Planning for resilience

Businesses face a considerable number of risks all the time, though most entrepreneurs take the view that most risks are quite small. Indeed, they perceive that some risks are so low that they do not even bother to prepare for them. Resilient businesses will, however, be more able to survive should any of these risks come to pass. Business resilience is defined as the ability of a business to respond to disruption, safeguard people and assets, and maintain normal business operations. Disruption can arise from any number of threats including, inter alia, cyber attacks, data breaches, extended loss of internet service, terrorism attacks, theft, fraud, extended loss of electric power, disruption in your supply chain or fire – and that is before we consider natural disasters like adverse weather or pandemics.

It is at times like those through which we are now living that businesses regret not having done more to build resilience. If you have already built in a degree of resilience to your business planning, well done. If you have not, now would be good time to think about how to become more resilient – so that you can weather the next crisis. I have six suggestions,  though I am sure the there are many more things that you could do. The first two – risk assessments and business continuity plans – help you to think about risks and mitigation strategies. The rest are all about developing the business in such a way that the business becomes more resilient overall – in particular, continues to generate cash in times of crisis and thus protects jobs and maintains business relationships.

Prepare a risk assessment

Think through all the possible risks that you face as a business. It may help to categorise: what are the (external) risks that might arise and over which you have no control (these include weather and pandemics); what are the (external) risks over which you have no control but could possibly put in place arrangements so that you can cope (having a generator in case there is a power outage, for example); and what are the risks more inherent to the business (such as supply chain disruption or cyber attack)? For all the risks that you identify, you can rate for the likelihood of it happening and the severity  of disruption if it does happen. This allows you to prioritise and put in place mitigation strategies.

Business continuity plans

Many businesses prepare disaster recovery plans or business continuity plans. Really they are just risk mitigation plans so are closely aligned to the risk assessment. These simply set out what a business will do if certain disruptions occur. What is necessary, for example, to replace a major internet service? Or how do you move everyone to home working? The advantage of a plan is that you have thought it all through in advance – and can thus take appropriate action much quicker when you find that you have to do it.

Diversify your customer base

When I was running an enterprise agency,  I used to advise my clients not to have more that. 18 per cent of their business with any single customer. Many businesses will,  of course, have so many customers that this is not an issue – but some businesses,  like the consultancy in which I now engage – may only have a handful of customers, so do not put your eggs all in one or two baskets. But go further: covid-19 is different in that it has hit the whole world. Luckily, many disasters tend to hit one or two countries. So explore how you can sell into more than one geographic market. If that is not possible, can you target more than one customer segment in your home market?

Be profitable

Every business wants to be profitable, so that sounds like a statement of the obvious. But my real point is this: aim for a margin of an extra one or two per cent. And put the extra into a ‘rainy day fund’ so that if disaster strikes you have a cash reserve. Nigel Doughty, who started the private equity fund, Doughty Hanson, was so worried about what would happen to his family if he died suddenly (which, as it happens, he did) that he put two years worth of living expenses into a bank account controlled by his wife so that it would not be caught up in probate. And when I was at the enterprise agency, I aimed to build up reserves worth a whole year’s running costs to give us a cushion should we ever need it.

Watch the costs

Another statement of the obvious, but successful businesses, like Evita with the money rolling in, become blasé and more likely to spend money. Keeping a tight rein on costs will help with the extra margin of profitability and thus help to protect you when times get tough. The government currently offers 100 per cent rates relief to businesses with premises with a rateable value of less than £15,000. If you are close to this, you may want to think about moving to smaller premises to get the tax relief. Can you switch your communications to the internet and save on your telephone bill? Do you need to send materials through the post or will e-mail do?

Build in flexibility

Easy to say,  but hard to do. Is there scope to be flexible in your costs? Increasingly, businesses use associates instead of employees, or have employees on zero hours contracts. Do you need all the workspace that you have? After the country’s enforced experiment with home working – full disclosure: I have worked from home for 15 years – more businesses are thinking about having more staff work from home more of the time. Could you have just a few desks in the office, with people hot desking (once the covid-19 requirements are a distant memory) and perhaps a meeting room.

