Energy prices? Epic fail on pricing strategy!

Pic By Thomas (ARRG.ch photostream Flikr)

This morning it’s become clear that the government intends to push ahead with forcing the energy companies to reform their tariff structures to help people ensure they are on the cheapest possible rate.

This is a major blow for the companies, a huge embarrassment and a counter intuitive PR victory for a governing party that is otherwise wedded to free market principles. Consumers will no doubt say this is long overdue, and for many this will be a relief.

For the energy companies this represents many things. But above all else for those that provide electricity and gas to our homes this will come to be viewed as a failure of pricing strategy.

Indeed for pricing experts, and this is turning into something of an industry here and in the US, the energy debacle will become a case study of a how the approach to pricing went disastrously wrong - so wrong in fact that a national government felt it had to intervene. Ouch!

It doesn’t help that the energy companies are selling an essential commodity. It didn’t help that on the back of constant price hikes, the companies kept making decent profits (they should, shouldn’t they?). It didn’t help that they became bogeymen for the media and consumer groups. But it would be a mistake for the energy providers to sit back and complain they are victims and that this was all out of their control. They and many other companies should take a long hard look at what happened with energy pricing and ask: why did it all go wrong?

It may be that the sector is poorly structured, and that’s a fundamental that may need addressing in some way. But my guess is that it will all come down to the way energy suppliers priced their products.

What happened? In short tariffs multiplied beyond most peoples’ understanding and ability to understand why gas and electricity was being priced the way it was. Consumers, I suspect, find the structure of the sector hard to grasp and their hold on why all the prices are the way they are is even less secure. That led to a widespread perception that people did not know exactly what they were paying for and if they don’t know that they simply couldn’t grasp the “value” they were receiving in return for hard earned money.

This haziness over the value was exacerbated even more when energy companies announced that prices had to rise (mostly across the board) because of rising wholesale prices, and yet continued to make big profits. Public perception inevitably gravitated toward the idea that something was wrong.

Executives, Patraeus their halos and indiscretion

“Who the fuck does Cox think he is? I never made a dime from public office! I’m honest.”

“They can’t impeach me for bombing Cambodia. The president can bomb anybody he wants.”

These are obviously the words of a leader concerned that his reputation should not be impugned. You will have guessed that the President concerned is Richard Nixon. These phrases though are taken from the Oliver Stone movie about the former president starring Anthony Hopkins in the title role. Though the film was extensively researched for reasons of legality and authenticity, I can’t tell you that they are actually Nixon’s words. But I think Stone was trying to capture something of the man.

The lines in the film come long after the Watergate scandal had broken and Nixon had devoted considerable effort to covering up. What do we understand from these quotes?

The first tells us that despite everything that went into the most notorious burglary of US political history, Nixon still saw himself as essentially an upright man doing right and serving the interests of the state. His exhortation that he was "honest" comes as something of a shock. The second gives us an idea of his warped sense of what the presidency and its powers meant - the president can literally do anything he wishes. Power is unlimited.

This week astonishing events saw General David Patraeus (pictured) resign his position as head of the Central Intelligence Agency following revelations of his affair with his official biographer Paula Broadwell. The affair has also raised questions of whether she had inappropriate access to state intelligence.

Coverage of whether he did or did not share sensitive information with Broadwell will rumble on for some time. But one of the first questions tackled by press, public, former soldiers and politicians alike is why a man vaunted for what are clearly considerable skills and intelligence should risk it all on an act of adultery.

Put aside the question whether he should have resigned. Patraeus obviously thought it was a resigning matter. The issue is why take the risk of embarking on what has turned out to be a catastrophic piece of behaviour? After all, this is a highly talented man who had achieved great success who potentially saw even more success out there in the future.

UK economy saves the living dead

You may remember that I recently wrote about zombie companies eating up vital financial resources when they should be dying off and making room for new thrusting more viable businesses
Well, the FT's Undercover Economist Tim Harford has turned his attention to the issue. His conclusion: in healthy economies companies die quickly. Sickly economies somehow enable the living dead to survive. See what you think - read his article here.
However, the policy implications are still difficult to divine. My article here.

Starbucks' CFO, tax and the riled up MPs

CFOs would have eagerly watched the performance of Starbucks' finance chief Troy Alstead in front of the House of Commons public accounts committee.
Alstead, along with other from Amazon and Google, was there to answer questions on their UK corporation tax contributions.

Branded: revealing the intellectual property that costs so much, Brompton Road, London

We know how this is done. Create a group structure with companies in different countries and have units in higher tax states make transfer payments to units in low tax nations for things like intellectual property. The scheme is as old as the hills, and perfectly legal.
The Financial Times concludes this:

The reality is that Starbucks is doing poorly in the UK. Local rival Costa Coffee is running (coffee) rings round it. And if some multinationals pay low levels of corporation tax in the UK and other markets, it is the fault of governments, not businesses. They talk up multilateral crackdowns on avoidance while individually trying to lure footloose company registrations with loopholes and low headline rates.

