HNW Magazine April 2014 Issue

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CONTENTSMONEY & WEALTH

hnwmagazine.co.uk April 2014

4

14 The Economic Thaw12 How Not To Invest

Opinions about the direction of the markets right now range from“charging bull” to “big bubble”; they’re as varied as all the places JustinBieber has been in trouble and sometimes as downright bizarre as theman unlawfully tasered for throwing his boxer shorts at a policemanduring a strip search.

Charting the herd mentalityof greed that repeats itselfuntil bankrupt.

Mike Williams shows us howthe markets are headed in theright direction.

18 Your Business Stage 21 “Monster Spray”The essential role in the cul-ture of sustainable business-es; the role of entrepreneur.

We could use something justnow to scare away all thenegative market sentiment.

HNWHigh Net World Magazine

Volume 03 Issue 04 / 2014

10 First Word: Perspective Pays Dividends

FEATURE

How to Guide theBusiness Through Crisis

Page 27

Page 14The Economic Thaw

22 Crowdfunding Options

27 Managing A Crisis

34 The Long Short

35 Venture Capital

36 Leadership Measures

ShareIn’s Jude Cook talks funding

Tips from McKinsey’s Doug Yakola

Alan Steel’s view on the markets

The business of funding is moving fast

Willie Maltman on recruiting value

40 Practical Business Section

Face-Coin? Social MediaCurrency

ZoneFox on “Heartbleed”

Tax Avoidance

Curing Our CarbonAddiction

Diatribe: The SmartAccessory Market

EDITOR’S VIEWMONEY & WEALTH


7

HNW-High Net World Magazine

SALES

John KennedyClient Services [email protected]

EDITORIAL

Ed Emerson, EditorLawrence TaylorSid LyonsMark Dennison“The Brunette”[email protected]

DESIGN

David TodMartha TodFull Circle [email protected]

DISTRIBUTION

Cath Emerson, [email protected]

DIRECTORS

Ed Emerson, Managing [email protected]

Cath Emerson, [email protected]

The views expressed in HNW Magazine are thoseof invited contributors and not necessarily thoseof HNW Magazine Ltd. HNW Magazine Ltd doesnot endorse any goods or services advertised orany claims or representations made in any adver-tisement in HNW Magazine, and accepts no liabil-ity to any person for loss or damage suffered as aconsequence of their responding to, or relianceon, any claim or representation made in advertise-ments appearing in HNW Magazine. By respond-ing or placing reliance, readers accept that they doso at their own risk. ©HNW Magazine Ltd.Reproduction in whole or part is forbidden with-out the written consent of the editor.

The Politics ofUndue Credit…I find few things more irritating thanheadlines claiming Government ‘plansand programmes’ have led us safelythrough economic turmoil.

What a load of rubbish.

First, a bit of a reality break; the newsfrom the Office for National Statistics(ONS) that wages are nowoutstripping inflation for the first timein six years sounds nice, but there arethree problems with it:

1) The ONS’ record for accuracy isworse than flipping a coin – look outfor a retraction buried on page 17 ofsome publication or other in 3 to 6months time saying that figure wasbeing ‘adjusted’, and usually thewrong way,

2) The six month fall in inflationfigures is potentially a good thing, butthe size of the fall is not. Nor is thissomehow suddenly ‘good news forfamilies’ that regular pay is rising atthe ballistic rate of 1.8% instead of1.3%. That’s a 0.5% rise, or £2.50 onevery £500 someone makes. More tothe point, that’s like two jugs of milkat the local Co-op…on sale. Notexactly what you’d describe as asignificant easing of pressure on thefamily finances.

3) Inflation is still 1.6% as regular payrises at 1.8%. By example, thedifference is more like the cost of asingle jug of milk in the averageweekly wage…from the store of yourchoosing.

Then the political parties line up totake the credit for increases in thelabour market, wages, inwardinvestment, growth in exporting et al.

Folks, Government doesn’t createjobs for anyone but Government.Let’s be specific on this; a job is anyroutine activity for which we earnincome. Jobs derived from taxrevenue and not private-sector

sales, every single fireman,public school teacher, marine,sailor, airman, soldier, nationalpark ranger, defense industryemployee, governmentscientist, social worker,librarian, etc., etc. are under thedomain of Government jobscreation and any subsequentwages rises versus inflation.

The routine activity for whichwe earn income paid by anentity required to earn a profitis a different story. The privatesector creates employment anddictates how much employeescan be paid above the minimumwage line.

Yet the politicos are quick tostand in line to take unduecredit for business supportprogrammes that have oftentimes been in position longerthan they have.

And the oddity in all this is theconclusion that thoseprogrammes are allowingemployers to hand out wagerises. Is that somethingGovernment wants to takecredit for; wage rises, bonusesand commissions?

The dynamics of businessgrowth and development haveabout as much to do withgovernment intervention as thepercentage rise in the ONS’latest announcement; about0.5%, or in other words, nextto nothing.

ED EMERSON EDITOR

FIRST WORD


PERSPECTIVE PAYSDIVIDENDS

Opinions about the direction of the markets right nowrange from “charging bull” to “big bubble”; they’re as variedas all the places Justin Bieber has been in trouble andsometimes as downright bizarre as the man unlawfullytasered for throwing his boxer shorts at a policeman duringa strip search.

Ouch!

Sometimes we need a little guidance, something to lean onwhen the rush to believe the latest headlines makes yourhead spin.

The media can be very good at dredging fear into believablesnippets that cloud your decision-making.

You’ll have either seen the recent headlines or understandthe theme; “Tech stocks tumble”, “The markets look like1929 all over again”, and even good news turned bad, like,“Dow Jones at All-Time High Signals Market Top”.

Most of these articles arrive with little by way of fact orresearch to justify the copy that follows, and can push folksto continue to do what they’ve done for decades; sell lowand buy high, an all-too-common problem that they repeatuntil bankrupt.

That urge to follow the headlines and herd of opinion canbe strong. After all, the human instinct to run from per-ceived danger and seek safety amongst the crowd is nestledright in the centre of our heads, in our Lizard Brains; a gen-

etic holdover that’s been with us since way backwhen we lived in caves, and about as useful as yourappendix when it comes to investing.

Rob Seawright in his blog Above the Market@RPSeawright offers up 30 short statementsas guidelines about investing that can help you findyour way through the ether of the daily media noise.

