Strategy & Operations » Leadership & Management » FD Virtual Roundtable: The Fab Four

LAST YEAR proved to be another tumultuous 12 months for UK business. The Office of National Statistics reported that GDP fell in the second quarter by more than expected – 0.7% – marking the third successive quarter of negative growth, while the UK recorded its worst ever balance of trade figures which suggested that the rebalancing of the economy by replacing domestic activity with exports was way off track.

Taking the ONS number for GDP at face value meant not only that the UK was well entrenched in a technical recession, but that the economy was one quarter of a percentage point smaller than when the coalition took office.

Recent news points to better times ahead. Mario Draghi, president of the European Central Bank, went some way to shoring up the eurozone’s crippled balance sheet with his ‘big bazooka’ and the US appears to have narrowly managed to avoid the fiscal cliff at the eleventh hour.

But George Osborne’s Autumn Statement, delivered last year, will have watered down expectations of recovery. His message: expect more of the same for the foreseeable future.

Financial Director spoke to four leading FDs from the public sector, FTSE 100, manufacturing and retail industries – John Lewis finance director Rachel Osborne (1), Unum finance director Steve Harry (2), Hadlow College finance director Mark Lumsdon-Taylor (3) and Cosworth finance director Mark Palethorpe (4) – to garner their strategies and expectations for the year ahead.

Here is what they thought.

How would you describe 2012, and what actions did you take to protect your company’s finances?

Mark Lumsdon-Taylor (MLT): A better year than 2011. Core business performed significantly above budget and the organisation was focused on delivery. We invested heavily to future-proof 2013 … we took a calculated and decisive risk.

Rachel Osborne (RO): The market was pretty much as expected, although our performance was better than expected – it was important to have budgetary controls in place.

Steve Harry (SH): It was a challenging trading year for Unum UK. To offset the impact of falling investment yields, we inevitably had to raise premiums, which is never easy when economic conditions are difficult. We also took a number of precautionary steps to mitigate the potential impact of a euro sovereign crisis by reviewing our investment strategy and liquidity arrangements.

Mark Palethorpe (MP): It was a year that tested the mettle of businesses both large and small throughout the UK, with many unable to overcome the hurdles in front of them. Strong management of cash flow and a sharp focus on operating costs have been two of the defences that the business has employed to protect its finances and compete more effectively within our core markets.

What will define your business strategy over the next 12 months?

RO: Invest for the longer term, given the changes facing retail, and have a higher focus on efficiency.

MP: Continued focused investment in technologies that will deliver annuity revenues in future while keeping a keen eye on costs.

MLT: Investment underpinned by managed risk in new markets and projects.

SH: We have a long-term strategy of growing our core market by increasing awareness of the risks and costs of long-term absence and the benefits of income protection products and services. We will continue to develop our relationship with brokers as our key distribution channel and to focus on providing excellent service to both employers and claimants.

How do you expect the economy to perform, and how will this shape your business’ strategy?

SH: We appear to be in a low-growth, low-inflation, low-yield environment that will persist for some time yet. Our investment return expectations and pricing levels will have to be set accordingly. Although our revenue growth projections are conservative, we will continue to seek efficiencies in cost and capital management to support returns in the short term.

MLT: We must create confidence and demand through investment and quality products that consumers want domestically and internationally.

MP: The economy will remain in its current condition for another two or three years. We have set our expectations accordingly, managing costs effectively and promoting synergies between new and established teams within the business. We have consolidated our research and development resources around a reduced number of programmes that we consider offer the right mix of ROI and technological advance.

What are the biggest risks your business will face in 2013?

RO: Competitor panic and unsustainable discounting.

SH: Further deterioration of global markets impacting investment portfolio yields, irrational pricing from competitors resulting in a failure to sustain the level of premium increases needed in the current economic environment and a contraction of the UK economy leading in particular to pressure on company payrolls.

MP: Continued uncertainty and inaction in Europe; a flat 2013 of no growth that drains remaining confidence out of the economy, and whether the lagging labour market weakens and saps the remaining strength from a very inconsistent recovery.

How can government/regulators help businesses this year?

MP: Energy costs need to be controlled through more effective regulation. Financing options for businesses remain limited despite the initiatives that have been announced from Westminster and Whitehall. For the economy to sail out of the doldrums, customers must have confidence to purchase – that starts with the consumers: cars, houses, mobile phones, etc., and feeds through to the engineering businesses.

SH: Since 2008, the insurance industry has been preparing for the EU-wide introduction of a new solvency regime which aims to protect policyholders. Many important aspects of what is called Solvency II, including the implementation timetable, remain undecided. The Bank of England and FSA support for the UK insurance industry is crucial in framing the relevant EU regulation and in ensuring firms’ preparations are proportionate.

MLT: Our core market is micro businesses and SMEs. Support their development and investment requirements by making credit easier to access – it’s not working at the moment. Make the big players pay the small players on time.

RO: Lower business rates and tax reductions – either VAT or higher rate income tax.

What sector-specific challenges do you expect to contend with in 2013?

SH: There is undoubted pressure on company employee benefit budgets, which is set to continue through 2013. However, partly as a consequence of the introduction of pensions auto-enrolment, this apparent risk is actually proving to be an opportunity. The change in pensions legislation has acted as a catalyst for many businesses to rebalance their entire benefits packages to make best use of that budget, ensuring packages include financial protection to meet the needs of businesses and their staff.

By continuing to focus on raising awareness of the risks and costs of long-term employee absence and the benefits of income protection, we hope to deliver growth by properly addressing the challenge presented by the new legislation.

RO: Acceleration of customer use of technology to make orders online.

MLT: The restoration of confidence of young people that investing in their education to the tune of more than £50,000 is the right thing to do.

MP: We supply a number of sectors, ranging from aerospace through to automotive and performance sports. This has been a deliberate strategy over the last few years to mitigate the impact of any one sector seeing a downturn. Probably the greatest sector challenges will come from government-based work while they seek to decide how to deal with their fiscal challenges.

What single piece of advice would you give to fellow FDs for navigating 2013?

MLT: Irrespective of how busy you are, walk the floor, know your business, and take those risks.

RO: Plan well, look forwards, and anticipate the risks.

MP: Make decisions and follow through on the actions that are required as quickly as possible. If you see a storm cloud on the horizon, don’t wait for it to start raining before you buy an umbrella.

SH: Focus and execution. The challenging economic environment requires proactive financial management to ensure a company is well positioned to succeed. A clear assessment of priorities, both tactical and strategic, is critical to enable an appropriate allocation of human capital and financial resources. Once priorities are set, excellence in execution will differentiate the more successful businesses.