BPO - it's OK really

I've been sceptical about finance function outsourcing (actually, BPO in general) since a FTSE 100 FD told me he'd love to bring his dull, process-driven teams back in house and re-locate that "feeling" about the business, its suppliers and customers he got from having on-floor feedback from the "drones". But I had breakfast this morning with a BPO expert who assured me that many of the biggest issues - contracts, service level agreements and pricing plans - are being addressed by great minds in the BPO and consulting arenas.

Hmm. Still sceptical. But one thing she said did ring true: the biggest BPO problem is clients. I agree 100% - if the client doesn't know what they want, how they want it to happen and where the trip-wires are, who can blame the BPO provider for locking them into an expensive screw-up? Which is why I always think that unless you've done two BPO deals before - and seen how they go wrong - you shouldn't try it (at least not for a company you love). Catch 22? Well, pick a couple of companies you don't like and do it there first...

Doomed, we're all doomed!

I'm a bit of a doom monger. I've called the top of the property market at least three times (wrongly) since the mid-nineties, I'm sceptical about the stock market and really a bit of a neo-malthusian at heart. Worse, the current state of the economy - asset bubbles, financial market uncertainty, rampant consumerism, high levels of personal, corporate and government debt - means that this post about the parallels between the twenties and today is pushing at an open door marked "Richard's paranoia".

In short? Lack of regulation has encouraged the growth of an asset bubble and risky practices in financial markets that threaten to repeat the calamity of 1929. Add in social psychosis, environmental degradation, moral collapse and tribal conflict and... well, it ain't pretty. Run!

Not business, finance or management

But pure genius, nonetheless:

Um

What he said.

Well, up to a point. There are lots of private equity firms that invest in growing companies in need of capital, experience and contacts; and others that turnaround businesses that would otherwise fail - and they have my full respect. I know lots of guys in that line of business, and they work hard and get a buzz out of transforming businesses.

But these days "private equity" has become shorthand for the LBO merchants - who fall into three categories: merchant bankers (ugh), asset strippers (ugh) and megalomaniacs (ugh). Them, you can keep - read John Caddell at the above link for a fairly reasoned attack on them and their actions.

Facebook vs Linkedin

I've just seen this blog posting about Facebook. Here's my reply about the relative merits of two social networking sites:

About a month after I joined Facebook - and found it great for both social and professional purposes - I got an invitation to Linkedin. I'd had them before, but I was now intrigued by my FB experience, so I joined and used the site to tell me who from my address book was also "Linkedin". I added them as connections, asking them to tell me whether they thought, as existing users, it was worth it. Everyone, out of about 40 users, said they'd joined but then found it passable at best. Most hadn't visited the site in the last year and couldn't see the purpose of it. They understood the idea - but in practical terms, it sucked.

Facebook scores because it fits my own personal maxim: "never do anything for only one reason". I'm not checking Facebook for professional connections, but my social network takes me back every day. Then when I need to find a contact for a feature (I'm a journalist) I can search groups, professions and companies and come up with people to get in touch with. and other people see more about me and my approach by understanding me socially.

My tiny poll also suggests that Linkedin (and the frankly scarily bad eCademy) fail because being on there just looks "pushy" and smacks of personal salesmanship. That's not as true on FB. Maybe the reticence to seem "proactive" is peculiarly British. But on FB, all my "friends" are Brits and they have no problem with "projecting"...

Not business, but...

Colbert genius on Blair and Brown:



http://www.comedycentral.com/motherload/index.jhtml?ml_video=86802

Debs delight for the burger boys

Apparently, Debenhams is looking for a fashion supremo. Well, no surprise there. Profits are down 40% and with PE gianr Texas Pacific Group still a major shareholder, you can bet that some feet are being held to the fire. Here's the thing, though. The PE investors have already cleared a huge return on their original investment. (Want to know how KKR might recover its $450m-odd commitment to Alliance Boots? Follows the Debs model and flog the property, natch...)

So if Debenhams folded tomorrow, there would be few tears shed. And that kind of burns me up. All of the other shareholders in Debs - many of whom will have bought in at the IPO for 195p a share - are looking at the current price of 148p-odd and wondering why they bought such a lame duck. After all, with no assets beyond a few leases and a brand, they'd get 87% of bugger all if things did take a turn for the worst, while TPG has already cleared its profit whatever happens to its 13% holding. As I say, I don't doubt they'll still push for their pound of flesh - and Debs is still profitable. But to say they have a long-term stake in the business in the same way as the other owners is... rubbish.

Oh, and TPG... that's the crowd who bought Burger King off Diageo - then flipped it like a Whopper with cheese kicking off the loudest howls of indignation around PE since RJR Nabisco.

And other sorts of accountants

The Onion was one of the first things on the web for which I made a beeline every week - this would be about 1997, I guess. (For the record, Suck was the other piece of web brilliance I checked every morning... Ah, the days before blogs...)

Anyway, if you don't already know him, check out Herbert Kornfeld, the accounts receivable supervisor whose Onion column has been amusing me for many years. I'm not saying he's a role model, but he's doing his thing to shake off the dull accountant tag. WARNING: Herbert is pretty "street" with his language...

