Financial Journalist

Finance Week, Gerry O’Kane, 23 May 2008

Harry, my FD mate who has moved on to talking to his red cabbage, told me it was the most stressful three weeks of his life. “And I’ve been through two divorces,” he emphasised.

It wasn’t a merger, or pay review or job interview or a new baby; it was getting BT to transfer his phone line and broadband to a new home. “And it wasn’t cheap,” he hissed.

You see, he has my sympathies since I’m going through a similar process myself: no communication, bills without explanatory notes, wrong equipment delivered, help-lines and web-pages that don’t exist, even the registration page that refused to recognise my (BT) landline number and stopped the registration process dead. Then there were the shirty and ignorant technical people in Bangalore.

Ms Shirty

I had followed Ms Shirty’s technical advice precisely (Outlook was objecting about connecting to BT Broadband in spite of numerous hours installing and reinstalling BT’s software) but the particular button she required was not there. Somehow that was my fault but please bear in mind that I started as computer journalist in 1984 even met Bill Gates that year and have been working with PCs ever since. I even started using the internet in 1994 and worked for an internet company!

The final straw for her was my refusal to allow her take control of my computer from India. Yeah, right and I fully trust you, especially since you’re trying to pretend that you’re in Birmingham. I don’t even trust BT.

Scottish burr

Eventually I complained to Helen, the UK complaints telephonist, who had that soothing Scottish burr and said I shouldn’t put up with it and agreed that BT had cocked up my equipment.

When I told Harry about my progress he snorted, said something to his leek and just bought me another house vodka and coke.

Well since then a delivery that I had no idea was coming turned up with no letter, a bin-liner for the existing router (no letter), nor has there been progress on the Lightweight Directory Access Protocol (LDAP) issue which has to be authorised manually before I can get email or any of the other numerous esoteric problems that spring out at me and my two computers like Tigger greeting Pooh.

Baseball bat to wireless router

I’ve now given up ever expecting it to work smoothly and realise why the CD wouldn’t run on the laptop or anything operate correctly: I’d signed an 18 month contract and they have been immune to screwing me on my landline rental for years, so why expect anything new? The only thing is my girlfriend is fed up with me swearing at the computer so much.

Now what makes all this worse is that Hanif Lalani recently won finance director of the year from a FTSE 100 company in a CBI co-sponsored competition. Nauseatingly Lalani is the FD of BT and was commended for making “a considerable impact on the company”.

I’ll have to start talking to Harry’s cabbage otherwise the only “considerable impact” I’ll have with BT will be baseball bat to my wireless router.

Gerry O’Kane Finance Week 7 July 2008

Just as I started to write this Avon and Somerset police announced that another pensioner had been the victim of a distraction burglary by someone pretending he was from British Telecom.

My heart goes out to the 83-year old, but she must only remember telephone companies being owned by the Post Office because if anyone approached my doorstep and says they’re from BT, I’m reaching for the SRAW/Eryx (my personal anti-tank weapon) stashed behind the door.

There are a couple of reasons for this. Firstly, BT actually trying to approach you personally is so rare that you figure there’s something wrong. Secondly, since my transfer to their broadband my life has been less than smooth.

The latest has been yet another demand for money with absolutely no clarification for what exactly they were charging. They expected me to cough up £95 with no breakdown of the expenses: is this a style of accounting that Hanif Lalani the firm’s CFO believes is a good one? This is not the first time this has happened: last time it was some direct debit but didn’t again say exactly what they were billing for.

Harry, my FD mate who likens dealing with BT to going through the pain of divorce, is rubbing his hands at the idea of a consultancy on implementing financial tracking systems at BT. “I could invoice them without telling them what it was for, that’d pay for replacing the brassicas!” he trumpets. (He hasn’t quite got over the Great Brassica Slaughter of 2008 when a concerted attack of commando rabbits took out over 2000 various members of the genus known collectively as cabbages, in two fields in 24 hours. We’re sending them to the States to train up Delta Force.)