Helping businesses cope with crisis

As the health crisis continues, Governments round the world are struggling to design and implement programmes that might help businesses to stay in business and then to rebuild once the economy starts to recover. Some governments are throwing money around like confetti; many are offering loans, often at low or zero interest rates; some are offering various forms of tax relief. Businesses deserve some support since not only was the crisis not of their making, but also it is the government responses to slowing covid-19 that has caused the pain for most businesses. One challenge for government, however, is that no one knows how long the crisis will last and therefore how much support will be needed; another challenge is that whilst most businesses deserve support, some may have died anyway.

 

There are two big requirements: the first is to help businesses get to the end of the crisis and still be in business. The second is then to help them rebuild.

 

There is much talk in many countries about giving loans to support businesses. The problem with loans, even with long repayment periods and low interest rates, is that ultimately they have to be paid back. For a business that is uncertain about its future, or for which the pandemic has taken away sales that will never be replaced, debt may not be the answer. In any event, since businesses do not know how long it will be before they can resume, they will not know how much debt is required or have any real sense of whether they will ever generate enough profit in the future to repay that debt.

Moreover, many of the businesses that are supported with debt now may still collapse in the future, leading to problems for the banks if a government guarantees only a proportion of the loan capital. This either means that the banks will seek enough collateral to cover the balance – so do not lend – or that they do lend and then suffer big losses, putting the banks themselves at risk, if their customers subsequently fall over.

 

So, in the short term, what businesses really need is advice on how to conserve cash – to ensure either that they stay in business or can resume in business – once the panic period is over. I suspect, too, that many will need to rethink how they are going to ‘do business’ in the future, because I suspect that much will change, at least until a vaccine is available.

 

Businesses then need support to rebuild. But the question has to be how to help them to do that. The point at which they start to rebuild is probably the point at which to be providing finance – businesses can come to a more informed conclusion about how much finance is required and how it can be serviced. Now would therefore be a good time to be more innovative in the way that finance is provided, recognising the challenges that businesses will face. Businesses do not want to add to their costs, at least in the short term. Businesses do not want to be taking more risks, when it is difficult to assess and quantify those risks.

 

So here are two ideas which could provide much needed finance to business whilst recognising the challenge.

 

The first is for revenue participation agreements: an investor buys a share of a business’s future revenue. It provides a large sum of money now, which the business can use as it needs, for investment in equipment or to provide working capital in exchange for which it agrees to share, say, five per cent of its sales revenue for a period of, say, five years to the investor. This means that the business transfers nothing if sales do poorly and transfers more if sales do well. It is a way of sharing the risk without compromising the cash flow. RPAs have not been widely used but there is enough experience of using them to know that they could make a difference at the moment.

 

A second idea is for “convertible equity”. More than likely, you will have heard of convertible loans, whereby an investor provides a loan (which is serviced in the normal way) but at some point is convertible into equity (usually designed to reward the investor for the risk taken). However, in the current circumstances, this is unlikely to help. But how about convertible equity. In this arrangement, the investor would take an equity stake (knowing that dividends are unlikely to be paid any time soon) but the equity can then be converted into a loan at some point in the future (and provided certain targets are hit). If the business fails, then the equity holder gets a share of the proceeds (if any). If the business succeeds, the owner gets to own all of it once again. It is highly unlikely that private investors would take equity stakes on these terms, but it may be more attractive to governments that providing guarantees or grants. Either of these is lost if the business fails, but there is little upside if the business wins through. With an equity stake, the money is still lost if the business fails, but help is provided to the business more quickly and more easily, and there is more of an incentive for the business to get back on its feet so that it can convert the equity back into debt.

 

Revenue participation agreements or convertible equity could be made available now, to support those businesses that need to keep going in a reduced way if they are to remain in business.

Innovation grows economic activity

I was invited by PNE Group to be one of five speakers at an event in November intended to think about Advancing the North East. Speakers covered topics such as productivity, growing talent and exporting. I focused on innovation, drawing inspiration from the history of the north east and from a current project.

