paralysed.”

The challenge is to manage the uncertainty and be flexible enough to move when market conditions are favourable. Chris Stooke, Chairman at broker Miles Smith, who is also a Non-executive Director for insurance entities Chaucer and NFU Mutual, comments that problems in the eurozone “are generating numerous steps forward and back which is leading to great volatility”.

He explains: “For Chaucer and NFU Mutual in particular, this means that we are having to manage quite large investment portfolios in this volatile environment and have to balance the effects of short-term fluctuations with our views of opportunities which will only emerge over the longer term. NFU Mutual, for instance, has some relatively large equity positions and, while the investment team is of the view that there is some good value to be found in this asset class, on a month-to-month basis large swings in value and income statement volatility can occur.”

Paul Staples, Head of Corporate Finance at BNP Paribas, observes that within the banking sector the European sovereign debt crisis is having a profound effect on the strategic options being considered by executive management teams. “The competitive landscape within both corporate and investment banking is in a clear and, candidly, unprecedented state of flux…

“The extensive de-leveraging exercise that is underway will have a meaningful impact on the way in which corporate clients manage their relationship banks and is already changing expectations of what can be sensibly expected, both in terms of pricing and balance sheet commitment.”

Shop around

For companies with the financial firepower, the crisis presents a special moment in time to look at potential acquisitions. “The eurozone crisis may create an opportunity for UK companies… who wish to expand in Europe as previously it’s been very expensive to compete there,” comments Aleen Gulvanessian, a Partner at law firm Eversheds. “Up to now Europeans have been buying more UK assets; if sterling starts getting strong would UK companies be better buyers as a consequence?”

It’s a scenario that has been jeopardised by the threat to downgrade the UK’s triple-A credit rating, but without question other businesses and investors are scouting Europe for deals. Daisuke Ishida, General Manager of Financial Markets Business Department at general trading firm Mitsui & Co Europe, says: “Many businesses are more financially constrained so they may want to dispose of some assets which wouldn’t normally come out in the market otherwise, so we’re very keen to identify those situations.

“We’re looking across all our target sectors, not excluding the opportunities coming out of the private equity portfolio, but more the corporates and specifically the banks that need to dispose assets [in order to] shrink their business in terms of geography and scale. We’re not trying to buy at the bottom of the market, but rather identify attractive deals that only come to market as a once-in-a-lifetime opportunity – and we’re willing to pay a fair price.”

In its way, it has to be said that this also heightens the mood of uncertainty and lack of confidence as venerable corporate institutions become targets for bidders. “The assets of business in Europe are vulnerable from sovereign wealth funds, particularly by those countries accumulating large amounts of capital,” says Mark. “China, for example, has 3.5 trillion renminbi accumulated in reserve. These funds are now taking positions in infrastructure projects and also in companies, such as the [Chinese Investment Corporation’s] 9 per cent stake in the UK’s Thames Water.”

Plan of action

The stark reality for many boardrooms is to adopt a ‘go slow’ mentality and monitor the situation carefully, which is true of Asian multi-nationals and European ones. Pankaj Ghemawat, a Criticaleye Thought Leader and Professor of Strategic Management at IESE Business School, Spain, says: “All kinds of investment projects have been put on hold which is really the worst thing for the eurozone right now, as people wait and watch and figure out what’s going to happen. I’ve seen relatively little attention paid to what business strategists would normally recommend, such as scenario analysis and trying to figure out contingency plans.”

Such an impasse is deeply damaging. “If you look at the eurozone’s international interactions, 60 to 65 per cent of exports and imports are to or from other European countries,” continues Pankaj. “In terms of inward foreign direct investment in the EU, 62 per cent is from the rest of the EU too. So, there will be these important cross-border interactions to manage and Europe will continue to be its own largest trading partner in multiple ways, which is why simply focusing on Asia is not an adequate response.”

Those speaking to Criticaleye largely have faith that the euro will not fail, mainly because of the political will that has been invested in it. Michael Cox, Professor of International Relations at the London School of Economics, says: “There has been one thing missing from the debate among economists and business people about the euro crisis: Europe is at the heart of a political project whose failure would not only lead to a run on the banks, massive inflation and the reintroduction of war-time like controls to prevent a flight of capital to safety (where the US would be the most likely destination),  but it would also loosen the political ties that have made Europe safe for peace for the past sixty-five years.”

The postponed decisions and lack of unity from EU leaders adds to the frustration and anxiety. Tom Taylor, Chief Executive of the Agriculture and Horticulture Development Board, says: “We would all like to see a solid stability pact, where the vulnerable countries take serious action to reduce sovereign debt. Personally, I think that the EU will get there but not without some bumps in the road and a prolonged period of no or limited growth and, as a consequence, weak demand as the austerity needed will have a recessionary effect.”

A similar point is made by Chris Merry, former CEO of financial services concern Matrix Group. “I would like to see decisive action and a quick resolution to the crisis, probably through the ECB [European Central Bank], which would in turn be supported by the eurozone countries. I think the euro will muddle through and there will be much dissatisfaction at the speed of decision making, but the alternative is too scary to contemplate.”

It’s a picture of Cubist complexity where tomorrow the situation may have taken yet another dramatic twist. Mark says: “My message to business leaders would be: don’t underestimate the political will as there will be ups and downs with the euro in 2012 and you do need to think quite carefully about risks and contingencies around it, taking into account low or negative growth rates and banking uncertainties, particularly when the banks start taking significant write-downs on Greek and other country debt.”

