RGU Aberdeen Business Journal 2010

ABERDEEN BUSINESS

JOURNAL > THE DEAN’S VIEW > DONALD TRUMP - Business Personality Interview > ETHICS, PEOPLE AND THE HUMAN RESOURCE PROFESSION > THE FUTURE OF FINANCIAL REPORTING > RIDING THE RAPIDS THROUGH RECESSION > PROFILE - STEWART SPENCE > THE TALE OF AVC > ENTREPRENEURSHIP IN A MULTINATIONAL COMPANY - THE BP EXPERIENCE > INTERNET RETAIL: THE DEVELOPMENT, GROWTH AND FUTURE OF ONLINE SHOPPING > LOCAL BUSINESS AND RECESSION SURVIVAL > Alumni PROFILE - PHILIPPE WEHMEYER > THE NEXT 10 YEARS FOR THE BUSINESS SCHOOL

ISSUE 5

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CONTENTS Editorial THE DEAN’S VIEW Professor Rita Marcella, Dean of Faculty, Aberdeen Business School

Business Personality Interview DONALD TRUMP, CHIEF EXECUTIVE OF THE TRUMP GROUP

Management Theory and Practice ETHICS, PEOPLE AND THE HUMAN RESOURCE PROFESSION Moira Bailey, Lecturer and Anne Stevenson, Senior Lecturer In Human Resource Management, Aberdeen Business School

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Business Basics THE FUTURE OF FINANCIAL REPORTING David Wood, Executive Director, Technical Policy, ICAS and Amy Hutchinson, Assistant Director, Accounting & Auditing, ICAS Spotlight LEADERSHIP IN THE OIL AND GAS INDUSTRY – RIDING THE RAPIDS THROUGH RECESSION. ABS RESEARCH INVESTIGATION REPORT Professor Rita Marcella, Professor Dorothy Williams, Dr. Naheed Tourish

The Entrepreneur ’s Skill PROFILE OF STEWART SPENCE OF THE MARCLIFFE HOTEL AND SPA

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Practice of Entrepreneurship THE TALE OF AVC Lynsey Shepherd, Account Executive, AVC Media Enterprises

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Multinational Mirror ENTREPRENEURSHIP IN A MULTINATIONAL COMPANY - THE BP EXPERIENCE Bernard Looney, Managing Director, BP North Sea

E – Business INTERNET RETAIL: THE DEVELOPMENT, GROWTH AND FUTURE OF ONLINE SHOPPING Dr Neil Connon, Lecturer in Retail Studies, Aberdeen Business School

Statistical Corner LOCAL BUSINESS AND RECESSION SURVIVAL Pete Jones, Lecturer in Accounting, Finance and Economics, Aberdeen Business School

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Aberdeen Business School Alumni PHILIPPE WEHMEYER, MANAGING DIRECTOR, GAMEGROUP PLC

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ABS Platform THE NEXT 10 YEARS FOR THE BUSINESS SCHOOL Veronica Strachan, Business Manager, Aberdeen Business School

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EDITORIAL: THE DEAN’S VIEW Professor Rita Marcella, Dean, Aberdeen Business School

sponsored by AMEC, and the Riding the Rapids seminar. Both were well attended by very senior industry representatives. We are planning a number of public events and Masterclasses for 2010 – including an anniversary event, at which we intend to recognise the valued contribution that has been made to the School by our major industry sponsors.

This is the fifth annual edition of the Aberdeen Business Journal and, as ever, we have an excellent mix of articles from industry practitioners as well as academic staff of the

This has been a very busy and successful year for Aberdeen Business School, with the national Research Assessment Exercise recognising international quality research in Business Management, Accounting and Finance, Law, Politics and Library and Information Management at the Robert Gordon University. The School’s MBA has also been reaccredited by AMBA with no conditions and a number of pleasing commendations. We have also achieved international accreditation for our MSc in Project Management from the Project Management Institute (PMI) and Robert Gordon University is the first UK University to achieve this recognition.

Aberdeen Business School celebrates its 45th anniversary in 2010 and that will provide an opportunity both to reflect on achievements to date but also to look forward, outlining our future aspirations. The School has hosted a number of exciting events in 2009, including the annual Entrepreneurship Dinner, 2

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Aberdeen Business School, Robert Gordon University. Most contributors acknowledge current economic challenges and raise important questions of interest to business globally and locally - whether in boom or bust.

The Journal opens with our business personality interview and this year our interviewee is one of the most instantly recognisable business personalities in the world – Donald Trump. In bringing potentially the

Bernard Looney, Managing Director of BP North Sea, talks about entrepreneurship in the context of a multinational company, illustrating the ways in which he has applied the lessons he has learned as a student and as a leader around the nature of the entrepreneurial characteristics essential to business success. He concludes that “responsibility, persistence and discipline are as important as innovation, risk taking and creativity”.

Renowned local entrepreneur, Stewart Spence of the Marcliffe Hotel, has retained a very firm strategic focus somewhat closer to home entrepreneurially, and is absolutely committed to the long term success of the region beyond oil and gas through building the tourism and hospitality sectors.

In the academic articles included in this issue we span a number of areas from a report generated from research, in which I was personally involved, on the experiences of leaders of the oil and gas industry in recession, ‘Riding the Rapids’, to a study of the importance of ethics as a core value in managing human resources, by Moira Bailey and Anne Stevenson. Neil Connon charts the rise of internet shopping which despite recent publicity about fraudulent cases, he predicts will continue to change the ways in which consumers behave.

largest development to the region – estimated at around £1bn – since the advent of oil and gas, this initiative has the potential to make a very significant contribution to the future economic health of the North East.

He emphasises the importance of focus and financial literacy for entrepreneurial success.

We also have an interview with an alumni, Philippe Wehmeyer, whose rapid career progression has led to his current role as MD of Game Group, yet who urges graduates “not to be too defined too early, not to be in too The Annual Entrepreneurship Dinner 2009, sponsored by AMEC

much of a hurry” echoing Donald Trump’s advice to the entrepreneur of “starting small and working up to big”. To further illustrate the point our case study of AVC charts the company’s 33 years of leadership

by Keith Main through a period of “experiential growth” from the North Sea to a global media service utilising the full range of digital media to market companies in the 21st century.

In the context of greater awareness of the importance of accurate and meaningful financial reporting post recession, David Wood and Amy Hutchinson of ICAS report very welcome changes to the minimum benchmarks that should be achieved in financial reports, in particular in delivering ‘clear messages’ and meaningful data to decision makers.

Finally, Pete Jones in his regular column examines how well placed local SMEs are to survive the current recession, drawing the conclusion that the average company is “in better shape to deal with the recession than at any time during the preceding few years”.

Rita Marcella Dean, Aberdeen Business School ABERDEEN BUSINESS JOURNAL

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BUSINESS PERSONALITY INTERVIEW

DONALD TRUMP Chief Executive, Trump Organisation

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What are the vital qualities and skills required of a successful entrepreneur?

How significant are opportunity and timing in a successful business career?

“It’s important to realize that being an entrepreneur is not a group effort. You have to be ready to go it alone, and to be tenacious.”

“They are important—first of all, seeing the opportunity and then sometimes waiting for it. I’ve waited twenty years to see some things happen.”

What do you consider to be the single most influential personal quality in achieving success?

Can you give an indication of a typical “day in the life” of Donald Trump?

“Being tenacious and being completely focused on your goals”.

“No two days are ever alike, but I usually come to the office around 8 a.m. and stay until 7 p.m., depending on the day. That’s

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average. I have appointments, take calls, deal with whatever comes up, which is usually a lot. In the evening I either have an event to attend, or spend it with my wife Melania and son Barron. I spend weekends with my family and golf at one of my courses. I also travel a lot, but having a jet makes it easier. However, I can’t say there’s ever a typical day.”

It’s often said that successful entrepreneurs have to have experienced failure—do you believe this to be true and if so can you give an example from your own experience?

“Being an entrepreneur means taking risks, and not everything is guaranteed to be a success, even if one is successful.

That’s part of the excitement. I had a significant financial turnaround in the 90’s—it had been predicted that I was done, over, and then I became far more successful than I had been before. I realized I had lost my focus. So I’m more aware of how important that is for success to happen as well as to continue.”

As an entrepreneur you’ve had fantastic success—do you have aspirations for the future that you’ve not yet realized?

“I have many plans for the future, and they are unfolding now”.

Can entrepreneurship be taught and if so how is this best achieved?

“To a certain extent it can be taught— primarily by example—but there are certain characteristics that make it easier.

Can you handle stress and pressure and uncertainty well? Some people have trouble in that area, and if so, it’s not for them. Do you like taking risks and are you willing to do the work yourself? Can you take full responsibility for the outcome? Do you have full confidence in yourself? Those are good questions to ask or be asked.”

How are entrepreneurial skills best acquired—business experience, training?

“The best is a combination of the two, plus a keen sense of intuition. Instincts are important, they can be developed but they need to be heeded.”

How can business and industry work with universities to improve young people’s engagement in entrepreneurship?

“The first thing is to make sure all students are financially literate. A sound financial education is necessary. Entrepreneurship is one step beyond that, and involves what was discussed in the previous question. The skill set is complex— knowledge and intuition and both needed. I would stress the importance of experience—starting small and working up to big—to make sure the pieces are in

place for endeavors larger in scope. An early wipe out is not the way to start.”

What’s the best form of support that can be provided for those just starting up in business?

What do you think are the major challenges facing the North East of Scotland today?

“The economy is difficult at this time, worldwide, and needs to be stimulated.

Things will even out but it will take a while. Real estate and other things run in cycles, so it’s a matter of time before it evens out.”

How should the region be preparing for the eventual decline of oil and gas reserves?

“By being prescient. It’s already clear the reserves are in decline, so it’s necessary to look into the future and prepare accordingly.”

What role would you like to see Trump International Golf play in the region’s future?

“As a stimulant to the region, economic and otherwise.”

“The best form of support should come from the individual. Being an entrepreneur requires a person who is capable of thinking for himself or herself.

This should be stressed while providing the skills necessary for any business endeavor.”

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MANAGEMENT, THEORY AND PRACTICE

ETHICS, PEOPLE AND THE HUMAN RESOURCE PROFESSION Moira Bailey, Lecturer and Anne Stevenson, Senior Lecturer In Human Resource Management, Aberdeen Business School

The Human Resource [ HR ] Profession What is the difference between an occupation and a profession? Debate on this topic often centres around the need for the latter to adhere to the concept of altruism which involves ‘self sacrifice’ and a ‘duty to follow a code of ethical behaviour’ (Gold & Bratton 2003). This emphasis on ethics is further reflected in Cheetham and Chivers’ (1998) Model of Professional Competence. In this model, four areas of competence are defined, namely, knowledge, function, behavioural and ethical; no one area is given prominence and they are all necessary skills for the able practitioner. Professional bodies recognise this by designing codes of conduct for their members.

One such body is the Chartered Institute of Personnel Development [ CIPD ].

Its code ‘covers professional standards of behaviour’ which requires members

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to: provide specialist professional knowledge, advice and support in the management and development of people; enhance the reputation of the profession; continually update and refresh their skills and knowledge; exercise integrity, honesty, discipline and appropriate behavior; and to act within the law’ (CIPD, 2005). The HR practitioner, to be considered ‘professional’, must therefore adhere to all the above and this is by no means an easy task.

Responsibility of the HR Profession Traditionally, professionals have had a duty to place the needs of their clients at the forefront of their considerations and this relationship has historically been unique. If human resource management is accepted as a profession, then it too should put the needs of their clients at the forefront. Nowadays many professionals - including HR practitioners - work for an organisation and depend on it for their salary.

This could lead to contradictory and conflicting accountability issues for HR professionals, as the definition of client in today’s organization is not clear-cut. Are clients the employees, the Board of Directors, the shareholders or all of the above and more?

In recent years, the role of the HR professional has become more strategic in focus. In some cases, this is a sharp shift away from the traditional role of the Personnel Officer, looking after the welfare and interests of the workforce.

This has involved a closer alignment with the management of an organisation, thus implying a different relationship with their traditional clients

of the workforce. In some ways, this may be considered to represent the first major ethical dilemma to affect the HR professional, as the needs of the workforce and the needs of the organisation are not always in harmony.

Whilst this is a dilemma which faces all managers, for the HR professional, the problem is two-fold.

There is a wider role for HR professionals because they are often considered to be the guardians of ethical behaviour in the workplace. This means that they are responsible for not only their own ethical standards but also for the ethical standards of those working for the organisation. The latter includes the need to identify the types of ethical attitudes that are essential for the operation of the firm. However, these ethical standards need to be constantly reinforced through appropriate training and development and measured regularly to ensure that they are being maintained.

Thus, if HR managers are responsible for ensuring ethical behaviour in the organisation, who trains the HR professional in this area? Evidence gathered over the years suggests that this is an area which needs far more attention than it receives, as ethics may be only a minor part of the required education or training in human resource management. This two-fold role of the HR professional makes it a very important part of their work.

It is likely that HR staff receive their ethical education in the same way as everyone else; it is learned from parents, schools, the media and society.

It can be considered to be the difference between actions which are perceived as acceptable and those perceived as unacceptable. The well – known problem is that often there is no definitive ‘right’ or ‘wrong’. For the HR professional, the right course of action for an employee may be wrong for the organisation and vice-versa. The existence of so many stakeholders and so many conflicting needs and requirements in an organisation cause regular ethical dilemmas.

The Role of Ethics in the HR Profession Ethics are often overlooked as an area for personal development as the concept is difficult to define and even more difficult to measure. As Billington (2003) explains, everyone makes ethical decisions every day which will affect other people. In the workplace, the decisions of managers have an impact upon their employees and therefore every decision is important. Billington further considers that morals can be defined as the way a person sets out to achieve ethical standards and these will naturally vary due to the variety of life experiences of individuals. Yet an organisation has to ensure that its employees are all behaving in an ‘ethical’ way.

A useful way of determining the ethical stance of organisations was devised

by Carroll (1990), who described organisations as moral, where decisions are made only after ethical considerations have been discussed; immoral, where organisations deliberately decide to adopt unethical behaviour; and amoral, where organisations do not consider the ethical implications of their actions. Amoral management can cause as much damage as immoral management. A well-known case is that of the powdered baby milk manufacturer which marketed and sold their products in a part of the world that had no safe water supplies and caused untold suffering to families. This was an amoral act with tragic consequences.

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Connock and Johns (1995) provide further definitions which are still very pertinent to help organisations judge whether their behaviour is ethical. They consider ethics as investigating the concept of fairness, deciding the actions which are right and which are wrong and requiring managers to provide practices and rules that will underpin responsible conduct between individuals and groups. Nevertheless, these are difficult to quantify and hence there is a need for a code of conduct which guides ethical behaviour and helps to keep the professional’s actions within acceptable limits. It is also the difficulty of deciding between ethical and unethical behaviour that causes ethical dilemmas. So how is ethical behaviour measured?

Measures of Ethical Behaviour Generally speaking, the three main ways of measuring ethical behaviours are by the Golden Rule, the Disclosure Rule and the Intuition Ethic (Carroll, 1990). The first is the thorny ‘do unto others as you would have them do unto you’. It is often considered to be outmoded and inappropriate but, in terms of dealing with employees, it can work in a moral organisation. For example, if a manager underperforms, he/ she would expect to be told so, face-to-face, in confidence, before anyone else is informed. Yet some managers still insist on discussing performance issues, not with the individual concerned, but with others in the organisation, thus breaking the Golden Rule.

The Disclosure Rule advises individuals only to undertake actions which they would be happy to report to colleagues, friends and family. In a moral organisation, this can work because its ethical culture acts as a regulating mechanism.

However, in an organisation where the manager or culture is amoral or immoral, the behaviour might be an action that could be disclosed without being ethical as it is merely a way of justifying those circumstances.

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The Intuition Ethic has obvious flaws. As a person’s moral stance is determined by their life experiences, two people in the same organisation with different life experiences may not both ‘feel’ that a course of action is correct. Yet how often has an employee or manager used this (“it felt like the right thing to do”) to justify their actions?

There are many areas with regard to HRM where ethical standards could potentially be breached so a mechanism must be found to ensure that breaches cannot occur, despite the difficulties of doing so. Mathis and Jackson (1997) highlight fairness, justice, truthfulness and social responsibility as fundamental areas of concern. This includes a number of particular challenges for the HR professional including the withholding of information on a problem employee from another potential employer; investigating credit and criminal records of potential employees; the effect of job changes on the capability and subsequent employability of long term employees; conflicts between lifestyle and professional choices; and privacy issues relating to health.

These have caused HR professionals to question the value

‘do unto others as you would have them do unto you’ of some of their actions, for example, the use of referees in the selection process; must be handled with care from an ethical point of view, not to mention the obvious legal concerns over this practice.

Additionally, authors have raised the issue of ethics in areas as diverse as drug testing (Birsch, 1995; Carson, 1995), total

quality management and outsourcing. These dilemmas can be seen to be caused by the high degree of role multiplicity in the HR professional’s task. Role multiplicity describes the many different duties and responsibilities required by the job, whether involving policy development, compliance, learning or outsourcing, to name but a few. This is in addition to their role of monitoring and maintaining the ethical standards of the organisation. This leads on to another point. All managers have some responsibility for managing human resources, therefore their ethical behaviour should be beyond reproach as their influence as a role model cannot be overlooked. If a manager frequently treats colleagues with disdain and derision, subordinates are likely to follow suit, believing that this is acceptable behaviour.

Similarly, going back to the code of conduct, if managers do not keep their own professional development up to date, subordinates may not either, thus allowing the organisation’s practices to become outdated. This can lead to the possibility of a less innovative and flexible workforce, with possible negative effects on efficiency, loss of business and decreased

profits and, ultimately, to the close of a firm. This would therefore have a negative impact upon all stakeholders and, so in this instance, the needs of the many cannot be ignored for the sake of the few.

Ethics and Workplace Behaviour On an ascending score of 1 – 10, it is possible to rate the ethical nature of an organisation’s workplace behaviour.

However research, indicates that subordinates always rate their managers as less ethical than the latter’s self-assessment.

Human resources are unique as they live, breath and experience emotions which have an impact upon their work and, if managers negatively affect those emotions through their behaviour, they can expect to reap the consequences in ABERDEEN BUSINESS JOURNAL

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terms of the behaviour of employees.

Most staff look at ethical behaviour according to the decision making of manager in the organisation, particularly with regard to their treatment by managers on a day to day basis, so reverting back to the Golden Rule.

The behaviour most likely to cause dissatisfaction with regard to ethics falls into a number of broad categories.

These include decision making based on favouritism with regard to promotion, pay awards and training; harassment of, or discriminating against, employees based on gender, race, age, sexual orientation or any other spurious excuse; and generally treating certain employees in a different way from their colleagues.

behaviour does not happen in isolation as there is a plethora of external demands upon the organisation. These include legislation, social and demographic changes and ecological concerns, to name but a few, plus the need to make the organisation efficient and capable of providing the goods and services which its customers need. The challenge for all is to undertake this in a way which ensures that both the business case and the ethical considerations are met.

This behaviour results in the perception of unfair treatment and is clearly at odds with a Professional Code of Conduct. Yet there is evidence that such behaviour happens regularly. Costly employment tribunals can be the result of unethical behaviour if that behaviour is also unlawful.

behaviour which, if overlooked, can mar a company’s reputation.

All the above hints at one of the major problems that organisations face with regard to ethics – the business case versus the ethical stance. Ethical 10

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This has serious implications for organisations. The business community no longer questions the need to behave ethically. This is now considered to be a core requirement of business

However, the view of employees on the ethical stance of their managers is important in another way. Peterson (2004) identified that if an employee believes his/her manager is demonstrating a high level of integrity, he/she is less likely to behave unethically.

This was slightly tempered by the conclusion that, if an individual has high ethical standards, they will be less

likely to act unethically, even if their manager has low perceived levels of integrity. However, for employees with low ethical standards, they were less likely to behave unethically if their manager had high levels of integrity. If organisations cannot attract employees with high ethical standards at all levels, ensuring managers have the right attitudes can help.

Nevertheless, a sound starting point in ensuring adherence to ethical standards is the practice of employing people who have the desired attitudes for the ethical operation of the organisation, at all levels and not just as managers.

However, this in itself is not enough,

particularly in light of the conflicting demands placed on people through ethical and commercial considerations.

The importance of ethical behaviour in an organisation can be emphasised by embedding it into the organisation’s core values. For example, a requirement to treat employees with honesty, fairness and respect requires a highly ethical stance to be adopted in the organisation and similarly a core commitment to ensuring the health

and safety of employees gives the same message. Embedding the ethical stance in the core values helps to emphasise the importance of this behaviours to the organisation and furthermore, allows staff who do not conform, to be performance managed. This requires proper training and support to be available for all employees, starting at the induction stage, and developing employees to consider ethics in every decision that is made in the organisation, regardless of its magnitude. The ‘partly ethical’ option should never be available.

It should be recognised that organisational culture is also crucial.

A ‘blame’ culture, which allows

incompetent managers to flourish, permits bullying and harassment between colleagues, condones pilfering, or any other undesirable behaviour, is not going to be conducive to ethical behaviour in the organisation. Much has been written about the difficulty of changing organisational culture but, in many ways, adopting ethics as a core value and managing performance can help in this regard as these continually reinforce the message.

However, it may be that the ‘oldfashioned’ Personnel Manager approach also has much to offer in this regard. Staff should be recognised as people with conflicting needs and skills and should be treated as such. To an extent, the need to ensure ethical compliance has taken away the ability to solve problems easily as managers are scared of talking to employees to resolve differences of opinion. Yet it is often the most effective approach and can prevent a problem from escalating.

Ethics are therefore of significant concern for both HR professionals and all managers. It could be further argued that the HR profession, in the role of guardians of ethical behaviour,

References Billington R (2003) Living philosophy: an introduction to moral thought. 3rd ed., London, Routledge.

Birsch (1995) The universal drug testing of employees. Business and Professional Ethics Journal, 14, 43±60.

Carroll A B (1990) Principles of business ethics: their role in decision making and an initial consensus. Management Review. Vol. 28, No. 8.

Carson (1995) Drug testing and privacy: why contract arguments do not work. Business and Professional Ethics Journal, 14, 3±22 Cheetham & Chivers (1998) The Reflective (and competent) practitioner: a model of professional competence which seeks to harmonise the reflective practitioner and competence –based approaches. Journal of European and Industrial Training V22 No7 pp267-276 CIPD (2008) Code of Professional Conduct accessed from http://www.cipd.co.uk/about/ profco.htm?IsSrchRes=1 Connock S & Johns T (1995) Ethical Leadership. London, CIPD. Gold & Bratton (2003) The dynamics of Professionalisation: Whither the HRM Profession Conference Paper – Critical Management Studies 2003 Stream 8 Human Resource Management Phenomena – HRM and beyond July 7-9 2003 Lancaster University Mathis & Jackson (1997) Human resource management (8th ed.). St. Paul: West Publishing Peterson D (2004) Perceived leader integrity and ethical intentions of subordinates.

Leadership and Organization Development Journal, Vol. 25 No. 1.

should work with managers to pioneer ways to achieve more ethical behaviour in organisations. This will involve managers at all levels asking some very difficult questions of themselves and others and perhaps receiving answers which are even more uncomfortable.

Re-examining and following Codes of Professional Conduct and re-considering organisational policies and procedures are effective starting points in the quest for more ethical behaviour in the workplace ABERDEEN BUSINESS JOURNAL

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BUSINESS BASICS

THE FUTURE OF FINANCIAL REPORTING David Wood, Executive Director, Technical Policy, ICAS and Amy Hutchinson, Assistant Director, Accounting & Auditing, ICAS.

Introduction The financial crisis of 2008 had many surprising consequences, one of these being that the rules regarding the presentation of information in the financial statements of banks and companies suddenly became headline news. As politicians, the public and the media searched for reasons for the dramatic failure of the financial system.

Accounting standard-setters were singled out for making financial reports too complex and for introducing rules that served to exacerbate the volatile

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nature of the financial markets. Such attention makes this an opportune time to re-examine the current state of financial reporting, to look at the changes being proposed as a result of the financial crisis and to consider whether any more radical changes are needed.

Context The International Accounting Standards Board (IASB) is the independent body set up by the International Accounting Standards Committee Foundation. It is responsible for setting accounting

standards used by most major economies around the world, including the European Union [ EU] for the consolidated accounts of listed companies) The IASB does not in itself have any authority as to which companies are required to use International Financial Reporting Standards (IFRSs) but over recent years governments, beginning with the EU, have made the decision to adopt the standards to replace to varying degrees the national rules that previously applied.

This has taken place in recognition of the fact that, for major international

companies, using a global accounting language has advantages in terms of increasing transparency and comparability and therefore aiding the smooth functioning of the capital markets. The USA is now the one major economy that has not yet committed to adopting IFRSs. Fair Value Accounting Two major criticisms have been levelled at the IASB over the course of the financial crisis; the first is that the ‘fair value’ accounting rules have contributed to the crisis and the second relates to the overall purpose and format of accounts.

Fair value accounting has been singled out for criticism because of its role in financial reporting by the banks at the centre of the financial crisis.

It is used to measure certain financial instruments such as security investments and derivatives in the balance sheets of banks and other listed companies at their current market price rather than at the price the company paid to originally acquire the instrument. There have always been varying degrees of support for fair values amongst the big banks, with the French banks particularly vociferous in their opposition but, in general, investors like market values which they see as more up-to-date, objective and relevant.

When markets are deep and liquid, fair values are relatively easy to determine and understand since actual quoted prices can be used. When there is no active market, the instrument is ‘marked to model’ , using valuation techniques to estimate the price at which a normal (i.e. not a fire sale price) transaction between market participants would have taken place at the measurement date. As the credit markets ground to a halt in 2008, many banks and others began to question the relevance of market values at a time when the financial markets were no longer functioning normally.

There are two main concerns with fair values in a recession; first, when market prices are exceptionally low, these do not reflect the underlying ‘intrinsic’ value of the instruments and secondly, the reporting of fair values has a

procyclical effect because the recording of low values has an impact on economic behaviour and may contribute to driving prices down even further. The IASB initially tried to assuage these worries by re-iterating its position that fair values remain relevant in times of market turmoil and it issued additional guidance on valuing financial instruments in illiquid markets.

However, by this time, politicians in the US and Europe had caught on to the debate and realised that there was a new target when it came to apportioning blame for the credit crunch. While the EU is the biggest user of IFRS in the world, its relationship with the IASB has never been an easy one. The European Commission has harboured concerns about the accountability and lack of political control over the IASB and the two clashed when IAS 39, the financial instrument valuation standard, was first introduced in the EU, resulting in the deletion of some of its sections in the European version. Thus the French president Nicolas Sarkozy and others took the opportunity to put pressure on the IASB to relax the fair value rules, with the threat that Europe would simply re-write the rules themselves if the IASB did not agree. This would effectively end the claim of IFRS to be the global accounting language.

Fair value is not without its supporters, including ICAS which takes the view that accounting is merely a language that explains the underlying economic events and as such has reflected, rather than contributed to, the market crisis.

Abandoning fair value at this stage would only serve to reduce investor confidence even further by reducing transparency and comparability and leaving investors to derive their own values, which are likely to be less reliable than the reality.

Retaining fair values would prevent banks from hiding their losses and will encourage prompt action to address the problems. The Japanese financial crisis of the 1990s showed that the absence of fair value reporting could in fact prolong a crisis.

“Accounting standard-setters were singled out for making financial reports too complex and for introducing rules that served to exacerbate the volatile nature of the financial markets.”

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In spite of this support, the IASB found itself backed into a corner and has been obliged to put together an accelerated timetable of amendments and revisions to the accounting standards relating to financial instruments as well as other areas. This will be a crucial phase for the IASB and for public confidence in financial reporting more widely.

are being obscured by the volume and level of detail of disclosures in corporate annual reports. We stated that “the corporate report does not tell a clear story about the performance of a business”. We are by no means alone in this view.

Developments In Financial Reporting

In summary, few would disagree with the view that many annual reports have become a lengthy exercise in regulatory compliance but fail to communicate a compelling account of the performance of a business. In other words, they are not obviously “decision-useful”. If that is the case, then there is a need for further development.

One of the principles underlying the debate over fair value is a fundamental one about the purpose of financial statements. The IASB’s position is that accounts are about the communication of information to a wide range of users both to demonstrate that management have fulfilled their stewardship responsibilities and to assist users in decision-making. This means that accounts need to give a transparent and unbiased account of a business’s performance. On the other hand, some politicians seem to think that accounts should help contribute towards achieving financial stability, for example, by allowing banks to build up provisions against expected losses on loans to shore up their balance sheets in a downturn and to smooth their results by abandoning fair value accounting.

We at ICAS think that it is vitally important that the purpose of financial reporting is not changed as a result of the financial crisis. Accepting financial stability as an objective of financial statements would allow companies to present a more biased view of their performance, which is not in the long-term interests of investors, governments and the companies themselves. Current information, neutral and free from bias, is required to help the markets function efficiently.

That said, we strongly believe that there is much work to be done in terms of improving the overall format and complexity of accounts. In a recent press release, we noted that key business information and risks 14

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In its May report on the banking crisis, the Treasury Committee argued that the complexity and length of financial reports represent a missed opportunity to improve users’ understanding of the financial health of firms. They complain that corporate reports “do not tell the reader much of a story” and appeal instead for listed companies to set out in a short jargon-free business review the nature of their business model, the sources of their profit or loss and the nature of their main future risks.

Accounting Standard Proposals In October 2008, the IASB released their Discussion Paper “Preliminary Views on Financial Statement Presentation”. The objective is to create a standard that “requires entities to organise financial statements in a manner that clearly communicates an integrated financial picture of the entity.” To effect this, the IASB proposes that companies follow two objectives: cohesiveness – formatting the information in financial statements so that a reader can follow the flow of information through the various statements; and disaggregation – separating information that responds differently to economic events.

Comments from interested parties were invited and welcomed

Unsurprisingly, with over 200 letters of comment, there is a mix of views. Many respondents, including ICAS, are concerned at the level of detail implied by the disaggregation objective. We seem to be heading for a world of even greater detail precisely when many users would rather see less information presented in a more relevant and vital way. Directionally, therefore, the board seems to have erred.

In our view, an alternative might be an environment in which the annual report had to comply with the following requirements:

it must be produced in short form only – say 20 pages or less;

8. Avoid repetition but provide all important information.

it must be used as the centrepiece of a company’s results announcement (or similar communication); and

9. Ensure consistency of information presented. For example, management’s commentary should be consistent with the results of the formal tools used internally to measure performance such as economic profit.

it must meet the minimum benchmarks specified in the box below.

Minimum benchmarks for corporate reports 1. Present a true and fair view.

2. Explain the company’s business model and strategy and its performance against these.

3. Deliver a clear message about management’s stewardship of the company’s assets – the past.

4. Deliver a clear message about the company’s current asset-liability mix and liquidity position – the present.

5. Deliver a clear message about where the company is headed – the future.

6. Use alternative reporting

technologies to allow readers to access the more detailed disclosure and regulatory information required by law, analyst requests and similar.

7. Report historic cash flow and liquidity information in a way which is meaningful to management.

10. Make clear the significant judgements that have been made.

These should reflect inter alia the content of the external auditors’ report to the audit committee.

Because the report is to be used as the centrepiece of a company’s results announcement, it would necessarily elicit the Directors’ “story” and eliminate much of the boilerplate narrative which pervades annual reports today. For those who might worry about the loss of disclosure, readers would be able to access such detail via alternative reporting technologies. There is no doubt that all manner of legal and other hurdles would need to be overcome.

However we have reached a point

where some action must be taken and the current crisis presents a golden opportunity to do so.

Much of this discussion has focussed on large listed companies while the vast majority of businesses in the UK do not fall into this category and therefore do not have to worry about

IFRS. These companies should be aware that financial reporting changes are afoot for them also The IASB has this summer issued a new IFRS for SMEs. This is a single document containing a simplified version of IFRS to be used by companies to which the full standards do not apply.

In the UK, it is being proposed that this standard will be introduced for medium-sized and large private companies which currently use UK Generally Accepted Accounting Practice (GAAP). At around 300 pages, the IFRS for SMEs has the appeal of being significantly more concise than UK GAAP which runs to nearly 2000 pages. It also has the advantage of being based on international standards which will aid those companies trading internationally as their accounts will be more widely understood, and for growing companies which may ultimately need to use full IFRS. For the smallest companies, the UK will continue to permit the use of the Financial Reporting Standard for Smaller Entities (FRSSE) which is specifically tailored to the needs of such firms. Over time, this may be replaced by the IFRS for SMEs so that there is a coherent and consistent financial reporting structure covering all UK companies.

So ultimately, changes taking place to IFRSs will have an impact for all UK companies. The next few months will be a critical time for the IASB as it seeks to placate its critics while maintaining its independence. At the same time, we at ICAS believe that the financial crisis has presented the opportunity to look at financial reporting more widely and to consider more radical changes, like the short-form report described above, that will allow companies to communicate more effectively with their stakeholders.

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SPOTLIGHT: LEADERSHIP IN THE OIL AND GAS INDUSTRY

RIDING THE RAPIDS THROUGH RECESSION Professor Rita Marcella, Professor Dorothy Williams, Dr. Naheed Tourish This research was commissioned by global energy company PSN (Production Services Network) and sponsored by McGrigors LLP

Introduction, methodology and observations As an earlier Ernst and Young report, ‘Opportunities in Adversity’ (2009) noted, ‘The economic news at the beginning of the New Year has made for grim reading. Headlines hype to attract attention and journalists simplify, but the collective media assessment of 2008 is clearly “economic crisis” and the forecast for 2009 is clearly “economic challenge”.’ 1 In this broader context the Riding the Rapids research project was designed to explore how senior executives in the oil and gas industry are leading their companies through the challenges of the downturn.

‘In 2009, executive leaders - CEOs, Chairmen, board members - will be tested not just for their mettle to ride out turbulence but also for their talent to build stronger, more resilient organizations...’ 2 (Bain & Company, 2009, Energy Industry Outlook )

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The present research seeks to understand how leaders are showing their ‘mettle’ in meeting the challenges of a time of unprecedented and unpredictable economic change. The participants were senior executives from majors and contractors across the oil and gas sector, as well as consultants and corporate banking executives closely associated with the industry. This was a short, sharp, swift piece of research carried out over a period of two months, in order to gain a deep insight into the industry from the perspective of its leaders – individuals with extensive experience of the industry across the globe through its highs and lows. Qualitative research is designed to obtain a deeper understanding from a smaller number of highly authoritative participants, talking openly and unreservedly and sharing their insights in confidentiality.

The approach used is qualitative narrative, based on an interpretation of responses obtained from the interviewees, secondary data from the literature and the analytical insights of the research team from the data. Some

participants were happy to be named in the main report, while others preferred to remain anonymous. We have sought where possible to let these leaders tell their stories in their own words.

The research team was pleased at the positive response they encountered and is very grateful to those who participated and gave their time and insights freely to this research.

A total of 31 in-depth interviews were conducted with executives based in UK, USA and Canada, exploring how respondents were dealing with the crisis. This represents a sound and valid sample for qualitative research, given the authority of the voices of the participants. One of the participants was a woman. All interviewees held very senior roles in the oil and gas industry, at CEO or Director level. The majority held global responsibilities. These participants represent a significant sample of the oil and gas industry as their companies employ over 740,000 people in over 130 countries.

Issues explored in the interviews covered a wide spectrum from the price of oil to the supply chain, and included areas such as alterations in financial and operational strategies, people management and communication, and plans for an eventual recovery. The research has produced a wealth of data which will yield further analytical insights: this report summarises some of the high level observations made from the data in order to generate continuing debate.

The impact of the recession • Almost half of the oil and gas companies participating in the research have been little affected by the recession. This finding was unexpected in that the sector is conventionally one that is subject to volatile response to factors such as fluctuations in the oil price. It is also a sector that had seen very significant growth in the preceding five years and where the impact of downturn might be expected to be keenly felt.

• Comparatively, the oil and gas sector would appear to be performing in line with comparable sectors such as Construction and Transport, Storage and Communication, where in 2009, 52% of business describe company performance as ‘badly affected’ by the recession (Anderson, Russell and Illingworth, 20093).

• The recession was seen as only one of a number of contextual factors driving change.

• A significant proportion of the participants were positive about the future and many were actively planning for it. Around half of the participants were optimistic or cautiously optimistic about the proverbial ‘green shoots’ of the upturn.

Management responses • Oil leaders were focused on reengineering and restructuring the business to perform efficiently and with a greater customer focus.

• There was a degree of measure and calm in management responses, with the majority of participants not reacting dramatically or disproportionately to the current challenge.

• A significant number of participants demonstrated a degree of exhilaration associated with steering a course through difficult times.

• Positive benefits of the recession were recognised by a significant number of participants, typified as preparing the industry for the ‘leaner, meaner’ dynamic in the new emerging business model.

Overall data indicate variable company response of two very distinct types.

There are those that are relatively unaffected by the downturn and optimistic about an imminent upturn and a second group who describe themselves as having been seriously

affected and who are naturally more pessimistic about the future. It might be hypothesised that the unaffected and optimistic were influenced not just by their experience but also by their corporate culture or sense of corporate self. This group might characterise itself as demonstrating a mettlesome spirit of engaging positively with challenges. This group are characterised as ‘the tough ones’.

The second group had suffered the impact of a number of factors with which they were wrestling. They were characterised by a sense of exposure and as less in control of their own destiny.

This group in refered to in the report as the ‘vulnerable’.

Key findings The key findings of this research have been categorised under three main headings: 1. The impact of the recession 2. Management responses to the recession 3. The way ahead – green shoots 1. The impact of the recession A. Introducing the ‘tough ones’ and the ‘vulnerable’ The findings, as presented in the chart that follows, revealed that of the organisations the senior executives led, • 19% were immune and still very successful

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mune and still very successful oderately affected riously affected dly affected The vulnerable Very badly affected

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‘We help operators take cost and time out of their operations - so that is a positive effect.’

Those products or services that fulfil a mandatory or regulatory requirement remain in demand and are, therefore, less exposed to market fluctuations and the appetite for ‘fat trimming’ typically being engaged in by customers.

‘It’s mandatory work – health and safety work which adds value. We have been very fortunate…’

a strongand and well e very aware of the variability of the impact of recession across companies inHaving the sector al- differentiated Respondents were very aware of the variability of the impact of recession across position in the market is also influential ving withcompanies impact some wereand better placed to deal withimpact the consequences. in the sector although all were living with some were better placed to deal with the consequences.

crisis has impacted butnotnot across the board.’

‘Thede crisisnitely has definitely impacted-- but across the board.’

and some participants talked about the extent to which the recession had caused them to develop a very keen sense of focus on their core purpose and the value they offer their customers.

some placeensured in the ‘foodthat chain’ ensured that theyto were able and control investment in ies their For place incompanies the ‘foodtheir chain’ they were able direct to direct and control investment in new developments, as they were initiators of ‘It’s very much around making the most s, as theybusiness. were initiators turned and offand theothers tapsinwhichofkept others aoat They turnedofonbusiness. and off the They taps which kept on others afloat the market position and we have the ‘food were more reactively dependent thedecisions decisions ofof thethe majors. ‘food chain’ werechain’ more reactively dependent ononthe majors. aHowever, particivery good market position.’

However, participants reported signs of a greater tendency than anticipated gns of a greater tendency than anticipated for these initiators to continue to invest and this was for these initiators to continue to invest and this was giving some confidence Some companies had specifically dence throughout thesector. sector. throughout the nurtured their market through

developing products and services which, ‘Some countries and companies high up the chain need to continue spending. while not mandatory, were a critical e countries and high updone thethis chain need to there continue spendSome of thesecompanies companies would not have in the past.

I think are contributor to their customers’ success. reasons to be optimistic. …’

Some ofseveral these companies would not have done this in the past. I think ‘One of the key aims was to ensure are several reasons be oroptimistic. …’

While the concept ofto a chain hierarchy of dependencies, with decisions made our customers had a high level of at one level impacting on all the rest is not unique to the oil and gas sector, it is a dependency on us, commercially, sector where its manifestation is at the most extreme. technically and and we of a chain or hierarchy of dependencies, with decisions made at one level impacting on professionally, all the positioned the business that way.’ to the oilAsand gasnoted, sector, it with is a the sector itseconomic manifestation the60most extreme. already faced most where significant downturnisforatover years, more than half of the interviewees regard themselves as immune or only ii. Diversified or multi-sector moderately affected by recession. These companies were not at the top of the offerings faced with most signi cantsought economic downturn 60insights years,why more than half of the foodthe chain and the research to understand from for theirover leaders’ Some respondents these companies wereor performing so well despite their dependencies. rd themselves as immune only moderately affected by recession. These companies werewere notcushioned at from the effects of the economic crisis, because they operated in multiple B. The ‘tough ones’: riding the rapids 5recession sectors, where the impact of This research found that companies who were less affected by the recession were varied and where spending had so far not characterised by: been restricted. However, interestingly one reported that it was the ‘non-oil i. A product line that remained in demand and gas sector’ which had suffered ii. Diversified or multi-sector offerings most as it was UK based. Operating iii. Sound management practices in different regions of the world was iv. Intrinsic sturdy financials also an advantage as this opened up opportunities where exploration and development are still expanding. Overall i. A product line that remained in demand non-reliance on a single sector has Those companies whose products were specifically designed to offer their helped businesses to sustain activity customers more cost effective solutions were in a stronger position in the market through challenges in the market. in a downturn and were facing increasing rather than decreasing opportunities.

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‘Being multi-sector has been a real help to us.’

There were also those who felt that their experience of delivering services in the oil and gas sector had positioned them particularly well in taking those services into other less competitive and commercially sensitive sectors.

‘Those who have operated in the oil and gas sector, where they move into new sectors they are more effective in capitalising on these because of the fitness of their businesses.’ iii. Sound management practices A recent survey by Ernst & Young (2009) argued that, ‘Companies that maintain a sustainable business model through the current downturn will not only survive the downturn, but will emerge stronger and in the best position to take advantage of new growth opportunities as the economy improves.’

Many of the interviewees whose companies were performing well, spoke of their internal management processes as a factor in sustaining success. One participant had taken a steady state approach, weathering the storm through tried and trusted management practices and keeping staff aware of the need to raise their game.

‘We stuck to tried and tested good business practice. We reinforced all the good practices… We have to make quick decisions and involve the right people. So we have put more effort into internal communication and make sure everyone understands that we have to keep raising our performance.’

Core management principles, such as focus on the understanding of customer priorities had helped to sustain business, meaning that these companies were continuing to deliver seamlessly to the customer, if in the context a tighter resource envelope.

‘We looked at saving money for our clients. In oil and gas we made sure we delivered on time and on budget.’

Some respondents emphasised the importance of a company’s capacity to change in rapidly changing times; resilience and flexibility they argued were required to underpin robust business models. For others it was about sustaining what works well and introducing change where it is most required.

‘Our model is pretty good…It’s stayed pretty much the same; maybe we made a few changes – we have just tried to make it more resilient.’

However, there appeared to be some disagreement amongst the groups about the value of change. Others had eschewed rapid change, in, for example, continuing to develop a brand built on quality rather than cutting corners with costs, remaining committed to concepts of continuous quality improvement and for these companies their evidence so far suggests that this is proving a successful strategy.

‘That will lead to benefits for our customers. They will get a better quality product which will mean we get more business…. We should then have the competitive advantage…’ iv. Intrinsic sturdy financials However a steady state management approach was acknowledged to be critically dependent on having reserves in place to survive economic turbulence and companies with an inherent sound financial position and creditworthiness were less vulnerable to the vagaries of the recession, ‘Companies whose debt facilities are due for renewal are likely to encounter some difficulties owing to the lack of liquidity in the banking community. Some banks are not as willing to provide debt for purposes of acquisition however for quality businesses there is still support from the banking community.’

Despite their willingness to be responsive to the economic climate and market changes, companies relied on a sound base as an essential prerequisite for survival.

‘From a general perspective the credit crunch and the crash in oil price was a shock to all the businesses and a lot of them have reacted, some more effectively as the fundamentals were stronger.’

Even amongst leaders of those companies performing well there was criticism of financial institutions, where it was felt that ‘the banks are worse than ever and that’s a big issue for businesses’. These respondents tended to have avoided the most parlous effects of customers renegotiating contracts.

C. The ‘vulnerable’: struggling to keep their head above the water This research found that companies who were affected by the recession gave the following reasons why they believed that the crisis has impacted on their company’s performance; v. Banking crisis vi. Oil price vii. Ineffective government incentives viii. Lack of skilled workers It is worth noting that all respondents whether continuing to perform well or struggling to survive the recession were aware of and spoke about these influential factors. However, for those most adversely affected the comments made reflected the impact that it had for their own company and it is these comments that have been drawn on for the following discussion. v. Banking crisis 89% of the participants in this group talked – some highly emotively - about the impact of the financial crisis on them and their company. One spoke of the effect of being let down by their bank as ‘our bank failed us – it’s like your wife dead in bed…’. Others spoke about the challenge of access to capital and funding, a factor still influential across all sectors, not just in terms of securing finance to enable new developments but also in terms of cash flow throughout the supply chain.

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‘Companies are being more aggressive with pursuing their payments.

When placing orders you have to test continued financial viability of purchasers and suppliers. Some companies have secured drilling rights and licences and then were faced with inability to raise the funds to exploit it.

Some have been shelved. That impacts work further down the supply chain.’

Given the significance of the series of complex commercial interdependencies in the oil and gas supply chain referred to above, the last point is of course particularly significant. Not only are companies suffering because of decisions at the top of the chain but their smaller customers are also affected and either failing to deliver projects or looking to trim excess cost out of ongoing projects.

