The Crunch Goes Wider Than Credit

The downward pressure on house prices is a simple market reaction to fewer buyers who are willing to pay the asking price and have enough funds to do so. The National Association of Estate Agents reports that the number of house buyers on agents’ books dropped in February to the lowest yet recorded, from an average of 276 per agent in January to 243. The number of properties for sale fell from 83 to 74 per agent over the same period.

There are three main groups who cannot wait out the present situation:

• Borrowers who have used the previous market value of the house to secure debts and where the lender is now calling either for repayment or further security;
• First time buyers now denied sufficient mortgage finance to purchase and unable to find suitable alternative rented accommodation;
• Sellers already in the process of moving home where the gap between the sale price and the buying price has widened due to different market conditions in each case.

For other groups, while present circumstances surrounding mortgages are an inconvenience, the delay and frustration involved are relatively small consequences.

Some characterise the credit crunch as the result of a series of market failures. On the contrary, the markets have worked as markets do. Through a combination of greed and incompetence some banks fell down on the job. The crunch occurred as a result of the parcelling up of mortgages into tradable securities. Now nobody wants to buy something that has little worth and banks are increasingly reluctant to lend to each other. It sounds like a typical market to me.

More serious is the indirect outfall. This takes the form of lost jobs and, in some cases, the wholesale closure of firms. Jobs and firms affected include planners, surveyors, gravel and cement works, brick makers, the transport industry, builders and the building trade, estate agents, solicitors, removers, domestic furnishers and appliance makers – even the Post Office, the Land Registry and the local Councils that need less people to deal with change of addresses.

As workers fall out of employment the tax-take drops and the social security bill grows. As firms go out of business the bad debts of their supplies and lenders increase. It takes very little to trigger a domino effect throughout the sector and associated providers.

Signs that this process may have already started are coming from the USA. 153,000 redundancies were declared across the US financial services industry in 2007, more than half of them relating to mortgages. In the next 12 to 18 months American commercial banks are expected to cut a further 200,000 US jobs to reduce costs. Those job cuts will be in operational and support departments among modestly paid people.

Meanwhile, those heading the institutions are out of their depth. The US banking industry has not experienced a reduction in revenue for 40 years. In 2008, it looks like it will decrease for the first time in the working lives of those in charge. They have no practical hands-on knowledge of how to handle it. We can expect more costly mistakes as they learn at everyone else’s expense.

The call now is for governments to “fix” the problem. In an interim report in February to the G7 the Financial Stability Forum said, “Events have shown that the quality of risk management varied significantly among the largest and apparently most sophisticated market participants.” What comfort can we take as governments now begin to meddle – the self-same governments that failed to notice and regulate the dangerous free-for-all in the first place? It is not sophistication we seek; it is plain commonsense.

The last Conservative government was rightly excoriated for devastating the manufacturing base of this country. We have yet to see the worst that this Labour government can do to rival that. When help and hemlock are offered by the same hand any hesitation is wholly understandable.

First Cloud Cuckoo of Spring?

Andrew Oswald proposes that to cope with possible bank collapses we should devise an effective insurance solution in which governments are only minimally involved (Independent on Sunday, 30 March 2008). He sees this as a cast-iron guarantee. I beg to differ.

Mr Oswald’s idea is that when depositors open an account they should be offered insurance deals that, for different levels of premium, would guarantee different amounts of their funds. Those customers who wish for complete security will have that option, but only at the cost of a substantial premium.

Those slightly less worried will be able to opt for a smaller premium and a larger "excess" where, in the event of a bank collapse, they will forgo the first X hundred pounds of their savings.

This wheeze seems to overlook the existence of The Financial Services Compensation Scheme. The FSCS is the UK's statutory fund of last resort for customers of authorised financial services firms. It pays compensation if a firm is unable, or likely to be unable, to pay claims against it. In general this is when a firm has stopped trading, and has insufficient assets to meet claims, or is in insolvency. The service is free to consumers.

The FSCS protects deposits, insurance policies, insurance broking (for business on or after 14 January 2005), investment business, and mortgage advice and arranging (for business on or after 31 October 2004).