And in his blog A Wealth of Common Sense@awealthofcs Ben Carlson looks at your point ofreference when measuring investments, and under-lines the importance of what truly successful inves-tors like Warren Buffet have long relied upon; thelong-term:

“Avoid the twin impostorsof short term out- andunder-performance. It isimportant for us to remem-ber what really matters isthe long-term.” Howard MarksBut what about a perspective on where we are to-day in the current bull market? Have a look at MikeWilliams’ The Thaw Continues (P14) to see the im-provements lurking beneath the headlines.

And remember, one good way to define insanity is:“Doing the same thing over and over again and ex-pecting different result.”

Don’t drive yourself insane. Get someone to helpyou who knows what they’re doing.

10ALAN STEEL


12

MONEY & WEALTH

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14

MONEY & WEALTH

MIKE WILLIAMS

Though markets, while bouncing a bit, continue theirinternal chop, the economic data also continues on itspath toward a "thaw".

The last few weeks have seen numbers improve, andwhile data output may pause for a bit earnings continueto be "surprising".

Some might argue the impact of the negative tone ana-lysts took to earnings expectations for Q1 created aneasier atmosphere to "beat".

That noted, companies continue to march ahead intorecord territory for cash flows, liquidity and earningspower even as slack builds in the productivity capacityfor many industries. And that's keeping a mild lid on costpressures for the most part.

Sentiment Stinks Again (that's a good thing)

With patience in mind, and avoiding the urge to rush tothe latest headline (I know - it's tough), some of the

recent sentiment surveys contain positive contrarydata worth consideration.

By example, on Monday 21st April a Bankrate.comsurvey revealed some 73% of respondents say they'reno more inclined to put capital to work in equities thanthey were a year ago, as the low rate of return onsavings accounts and certificates of deposit continues.

Note that bonds are rallying a bit again too as marketchop causes a pause in stocks.

The frustration over the last sev-eral months' market chop isprobably best viewed as "diges-tion" rather than fear, and shoulddirect us to search for value forthe long-term investor.

Even the Berkshire position is just hitting new highs.


MONEY & WEALTH

15

Is There More to Support That View?

Yes indeed. While hampered by the bitter winter thedata is thawing as noted and the economy is getting backinto gear.

Even though it demands our patience as investors andcauses more than a little heartburn at times, theresults should pay off handsomely over time.

Our friend Scott Grannis has some nice new chartsshowing the improvement lurking beneath the head-lines.

March industrial production figures exceeded expecta-tions (surprised?) (+0.7% vs. +0.5%) and February wasrevised sharply higher (+1.2% vs. +0.6%).

Dr. Ed Yardeni reminds us too that: "…over the past sixmonths, industrial production has expanded at a solid5% annualized pace. This is impressive."

Industrial production in the Eurozone is still lagging butnevertheless is still on the mend. Industrial commodityprices are up almost 3% in the past two months to aone-year high, suggesting that global manufacturing ac-tivity is doing just fine.

“As the thaw continues and theweather continues to warm up,please don't fret. Right after wefind out that the winter chill didnot end life as we know it, the‘Sell in May’ crowd will surelytake its place on the fear scaleand in the headlines.”


16

MONEY & WEALTH

The manufacturing component of industrialproduction was also strong, but was out-paced by gains in utilities (we should likelythink "cold weather"). And manufacturingproduction was up at a 3.5% annualizedpace over the past six months.

By the Fed's estimates (it should be proper-ly noted that they can only estimate it, sincethere is no way to actually measure it), theutilization rate of the nation's productiveapparatus rose a good deal more thanexpected (79.2% vs. 78.7%).

However, utilization rates are still belowtheir pre-recession high suggesting theeconomy still continues to carry a decentamount of "slack" as noted above.

This remains the Fed's justification forkeeping real short-term interest rates firm-ly in negative territory.

That said the chart above shows gains incapacity utilization in the past four yearsthat would typically elicit a substantial Fedtightening by now.

So don't be surprised when "it" happens.The Fed is still in uncharted territory; it'snot a question of whether they will tighten,but when and by how much. Continuedgains like we have seen of late will almostcertainly tip the scales in favour of soonerrather than later.

Is Housing Soft?

Not really, it was too cold to build or buy.Realtors I speak with are talking about a"busy spring" and "pent-up demand to hitthe pipeline", so by summer we should seemore positive data here too. Thus, housingstarts posted "lacklustre gains in March, butthat is not surprising given the poor weath-er that persisted."

As the chart above shows, builder senti-ment is still strong enough to expect hous-ing starts to move higher in the comingmonths. The housing boom has cooled offin recent months, but one can likely becomfortable that it is "still underway."

Par Equity invests in innovative young companies with high growth potential. Our approachis hands-on, investing where we can add value through our Par Advisers, deploying intellectualas well as financial capital. We offer qualifying investors access to both EIS and conventionalventure capital collective investment vehicles.

To find out more please contact either Paul Atkinson at [email protected] orPaul Munn at [email protected] or call +44 (0)131 556 0044.

www.parequity.com

Par Equity invests in innovative young companies with high growth potential. Our approachis hands-on, investing where we can add value through our Par Advisers, deploying intellectualas well as financial capital. We offer qualifying investors access to both EIS and conventionalventure capital collective investment vehicles.

To find out more please contact either Paul Atkinson at [email protected] orPaul Munn at [email protected] or call +44 (0)131 556 0044.

www.parequity.com

Par Fund Management Limited is authorised and regulated by the Financial Services Authority. Funds managed by Par Fund Management Limited are available only to electiveprofessional customers, who are able to invest in unregulated collective investment schemes. Retail investors will not be eligible to receive information about, or to invest in, such funds.


18

FEATURE

The Role of the Entrepreneur

We have long identified how business culture is key toinnovation, and specifically how business owners have aresponsibility to create a culture that allows innovationto thrive, whilst driving a long-term competitive advan-tage for the business.

Distinctions are commonly made between the roles ofleaders and managers. But we believe that a third keyrole is essential in the culture of sustainable businesses:the role of entrepreneur.

Let's look at the distinctions between the three roles andthe part they each play over the course of a business' lifecycle.

Entrepreneurs

Entrepreneurs are excited by novelty. Their focus liesin the future rather than the day-to-day. They are notalways the best communicators and due to their driveto create new things, they are not best placed to createprofit from their inventions.