‘Access to funding for some of our smaller customers became unattainable. This affected juniors wanting to enter into projects or needing to refinance.’ vi. Oil price Almost all participants (78%) spoke of the difficulty of responding to the vagaries of the oil price and resultant fluctuations in the market: ‘what we need is stability, not this volatility’. One interviewee from an oil major acknowledged the huge significance of fluctuations in the price per barrel for the fortunes of companies across the sector.

‘Well, of course the commodity price has affected us. We have cut back activity and focussed on the higher quality end of the portfolio. We work very hard on the supply chain and attempt to deflate the base.’

And of course not only oil and gas prices have fluctuated, much of the cost base has been subject to change.

‘The factors for us are commodity prices – oil but also metals prices as one of the markets we operate in is mining and metals – copper, nickel, gold. These prices were whacked.’

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The importance of those initiating projects and commissioning work taking a long term view and continuing to commit to growth was reiterated a number of times by participants.

months, that the order of urgency between measures of Recovery and measures of Reform has been duly observed, or that the latter has not sometimes been mistaken for the former.” 4

‘Our main business has been working with [a large oil major] who have taken a very long-term view and have just decided to go for it and have contracted us to do the work.’

(John Maynard Keynes, New York Times, 1933)

vii. Ineffective government incentives A number of participants (46%) talked about the extent to which government had failed to incentivise continued long term exploration and development in the sector.

‘There are no real incentives for the oil and gas industry.’ viii. Lack of skilled workers In contrast to the experience of companies in recent years, only a proportion of leaders of companies, specifically those with headquarters in Canada (6%), spoke of difficulties associated with recruiting skilled staff.

Indeed it would appear that workforce issues have become irrelevant to most as a result of cutbacks releasing skilled individuals onto the job market.

‘Our peers are having things hard and making cuts but we have found some good people in the marketplace as a result of this. It’s a positive twist.’

2. Management responses to the recession A. A new business model “You are engaged on a double task, Recovery and Reform; - recovery from the slump and the passage of those business and social reforms which are long overdue. For the first, speed and quick results are essential. The second may be urgent, too; but haste will be injurious. ... [E]ven wise and necessary Reform may, in some respects, impede and complicate Recovery. For it will upset the confidence of the business world and weaken their existing motives to action. ... Now I am not clear, looking back over the last nine

As we have seen many of the companies, particularly those performing well, were seeking to reinforce good practice rather than make massive change in response to recession. One participant reinforced the theme of pragmatically continuing to manage well, while instituting economies in delivery, rather than seeking to put in place quick fix solutions.

‘Really a slump doesn’t make a lot of difference. You should be running your company efficiently all the time. You make some economies perhaps. I believe the rules apply in good and bad times.’

However, it appears that recession has the power to focus the mind wonderfully. Many participants spoke about the importance of focus, not just on cost but on all aspects of the business and the product. ‘…just forces you to be tighter in control of the business. You can’t afford to be sloppy. It constantly refocuses your mind to make sure you are running the best possible business.’

Although there was some evidence of a recognition of continuing to invest in the long term future despite recession, which has already been referred to above, another participant believed that the oil and gas industry had not learned lessons from its traditional volatility. This individual argued that sector leaders should have been better prepared and more willing to look to the future in line with Keynes’ longer term recovery model.

‘I would just say that we don’t really learn too well from the past. Oil companies perpetuate the same traits in each rise and fall of the oil price. I wish we could do a more stable and consistent job in how we deliver business but I haven’t seen it yet in 32 years. We still get drawn into reactive decisions.’

Participants also emphasised the need to avoid responding to the recession in isolation from other important factors.

One argued indeed that it was not the downturn which was causing the business model to evolve but rather the broader industry context. ‘the whole business model continually evolves; it’s happening all the time...

It is just that people focus on it during downturns as a subset of the downturn…’

‘The cost base was out of control and not helpful. Creating a period of calm so we can do a better job of delivering the activity and reducing costs will make the base fi tter for longer.’

One of our participants summed up the range of impacts of the recession holistically, taking a very balanced view of the positive and negative impacts.

‘Margin restriction does filter through. I think there will definitely be changes. I heard that the majors were calling in their contractors six to nine months ago to pass on the problems. There will be changes in the financial model which will drive changes in the commercial model which will drive changes in the operational model…’

One participant saw changes in the operating model that could result from the combination of the recession and the recognition that the United Kingdom Continental Shelf is in terminal decline.

Some participants believed that alterations to the existing business model would include reducing ‘I think we will see a big change in the [operating] model … driven by the profitability, with tighter margins and realisation that this is no longer frontier territory – the assets are declining now greater competitive sensitivity. For but you can still make money out of it. We are trying to get the same end result some the upside to the lower oil prices without having to put so much into it.’ and the demanding new dynamics B. Restructuring engendered by the recession was B. Restructuring evolving a ‘leaner, meaner business The vast majority of our respondents spoke of a decrease in headcount in the The vast majority of our respondents spoke of a decrease in headcount in the past two years. The following ch model’, with new price sensitivity past two years. The following chart shows the proportion of businesses that have and cost awareness.

One has shows themajor proportion of businesses have undergone undergone athat restructuring process.a restructuring process. launched a strategy to improve its efficiency on a plethora of safety issues Unrestructured companies 31% as well as its financial performance and this strategy, although directed at the deflation of the whole supply chain, was argued to be necessary in order to support sustainable future growth.

The model although enabled as a result of recession and the tightening of the market, may also have been necessary as part of eventual recovery.

‘We have done pretty much everything Restructured companies 69% we wanted to do in making BP leaner, smaller and more efficient … Going forward, we will begin to see the Some companies advantage of back the recession to strip excess Some companies are taking advantage of are thetaking recession to strip excess and trimback payrolls but participants a benefits of deflation beginning to and trim payrolls but participants also spoke of the benefits associated with this the bene with this process which include critical review and the identication of better w enter the supplyspoke chain,of which means ts associated process which include critical review and the identification of better ways of of doing business.

For many this was a pragmatic response to their income and/or margin we will be able to continue with the doing business.

For many this was a pragmatic response to their incomeshrinkage. and/or level of activity necessary to grow the margin shrinkage.

5 company, but for a lower cost.’

‘It’s like this - if contracts aren’t being renewed, the staff have to come off (Tony Hayward, 2009) the books…’‘It’s like this - if contracts aren’t being renewed, the staff have to come off the books…’

There was a sense amongst participants thatOthers both boom had and sought to takeOthers a more approach the maintenance of the their skilled workforce hadmeasured sought to take a moretomeasured approach to maintenance of their capacity an bust presented their challenges were seeking toand maintainskilled levelsworkforce of expertise, so that a period oftorecovery nd themselves in desp capacity andin were seeking maintainthey levelsdoofnot expertise, so that that potentially aate cycle of highs and in a period of recovery they do not find themselves in desperate straits.

However, straits. However, in some instances it is likely that they are just passing the problem down the supply chain lows was necessary in the oil and in some instances it is likely are just causing passing the problem down the that while they are not cutting their own staff they that are they potentially others to institute cuts. gas sector as it allowed the industry supply chain and that while they are not cutting their own staff they are potentially to realign itself periodically. Another causing others to institute cuts. participant supported the argument ‘We are not making people redundant but we are using fewer contractors that streamlining costs was one of the than before. We are still recruiting graduates – not as vigorously as in previpositives derived from the downturn ous years but we are bringing in new graduates this year and treasuring the and placed the industry in a stronger position to move forward. ones we brought in previously…’

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In contrast with some other sectors, a quarter of the senior executives interviewed talked about plans to freeze

The Ernst and Young survey (January, 2009 ) established that senior executives in the oil and gas pessimistic about the prospects of rapid economic recovery, with nearly 70% of respondents expect covery begin sometime in 2010. Over two-thirds of respondents predicted modest to substantial eco tion over the next 12 months .

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When asked our participants had seen2009 any(6)) green shootsthat ofsenior recovery, the response ‘We are not makingwe people redundant The Ernstwhether and Youngthey survey (January, established executives but we area. using fewer contractors in the oil and gas sector remain pessimistic about the prospects of rapid economic 31% of our participants said that they saw green shoots and signs that the economy was begin than before. We are still recruiting recovery, with nearly 70% of respondents expecting to see recovery begin These respondents believed that Over the worst of the recessionpredicted was over. graduates bound.

– not as vigorously as in sometime in 2010. two-thirds of respondents modest to substantial previous years but we are bringing in economic contraction over the next 12 months . b. 16% were cautiously optimistic about imminent recovery. new graduates this year and treasuring c. 53% of our participants believed that we are still rmly in the grip of the recession and that th the ones we brought in previously…’

When we asked our participants whether they had seen any green shoots of shoots was delusional. They thought that perhaps, 2010 could herald the beginning of an upturn. recovery, the response was varied: In contrast with some other sectors, a. 31% of our participants said that they saw green shoots and signs that the a quarter of the senior executives economy was beginning to rebound. These respondents believed that the worst of Ittalked was about observed the combination of those that saw green shoots sprouting (31%) with the cau interviewed plans tothat freeze the recession was over. salaries and as their way ticbonuses (16%), gave usofa fairlyb.even distribution 47% about of participants who were optimistic or cautiou 16% were cautiously of optimistic imminent recovery. reducing the high costs of people. and 53% of participants who were about green shoots, shown chart below. Thes c. 53% of oursceptical participants believed that we are stillas firmly in the in gripthe of the recession and who that the idea been of green shoots waslittle delusional.

Theyby thought that very closely the distribution of those have relatively affected the recession as opp C. Risk Management perhaps, 2010 could herald the beginning of an upturn. who have changes been badly In light of the dramatic that affected. had occurred in the last 2 years, it was hypothesised that risk management Optimistic and might have become more important Sceptical to companies. However, our data cautiously optimistic revealed that 78% of interviewees said that their risk management processes remained very much 31% 16% 53% on the same level of importance as in the past; risk assessment is a process that was embedded in the everyday management regime of most companies associated with the oil and gas industry.

Only 22% of our interviewees believed itare delusional or the sceptical are overly fatalistic remains to be seen. Howev Whether the optimists It was observed that the combination of those that saw green shoots sprouting had increased in focus and importance. with the cautiously (16%), gave where us a fairlythey even would distribution of 47% ity of our interviewees are(31%) actively planning foroptimistic a future upturn relish the opportu of participants who were optimistic or cautiously optimistic and 53% of participants Most companies were extremely ity growth.

Indeed the optimists notabout just green anticipating upturn, but above. also making who werewere sceptical shoots, asthe shown in the chart These concrete pla vigilant about any risks related to their figures matchof very closely thewhen distribution those who have relatively placed to take maximum advantage recovery their ofcon dence wasbeen proven welllittle founded. W cash exposure. affected by the recession as opposed to those who have been badly affected.

many of our participants are thinking of and planning strategically for the upturn.

3. The way ahead - green shoots

Whether the optimists are delusional or the sceptical are overly fatalistic remains Some participants were highly sceptical to be seen. However, the majority of our interviewees are actively planning for a about the prospect of a recovery in the future upturn where they would relish the opportunity for activity growth. Indeed near future and regarded the belief the optimists were not just anticipating the upturn, but also making concrete plans 6 and Young (2009) Available in the existence Ernst of green shoots as Opportunities to in beadversity. best placed toat: take maximum advantage of recovery when their confidence [http://www. c.org.rs/admin/article/download/ les/EY%20-%20Opportunities%20in%20Adversity_Feb16.pdf?id=92] Retrieved June, 2009 delusional. However, this research was proven well founded. Without doubt, many of our participants are22nd thinking of also found a considerable group who and planning strategically for the upturn. expressed optimism about the budding of these proverbial green shoots.

Conclusion Many participants were thinking of and planning for the upturn. On a strategy for the upturn, one of our participants explained, ‘Like all economic cycles there will be an upturn at some point. I am now getting my companies to start to look outwardly at the opportunities that are out there and getting ready for them to present themselves in the future and how we capitalise on these …’

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That there were two such distinct, indeed dichotomous, groups amongst respondents – the tough ones and the vulnerable, the optimists and the sceptical – is an interesting finding in itself. The natural question to pose, therefore, is why some are proving more resilient than others. All companies are coping with the same recessionary challenges; most of these companies are not at the top of the food chain; they are all equally open to the vagaries of the oil price; they have survived boom and bust in the past. Some have reflected critically on internal management issues and achieved a greater focus; some are steering a measured course, while others are shifting flexibly to accommodate change in the external environment.

Some recognise that they have been fortunately placed, in terms of contracts or their financial base but it is not entirely fortuitous that they find themselves in this position in the first place. Sound management practices were cited again and again as

influential. A clear sense of their value to customers seemed to be profoundly felt by those performing well. Certainly the capacity to recognise opportunity in the face of threat must be significant. Again the vulnerable group were precisely that – more vulnerable to external factors, more open to critical injury as a result, less able to ignore or avoid the dangers.

These findings would also suggest that the oil and gas sector, despite or even as a result of its historic volatility has found itself able to survive the current recession and that leaders in the sector were dealing with, and even in some cases relishing, the turbulence. They were certainly aware of the benefits of a downturn to the long term future of the industry, to an extent that might not be replicated elsewhere, even when it had not operated to the direct benefit of their own company. The leaders who participated in this research could take the longer view, recognised the need for evolving business models and demonstrated a willingness to adapt to changing circumstances.

This research, on the whole, noted a tone of determined buoyancy and sassy chutzpah in their responses.

As Brian Nixon, Director of Energy, Scottish Enterprise, recently said, on an optimistic note, ‘… many of the initiatives we take for granted were borne out of previous hard times. We know it can happen again. This particular blip is not the first - and the oil and gas industry can respond again.’ 7

Inevitably, a new cycle will begin again …

‘It’s a force as powerful as the tide, but we know how that works. This year’s profit implosion isn’t any more durable than the profit bubble of two years ago. Earnings move in big cycles and they are destined to recover as the labour costs fall … and the consumer is coaxed back into anything like normal spending… Profits have a way of soaring out of steep slumps. And this one is as steep as they get.’ 8 (Larry Shine, 2009)

This research raises a fundamental question as to why some companies are more resilient and optimistic in the face of similar environmental and economic challenges; whether it be fate or skill or cultural attributes or indeed a mix of all three remains to be proven.

The research also poses the question about the necessity of periodic recession in order to rebalance market forces and prepare the economy for longer term recovery. Some of the companies participating in our research are shouldering the burden of that rebalancing, through contracting margins and are doing so in the main in a spirit of calm leadership.

References 1 Ernst and Young (2009) Opportunities in adversity. Available at: [http://www.fi c.org. rs/admin/article/download/files/EY%20-%20 Opportunities%20in%20Adversity_Feb16. pdf?id=92] Retrieved 22nd June, 2009 2 Bain & Company (2009) Energy Industry Outlook, Available at: [http:// www.bain.com/bainweb/LocalOffices/ office_publications.asp?menuinit=1&office_ id=120&language=1&menu_ id=127&page=5] Retrieved 15th April, 2009 3 Anderson, A.R., Russell, E.O, and Illingworth. L., 2010, Rural small businesses in turbulent times; impacts of the economic downturn, International Journal of Entrepreneurship and Innovation, forthcoming 4 Keynes, John Maynard (31/12/1933) An open letter to President Roosevelt: From Keynes to Roosevelt: Our Recovery Plan Assayed, New York Times.