I had tried to call BT before the latest bill, but it was a maze of phone options that took 15 minutes before you were put in a queue and told how valuable you were as a customer. By this stage your brain is hurting because if you were a valued customer they’d answer the bloody phone.

This time I persevered. Success, someone answers. Headache goes. Headache returns: I was back in a Bangalore.

This irritates me because (a) the money for my over-priced bills is paying to take jobs out of the UK, (b) they have no idea of why we all hate BT and (c) you know that it is pointless venting your spleen on these clueless victims of outsourcing gone mad, who continue to dream of taking their double-first in Brain Surgery to somewhere sensible.

Anyway I was told that part of the bill was from my BT Option 75a, which I don’t use because I get better rates from my third party call supplier who is forced to use the BT landline.

But he had no idea what the “fine” of £2.75 was for, nor what was going on with the broadband charges, oh yes it was on there. I had to talk to the broadband department which was either in Delhi or three desks away. I then went through the palaver of phone numbers, customer billing numbers, post code, inside leg measurements, all over again.

This time I was told to go online and get a break-down of my bill, because she couldn’t be bothered to tell me. Well she didn’t say this, but did tell me to look it up for myself.

My voice did go up an octave at this point, with me arguing that since I was expected to pay them money they could at least break down what it was for and sod their paperless billing since they’re about as interested in the environment as telling me what they’re billing me for.

She put me on hold and went to speak to her supervisor because evidently she didn’t know either.

It appears I was now paying three months in advance for something-broadband and apparently I was meant to know this, the half price offer too, the fine (still don’t know what for), VAT and something towards African national debt, but it was me who had to add up what was happening on the landline side too…

The last time I had something like this was a week before I got thrown out off the National Union Of Journalists for having the temerity of asking what I had on account with the union and into which charge band they had now put me, since I had just joined the BBC. When they didn’t tell me, I refused to pay. Then they told me I was blacklisted.

That saved me a fortune over the years.

What staggers me is that BT pretends to be technology company - yet two departments can’t communicate. It espouses good value: yet it keeps hiking prices including charging me for not allowing a multinational corporation with monopolistic tendencies to have access to my bank account and remove whatever cash it sees fit. It certainly sees no need to tell me what I’m paying for.

Is this how a company retains customers, is this what is meant by improved reporting, is this good corporate governance?

If they didn’t have an effective monopoly I’d be one less customer.

No wonder the company’s preliminary pre-tax fourth quarter results were up 3% at £715 million. Oh no, my brain is melting, my brain is melting…

16 December 2008 — Gerry O’Kane, Finance Week

Here we go again, ‘there shall be a weeping and gnashing of teeth’ heard globally as pension funds, charities and banks lament the loss of billions of pounds because Madoff was a crook.

Sorry ‘alleged’ crook.

While the Securities and Exchange Commission will certainly be puckering up because no matter how fast its excuses are spewed out of the press office, it fundamentally failed in its role. But it wasn’t the only one.

Questions must be asked of investment managers, CEOs, auditors, compliance officers, those responsible for corporate governance, risk analysts, the list could continue.

It shows yet again that only lip service has been paid to corporate governance in the investing companies and risk management across the spectrum of what that entails.

Indeed it should come as no surprise that in this humble editor’s opinion, many directors may face litigation under the Companies Act for failing to use reasonable skills to defend the interest of their shareholders.

Does the risk of holding this form of security fit in with the profile of risk across the portfolio or does it skew it? Are liabilities covered? Indeed does the type of investment fall within the parameters of the legal licensing of your own fund?

Secondly, you have to assess the risk profile of the company itself and those along the critical supply chain; the service providers, those executing critical parts of the process. While Madoff may have been the former chairman of the Nasdaq Stock Market, it is not enough as an assurance, after all Jeffrey Archer is a peer of the realm.

What is worse is that only a little digging has shown critical flaws in his corporate structure that even the mildest form of due diligence would have revealed.