Leaders

Leaders are revered in society for their ability to con-nect and communicate with everyone. They are natu-rally people-focused and have a talent for creating aclear vision for tomorrow to engage everyone in the

AT WHAT STAGE IS YOUR BUSINESS?BY SHIRLAWS


FEATURE

19

business. They are a natural bridge between entrepre-neurs and managers.

Managers

Managers focus on today - on the business and itsprocesses. They provide the rigour and attention todetail that ensures the business runs smoothly. In short,managers make you money.

Interestingly, whilst leadership is revered in business, asdemonstrated by the thousands of books and blogswritten on the subject, managers rarely receive suchaccolades.

A Fresh Definition of “Roles”

At a recent dinner for a New York bank, where DarrenShirlaw was a guest speaker, he asked, "How many ofyou are leaders and how many are managers?"

Most people identified themselves as leaders and veryfew claimed to be managers, for fear of being seen as apoor relation.

Darren then offered his definition - that entrepreneursare concerned with vision and the future; leaders areconcerned with people and tomorrow; and managersare concerned with process and today.

He asked the audience to state their role using this freshdefinition and the picture changed. Approximately 1 in20 people said they were entrepreneurs and the splitbetween leaders and managers was around 60:40.

Businesses grow faster and more profitably when theright people are in the right roles and when the manage-

ment skill mix aligns with the business' position in its lifecycle.

In the early stages, entrepreneurial skills are essential toinnovate great product. Without that, the businesswould not exist.

As the business moves from a conceptual stage intogrowth, a leader is required to build a great team ofmotivated people to take the product to market. Andas the business grows in size and complexity, manage-ment skills are essential to implement processes and todrive profit from the activities in the business.

“Entrepreneurs are concernedwith vision and the future; lead-ers are concerned with peopleand tomorrow; and managersare concerned with process andtoday.”

We can probably all think of great businesses that havebeen around for years but eventually foundered througha lack of innovation and failure to keep pace with achanging market.

So the role of the entrepreneur will take a maturebusiness through to advanced growth, by developing astream of innovative products that provide a consistentsource of future profits.

Entrepreneurs, leaders and managers are key roles inbusiness culture, each playing their part to enable com-panies to deliver sustainably against their strategicobjectives.

“As entrepreneurs we understand thatour biggest risk will always be the

performance of our business.”

Martin Cook B.Acc.C.ADirector

Martin Cook Accounting Services Ltd

19 Monktonhall PlaceMusselburghEast Lothian EH21 6RR

Tel: 0131 665 7238Mob: 07866 465 223E-mail: [email protected]

www.mcaccounting.co.uk

Helping contractors and consultants to keepwhat they earn


MONEY & WEALTH

21Sometimes the best innovations are the ones that keepthe ‘monsters’away; the things we imagine are real, butreally aren’t!

It’s these little placebos that allow us a glimpse of thetruth even as we’re leaning on them like a crutch. Likethe wonderful ‘innovation’ from a pharmacy in the smalltown of Watford City, North Dakota that made a curefor kids who are afraid of the dark; “Monster Spray”!

Boy could we use some Monster Spray for the marketsjust now, something that could scare away the negativesentiment, reveal the good opinions from the bad ad-vice, and help see our way clear of the 24/7 filler newsand the fears therein.

Hey, remember when the news was on the telly for anhour and then just stopped til the next day? How did weall survive?!

The psychological benefit of a spare can of Market Spray(or two) might have helped a lot of folks participate in,and benefit from, the now five plus year-old bull marketinstead of hiding in the closet waiting for the media totell them the good times have finally arrived…becausethat’s usually when it’s too late.

Tadas Viskanta, in his Avoiding the personal financemonsters, takes this point further on his blog@abnormalreturns:

“The world is awash in personal finance advice and commen-tary. There is no shortage of free (and paid) advice out there.While at the same time we are in the midst of what can bestbe described as a period of gross financial illiteracy. Part ofthe problem is that consumers have a difficult time distin-guishing between good and bad advice.

“The bad advice is often a function of a writer or financialadvisor simply talking their book. This is the if you all have isa hammer everything looks like a nail problem. That is whyinvestors need enough education so that in the very least theycan tell the difference between self-serving advice and morefair-minded advice. Fortunately this weekend there were acouple of pieces of financial advice that are worthy of yourtime and attention.

“The first is short, nearly free e-book from author WilliamBernstein,If You Can: How Millennials Can Get Rich Slowly,that provides younger investors with a primer on how to getstarted investing. Bernstein notes five things that all investorsneed to do including focusing on saving and avoiding the“monsters that populate the financial industry.”

There are far too few folks out there qualified to givegood financial advice; apparently only 1 in every 10,000has the capability, experience, historical knowledge andmathematical background to do so.

The rest are either making mistakes, making it up ormaking monsters.

HOW ABOUT SOME “MONSTER SPRAY” FOR THEMARKETS?

“We coulduse a littlesomethingto scareaway all thenegativesentiment.”

ED EMERSON EDITOR


22

Which type of crowdfunding is the best for my techcompany?

Most tech entrepreneurs I meet have now heard aboutcrowdfunding, which is great news and testament to theincredible growth the sector has experienced.

Although awareness is high I still find that an understand-ing of the different types of crowdfunding is still quitelow.

Here is a very brief guide as to which type of crowdfund-ing is best for your tech company.

Reward Based Crowdfunding

For who? Perfect if you have a consumer product thatis around the £100 or less mark.

Why? You are able to effectively pre-sale your product.You can gain lots of market insight as to whether peoplewill actually want to buy your product.

You’ll get loads of invaluable feedback from the crowd. Ifyou’re going to be seeking investment this is a fantasticway to demonstrate traction. You’ll need to ensure the

rewards you offer are achievable (and cost in for you!).A great way to get international exposure. Start build-ing your contact list right now – friends, customers,suppliers, communities that will care about yourproject.

The most successful pitches have been planned toperfection by the companies listing.

Which platforms? Kickstarter & Indiegogo with a trackrecord of funding technology projects.

P2P or Debt Based Crowdfunding

For who? You are making a profit and can afford topay interest. You have a couple of years of trading. Sonot for start-ups or pre-revenue technology companies.

Why? If you’re thinking of a bank loan/assetfinance/invoice factoring then you should seriouslyconsider P2P as an option.

A report recently issued by the Peer 2 Peer FinanceAssociation shows that UK P2P loans (or debt basedcrowdfunding) to business has cumulative loansexceeding £0.5bn in Q1 2014.

