June macroeconomic snapshot of UK regional economic inequality

UK regional economic inequality snapshotWe hear a lot about UK regional economic inequality, so as part of our series of macroeconomic snapshots we’re taking a look at some of the data.

These are just a few examples of recent announcements of businesses facing closure or insolvency in the immediate or near term: British Steel, Scunthorpe (c.3,000 jobs), Honda UK, Swindon (3,500 jobs), Kerry Foods in Burton-upon-Trent (900 jobs). What they all have in common is that they are situated in the regions outside London.

Then, of course, there is the ongoing carnage in the High Street retail sector which according to the British Retail Consortium’s calculations has cost 75,000 jobs since the first quarter of 2018.

The long decline in UK manufacturing, initiated in the 1980s Thatcher era, has hit the regions of the north and Midlands, and S. Wales, particularly hard.

In January this year NIESR (National Institute for Economic and Social Research) calculated that since the mid-1990s regions that now have reduced shares of the national economic pie are the North West (-1.8%), West Midlands (-1.4%), Yorkshire and the Humberside (-0.8%), and the North (-0.4%).

The ONS (Office for National Statistics) list of the top 10 most deprived UK towns and cities are Oldham, West Bromwich, Liverpool, Walsall, Birmingham, Nottingham, Middlesbrough, Salford, Birkenhead and Rochdale. In their most recent report, they took into consideration metrics like low incomes, levels of employment, health, education and crime.

By contrast, real output rose twice as fast in London as in other regions over the 10 years to 2017. The “the Golden Triangle of London, Cambridge and Oxford that attracts over half of all research funding – more than £17bn” while just £0.6bn goes to the north east, according to Newcastle on Tyne MP (Lab) Chi Onwurah.

Also, according to the 2019 Global Cities report released today by consultancy firm A.T. Kearney, London has been ranked as the top city in the world for future business investment.

Of course, none of this disparity is a revelation. The 2010-15 Conservative/Liberal Democrat coalition prioritised cutting public spending in the short term over all other objectives, including regional equality and long-term social cohesion. One of their first acts was to abolish the regional development agencies. But in 2014 the then chancellor, George Osborne coined the phrase Northern Powerhouse, a recognition, and arguably a u-turn, that action was needed on UK regional economic disparity.

There is some evidence that the north’s economy has strong foundations, with productivity growing at a faster rate than in London between 2014 and 2017 and jobs being created at a greater rate than the UK average.

According to new report from TheCityUK, the trade body says the number of people employed in the financial services sector in Wales has jumped by over 20%, about 11,000 people. There has also been a 10,000 rise in the West Midlands, 12,000 in the East of England, and 24,000 in Yorkshire and Humber. Conversely, the number of financial workers in London has dropped by 10,000 since 2016, and by 32,000 across the South East of England.

However, with a £3.6bn cut in public spending in the north of England since 2009/10 and 37,000 fewer public sector workers, there is also evidence, reinforced by IPPR figures in May, that the Northern Powerhouse has been “undermined” by austerity, with power and resources “hoarded in Westminster.”

There is clearly a long way to go before the UK’s regional economic disparities are anywhere near to being reduced.

 

SME owners need to pay more attention to their own mental and physical health

mental and physical health benefits of natureThere is plenty of evidence that owning and running a SME leaves little spare time to pay attention to their mental and physical health.

Research by Opus Energy earlier this year revealed that SME owners in the UK work an average of 2,366 hours per year in order to make their business a success, working an average of 45.5 hours per week (compared to the average full time working week of 37 hours). More than half (56%) of owners reported working either six or seven days per week.

It also found that 14% percent of all entrepreneurs say that they don’t take any time off while a quarter (23%) claim that they have to work even when on holiday.

A survey by Yorkshire Bank in April found that a quarter of small business owners across the UK sacrifice time with friends and family and around 30% of UK business owners have sacrificed their work-life balance. This results in detrimental effects on their mental and physical health.

In May the FSB announced a partnership with Heads Together, a project run by the Royal Foundation, to raise awareness about mental health in SMEs.