As Paul puts it: “The primary challenge is to design business models that deliver a sustainable risk-adjusted return on equity that can reassure, and in due course be embraced by, stakeholders.”

A mantra that will hold true for the boards of both public and private concerns for some time to come.

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

2012: Keep Your Eyes on the Prize

You could be forgiven for thinking that the cinematic storms lashing the UK’s shorelines and cities are a macabre foreshadowing of the economic tempest to come over the next 12 months. Although it’s obvious that troubles most certainly do lie ahead, it’s equally true that leaders who continue to hold their nerve and are willing to adapt can and will make their businesses prosper.

As the CEO and one of the founders of Criticaleye, I believe that whatever the wider economic and political environment, over the course of this year those leaders that are able to put ‘context’ first will thrive. The leaders that base their decisions on the context of their own organisation and its eco-system, while carefully monitoring the experiences and views of others rather than just the macro-picture, will take their companies into strong commercial positions.

To my mind, 2012 is going be a great year for leadership, an investment year, a growth year and, above all, a positioning year.

As Ian Bowles, Chief Executive Officer of Allocate Software plc says, the current crisis was not triggered by widespread business failure or lack of opportunity: “Good companies can thrive if they focus on core activities and execute well.”

Besides, plenty of corporates and SMEs have piles of cash on their balance sheets – the question is when and where to invest. For Bala Chakravarthy, a Criticaleye Thought Leader and Shell Professor of Sustainable Business Growth at IMD, “2012 will sort out the true blue-chip companies from the pretenders” and that will require a potent mixture of “innovative strategies and prudent risk taking”.

Troop morale

The immediate priority for executive and non-executive teams is to buoy the spirit of employees and stakeholders so that everyone continues to believe in a business and its future. Siva Shankar, former Corporate Finance Director at commercial property investment and development company  SEGRO plc, warns against the dangers posed by employees falling into the trap of alarmist thinking, largely fuelled by ‘sensationally negative’ stories in the media.

He says: “Unfortunately, this kind of ‘negative sensationalism’ will naturally seep into organisations and leaders will have to be vigilant and take firm steps to contain the impact that a few destructively influential ‘tabloid communicators’ can have across a whole organisation.”

Laura Haynes
, Chairman of brand and communications company Appetite, says: “The growing uncertainty often leads to paralysis in change, development, innovation and investment, not only for individual companies, but for the economy as a whole… I [do] think there should be a focus on employee engagement and keeping people focused on the goals ahead and the values of the brand and how to deliver against the ambitions of the organisation.”

The ability to react to change and take an opportunity remains paramount. Mike Hayes, President of  gaming company SEGA Europe Ltd, says: “There [is a] need to adapt to the way technology is changing methods of consumption. As broadband improves… consumers will want to experience their entertainment, receive their key information and buy goods in a far more real time and direct manner… Businesses will have to adapt to keep consumers engaged.”

Andy Dunkley, CEO of Lee Cooper Brands, says: “For our business the key opportunity is expanding internationally and giving our customers a full menu of support so they can take as much or as little as they need. That being said, I am anticipating a harder scenario in picking up international business in 2012 than we had in 2009 to 2011, so we are going to be much more cautious in the management of our cost base.”

When assessing the bigger political and financial picture, there’s no point in denying the dangers that exist as growth in Asia slows, the Eurozone teeters on collapse and economists predict a double-dip recession. The threats are out there and, as Marcus Stuttard, Head of AIM, the London Stock Exchange’s international market for growth companies, states, confidence is crucial as “uncertainty in the markets has been the biggest brake on activity in recent months and is likely to continue in the early part of 2012”.

Ian McCaig, Deputy Chairman of smart meter energy company First Utility, says: “I still have deep uncertainties over the consequences of any stimulus actions that seek to bring about short-term improvements. It’s difficult to be positive unless we know what happens next in the Eurozone. If we see an individual market or the currency collapse, trading relationships will continue to worsen.”

Guessing game

Every sensible executive and non-executive team will be measuring the wider risks against the individual strengths and weaknesses of their organisation. Brian Stevenson, former Chairman of Global Transaction Services for the Royal Bank of Scotland Group plc, says: “Most companies are in good shape to weather the challenges of 2012 but, in general, banks and governments are not. This, together with the continuation of macro-economic imbalances in the world’s economy, mean that it is difficult to be optimistic.”

In this sense, over-exuberance and bullishness may appear ridiculous and even offensive, especially as austerity measures start to bite and organisations need to make realistic cuts in tight market conditions. For those in the public sector, for instance, the pressure is on to make savings and reduce expenditure while seeking to improve service. Jane Furniss, CEO of the Independent Police Complaints Commission, admits that this is no easy task as “it’s a combination of adapting and trying different things”.

It’s not a time for any business leader to be operating in a silo. Jane continues, “Certainly, advice from colleagues within other organisations that have been through this, both in the public and private sector, has been useful and that’s where the Criticaleye Community has really helped me. I have conversations that help to give me ideas and also having more formal discussions with people about how they have tackled similar situations.”

And so it comes back to the importance of understanding the context of your business. Only through dialogue, interaction, hard analysis and good old-fashioned gut-feeling will you be able to make the right choices and empower your leadership team so that you’re where you need to be in 2012.

Those who lose sight of their contextual position will be sucked into a very tough vortex!

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk