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FEATURE MONEY & WEALTH
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How to Guide the Business Through Crisis
CONTENTS 22 Crowdfunding Options ShareIn’s Jude Cook talks funding
27 Managing A Crisis Tips from McKinsey’s Doug Yakola
34 The Long Short Alan Steel’s view on the markets
35 Venture Capital The business of funding is moving fast
36 Leadership Measures Willie Maltman on recruiting value
40 Practical Business Section
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Face-Coin? Social Media Currency ZoneFox on “Heartbleed” Tax Avoidance
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Volume 03 Issue 04 / 2014
Curing Our Carbon Addiction Diatribe: The Smart Accessory Market
10 First Word: Perspective Pays Dividends Opinions about the direction of the markets right now range from “charging bull” to “big bubble”; they’re as varied as all the places Justin Bieber has been in trouble and sometimes as downright bizarre as the man unlawfully tasered for throwing his boxer shorts at a policeman during a strip search.
12 How Not To Invest Charting the herd mentality of greed that repeats itself until bankrupt.
18 Your Business Stage The essential role in the culture of sustainable businesses; the role of entrepreneur.
The Economic Thaw Page 14
14 The Economic Thaw Mike Williams shows us how the markets are headed in the right direction.
21 “Monster Spray” We could use something just now to scare away all the negative market sentiment.
hnwmagazine.co.uk April 2014
MONEY & WEALTH
HNW -High Net World Magazine
SALES
EDITOR’S VIEW The Politics of Undue Credit… I find few things more irritating than headlines claiming Government ‘plans and programmes’ have led us safely through economic turmoil. What a load of rubbish.
John Kennedy Client Services Director john@hnwscotland.co.uk EDITORIAL Ed Emerson, Editor Lawrence Taylor Sid Lyons Mark Dennison “The Brunette” editorial@hnwscotland.co.uk DESIGN David Tod Martha Tod Full Circle Graphics enquiries@fullcirclegraphics.co.uk DISTRIBUTION Cath Emerson, Director cath@hnwscotland.co.uk DIRECTORS Ed Emerson, Managing Director ed@hnwscotland.co.uk Cath Emerson, Director cath@hnwscotland.co.uk The views expressed in HNW Magazine are those of invited contributors and not necessarily those of HNW Magazine Ltd. HNW Magazine Ltd does not endorse any goods or services advertised or any claims or representations made in any advertisement in HNW Magazine, and accepts no liability to any person for loss or damage suffered as a consequence of their responding to, or reliance on, any claim or representation made in advertisements appearing in HNW Magazine. By responding or placing reliance, readers accept that they do so at their own risk. ©HNW Magazine Ltd. Reproduction in whole or part is forbidden without the written consent of the editor.
First, a bit of a reality break; the news from the Office for National Statistics (ONS) that wages are now outstripping inflation for the first time in six years sounds nice, but there are three problems with it: 1) The ONS’ record for accuracy is worse than flipping a coin – look out for a retraction buried on page 17 of some publication or other in 3 to 6 months time saying that figure was being ‘adjusted’, and usually the wrong way, 2) The six month fall in inflation figures is potentially a good thing, but the size of the fall is not. Nor is this somehow suddenly ‘good news for families’ that regular pay is rising at the ballistic rate of 1.8% instead of 1.3%. That’s a 0.5% rise, or £2.50 on every £500 someone makes. More to the point, that’s like two jugs of milk at the local Co-op…on sale. Not exactly what you’d describe as a significant easing of pressure on the family finances. 3) Inflation is still 1.6% as regular pay rises at 1.8%. By example, the difference is more like the cost of a single jug of milk in the average weekly wage…from the store of your choosing. Then the political parties line up to take the credit for increases in the labour market, wages, inward investment, growth in exporting et al. Folks, Government doesn’t create jobs for anyone but Government. Let’s be specific on this; a job is any routine activity for which we earn income. Jobs derived from tax revenue and not private-sector
sales, every single fireman, public school teacher, marine, sailor, airman, soldier, national park ranger, defense industry employee, government scientist, social worker, librarian, etc., etc. are under the domain of Government jobs creation and any subsequent wages rises versus inflation. The routine activity for which we earn income paid by an entity required to earn a profit is a different story. The private sector creates employment and dictates how much employees can be paid above the minimum wage line. Yet the politicos are quick to stand in line to take undue credit for business support programmes that have often times been in position longer than they have. And the oddity in all this is the conclusion that those programmes are allowing employers to hand out wage rises. Is that something Government wants to take credit for; wage rises, bonuses and commissions? The dynamics of business growth and development have about as much to do with government intervention as the percentage rise in the ONS’ latest announcement; about 0.5%, or in other words, next to nothing.
ED EMERSON EDITOR hnwmagazine.co.uk April 2014
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FIRST WORD
PERSPECTIVE PAYS DIVIDENDS 10
ALAN STEEL Opinions about the direction of the markets right now range from “charging bull” to “big bubble”; they’re as varied as all the places Justin Bieber has been in trouble and sometimes as downright bizarre as the man unlawfully tasered for throwing his boxer shorts at a policeman during a strip search.
etic holdover that’s been with us since way back when we lived in caves, and about as useful as your appendix when it comes to investing. Rob Seawright in his blog Above the Market @RPSeawright offers up 30 short statements as guidelines about investing that can help you find your way through the ether of the daily media noise. And in his blog A Wealth of Common Sense @awealthofcs Ben Carlson looks at your point of reference when measuring investments, and underlines the importance of what truly successful investors like Warren Buffet have long relied upon; the long-term:
Ouch! Sometimes we need a little guidance, something to lean on when the rush to believe the latest headlines makes your head spin. The media can be very good at dredging fear into believable snippets that cloud your decision-making. You’ll have either seen the recent headlines or understand the theme; “Tech stocks tumble”, “The markets look like 1929 all over again”, and even good news turned bad, like, “Dow Jones at All-Time High Signals Market Top”. Most of these articles arrive with little by way of fact or research to justify the copy that follows, and can push folks to continue to do what they’ve done for decades; sell low and buy high, an all-too-common problem that they repeat until bankrupt. That urge to follow the headlines and herd of opinion can be strong. After all, the human instinct to run from perceived danger and seek safety amongst the crowd is nestled right in the centre of our heads, in our Lizard Brains; a gen-
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“Avoid the twin impostors of short term out- and under-performance. It is important for us to remember what really matters is the long-term.” Howard Marks But what about a perspective on where we are today in the current bull market? Have a look at Mike Williams’ The Thaw Continues (P14) to see the improvements lurking beneath the headlines. And remember, one good way to define insanity is: “Doing the same thing over and over again and expecting different result.” Don’t drive yourself insane. Get someone to help you who knows what they’re doing.
hnwmagazine.co.uk April 2014
But this is what happens (pictured) when "following the crowd" is your investment strategy!
It’s easy to follow the herd of opinion that wants you to think Tech stocks are falling apart, Ukraine is moving the market down and China has had it’s chips.
12 (Chart Courtesy @stocktwits and @scheplick)
How NOT to Invest MONEY & WEALTH
MONEY & WEALTH
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MIKE WILLIAMS
Though markets, while bouncing a bit, continue their internal chop, the economic data also continues on its path toward a "thaw". The last few weeks have seen numbers improve, and while data output may pause for a bit earnings continue to be "surprising". Some might argue the impact of the negative tone analysts took to earnings expectations for Q1 created an easier atmosphere to "beat". That noted, companies continue to march ahead into record territory for cash flows, liquidity and earnings power even as slack builds in the productivity capacity for many industries. And that's keeping a mild lid on cost pressures for the most part. Sentiment Stinks Again (that's a good thing) With patience in mind, and avoiding the urge to rush to the latest headline (I know - it's tough), some of the
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recent sentiment surveys contain positive contrary data worth consideration. By example, on Monday 21st April a Bankrate.com survey revealed some 73% of respondents say they're no more inclined to put capital to work in equities than they were a year ago, as the low rate of return on savings accounts and certificates of deposit continues. Note that bonds are rallying a bit again too as market chop causes a pause in stocks.
The frustration over the last several months' market chop is probably best viewed as "digestion" rather than fear, and should direct us to search for value for the long-term investor. Even the Berkshire position is just hitting new highs.
MONEY & WEALTH
Is There More to Support That View? Yes indeed. While hampered by the bitter winter the data is thawing as noted and the economy is getting back into gear. Even though it demands our patience as investors and causes more than a little heartburn at times, the results should pay off handsomely over time. Our friend Scott Grannis has some nice new charts showing the improvement lurking beneath the headlines.
March industrial production figures exceeded expectations (surprised?) (+0.7% vs. +0.5%) and February was revised sharply higher (+1.2% vs. +0.6%). Dr. Ed Yardeni reminds us too that: "…over the past six months, industrial production has expanded at a solid 5% annualized pace. This is impressive." Industrial production in the Eurozone is still lagging but nevertheless is still on the mend. Industrial commodity prices are up almost 3% in the past two months to a one-year high, suggesting that global manufacturing activity is doing just fine.
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“As the thaw continues and the weather continues to warm up, please don't fret. Right after we find out that the winter chill did not end life as we know it, the ‘Sell in May’ crowd will surely take its place on the fear scale and in the headlines.”
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MONEY & WEALTH
The manufacturing component of industrial production was also strong, but was outpaced by gains in utilities (we should likely think "cold weather"). And manufacturing production was up at a 3.5% annualized pace over the past six months. By the Fed's estimates (it should be properly noted that they can only estimate it, since there is no way to actually measure it), the utilization rate of the nation's productive apparatus rose a good deal more than expected (79.2% vs. 78.7%). However, utilization rates are still below their pre-recession high suggesting the economy still continues to carry a decent amount of "slack" as noted above. This remains the Fed's justification for keeping real short-term interest rates firmly in negative territory.
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That said the chart above shows gains in capacity utilization in the past four years that would typically elicit a substantial Fed tightening by now. So don't be surprised when "it" happens. The Fed is still in uncharted territory; it's not a question of whether they will tighten, but when and by how much. Continued gains like we have seen of late will almost certainly tip the scales in favour of sooner rather than later. Is Housing Soft? Not really, it was too cold to build or buy. Realtors I speak with are talking about a "busy spring" and "pent-up demand to hit the pipeline", so by summer we should see more positive data here too. Thus, housing starts posted "lacklustre gains in March, but that is not surprising given the poor weather that persisted." As the chart above shows, builder sentiment is still strong enough to expect housing starts to move higher in the coming months. The housing boom has cooled off in recent months, but one can likely be comfortable that it is "still underway." hnwmagazine.co.uk April 2014
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FEATURE
AT WHAT STAGE IS
YOUR BUSINESS? BY SHIRLAWS
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The Role of the Entrepreneur We have long identified how business culture is key to innovation, and specifically how business owners have a responsibility to create a culture that allows innovation to thrive, whilst driving a long-term competitive advantage for the business. Distinctions are commonly made between the roles of leaders and managers. But we believe that a third key role is essential in the culture of sustainable businesses: the role of entrepreneur. Let's look at the distinctions between the three roles and the part they each play over the course of a business' life cycle. hnwmagazine.co.uk April 2014
Entrepreneurs Entrepreneurs are excited by novelty. Their focus lies in the future rather than the day-to-day. They are not always the best communicators and due to their drive to create new things, they are not best placed to create profit from their inventions.
Leaders Leaders are revered in society for their ability to connect and communicate with everyone. They are naturally people-focused and have a talent for creating a clear vision for tomorrow to engage everyone in the
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business. They are a natural bridge between entrepreneurs and managers.
ment skill mix aligns with the business' position in its life cycle.
Managers
In the early stages, entrepreneurial skills are essential to innovate great product. Without that, the business would not exist.
Managers focus on today - on the business and its processes. They provide the rigour and attention to detail that ensures the business runs smoothly. In short, managers make you money. Interestingly, whilst leadership is revered in business, as demonstrated by the thousands of books and blogs written on the subject, managers rarely receive such accolades.
A Fresh Definition of “Roles” At a recent dinner for a New York bank, where Darren Shirlaw was a guest speaker, he asked, "How many of you are leaders and how many are managers?" Most people identified themselves as leaders and very few claimed to be managers, for fear of being seen as a poor relation. Darren then offered his definition - that entrepreneurs are concerned with vision and the future; leaders are concerned with people and tomorrow; and managers are concerned with process and today. He asked the audience to state their role using this fresh definition and the picture changed. Approximately 1 in 20 people said they were entrepreneurs and the split between leaders and managers was around 60:40. Businesses grow faster and more profitably when the right people are in the right roles and when the manage-
As the business moves from a conceptual stage into growth, a leader is required to build a great team of motivated people to take the product to market. And as the business grows in size and complexity, management skills are essential to implement processes and to drive profit from the activities in the business.
“Entrepreneurs are concerned with vision and the future; leaders are concerned with people and tomorrow; and managers are concerned with process and today.” We can probably all think of great businesses that have been around for years but eventually foundered through a lack of innovation and failure to keep pace with a changing market. So the role of the entrepreneur will take a mature business through to advanced growth, by developing a stream of innovative products that provide a consistent source of future profits. Entrepreneurs, leaders and managers are key roles in business culture, each playing their part to enable companies to deliver sustainably against their strategic objectives.
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MONEY & WEALTH
HOW ABOUT SOME “MONSTER SPRAY” FOR THE MARKETS? “We could use a little something to scare away all the negative sentiment.”
Sometimes the best innovations are the ones that keep the ‘monsters’away; the things we imagine are real, but really aren’t! It’s these little placebos that allow us a glimpse of the truth even as we’re leaning on them like a crutch. Like the wonderful ‘innovation’ from a pharmacy in the small town of Watford City, North Dakota that made a cure for kids who are afraid of the dark; “Monster Spray”! Boy could we use some Monster Spray for the markets just now, something that could scare away the negative sentiment, reveal the good opinions from the bad advice, and help see our way clear of the 24/7 filler news and the fears therein. Hey, remember when the news was on the telly for an hour and then just stopped til the next day? How did we all survive?! The psychological benefit of a spare can of Market Spray (or two) might have helped a lot of folks participate in, and benefit from, the now five plus year-old bull market instead of hiding in the closet waiting for the media to tell them the good times have finally arrived…because that’s usually when it’s too late. Tadas Viskanta, in his Avoiding the personal finance monsters, takes this point further on his blog @abnormalreturns:
“The world is awash in personal finance advice and commentary. There is no shortage of free (and paid) advice out there. While at the same time we are in the midst of what can best be described as a period of gross financial illiteracy. Part of the problem is that consumers have a difficult time distinguishing between good and bad advice. “The bad advice is often a function of a writer or financial advisor simply talking their book. This is the if you all have is a hammer everything looks like a nail problem. That is why investors need enough education so that in the very least they can tell the difference between self-serving advice and more fair-minded advice. Fortunately this weekend there were a couple of pieces of financial advice that are worthy of your time and attention. “The first is short, nearly free e-book from author William Bernstein,If You Can: How Millennials Can Get Rich Slowly, that provides younger investors with a primer on how to get started investing. Bernstein notes five things that all investors need to do including focusing on saving and avoiding the “monsters that populate the financial industry.” There are far too few folks out there qualified to give good financial advice; apparently only 1 in every 10,000 has the capability, experience, historical knowledge and mathematical background to do so. The rest are either making mistakes, making it up or making monsters.
ED EMERSON EDITOR hnwmagazine.co.uk April 2014
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FEATURE
THE BEST
22
JUDE COOK SHAREIN
OPTIONS FOR MY TECH BUSINESS Which type of crowdfunding is the best for my tech company? Most tech entrepreneurs I meet have now heard about crowdfunding, which is great news and testament to the incredible growth the sector has experienced. Although awareness is high I still find that an understanding of the different types of crowdfunding is still quite low. Here is a very brief guide as to which type of crowdfunding is best for your tech company.
Reward Based Crowdfunding For who? Perfect if you have a consumer product that is around the £100 or less mark. Why? You are able to effectively pre-sale your product. You can gain lots of market insight as to whether people will actually want to buy your product. You’ll get loads of invaluable feedback from the crowd. If you’re going to be seeking investment this is a fantastic way to demonstrate traction. You’ll need to ensure the
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rewards you offer are achievable (and cost in for you!). A great way to get international exposure. Start building your contact list right now – friends, customers, suppliers, communities that will care about your project. The most successful pitches have been planned to perfection by the companies listing. Which platforms? Kickstarter & Indiegogo with a track record of funding technology projects.
P2P or Debt Based Crowdfunding For who? You are making a profit and can afford to pay interest. You have a couple of years of trading. So not for start-ups or pre-revenue technology companies. Why? If you’re thinking of a bank loan/asset finance/invoice factoring then you should seriously consider P2P as an option. A report recently issued by the Peer 2 Peer Finance Association shows that UK P2P loans (or debt based crowdfunding) to business has cumulative loans exceeding £0.5bn in Q1 2014.
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The platforms can provide quick decisions and are transparent on their fees. Funding Circle say the forms will take less than 30 minutes and will get back to you within 2 days with an answer on whether you can list on their platform. The P2P platforms will often have the same criteria that a bank would have: require security, ablity to demonstrate you’ll be able to pay the interest and provide a financial history demonstrating positive cashflows. Which platforms? FundingCircle, ThinCats and MarketInvoice have a track record of funding technology companies.
Equity Crowdfunding For who? Companies that offer a scalable business that could be attractive to external investors. Why? For companies that want investment to grow their early stage company. You’re selling shares in your company so you’ll need to be able demonstrate that your business is an attractive investment. This will include producing a detailed business plan and explaining how your team have the ability to achieve your plans. You don’t necessarily get the involvement that you might get from an angel (syndicate) but you get a “crowd” of who want you to succeed.
23 You don’t have to travel the country on a pitching roadshow and you can clearly see how your funding is progressing. Which platforms? ShareIn focuses on tech companies. Others include CrowdCube, Seedrs and Syndicate Room. Seedrs specialise in very early stage seed investments (<£150k). Syndicate Room work with companies that have already secured an angel syndicate as the crowd follows their terms. ShareIn and all of the other equity crowdfunding platforms listed here are all members of the UK Crowdfunding Association and adhere to their code of practise.
hnwmagazine.co.uk April 2014
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HOW TO LEAD A COMPANY OUT OF A CRISIS… “I’ve seen my share of boiled frogs,” says Doug Yakola, comparing companies in crisis with the metaphorical frog that doesn’t notice the water it’s in is warming up until it’s too late. As the chief restructuring officer or CFO of more than a dozen turnaround situations over nearly two decades, Yakola has witnessed firsthand how
DOUG YAKOLA MCKINSEY managers back right into a crisis without recognizing that their situation is worsening. “They’re not bad managers, but they’re often working under a set of paradigms that no longer apply and letting the power of inertia carry them along.” And if they don’t realize they’re facing a crisis, they won’t know that they need to undertake a turnaround, either.
“Even good managers can miss the early signs of distress,”says McKinsey’s Doug Yakola, who’s been running recovery programs for 20 years. “The first step is to acknowledge there’s a problem.” hnwmagazine.co.uk April 2014
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Memoirs of a turnaround artist McKinsey’s Doug Yakola reflects on nearly two decades of leading companies through crisis. He’s also heard the regrets: sometimes managers underestimated how critical their situation was—or they were looking at the wrong data. Others took advantage of easy access to cheap capital to stay the course in spite of poor performance, believing they could push through it. Still others got so caught up in the pressure for short-term returns that they neglected to ensure their company’s long-term health—or even willfully sacrificed it.
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Rare among them is the executive who stepped back to review his or her own plans objectively, asking “Is this what I thought would happen when I first started going down this road?” That’s a problem, Yakola says, because acknowledging that your plan isn’t working is a necessary first step.
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Yakola joined McKinsey’s Recovery & Transformation Services as a senior partner in 2011. Here, he offers ten ways ailing companies can get started on the turnaround work they need. 1. Throw away your perceptions of a company in distress It’s next to impossible to come up with one working definition of a company in distress—and dangerous to think that you have one for your own company. Depending on the situation, there are probably 25 different signs of potential distress (exhibit). The problem is seldom made up of just one or two of these things, however. Rather, it is the result of a greater number of them interacting together and with other external factors.
Exhibit There are numerous signs of distress—and a dis-
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-tressed company is typically dealing with multiple signs. 2. Force yourself to criticize your own plan The biggest thing you can do to avoid distress is periodically review your business plans. When you’re creating them, whether at the beginning of the year or the start of a three-year cycle, build in some trigger points. A simple explicit reminder can be enough: “If we don’t have this type of performance by this date or we haven’t gotten the following 12 things done by this date, we’ll step back and decide if we’re going down the right path, given what’s happened since our last review.” Such trigger points should be oriented both to operational and market performance as well as to basic financial metrics and cash flow. Look at where you are as a company using basic financial and cash milestones, and then look at where you are with respect to your industry and competitors. If you’re not moving with the rest of the industry (or not outpacing it, if the industry is struggling), then your plan may be obsolete. And don’t forget to look back at your performance over past cycles to identify any trends. If you keep missing performance targets, ask why. 3. Expect more from your board The beauty of a board is that it has enough distance from the company to see the forest for the trees. Managers often treat their board as a necessary evil to placate so they can get on with their business, but that undermines the board’s role as an early-warning system when a company is heading for distress. It’s also the board’s responsibility to look the CEO, the CFO, and the chief operating officer (COO) in the eye and say, “OK, we like your plan. Now let’s talk about what it would take to cut costs not just by 3 percent but by 20. Let’s talk about all the things that can go wrong;
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the risks to the business.” Sometimes significant events happen that no one could have foreseen, of course. But in a typical distress situation, a company has usually just had 18 to 24 months of poor performance, and the board hasn’t been aware or hasn’t asked the right questions. Independent board members—truly independent ones—can have a big impact here. The senior team at one company maintains a list of risks to the business, employees, and the plan. They review those risks with the board on a quarterly basis to ensure that they’re staying top of mind. It’s an excellent way to have conversations that you wouldn’t normally otherwise have in a business operation. 4. Focus on cash A successful turnaround really comes down to one thing, which is a focus on cash and cash returns. That means bringing a business back to its basic element of success. Is it generating cash or burning it? And, even more specifically, which investments in the business are generating or burning cash?
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I like to think about this in the same way one would if running a local hardware store. By that, I mean asking fundamental questions, such as whether there is enough cash in the register to pay the utility bill, for example, or to pay for the pallet of house paint that will arrive next week, or how much more cash I can make by investing in a new delivery truck. When you bring a business back to those basic elements, the actions you need to take to get back on track become pretty clear. In many of the cases I have seen, the management team and board are focused on complex metrics related to earnings before interest and taxes (EBIT) and return on investment that exclude major uses of cash. For example, variations on EBIT commonly exclude depreciation and amortization but also exclude things like rents or fuel. These are all fine metrics, but nasty sur-
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prises await when no one is focused on cash. Keeping track of cash isn’t just about watching your bank balance. To avoid surprises, companies also need a good forecast that keeps a midterm and longer view. For example, failing to pay attention to the cash component of capital investments routinely gets companies introuble. Project net present values can look the same whether the return begins gradually at year two or jumps up dramatically at year five. But if you’re not focusing on the cash that goes out the door while you’re waiting for that year-five infusion, you can suddenly find yourself with very little cash left to run the business, sending you into a spiral you may not recover from.
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5. Create a great change story Companies in distress don’t focus enough on creating a change story that everyone understands—and that creates some sense of urgency. Here’s an example. I recently did a turnaround as chief restructuring officer of a mining company. It was profitable, returned a decent margin, and was cash positive. But the commodity price was dropping, and the board was worried about generating enough free cash flow to drive the capital needs of the business. The change story we created said, “Yes, we are profitable. But the whole point of profitability is to generate enough cash to expand, grow, and maintain operations. If we can’t do that, then we’re headed for a long, slow decline where equipment breaks down and lower production becomes the new reality.” If you can tell that story in a paragraph or less, in a way that means something to the average guy on the front line, then people will get on board. In this case, employees wanted to have their children and their grandchildren work for this company in the same remote mining location, and the change story spurred them to action. The key was a simple message, not fancy metrics. 6. Treat every turnaround like a crisis Without a crisis mind-set, you get a stable company’s response to change: risk is to be avoided, and incrementalism takes over. Your workers are asked to do a little more (or the same) with less. More aggressive ideas will be analyzed ad nauseam, and the implementation will be slow and methodical. In contrast, a crisis demands significant action, now, which is what a distressed company needs. Managers need to use words like crisis and urgency from the first moment they recognize the need for a turnaround. A company that’s in true crisis will be willing to try some things that it normally wouldn’t consider, and it’s those bold actions that change the trajectory of the company. Crisis drives people to action and opens managers up to consider a full range of options.
a company around. That can be a high-risk approach. Even if big bets are sometimes necessary, they take a lot of time and effort—and they don’t always pay off. For example, say you decide to change suppliers of raw materials so you can source from a low-cost country, expecting 30 percent lower direct costs. If you realize six months later that the material specifications don’t meet your needs, you’ll have spent time you don’t have, perhaps interrupted your whole production schedule, and probably burned a bunch of cash on something that didn’t pay off. In addition to going after big bets, managers should focus on getting a series of quick wins to gain traction within the organization. Such quick wins can be cost focused, cutting off demand for some external service they don’t need. Or it could be policy focused, such as introducing a more stringent policy on travel expense. Not only do such moves improve the bottom line, they also generate support among employees. In any given company, you’re likely to find that a fifth of employees across the organization are almost always supportive. They work hard. And they will change what they’re doing if you just ask them. These are the people you’ll want to spend most of your time with, and they’re the ones you’ll promote—but you’ll probably spend too much time with the bottom fifth of employees.
7. Build traction for change with quick wins
These are the underachieving ones who actively resist change, look for ways to avoid it, or are simply high maintenance.
The tendency of most managers is to put all of their focus and resources into three or four big bets to turn
What often gets ignored is the remaining 60 percent of the organization. These are the fence-sitters, and they
hnwmagazine.co.uk April 2014
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are tuned into action, not just talk. They see the changes going on, and if you proactively work with them, then 80 percent of the organization will be behind you. But if you don’t give them a reason to stand up and be positive about the company, they’ll go negative. That’s the importance of quick wins. When you quickly take real action, and when those actions affect the management team as well, you send a powerful message. 8. Throw out your old incentive plans Management incentives are often the most overlooked tool in a turnaround. In stable companies, short-term incentive plans can be a complex assortment of goals related to safety, financial and operational performance, and personal development.
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Many are so complex that when you ask managers what they need to do to earn their bonus, many just shrug their shoulders and say, “Someone will tell me at the end of the year.” In a turnaround, take a lesson from the private-equity industry and throw out your old plans. Instead, offer managers incentives tied specifically to what you want them to do. Do you need $10 million of improvement from pricing? Then make it a big part of your sales staff’s incentive plan. Need $150 million from procurement? Give your chief purchasing officer a meet-or-beat target. Be willing to forgo bonus payments for those that don’t achieve 100 percent of their target—and to pay out handsomely for those whose results are beyond expectations.
What they believe to be true. Although it’s difficult, removing those people sends another signal to your stakeholders that there will be changes and you’re not afraid to make tough moves. 10. Find and retain talented people Beyond the leadership team, there are two types of people I look for immediately. First are those that have the institutional knowledge. They may not be your top performers, but they know all the ins and outs of the company—and are vital to understanding the impact of potential changes on the business. Many times they are the disgruntled ones, unhappy with the company’s performance. But you need people who are willing to point out the uncomfortable truths. A turnaround is also a real opportunity to find the next level of talent in an organization. I’ve been through multiple crises where the people who added the most value and impact weren’t the ones sitting around the table at the beginning. I have often found great leaders two and three levels down who are just waiting for an opportunity—and the fact that they can be part of something bigger than themselves, saving a company, is often enough to attract and retain them. For both groups, it’s important to realize that retention isn’t always about money and bonuses. It’s also about figuring out the individual’s needs. Good turnaround managers actively look for those people and find a way to get them involved.
9. Replace a top-team member—or two Experience tells me that most successful turnarounds involve changing out one or two top-team members. This isn’t about “bad” managers. In my 20 years of doing this, I’ve only seen a small handful of managers I thought were truly incompetent. But it’s a practical reality that there are managers who must own the decline. And more often than not, they are incapable of the shift in mind-set needed to make fundamental changes to the operating philosophy they’ve believed in for years. Whether they realize it or not, they block that change because they’re bent on defending hnwmagazine.co.uk April 2014
About Doug Yakola Doug Yakola, senior partner in McKinsey’s Recovery & Transformation Services, focusingon turnarounds and financially distressed companies. With thanks Ryan Davies and Bill Huyett for their contributions to this article. This article originally appeared at mckinsey.com Insights & Publications.
MARKETS
The long short…triggering the stock market rally ALAN STEEL ASAM
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As I write this the Dow Jones, FTSE 100 and S&P 500 are all up, in or near all-time high territory. That’s good news for investors, and a monetary migraine for headline writers looking for short-term stockmarket woes to worry us about. And therein lies the point; we should all be looking longer term, coming to grips with product innovation and development, seeing that the advances we’ve made in technology and telecoms over the last 20 years in particular are likely to be repeated in areas in the future throughout healthcare and biotechnology, the Internet of things and robotics, and even the financial markets and how we use currency and conduct transactions. Barry Ritholtz of The Big Picture relays the importance of longer-term thinking for the corporate community in his recent post Triggering the Next Stock-Market Rally where he writes: Laurence Fink, chief executive officer of Blackrock Inc., the world’s largest money manager with more than $4 trillion in assets, recently issued a warning to U.S. companies: Stop focusing on short-term returns at the expense of longer-term investments. “It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.” Fink made these comments in a letter to the CEOs of the companies in Standard & Poor’s 500 Index, referring to stock buybacks and dividends as a form of “short-termism.”
“We should all be looking longer term. What’s already happened in tech and telecomms will soon happen in healthcare, robotics and even financial markets.”
What were the longer-term investments he suggested? “Innovation and product enhancements, capital and plant equipment, employee development, and internal controls and technology.” I find it hard to disagree with him. Stock buybacks and cash dividends totalled $214.4 billion in the fourth quarter of 2013. That is the highest level since the record high of $233.2 billion in the final quarter of 2007, according to the Wall Street Journal. Compare that to the second quarter of 2009, when buybacks and dividends totalled a mere $71.8 billion. Alan here – Barry makes a good point; where the money is being spent right now for shorter-term gain is where it’s not being spent on longer-term development issues, and that’s why we so often hear the collective whinges about “this is the slowest recovery in history” and “It’s all looking like 1929 or 1987 or 1999…again”. Right now there are $Trillions in corporate cash “sitting on the sidelines”. And as that money moves, so too will the markets. hnwmagazine.co.uk April 2014
VENTURE CAPITAL
THE IPO & M&A MARKET The level of dollar commitments during the first quarter of 2014 more than doubled the comparable period in 2013 and marks the strongest quarter for venture capital fundraising, by dollars, since the fourth
quarter of 2007 when $10.4 billion was raised for venture capital investments. “With the exception of some established firms, fundraising for most venture capital firms has been difficult in recent quarters due to a shaky exit market,” said Bobby Franklin, President and CEO of the National Venture Capital Association (NVCA).
“Recently, however, we’ve been experiencing an uptick in IPO activity as well as momentum in the M&A market, enabling venture capital firms to distribute proceeds to their investors and begin the process of raising money for the next crop of American businesses. “While conditions are certainly better, the fundraising environment for many of our members continues to be very difficult.” U.S. venture capital firms raised $8.9 billion in new commitments from 58 funds during the first quarter of 2014, an increase of 81 percent compared to the level of dollar commitments raised during the fourth quarter of 2013 and a nine percent increase by number of funds, according to Thomson Reuters and the NVCA. hnwmagazine.co.uk April 2014
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FEATURE
BY WILLIE MALTMAN “Losing value from your most important jobs. Why those expensive new hires just don’t work out.” It goes something like this: you identify a critical position in your company. You draft a job spec and if you’re a pro, a person spec too. You write some copy for an ad, brief a recruiter, put the word out etc etc.
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Then you get some cvs – hopefully lots of them. You shortlist these and draw up some preferred candidates. You interview those, maybe more than once. You may even get some to present for you on why they want the job. You pick the best of those, issue a contract and agree a start date, salary & package. They turn up and it starts to go downhill from there, when you need to manage them. Or did it go wrong even earlier than that somewhere else in the process? You’ve done all the best practice things in hiring, yet it still didn’t work out as planned. How could that be? Think about it this way. Maybe your “best practice” was never going to deliver you the best candidate or ensure that they would perform successfully for you. So what do you do? Start again? Some do, but are they likely to be more successful the next time? Perhaps. Knowing what mistakes you made last time will certainly make you more aware of what to avoid in the future. However, is that sufficient to help you succeed? Probably not. Human frailty being what it is, you just need to take active steps to minimise your potential losses along the way. hnwmagazine.co.uk April 2014
L E A D E MEASURES R S H I P
FEATURE
Let’s examine more closely what could go wrong and what you can do about it. Try thinking about it as a series of compromises that you just need to accommodate as you can only influence some of them.
based on the job & person spec. That person never really exists outside your head and even if they did, how likely is it that your search for a candidate would turn them over?
Once you realise and accept that, you can start to move forward towards being a better manager.
The first inside box is what the best candidate you can find will bring to the role. It’s likely to be a little less than your ideal, but it IS the best you can find, so be happy and get ready to work with them.
Look at the image below. The outer box represents the contribution you wish for from your ideal candidate,
The second inside box is how well you induct them into your organisation. Usually, we are not well prepared for
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“Can we do anything about our behaviour, or are we just hardwired for neglecting valuable resources? “Well, the good news is that we can and should. Maybe finding the best person of all is out of our reach, but what’s important is what we do with the best we could find?” hnwmagazine.co.uk April 2014
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FEATURE
this and think we can just wing it. After all, they’ll be keen to get started and shouldn’t really need all of that. Anyway, we probably told them enough at interview. The third inside box is how well we manage their performance. This is another thorny issue. If we have a clear and compelling strategy or business plan, can we turn that into some coherent performance objectives for the new recruit who hasn’t been inducted properly? Thought not. And don’t get me started on those who don’t have a plan. The fourth and final box is how well supported they are. Do we provide relevant training and development to enable them to improve their existing skills or learn new ones? Do we provide regular and targeted constructive feedback that reinforces their successes and minimises the recurrence of failure?