The head of compliance was his brother. This is not in itself illegal but should raise a question.

As an investment company I should also be concerned that the fund’s administration and custodial services will make sure I get paid my dividends, is aware of the size of my holdings, move on corporate actions, make sure the shares Madoff’s company has bought arrive in the account and counterparties settle.

It is unheard of for a company of the size of Madoff’s to do its own custody. The largest players in the custodial market: JP Morgan, Bank of New York Mellon, State Street, Northern Trust, Citi are dominated by trust banks rather than retail (Citi) and investment (JP Morgan) banks and even within their own hallowed halls many custodial contracts go to their competitors.

It goes further. A prime broker has transparency into the books of hedge funds, contributing valuations that enable administrators to calculate net asset value (NAV). They also have to assess counterparty risk: in other words should the fund default on loans or purchases or paying margins on over-the-counter securities, prime brokers have to step up and pay up.

Madoff had no independent prime broker. It was his own firm.

And all of this was audited by a three-man sun-lounging team who went for their McDonalds in golf carts somewhere around Disney World. Mickey Mouse - you bet!

Just one of these issues should have raised eyebrows for even the most junior paralegal in the due diligence team or the secretary to the head of risk analysis. The fact that so many were caught for so long, proffers the question (as did the subprime debacle), do any firms carry out any intelligent risk analysis, does governance truly reach the boardroom?

compliance+risk+governance+Madoff

27 November 2008 — Gerry O’Kane, Finance Week

Although factoring has become more important to the cash flow of British business, it still has its pitfalls. Here Gerry O’Kane looks at how to truly value your deal and points to other pitfalls and benefits.

The first thing to remember about factoring companies is that they don’t offer the same thing; there are always differences.

This is the considered opinion of Ian Johnston who has been in the business for over 30 years and runs Factoring Solutions, a broker for the sector. Although companies may only now be coming around to understanding the potential of how factoring can help in stabilising cash flow, they have also picked the worst time in 10 years to dip their collective toe in the water.

Even so, some SMEs have been forced to take this route over the past eight years as banks have pushed the business of lending from their company account overdrafts to higher charging factoring.New research from software house, KashFlow, revealed that SMEs in the business services sector are spending an average of five hours every week chasing overdue invoices to maintain their cashflow. Late payment of monies owed - including the time and resources taken to chase late debtors - is a large contributory factor to the failure of many smaller businesses.

Kashflow, a winner of Finance Week’s Software Satisfaction Awards, fielded more than 55 phone calls in one week from customers with clients who have gone out of business owing them money. Duane Jackson from the company said, “I’ve never know anything like it. We’re all aware of the economic downturn, but our small business customers are very concerned. And many are frankly scared.”

But can factoring offer a solution? Many of the largest in the business of factoring or invoice lending, are arms of the banks and we all know how cash flush they are. There are other companies in the business, but Johnston warns that both the big boys and the independents have drawbacks and customers need to be even more canny.

As it stands currently deals of anything under £100,000 are snubbed; the cost of money is too high and the factor’s fixed costs need to be serviced.

One major warning he makes, is to truly cost your deal. While one company may offer a lower interest charge on the invoice, their capability to turn your invoices into payments efficiently, may be much worse then their competitor. The result is that the company may end up paying more in charges.

For factoring companies their biggest expense after the cost of money [to be lent out] is staffing. As risk increases many factoring companies may take on more and more customers to spread this risk, this stretches staff and may affect how good they are at credit control.

The banks have become far more choosy in their customer base and Johnston comments that while Lloyds TSB would have taken “any business” months ago, now even well-heeled customers were under pressure as charges have been ramped up.

“I’m receiving a lot more enquiries from existing factoring clients partly because many of the major bank-owned factors that have spent the last couple of years just buying turnover at any cost who are now reassessing their portfolio a little more closely and pruning those that don’t meet this year’s criteria and upping the rates on some of the others,” says Johnston.