As a statutory fund of last resort there are limits to the protection FSCS can provide. The maximum levels of compensation are:
· deposits: 100% of the first £35,000.
· investments: £48,000 per person (100% of the first £30,000 and 90% of the next £20,000).

Other levels govern insurance and mortgage provision.

The point being that 100% cover was in place for most small depositors of Northern Rock. It made no difference. People wanted their money out. Demonstrably, offering guarantees is wholly ineffective in such circumstances. People want to avoid the turmoil ahead of a collapse and the interregnum following a collapse when everything is sorted out at some other institutions’ leisure. Substituting commercial insurance cover for the Government-backed provision offered by the FSCS is unlikely to work.

Andrew Oswald also holds a somewhat rose-tinted view of the insurance industry. He believes that the large institutions who might offer this kind of saver insurance have assets spread widely enough, across many nations, to survive even major financial shocks within a single country. And, moreover, insurance companies are better placed than government inspectors to keep an expert eye on any profligate lending practices inside banks.

This is serious cloud cuckoo land. Maybe Mr Oswald is too young to remember the collapse of Lloyds. Let me remind him.

Between 1940 and 1970 many Lloyds syndicates took on enormous amounts of excess insurance business for leading asbestos companies. Underwriters ignored the medical evidence of the risks they were running, even though insurance companies had been refusing to sell life insurance to asbestos workers since 1918. The syndicates were enticed by the lucrative stream of premium and investment income which such business produced.

In 1992 the Yale School of Organisation and Management predicted 200,000 asbestos-related deaths over the next quarter of a century at a cost to asbestos manufacturers and their insurers of $50 billion. The combined book value of their 45 primary and excess insurers was estimated at only $50 billion, before allowance for all other types of claim likely to arise and make a call on those assets.

Many Lloyds Names were ruined financially. Some went bankrupt. Some committed suicide.

It doesn’t end there. On January 10, 2001 Chester Street Insurance Holdings Ltd., formerly Iron Trades Holdings Ltd was declared insolvent. Financial uncertainty over the escalation in asbestos liabilities led Chester Street’s directors to propose a run-off of the company’s business. The High Court approved the Scheme on February 28. Within ten days, the Scheme Administrators, in consultation with the Creditors’ Committee, set an initial payment percentage of just 5%. The likelihood of obtaining insurance-backed compensation for many UK victims of asbestos-related diseases evaporated.

The woeful record of the insurance industry is not confined to asbestos. In August 2001 the business of the Frontier Insurance Company was seized by officials of the New York State Insurance Department in a move designed to avoid insolvency. Harry W. Rhulen, the group's president and chief executive, said that the company's collapse had been caused by unsound underwriting and pricing of medical malpractice policies in the early and mid-1990's. “We did a poor job of determining which were the good doctors and which were the bad”.

In the same year the HIH Insurance Group collapsed and the NSW Supreme Court placed it into provisional liquidation. HIH insurance is now in run–off, which means it is managing its outstanding claims and not writing any new business. This could take several years to complete; some have suggested as long as 10 years.

Also in 2001 Independent Insurance, based in the UK, collapsed. The business consisted mainly of home contents insurance for council tenants, which involves the regular payment of small premiums. An initial valuation of the company's assets ran into "tens of millions", while estimates of its liabilities ranged as high as £1bn. The liquidators described the disaster as the worst “since Maxwell”.

Saver insurance is not the answer. It merely hands the hot potato to an industry no better placed to moderate risk and mitigate disaster than the banks themselves.

Time to Get Real

In a recent post Damian Wild recalls Sir John Harvey-Jones’ optimistic expectation that “at the present rate of progress, everyone will know the financial position of the company at every level in real time”. However, Sir John was sufficiently realistic to note, “FDs could be the key gatekeepers making that happen or they could be the abominable snowman preventing that from happening.”

Unfortunately, casting around in the snows of corporate reporting for recent signs of Bigfoot there is plenty of evidence that FDs, and the accounting profession in general, are leading the corporate world deeper and deeper into the trackless wastelands. Financial reporting has now become so esoteric that fewer and fewer people understand the figures that are put in front of them. We are light years away from the stewards of the business (directors) accounting to owners (shareholders) for their conduct and we seems to be accelerating.