Tyneside’s pioneers

I was born in Newcastle and am passionate about the north east of England. Arguably the north east of England was the centre of the industrial revolution, with many inventors, innovators and pioneers. I want to mention just two. One of the buildings occupied for 15 years by PNE Group was Hawthorn House in Newcastle. This was originally built by Robert Hawthorn, who filed 84 patents whilst in the building and built railway engines for Robert Stephenson, whose father built the first locomotive, and who had the site on the other side of our car park. Across the river in Gateshead, Joseph Swan invented the incandescent light bulb, lighting not only his shop in Newcastle, but the whole street, so that Newcastle became the first city in the world to light a street with electric light. This is of particular interest to me because one of my forbears was the first retailer anywhere to use electric lighting in his shop window for advertising purposes.

But the north east seeemed to lose its way. It forgot about the entrepreneurship and innovation that had made Tyneside great and, by the end of the 1970s, it had one of the lowest levels of self-employment in Europe, an insignificant number of large companies and a total lack of enterprise.

David Grayson and I founded Project North East as a response to that problem and, over the years, PNE has been able to innovate in its approaches to supporting entrepreneurship, with the first Youth Enterprise Centre, with Design works, with Business Information Online, long before the internet, and with the first televised business competition. But my objective is not to eulogise PNE; rather it is to explore how PNE can stimulate more businesses to innovate.

Innovate to compete

As long ago as 1955, Peter Drucker was arguing that the purpose of business is to create a customer, and therefore that there are only two entrepreneurial functions, marketing and innovation. New businesses foster competition and economic growth. Entrepreneurail activity supports job creation. Small businesses are flexible, innovative and responsive. Between 1945 and the 1990s, 50 per cent of all innovation and 95 per cent of all radical innovation came from new and smaller businesses (Spinelli et al. 2012). Economies with a high proportion of smaller and medium sized businesses are more resilient to external shock and will have a greater likelihood that more businesses will grow into large businesses. But we need to encourage them to start.

How do we do that? I have recently bought a state of the art HP laptop. Bill Hewlett and Dave Packard started their business in a garage in 1939. Steve Jobs and Steve Wozniak did not have their own garage. They started Apple Computers in Jobs’ parents’ garage in 1976.

But many of the most innovative, most entrepreneurial businesses in the US, certainly the technology ones, emerged fro research institutes and large company research labs where bored and stifled researchers and middle managers realised that the only way to ‘do their own thing’ was to resign and find a garage. Fairchild Semiconductor, founded in 1957, spawned 10 new ventures in its first 8 years; indeed, most of the 31 semiconductor firms founded in Silicon Valley in the 1960s could trace their roots back to Fairchild including Intel, Advanced Micro Devices and Raytheon.

In the absence of applied research labs with bored staff, though, is there an alternative approach?

Exploiting the innovations of others

In an effort to encourage more innovation, and perhaps spurred by large companies innovating but not knowing how to exploit their innovations, a number of initiatives have focused on increasing the ‘supply’ of innovative ideas. There are some interesting examples of companies recognising for themsleves the value in sharing ideas that they did not wish to pursue themselves. In the late 1970s, for example, General Electric in the US started to publish newsletters with their innovations and then offered to license them to firms who wished to exploit them. In the UK, there have been a number of ideas newsletters, though all independent of large firms, and none has been particularly successful. One difficulty is that firms cannot always see the potential in a new product or process, especially when it is peripheral to its main activity. Universities and research institutes have tried to encourage both their own staff and others to take up their research ideas, with mixed success.

Promoting demand rather than supply

Possibly the most successful has been MIT, which encourages businesses looking for specific innovations to come into the university once a year to see what is available. In other words, businesses are looking for an innovation that might satisfy a need, rather than universities offering a solution that is looking for a problem. This has been a remarkably successful approach. Indeed, it has been estimated that MIT’s spin outs, both companies and innovations, would constitute the world’s 24th largest gross domestic product (Schramm 2004).