Communicatin' accountants

For years now I've been banging on about how much more important communication skills have got for senior finance execs. Hey, the systems are doing all the number crunching and they're even moving into the analysis. So all you've got left is the strategy and the story-telling, right?

So it's a delight to find accountants who are truly brilliant communicators - especially when they appear on truly brilliant TV shows like the Colbert Report.

Sustainable business is good (in both senses of the word) capitalism

Yep, all Dennis's shots about ethical businesses are hitting the target. But it feels odd to be having a discussion about sustainability here in 2006. I thought the dangers of the quarterly reporting cycle and the pressures on management to deliver for the short-term had been laid to rest when Enron and WorldCom showed their investors how dangerous it was to ignore long-term business objectives.

The problem, of course, is the free movement of capital. If shareholders had to hold equity for a minimum of, say, five years, they'd pressurise management to deliver sustainable growth; businesses that had true "density" - and that means great relations with staff and customers - would win out both in terms of market cap and revenues. That enforced holding is impossible to engineer, of course. But some investors do it voluntarily - Warren Buffett, for instance.

As an aside, I once had a chat with John Rishton when he was CFO at British Airways. Oil was heading north at a rapid pace at the time, and I asked how his financial planning was going. He said they had a few more months of their forward buying to unwind, so they were OK for the moment. But he also told me what a lousy investment airline shares were. I said I was amazed - surely he could explain why BA was a good buy. Not to hold, he argued. No airline has ever really made any money over the long term and the professionals simply watch the yo-yo of the share price and sell on the peaks to make their money.

In other words, there is no incentive for the airlines, individually or collectively, to operate sustainably. They see the long-term investors as fools and the ones who make money on their stock as bandits. We all know how they view a majority of their customers (cattle - and DVT, did you now, is largely down to poor air quality in the cabin so they can save money). And they're having a tough time with staff, too. Not, then, the model of the open, honest and fair organisation that can deliver for the long term.

China as a market

Just heard Alan Wood CBE, chief exec of Siemens UK and speaker at the CBI conference, on the Today programme. He was being interviewed about the trend for foreign companies to buy UK businesses and argued that while this was not a positive movement, legal barriers to overseas acquirers were not appropriate. Instead, he said, British business needs to get more outward facing, seeing China and India not as sources of cheap labour but as huge potential markets - and the government should lobby to ensure they are as open to UK exports as we are to their imports.

All motherhood and apple pie (at least for a capitalist - he could hardly call or less free markets, although the leader of the capitalist world, the US, has plenty of funny quirks and folds in its free trade eiderdown). But then he said, (and I paraphrase) "We have to look at China as the single biggest market in the world."

Hmm. I wonder. Is China really the single biggest market? One might successfully argue that England and Scotland are different markets (especially for services - in goods, it's still probably advisable to operate off the logisticians' approach to geographic proximity when discussing "markets"), let alone Britain and Italy. Is Shanghai the same market as Zhuzhou or Chonqing or Xi'an or Urumqi? Is doing business in Delhi the same as in Cochin or Calcutta or Patna? You'd treat Lahore differently from Amritsar, but they're relatively close neighbours.

Perhaps that's the key: start thinking of true markets and not nation states. Yes, the legal and regulatory borders are still significant. But if we think of peoples by our own, rather crude and dare I say imperialist, categorisations, we'll never really be able to sell to them properly.

One day I'll round to publishing my thoughts on the death throes of the concept of the nation state...

Reporting: keep it simple, stupid

A rather lengthy response to a post over at Dennis Howlett's place.

I, too, find it strange that we're having the debate on IFRS now - when the damage has already been done. I can understand why fair value accounting was seen as a viable way of taking company reporting forward, but the tools just ain't there. (And although I sympathise with Dennis's finance/HR alliance ideas, the fact is that in the vast majority of companies, HR is a substandard function that just isn't up to managing its people well, let alone coming up with viable ways of communicating their value.)

My view - based on nine years of watching what FDs actually do and hearing how they feel - is that we need to ditch the whole idea of comparability. So I guess I'm actually siding with the Big Four - although I agree with Dennis that they've been a bit disingenuous in how they've gone about this. Here's my thinking.

Most good managers don't run their companies to engineer reported results anyway. We've seen what happens when they do (Enron, WorldCom, iSoft etc etc) and those of you with an accountancy qualification know how much leeway there is in the standards even when (in theory) we can all agree on what they mean. Instead, they use a set of targets and metrics – many of which are shared, like ROCE – to monitor their performance and produce better results. Knowing what those targets are and how management is performing against them is surely more use to investors that how they’ve been filtered into a set of accounting standards. It also means companies can focus on the real drivers of their particular businesses, not some arcane way of segmenting their accounts that fits a theoretical notion of how you uncover value.

I was talking to an M&A adviser at KPMG the other day about the market research industry. He pointed out that it was almost impossible to compare any two businesses in the sector. "Evaluating MR companies is tricky because it’s hard to find true like-for-like comparisons," he told me. "Even with an Ipsos or a TNS, where you have a big group mostly involved with MR, they present their results differently and the only way to really compare them is net margins. But even then, with so many M&A deals going on, it’s hard to make real comparisons between them on like-for-like basis."