Ignoring your mental and physical health can take a toll on your business

In an economy that relies heavily on the thousands of SMEs, this situation has some worrying implications.

Given the significant rise in the numbers of SME owners reporting burn out, what will happen to the continuity, efficiency and potential growth of their businesses?

Is it a case of business owners not organising their time efficiently, or taking on too much, or unable to delegate, or simply not saying “no”?

There is no doubt that the regulatory and administrative burden on SMEs is considerable – from Business Rates, employee and pensions administration, Health and Safety regulations, tax and legislative changes, such as Making Tax Digital and increasing demands from corporate customers, suppliers, landlords and banks to complete compliance documents.

In addition, there has been a level of stress and anxiety relating to uncertainty following the financial crisis of 2007, the lack of any subsequent growth and more recently the downturn in the global economy. As well as other elephants in the room.

However, there are some things business owners could do to allow them to take better care of their mental and physical health.

The first may be to simply to stand back from their business and take stock. With the help of a mentor they can objectively assess how they use their time and suggest improvements.

As a consequence of this it may be that the business owner needs to be more self-disciplined and focused on working on their business rather than in it. Having a daily work plan, with space in the diary for reflection, cutting back on meetings, actually building in thinking and leisure/exercise time. Such discipline and sticking to a plan can be helpful.

Outsourcing or delegating functions is another option. Many SME owners find it difficult to trust others to do some tasks, but actually, if they want to grow their businesses, they need to ensure they have a team of key people capable of taking over some of the workload.

The mental and physical health benefits of simple things like a walk cannot be over-emphasised. Finding a way to de-stress, to let the mind roam and reflect on problems often leads to new ideas and solutions that were not initially considered.

Lastly, spending time with friends and especially family should not be at the bottom of the priority list. After all, a large number of SME owners say that they originally started their businesses in order to have more freedom to manage their work-life balance. Sadly, too many of them are finding that the decision has had the opposite effect.

Why are businesses not taking advantage of the new apprenticeship scheme?

The Government’s new Apprenticeship Levy scheme introduced two years ago set an ambitious target of creating 3 million new apprenticeships by 2020.

Under the scheme any business with annual payrolls exceeding £3million have had to pay a 0.5 per cent levy on their payroll to the Government which can be redeemed against the cost of staff employed under an approved apprenticeship programme.

But there is now very little confidence that the 3 million number will be achieved. Indeed, the numbers of new apprenticeships have been reducing and in January this year was revealed to be 15% lower than before the system was introduced two years ago.

In May the Public Accounts Committee said that the DfE’s “poor execution” has created “serious longer-term problems” for apprenticeship programmes.

Yet UK businesses have been for some time facing serious problems in finding appropriately skilled candidates for jobs, particularly in engineering, construction and IT. And the OECD has warned that automation will affect more than a million workers, who will need re-training as a result.

The new apprenticeship levy has been variously described as “yet another tax on business”, with an online system for claiming training vouchers that is too complicated to use and with the maximum amount that can be claimed set far too low.

For example, in the engineering and manufacturing sector, the levy caps the possible funding for any single apprentice at £27,000, but some firms say they can spend up to £100,000 for some apprenticeships. To make matters worse, those firms paying the levy must claim their vouchers within two years or lose the money paid under the levy altogether.

Even worse is that some of the standard training programmes are not yet ready, according to the website redflagalert in an article in October last year: “In high-cost sectors such as engineering, construction and manufacturing, the immediate cost needed to set up the new training deters many.”

According to the Financial Times, reporting in January this year: “A survey of 765 levy paying businesses in November by the training body City & Guilds found that 93 per cent had hit some form of barrier preventing them from investing in apprenticeships since the levy was introduced.”

If the larger levy-paying businesses are struggling to implement apprenticeship schemes, then imagine how much of a burden it is for the UK’s many SMEs. Although the Chancellor of the Exchequer this year halved the amount small firms must spend on apprenticeships to 5% the burden of dealing with the online voucher claiming system and finding a suitable training scheme is likely to be far more onerous for already-busy owners and managers than it is for the larger businesses.

Yet another example of a well meant Government policy badly executed without really understanding the way business operates and what it really needs?

