Sunday 21 April 2013

Buying Groups – Improving Sales and Profits even in a recession?

When we started our buying group, our objective was to improve our buying terms by 2%. So we were surprised when our first tender improved purchase prices by 22% on a major product group and we achieved purchase price improvements between 10% and 20% across the other product groups. Subsequent purchase rounds improved buying terms further, improved credit terms and added significant marketing support. The returns were way ahead of what we ever expected.

My company was a founder member and we were careful in selecting colleagues who shared similar aspirations and similar business views. The founding group was made up of 4 companies, 3 of which ranked within the largest 6 companies within our industrial sector. As well as sharing the rewards we invested in a central warehouse facility which allowed us to source from overseas, in shared IT and a centralised purchasing function. As a group, we marketed together, exchanged skills and tendered for national contracts. 

Ten years after it’s formation, c15% of my company’s turnover was directly or indirectly linked to the buying group.

The buying group concept can probably trace its ancestral routes back to the earliest cooperative groups in the mid 18th century. 

Although the Rochdale Society of Equitable Partners from 1844 is often cited as the earliest successful cooperative group, “The Cooperator” newspaper was established in 1828 and the earliest records go back to the mid 1700’s and the Fenwick Weavers Society of 1761. Whereas most of these early groups concentrated on selling and or social enterprise, the cooperative concept has developed across the world in various directions, including what is described as Retailers’ Cooperatives, where commercial organisations employ economies of scale to leverage purchasing opportunities and often pool marketing and other resources.  The Best Western hotel chain is a Retailers’ Cooperative whose members are independent hotel operators and who only dropped the cooperative description in order to avoid possible legal confusions within some US states.

Traditional buying groups operate in both horizontal and vertical markets.

Horizontal groups are not industry specific and focus upon generic services that are consumed across businesses in general. Horizontal groups tend to cover purchases of utilities, office supplies, building resources, packaging and generic professional services. At the small corporate level, many horizontal groups are independently owned, where the ownership is entirely separate from the membership, whereas in the large corporate arena ownership and membership are more likely to be aligned. According to research in the US, up to 20% of the Fortune 1000 use horizontal buying groups and reportedly receive improvements in excess of 10% on products that they source through these channels.

Vertical buying groups arise where business enterprises within the same industry come together to purchase raw materials, goods for resale and other goods and services within their industrial sector. Vertical buying groups are common within the grocery trade, electronics, hardware/builders merchants, plumbing supplies, leisure and hospitality, motor components, farming, healthcare and manufacturing. Some buying groups are independently owned whereas many are owned by their members. Some of these groups are enormous. “Today’s Group” claim to be the largest buying group of its kind in the UK with buying power exceeding £5bn although most UK buying groups are significantly smaller. “Today’s Group” are owned by their members.

As well as the normal commercial issues, buying groups have unique, but related, problems in terms of ownership, governance, finance and competition law.

In the early days of any group the founding members are more likely to concentrate on the practical issues and pay scant attention to the organisation. By definition, there is likely to be mutual empathy amongst the founding partners together with a shared vision. Shares/ownership will probably be allocated equally and decisions will probably be agreed by consensus, with a genuine incentive to compromise so that the project can be taken forward. Initial funding is likely to be shared equally with an agreed objective of getting the suppliers to pay the running costs by way of rebate or improved invoice prices. And little thought is likely to be given to competition law.
As the group grows, the opportunity for disagreement increases. Decision making tends to be by ownership rather than ability and there is often a tendency for decision makers to focus on the cost to their particular organisation, as opposed to the merit of the proposition. With equal funding, smaller members might be unable to fund ambitious projects. Whereas with funding linked to purchasing, larger members might reflect upon the differences in financial contribution, which might be further distorted by differences in product mix. And what happens when there is fundamental disagreement or a significant member leaves?

The legal implications are equally interesting.

In its broadest and simplest terms, it is illegal for businesses to do anything that distorts competition and which has a negative impact on the final consumer. In most cases, the purchasing process should be OK, but there is a need for caution when buying groups look at purchasing compliance rates within their membership. And additional caution is required when members start to cooperate on marketing, selling and contracting? Which, of course, is what many buying groups actually do. And extreme caution is required in terms of restrictions on membership or on member’s activities.