The highest rate on invoices from factors now stands at 90% at the very top end.

But these are not the only issues facing company customers. To protect themselves against unpaid invoices on which the factor has paid against, companies have tied up non-recourse factoring deals.

This structure means the factoring company takes on the risk of non-payment and you pay a fee for the privilege. However as times have got tougher so have the terms on non-recourse deals and in some cases they are no longer offered. Generally companies would be looking at a 2% charge over base rate for non-recourse factoring in addition to the charge of up to 3% to provide factoring.

Two sectors in particular have always been hand-in-hand with the factors (the company that provides the finance), the building industry and recruitment. “While construction is unloved by some factors there are those who will accept business and in my view it means they’re desperate for work, while the recruitment industry might take up nearly 50% of the business,” outlines Johnston.

The sector that does not benefit from the magic of factoring is retail; in part the Consumer Act prevents deals with those who rely on receipts from private individuals.

It is always worth taking legal advice when entering any factoring or invoice lending deal.

Factoring+UK business

12 November 2008, Finance Week

Working capital specialist, Brian Shanahan tells Gerry O’Kane that Tesco’s move to improve its own working capital by taking longer to pay its suppliers, is wrong.

Long accused of pushing suppliers into tough deals, Tesco has ratcheted up its squeeze on them as it searches for improved cashflow.

While it may be asset- or cash-rich, so important is improving the vast amounts of working capital Tesco needs for day-to-day business that it is trying to shore up cashflow by extending payment terms to its suppliers.

In other words it is using its purchasing muscle in a shrinking market to demand that companies allow Tesco to hold onto cash longer while cash-strapped suppliers struggle to handle longer debt periods. Drinks suppliers, amongst other firms, have been given ‘take it or leave it’ ultimatums demanding drops in prices by up to 10%, cough up extra cash for advertising and a moratorium on price increases.

It has also claimed that some of its suppliers have benefited from falling commodity prices so they could afford to pass on improved cashflows. Suppliers deny this.

“The fact that Tesco and others are trying to extend terms to 60 days is no surprise - we already have Argos extending terms to 105 days and other retailers are attempting similar strategies - what is surprising is the speed at which Tesco are trying to implement these measures,” observes Brian Shanahan, senior director at REL, a company with over a decade history in surveying British and European working capital practice.

He believes it reflects poor supply chain planning amongst retailers as the speed of these actions indicates that large retailers are desperate to rebalance the working capital strain that will come with large quantities of unsold stock. Tesco, in particular is under increasing pressure from perceived low-cost chains like Lidl and Aldi.

However the way in which companies like Tesco are trying to improve cashflow, by squeezing payment terms in their suppliers, will have a bad effect on the UK economy over the longer period. “It is pretty standard practice for larger companies to strong-arm suppliers, particularly when times are tough. But Tesco’s decision is bad business plain and simple. At best, they’ll damage their relationship with these smaller suppliers. Some may even walk away from the relationship. At worst, Tesco’s actions could even put some of their suppliers out of business,” says Shanahan.

He, like others, believes this type of tactic will cause businesses to fold creating short-term supply issues and possibly force up consumer prices at a time when the market place is ultra competitive.

“There’s no question that the current economic environment is very challenging. But rather than resort to these types of desperation moves, the most forward-thinking large companies will do almost exactly the opposite of what Tesco and others have done,” says Shanahan. “They’ll work more closely with their suppliers and collaborate with them, creating a situation where both companies share key data on manufacturing capabilities, inventory and demand forecasts. It is possible to create a win-win situation here, with buyers more easily able to find the products they need, when they need them, at the best possible prices, and suppliers able to count on their best customers and still make a reasonable profit.”

Tesco+working capital

31 October 2008 — Gerry O’Kane, Finance Week

Many British businesses are ignorant of working capital and need to understand forecasting, cashflow and the financial supply chain. But there are solutions to both ignorance and problematic working capital. Gerry O’Kane talks to working capital expert John Mardle.