Is an Employee Ownership Trust the way forward to show your workers they are valued?

In May this year Julian Richer gave his employees shares in the company through an Employee Ownership Trust (EOT) whereby they will own 60% of the business.

Announcing the decision, Richer said that he felt it was better to do it now he had reached the age of 60, than to wait until his death, as originally intended. This way, he said, he could ensure the transition would go smoothly.

Richer Sounds, the hi-fi and TV retail chain, since it was set up in 1978 has survived the last five recessions and is regarded as one of the best companies to work for.

Julian Richer’s success as founder and owner can very much be attributed to his commitment to his employees which includes initiatives such as an extra day of holiday on their birthday, heavily discounted access to holiday homes for all employees with over six month’s service, a month’s use of the company Bentley to the store that has scored highest on customer service each month and chiropody treatment and massages for his 500 employees. He even has a bring-your-pet-to-work scheme and donates 15% of company profits to various charities.

Giving employees a stake in their company via shares is not a new idea.  It began in the 1920s when John Lewis created a trust settlement for his father’s department store which was then expanded in the 1950s to full 100% employee ownership.

EOTs were formally established in the Finance Act 2014 and alongside them the Act allowed a Capital Gains Tax exemption when an owner sells at least half of the business to an EOT.

Why is valuing employees good business sense?

There are, sadly, innumerable examples of businesses that don’t treat their employees fairly, despite efforts to coax, or legislate them into doing so.

Examples include the continued, and reportedly widening disparity between the remuneration of male and female workers doing the same job, despite recent regulations requiring employers of more than 250 staff to publish their gender pay gap data.

The treatment of “gig economy” or zero hours workers has been sufficiently callous that it has prompted the European Parliament this year to pass legislation to set minimum rights that include more predictable hours and compensation for cancelled work, and an end to “abusive practices” around casual contracts. Similarly, the Parliament passed a law to give whistleblowers greater protection.

The accepted wisdom, still, among businesses wanting to improve their productivity is to expect their employees to work longer and harder. Moreover when a company is in financial difficulties their jobs are often threatened such that employees often agree pay cuts to save their jobs and in doing so save the company. Despite such sacrifice all too often employees do not share in the spoils of success when their employer returns to profitability.

Yet there is evidence that productivity gains are more likely with a short working week than with 12-hour days six days a week. In a research paper in which Will Stronge, co-founder of the thinktank Autonomy, comments that the culture of long hours fostered by US and Chinese firms “part of the ideology, and the dominant narrative that entrepreneurialism and long working hours come hand in hand […] Actually, it’s not the case. It doesn’t make business sense to work workers to the bone.” In fact, overworking employees “is the main reason for sickness in the UK and responsible for a quarter of sick days”.

At a time of skills shortages and record high employment, it therefore makes better sense for a business to retain staff by demonstrating that they are valued and by rewarding them such as giving them a stake in the business, via an EOT, or other forms of recognition.

June sector focus on the restaurant trade and changing eating habits

The restaurant trade is notoriously volatile at the best of times but the last two years have seen it undergoing a particularly torrid time.

Even by the standards of the recent decline in High Street retail the restaurant trade stands out.

By December 2018, according to a BBC report, “Gourmet Burger Kitchen [has] earmarked 17 sites for closure while Carluccios is shutting 34 outlets. Prezzo said it would close 94 – about a third of the chain – including all 33 outlets of its Tex-Mex brand Chimichanga.” Add to these burger brand Byron, and the French cuisine chain Cafe Rouge.

In all, according to the trade publication The Caterer, 1,123 restaurant businesses filed for insolvency in the first three-quarters of 2018 and the most recent Market Growth Monitor from CGA and Alix Partners reveals that the number of restaurants in the UK decreased by 2.8% in the year to March 2019.

The problem is highlighted by the experience of Jamie Oliver who in August 2018 closed 12 of his 37 Jamie’s Italian restaurants and made about 600 staff redundant in an attempt to save the rest of his business. It didn’t work as in May this year he announced the immediate closure of his restaurant group, including Barbecoa and Fifteen, with the loss of 1,000 jobs, leaving him with just three surviving restaurants.