City figures have asked questions about the reliability and relevance of fair value accounting when mark-to-market valuations are based on an insignificant number of related market trades. Many have been even more sceptical about mark-to-model assumptions used to value illiquid assets. If Sir John’s Yeti is a mythical creature of folklore and legend, perhaps it is only fitting that FDs are now accounting in make-believe money.

The Association of British Insurers has claimed recently that investors feel audit committees don’t know enough about what is going on. According to Peter Montagnon, director of investment affairs, “This relates to the committees’ knowledge and also to the accounting standards and what has to be reported.” Where does this leave the average shareholder? The ceaseless change, standardisation and internationalisation of accounting rules when combined with the increasing complexity of financial instruments has succeed in generating an impenetrable fog around the conduct and condition of our major institutions.

Grant Thornton claims that “audit committees, are having to place increasing reliance on financial directors and auditors to explain the IFRS accounts and to obtain appropriate assurance” as they attempt to find their way through the traps and tripwires set by standards on financial reporting. If this level of support is required by highly paid and experienced businessmen at the head of our major quoted companies, how is the man in the street expected to cope? In trying to understand the labyrinthine logic of their own conduct do our public companies now face the centipede’s dilemma?

Last week’s Accountancy Age editorial wonders whether the current confusion and uncertainty being experienced by audit committees would be most easily resolved by regulation, such that those that serve on them meet some minimum level of financial acumen. This proposal only serves to distance the shareholders even further from the core issues. If only those who are specially trained can hope to understand what is happening where does that leave the underlying fundamental associated with accounting – giving a convincing explanation of what is going on?

Sir David Tweedie, head of the International Accounting Standards Board has suggested a form of parallel balance sheet on which entities such as SIVs could be explained in greater detail. Sir David must accept a large measure of blame for the sorry mess that corporate reporting now finds itself in. Floating the idea that companies ought to keep two sets of books would appear to be the final scene in an increasingly farcical drama.

Sir David claims, “What we’re trying to do is simplify the accounting”. Wonderful! Then let’s do just that. Let us make everything as simple as possible, but not simpler and introduce what I shall dub “The Alf Garnett Test”:

1. Take your next financial instrument, accounting standard or set of Statutory Accounts into a randomly selected local boozer (wine bars, tapis parlours and cocktail lounges excluded) .
2. Approach the nearest person at the bar.
3. Ask him or her to explain what they understand your document to mean.
4. If they can give a cogent explanation in ten minutes or less, then you may publish.
5. If not, scrape it, buy a round of drinks and get back to reality.

The Source of Stress

A recent Whitehall report on stress claimed that high-pressure jobs which cause chronic stress can dramatically increase the risk of a heart attack (Independent, 23 January). Unfortunately, the report would appear to have the causation hopelessly muddled. The possibility that its findings could lead to tougher guidelines for employers on reducing stress just perpetuates the confused thinking.

The inference is that the jobs in question are inherently stressful. Thus, only by changing either the job, or the way that it’s managed, can the level of associated stress be reduced. A little reflection shows that this is not the case. Stress is an emotional state experienced by a particular individual.

Imagine there’s a woman called Mary who has just taken on a task that’s entirely new to her. She is keen to perform the task well not only for her own satisfaction, but also to impress her boss, to obtain a much needed increase in pay that will help her stave off mounting debt and, finally, to get noticed by that dishy man in the Purchasing Dept. Her first few tries are a disaster. Her workmates laugh at her. She believes she will never perform the task well. Her stress level is rising.

At a different time and place a man called Philip also takes on an entirely new task. Philip considers the task trivial and it is really of no interest to him. He attaches no importance to anyone else’s opinion, he is already wealthy and there is no significant other on whom he wishes to make an impact. His first few tries are also a disaster; he fares no better than Mary. His workmates also laugh at him and, although he believes he will never perform the task well, he is totally unconcerned. Philip is not stressed.