The nature of innovation

Innovation needs to create value for which customers will pay. On that basis, I have concluded that that there are four types of innovation, of which three are important to business: (i) the product that does something completely new for the consumer (for example, the original Sony Walkman, the now ubiquitous mobile phone, kite-surfing, drones); (ii) the product that delivers an existing requirement in a new way (for example, LED lightbulbs, digital radio, electric cars); and (iii) a change in the manufacturing or delivery process that delivers a product more efficiently or more cheaply (for example, use of robots in manufacturing, renewable energy). The fourth, by the way, is blue sky thinking.

Connect to Grow

I am currently managing a programme, funded by DFID India, which we call Connect to Grow. It is a three year programme, which started in May 2015, with the objective of supporting SME growth that might lead to development impact in the agriculture and health sectors in sub-Saharan Africa and south Asia. Connect is unique because it focuses on demand.

It does this by facilitating partnerships between enterprises in sub-Saharan Africa and south Asia that have identified a market need and are seeking to grow and enterprises in India with an innovation that could address that need and a desire to enter new markets.

Connect supports the enterprises from sub-Saharan Africa and south Asia to articulate their market and their oportunity clearly and then provides bespoke technical assistance and grant funding to find suitable Indian enterprises; to develop a partnership; to implement a pilot venture and test the concept; and to access finance and create a plan to scale up and deliver greater social impact.

Connect has supported 20 pilot projects altogether and we have examples of all three type of innovation. These include:

Agromite, in Ghana, that has been experimenting with laser land levelling to support rice farmers

Pure Products in Uganda, that has introduced water ATMs, to provide purified water at low cost

SokhiPad in Bangladesh that is manufacturing low cost santitary pads

Nzua and Msigani Farms in Tanzania that are importing a hybrid chicken known as Kuroiler to offer a faster growing, high yielding chicken to poultry farmers

Masole Ammele in Malawi that is expanding its aquaculture business to be able to hatch fish and sell fingerlings to other fish farms

Agriaccess in Ghana that is ingtroducing drip irrigation to increase the yields of sorghum of all its farmers to meet growing demand from the breweries

We have learned a great deal from the project and have already published some learning snapshots (available from the Connect website). Four lessons that might resonate with PNE and its work with new and growing businesses in the north east of England are that (i) business tend not to ‘envisage the future’, or at least not far enough ahead; (ii) businesses struggle to describe precisely their current market and the market opportunities and thus their business needs; (iii) partnership can offer many benefits, including the faster introduction of innovation and reduced risk, but it is not the right strategy for everyone; and (iv) individual enterprises may need support beyond their specified need (for example, improving the production capacity to increase the availability of a product may have ramifications for the acquisition of the raw materials and may also require more working capital) and all need to be addressed to make a difference.

The challenge

For me, this presents two interesting and complementary opportunities for PNE: what can it do to stimulate innovation amongst businesses in the north east of England – in particular, is there scope to learn from Connect and promote partnerships for innovation in the north east; and what can it do to persuade government to reform public policy to encourage more innovation?

The Brazilian entrepreneur, Ricardo Semler, in his great book, Maverick, says that “a turtle may live for hundreds of years because it is well protected by its shell, but it only moves forward when it sticks out its head”, so my challenge to PNE is to stick out your head.

 

Need for dialogue to improve competitiveness

Sub-saharan Africa has seen economic growth rates averaging more than 5 per cent for the last 15 years. However, economies are largely agrarian bolstered by extractive resources and usually with a large informal economy, which largely focuses on local trading. The Africa Competitiveness Report 2015 makes the assumption that increased competitiveness is a critical driver of structural transformation and broad based growth. However, as we learn from WEF’s Global Competitiveness Index, most countries in Africa are not competitive. Indeed, the move by many from agriculture to services rather than to manufacturing suggests that their current growth is unsustainable. But, WEF suggests, to support manufacturing and to become more sustainable, they need better infrastructure – energy, roads, ports, irrigation – as well as improved education, and a more conducive business enabling environment. In particular, WEF sees a need for reduced barriers to trade a strengthened regulatory framework (especially for rules of origin, competition policy, intellectual property rights and dispute resolution). They argue for the removal of both tariff and non-tariff barriers and improved access to finance. They suggest that the “success of reform agenda will also depend on active dialogue among key stakeholders” (p82) between countries, not least to promote knowledge sharing and peer learning, but I would argue that more dialogue is needed between public and private sectors as well.