The bulk of the insolvencies and closures has been among restaurant chains, of which arguably, there has been an oversupply.

Having said that, some chains are still surviving and expanding, notably Indian food chains Dishoom and Mowgli.

What is driving the contraction of the restaurant trade?

Of course, and inevitably, the backdrop to some of this is at least in part the still-unresolved issue of Brexit and when, if ever, the UK will finally leave the EU. This is arguably the undercurrent driving a significant drop in consumer spending and confidence in future job security despite current record employment levels.

Then there is the impact of high business rates, the minimum wage and rising ingredient costs and increasingly a shortage of staff, many of them from overseas and notoriously badly-paid, as more and more EU citizens return home either because conditions in their home countries have improved or out of a perception of the hostility towards them in the UK.

However, there is also arguably a shift in eating habits taking place.

It is partly a case of a desire for quality over quantity or a unique dining experience that has contributed to the survival of small, independent local artisanal restaurants, although if you speak to their owners, rent and business rates are a major issue.

It is also about an increased desire for more healthy, often locally-sourced food, the rise of vegan diets, and above all, it is about time and convenience. Increasingly, people are opting to eat in, either with their families or with friends and to order food online. With Deliveroo, Just Eat and Uber catering to this demand the traditional “dine out” restaurant trade faces an uphill struggle unless it can offer something unique as the small independent offering well-cooked, authentic, regional specialities can.

Evidence mounting that SMEs are more attractive to millennials

There has been a growing body of evidence and research over the last couple of years that millennials prefer working for and shopping with SMEs.

Too often we hear about the difficulties and obstacles SMEs face, such as excessive red tape and disproportionate taxation, but it should be remembered that they account for more than 99% of all businesses in the UK, and recently, Secretary of State for International Trade Liam Fox called UK SMEs “the future of the UK economy”.

As such, it would be foolish for millennials starting out on their careers to ignore the potential opportunities SMEs could offer, and indeed, according to research carried out by Sodexo, it seems that 47% of this young cohort see them as the ideal business size to work for compared to 19% who put their faith in larger companies.

Among the benefits they saw in working for SMEs millennials in the survey they cited flexible working hours, the ability to work remotely, career progression and a friendlier company culture.

Research for the software firm WebOnBoarding suggests that new staff settle in more quickly at smaller businesses and newcomers found people friendlier than in larger companies.

Other benefits to millennials from working in SMEs

In a small business there is more opportunity for both hands-on experience as well as a wider variety of tasks.

As a SME grows, the opportunities for advancement are likely to be greater than they would be in a larger business with a more formal structure and the small business also needs to be agile to survive and flourish, which arguably allows from for more innovative thinking and contributions from all members of the workforce.

This gives younger employees the opportunity to develop their skill set much more quickly than they could in a larger organisation and also tends to give them more responsibility.

While the SME may not be able to afford to pay the large bonuses paid by some larger companies, they can be creative in the ways they reward employees, such as by offering a day off for a sporting activity, a luxury spa treatment or an early end to the working day on Fridays during the summer.

What is the future for company audits?

conducting company audits

In principle, company audits must be carried out on any public body, FCA regulated business and most companies unless they are exempt. The exemption threshold means a company must have at least 2 of the following: an annual turnover of no more than £10.2 million, assets worth no more than £5.1 million, 50 or fewer employees on average.

The audit industry has been under review for some time and this scrutiny has intensified since the collapse of Carillion the construction and outsourcing firm in early 2018.

The industry is dominated by the “Big Four”, Deloitte, EY, PwC and KPMG, who audit almost all of the FTSE 100 largest companies. Despite their dominance other accountants have also come under the spotlight such as Grant Thornton who were auditors of Patisserie Valerie that went bust recently, apparently due to a £40 million fraud.

Mr Dunckley, CEO of Grant Thornton told MPs on the business, energy and industrial strategy committee “we are not looking for fraud and we are not looking at the future and we are not giving a statement that the accounts are correct. We are saying they are reasonable, we are looking at the past, and we are not set up to look for fraud.” MPs were not impressed. Should they have picked up the fraud as part of their audit? What is their level of accountability for failing to spot the fraud?