Buying group membership isn’t without its challenges. Members leave with possible implications upon the financial structure. New members join who may or may not share the perceived vision. Some members are fully engaged and fully supportive, whereas other members are less so. There is a tendency for secret agendas. But it works when there is a common goal and a well constituted membership agreement.
Our group produced an agreement from day one & I was responsible for drafting and negotiating a revised agreement when our largest member left, exposing operational and financial issues with the original contract. At that time, we chose to move away from a one member one vote system and to agree a voting system of my design and based upon financial contribution. It worked because we had a mature membership.
Buying groups are not for everybody, but where they are suitable, they can have a transformational impact. Having experienced the ups and downs of a £365m turnover buying group, we have the experience to advise and guide other buying groups along their journey to success.

Budget 2013

Budgets come & Budgets go and Budget 2013, which George Osborne described as a Budget “for an aspiration nation” passed with hardly a whisper. There are many that argue that the Chancellor had little room for manoeuvre, whereas there are others that argue that it was time, or even past time, for Plan B. Either way, the Budget is what it is & the main points are:
  • An increase in capital spending plans by £3bllion a year from 2015-16, funded through reductions in current spending so no plan B!
  • A reduction in Departmental spending of £1.1billion in 2013-14 and £1.2 billion in 2014-5. The schools and health budgets to remain unchanged – again, no plan B!
  • A limit in public sector pay awards to an average of up to 1 per cent in 2015-16 – whatever that will actually mean in practise!
  • A reduction in the main rate of corporation tax to 20 per cent – the joint lowest level in the G20 - & really welcome to those large corporates that actually pay tax.
  • An entitlement to a £2000 per year employment allowance towards employer NIC bills from April 2014 – a huge incentive for micro businesses, an incentive which is limited to businesses and charities, which means that it is not available to private employers of domestic staff. But why is it available to large corporates?
  • A £5.4 billion package of financial support to tackle long-term problems in the housing market – although this particular announcement already appears to be in trouble, with memories of the pasty tax in the forefront of every bodies mind.
  • £1.6 billion of funding for an industrial strategy to include the creation of an Aerospace Technology Institute.
  • Meeting the commitment to make the first £10,000 of people’s income free from income tax a year ahead of schedule.
  • Cancelling the beer duty escalator and reducing general beer duty by two per cent from 25 March 2013.
  • Cancelling the fuel duty increase that was planned for 1 September 2013 – did he have any other choice & notably, he didn’t cancel the escalator?
  • Introducing a Tax-free Childcare scheme so that working families can pay for childcare effectively tax-free – but why is it only available where there are two parents, both of whom work? & why is it available for parents with a combined income of £300,000 per annum.
  • Introducing the single-tier State Pension and implementing the £72,000 cap on social care costs from April 2016 – where, of course, a cap isn’t what you or I might have understood by the word.
  • An updated remit for the Monetary Policy Committee.
  • A crack down on tax avoidance and evasion, which is intended to raise over £4.6 billion in new revenue over the next five years – and on face value not many people, will argue with that. But this crack down includes a couple of nasty surprises which might have effects that many people might well argue with.
The first nasty surprise relates to partnerships. Apparently there are avoidance schemes that use partnerships to avoid PAYE but equally, there are thousands of partnerships that are perfectly legitimate but whose very existence has been called into question until we see the full details of the proposals. Watch this space!
The second nasty surprise relates to Inheritance Tax. Again, apparently there are avoidance schemes where wealthy people attach loans to their estates, thus reducing the value of the estate, and use the proceeds of the loan to purchase assets that fall outside of the scope of Inheritance Tax. & where these schemes are clearly tax avoidance, they should be regulated. But what about the entrepreneur who uses his home as security for a loan that is used to invest in his trading business? Isn’t this legitimate? Isn’t this a standard requirement of many lenders of capital? Watch this space again, because this proposal needs careful consideration!

What does the expression “Part Time” mean to you?

First published November, 2012

"What does the expression “Part Time” mean to you? Working in an industry, it’s easy to assume that everybody understands the colloquialisms or expressions that are familiar to insiders & how many industries have been handicapped by an assumption that their customers understand the basics behind the name. Subscribers to this forum undoubtedly understand the meaning of the word BLOG, but to a whole generation the word is almost completely meaningless. So what would they make of a person who is described as a blogger?

So what does the expression “Part Time” mean to you? Maybe a mum returning to work? Or a person looking for an easy life, leading up to, or maybe post, retirement? Or maybe a person who works full time, but for a number of different people or organisations – a sort of full time, part timer, if you will! All descriptions are surely true.