Advocacy and transparency

There is increasing activity all round the world by interest groups aiming to influence government. There is much criticism of interest groups – indeed even the description of them as interest groups is somewhat pejorative – but they fulfil an extremely valuable function and should be encouraged. I work particularly with business associations, but these comments would apply equally to other interest groups, whether membership organisations or single issue lobby groups.

Interest groups undertake research, either directly or by commissioning researchers, and this provides objective data to all stakerholders, at least if it is undertaken rigorously. In many countries, and especially in developing countries, there is a lack of evidence so the work of interest groups is an essential contribution to the policy debate.

We all, as citizens in democracies, have a right to lobby government and persuade it of our point of view. This is not just confined to election time – and in any event, we may not accept all the contents of a manifesto – but is appropriate at any time. As individuals, we are likely to struggle to get our voice heard – which is why so many people organise themselves into groups so that they have more chance of  having their voice heard. Businesses are the same. They worry about the impositions through regulation and taxation all of which increase the cost of doing business. Business recognises that being responsible members of society means that they have to pay tehir share of tax and need to conduct themselves in a way that does not put people or the planet at risk, but nevertheless they want to minimise the burden. So they too form associations – to advocate on their behalf.

Associations working with government on regulation and legislation builds legitimacy and buy-in. There is good evidence that where business has been consulted and involved, then the final policy is better; certainly there are less likely to be unforeseen consequences. If businesses recognise the need for regulation and if they perceive that the private sector has influenced the final shape of the policy and regulation then they will be much more likely to accept it and abide by it.

There are concerns however that too much lobbying is opaque; that lobbying serves narrow vested interests rather than the wider private sector or better still society at large; and that influence is bought rather than based on evidence and compelling argument. That is why some governments have legislated to regualte the lobbyists. The US introduced a code of conduct as early as 1946 though it was revised in 1995. Germany introduced a code in 1951. Australia introduced a code in 1983, then abolished in 1996, but reintroduced one in 2008. Canada introduced a code in 1989. Often there is a need to register as a lobby group and to record all interactions with government, which can be onerous. In many cases, these codes only apply to professional lobbyists and not to organisations, such as business associations, which have a wider role but also occasionally advocate on behalf of their members. The principles enshrined in the codes however could apply just as much to all interest groups and adopting them could help interest groups to build relationships with their stakeholders.

For many developing countries, regulating those who lobby is a long way down a list of priorities likely to include health, education, balancing the trade deficit, promoting trade, creating jobs etc. And indeed, it is on these very topics that many of the interest groups are lobbying. Interest groups could however be much transparent about their dealings with government.

So, here are some suggestions which could either be incorporated into an existing code of ethics or code of conduct or could form the basis of a lobbying code by which interest groups would voluntarily abide:

Principles

Integrity: We will undetake all our relationships with elected politicians, public officials and other stakeholders with integrity and honesty.

Transparency: We will be open and transparent about all of our lobbying activities whilst respecting confidentiality

Professionalism: We will observe the highest professional and ethical standards.

Rules

Accuracy: We will ensure, as far as possible, that all research evidence is accurate, unbiased and up to date. We shall now knowingly mislead and will aim not to do so inadvertently. We will publish all our research so that stakeholders can both see the results but also check it for accuracy.

Confidentiality: We will not divulge confidential information obtained through our advocacy activities.

Transparency: We will publish all our policy position statements so that stakeholders can see our position and our arguments.

Wider interests: We will aim as far as possible to balance the interests of different stakeholders in the development of our policy positions and will not seek advantage for a narrow goup of businesses if that has the effect of disadvantaging other businesses.

Integrity: We will base our arguments on evidence and argument and will not engage in corrupt practices to influence policy. We will neither offer nor accept gifts beyond token business mementoes.

Conflicts of interest: In the event that there are conflicts of interest, we shall declare them clearly.

