ISAMBARD

I've long been a fan of journalist and broadcaster Tim Harford (aka.  The Undercover Economist ). Harford's skill is making economics and related topics understandable/readable/listenable for you and me.  His latest book is Fifty Things That Made The Modern Economy , published by Abacus and based on the excellent  BBC series of the same name. As the title implies, Harford tells the reader something of the often-quirky history of 50 important inventions which have had a profound impact on the world today.  These are not "The Top 50" - more like a curated selection among many important developments. Some are obvious, such as the plough and its impact on food production.  Others perhaps less so; for example, copyright and the limited liability company.  And Harford makes no bones about leaving out some of the more obvious, such as the computer, while extolling the significance of Grace Hopper's computer language compiler, and the wonders unleashed by comput...

I’ve had this conversation often, including with myself on a couple of occasions. Most businesses go through a major financial crisis at some point. You just don’t hear about most of them unless they prove fatal. The banks are very tough on anyone in breach of their bank covenants (key financial targets which have to be met or the bank can call in its loan). Assuming your business is salvageable, the best way to keep the bank from sending in the receivers is to be tougher than they would be. By that I mean that you should think like a receiver - drastically chopping expenditure, cutting staff, closing branches, taking a large axe to management, killing off non-profitable products and services, and so on. Not half-hearted measures, but really tough-minded ones. If you’ve got a plan that the bank can easily see is tougher than what they’d do, you’ve got a chance of staying in control - providing you actually do what you said you’d do. And you’ve got a better chance of preserving some...

If you’ve thought much about why your business exists, you’ve probably come up with some worthy statement of business purpose. Good; but what about making money? I’m not denigrating high ideals of business purpose, but a business that doesn’t make money can’t achieve those ideals. Some business leaders seem ashamed to explain this fact of life to their staff. Indeed, in many companies, most staff do not understand how the company makes money or their responsibility and role in that. That’s madness. If your people don’t understand your business model and its key metrics, any targets you set may seem capricious or arbitrary. That can mean wrong operating decisions and a high probability of staff not taking responsibility for their own contribution (or lack of it) to the viability of the business. Let’s look at a very simple business - hourly-billed services (basic labour or top-end professional services): You pay people for 52 weeks of 5 days = 260 days a year. At 8 hours per ...

Why do corporate (and especially government) buyers keep confusing cheapness with value? Time and again I’ve seen the best vendors lose on price because the buyer could “get it much cheaper elsewhere”. The classic example is professional services charged by the hour. Any good manager of people knows that you pay your better staff more because they are more than worth it to you. For example, a good IT designer/developer will work out many times cheaper in the long run. They understand the business need quicker, design quicker, design better, write code quicker, write better code with faster performance and fewer bugs, and their software is cheaper to maintain. That can equate to a 10-30 fold lifetime cost difference - the saving more than outweighing any hourly rate difference. And that’s before you factor in the risk of non-delivery - much lower with better suppliers. But many corporate buyers persist in penny-wise, pound-foolish buying practices. I have interests in several f...

Time and time again, I hear business leaders complaining that their business is barely viable. Typical issues: providing essential attributes of a service for free because the customer refuses to pay for it. allowing arbitrary changes in terms e.g. stretching out payment at no extra charge. giving away customisation for free. agreeing to prices below the true long-run cost (including cost of capital). the list goes on. Product-bundling and loss leadership may be relevant to your business, but the total deal has to be even more profitable than any deal without it.  If someone comes up with a genuinely smart new way of doing business, and chooses to compete on price, that’s a real challenge. But many businesses - especially those offering similar services - are essentially distinguished not by lower costs or different business models, but by their knowledge, modus operandi, reputation for delivery, and relationships. Getting trapped into a downward price spiral, especia...

Ever wondered why governments make the economic choices they do, and why these sometimes seem counter-intuitive?  Then you should read Tim Harford's new book The Undercover Economist Strikes Back .  It will answer a lot of questions for those not trained in macro-economics. British economics journalist Tim Harford rose to fame with The Undercover Economist , which did a brilliant job of explaining micro-economics - the economics of the everyday world, if you like.  It was very easy to read and I liked it so much that I gave copies to my two sons.  The Undercover Economist Strikes Back does the same thing with macro-economics, or the economics of nations. Subtitled How to Run - or Ruin - an Economy , Harford's book takes you through some basic concepts before explaining GDP, inflation, money supply, employment and the like.  He also explores newer concepts such as happiness economics and inequality.  My biggest "Aha!" moment came when he explained the...

Ever used one of those retirement planning calculators ? Almost all of them ask your current age, your planned retirement age, and then look up a set of life tables to work how many years of retirement you need to fund, based on the remaining life expectancy for someone your age. You define the retirement income you’d like and it then tells you how big a lump sum you need, given average investment returns and inflation. All very sensible, you’d think. But I suspect most people forget that these calculations are all based on averages, and the most misleading average of them all is life expectancy. Let me explain, using myself as an example: age now, 56; expected age at death, 82. Let’s say I plan to retire at age 65 (I don’t); when I get to 65, my expected age at death is 83, ie. another year to fund. But if I make it to 83, my expected age at death is 90, so it’s 8 years more. And so it goes on. In other words, if I follow the usual retirement planning advice, I may not have ...

Some days ago, I shocked you with the news that half of you are below average ; yet I was prepared to make a small wager that, in just about any organisation, the average staff appraisal assessment is some synonym for “above average.“ In the same vein, I’d be prepared to make a small wager that, across most mid- and large-scale companies who undertake some form of payroll planning (and they all do), the average target salary range is “above average” too. At pay review time or when you’re hiring someone, you need some idea of what the market rate is for your people. Most mid-scale and large organisations subscribe to one or more pay surveys relevant to their industry, location and job types. While you’ll have some stretch for lesser or superior skills and performance, your organisation almost certainly has set its job pay bands with midpoints linked to some benchmark percentile of market pay rates. “We pay upper quartile salaries to attract and retain the best talent in our indus...

Remember when providing company cars was a big part of staff remuneration? Many firms have stopped doing that, and simply pay staff more, with (subject to the whims of the taxman) generous mileage allowances. Why? Basically simplicity and flexibility. The company car costs far more to provide and administer than the expense claim method; and the internal angst and envy that goes with company cars isn't not worth the hassle. Give them the cash and get rid of the problems. There's  a growing school of thought that suggests you should take the same approach to people’s business technology, ie. their mobile phones and laptops. These are increasingly subject to personal preferences and, like cars, companies face specification creep as everyone aspires to the latest status symbol. Not only that, if you look around many businesses (especially in IT), you’ll see people who’ve brought their own computer and phone to work, because they prefer them to the standard issue platfo...

Some years ago, I worked with the board and owners of a mid-size business which had the opportunity to expand, and had several funding options available. At the same time, we also considered the implications of outright exit. Adding to the issues was the realisation that the status quo wasn’t a long-term survival option. This table summarises the discussion of the pros and cons of the options: Investment stage Expansion Exit Investor type Pro Con Pro Con Self-funding No transaction cost You’re still involved Miss rapid growth opportunity Too small for long term viability You’re still involved NA NA Trade investor Access to markets, channels, know-how Patience Grows the pie faster You’re still involved Exclusive distribution Limits on additional investors Pre-emptive rights diminish exit choices and value You’re still involved. They want a future strategy - often 100% acquisition Highest potential exit value Loss of your baby and what you’ve built Financial investor You’re stil...