One of the contentious issues raised has been a suspected conflict of interest between auditors’ auditing and consulting arms.

In 2018 PwC, was fined £6.5 billion for its “inadequate review” of now-defunct department store BHS’s books.

In April 2019 the FRC (Financial Reporting Council) fined KPMG £6m and “severely reprimanded” them, telling them to undertake an internal review over the way it audited an insurance company, Syndicate 218, in 2008-09.

And in May 2019 the FRC fined KPMG another £5m and again “severely reprimanded” them after they admitted misconduct over their 2009 audit of Co-operative Bank.

KPMG must be feeling the heat as it was also the auditor for Carillion, which collapsed with debts estimated £1.5bn.

Since the Carillion collapse the CMA (Competition and Markets Authority) has been investigating and announced its recommendations in April.

It concluded that there should be:

* A split between audit and advisory businesses, with separate management and accounts

* A mandatory “joint audit” system, with a Big Four and a non-Big Four firm working together on an audit

* Regulation of those appointing auditors

The CBI criticised the proposals saying they could add cost and complexity for business with no guarantee of better outcomes and could restrict access to the skills required to carry out complex audits.

For smaller businesses, including those below the exemption threshold, company audits can be an effective test of a company’s accounts and are a useful tool for directors in assessing their business’ health.

The worry is that the seemingly endless question marks, fines and “reprimands” issued to large firms and their presumed conflict of interest between earnings from consultancy and from audit work could undermine confidence in the audit function and in the many smaller accountancy practices that diligently carry out audits.

Key Indicator – investment decisions in a mature business cycle

21st century city setting for mature business cycle

A mature business cycle is one where the prevailing conditions are such that any economic slack is largely used up and assets are richly priced after a period of expansion.

Arguably this is the position in which the economies of the developed countries, such as the USA, UK, EU and Japan now find themselves, where there is a stable population and slowing economic growth. In this context a growth rate of 2% is seen as acceptable.

Arguably, too, mature economies are at a pivotal moment, in that a market economy is never static and there have been signs for some time that the situation is somewhat volatile, as a selection of headlines in any period illustrates.

For example, on April 28 a new report on global trends published by KPMG Enterprise suggested that increased activity from venture capital investors had been pushing up deal prices in the North of England, and the billionaire investor Warren Buffett told the Financial Times that he is “ready to buy something in the UK tomorrow” regardless of Brexit.

A month later, a member of the Bank of England’s MPC (Monetary Policy Committee) was reported in The Times as saying that “levels of business investment in Britain could be stronger than they appear, because official measures underestimate spending on intangible assets”.

Within days of the collapse of British Steel in Scunthorpe into administration there were reportedly 80 potential buyers for the business.

All this seems positive but at the same time there are equal numbers of less positive headlines suggesting a global economic slowdown, rising prices and inflation in some countries and worries about an imminent recession being due at this point in the economic cycle.

According to a recent article in the Economist on the mature business cycle, markets are choppier, perhaps due to the latest developments in the on-going trade war between the US and China, and it would be wise, it says, for investors to watch what happens in the foreign-exchange market where, it argues, the dollar is “a thermostat for global risk appetite: it rises with a weak dollar and falls with a strong one”.

Clearly, for investors, especially those that are rent seekers or seeking quick returns on their money, the current volatile economic situation is hardly welcome. Questions arise about where it is safer to put money and it is hardly a surprise that commodities such as oil (see last month’s Key Indicator) are seeing significant price rises.

VOIP a phone solution for growing SMEs

VOIP replaces the old-fashioned switchboard

As a SME develops and grows costs can quickly escalate, no more so than its phone and communication systems and yet there is a cost-effective solution called VOIP that some may not be aware of.

VOIP stands for Voice over Internet Protocol and is essentially a broadband-based phone service that can include a free switch board.

A business can make calls using laptops or PCs but equally using VOIP telephones, which cost very little and are the only additional piece of hardware needed if bought upfront since the exchange is either embedded in the phone or provided by the VOIP supplier who is normally also the broadband service provider.