FEATURE

THE BEST

OPTIONS FOR MYTECH BUSINESS

JUDE COOK SHAREIN


FEATURE

23

The platforms can provide quick decisionsand are transparent on their fees. FundingCircle say the forms will take less than 30minutes and will get back to you within 2days with an answer on whether you can liston their platform.

The P2P platforms will often have the samecriteria that a bank would have: requiresecurity, ablity to demonstrate you’ll be ableto pay the interest and provide a financialhistory demonstrating positive cashflows.

Which platforms? FundingCircle, ThinCatsand MarketInvoice have a track record offunding technology companies.

Equity Crowdfunding

For who? Companies that offer a scalablebusiness that could be attractive to externalinvestors.

Why? For companies that want investmentto grow their early stage company. You’reselling shares in your company so you’ll needto be able demonstrate that your business isan attractive investment.

This will include producing a detailed busi-ness plan and explaining how your team havethe ability to achieve your plans. You don’tnecessarily get the involvement that youmight get from an angel (syndicate) but youget a “crowd” of who want you to succeed.

You don’t have to travel the country on a pitching roadshow and youcan clearly see how your funding is progressing.

Which platforms? ShareIn focuses on tech companies. Othersinclude CrowdCube, Seedrs and Syndicate Room. Seedrs specialise in veryearly stage seed investments (<£150k). Syndicate Room work withcompanies that have already secured an angel syndicate as the crowdfollows their terms.

ShareIn and all of the other equity crowdfunding platforms listedhere are all members of the UK Crowdfunding Association and adhereto their code of practise.

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FEATURE

27

“Even good managers can miss the early signs of distress,”saysMcKinsey’s Doug Yakola, who’s been running recovery programsfor 20 years. “The first step is to acknowledge there’s a problem.”

DOUG YAKOLA MCKINSEY

HOW TOLEAD ACOMPANYOUT OF ACRISIS…

“I’ve seen my share of boiled frogs,” says Doug Yakola,comparing companies in crisis with the metaphoricalfrog that doesn’t notice the water it’s in is warming upuntil it’s too late. As the chief restructuring officer orCFO of more than a dozen turnaround situations overnearly two decades, Yakola has witnessed firsthand how

managers back right into a crisis without recognizing thattheir situation is worsening. “They’re not bad managers, butthey’re often working under a set of paradigms that nolonger apply and letting the power of inertia carry themalong.” And if they don’t realize they’re facing a crisis, theywon’t know that they need to undertake a turnaround, either.


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FEATURE

Memoirs of a turnaround artist

McKinsey’s Doug Yakola reflects on nearly two decadesof leading companies through crisis. He’s also heard theregrets: sometimes managers underestimated how criti-cal their situation was—or they were looking at thewrong data.

Others took advantage of easy access to cheap capital tostay the course in spite of poor performance, believingthey could push through it. Still others got so caught upin the pressure for short-term returns that they neglect-ed to ensure their company’s long-term health—or evenwillfully sacrificed it.

Rare among them is the executive who stepped back toreview his or her own plans objectively, asking “Is thiswhat I thought would happen when I first started goingdown this road?” That’s a problem, Yakola says, be-cause acknowledging that your plan isn’t working is anecessary first step.

Yakola joined McKinsey’s Recovery & TransformationServices as a senior partner in 2011. Here, he offersten ways ailing companies can get started on the turn-around work they need.

1. Throw away your perceptions of a companyin distress

It’s next to impossible to come up with one workingdefinition of a company in distress—and dangerous tothink that you have one for your own company. De-pending on the situation, there are probably 25 differ-ent signs of potential distress (exhibit).

The problem is seldom made up of just one or two ofthese things, however. Rather, it is the result of agreater number of them interacting together and withother external factors.

Exhibit

There are numerous signs of distress—and a dis-


FEATURE

29

-tressed company is typicallydealing with multiple signs.

2. Force yourself to criti-cize your own plan

The biggest thing you can doto avoid distress is periodical-ly review your business plans.When you’re creating them,whether at the beginning ofthe year or the start of athree-year cycle, build insome trigger points.

A simple explicit reminder canbe enough: “If we don’t havethis type of performance bythis date or we haven’t gottenthe following 12 things doneby this date, we’ll step backand decide if we’re goingdown the right path, givenwhat’s happened since ourlast review.”

Such trigger points should be oriented both to opera-tional and market performance as well as to basic financialmetrics and cash flow. Look at where you are as acompany using basic financial and cash milestones, andthen look at where you are with respect to your industryand competitors.

If you’re not moving with the rest of the industry (or notoutpacing it, if the industry is struggling), then your planmay be obsolete. And don’t forget to look back at yourperformance over past cycles to identify any trends. Ifyou keep missing performance targets, ask why.

3. Expect more from your board

The beauty of a board is that it has enough distance fromthe company to see the forest for the trees. Managersoften treat their board as a necessary evil to placate sothey can get on with their business, but that underminesthe board’s role as an early-warning system when acompany is heading for distress.It’s also the board’s responsibility to look the CEO, theCFO, and the chief operating officer (COO) in the eyeand say, “OK, we like your plan. Now let’s talk aboutwhat it would take to cut costs not just by 3 percent butby 20. Let’s talk about all the things that can go wrong;

the risks to the business.” Sometimes significant eventshappen that no one could have foreseen, of course. Butin a typical distress situation, a company has usually justhad 18 to 24 months of poor performance, and theboard hasn’t been aware or hasn’t asked the right ques-tions. Independent board members—truly independentones—can have a big impact here.

The senior team at one company maintains a list of risksto the business, employees, and the plan. They reviewthose risks with the board on a quarterly basis to ensurethat they’re staying top of mind.

It’s an excellent way to have conversations that youwouldn’t normally otherwise have in a business operation.

4. Focus on cash

A successful turnaround really comes down to onething, which is a focus on cash and cash returns.

That means bringing a business back to its basic ele-ment of success. Is it generating cash or burning it?

And, even more specifically, which investments in thebusiness are generating or burning cash?


30

FEATURE

I like to think about this in the same way one would ifrunning a local hardware store. By that, I mean askingfundamental questions, such as whether there is enoughcash in the register to pay the utility bill, for example, orto pay for the pallet of house paint that will arrive nextweek, or how much more cash I can make by investing ina new delivery truck.