In each case the task in question was identical. The reaction to it and its associated outcomes were entirely different. The task is neutral. The stress experienced only rises when the person concerned attaches particular significance to what they are doing. Someone who is largely indifferent to what happens in any particular set of circumstances is not going to get stressed.

The association between the stress people report and their biological responses found by the Department of Epidemiology at University College London is to be entirely expected. A person’s emotional state feeds through to their physiology and their behaviour. They are inextricably linked. Such a finding merely confirms an interaction that is already recognised and well known.

Earlier results from the studies, led by Professor Sir Michael Marmot and published in the European Heart Journal, showed that those in low-status jobs who were required to follow the orders of their bosses were more stressed, and died sooner, than the hot-shot executives handing out the orders. Again, this is to be expected. Those hot-shot executives are a self-selecting sample.

If you have the ability to become a hot-shot executive, but do not relish the stress you associate with that position, then you unlikely to either put yourself forward for promotion, or accept it should it be offered. Those lower down the hierarchy will include a higher proportion of those already approaching the limits of their abilities, those less mobile in the job market for want of talent and those essaying new tasks and fresh assignments with which they have yet to become comfortable. Professor Marmot’s findings are a glimpse of the blindingly obvious.

Given this set of facts it would be perverse to place the onus on employers to mitigate the stress experienced by each individual in their workforce. Even among those engaged on exactly the same work, in the same location for the same boss stress will vary from individual to individual. Those that care most will be stressed most, other things being equal.

But other things rarely are equal, so is the employer entirely culpable in respect of Mary where the money element of her emotive reaction is self-imposed and outside the employer’s control? Or is the expectation now that employers should hire only those that couldn’t-care-less on the grounds that people with that attitude are less likely to experience stress?

Full and appropriate consideration and nurture of the workforce is in the interest of every employer. Some legislation in some areas is necessary to direct the unenlightened, but the nanny tendency of the British state can go too far, especially when it is guided by questionable science.

10 Top Networking Tips

What makes a successful business? 99% of the time it is not a killer business idea. Those are as rare as hen’s teeth. 99% of the time it is determination, passion and commitment. These qualities work in any business and are quickly and easily communicated during networking.

Networking brings people together. And since people buy from people it is one of the most effective and direct ways of communicating your message.

Here are some additional tips to help you through the process:

1. 80% of life is showing up.
Woody Allen’s well-known quotation applies to networking just as much as it applies in the rest of life. Some of us find crowds oppressive and strangers intimidating so, for us, actually showing up at a network event is a real achievement. For others the network event comes at the beginning of a very full day or after hours of frustrating and exhausting toil. Do we really want extend our work-life any more?

Yes, we do, if we want to continue to build our business and ensure future orders arrive when needed. Showing up at a network event is a critical step in that process.

2. Being self-conscious is normal.
Having made the effort, now what do you say? Even if you have prepared and rehearsed that ‘elevator pitch’ (you did do that, didn’t you?) when you are face-to-face with a stranger, somehow it does not sound quite as good. This feeling gets worse as the noise levels in the room rise and your voice gets louder and louder. Fear not. Feeling awkward is normal. We’ve all been there. It’s even a place that some of us revisit from time to time as we experiment with different approaches. Remember two things:
a. Your companion has no idea what you were supposed to say, so they won’t know if you get it wrong;
b. Be yourself. If you are feeling nervous, lost for words or out of your depth – then say so. The person you are talking to will already have experienced the same thing. The only reactions you are likely to get are sympathy and support.

3. Now you’re here, you may as well have fun.
Networking is about business and it does form part of your marketing, but that is no reason to treat it as a sombre and solemn subject. You are among people with the same aims and aspirations as you have. You could learn something from them. They could even learn something from you.

It may be business, but it’s in a social setting so relax and enjoy it. Take a few deep, calming breathes and jump right in. You will come across more naturally and you will notice a lot more about other people once you overcome the initial jitters.

Forget about yourself, nobody cares anyway. They are all fully absorbed with their own worries – oh, yes they are. And you can help both of you by talking about them (it’s everyone’s favourite subject). Once you start to concentrate on what they are saying you will soon forget about yourself.