5 Hayward, T. (28/7/2009) as quoted in BP Review of Energy, 2009: Available at: [http://www.bp.com/productlanding.do? categoryId=6929&contentId=7044622] Retrieved 2nd August, 2009 6 Ernst and Young (2009) Opportunities in adversity. Available at: [http://www.fic.org. rs/admin/article/download/files/EY%20-%20 Opportunities%20in%20Adversity_Feb16. pdf?id=92] Retrieved 22nd June, 2009 7 Nixon, Brian (2009) Aberdeen Breakfast Briefing - Energy Trends in Turbulent Times available at: [http://www.ukooa. co.uk/new/events/eventDetail.cfm?frm EventID=326&frmEventTitle=Aberde en%20Breakfast%20Briefing%20-%20 Energy%20Trends%20in%20Turbulent%20 Times&frmArchivedEvent=1] Retrieved 27th July, 2009.

8 Shine, L. (May, 2009) The upside of the downturn. Fortune Magazine.

So, what’s next?

The Ernst and Young (2009) survey notes, ‘… this is not the first recession — and the business world has experienced serious downturns before.’

Indeed, the global recession of 20089, now considered the worst in 60 years, has highlighted the inevitability of economic cycles. The same goes for the incredible highs and lows experienced by the oil market, the cycles of which are not necessarily replicated in the economy as a whole.

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PRACTICE OF ENTREPRENEURSHIP

PROFILE OF STEWART SPENCE OF THE MARCLIFFE HOTEL & SPA

After a year working at the Great Northern Hotel in Kings Cross, London, Stewart was lured back to his home city by an offer to become Assistant Manager at the Treetops Hotel. The next stage of his career involved an exciting opportunity for a young hotelier to develop The Commodore as a brand new hotel in Stonehaven in May 1970.

In 1972, the opportunity arose to work overseas again, in Bermuda. However the prospect of owning his own hotel here in Aberdeen persuaded Stewart to remain and soon afterwards, with the help of his father-in-law and

Stewart’s interest in the hotel industry began when as a 12 year old he would holiday with his family in Ballater at the Invercauld Arms Hotel, considered at that time to be the number one hotel on Deeside. As the hotel was owned by members of his extended family he was fortunate enough to work in the hotel and his passion for the hospitality industry was born.

Educated at Robert Gordon’s School he left at age 15 to work as a trainee chef at the Station Hotel in Aberdeen, which at the time was owned by British Rail, as were many of the first class hotels in the country at that time.

After 3 years Stewart moved on to the British Rail Management Programme which offered opportunities to work abroad on the company’s Exchange Scheme. By 18 Stewart was now working at Fouquet’s, one of the top restaurants in Paris on the corner of Avenue George V and the Champs Elysees. Its clientele included film stars and the elite of the world and Paris where he stayed for 2 years.

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local entrepreneur, Dick Donald, he purchased the Atholl Hotel.

A string of successes followed, including the Queens Hotel in 1973, the original Marcliffe in 1979, The Belvedere (now Simpsons) and Invery House in Banchory. Stewart considers the move to Banchory to be pivotal, enabling him to take his business skills to the next level by accessing the country house market. In 1983 he converted the Queens Hotel in Aberdeen to The New Marcliffe.

Stewart had huge success at the Treetops Hotel back in the 1960’s as

remain loyal to the area and everyone gains. He has recently been involved in establishing the North East Food Trail which provides visitors to the region with a food trail of recommended places to eat.

As with most businesses the recession has had an impact. However, diversity in the offering has meant that the business has been more resilient than many and has only seen a very modest dip in turnover. Lessons have been learnt from the last major economic downturn in the 1980s when a number of hoteliers had focussed on visitors from the oil industry rather than on leisure tourists and, when numbers of the former dipped, they had little on which to fall back.

Plans to achieve 5 star status for the hotel will be the focus for the future when the timing is right but for now The Marcliffe has an enviable reputation as a premier golf hotel in the region which is highly valued by customers. In fact, Stewart has been supportive of a number of golf developments around the region and, although some of these are on hold due to the current climate, he is hopeful that they will progress when the economy recovers.

Stewart also believes that membership of associations such as the Small Luxury Hotels of the World and Connoisseurs of Scotland provides an invaluable network of connections.

the premier hospitality destination in the region and he has throughout his career striven to emulate this recognition of quality in his own hotels. In fact, he considers his greatest achievement to be the fact that the Marcliffe restaurant has been fully booked every Saturday night for all of its 16 years since opening in November 1993.

The Marcliffe Hotel & Spa has won the AA hotel of the year award for Scotland and consistently receives the best rating in the Michelin guide locally in the North East. Although not personally driven by awards, Stewart

believes these are very rewarding for his staff.

Ultimately, for Stewart, the most important criterion of success is a returning customer. He has always sought feedback from clients and 90% of new visitors to the Marcliffe are as a result of a recommendation from a friend or colleague.

Stewart feels that one of the key elements of a successful business is to have a first rate website with many links to other local businesses.

Working together as colleagues rather than competitors means that clients

Already heavily involved in and committed to enhancement of the local community, Stewart is currently on the Board of the Aberdeen City and Shire Economic Forum [ ACSEF ] and his ambition is to see the area raise its standards and restore pride in the city through developing a cafĂŠ and leisure culture such as might be found in many European cities.

He is supportive of plans for an ACSEF Youth Future Forum in 2010 which will seek the views of younger people about their aspirations for the City and Shire over the next 30 years.

An accomplished businessman, he believes one of the most important skills of a successful and effective entrepreneur is employing the right people. “I treat all my staff as family and know them all by name, chef or dishwasher, as without the great people who have worked with me none of my success would have been possible.�

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THE PRACTICE OF ENTREPRENEURSHIP

THE TALE OF AVC Lynsey Shepherd, Account Executive.

AVC Media Enterprises

AVC – The Humble Beginnings Thirty-three years ago, Keith Main embarked on a unique drive and vision for the future. Keen on making a difference within the entertainment industry from the outset, he launched a business from scratch, supplying mobile discos and video recorders to the offshore industry.

He soon realised that his vision for communications, coupled with a unique niche market opportunity, presented him with the chance to offer a service which surpassed anything else available in the north east of Scotland. He thus set about initiating and developing the company. After moving into the supply of blockbuster movies offshore

AVC’s headquarters in Altens, Aberdeen

With the digital age having well and truly arrived, technologies, cultures, economies and demographics

Directors of AVC Creative: Stewart Buchanan and Simone Barnett, and Director of AVC Media Enterprises, Spencer Buchan.

in the early 80s, Keith was quick to complete a deal with Sky which gave AVC the rights as the main contractual supplier of Sky’s digital entertainment products to the whole of the North Sea oil industry. This significant contract covered every moving vessel and every rig in the region, and was essentially the substantial key element in the development of AVC.

have evolved and in turn have challenged the ways of traditional communications. By acting proactively in response to these industry shifts, AVC has adapted from offering predominant and traditionally print-based material to alternative electronic marketing solutions.

Keith has since led the company through phenomenal growth, remaining the visionary behind the company that has evolved to its present day status as AVC Media Enterprises. It is now a focal centre of audiovisual sales and technical services, audiovisual hire, media productions, sports productions, film and satellite services, advertising, PR, IT, graphics and a multi-million pound Business and Training Centre.

AVC has grown into a fully integrated media and communications agency that supplies marketing and communications solutions to clients around the globe.

The impact of such change has been staggering, with the inclination by AVC’s clients to utilise digital marketing techniques significantly increasing. AVC has found that its ability to streamline communication digitally can be advantageous due to the ability to utilise numerous techniques at the same time. By incorporating techniques such as e-mail marketing, e-commerce, web design, mobile marketing, online public relations, social networking, blogging, web streaming, viral marketing and Search Engine Optimisation (SEO), clients are receiving modern, targeted communications campaigns for the local, national and international arenas. The rise and growing importance of Digital Marketing has signalled a completely new way of communicating, opening up new ways of reaching a target audience instantly and cost effectively, essentially changing the way in which the marketing profession operates.

The New Chapter – AVC Creative and the Digital World In recent years, AVC has continued to develop its service range with the introduction of its marketing communications arm, AVC Creative. With an enthusiastic team, led

by Director, Spencer Buchan, AVC has begun a new chapter with a focus driven by an innovative approach to marketing communications By encompassing research, brand strategy and development, public relations, advertising, graphic design, media productions and digital solutions, the team works

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closely together to develop integrated campaigns and solutions for clients across the full spectrum of marketing disciplines; quite unique in the north east of Scotland.

The team has been quick to realise the realities of changing trends, adapting and developing new and forward thinking solutions in response to the challenges their clients are facing in the current climate.

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A recent Business-to-Business Marketing Agency Survey found that of all the services offered by agencies, ‘web design/digital marketing’ led the way and was most in demand from clients. Many of AVC’s recent projects have mimicked this trend with clients increasingly opting for interactive brochures, e-communications and investments in their SEO strategies.

AVC acknowledges that client investment in digital marketing has to be converted into sales leads and ultimately profit. The surrounding hype means that this format will be under closer scrutiny and pressure to deliver results. With this in mind, AVC provide clients with reports detailing the effectiveness of digital campaigns, allowing an instant insight into the interests and potential areas of business for each unique visitor/recipient. This equips companies with a slightly ‘warmer’, more informed client approach for developing business opportunities. This is especially useful in this difficult ongoing financial climate, where fine details can set a company apart from the competition. Understanding client requirements could be the difference between success and failure.

Creation of Sector Identity Every company has its own identity and within every sector comes a variety of different organisations, with varying strengths, objectives and requirements.

In order to devise a communications plan for each company, AVC ensures it gains knowledge of its clients’ nature and needs; rolling out the same or a very similar model for each company just would not work.

The team works across an array of industry sectors, boasting a portfolio which incorporates education, oil and gas, food and drink, motors, professional services, retail, public, government, local authorities and voluntary organisations. By earning a credible reputation for the ability to create pioneering campaigns, AVC continues to welcome new clients to further develop its experience and to breed knowledge and diversity in its team.

Stewart Buchanan, Creative Director for AVC Media Enterprises, explains the need for a greater understanding of the digital market: “Industry research has shown that many marketers are not overly confident that agencies are well positioned to take their brand into the world of digital marketing.

Much of it is relatively uncharted waters, especially in terms of things like interactive advertising, and they need to trust the knowledge and ability of an agency before handing over some of their valuable budget.

AVC believes that by taking steps to research and develop new techniques within the digital space, it will act to our advantage well into the future.”

“The industry has evolved when it comes to attracting consumers to your brand and the predominance of social media, such as Twitter and Facebook is becoming everpresent. These online communities are beginning to act as ‘pull’ strategies within a communication campaign, generating initial brand interest before being introduced to fresh, slick websites with interactive features.

“It is very much a ‘practice what you preach’ ethos here at AVC. We understand that our clients would not be overly keen to adopt these strategies if it hasn’t already been proven a success.

This is why AVC has heavily invested in technology, new tools and search engine optimisation for its recently launched website, has a presence on Facebook and adopts a relationship marketing practice of utilising e-marketing as a method of communicating with its customer base; with great results. We have also had a succession of highly successful client digital marketing projects, incorporating various techniques to raise brand profiles across the relevant market. By combining digital marketing techniques with interactive features such as 3D animation, with online advertising and PR, it is proving to be the way forward for both our clients and us, as an agency. The digital age is here to stay, and by embracing this, I am confident we are in a position to produce the most future-proof results for our clients.”

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MULTINATIONAL MIRROR

ENTREPRENEURSHIP IN A MULTINATIONAL COMPANY - THE BP EXPERIENCE Bernard Looney, Managing Director. BP North Sea

BP’s Foinaven Field was the first to be developed west of Shetland

Introduction I had the pleasure of speaking at the 2009 Robert Gordon University Entrepreneurship Lecture and discussing whether a company as large as BP can really claim to have an entrepreneurial spirit at the heart of our organisation.

I believe that entrepreneurship has been part of BP’s business philosophy since it came into existence some 100 years ago with the founding of the Anglo-Persian Oil Company in 1909. Indeed this has sustained BP’s position as one of the leading businesses in the North Sea for over 40 years now and will help it retain this status for decades to come, long after I have retired.

It is of course not the only factor examined in this article. I will discuss some of the other elements which have contributed to this story, particularly our North Sea business headquartered in Aberdeen.

Entrepreneurship Most definitions of entrepreneurship will usually include some combination of description such as “vision”, “innovation” and “risk taking”, leading to wealth creation or added value.

I was privileged to spend a year at the Graduate

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HIVE - Highly Immersive Visualisation Environment

School of Business at Stanford University in 2005, discussing enterprise and meeting many of the entrepreneurs immersed in the Silicon Valley story.

The area is sometimes described as “the largest legal creation of wealth in the history of the planet”!

Much of Stanford’s agenda is focused on entrepreneurship and that agenda has spawned numerous success stories over the years, including the creation of Yahoo, Google, Hewlett-Packard and Sun Microsystems . Sun originally stood for Stanford University Network.

One of the classes I took was “Entrepreneurship and Venture Capital” which was taught by Eric Schmidt, the Chief Executive Officer of Google. I learned much about the creation of business, the generation of employment and wealth, and about the requirements and skills needed to become a great entrepreneur.

I learned that being an entrepreneur or an innovator is not necessarily just about taking new risks; it can often be more about the capability to manage existing risks. It is not just about creativity and vision; it is also about discipline, persistence and a bias for action.

If you look at the evolution in Aberdeen of successful entrepreneurs like Sir Ian Wood, you will certainly see imagination, innovation and boldness.

However you will also see a determination to succeed, to act decisively, to do the right thing and to return value to the people and communities who made their success possible. Sticking to these principles is often the secret of great organisations and great leaders.

Entrepreneurship and BP What does an entrepreneurial spirit mean for The Magnus Platform, east of Shetland

distillation of coal and shale in West Lothian in 1851. This enterprise became Young’s Paraffin Light and Mineral Oil Company and was acquired by the Anglo Persian Oil Company in 1919. The company name is still registered today within BP. It is a little known fact that Scotland was actually the largest producer of crude oil and its refined products in the mid 19th century.

It is a better known fact that BP was the first to explore for, and discover, oil in the Middle East.

The company also led the development of the oil

BP’s new North Sea HQ in Aberdeen

today’s energy sector in general and for BP and my role as the leader of our North Sea business here in Aberdeen in particular ?

2009 is BP’s centenary year and in many ways an entrepreneurial spirit has marked BP out above all else over the past 100 years in the form of a pioneering spirit which still characterises the company today.

The Anglo-Persian Oil Company (APOC) was formed in 1909. It played a pioneering role in Iran, leading to the opening up of the Middle East as a major oil producing region. The subsequent interplay of events on the international stage in the 20th century led to the evolution of APOC into BP. However, it is possible to trace the roots of BP even further back than 100 years and much closer to home than Iran. I am referring to the start of the shale oil industry in Scotland in the 1850s and the development of oil refining which is a real story of innovation and persistence.

The pioneer in this case was James Young or Paraffin Young as he came to be known – the world’s first oilman. He set up the world’s first commercial plant to produce paraffin by the

industry in Alaska and the North Sea and was one of the first to move into deepwater exploration.

Being a pioneer means by definition working at the frontier. Physical frontiers encompass deep water drilling in extreme weather conditions and the nature of the resources being developed, such as more challenging and complex reservoirs, heavy ABERDEEN BUSINESS JOURNAL

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there have certainly been challenges. However, the calculated risk has paid off and has turned out to be one of the best investments BP has ever made, not only for the value and potential of the resource base, but also in terms of learning to operate and cooperate in new kinds of partnership.