Manage their performance – if you don’t have a plan, then get one and fast. If you do, make sure it’s good enough, credible and convincing. Relate its contents directly to the job you’ve just filled. Ensure that their priorities are spelt out in sufficient detail, especially how their contribution will be measured & judged. That takes care of the initial period, but you need to keep it up and probably to step it up after they get through the learning curve. Support them – training & development matters, but relevant, timely feedback is better. Ensure you schedule and keep a regular 121 with them and check in informally outside that. Don’t crowd or micromanage them, but keep in close touch, assessing & reviewing how it’s going – on both sides, not just yours.
I could go on. There are more boxes, including incentives, development opportunities, succession planning, team orientation and using technology. Even simple communication can get diluted or overlooked.
Try to “bookend” any key challenges they’re facing – by checking with them before and especially after any major meetings, events or assignments they’ve had.
Can we do anything about it, or are we just hardwired for neglecting valuable resources? Well, the good news is that we can and should act on this. Maybe finding the best person of all is out of our reach, but what do we do with the best we could find?
Above all, learn how to manage better yourself by being more tuned in to others’ needs than your own.
The best payback typically comes from pursuing a few things at a time and doing them well. So, let’s focus on: induction, managing performance & support.
Books and courses will help but you can also try to treat working life as a laboratory. Think of it as a place where you conduct controlled experiments on your own style by seeking feedback on your approach and being more responsive to the individuality of people in your team.
Induct them with care – prepare well in advance for their arrival, starting from when they accept your offer.
Try to extract key learning points from discussions with them to improve your own practice as a people manager.
Send them some core materials that you couldn’t do without yourself. If you’re brave, ask other staff what was missing from their own inductions.
Treat them not as commodities but as individuals, who deserve specialist treatment from you.
Get them in early if they can, for less formal briefings and initial meetings to get them used to the business and meet key people.
The more you try and the better you get at flexing your style, the more they will grow to fill the outer boxes. That way, you will get the person of your dreams and you will both fulfil those initial promises that you made to yourself.
It’s also important for other people to get used to the new person being around.
WILLIE MALTMAN EGLINTON hnwmagazine.co.uk April 2014
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PRACTICAL BUSINESS HNW Magazine’s Practical Business section looks at key areas of business needs across legal, accountancy, marketing, finance, leadership, strategy, research and other areas of support.
FACE-COIN? SOCIAL MEDIA CURRENCY
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Facebook has been testing services in the payments arena since going public in 2012 and, following the acquisition of WhatsApp for its crossplatform messaging capability, is now reportedly developing e-money services for a proposed launch in Ireland.
ZONEFOX ON THE HEARTBLEED BUG
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The latest security vulnerability dubbed “Heartbleed” has been revealed as having severe implications for the entire Web.
TREASURY TOUGH ON TAX AVOIDANCE
P.44
The pending legislation, which has been unveiled by The Treasury, is an attempt for HM Revenues and Customers to crackdown on tax avoidance – bringing financial criminals to justice.
CURING OUR CARBON ADDICTION The Intergovernmental Panel on Climate Change (IPCC) released a new report revealing global emissions of greenhouse gasses are at record highs despite policies designed to help reduce these activities.
hnwmagazine.co.uk April 2014
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PB: FACE-COIN?
FACE-COIN? FACEBOOK & AMAZON ENTER THE CURRENCY MARKETS Amazon and Facebook both appear headed into the mobile payments and remittances business, an area of the tech market with enormous potential upside.
And while Mark Zuckerberg’s social media colossus has the advantage of a larger mobile audience, Amazon as the world’s largest online retailer has already established trust amongst users in handling their transactions. Facebook has been testing services in the payments arena since going public in 2012 and, following the acquisition of WhatsApp for its cross-platform messaging capability, is now reportedly developing e-money services for a proposed launch in Ireland.
Why Ireland? Apparently Irish regulatory approval would allow for further operations in Europe in order to target emerging markets thereafter. How does it work? Users would have the option to to store money online and use it to pay for goods and/or transfer funds within the network. This would go some way toward answering the Holy Grail question of large scale social media businesses; how do you successfully monetise the audience and keep them engaged? The answer it seems is not in the social interactions themselves – like dropping adverts into links and conversations – but the attached retailing options available offline or online outside the chat, and profiting from those transactions.
hnwmagazine.co.uk April 2014
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PB: HEARTBLEED
ZONEFOX ON THE HEARTBLEED BUG KELLY GREENE ZONEFOX
What is the Heartbleed bug?
Why is it dangerous?
The latest security vulnerability dubbed “Heartbleed” has been revealed as having severe implications for the entire Web.
The bug allows anyone on the Internet to read the memory of the systems protected by the vulnerable versions of the OpenSSL software.
The Heartbleed Bug affects the technology used to encrypt sensitive information: a serious virus in the popular OpenSSL cryptographic software library.
It allows hackers to exploit a flaw in the OpenSSL encryption software to steal sensitive data.
Victims?
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The bug can scrape a server’s memory, where sensitive user data is stored. This can include private data such as passwords, usernames & credit card numbers.
How does it work? The Heartbleed virus takes advantage of OpenSSL encryption software (standard for many websites) and designated by the small padlock symbol. When messaging back and forth on a secure connection such as web, email, instant messaging (IM) and some virtual private networks (VPNs) sometimes a computer wants to check if the other computer is still available. They check by sending a “heartbeat,” which is a small packet of data.