The operating loss stood at £28m, £25m accounted for by the payments mentioned above. Why wouldn't a company do that if it is legal? As the FT writes, it is not the companies that are the issue, it is why government continues to allow this situation to persist. Perhaps the public accounts committee should have called George Osborne to answer questions on why he has not instigated root and branch reform of the corporate tax system. Without that it's hard to see how things will change. In truth, as a result of the policy ambiguities highlighted by the FT, government is incoherent on the issue - sadly lacking in substance despite a lot of noise.
As for Alstead, he seemed well prepared and composed. Unlike his namesake city, he seemed unlikely to yield. Except the point that he wished Starbucks was making more money. But there was about as much froth as in a decaf flat white.

Economics and reading the runes

Though The Guardian does business reporting it rarely comes up with really thought provoking commentary on the subject.
This morning is different, however, as Simon Caulkin asks where management theory went wrong.

In short, for Caulkin, management theory became hijacked by the Chicago School of economics - you know that brand of economic theory dominated by Milton Friedman (rational choice theory leading to efficient markets). The point being that Chicago economics has been superseded but no one saw fit to feed that into management theory. This has therefore led to some dodgy corporate management and some poor corporate governance.
This is pretty much in tune with The Guardian's agenda. Sadly, I'm not well versed enough in economics to argue the pro and cons (I wish I was) but the idea that two fields of thought would cease to keep pace with each other is an interesting one. Economic theory raced on, management theory remained stuck at a certain point in time, is what Caulkin is saying.
More interesting is the way finance directors - de facto economists for their organisations - should regard this. I was reading the Secret FD column in Financial Director magazine who had this to say: "I have found advice from economists to be more ambiguous and open to contradiction than in almost all other areas."
FDs, perhaps, more readily question economic theory than anyone else. And yet if Caulkin is right, they did not question rational choice theory assumptions and efficient markets. They merely stuck to a particularly comfy set of theories and ignored everything else that came after.
I'm not sure that's correct. Though I do like this from Caulkin: "The irony is that we know what makes companies prosper in the long term. They manage themselves as whole systems, look after their people, use targets and incentives with extreme caution, keep pay differentials narrow (we really are in this together) and treat profits as the score rather than the game. And it's a given that in the long term companies can't thrive unless they have society's interests at heart along with their own."
But Caulkin's broader point would lead to the conclusion that FDs must get their underlying economic assumptions right. Which means enormous pressure on them. At a time when debate rages over economic theory it is perhaps harder than ever to pick the right camp. Caulkin's article is really an invitation to actively engage in that process. On top of everything else an FD does, like run the business.
But it does get at a fundamental point which I think the Secret FD is getting at too. If you are an FD you are relied upon for your ability to read the economic runes and the current circumstances we find ourselves in places a premium on that skill set. But there's a little bit more. It's the ability to take a step back and ask whether the old order was right. Call it "disassociation" if you like. You might do this about a product. Managers get wedded to old products - can't believe they could be wrong. Agile managers can disassociate themselves from the old product, have a clear vision of its future, or not, then switch to focus on something new. Likewise the FD might have to do the same thing with so called economic wisdom. But it's tough, perhaps bordering on traumatic. After all how can everything that came before be wrong. It's probably a mistake to see it as wrong. More "of it's time".
Certainly one worth discussing.

Earth tremors for IFRS

The world of accountancy was jolted by something of an earth tremor today as the UK’s chief supervisor of financial reporting, the FRC, revealed that it was considering a different set of accounting measures for banks.

The move will encourage those who have argued - in a debate growing increasingly vociferous - that banks should not have been using International Financial Reporting Standards (IFRS).

The FRC’s chief executive Stephen Haddrill (left) made the concession at a conference today staged by the accountancy firm Ernst & Young.

He is reported by Reuters to have said: “To what extent, for the purposes of our work, should banks be regarded differently?" He added: “"Should they have a separate code and their own accounting standards?" While not going so far as to emphatically say they should, Haddrill now has a working party examining the issue.

Haddrill is not the first to point at the growing disquiet with IFRS. Earlier this year Andy Haldane, a member of the board of the Bank of England, the new regulator of banks in the UK, said separate accounting standards were required for them.

The claim is that the current accounting precepts embodied in IFRS allow banks to indicate they are more healthy than they really are.

With the Bank of England is banging the drum, the FRC probably came to conclude it had little choice but to join in. It’s unlikely that its leadership could have seriously believed it could set itself in opposition. Things just don’t happen like that in the City.

Haddrill’s declaration was immediately welcomed in some quarters. PIRC, a lobby group for shareholders issued this uncompromising statement through a spokesman: “IFRS has been a fiasco since introduction. The French were consistently critical and warned of the implications for banking stability. The ability of IFRS to make any insolvent company appear solvent is deeply embedded in the philosophy of the IASB. Now is the time to ask, how on earth could it happen when these people were supposed to be experts. The IASB is about to embark on insurance, having so far left that sector to UK GAAP, heaven help what problems will lay in store there.”