In fact, many professional investors already take a case-by-case approach. They get close to companies to understand them beyond the accounts – that’s what gives them an edge as professionals. Some like to focus on a couple of key metrics – Terry Smith once told me that all he was interested in was cash, and talking to management was just a distraction! I suspect many analysts and institutions already operate more like private equity managers now – they’re looking way beyond IFRS and into their own set of either unambiguous or tailored value drivers.

A majority of private investors don’t read the annual report and accounts anyway – or if they do, they’re more likely to be steered by the marketing bumpf at the front than the crowd of figures at the back. And a really smart investor looks at things they can see – joking aside, if you want to know which retail shares to buy, spend an afternoon in Bluewater or your High Street. If M&S is packed… well, you’re in possession of intelligence that won’t be in the accounts for another six months. Buy.

Bottom line: whatever happened to caveat emptor? By scaling back the accounting standards to a bare minimum that allows the banks, investors and the tax man to see a couple of key metrics presented objectively (cash! net margin!), you force companies to compete for finance on their own terms. And you force finance providers to take a much harder look at the companies they invest in. If that means some people get burned because they choose to believe outrageously optimistic statements or shonky metrics from management – well, that’s their look-out. Even my old mum knows that if something looks too good to be true, it probably is.

But the companies that do engage in transparency, the managements that have a track record of good risk management and delivering results – they’ll get the lower cost of capital that, it has been suggested, is the big benefit of these increasingly complex and prescriptive accounting standards. (Of course if FDs, analysts, investors and regulators all think accounts are more confusing under IFRS - and they are - then cost of capital will rise...) And if investors think management isn’t transparent? Big flashing warning signs should go off and that obfuscatory management should be removed.

The one glimmer of hope might be that the ASB and the IASB pursue the international FRSSE for all non-“public interest entities”. But they’d have to take some bold steps to simplify it still further. FDs and investors, I believe, would breath a sigh of relief.

Barclays: a step back in time

Interesting that earlier this week Barclays appointed one of its former advisers as its new finance director. Naguib Kheraj is leaving in the spring - ostensibly to the timing is to allow the new chap, Chris Lucas, to be clear of regulatory handcuffs that prevent him taking a senior management role at the bank before the 2006 results are signed off. Why?

Well, Lucas is currently employed by PricewaterhouseCoopers where he is UK Head of Financial Services and Global Head of Banking and Capital Markets - and was Global Relationship Partner for Barclays from 1999 to 2004. That prevents him moving across until a decent interval is deemed to have passed.

Two things. First, what's up with Kheraj? A high-flyer, one can only assume he'll pop up in a CEO role in the not-to-distant. There's certainly no suggestion he was lame in the role (anything but), although he has suggested that he was fed up with the FD role and all the red tape that accompanies it in a large quoted bank like Barclays. In a year-old interview with AccyAge he said: "I wouldn’t rule it out [going for a chief executive role], but I think it’s unlikely. It’s more likely I would do something more akin to what I’ve done in the past, which has been to go back to advising on transactions or working in private equity. I don’t have any firm views at the moment." I guess his views have firmed up a little in the past 12 months...

Second, how long has it been since a major FD post was filled by someone directly from a professional services firm? Of course it happens, but I think the idea that a modern CFO could handle the job without some experience of business has faded somewhat. Time was when a highly technically skilled accountant could just step into the FD seat. But without that broader sense of strategy, of how operations work, about communication, about politics... well, it's just much tougher these days to be an effective FD. Lucas obviously knows Barclays well. But will he make a great CFO?

and interestingly, of course, they've gone from a CFO who wasn't an accountant to one who has no business experience. Feast or famine...

Ready for October 1?

The new age discrimination laws are coming into effect on October 1 - that's next week. You don't even want to think about how easy it's going to be to fall foul of them, and there are sure to be a whole raft of test cases after companies leave subtle references to age in job ads, hand people a golden carriage clock on their 65th birthday (and then clear their desks), or tweak their benefits packages according to their decrepitude.

Ach, most of this kind of legislation is poorly drafted, over-fussy and fails to protect those most in need. But... smart companies do know that with age comes wisdom and experience, which are hugely valuable commodities. Just take a look at Anite Group, where FC Neil Bass is facing a taxing time in the absence of FD Christopher Humphrey, who's been out of action since earlier this month with health problems. He's set to be off for a few weeks yet, so Anite has brought in Geoff Bicknell, a seasoned FD with bags of experience in the IT services sector, to act as interim.

Geoff's seen it all - he was the FD who helped turned basket-case MDIS into rather more successful Northgate Information Solutions, for example. He's been around the block - and the world - a fair few times. Just the guy you need to mentor an FC in this situation - and proof that the senior memebers of the business community have a huge amount to offer, whether they're "protected" by legislation or not. More from Geoff on his interim experiences (and how his plural career is shaping up - "I started going into the non- exec arena, but a full time job, albeit for only a few weeks was an irresistible challenge," he tells me) when he's less busy!