The first oil strike by the Anglo Persian Oil Company at Masjid-i-Suleiman Willaim Knox D’Arcy, the founder of the Anglo Persian Oil Company

We are also now the first major oil company to return to Iraq in a big way in partnership with the China National Petroleum Corporation. If we are to continue pushing the frontiers of our business and accessing the resources of tomorrow, the traditional operating model of the international oil companies will need to evolve and be flexible to the needs of the partnerships of tomorrow.

Therefore I think it is fair to claim that entrepreneurship is an integral part of BP’s business philosophy.

Entrepreneurship in BP’s North Sea Business In our North Sea business, we have many examples of technological and commercial creativity in the 40 plus years of our involvement here. One in particular is a great example of lateral thinking, solving two apparently unconnected challenges for BP some 200 miles apart.

BP opened up the west of Shetland area with its Foinaven and Schiehallion fields in the mid 1990s.

This was despite the opposition of Greenpeace and others to any new oil exploration in the Atlantic frontier area and the physical challenge of developing oil in much deeper water than BP had experienced up to that point in the North Sea. The result was combined production of over 200,000 barrels a day at peak and the first infrastructure for the industry west of Shetland which is making further development there more feasible today.

However, in the early years we were injecting or flaring the produced gas as we had no means of exporting it. There was not a market nearby that would justify investment in any new gas infrastructure.

oil and non conventional gas. There are also commercial and knowledge frontiers where it is necessary to find new ways of working and collaborating to create events which would not otherwise be possible.

In recent times, BP has led the wave of consolidation in the global upstream industry with the mergers and acquisitions of the1990s. In the early part of this decade, we became the biggest private investor in Russia with our TNK joint venture.

Many “experts” thought this was a risk too far for BP and

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At the same time, one of our mature fields east of Shetland had become deficient in the gas which it needed for re-injecting into the reservoir to maintain pressure and sustain oil production. The Magnus field started production in 1983 and is one of the North Sea’s biggest fields.

The solution was to build a pipeline to bring the unused gas from the west of Shetland fields to Magnus. We had never before built a pipeline of this scale, specifically to take gas produced from one field to another for re-injection and we believe this was also an industry first for the North Sea. This created real value for the west of Shetland gas and

provided Magnus with the enhanced oil recovery mechanism needed to boost oil production. We estimate this will ultimately add 50 million barrels to the reserves of Magnus and extend the field life by up to 15 years.

Around the same time, BP invested in building a different type of infrastructure, consisting of a high bandwidth fibre optic network reaching out to our North Sea fields. This not only enables the sharing of vast quantities of data but has also created a completely new way of collaborative working between our offshore and onshore teams.

BP’s new North Sea headquarters in Aberdeen has dedicated ACEs (Advanced Collaborative Environment) for each of its offshore fields. This technology infrastructure has now spawned a new business providing a service for third parties in the UK and Norway.

One final example of commercial innovation is the ETAP multi field/multi owner project in the central North Sea in the mid 90s. This was a development that nobody really believed could happen. It was a cluster of fairly small fields, with different owners and varied technical challenges. No single field was viable as a stand alone development. However, we did not give up and in fact we were eventually able to adopt a different stance and suggested the creation of a single “synthetic field” resulting in a $3 billion development delivering 270,000 barrels a day of oil and gas at peak.

The BP story is one of a pioneering spirit and that of a prime mover establishing and shaping the company and industry. Yet it has taken more than that to maintain BP in business as a successful enterprise for the past 100 years.

Beyond Entrepreneurship I believe that an entrepreneurial spirit on its own is not enough to make an organisation great.

Characteristics such as responsibility, persistence and discipline are as important as innovation, risk taking and creativity. Putting all of these together creates the “jigsaw for success.”

With success on the scale that BP has achieved comes a responsibility to be more than a pioneer not just in the oil and gas sector and for our own self interest but far beyond that. The challenges facing the world and the upstream industry today are immense. Recovery from economic turmoil, dealing with climate change and facing up to energy security issues are just a few.

I believe BP has a role to play in each of these.

We need to be innovative and entrepreneurial; to view issues differently; and to find new ways of solving problems.

This is the challenge I am most aware of every day in my role as leader of BP’s North Sea business. How can creativity and innovation be unleashed while ensuring rigour and discipline?

In my role, I can only define the purpose of the organisation. I then need to step back and allow the talented people in BP to be given the space to be creative and to perform as they know best how to undertake and complete the required tasks. I have to trust that they will innovate and that they will deliver and I am rarely disappointed!

I also have a responsibility to set boundaries. There are obviously areas where creativity and risk taking are not appropriate. The standards set for staff health and safety and for maintaining the integrity of our plant and protecting the environment are clearly not open to interpretation.

BP’s North Sea enterprise is really about a combination of space and encouragement to be innovative allied to discipline and responsibility.

All of these qualities and more are needed if we are to be successful in the next phase of the North Sea story where there are significant challenges to test our ingenuity.

North Sea Challenges The UK Government’s analysis of oil production for 2008 showed that there is now only one UK field with production greater than 100,000 barrels a day and only three with production over 50,000 barrels a day. In fact the average UKCS field produces just 8,000 barrels a day of oil. At peak in the mid 1970’s, the Forties field alone was producing 500,000 barrels a day. Our fields and developments are becoming smaller.

Compare that to our own Thunder Horse field in the Gulf of Mexico. This single development produces around 300,000 barrels a day and represents the competition that the North Sea faces.

At the same time, costs have risen significantly. Within BP between 2004 and 2008, there was a 50% increase in overall North Sea operating costs.

With declining production, this means that the cost of producing one barrel of oil more than doubled in that period.

The oil price has been higher in 2009 but gas prices are still relatively low and almost 50% of UKCS production is gas. Whether the price of oil is $70 or $140 per barrel we must ensure that the North Sea stays competitive and continues to attract investment into the basin. We have increasingly small fields, high costs, complex taxation and global competition. We simply cannot rely on price to bail us out.

I am an optimist and I believe BP and the North Sea industry will come through these current challenges and will be even stronger than before. We will achieve this by being bold and entrepreneurial but we will also be successful by being disciplined and persistent.

It is the way in which we have always managed our business globally and it has been BP’s “jigsaw for success” here in the North Sea. ABERDEEN BUSINESS JOURNAL

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E – BUSINESS

INTERNET RETAIL: THE DEVELOPMENT, GROWTH AND FUTURE OF ONLINE SHOPPING Dr Neil Connon, Lecturer in Retail Studies, Aberdeen Business School

Introduction As a practitioner, academic and general observer of the development of the internet I have been fortunate to have been involved with the internet from its commercial beginnings. Internet retail has been much vaunted in recent times as spelling the death knell of the high street as we know it. The ability to shop from home without the problems of transportation and crowds is certainly attractive but will it call time on the high street? Current figures suggest that a mere 5% of shopping is undertaken online with the rest (other than home catalogue) coming from the high street, so judging by these figures there may be a long way to go before the internet takes over – or is there?

Many have attempted to take the glory for the invention of the internet.

Despite the legitimacy of some of these it is perhaps the UK’s Tim Berners Lee who can best lay claim to transforming in 1989 the internet from an academic curiosity into today’s communication 32

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and business powerhouse. The internet as a commercial entity has existed since the mid 1990s and as such has now reached a degree of maturity. That said, it is still a highly dynamic and exciting business environment that, just when you feel you understand its structure and boundaries, heads off in another previously unseen direction. I have been involved with the internet since its commercial beginnings in the early 1990s; the development has been fascinating to watch and still has the ability to surprise.

This article aims to provide an overview of the changing face of the internet, looking at its development, growth and structure and trying to identify the pattern of its future. It will also address the input of academics in attempting to better understand the phenomenon and how it can be best harnessed for business purposes. To assist with this, some academic theories will be presented at the end of the article which

capital value on a monthly basis. This modern day gold rush peaked in March of 2000 followed by an unprecedented market crash with the falls being particularly acute amongst technology shares.

have been developed to measure the changes that have occurred and help predict its future impact.

Birth The exact origin of internet retail is somewhat unclear, although few would argue that the most successful early model, and still performing well today, was Amazon. Jeff Bezos thought books would be the ideal product to sell online and set up his company in Seattle near the main US book depositories, starting commercially in 1995. Despite being touted as an online company, to begin with very little selling was actually undertaken online other than the initial customer interface. That said, Bezos was able to develop the site using the comments and opinions of his customers. This idea of word of mouth online (consistently the most powerful marketing tool available to any business), took off. Many other companies worldwide such as Webvan were developed, were heavily capitalised and then went bankrupt

in the aftermath of the stock market collapse of 2000.

This may have deterred investors from investing in internet based firms but managers of existing companies found some breathing space and were able to pursue e-business opportunities. It was therefore at the start of the 20th century, in a period described as the ‘digital decade’ by Bill Gates, that the larger retail companies looked to capitalise

During the latter part of the 1990s equity share prices rose dramatically on the assumption that every industry and business function could be improved by using the internet. This led to a swelling of the number of worldwide entrepreneurs looking to exploit the new phenomenon.

This sharply increased the level of advancement in the use of the internet and allowed for a rapidly developing technology industry and the emergence of many new organisations based on the use of technology. The market capitalisations of newly established companies grew at incredible rates and speculators in some cases doubled their ABERDEEN BUSINESS JOURNAL

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www.spotify.com

www.asos.com

on the abilities of the internet. The internet represented a new channel for retail to be added to the existing channels of the high street shop and the home catalogue.

Many important changes have occurred since the turn of the century. Firstly, the level of internet uptake has increased dramatically reaching a point where some 70% of the UK population have access. The development the internet as a serious shopping channel was, not surprisingly, crucial. The second factor was the adoption of broadband which beginning in its current form in the middle of the decade has now spread to the majority of internet users in the UK. Despite the fact that broadband speeds are currently a point of some contention, download times have significantly improved.

A less measurable but equally important factor has been a change in the shopping habits of the consumer. We are now mainly happy to purchase online and do so with increasing frequency. It is this trend that is perhaps the most crucial in the development of online retail.

Other markets linked to retail have seen wholesale change that has permanently altered the prevailing business structure. The existing music business has experienced mass change having to cope with person to person MP3 file sharing where music becomes more or less free (Kazaa).

In addition, new start ups are stealing market share through MP3 sales (Napster) and existing powerful companies such as Apple are converging into their market space with both hardware (iPod) and software (iTunes) applications. The various stakeholders in this industry have had very different experiences. The high street retailers such as Zavvi and HMV have been perhaps worst affected with the former going out of business at the end of 2008. A generation has grown up believing it to be their inalienable right to listen to the music of their choice for free. Despite this, the particular industry has not ground to a halt and indeed shows growth in many areas.

Companies representing new business models such as Spotify have aimed to provide music for free accompanied with advertising, allowing the customer a guilt free listening experience.

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Current There are currently some 1.5 billion people online and half of these are making online purchases.

Also 600 million will have mobile internet access which is twice as many as 2006 (The Economist, The World in 2009). Following an unprecedented boom in nearly all aspects of retail since the early/mid 2000s, the ‘credit crunch’ has now taken its toll with severe repercussions across the industry. The British Retail Consortium (BRC) has predicted that about 15% of High Street shops will be closed by the end of 2009 (BBC, 2009).

Despite these harsh economic conditions one of the few areas of retail that continues to show growth is that of online sales (figures). Traditional companies struggling in other aspects of their business are still noting increases in online retail.

As the economy emerges from the credit crunch the online part of retail will have taken a further big step forward in relation to the other two channels.

The boundaries of online retail have expanded dramatically since the early days of Amazon and the product types have similarly grown leading to the birth and rapid growth of some new players.

One such success story is that of ASOS (as seen on screen) which has experienced spectacular success over the last three years. The area of online apparel shopping was increasing but it required the injection of a new player, ASOS, to take it to the next level. In 2009 the company reported a 93% increase in pre-tax profits to ÂŁ14.1 million in the 12 months to 31 March with sales revenue doubled.

Despite these case studies it has been the traditional companies which still dominate and continue to develop and expand market share in the online environment. Many of those which appeared to lose their way before the stock market crash of 2000 have been able to transform their company from traditional high street to fully fledged e-businesses. Marks and Spencer have noted increases of 34% in their online sales (October, 2008) despite falls in the other major domestic areas of their business.

Future The trends suggest an increasing importance of online retailing both to traditional companies and to those which started their business on the internet. The percentage of online versus non online sales is moving decidedly in the direction of the former. That said online sales in general still only represent about 5% of overall retail sales.

The vexed question as to where the split between online and store sales will eventually level out is impossible to answer and will take years or even decades to be realised.

From the point of future applications, many important technologies that may lead to substantial changes in online retail are already here. Mobile internet (3G) technology allows the retailer to access their customers no matter where they are located and at all times of the day. With the introduction of the iPhone the fast growing apps market has developed rapidly and has reinvigorated the mobile internet market. Unlike internet technology that was adopted most rapidly in the US, mobile technology uptake has tended to develop most quickly in the Far East. In Japan over 25% of online surfing is undertaken on mobile devices. With these changes it is likely to be the practitioners who can best apply themselves to this new technology and gain market share, so ultimately proving successful. One way in which practitioners can better develop online is by looking at the efforts of the academic community to make sense of internet development.

Academic As an academic it is my role and that of my students to take a structured approach towards the analysis of the internet and its impact on retail. That said the academic world has struggled to keep up with the rate of change of internet retail. The academic process is required to be robust and as such research work takes time to be developed to ensure a level of quality.

Various renowned pre-internet frameworks have however been successfully applied and new examples created to provide ways and means of measurement in the area of online retail. Three examples are outlined below:

Technology Acceptance: The work of Fred Davis (1989) has developed previous social psychology models of social behaviour and applied it to the adoption of technology. This work has assisted in developing the knowledge of managers by providing the main factors that are likely to lead to an individual adopting a technology - or not. For example, when the iPod was introduced, personal MP3 players had been on the market for three to four years. This suggestion here is that, by examing these models, it would be clearer to the manufacturer and retailer if the product would sell well or not. There are quite a few variations of this work. One by Venkatesh et al. (2003) is the Unified Theory of Acceptance and Use of Technology (UTAUT) which identifies that age, gender and experience may have an impact on the decision by an individual to adopt a technology or not. These antecedents may impact on the major factors which may lead to, or hinder, adoption. These are: Performance expectancy: This relates to the benefit which the potential user of a technology may derive from its use. For example, does the user feel they will be able to undertake a task more efficiently and/or quicker? If they feel this is the case and are motivated then they are more likely to accept this technology if it is available.

Effort expectancy: This relates to the extent of the effort which a potential user perceives they will require to apply to learning a new technology. If they feel little effort is required they may not be too concerned about the learning process diverting them away from other uses of their time and will therefore be motivated to learn how to use the new technology. If, however, they feel considerable effort is required, they are likely to have a less positive attitude towards adoption.

Social influence: Each individual tends to have people of influence in their lives, be they friends, colleagues, managers and/or subordinates. Their views on adoption of a particular technology are likely to influence an individual’s reaction to it. If these influential people are involved and enthusiastic about the use of a particular new technology, it is likely this will have an impact on an individual’s behaviour and ultimate decision.

Facilitating conditions: this relates to the support and knowledge networks available that may have a positive impact on your decision to adopt.

The model (see below) can be used to look at varying different situations including the use of mobile telephones and MP3 adoption of new online (paying) services such as Spotify.com. As such it can provide the practitioner with insight and guidance on the main areas to examine.