A VOIP system allows the business to dispense with call handling and an in-house switching system, all of which can be set up and automated by someone familiar with IT systems. You can have unique phone numbers and set it up so that calls can be switched from one number to another.

With a phone-based service, you use VOIP the same way you use a regular landline: by picking up the phone to answer it or dialling a number to place a call.

Calls are not confined to only others who are using a VOIP system and usually there is no additional or at most a minimal cost for calling overseas. The system can also be used to make conference calls and it allows you to take your number with you when you travel.

It has been estimated that savings using VOIP can be as high as 95% per month but if you are considering this option, there are some things to remember.

Getting your VOIP system right

Basic requirements are a high-speed internet connection and VOIP phones which are inexpensive. You should also remember that in the event of a power cut your phone set-up will not work and it is therefore wise to have a secondary power source, such as a generator, as a standby.

For businesses with multiple users, a separate PBX (Private Branch Exchange) is not required as the phones can be set up to manage calls within a network and can also be set up to transfer calls between phones like in a normal office exchange as well as routing incoming and outgoing calls. Most Internet Providers offer hosted/virtual PBXs, so that your SME does not have to go to the expense of buying and installing expensive equipment.

There is one caveat if considering using VOIP for your business, and this is that you will likely come across many phone company providers, such as BT, as well as specialist providers, who will offer to install and manage your set-up and hire you the phones.

You should remember that the uplift charged by VOIP phone companies is their gross profit plus phone hire if they supply the hardware and for the small, but growing SME this means a significant, and unnecessary, expense.

This website is a very useful introduction to all things VOIP.

Why advice to aspiring women leaders may have been all wrong

The numbers of women leaders are not rising despite the growing calls to eliminate gender discrimination in the workplace.

women leaders advised not to emulate men

There are just six female CEOs of the FTSE 100 companies and at the start of the year The Equality Trust revealed that they earn 54% of their male counterparts.

Some years ago, Sheryl Sandberg published her book Lean In, in which she argued that women should show more drive and determination, put themselves forward for daunting tasks, and showcase the same level of confidence conveyed by male leaders.

But either aspiring women leaders have been ignoring Sandberg’s advice or, if they have followed it, it has not resulted in promotion.

The “lean in” advice may even be wrong according to personality scientist Tomas Chamorro-Premuzic, an international authority on psychological profiling, talent management and leadership development who argues that it could actually be counter-productive.

It is more likely, he says, that if women mimic the accepted male behaviours of self-promotion, showing ambition and so on, it could actually lead them to mimic the dysfunctional behaviours that are shown by many toxic leaders.

Regular readers may know I have tackled the subject of the “dark triad” of corporate leadership behaviours in previous blogs, identifying the traits of narcissism, Machiavellianism and psychopathy shown by many such leaders.

In fact, the problem, says Chamorro-Premuzic, is that while gender discrimination plays a part in potential women leaders being overlooked, the primary reason why so many incompetent leaders are appointed is because there is a general difficulty in identifying and selecting competent leaders.

He identifies several reasons for this.

Firstly, he argues “there is not much overlap between people’s self-perceived and actual talents for leadership”. Often, he says, the most incompetent leaders suffer from “extreme deficit of self-awareness”. This could also be applied to many politicians.

Secondly, he says, narcissists and psychopaths often lean in. This leads to excessive risk-taking, which may be counter-productive for a business’ stability and growth. Therefore, if leaders are selected on ability to showcase aggressive behaviours we are likely to select a disproportionate number of candidates with antisocial tendencies.

However, the biggest problem with the lean in argument, he says, is that we have double standards when evaluating women and men, leading to women typically being rejected and disliked for being intimidating bulldozers or simply for not being “feminine” enough.

Instead, his advice is that in order to pick the best potential leaders, of either gender, we should be looking for such qualities such as integrity, emotional intelligence and communication skills.

Moderate ambition therefore may be a better indicator of leadership potential and aspiring women leaders’ greatest advantage because it means “having the drive and ability to lead without wanting to become the centre of the universe … perhaps because that place is usually reserved for narcissistic men.” Boris beware!