So which is it, when you see a person described as a Part Time Finance Director? Well, it could be a mum returning to work, employed for 3 or 4 days a week for one organisation & it could also be someone at or around retirement, looking for an easy life. But these days, it is more likely to be a full time FD, working part time for a portfolio of clients. The advantages to the client are many and varied. They have access to a mature, experienced, commercial FD at a fraction of the cost of employing a full time person. Most clients will already have an established accounting function and are likely to already employ a bookkeeper and/or an accountant, possibly on a part time basis. But until they came across the concept of a portfolio part time FD, the client probably thought that they couldn’t afford their own Finance Director. And as most portfolio part time FD’s operate via their own limited company, the client is also absolved from the costs of employers NI, pensions, sick benefits, holiday leave, maternity/paternity leave and company cars.

And what is the difference between a part time FD and an interim FD? An interim tends to work full time for one client for a period of time – often to cover for maternity or to assist a client over a major project or increase in workflow. Assignments might be a number of weeks or a number of months, but after the assignment is completed, the interim FD moves on. A portfolio part time FD, on the other hand, will work for a number of clients at the same time and assignments will tend to last for many months, often years.

So what does a portfolio part time FD actually do? In simple terms, everything that a strategic full time FD does, but on a part time basis. Staff supervision and mentoring – often including HR, IT, purchasing, pricing and other admin functions. Risk and compliance. Cash flow management. Internal controls, KPI’s and reporting. Budgets and business plans. Relationship management with bankers, auditors, shareholders and other stakeholders. Raising finance. Mergers, acquisitions and other significant projects. Exit planning.

These days, many experienced part time FD’s are members of a group, whereby they can share skills, experiences and resources calling on colleagues to assist as the need arises. Maybe it’s an expert on Sage, a colleague with experience with buying groups, a franchise expert or maybe a colleague with experience within the angel investor market. And how many full time FD’s can say that!"

Christmas was the final straw for Comet

This blog was originally written in November 2012. 

"The sad news from Comet is a lesson for us all. Comet’s problems are well documented, as was its sale to the private equity company OpCapita for a reported £2. In reality, OpCapita was paid the sum of £50m by Comet’s then owners in order to persuade OpCapita to take the business off their hands. A rescue plan was enacted under the veteran retailer John Clare, the former chief executive of Dixons. Recent reports suggest that significant progress had been achieved with costs slashed and sales stabilised. 
So why the current demise? According to reports, suppliers to Comet have been unable to secure credit insurance and were therefore forcing Comet to pay in advance for their stock. And the final straw appears to have been the need for additional stock in order to cover the Christmas period.
And why is this, a lesson to us all? The fact is that there are a limited number of companies that are willing to offer credit insurance in the current uncertain times and, unsurprisingly, there is a tendency for these credit insurers to specialise in a particular market.  In other words, it would not be surprising to find that several of your suppliers are using the same company to insure your debt with them.
The problem arises when the total amount insured starts to rise. Your credit rating might be excellent, but may not be sufficient to persuade a credit insurer to take the whole risk on their books.  Interestingly, in my experience, when one insurer is insuring one company’s debt with lots of suppliers, it is often the small supplier that receives a refusal to insure. They are never told the real reason – that the customer is a good risk, but that the insurer is too heavily exposed – they are merely told that the risk isn’t covered. The supplier assumes that there is a problem with the customer, when it may actually mean that the supplier’s account is less important to the insurer than those other accounts that the insurer continues to cover. Either way, your debt with your supplier is no longer insured & your account might well be placed on stop.
So what can you do to mitigate this risk?
  • Regularly review your credit rating with all the major rating agencies. You check out your customers, why not check your own. A client of mine discovered a disastrous credit rating following his best ever year. The credit rating agency was happy to investigate and discovered a data entry error, which they were pleased to correct. 
  • Ask your suppliers who they use for credit insurance. If you are lucky, you will discover a diverse range. If you are unlucky, you can be put on alert of a potential problem. Always react to requests for additional information from credit reference agencies or credit insurers. Build a dialogue with the credit insurance providers. This might initially arise from a refusal to insure. Don’t ignore the problem, talk to the insurer. They will always welcome explanations and trading updates, particularly in the period between your accounting year end and the date your accounts are filed at Companies House.
  • Talk to your supplier and let him know the results of your research. Again, a client of mine was refused insurance on an amount of a few thousand pounds, whilst the same insurer was willing to cover debts amounting to hundreds of thousands of pounds, but where the supplier they insured was a far bigger company. In this case, the supplier who had been refused cover was willing to continue to supply without cover.
But whatever you do, manage the risk."