When you bring a business back to those basic elements,the actions you need to take to get back on track becomepretty clear. In many of the cases I have seen, the manage-ment team and board are focused on complex metricsrelated to earnings before interest and taxes (EBIT) andreturn on investment that exclude major uses of cash.

For example, variations on EBIT commonly exclude de-preciation and amortization but also exclude things likerents or fuel. These are all fine metrics, but nasty sur-

prises await when no one is focused on cash. Keepingtrack of cash isn’t just about watching your bankbalance.

To avoid surprises, companies also need a good fore-cast that keeps a midterm and longer view. For exam-ple, failing to pay attention to the cash component ofcapital investments routinely gets companies introuble.

Project net present values can look the same whetherthe return begins gradually at year two or jumps updramatically at year five.

But if you’re not focusing on the cash that goes out thedoor while you’re waiting for that year-five infusion,you can suddenly find yourself with very little cash leftto run the business, sending you into a spiral you maynot recover from.


FEATURE

31

5. Create a great change story

Companies in distress don’t focus enough on creating achange story that everyone understands—and that cre-ates some sense of urgency. Here’s an example. I recent-ly did a turnaround as chief restructuring officer of amining company. It was profitable, returned a decentmargin, and was cash positive.

But the commodity price was dropping, and the boardwas worried about generating enough free cash flow todrive the capital needs of the business. The change storywe created said, “Yes, we are profitable.

But the whole point of profitability is to generateenough cash to expand, grow, and maintain operations.If we can’t do that, then we’re headed for a long, slowdecline where equipment breaks down and lower pro-duction becomes the new reality.”

If you can tell that story in a paragraph or less, in a waythat means something to the average guy on the frontline, then people will get on board. In this case, employ-ees wanted to have their children and their grandchil-dren work for this company in the same remote mininglocation, and the change story spurred them to action.The key was a simple message, not fancy metrics.

6. Treat every turnaround like a crisis

Without a crisis mind-set, you get a stable company’sresponse to change: risk is to be avoided, and incremen-talism takes over. Your workers are asked to do a littlemore (or the same) with less. More aggressive ideas willbe analyzed ad nauseam, and the implementation will beslow and methodical.

In contrast, a crisis demands significant action, now,which is what a distressed company needs. Managersneed to use words like crisis and urgency from the firstmoment they recognize the need for a turnaround.

A company that’s in true crisis will be willing to try somethings that it normally wouldn’t consider, and it’s thosebold actions that change the trajectory of the company.Crisis drives people to action and opens managers up toconsider a full range of options.

7. Build traction for change with quick wins

The tendency of most managers is to put all of theirfocus and resources into three or four big bets to turn

a company around. That can be a high-risk approach.Even if big bets are sometimes necessary, they take a lotof time and effort—and they don’t always pay off.

For example, say you decide to change suppliers of rawmaterials so you can source from a low-cost country,expecting 30 percent lower direct costs.

If you realize six months later that the material specifica-tions don’t meet your needs, you’ll have spent time youdon’t have, perhaps interrupted your whole productionschedule, and probably burned a bunch of cash onsomething that didn’t pay off.

In addition to going after big bets, managers should fo-cus on getting a series of quick wins to gain tractionwithin the organization. Such quick wins can be costfocused, cutting off demand for some external servicethey don’t need.

Or it could be policy focused, such as introducing amore stringent policy on travel expense.

Not only do such moves improve the bottom line, theyalso generate support among employees. In any givencompany, you’re likely to find that a fifth of employeesacross the organization are almost always supportive.

They work hard. And they will change what they’redoing if you just ask them. These are the people you’llwant to spend most of your time with, and they’re theones you’ll promote—but you’ll probably spend toomuch time with the bottom fifth of employees.

These are the underachieving ones who actively resistchange, look for ways to avoid it, or are simply highmaintenance.

What often gets ignored is the remaining 60 percent ofthe organization. These are the fence-sitters, and they


32

FEATURE

are tuned into action, not just talk. They see the changesgoing on, and if you proactively work with them, then 80percent of the organization will be behind you.

But if you don’t give them a reason to stand up and bepositive about the company, they’ll go negative.

That’s the importance of quick wins. When you quicklytake real action, and when those actions affect the man-agement team as well, you send a powerful message.

8. Throw out your old incentive plans

Management incentives are often the most overlookedtool in a turnaround. In stable companies, short-termincentive plans can be a complex assortment of goalsrelated to safety, financial and operational performance,and personal development.

Many are so complex that when you ask managers whatthey need to do to earn their bonus, many just shrugtheir shoulders and say, “Someone will tell me at the endof the year.”

In a turnaround, take a lesson from the private-equityindustry and throw out your old plans.

Instead, offer managers incentives tied specifically to whatyou want them to do. Do you need $10 million ofimprovement from pricing? Then make it a big part ofyour sales staff’s incentive plan. Need $150 million fromprocurement?

Give your chief purchasing officer a meet-or-beat target.Be willing to forgo bonus payments for those that don’tachieve 100 percent of their target—and to pay outhandsomely for those whose results are beyond expecta-tions.

9. Replace a top-team member—or two

Experience tells me that most successful turnaroundsinvolve changing out one or two top-team members. Thisisn’t about “bad” managers. In my 20 years of doing this,I’ve only seen a small handful of managers I thought weretruly incompetent.

But it’s a practical reality that there are managers whomust own the decline. And more often than not, they areincapable of the shift in mind-set needed to make funda-mental changes to the operating philosophy they’ve be-lieved in for years. Whether they realize it or not, theyblock that change because they’re bent on defending

What they believe to be true. Although it’s difficult,removing those people sends another signal to yourstakeholders that there will be changes and you’re notafraid to make tough moves.

10. Find and retain talented people

Beyond the leadership team, there are two types ofpeople I look for immediately.

First are those that have the institutional knowledge.They may not be your top performers, but they knowall the ins and outs of the company—and are vital tounderstanding the impact of potential changes on thebusiness.

Many times they are the disgruntled ones, unhappywith the company’s performance. But you need peoplewho are willing to point out the uncomfortable truths.

A turnaround is also a real opportunity to find the nextlevel of talent in an organization. I’ve been throughmultiple crises where the people who added the mostvalue and impact weren’t the ones sitting around thetable at the beginning.

I have often found great leaders two and three levelsdown who are just waiting for an opportunity—and thefact that they can be part of something bigger thanthemselves, saving a company, is often enough toattract and retain them.