If British business people do not learn how to handle working capital more professionally, the current recession will last much longer than it need do. This is the viewpoint of John Mardle, an expert in how to make working capital perform efficiently and managing director at Develin & Partners. He also warns simply delaying payments or cutting suppliers’ margins is not the solution.

“I’ve got a pessimistic outlook and groups like CIMA and the ACT have got to get finance directors up to speed on working capital,” he says. He estimates it’ll take at least nine months of education but should business people become more aware of handling their working capital, the supply chain finance and their forecasting, the impact on nationwide free cash flow could have a beneficial dramatic effect on UK business.

The down side, in his view, is that it will take 18 months to work.

As access to alternative finance for companies, whether from private equity companies or from banks, has been shrinking for nearly a year, finding money for new equipment or even paying wages is proving difficult and companies’ working capital needs to be handled more efficiently.“Companies are desperate for every penny of that £10,000 invoice, and think they can manage it well, but few do so,” he argues. Mardle lectures for CIMA in their Mastercourse qualifications, mentors at Cranfield Business School and will be lecturing at the ACT’s seminar on working capital in Reading in November.

He points out that British industry is often led by those with strict accounting backgrounds and their grasp of working capital was slim. “They haven’t been taught what it is or top 10 tips to reducing working capital. When the economy was moving along well they sat back on their laurels and didn’t look at it properly,” explains Mardle.

There was an ability to analyse debt but not how to practically improve working capital.

While every case will have its own characteristics, Mardle argues that there are several steps all companies can take to (a) assess their future liabilities and (b) cut the pain to the company.

While he agrees there are methods like factoring and asset-based lending to increase working capital, these are much less available in the current market. “In terms of factoring who is going to want to fund invoicing efficiently?” he asks.

He points out that companies in Europe and the UK do not collect monies owed very efficiently. “And they also do not look at the financial supply chain any further than who they are directly dealing,” says Mardle. In the US it is not uncommon for the supply chain to be analysed seven companies down the line, in order to reduce risk or find ways to solve any glitches in the system (see ‘How to boost working capital with a broader view of supply chain finance’).

Another side of the same coin is examining how your other suppliers will be able to pay. Cutting what you’re prepared to pay by 10% might simply put your supplier out of business.

Go and talk to that supplier: it might be that you’re getting something that is completely over-engineered for what you require,” says Mardle. You might be getting benefits of economies of scale but paying a price for a premium product. With a few adjustments perhaps the product could give the same performance but save money to both you and the maker.

He gave the example of Rolls Royce requiring bolts for aeroplane engines. By dropping the specification from the over-engineered supplier, it saved 50% per bolt – or $500.

He warns that unreasonableness in cutting payments are lazy and sometimes self-damaging. “I already know of some companies who have reprogrammed their ERP systems not to pay invoices over £10,000 or under £5,000, but it’s the wrong way as it creates uncertainty. It’s important to know when payments are going to be there,” he adds.

The second area he sees as important is examining your own customer base. “A lot of firms are dealing with non-profitable customers, they’re just looking at revenues, when in fact delays in payment and profit margins might be low. It might be better to lose them and concentrate resources on the profitable customers,” explains Mardle.

John Mardle’s next CIMA Mastercourse on ‘Managing Work Capital’ is on 7 May 2009 in London. Go here for details of this and other CIMA Mastercourses.

working capital

Finance Week, Gerry O’Kane, 25 June 2008,

So, Farewell
Then Bill
Gates

Famous for
Being so rich
And
Having glasses

You have altered
My life forever
My blood pressure has
Never been the same since
But you couldn’t care less

Apologies to E.J. Thribb

By the end of June, the world’s richest man is going to step down as chairman of Microsoft. The reality is that had anyone met Bill Gates in the early days of Microsoft when it was in bed with IBM, they would have raised an eyebrow that he managed to sign a contract with Big Blue at all, let alone become the world’s richest man.

