Accounting & Business

Many articles on a wide range of business and financial subjects. Accounting & Business is the magazine of the Association of Chartered Certified Accountants.

How much is e-mail costing your business?

Filed in: , it, business, computing, technology, communications

Can you still remember your delight when you sent your first e-mail? And then again, even better, when you got your first reply? Sadly those joyous days are long gone and instead e-mail is fast becoming a curse of contemporary corporate life, and an expensive one too.

How much is e-mail costing your business?
Richard Willsher

Can you still remember your delight when you sent your first e-mail? And then again, even better, when you got your first reply? Sadly those joyous days are long gone and instead e-mail is fast becoming a curse of contemporary corporate life, and an expensive one too.

Research by IT specialists Gartner and IDC suggest that up to 40% of e-mails sent in private sector firms are non-work related. This, according to e-mail management software vendor Waterford Technologies, rises to 70% in the public sector.

Waterford’s general manager Richard Kolodynski says, “It seems hardly credible, but a staggering 70-80% of emails sent by staff working in the public sector are personal. Local government employees are big offenders, but the worst email abusers by far are staff working for health trusts and other Central Government departments.”

No wonder then that some private sector entrepreneurs see e-mail, and particularly internal e-mail as threat to their business culture and profitability. When John Caudwell banned internal e-mail at his 335-store mobile phone retail chain Phones4u he reckoned it would save him £1 million a month in lost time. “I saw that email was insidiously invading Phones 4u so I banned it immediately,” said Caudwell.

This contrasts with the vision of arguably the world’s greatest living entrepreneur, Microsoft’s Bill Gates. In his 1999 book, Business @ The Speed of Thought he draws on a number of case studies, including reference to his own company, to show how e-communication is speeding up business processes and eradicating paper to the great benefit of some of the world’s leading businesses.

In fact many more companies have followed Bill Gates’ lead, recognising that e-communications have become the lifeblood of their businesses. And the latest news from Phones4u is that although the internal e-mail ban had some excellent effects such as eradicating 70% of personally generated e-mail messages it was not practical to abolish e-mail altogether. What the company has decided to do is to develop a thoroughgoing policy to define what is and what is not acceptable use of e-mail.

Moreover Phones4u never attempted to ban external e-mail because it was a crucial tool in communicating with customers, suppliers and those parts of the company based overseas. But if internal e-mail wastes time and money it pales into insignificance as compared with the effects of externally generated e-mail and risks that it poses 24hours a day 365 days a year.

Customer-profiling software company NCorp has conducted research that has produced some startling numbers. 6.3 million junk e-mail messages are read at work, in the UK everyday. They say that this equates to 500,000 lost man-hours of working time each work and costs UK plc over £300 million each year in lost productivity.

How accurate such numbers can be is difficult to verify but think about the state of your own inbox when you return from a two-week holiday. How many messages are waiting for you? How many are worth reading? How many are remotely relevant? How long does it take you to go through and delete them? Multiply all that by every person in your company and that’s the size of the problem. NCorp reckons that a 1,000-person company would need to employ three full-time staff to filter out the spam e-mail received over a one-year period. And the problem seems to be growing day by day.

As it stands at the moment, legislation governing the sending of unsolicited marketing e-mails is patchy and inconsistently drawn and applied from country to country, despite the obvious fact that e-mail is one of the most international means of communication. In the UK for example new regulations took effect on 11th December 2003 as the UK’s implementation of the European Directive on Privacy and Electronic Communications. The penalty for breaches is a fine of up to £5000.

On the face of it this sounds like government getting tough but the measures are widely regarded as lacking real punch. Firstly, they merely price the spammers entry ticket, should he or she get caught and prosecuted. Secondly, they have no international effect and large amounts of spam are generated outside of the legislation’s jurisdiction, for example in the U. S. Thirdly, the legislation applies to individuals and not to companies. The problem of corporate junk mail has not been addressed.

Meanwhile the cost of spam does not take account of the risks posed by viruses, worms and other e-mail borne software threats that can wreak havoc with internal systems and external service providers; all of which costs time and money. The Corporate IT Forum, an organisation which represents 140 of Europe’s largest IT departments including 50% of companies included in the FTSE 100 and 250 indices, reckons that the average cost of the Welchia / Blaster viruses and worms which hit the UK in August was £122,000 per company. This was calculated with reference to the cost of man time and necessary related expenditure.