For both groups, it’s important to realize that retentionisn’t always about money and bonuses. It’s also aboutfiguring out the individual’s needs.

Good turnaround managers actively look for thosepeople and find a way to get them involved.

About Doug Yakola

Doug Yakola, senior partner in McKinsey’sRecovery & Transformation Services,focusingon turnarounds and financiallydistressed companies.

With thanks Ryan Davies and Bill Huyettfor their contributions to this article.

This article originally appeared atmckinsey.com Insights & Publications.

What were the longer-term investments he suggested? “Innovation and product enhancements, capital and plantequipment, employee development, and internal controls and technology.” I find it hard to disagree with him.Stock buybacks and cash dividends totalled $214.4 billion in the fourth quarter of 2013. That is the highest level since therecord high of $233.2 billion in the final quarter of 2007, according to the Wall Street Journal. Compare that to the secondquarter of 2009, when buybacks and dividends totalled a mere $71.8 billion.

Alan here – Barry makes a good point; where the money is being spent right now for shorter-term gain is where it’s notbeing spent on longer-term development issues, and that’s why we so often hear the collective whinges about “this is theslowest recovery in history” and “It’s all looking like 1929 or 1987 or 1999…again”.

Right now there are $Trillions in corporate cash “sitting on the sidelines”. And as that money moves, so too will the markets.

As I write this the Dow Jones, FTSE 100 and S&P 500 are all up, in or nearall-time high territory. That’s good news for investors, and a monetarymigraine for headline writers looking for short-term stockmarket woes toworry us about.

And therein lies the point; we should all be looking longer term, coming togrips with product innovation and development, seeing that the advanceswe’ve made in technology and telecoms over the last 20 years in particularare likely to be repeated in areas in the future throughout healthcare andbiotechnology, the Internet of things and robotics, and even the financialmarkets and how we use currency and conduct transactions.

Barry Ritholtz of The Big Picture relays the importance of longer-termthinking for the corporate community in his recent post Triggering the NextStock-Market Rally where he writes:

Laurence Fink, chief executive officer of Blackrock Inc., the world’s largestmoney manager with more than $4 trillion in assets, recently issued awarning to U.S. companies: Stop focusing on short-term returns at theexpense of longer-term investments. “It concerns us that, in the wake ofthe financial crisis, many companies have shied away from investing in thefuture growth of their companies. Too many companies have cut capitalexpenditure and even increased debt to boost dividends and increaseshare buybacks.”

Fink made these comments in a letter to the CEOs of the companies inStandard & Poor’s 500 Index, referring to stock buybacks and dividendsas a form of “short-termism.”

“We should allbe lookinglonger term.What’s alreadyhappened intech andtelecommswill soonhappen inhealthcare,robotics andeven financialmarkets.”

MARKETS


34

triggeringthe stockmarketrally

The long short…

ALAN STEEL ASAM


VENTURE CAPITAL

35

quarter of 2007 when $10.4 billion was raised for ven-ture capital investments. “With the exception of someestablished firms, fundraising for most venture capitalfirms has been difficult in recent quarters due to a shaky

U.S. venture capital firms raised $8.9 billion in new commitments from 58 funds during the firstquarter of 2014, an increase of 81 percent compared to the level of dollar commitments raisedduring the fourth quarter of 2013 and a nine percent increase by number of funds, according toThomson Reuters and the NVCA.

The level of dollar commitments during the firstquarter of 2014 more than doubled the comparableperiod in 2013 and marks the strongest quarter forventure capital fundraising, by dollars, since the fourth

exit market,” said Bobby Frank-lin, President and CEO of theNational Venture Capital Asso-ciation (NVCA).

“Recently, however,we’ve been experienc-ing an uptick in IPOactivity as well as mo-mentum in the M&Amarket, enabling ven-ture capital firms todistribute proceeds totheir investors and be-gin the process of rais-ing money for the nextcrop of American busi-nesses.

“While conditions arecertainly better, thefundraising environ-ment for many of ourmembers continues tobe very difficult.”

THE IPO& M&AMARKET


36

FEATURE

LEADERSHIP

MEASURES

“Losing value from your most importantjobs. Why those expensive new hires justdon’t work out.”

It goes something like this: you identify acritical position in your company. Youdraft a job spec and if you’re a pro, aperson spec too. You write some copyfor an ad, brief a recruiter, put the wordout etc etc.

Then you get some cvs – hopefully lots ofthem. You shortlist these and draw upsome preferred candidates. You inter-view those, maybe more than once. Youmay even get some to present for you onwhy they want the job.

You pick the best of those, issue a con-tract and agree a start date, salary &package. They turn up and it starts to godownhill from there, when you need tomanage them.

Or did it go wrong even earlier than thatsomewhere else in the process? You’vedone all the best practice things in hiring,yet it still didn’t work out as planned.

How could that be?

Think about it this way. Maybe your “bestpractice” was never going to deliver youthe best candidate or ensure that theywould perform successfully for you. Sowhat do you do? Start again?

Some do, but are they likely to be moresuccessful the next time? Perhaps. Know-ing what mistakes you made last time willcertainly make you more aware of whatto avoid in the future. However, is thatsufficient to help you succeed? Probablynot. Human frailty being what it is, youjust need to take active steps to minimiseyour potential losses along the way.

BY WILLIE MALTMAN

36


FEATURE

37

Let’s examine more closely what could go wrong andwhat you can do about it.

Try thinking about it as a series of compromises that youjust need to accommodate as you can only influencesome of them.

Once you realise and accept that, you can start to moveforward towards being a better manager.

Look at the image below. The outer box represents thecontribution you wish for from your ideal candidate,

based on the job & person spec. That person never reallyexists outside your head and even if they did, how likelyis it that your search for a candidate would turn themover?

The first inside box is what the best candidate you canfind will bring to the role. It’s likely to be a little less thanyour ideal, but it IS the best you can find, so be happy andget ready to work with them.

The second inside box is how well you induct them intoyour organisation. Usually, we are not well prepared for

“Can we do anything about our behaviour,or are we just hardwired for neglectingvaluable resources?

“Well, the good news is that we can andshould. Maybe finding the best person ofall is out of our reach, but what’simportant is what we do with the best wecould find?”

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Since our establishment in 1993 ourmembers have made investments inhundreds of companies.

of millions of their own risk capital, onaverage levering three times more fromother sources.