Diffusion: Everett Rogers’ work is well known in the context of marketing.

U.T.A.U.T. - 2003

Performance Performance Expectancy Expectancy Effort Effort Expectancy Expectancy

Behavioural Behavioural Intention Intention

Use Use Behaviour Behaviour

Social Social Influence Influence Facilitating Facilitating Conditions Conditions

Gender Gender

Age Age

Venkatesh et al. 2003

Experience Experience

Voluntariness Voluntariness of of use use

Copyright © 2003 Regents of the University of Minnesota. Used with permission.

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It can be used to outline a lifecycle approach to products indicating when their usage is rising and when it is declining. It should not be used to attempt to diagnose a particular product or service but it does provide insight to the practitioner looking for clarity on historical development. The concept predates the commercial internet by many years and, in terms of online shopping, it is a useful tool in tracking the uptake of internet shopping, broadband and mobile applications to name but a few.

Servqual: This theory is generally attributed to Zeithaml, Parasuraman and Berry (1988) and espouses that service quality can be divided into the following five constructs: Tangibles - physical facilities, equipment, staff appearance, etc.

Reliability - ability to perform service dependably and accurately Responsiveness - willingness to help and respond to customer need Assurance - ability of staff to inspire confidence and trust Empathy - the extent to which caring individual service is given This has been further developed by various researchers to look at the online shopping

environment. One new variant is called E-S-QUAL and includes the following four dimensions: Efficiency – the site can be used easily and quickly Fulfilment – the site fulfils its promises on delivery and availability System availability – the site functions properly Privacy – the site is secure and protects customer information Structures like this can be used to evaluate service quality online and may be adapted to suit the needs of the particular case.

These theories are just a taste of the diverse ways in which academics and students have chosen to measure the online retail phenomena in an attempt to understand it more clearly and provide insight into its contribution to greater profitability. Some theories can be very complex and others very simple. When faced with a problem, it is the role of the manager to apply the model felt to be the most useful in finding a resolution to the particular problem they are facing and amend it accordingly. The academic approach to this, and any other area of study, provides a clear way of looking at problems and thus makes it easier to achieve resolution.

Conclusion The development of online retail has over the last fifteen years been very significant. It would have been hard to predict that it would move so fast and become such an important retail channel in such a short space of time. Its future is as difficult to predict although current trends would suggest it is still increasing and that this is likely to continue. The ability of

There are currently some 1.5 billion people online and half of these are making online purchases.

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the internet to allow a level playing field for new entrants into many retail markets ensures that entrepreneurial activity is likely to remain at a high level for some time to come as new ideas and concepts are tried out. Similarly the large existing retailers will be looking to the internet as a way of decreasing costs and reaching a wider customer base and generally developing their business.

I have enjoyed watching, studying and working with the developing internet over the years. As for predictions on the future probably the only certainty is that it will be dynamic, move quickly and be unpredictable.

Online shopping is here to stay and is likely to increase but, despite all the changes both technological and cultural it would appear that the end of the high street is not nigh well not yet, anyway.

References ASOS web site home page, www.asos.com [accessed 2.12.09] DAVIS, F.D., 1989. Perceived usefulness, perceived ease of use, and user acceptance of information technology. MIS Quarterly, 13 (3), pp.

319-339 BBC 21 July, 2009 - http://news.bbc.co.uk/1/hi/ business/8160575.stm) Economist, The, 2009, The World in 2009 ROGERS, E., 1995. Diffusion of Innovations, 4th edition. Free Press, New York SPOTIFY web site home page, www.spotify.com [accessed 2.12.09] Venkatesh, Viswanath, Morris, Michael G., Davis, Gordon B., and Davis Fred D., 2003, User Acceptance of Information Technology: toward a unified view, MIS Quarterly, Vol. 27, No. 3, September 2003, pages 425 – 478 Zeithaml, V. A, Parasuraman, A and Berry.L. L, 1988, SERVQUAL: A Multiple-Item Scale for Measuring Customer Perceptions of Service Quality. Journal of Retailing, Spring 1988: 12-40

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LOCAL BUSINESS AND RECESSION SURVIVAL Pete Jones, Lecturer in Accounting, Finance and Economics,Aberdeen Business School

Introduction This edition of Statistical Corner continues the theme introduced in the 2008 contribution by focusing on a key aspect of the financial health of companies based in the city of Aberdeen. Specifically, it addresses the important question: ‘How well placed are local small and medium-sized enterprises (SMEs) to survive the current recession?’ The onset of a significant downturn in economic activity places an even greater emphasis on the effective management of cash flows particularly for SMEs. In order to examine this we analyse recent trends for a sample of Aberdeen-based companies in the main short-term cash flow measures, namely, the operating cycle and the cash cycle and their component indicators. Therefore, before proceeding, we need to define our terms.

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Firstly, the operating cycle is the number of days that elapses between ordering stock and collecting cash from customers. The cash cycle is the length of time between cash leaving the company in the process of paying suppliers and cash being received from customers. The key to survival is managing these time periods, particularly the latter, as effectively as possible. The operating cycle is defined as the average age of stock (AAS) plus the average collection period (ACP) and the cash cycle is estimated by subtracting the average payment period (APP) from the operating cycle. These measures are calculated as follows: AAS = Average Stock x365

Cost of Sales ACP = Average Trade Debtors x365

Turnover AAS = Average Trade Creditors x365

Cost of Sales

Sample Companies For the purposes of this article the HMRC [ Her Majesty’s Revenue and Customs ] definition of an SME (from 1st August 2008) is used, i.e., a company with less than 500 employees and either an annual turnover of less than £100 million or a balance sheet value of less than £86 million. The requisite data were obtained from the FAME database.

The final sample of companies comprises 336 Aberdeenbased SMEs of which 16 per cent are operating in primary sector activities, 19 per cent are engaged in manufacturing and 65 per cent are classified as service companies.

Analysis Figure 1 shows the trends in the average values of the AAS, ACP and the APP for the whole sample over the period 2004 to 2008.

Figure 1

The results for the AAS period indicate general stability with a low of 30 days in 2004 and a high of 36 days in 2007. This is indicative of consistent stock control systems and procedures.

The ACP figures are also relatively stable increasing from 56 days in 2004 to 59 days in 2006 followed by a marginal reduction to 54 days in 2008. Similarly, the results for the APP are also fairly steady with a high of 41 days in 2005 and a low of 38 days in 2008. Overall, these figures imply an average operating cycle (cash cycle) which increases from 86 days (46 days) in 2004 to 94 days (55 days) in 2006 and then declines to 89 days (52 days) in 2008. Overall, the reductions in the length of the cash cycle observed in both 2007 and 2008 suggest that the average Aberdeen SME was reasonably well placed to cope with the recession.

Whilst the preceding analysis can provide some indication of the general position facing local SMEs, the fact that the sample covers a significant range of sectors does tend to obscure potentially important inter-industry variations. As a consequence we disaggregate the original sample into primary, manufacturing and service activities and repeat the analysis.

The results are reported below.

Primary Sector Companies The relevant findings for this group of companies are reported in Figure 2 below and the most obvious feature is that the figures exhibit far greater volatility than was evident for the whole sample.

Figure 2

Firstly, the results for the AAS are rather lower than those of the whole sample with a high of 34 days in 2006 falling to a low of 14 days in 2008. The figures for the ACP show a downward trend throughout the period culminating with the shortest ACP of 46 days in 2008. Apart from 2004, the APP results are far more stable ranging from 31 days in 2006 to 36 days in 2007.

These results suggest that the average Aberdeen-based SME had the lowest operating cycle (60 days) and cash cycle (29 days) observed over the sample period in 2008. This implies that, in terms of cash flow at least, the average company in this group was in better shape to deal with the recession than at any time during the preceding four years.

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Manufacturing Companies The results for the sample of manufacturing companies are provided in Figure 3.

Figure 3

Simply because of the nature of their business, manufacturing companies tend to have longer operating and cash cycles than those in other sectors and this is confirmed by these results.

The AAS figures display the greatest variability of the three measures ranging from 42 days in 2006 to 70 days in 2005. In contrast, the results for the ACP and APP are rather more stable with the former varying between 56 and 72 days and the latter between 41 and 52 days. Overall, these results imply that the average local manufacturing SME faced the impending recession with an operating cycle of 123 days and a cash cycle of 71 days. Although these are approximately double the length of the cycles observed for companies operating in the primary sector, the cash cycle is 7 days shorter in 2008 than in 2007.

Service Sector Companies As identified above this sector represents the largest grouping in the sample and the findings are detailed in Figure 3 below.

Figure 3

Whilst it is not really feasible to further disaggregate the data due to problems with small samples, there is one additional subgrouping that can be analysed. Specifically, 95 of the sample companies are classified under the SIC(2003) system as ‘other business activities’.

Closer inspection of these companies reveals that they can all be described as being engaged in supplying services to the oil sector. Therefore, given the importance of such companies to the local economy, it would seem appropriate to report their results separately. These are provided in Figure 4.

Perhaps not surprisingly given that these companies are a sub-set of the services sector grouping, there are clearly similarities in the two profiles, particularly in terms of the ACP and the APP. Figure 4

However, there is a difference in the AAS figures with the oil service companies, on average, consistently having cash tied up in the form of stock for significantly shorter periods. The impact of this is that both the operating and cash cycles are shorter throughout the period and in 2008 the implied cash cycle for the average oil service SME was 35 days compared to 51 days for the overall service sector. Moreover, in terms of facing the economic downturn, this was the shortest cash cycle observed throughout the 2004-2008 period.

Small versus Large SMEs

The obvious feature of these figures is that they are the most stable of the three sectors.

Specifically, the AAS varies between 26 and 36 days, the ACP between 53 and 59 days and the APP between 31 and 39 days. In 2008, the average operating and cash cycles were 85 and 51 days respectively which are the lowest figures observed since 2004.

Given the definition of an SME employed in this analysis, there is clearly a significant variation in the size of the companies included in the sample. Indeed, whilst the average company has an annual turnover of £17.2 million, the range is from a minimum of £198,000 to a maximum of £92.7 million. Consequently, it would appear to be pertinent to examine the extent to which there are any significant variations in the profiles of small and large SMEs. To this end, the sample was divided into quartiles and companies in the bottom quartile (turnover less than £3.76 million)

were defined as small SMEs and those in the top quartile (turnover greater than £25.26 million) were considered to be large SMEs. The results for the two groups are illustrated in Figures 5 and 6 respectively.

Figure 5

Figure 6

The APPs for both groups are broadly similar throughout the period ranging between 30 and 40 days. As far as the ACP is concerned, the average small SME has clearly benefited from a significant decline of 19 days since 2006 which, ceteris paribus, would lead to a reduction in both the operating and cash cycles. However, the most noticeable aspect of these figures is that the AAS has more than doubled in 2008 for the small SMEs which has more than offset the benefits arising from the reduction in the ACP. The significance and timing of this increase would appear to reflect, in very graphic terms, the onset of the recession with small local SMEs finding it increasingly difficult to move stock. Moreover, it clearly illustrates the severity and speed of the impact of the economic downturn as well as the vulnerability of these companies to such a change in general economic conditions. Overall, the net result of these changes was that in 2008 the average small SME had an operating cycle of 97 days and a cash cycle of 62 days compared to 83 days and 53 days for the average large SME. In Search of the Negative Cash Cycle The ‘ideal’ situation for any company would be to operate with a negative cash cycle whereby cash is received from customers before suppliers are paid and as a consequence the funding

requirement associated with managing the cash cycle is removed. However, such a position is generally not possible unless the company operates in a cash-based business such as retailing. Moreover, SMEs will tend to find the attainment of a negative cash cycle even more problematical as they will generally have less negotiating power than larger companies in relation to the setting of credit terms. Indeed, this is exemplified by a simple analysis of the sample used here in which there are only 76 instances of companies operating with a negative cycle.

Nevertheless, there were a few examples of local companies that were able to operate with a negative cycle throughout the period.

Perhaps the most striking example of this is a local company whose activities are described in the FAME database as: “Hire of relocatable accommodation and, in particular, jackleg cabins, chemical toilets and modular buildings.” For the years for which data were available (2004-2007), this company operated with an AAS of between 12 and 35 days; an ACP ranging from 48 to 67 days; and an APP of between 113 and 211 days, all of which resulted in cash cycles of between -11 and -129 days. Clearly, in cash cycle terms at least, this company was in an extremely healthy position to face recessionary conditions.

Conclusions The aim of this edition of Statistical Corner was to report the findings of a desk-based survey of the operating cycle and cash cycle positions of a sample of 336 Aberdeen-based SMEs. The specific intention was to assess how well placed these companies were, in terms of short-term cash flow, to weather the onset of the recession.

Overall, the picture that emerges from the analysis is very positive with the average primary sector, manufacturing and service sector SME all experiencing reductions in the length of their cash cycles between 2007 and 2008. Indeed, this situation was also replicated in the case of local SMEs which are engaged in supplying services to the oil sector.

However, one negative sign emerged when the sample companies were divided into sub-samples of small and large SMEs. The analysis of the small companies revealed, in particularly graphic terms, how dramatically the average small SME was affected by the onset of recession with AAS figures more than doubling between 2007 and 2008.

Finally, the usual cautionary note must be sounded regarding the use of average figures which can clearly mask significant variations in the figures between individual companies.

ABERDEEN BUSINESS SCHOOL ALUMNI

PHILIPPE WEHMEYER MANAGING DIRECTOR, GAMEGROUP PLC Philippe Wehmeyer (40) is a business studies graduate from Aberdeen Business School in 1991. He was appointed Managing Director of GAME Group France at the age of 34.

In his six years as MD he has been instrumental in growing the group brand in France, increasing their number of stores from 56 – 200 and their turnover by a massive 450%.

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Why did you decide to study at Aberdeen Business School?

There had been a student exchange programme set up between my university in Paris and business schools in the UK. I was given the choice to study in Scotland and England and I’m not sure why but my gut instinct told me to go to Scotland.

What was student life like?

I had an incredible time at University; Aberdeen is an exceptional place. Whilst I was studying we were in the middle of the Gulf War. It had a huge impact on the rest of the world but Aberdeen city stood confident; it was surfing on the oil wave and it was a great time to be there.

There was a real buzz about the city and amongst the students.

As a student, what were your aspirations for the future?

From very early on I knew that I wanted to manage a company, but just didn’t know what. I was very tempted to stay in the UK but, having studied in Aberdeen

and fine tuned my English skills, it made sense to work for a French company and utilise these. I also had to go back to France to complete National Service, so my career aspirations were to be put on hold for a year.

not interested in the product but we did keep the personnel in 50 of the stores.

This was a very important move as the stores were in good locations and allowed us to dramatically increase our market penetration very quickly.

What were the significant events that led to you being where you are today?

The sector is constantly evolving and we need to be one step ahead all the time. The French online market is very advanced and we are concentrating on how we can develop our presence on that front after developing our brick and mortar operations over the last few years.

After graduation I was drafted into the army but was fortunate enough to secure a civil service opportunity working for the beverage company Heritier R. Cointreau for 16 months in Madrid as an alternative form of National Service. This was a great experience since it also gave me the opportunity to speak Spanish, a fourth European language after French, Italian and English.

I then built up my portfolio of operational and export experience in the retail sector, working for leading fashion group Zannier followed by major clothing group Caroll Paris with over 245 stores in Europe. Both these roles gave me a broad understanding of the retail industry and how to successfully implement a worldwide export strategy.