Not only that but he and his firm had moved from being seen as the rebels that had brought the corporate might of IBM to heel. How things change; now a company with annual revenues of $30 billion a year and with more anti-trust actions under its belt than an arms dealer, the fighter for the small chap has become the dictator of global personal computing.

I first met Bill in 1984 at some expensive hotel in central London. In those days I was a technology journalist and excited to meet the man behind DOS (disk operating system), then only three years old.

Boy, did I get a shock. Sitting tapping feet, hands clasped under arms while rocking backwards and forwards, he sat in the middle of the room on a dining chair and looked like he was going through cold turkey.

IBM had approached Gates in July 1980, with tentative marketing discussions about a ‘new personal computer’. Because IBM wanted to steal a march it wanted development finished in a year and the design would use industry-ready parts but required a disk operating system. Gates had advised them to go and see Digital Research, which had already designed one called CPM.

But it wasn’t to be. So hated was Big Blue in those days, kept afloat by the pervading phrase in the business that “No-one ever got fired for buying an IBM”, that boss of Digital Research, Gary Kildall, spent several hours flying above the Arizona desert while IBM executives sweated below awaiting a meeting and some sort of agreement. The apocryphal tale ended with IBM executives, shirts open and ties loosened, returning to Gates and begging for help.

“We had heard of a guy in Seattle who had designed his own 8086 operating system. He was called Tim Patterson, so we bought it and modified it,” said Gates, at the time. Few now recall that he was not the guy who invented the worlds first virtually ubiquitous operating system, but he knew a man who did.

In possibly his best move in corporate strategy, the IBM contract was based on royalties. IBM never owned the operating system and by the time it developed PS/2 and OS/2, everyone was hooked on PC and MS-DOS. And IBM had to pay a new licence fee for each version, Bill was taking baths in dollar notes.

While in 1984 Gates remained diplomatic saying about IBM “They are the most honest and straightforward company we deal with,” he quietly admitted that dealing with a large company could be frustrating and only personal contacts could help clarify IBM’s often ‘mysterious’ policies.

It was only later that I learned that internally at the time Microsoft’s dealings with IBM was called ‘Bogu’; bend over and grease up.

It wasn’t until about 1996 that I had another chance to meet Bill, when he decided to announce a deal with CNBC, the business cable network of the world’s largest broadcaster, NBC. How times had changed. Not only was he doing business with a company that was created to break the unions at NBC by its owners the global behemoth, General Electric, but he was wearing a suit.

I was working at CNBC, but regarded as a lowly hack, he swept on by only to mumble incoherently about ‘its all good’.

Over the years I had become disillusioned with Microsoft. The once baiter of the school playground bully, had become one itself. I had listened in amazement to its Asia Pacific boss tell me there was nothing wrong with Windows 95 at launch and that if it was wiping data from people’s disk drive it was because they didn’t install it correctly. When I pointed out that head or research at a well-known computer company had done the same and his hobby was creating mathematical algorithms to find a cure for cancer, I was then told it was flaw in some internal hard drives.

But it was never Microsoft’s fault.

When I relate the story of Gerry meeting Billy, my mate Harry just mumbles something about bloody computers, wishes he had Gates’ cash and extols the virtues of Excel. Mind you he’s coming up to the end of his finance director contract and has been busying himself building a pond about the size of Lake Windemere, so his grasp on reality is tenuous.

But the reality I never grasped in 1984, was that Gates was a genius at strategy, he could see the long-term. He was never the computer genius everyone thought.

He had good concepts, after all when he talked about a computer in every home in those days, everyone did think he was on smack. When he said the future was software, not hardware, Digital Equipment, IBM and HP laughed at him.

He saw opportunities, found people to do the grunt work and sliced up some excellent deals. He knew the key to winning was domination.

The one mistake he made was that he never saw the value of the internet, labelled Netscape a flash in the pan and now his firm is locked in combat with Google.

If you would like to read the original 1984 story it can be found; http://www.financial-journalist.co.uk/financial_journalist/?p=3