Just as importantly they have investedtheir own skills and experience in thenext generation of SMEs.

The companies supported havecreated thousands of high quality jobs inthe Scottish economy.

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Millions of £s, Thousands of jobs,Hundreds of deals, One Network...


FEATURE

39

Manage their performance – if you don’t have aplan, then get one and fast. If you do, make sure it’sgood enough, credible and convincing.

Relate its contents directly to the job you’ve just filled.Ensure that their priorities are spelt out in sufficientdetail, especially how their contribution will be meas-ured & judged.

That takes care of the initial period, but you need tokeep it up and probably to step it up after they getthrough the learning curve.

Support them – training & development matters, butrelevant, timely feedback is better. Ensure you scheduleand keep a regular 121 with them and check in infor-mally outside that.

Don’t crowd or micromanage them, but keep in closetouch, assessing & reviewing how it’s going – on bothsides, not just yours.

Try to “bookend” any key challengesthey’re facing – by checking with thembefore and especially after any majormeetings, events or assignments they’vehad.

Above all, learn how to manage better yourself by be-ing more tuned in to others’ needs than your own.

Books and courses will help but you can also try totreat working life as a laboratory. Think of it as a placewhere you conduct controlled experiments on yourown style by seeking feedback on your approach andbeing more responsive to the individuality of people inyour team.

Try to extract key learning points from discussionswith them to improve your own practice as a peoplemanager.

Treat them not as commodities but as individuals, whodeserve specialist treatment from you.

The more you try and the better you get at flexingyour style, the more they will grow to fill the outerboxes. That way, you will get the person of yourdreams and you will both fulfil those initial promisesthat you made to yourself.

this and think we can just wing it. After all, they’ll bekeen to get started and shouldn’t really need all of that.Anyway, we probably told them enough at interview.The third inside box is how well we manage their per-formance.

This is another thorny issue. If we have a clear andcompelling strategy or business plan, can we turn thatinto some coherent performance objectives for thenew recruit who hasn’t been inducted properly?

Thought not. And don’t get me started on those whodon’t have a plan.

The fourth and final box is how well supported theyare. Do we provide relevant training and developmentto enable them to improve their existing skills or learnnew ones?

Do we provide regular and targeted constructive feed-back that reinforces their successes and minimises therecurrence of failure?

I could go on. There are more boxes, includingincentives, development opportunities, successionplanning, team orientation and using technology. Evensimple communication can get diluted or overlooked.

Can we do anything about it, or are we just hardwiredfor neglecting valuable resources? Well, the good newsis that we can and should act on this. Maybe finding thebest person of all is out of our reach, but what do wedo with the best we could find?

The best payback typically comes frompursuing a few things at a time and do-ing them well. So, let’s focus on: induc-tion, managing performance & support.

Induct them with care – prepare well in advance fortheir arrival, starting from when they accept your offer.

Send them some core materials that you couldn’t dowithout yourself. If you’re brave, ask other staff whatwas missing from their own inductions.

Get them in early if they can, for less formal briefingsand initial meetings to get them used to the businessand meet key people.

It’s also important for other people to get used to thenew person being around.

WILLIE MALTMAN EGLINTON

PRACTICAL BUSINESS

FACE-COIN? SOCIAL MEDIA CURRENCY P.41

ZONEFOX ON THE HEARTBLEED BUG P.42

TREASURY TOUGH ON TAX AVOIDANCE P.44

CURING OUR CARBON ADDICTION P.45

The latest security vulnerability dubbed “Heartbleed” has been revealedas having severe implications for the entire Web.

HNW Magazine’s Practical Business sectionlooks at key areas of business needs across legal,accountancy, marketing, finance, leadership,strategy, research and other areas of support.

Facebook has been testing services in the payments arena since goingpublic in 2012 and, following the acquisition of WhatsApp for its cross-platform messaging capability, is now reportedly developing e-moneyservices for a proposed launch in Ireland.

The pending legislation, which has been unveiled by The Treasury, is anattempt for HM Revenues and Customers to crackdown on tax avoidance– bringing financial criminals to justice.

The Intergovernmental Panel on Climate Change (IPCC) released a newreport revealing global emissions of greenhouse gasses are at recordhighs despite policies designed to help reduce these activities.



PB: FACE-COIN?

41

Amazon and Facebook both appear headed into themobile payments and remittances business, an area ofthe tech market with enormous potential upside.

And while Mark Zuckerberg’s so-cial media colossus has the advan-tage of a larger mobile audience,Amazon as the world’s largest on-line retailer has already estab-lished trust amongst users inhandling their transactions.

Facebook has been testing services in the paymentsarena since going public in 2012 and, following theacquisition of WhatsApp for its cross-platform messag-ing capability, is now reportedly developing e-moneyservices for a proposed launch in Ireland.

Why Ireland?

Apparently Irish regulatory approval would allow forfurther operations in Europe in order to target emerg-ing markets thereafter.

How does it work? Users would have the option to tostore money online and use it to pay for goods and/ortransfer funds within the network.

This would go some way toward answering the HolyGrail question of large scale social media businesses;how do you successfully monetise the audience andkeep them engaged?

The answer it seems is not in the social interactionsthemselves – like dropping adverts into links and con-versations – but the attached retailing options availableoffline or online outside the chat, and profiting fromthose transactions.

FACE-COIN? FACEBOOK & AMAZONENTER THE CURRENCY MARKETS


42

PB: HEARTBLEED

ZONEFOX ON THE HEARTBLEED BUGKELLY GREENE ZONEFOX

What is the Heartbleed bug?

The latest security vulnerability dubbed “Heartbleed”has been revealed as having severe implications for theentire Web.

The Heartbleed Bug affects the technology used to en-crypt sensitive information: a serious virus in the popularOpenSSL cryptographic software library.

The bug can scrape a server’s memory, where sensitiveuser data is stored.

This can include private data such as passwords, user-names & credit card numbers.

How does it work?

The Heartbleed virus takes advantage of OpenSSL en-cryption software (standard for many websites) anddesignated by the small padlock symbol.

When messaging back and forth on a secure connectionsuch as web, email, instant messaging (IM) and somevirtual private networks (VPNs) sometimes a computerwants to check if the other computer is still available.

They check by sending a “heartbeat,” which is a smallpacket of data.

The flaw allows hackers to use a fake packet of data,which tricks the computer into responding with datastored in its memory.