Some websites that appeared to have been affected included Yahoo and OKCupid. Unfortunately for Yahoo, it seems to be the most major website to have been vulnerable to the bug. Initial tests for Facebook, Google, and Twitter’s websites show they appear safe.
What can I do to protect myself from the bug? It is worth noting that according to Heartbleed.com, roughly two-thirds of all active websites run OpenSSL! Naturally the first defense for Internet users is to change your passwords to protect your information from being taken and abused.
The flaw allows hackers to use a fake packet of data, which tricks the computer into responding with data stored in its memory.
But in this case, security experts are strongly advising that you wait for service providers to patch their software before changing passwords. This is because further activity on a vulnerable site could further the problem.
“This compromises the secret keys used to identify the service providers and to encrypt the traffic, the names and passwords of the users and the actual content.
“As long as service providers have patched their software it would now be a prudent step for the public to update their passwords.“ (NCC Group)
This allows attackers to eavesdrop on communications, steal data directly from the services and users and to impersonate services and users.” (Heartbleed.com)
Ensure you do not use the same password for multiple services. This will mean that if one site is compromised, at least all your information is not at risk.
hnwmagazine.co.uk April 2014
PB; TAX AVOIDANCE
TREASURY GETS TOUGH ON TAX AVOIDANCE 44
Following the introduction of a new government proposal, those with offshore accounts could face hefty fines or jail time if they cannot be lawfully justified. The pending legislation, which has been unveiled by The Treasury, is an attempt for HM Revenues and Customers to crackdown on tax avoidance – bringing financial criminals to justice.
Unlike the current measures that are put in place, George Osborne claims that the new rules will shift the “burden of proof ”, suggesting that the inspected individuals will have to provide substantial evidence to be free from prosecution. The Chancellor described the proposed regulation, which is expected to go ahead next year, as a “significant new weapon”, in tackling those that are trying to hide money from authorities. He added: “It is totally unacceptable for people not to pay the tax that is due, and the message will be clear now with this new criminal offence that if you’re evading tax offshore, there is no safe haven and we will find you.”
hnwmagazine.co.uk April 2014
As indicated by a Treasury spokesperson, those that are suspected of tax avoidance will be discreetly examined by government officials, in relation to their generated income from offshore dividends or investment trusts. Mr Osborne also outlined that those who have already signed up to disclose tax avoidance schemes, will have to pay their disputed funds upfront. Following the new agenda, an estimated £4 billion of tax payments will be processed over the next five years. Official figures show that the amount of tax lost in the 2011-12 tax year, rose by £1 billion, which resulted in a staggering total loss of £35 billion. HMRC’s current less severe approach to tax evasion was still responsible for recovering £1.5 billion over the past two years, suggesting that the proposed harsh procedures will provoke exceptional outcomes.
DES VENEY HAINES WATTS
PB: CARBON ADDICTION
NO CURE FOR CARBON ED EMERSON EDITOR On Sunday 13th April 2014 the Intergovernmental Panel on Climate Change (IPCC) released a new report revealing global emissions of greenhouse gasses are at record highs despite policies designed to help reduce these activities. The data appears to include up to 2010, which means we won’t know how truly screwed we either are, or are not, until 2020 as these tend to run in decade-by-decade comparisons. Some 1200 scenarios from scientific literature generated by 31 modelling teams from around the world have explored the economic, technological and institutional implications of our emissions activities.
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So why is this interesting regardless of your environmental stance? Well, it’s a lesson in trying to predict the future and the crystal balls you’re using to do it.
We can not predict the weather five days in advance. Despite £billions in research and analysis we can not predict what the stockmarkets are going to do even tomorrow (much less next week or next year). Economic analysts are historically far more often wrong than right when attempting to predict global financial cycles (check how many saw the 2008, 1999/00, 1987 and 1973 recessions coming. And technologically speaking, no one knew the future of the “eight-track”, blue ray or video store when we were lined up at the counters of Blockbuster asking after a copy of Forrest Gump and a pack of Twizzlers. While I can see little harm in continuing to progress carbon reduction and greener energy policies and activities – after all, they have created entire economies and new employment thus far subsidised by governments in the majority – if you truly want to know what the future holds, you’re going to have to wait until tomorrow.
hnwmagazine.co.uk April 2014
DIATRIBE Smart Accessory Market (SAM) Expands The worldwide wearable computing market (commonly referred to as “wearables”) is finally expanding beyond early adopter status to more functional and stylish lifestyle accessories that are making their way onto the pages of GQ and Shape as well as Computerworld and Wired.
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According to new research from International Data Corporation (IDC), wearables took a huge step forward over the past year and shipment volumes will exceed 19 million units in 2014, more than tripling last year’s sales. From there, the global market will swell to 111.9 million units in 2018, resulting in a CAGR of 78.4%. Complex accessories (e.g., Nike+ FuelBand, Jawbone UP, and Fitbit devices) will lead the wearables market through 2018 as users continue to embrace their simplicity and low price points. These devices are designed to operate partially independent of any other device, but fully operate when connected with IP-capable devices such as a smartphone, tablet, or a PC.
hnwmagazine.co.uk April 2014
“Complex accessories have succeeded in drawing much-needed interest and attention to a wearables market that has had some difficulty gaining traction,” said Ramon Llamas, Research Manager, Mobile Phones. “The increased buzz has prompted more vendors to announce their intentions to enter this market. Most importantly, end-users have warmed to their simplicity in terms of design and functionality, making their value easy to understand and use.” Another segment of the market, smart accessories, will gain momentum through the forecast period and surpass complex accessory shipments by 2018. Similar to complex accessories, with their dependence on connecting with IP-capable devices, smart accessories allow users to add third-party applications that boost features and functions for a more robust experience. While not quite ready for prime time, the smart accessory market will continue to mature as users better understand and accept the value proposition and vendors refine their offerings.
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