4. Be among the first to get here and the last to depart.
Networking events only last so long – usually around 2 hours. Together in one room, for just a short period of time, you have a group of people who are there with the specific intent of meeting you. Make the most of it. Speak to as many of them as possible and allow yourself the time to find out a little about them. Who are they? What do they do? What are their plans? What issues are they grappling with? Where could you help? If you spend as little as 10 minutes talking with each one, just 12 people will fill those two hours easily.

Where possible, position yourself to watch the door out of the corner of your eye. Is a previous contact arriving that you want to touch base with again? Or is an interesting prospect about to leave before you have had a chance to exchange a few words? If you arrive late or leave early you will miss those opportunities and others may then get in the queue ahead of you.

5. Telling isn’t selling.
If your conversations at a networking event consist mainly of you telling the other person what you do, how you do it, the prices you charge and the guarantees you give then you will part company knowing very little about them and nothing about how you might be able to help them. Working out how your business can best meet their needs is your responsibility, not theirs.

Selling consists of learning as much as possible about the other party and finding a way of being of service to them. Initially that may not equate to a sale. It may be a piece of information, a telephone number or a contact of yours capable of meeting their current need. That’s good. That gives you a common point of reference and the opportunity to follow up later to see how things have progressed.

Taking a (genuine) interest in your prospects will rank you ahead of most of the competition and keep you ‘on the radar’. Acquiring good customers takes time; be prepared to invest it.

6. Make friends when you don’t need them.
If you wait until you need someone’s help and then befriend them in order to obtain it you are likely to be found out. Out of desperation you are also likely to find yourself in a worse bargaining position and give away more than is necessary in order to relieve an emergency. Following this approach you will be entirely dependent on goodwill, rather than fair and equal reciprocity (a favour asked for a favour done).

Making genuine friendships, built on mutual interest and warm companionship with nothing at stake, is a much better reflection of the generous person that you are. Approaching another person in an open and honest manner gives you the freedom to be yourself. You carry no hidden agenda and are less likely to provoke the instinctive, defensive reaction: “What’s this person after?”

7. It is not about the business cards you give out.
If you attend a network meeting with the sole intention of giving out as many of your business cards as possible, even to people who do not request one, you may very well succeed. Then what?
a. Those that did not request your card are likely to file it or throw it, which will amount to much the same thing.
b. Those that did ask for your card without you taking any interest in them are probably being polite. The result will be the same.
c. Those in whom you did show some interest and who asked for a card will put it down meaning to call you; lose it under a pile of paper; find it three weeks later; spill tea on it and then sweep it into the rubbish by mistake.

Relying solely on the business cards you give out cedes control to the people who have them. They have busy lives too. It is more in your interest than theirs that they use the card – after all, you are not the only fish in the sea. That leads on to…

8. It is not about the business cards you collect.
Merely scooping up business cards from everyone else in the room will just add to your large and growing collection. I am sure it is a fascinating hobby, but is it taking your own business forward? Once you have someone’s business card…you have to put it to work. Now YOU are in control, so make good use of it.

Add the contact to your database (you do have…?) and programme in a series of appropriate follow-ups. The first need be little more than a ‘nice to meet you’ and a reference to something that came up in conversation between you. Subsequent ones at decently spaced intervals need to offer slightly more, or it just becomes spam. It’s your business, I will leave you to work out what you can offer.

9. Don’t end the evening wishing you had…
…done something, or said something, or met someone that was there. Opportunities in life can be fleeting. If you have spent the money to be here and taken the time and trouble to turn up, then you owe it to yourself and your business to make the most of it.

At a networking event that usually means taking ‘people risks’. It means stepping forward and introducing yourself to total strangers. But the magical thing about that is you need only do it once. After the first time the person concerned is no longer a stranger!

The other bonus is that people who attend networking events do so with the explicit intention of meeting strangers such as you. By stepping forward with a welcome of your own you are already helping them fulfil the purpose they had in coming here. How cool is that as an opening gambit with a potential customer?
10. What would you do next, if you knew you could not fail?