Further reading

Economist: Germany’s Corporate Lobby: http://www.economist.com/news/business/21651270-corporate-lobbying-booms-stronger-regulation-needed-turning-american

Economist: Courting the State: http://www.economist.com/news/business/21651269-upside-professional-lobbying-courting-state

Transparency International: Lobbying in Europe: https://www.transparency.org/whatwedo/publication/lobbying_in_europe

Government of Australia: Lobbying Code of Conduct: http://lobbyists.pmc.gov.au/conduct_code.cfm

Government of Canada: Lobbyists’ Code of Conduct: http://www.ocl-cal.gc.ca/eic/site/012.nsf/eng/h_00013.html

European Union: Code of Conduct for Interest Representatives: http://www.euractiv.com/pa/commission-adopts-code-conduct-eu-lobbyists/article-172840

Cut VAT on tourism to boost growth

One of the big issues in Tanzania at the moment is whether the government will, as it proposes, levy VAT on tourism or whether the industry will persuade the government that this would be a retrograde step. As it happens, it has now been raised as a major issue in the UK as well.

CutTourismVAT, an alliance of two tourism trade associations and two large companies, on 30 July launched its new report on the impact of cutting VAT on tourism. The report argues that a cut in VAT from 20% to 5% on the tourism sector would lead to a £4 bn tax windfall for the Treasury and would lead to growth in GDP of £4 bn as well as creating 120,000 jobs. The report makes persuasive reading – though I don’t expect the politicians to be persuaded.

However, the report and accompanying fact sheet – in reality a policy position paper – are exemplars that other trade associations might like to emulate. The report, by Nevin Associates, is full of figures explaining the costs and the benefits, especially to government. It makes good use of ‘infographics’ to illustrate its key points. The policy position paper is just two pages long, yet manages to squeeze in all the relevant information and, again, makes excellent use of graphics to  illustrate its key arguments.

 

 

Big Results Now: regulations and regulatory reform

In October 2012, the Government of Tanzania resolved to establish a strong and effective system to oversee, monitor and evaluate implementation of its development plans and programmes – called ‘Big Results Now’. This was launched in the first half of 2013 and is being implemented through the Transformation and Delivery Council (TDC), the President’s Delivery Bureau (PDB) and Ministerial Delivery Units (MDUs).

The PDB has a primary objective to facilitate, monitor and evaluate the delivery of BRN initiatives in six national key priority areas: agriculture, water, energy, education, transport and resources mobilisation.

In December 2013, at a meeting of the Tanzania National Business Council chaired by President Kikwete, it was agreed that the PDB should also focus on constraints imposed on business by the enabling environment and recommend proposals to address those constraints.

The GoT recognises the need to improve Tanzania’s business enabling environment as one contributor to economic growth and is therefore organising a four week “lab” on business environment reform commencing 24 February 2014. The objective of the lab is to proposals with timescales, costs and key performance indicators. A planning meeting has agreed six priority areas to be addressed by the lab: regulations and regulatory institutions; access to land and security of tenure; taxation; corruption; labour law and skills; and contract enforcement, law & order.

I will be participating in the work stream looking at regulations and regulatory institutions. The pre-lab meeting identified seven basic issues that will need to be considered:

• Simplification and automation of processes and procedures in doing business;
• Harmonisation, consolidation and automation regulatory institutions;
• Separation of revenue generation objective and functions from regulatory functions – agencies funded from government budget;
• Regulation making should be participatory and transparent and reflect the spirit of underlying laws;
• Business registration and regulatory licensing is streamlined, simplified and modernised;
• Lead times for enforcement of regulations introduced; and
• Regulatory Impact Assessment (RIA) including participatory processes and consultations should become part of a mandatory process for development and gazetting of regulations.

Each lab will involve around 20 senior people drawn private and public sectors. The hope is that the participants will not only develop workable and acceptable proposals but also that they will feel sufficiently committed to success that they will do whatever is necessary when they return to their day job.

I would welcome feedback from anyone who would like to influence the work of the lab and will be blogging over the course of the time that I am participating