By the time I left Caroll, the changes I had implemented had been instrumental in increasing their export turnover tenfold.

Up to this point my job involved a huge amount of international travel which I wanted to limit and my next move provided the perfect opportunity. I started working with Morgan Fashion in France as their Operations Director and after three months I was promoted to Managing Director. This was a big jump but the role was based in France and was a great opportunity to gain experience as a MD before securing my role with GAME Group in France.

GAME France has seen substantial growth - how have you achieved this?

It is my job to make the company competitive and, just as importantly, maintain this. Over the past six years the group brand in France has increased their number of stores from 56 – 200 and their turnover by 450%.

The key to this growth has been the acquisition and rebranding programme.

We bought a company from the retainer for its portfolio of 100 stores. We were

Do you have any advice to students entering the job market?

It is important not to be too defined too early, not to be in too much of a hurry; being open minded and opportunistic is key. I didn’t originally want to work in retail but it is an industry I am now very passionate about and enjoy the challenges. It is important to look at the opportunities further down the line; what may seem appealing now may not be such a good option in the long-term.

Sometimes the glamour of working for a large company is very attractive but there is a lot to be said for working with a small company; it can provide you with a wide range of experience and the opportunity to try out different roles.

What do you do when you are not working?

I don’t have a lot of spare time; I have good balance of working and family life but, with three children in the past five years, I have a very active household. In the past I have enjoyed sailing and skiing but these hobbies are on hold, for the short-term anyway.

Have you been back to Aberdeen?

Unfortunately not but it has always been at the back of my mind. I would love to come back one day to explore Scotland with my wife and family.

GAME Group plc is Europe’s leading specialist retailer of pc and video game products. The business started trading in 1991 from 11 stores in the UK and has grown both organically and through acquisition to a chain of 1,367 outlets across Europe.

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ABS PLATFORM

A BUSINESS FOCUSED BUSINESS SCHOOL - THE NEXT 10 YEARS Veronica Strachan, Business Manager, Aberdeen Business School

Aberdeen Business School, Robert Gordon University, will celebrate its 45th anniversary in 2010. Anniversaries are often a catalyst for both reflection and for setting an agenda for the future. As 2009-2010 begins it is a very real boost to note that for the second year running The Sunday Times Good University Guide 2010 ranks Robert Gordon University as the best Modern University in the UK. At the same time the Research Assessment Exercise 2008 rated Robert Gordon University as the best modern university for research in Scotland. The school has also moved to equal 13th (from 20th) in the 3 Palmes category of the EDU Universal Business School Awards.

The School as presently constructed is much larger than the original Business School, not only 44

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as a result of the merger in 2001 of the four schools of the faculty: Aberdeen Business School, the School of Hotel Tourism and Retail Management, the School of Information Management and the School of Public Administration and Law, but also due to a fundamental shift in the business of the School towards increasing Masters and distance learning students. Over the last 15 years the School has maintained a successful track record in undergraduate delivery, launching new products such as BA Fashion Management, whilst at the same time significantly expanding the portfolio of Masters level courses. This expansion has been coupled with continued investment in, and development of, our research and corporate activity.

One of the real strengths of Aberdeen Business School is that it is broadly based, offering a wide range of specialist skills, which are aligned into our 5 academic departments: Accounting, Finance and Economics, Communication, Marketing and Media, Information Management, Law, and Business Management. The academic departments are enriched by the research efforts of our newly developed research institute. IMaGeS, the Institute for Management, Governance and Society has three themes:

Business and Enterprise, Information and Communication and Governance and Society.

A Clear Future is the strategic plan of Robert Gordon University and it identifies as the key strategic priorities: • Enrich the all-round experience of our students throughout their engagement with the University • Enhance the quality and relevance of our taught provision • Increase the diversification of our student population • Expand our provision of corporate programmes and life-long learning opportunities • Focus and concentrate our research and knowledge transfer activities • Secure our economic and environmental sustainability

(although in some courses the period is shorter and in our new BA (Hons) Events Management course the students will develop a placement portfolio in every year of their course). The success of our placement programme is evidenced by the track record of both the number of employers who annually participate in our placement programme as well as the number of students who on graduation return to their placement organisation. The School recognises the importance of business engagement in our placement programme, and for the last few years has sponsored an award for the Best Student Placement Provider at the Chamber of Commerce Northern Star Awards. The 2009 award was made to NHS Grampian with AMEC and ITI Energy being the other two shortlisted finalists.

In a number of our postgraduate courses work based learning is delivered by way of either shorter four to six week placements or work based projects which allow our postgraduate students to further develop their business skills and gain useful insights into other organisations. The MBA full time cohorts (on both the general MBA and the Oil and Gas Management MBA) have the opportunity of undertaking either a dissertation or a consultancy project. The consultancy project is increasingly the more popular choice as it provides students with a real life challenge. The students in consulting teams work with companies on a strategic issue affecting their business. It is a tribute to the usefulness of the work of our students that projects are offered from all sectors in the international marketplace, and that the number of projects continues to increase.

The achievement of these priorities requires the School to remain relevant through being business focused, entrepreneurial, international and responsive in terms of our learning provision.

Business Focused One of the key performance indicators for Robert Gordon University is our graduate employment and, therefore, the School seeks to ensure that our students develop the business skills necessary to play a full and active part in the organisational success of their future employers.

The development of these skills is enhanced through our focus on work based learning as a key component to many of our courses. Most of the undergraduate courses at Aberdeen Business School include a one year work based placement ABERDEEN BUSINESS JOURNAL

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entire MBA course and the various mode of delivery offered. As from 1 December 2009 GAC Accreditation status is conferred upon the MSc in Project Management degree program.

The PMI (Project Management Institute) Global Accreditation Centre (GAC) ensures the quality of academic degree programmes in project management at an international level. Achieving this recent accreditation continues to ensure that the MSc Project Management offered by the School is an industry relevant and sector leading course. As new courses are developed the range of professional accreditations offered by the School will increase. The School will also continue to work at enabling those with professional qualifications articulate onto our degree programmes as part of our commitment to life long learning by making our courses ever more accessible via flexible modes of delivery.

The University and School engage and support the local business community through providing accommodation for Common Purpose, SCDI and

The School has been shortlisted for the inaugural RateMyPlacement Awards (which are taking place at Oxford Brookes University on the 21st January 2010) for the Award for the University with a Forward Thinking Attitude to Work Based Learning. Over the next 10 years the School will continue to develop opportunities for work based learning via placements and the use of personal development plans, portfolios and consultancy is likely to increase.

Business focused course delivery is closely linked by the School to professional accreditation. The School is a key provider of specialist postgraduate level courses and wherever possible offers professional accreditation alongside degree awards. The School is proud of its accreditation record, including AMBA accreditation for our 46

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by being a principal sponsor of the Aberdeen and Grampian Chamber of Commerce Northern Star Awards. It is important for the Business School to be the local provider of choice for the training and development needs of the local business community. Through Univation, the corporate arm of Robert Gordon University, the school delivers a number of corporate programmes globally. In the next ten years, it is anticipated that the School will become increasingly involved in corporate business development from short course to degree entry level to Masters/ MBA programmes. This activity will be supported by the creation of a new corporate suite in the Business School in 2013.

A recent piece of research carried out by the School indicated the ways in which organisational need for executive development is changing and this has led

to the evolution of a new programme aimed at the next generation of leaders in oil and gas.

Entrepreneurial Spirit Robert Gordon University has entrepreneurship at the heart of the institution and the University culture is one of innovation. The development and publication of the forward strategy of the institution, “A Clear Future” in 2008, underpins the commitment of the University to being an entrepreneurial university and to continue becoming increasingly non- dependent on state funding.

The School adopts an entrepreneurial attitude by constantly working on enterprising projects that generate value for its stakeholders: staff, students, future employers, the business community and wider society. The Centre for Entrepreneurship has a pivotal role to play in developing entrepreneurship both within the university and the wider business community. The achievements of the centre include securing appointment by

the Federation of Small Businesses to provide academic expertise to them. Entrepreneurial spirit is not limited to the Centre for Entrepreneurship, the Centre for International Labour Markets secured ESF funding for “Business Skills for Growth” and is currently disseminating business skills amongst local SMEs. The portfolios of courses are designed to develop innovative and independent thinkers. The culture of entrepreneurship is effectively conveyed to our students; indeed according to the Business of Branding Survey 2008 (conducted by CarringtonCrisp with support from Association of Business Schools) 70% of our first degree students think that the School has an enterprising approach.

The School actively encourages students to engage in extra curricular activities, entering national and school-based competitions such as our Mooting competition for law students. Over the last year, students from the School have been successful in major national competitions including the Association for Project Management (APM) Student Challenge, which was won by our students for the second year running, beating teams from across the UK. The competition was open to postgraduate project management teams from all UK universities.

Having begun to develop a track record in competitions, it is hoped that over the next ten years students from the various cohorts will continue to compete and achieve success at a national level.

A good example of the use of entrepreneurial skills by our students to benefit society more generally is in charity fund raising. In 2007/08 Aberdeen Business School students organised and ran an incredibly successful fashion show which raised over £6,000. In 2008/09 the event raised over £10,000 for the local CLAN charity.

With the recruitment success of our BA (Hons) Fashion Management and our new BA Events Management courses such events are likely to become increasingly part of our annual calendar.

International Business School The internationalisation of a business school is a critical factor to ensure the development of the knowledge and understanding necessary to operate in a global economy. Internationalisation is a significant theme cutting across all aspects of our business. Aberdeen Business School has for several years ensured that international aspects are a key component throughout all of our courses. This has been coupled with a diversification of the faculty. The School enhances the overall international experience of all students using a variety of techniques including an annual ABERDEEN BUSINESS JOURNAL

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International Week where students have the opportunity to attend lectures from visiting international faculty, international cultural events and of discovering the range of international exchanges and international careers support available. It was therefore gratifying that in the Business of Branding survey 2008 the student body overwhelmingly agreed that Aberdeen Business School has an international outlook.

As technology enables new and different means of engagement and collaboration, the opportunities for joint degrees with international partner institutions will continue to develop. In developing such partnerships, the School will build on the experience currently gained through projects such as the Erasmus Mundus funded project HOTEL Atlantis, which seeks to develop the transatlantic hotel manager through an innovative programme that involves student exchange between Turku University, Finland, Aberdeen Business School and Oklahoma State University, in Tulsa.

Acknowledging that learning emanates from interaction with fellow students the School remains committed to recruiting a diverse cohort. In recruitment the School competes in an increasingly global marketplace. The behaviour of students searching for a degree was investigated in the Business of Branding Survey 2008. Perhaps not surprisingly the undergraduate market remains predominately local; however the survey of postgraduate level students found that students are searching in wider geographic areas, the majority casting their search Europe-wide (as per the diagram below).

The most recent development has been to adopt a blended learning approach. Blended learning is a mixture of face-to-face learning whether in lecture or seminar style activities supported by a variety of on-line learning. Whilst our face-to-face teaching has been supported to some extent by on-line materials over the last ten years, blended learning is about changing the balance of delivery in a more fundamental manner. It also exploits the increasing range of technologies available to create innovative learning materials. In our corporate offerings the School has customised course delivery to meet the needs of the client company, and this has invariably involved a blended learning approach.

At undergraduate level, this academic session (2009-2010) stage 1 of BA Management part-time is being delivered in a blended approach whereby students work on-line in a supported distance

learning environment and attend classes one Saturday a month. At postgraduate level, the parttime MBA has been redeveloped into an executive mode of delivery where students work online and attend classes one weekend a month. Certainly weekend delivery has an appeal to those trying to balance work and family alongside their degree studies. The experience of both these courses will undoubtedly shape the future delivery patterns of our portfolio and the traditional postgraduate parttime consisting of evening classes will change.

60%

50%

40%

30%

20%

10%

0% First degree (BA/BSc) Within 50kms of where I lived at the time Within the continent that I lived at the time In Asia

Other Business Masters (MA/MSc) Within the region that I lived at the time In Europe In Australasia

Within the country that I lived at the time In North America Anywhere in the world

Source: Business of Branding Survey Successful recruitment at the increasingly competitive postgraduate level, requires the School to be able to offer advantages over our rivals. Our differentiation lies in our focus on relevant work based learning, professional accreditations and innovative course design and content. In the Business of Branding Survey 2008 when asked why students would recommend Aberdeen Business School, across all groups the most important reason for recommending the School is that course content is relevant to modern business. We seek, through our industry liaison groups, to ensure that courses remain focused on delivering the skills and knowledge demanded by industry.

Aberdeen Business School has a longstanding reputation for undergraduate delivery and has become ever more firmly established as a deliverer of high quality postgraduate education. Over the last ten years the expansion of the portfolio of courses offered by Aberdeen Business School has been twofold, in subjects offered and in modes of delivery. According to the Annual Review 2007/08 of our 2910 postgraduate students, 1730 were part-time (which 48

includes both traditional class based cohorts as well as distance learning cohorts). Many of our very successful part time courses are delivered entirely by distance learning, such as our LLM Construction Law and Arbitration.

ABERDEEN BUSINESS JOURNAL

In the next ten years the changing mode of delivery will have a significant impact on both our human, IT and physical resources. Aberdeen Business School remains committed to providing a state of the art learning environment for our students, whether they are on-line or in our premises. E-learning technology and support are fundamental to the development of our blended learning strategy. Perhaps surprisingly using e-learning technology has an impact on our physical space as staff need to have an appropriate physical environment in which to create e-learning material and the school is investing in some immediate changes.

Ten years for now the Business School will certainly have changed and adapted both physically and in terms of its portfolio. However the industry focused approach and entrepreneurial spirit of the School will ensure that we continue to provide a real advantage to our graduates, employers and the wider business community, both locally and increasingly internationally.

GAIN AN DVANTAGE OVEr YOUR RIVALS Studying for an MBA at Aberdeen Business School is the smart way to get ahead in your career. Fully accredited

by AMBA – this prestigious course is available online, full-time and part-time. Partial scholarships may also be available – so just ask us for details. As a part of Robert Gordon University, we were named the UK’s best modern university in The Times Good University Guide 2010.

Accolades such as these reflect the quality of our courses, which also include:

> MBA Oil and Gas > MBA Transport Strategy and Management

R DS A W O T G N I K R O L BY W A I T N E T O P L A E R HOOL. C S S DISCOVER YOUR S E N I S U B RDEEN E B A H T GU.AC.UK I R W @ T A T B O C .S A : AN M 263428, EMAIL L 01224 L A C S IL A T E D R /ADVANTAGE K .U C FOR FURTHE .A U G .R W LINE AT W W N O S U IT IS V R O

THE PROFESSIONAL UNIVERSITY The Robert Gordon University, a Scottish Charity registered under charity number SC013781.

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otion m o r p r u o y d n ential a t o p g n i n r a e t. n e m e g a n a M t Improve your Projec n i c S M n a h t i prospects w This highly portable degree prepares you for a career anywhere in the world. Have the confidence of joining a relevant high quality programme accredited by the PMI and APM, RGU is a recognised supplier to the Engineering Construction Industry Training Board.

You can study full-time on campus or part-time distance learning. Show the right attitude – apply now and start September.

THE PROFESSIONAL UNIVERSITY The Robert Gordon University, a Scottish Charity registered under charity number SC013781.

Contact: Tel +44 (0)1224 262203 www.rgu.ac.uk/projectmanagement