Life is full of surprises. The biggest surprise to me is the limits people impose on themselves. Too often the hobgoblins inside their heads whisper, “Who do you think you are?” and “You couldn’t possibly!” At that point self-doubt creeps in and many a wonderful adventure is stillborn before it begins.We all have wild and wacky ideas, many more than we ever feel happy disclosing. If networking is about getting noticed, if your future means being memorable, then a networking meeting is just the place to spread your wings and be eager to fly!

Valuing People

What species of thinking produces an expression like ‘Human Capital Management & Measurement’ and then holds a conference that devotes a whole day to the subject? To me such terminology displays arrogance in those that use it and portrays disdain for those about whom it is used.

As professionals let us be clear: 'capital' is the money or other assets owned by a company. Judicious use of such assets helps to keep it in business. 'Capital Assets' are the plant and machinery owned by the company and used in producing goods. As much as some directors and senior managers may like to think otherwise a company does not own the people who choose to work for it.

In no sense can people be counted as capital!!

Some companies, perhaps the same companies, do have the habit of referring to people as ‘assets’ or ‘resources’. Again, assets are property; people are not. The staff may have certain qualities which yield benefits to the firm (why else would they be employed? Duh!), but the qualities belong to the people, not the firm. I await the day - not holding my breathe - when a firm says, “the people who work for us did a great job last year, but there is no guarantee they will stay with us and no certainty they will remain as capable when circumstances change.”

And where ‘Human…Management’ is concerned, the best response is Steven Covey's: “You cannot manage people - you can only manage tasks. People must be led.” Inevitably, I can only doubt the capacity to lead of anyone who refers to the people on whom they depend in terms more suited to inanimate, unfeeling objects.

The same conference boasted of "developing both a talent management strategy and… effective measures of [an] organisation's human talent." Good grief.

Even if talent could be measured (how talented was Mozart? Was that an 8.7 or a 9.3?) just what particular talent - note the singular - will your business need most tomorrow? Or in 12 months time?

Do two people with the same talent double your talent score, or leave it unchanged?

Is a talented pianist worth two talented footballers, or can I swap six talented accountants for one talented plumber? And, as Network Rail struggle to complete their west coast mainline engineering works, what price talented engineers? Several million pounds I would judge, based on the £2.4 million it had to pay in 2007 for failing to complete work on a project in Portsmouth on time.

The terms we use to refer to others shape our attitudes and influence our thinking. Words are not neutral. As a professional I hope I do not treat those I work with in such a callous and cavalier fashion. People respond better and feel more motivated when they are acknowledged and recognised for the all qualities they have, rather than being taken for granted, sucked dry and then carelessly discarded when no longer of use.

If we wish to get the most from our people we must treat them as people. On the other hand, should you happen to work for an organisation that subscribes to this stack ’em, rack ’em and sack ’em approach, please put on a pair of trainers…and run like hell.

How invisible are you?

Recently I was talking with a new contact who offers data management services - basically making digital copies of archive documents. He was wondering whether having a presence on sites like Ecademy or Facebook would yield any benefit to his business. On balance he doubted it.

The reason he gave was that he dealt mainly with people like the Senior Partner in a firm of Solicitors or the CEO of a Hospital Trust. He questioned whether that sort of individual would ever look at any website, even Ecademy, to find services such as his. Probably not.

I asked him to imagine that he was a Senior Partner.

Only then did he recognise the full course of events that led up to a request to tender and eventually a signed contract. He realised - for the first time - that although he might end up meeting people like Senior Partners, such exalted beings do not do the initial leg-work to identify possible service providers.

Generally that is done by someone much lower down the organisation, usually a lot younger and with no decision-making capacity - but certainly with the freedom to list, or not to list, those who might provide that service. And, being younger, that more junior person would almost certainly look at Ecademy, Facebook and other similar sites.

Clearly, if his firm had no presence on those portals, then he would be invisible to the list makers of this world.

Being on the list would not guarantee an invitation to tender; but not being on the list would certainly guarantee no invitation to tender.

It was a small point, missed by my new friend until now, but with all the potential to make a difference. And all from a small piece of networking.

So, how invisible is your firm? And would you like to get more noticed?