The news will be a blow to the International Accounting Standards Board (IASB). Intriguingly its chairman, former Dutch finance minister Hans Hoogervorst, will be speaking tonight at the London School of Economics. His comments should attract much attention from the accounting world. He will certainly not concede that IFRS have been a fiasco (though he has been concerned about the body’s current work schedule). But could he even hint that bank’s may be a special case for accounting rules? There is some added pressure because the IASB is still working to converge its standards with the US. The FRC’s move may just give ammunition to those across the Atlantic who argue the country is fine with its own national rules.

/ends

Darwin and insolvency

The number of company failures is down for the second quarter running. Hurrah! We’re out of recession, apparently, and now the volume of businesses hearing the nails go in the coffin has dwindled. A bit.

Truth is though that many people are not convinced the company death rate falling is good news. Their view is that many are zombie companies - living dead corporates.

What’s keeping them alive? You know this better than I. Low interest rates, personal savings, deferred tax bills. Nick O’Reilly, an insolvency expert at HW Fisher says he’s routinely seeing companies taking on work at below cost rates, just to keep things ticking over.

In the summer I saw Jon Moulton, former head of Alchemy Partners and now running private equity outfit Better Capital, talk about the total absence of a "Darwinian" process killing off weak companies. Government policy and economic policy was artificially keeping them alive.

Of course, this is the great public policy conflict. Keep businesses alive and keep (some) people in work, garner positive headlines. Or, let nature, as it were, take it’s course.

Moulton’s point was that the current situation is only postponing the pain, plus it’s clogging up the country’s corporate arteries. The zombies are dominating energy, capital and resources that could otherwise be devoted to businesses with better prospects.

Maybe so, but it would be a near suicidal politician who said we needed a policy to kill off wounded businesses. The outcry would be deafening.

Obama, Sandy, business leadership and a confession

A week before the US presidential election, probably the most important decision for the future of the planet over the next four years and the incumbent, President Obama, is not campaigning. He’s not even talking about the election (except to say he’s not talking about the election).

No, what he’s doing is very obviously taking care of the crisis brought on by Hurricane Sandy. Now, there’s a lesson in leadership that businessmen would do well to remember.

From the Whitehouse website

It's personal (warning bad language on the way)

It brings to mind a personal story (former colleagues will remember this), please bear with me. It goes back to the time when the London tube network was attacked by a group of suicide bombers in July 2005. I was editing a magazine at the time and though the transport infrastructure and mobile phone network came to a grinding halt during morning rush hour I managed to get to work. What I did on arrival, the very first thing I did, was set my team to work on finding out whether there were angles we should be covering - what were the stories we should be writing then and there. As dazed as they looked, I demanded they hit the phones, start writing and posting online.

I thought this was our primary role. All I could see were the stories we should be writing, the narrative we should be crafting. I was driven, blinkered, and I thought my team should be too. I even called one of them at home to interview him about his experience of being terrifyingly close to one of the bombs. I was high on adrenaline, excited. I thought I was heroic.  

The next day, back at work, I overheard one of my team describing me as “a c**t.” This, as it turned out, was because I had failed to ask how any of the individuals in my team were. In all honesty, in the rush to do the story, I didn’t even give it a thought. I was caught up in the excitement, the rush. But on reflection the comment was quite right and I more than likely deserved such an epithet. Even now, some years on, the thought of my behaviour that day sends a shudder of embarrassment down my spine.

Obama and wellbeing
So what’s this got to do with Obama and business managers? In short you cannot afford to ignore the wellbeing of your people. They are the most important element to what you do. Without them, their goodwill and support, you will struggle to achieve your aims. Obama recognises this, I hope I do now, and business people need to keep it front of mind.

Senior business leaders all too often get caught up in their strategic objectives, the spreadsheets, the client meetings, boardroom intrigues, P&L predictions. Their people, their needs, especially in relation to how they do their jobs can come depressingly low on the priority list. Leadership should get your head out of those things to be concerned about the people who are delivering the products and services you sell.

Moreover Obama has been careful to be seen to do something else - ensuring that all the people that matter in dealing with the crisis are getting the support they need to do their jobs. This is not my observation but Eric McNulty in the Harvard Business Review. Obama is taking great care not to seem omnipotent. He can only control what he can control. McBulty's point is that it's taken a while for the President to understand that he used to over-estimate his ability to control things. He must therefore support others in their effort to deal with the disaster. He has not guaranteed that everything will be alright. He can’t. But if he supports well he will “share” in the credit (that’s already happening and could prove to be an election game changer). Others have written he has misunderstood America’s “can-do” approach to life. But to back-off and assume individuals can take care of themselves, even in such a crisis, is just bizarre.

Business leaders would do well to learn from this. Support your people well, pay attention to their needs,  and they may well deliver more reliably than if you are calling the shots from on high.

Even more personal

Personally, I forgot the support and I forgot that it wasn’t just about my intentions. I should have apologised to the team member who thought I was a “c**t”. If you're reading (I hope you are, I need the traffic) you got me bang to rights. Some might claim that I’ve never learned that lesson - they’re entitled to their opinion. I like to think I remember more often than not. Which is an improvement.