“This compromises the secret keys used to identify theservice providers and to encrypt the traffic, the namesand passwords of the users and the actual content.

This allows attackers to eavesdrop on communications,steal data directly from the services and users and toimpersonate services and users.” (Heartbleed.com)

Why is it dangerous?

The bug allows anyone on the Internet to read thememory of the systems protected by the vulnerableversions of the OpenSSL software.

It allows hackers to exploit a flaw in the OpenSSLencryption software to steal sensitive data.

Victims?

Some websites that appeared to have been affectedincluded Yahoo and OKCupid.

Unfortunately for Yahoo, it seems to be the most majorwebsite to have been vulnerable to the bug. Initial testsfor Facebook, Google, and Twitter’s websites show theyappear safe.

What can I do to protect myself fromthe bug?

It is worth noting that according to Heartbleed.com,roughly two-thirds of all active websites run OpenSSL!

Naturally the first defense for Internet users is to changeyour passwords to protect your information from beingtaken and abused.

But in this case, security experts are strongly advisingthat you wait for service providers to patch their soft-ware before changing passwords. This is because furtheractivity on a vulnerable site could further the problem.

“As long as service providers have patched their soft-ware it would now be a prudent step for the public toupdate their passwords.“ (NCC Group)

Ensure you do not use the same password for multipleservices. This will mean that if one site is compromised,at least all your information is not at risk.


44

PB; TAX AVOIDANCE

Following the introduction of a new government propos-al, those with offshore accounts could face hefty fines orjail time if they cannot be lawfully justified.

The pending legislation, which has been unveiled by TheTreasury, is an attempt for HM Revenues and Customersto crackdown on tax avoidance – bringing financial crim-inals to justice.

Unlike the current meas-ures that are put in place,George Osborne claimsthat the new rules will shiftthe “burden of proof”, sug-gesting that the inspectedindividuals will have to pro-vide substantial evidence tobe free from prosecution.The Chancellor described the proposed regulation,which is expected to go ahead next year, as a “significantnew weapon”, in tackling those that are trying to hidemoney from authorities.

He added: “It is totally unacceptable for people not to paythe tax that is due, and the message will be clear nowwith this new criminal offence that if you’re evading taxoffshore, there is no safe haven and we will find you.”

As indicated by a Treasuryspokesperson, those thatare suspected of tax avoid-ance will be discreetly ex-amined by governmentofficials, in relation to theirgenerated income fromoffshore dividends or in-vestment trusts.Mr Osborne also outlined that those who have alreadysigned up to disclose tax avoidance schemes, will haveto pay their disputed funds upfront.

Following the new agenda, an estimated £4 billion oftax payments will be processed over the next five years.

Official figures show that the amount of tax lost in the2011-12 tax year, rose by £1 billion, which resulted ina staggering total loss of £35 billion.

HMRC’s current less severe approach to tax evasionwas still responsible for recovering £1.5 billion overthe past two years, suggesting that the proposed harshprocedures will provoke exceptional outcomes.

TREASURYGETS TOUGHON TAXAVOIDANCE

DES VENEY HAINES WATTS


PB: CARBON ADDICTION

45

On Sunday 13th April2014 the Intergovern-mental Panel on ClimateChange (IPCC) releaseda new report revealingglobal emissions ofgreenhouse gasses are atrecord highs despitepolicies designed to helpreduce these activities.

The data appears to in-clude up to 2010, whichmeans we won’t knowhow truly screwed weeither are, or are not,until 2020 as these tendto run in decade-by-dec-ade comparisons.

Some 1200 scenariosfrom scientific literaturegenerated by 31 model-ling teams from aroundthe world have exploredthe economic, techno-logical and institutionalimplications of our emis-sions activities.

So why is this interestingregardless of your envi-ronmental stance? Well, it’s a lesson in trying to predict the future and the crystal balls you’re using to do it.

We can not predict the weather five days in advance. Despite£billions in research and analysis we can not predict what thestockmarkets are going to do even tomorrow (much less nextweek or next year).Economic analysts are historically far more often wrong than right when attempting to predict global financial cycles(check how many saw the 2008, 1999/00, 1987 and 1973 recessions coming.

And technologically speaking, no one knew the future of the “eight-track”, blue ray or video store when we were linedup at the counters of Blockbuster asking after a copy of Forrest Gump and a pack of Twizzlers.

While I can see little harm in continuing to progress carbon reduction and greener energy policies and activities – afterall, they have created entire economies and new employment thus far subsidised by governments in the majority – ifyou truly want to know what the future holds, you’re going to have to wait until tomorrow.

NO CURE FOR CARBONED EMERSON EDITOR


46

DIATRIBE

Smart Accessory Market(SAM) Expands

The worldwide wearable computingmarket (commonly referred to as“wearables”) is finally expandingbeyond early adopter status tomore functional and stylish lifestyleaccessories that are making theirway onto the pages of GQ andShape as well as Computerworldand Wired.

According to new research fromInternational Data Corporation(IDC), wearables took a huge stepforward over the past year and ship-ment volumes will exceed 19 mil-lion units in 2014, more than triplinglast year’s sales. From there, theglobal market will swell to 111.9million units in 2018, resulting in aCAGR of 78.4%.

Complex accessories (e.g., Nike+FuelBand, Jawbone UP, and Fitbitdevices) will lead the wearablesmarket through 2018 as users con-tinue to embrace their simplicityand low price points. These devicesare designed to operate partiallyindependent of any other device,but fully operate when connectedwith IP-capable devices such as asmartphone, tablet, or a PC.


“Complex accessories have suc-ceeded in drawing much-neededinterest and attention to a wear-ables market that has had somedifficulty gaining traction,”said Ramon Llamas, ResearchManager, Mobile Phones. “Theincreased buzz has promptedmore vendors to announce theirintentions to enter this market.Most importantly, end-usershave warmed to their simplicityin terms of design and function-ality, making their value easy tounderstand and use.”

Another segment of the market,smart accessories, will gain mo-mentum through the forecastperiod and surpass complex ac-cessory shipments by 2018. Sim-ilar to complex accessories, withtheir dependence on connectingwith IP-capable devices, smartaccessories allow users to addthird-party applications thatboost features and functions fora more robust experience.

While not quite ready for primetime, the smart accessory mar-ket will continue to mature asusers better understand and ac-cept the value proposition andvendors refine their offerings.

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HNW Magazine April 2014 Issue

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