A further area of risk and of cost, which many companies have yet to fully appreciate, is the legal obligation highlighted by recent corporate scandals in the United States. On the one hand company executives’ inappropriate behaviour and in some cases malfeasance was freely evidenced in e-mail exchanges, often to the cost of those executives themselves as well as their employers. At the same time there is an increasing body of law which defines what records and archive material of e-communication must be stored as part of best corporate governance practice. It will be surprising if legal requirements of this sort do not tighten with time and give rise to additional costs whether in terms of the cost of storage, of software, of compliance as well as of legal consequences in due course when incriminating evidence is discovered in such archives.

The situation is crying out for regulation and in the absence of any over-arching legal or other regulatory framework it comes down to businesses themselves to apply their own internal ethics and implement their own controls.

E-mail definitely begins at home and companies involved in producing e-mail control software are, not surprisingly, in the forefront of getting companies to think about their e-mail policies and how they control internal generation of e-mail as well as filtering in-coming spam.

The Corporate IT Forum, suggests various best practice measures:

  * Asking staff to allocate specific times to deal with emails
  * Minimising the proliferation of internal spam by a) avoiding the forwarding of attachments, b) use of organisation-wide information broadcasts and c) unnecessary copying-in of others.
  * Using intranets for internal communications
  * Promoting the mature use of email as a key business tool

What is clear is that companies cannot afford to be as free and easy with e-mail as they once were. E-mail is clogging up the time and processes of businesses rather than helping them run more smoothly. Ask yourself some questions: how much of your time and how much of the time of your staff and of your organisation is taken up with dealing with unnecessary e-mail? Can you and/or your organisation afford to it ignore this? Whose job is it to sort this problem out? Once the answers to these questions are clear then you may be well on the way to avoiding wasting time and money on e-mail whether internally or externally generated and making the best use of this marvellous communication tool.

The Dilemma facing every Business in the West

Filed in: employment, baby boom, human resources, business, discrimination, retirement, age

The fast approaching retirement age for the baby boom generation threatens huge knock-on effects for industry resources - not least in areas such as engineering where the average age of employees is much higher. So, can anything be done to alleviate this?

The Dilemma facing every Business in the West
Richard Willsher
11 Feb 2006

The fast approaching retirement age for the baby boom generation threatens huge knock-on effects for industry resources - not least in areas such as engineering where the average age of employees is much higher. So, can anything be done to alleviate this? Richard Willsher reports on the measures being taken to counteract a diminishing workforce
When a report appeared on the BBC’s website that the UK retirement pension age may need to rise, an apparently alarmed member of the public e-mailed the site: “Can anyone tell me what kind of jobs 67-70-year-olds are going to be doing?”

But his concern may have been unjustified. A raft of recent research is now pointing to the need for businesses to retain older workers, and those companies who do not risk losing a valuable human resource.

Year-by-year from now on, the post-World War Two baby-boomers will retire in droves. “Among countries in the European Union,” reports IBM Business Consulting Services - Human Capital Management group, “the number of older workers (50-64 years) will grow 25%, while younger workers (20-29 years) will decrease by 20% over the next two decades. And in the US, by 2010, the number of workers between ages 45-54 will grow by 21%, the number of 55-64-year-olds will expand by 52%, and the number of 35-44-year-olds will decline by 10%.”

The problem of the shrinking workforce is set to affect all members of the Organisation for Economic Cooperation and Development (OECD) with Italy, Japan and South Korea being among the worst affected over the next 50 years. Countries such as Mexico and Turkey will also experience an ageing workforce. Some industries will suffer more than others. Careers offered by certain sectors, such as engineering and oil and gas exploration, have failed to appeal to young people. The Financial Times reported in an article that: “At an estimated average age of 49, half the workforce [in the oil and gas industry in Europe and the US] is expected to retire in the next five to 10 years. The US nursing and teaching professions face a similar demographic crunch, as do aerospace and utilities companies.”

So it is a short leap of the imagination to conclude that the answer is simple; all you have to do is persuade people not to retire. But it is not as straightforward as that. Dr Wesley Payne McClendon, European partner at Mercer’s Human Capital Advisory Services, says that employers are faced with some difficult considerations.

Retaining older staff
While there are undoubted benefits, employees should consider the following:
• pay policies to retain staff may push up wage costs and produce greater pensions and health care costs
• there may be mismatches between salary levels and contributions / performance levels of some long-serving members
• it is often difficult to attract new talent - particularly in public utilities - given the traditional recruitment methods and persona of the industry
• reduced mobility between jobs and lower turnover within enterprises may reduce turnover costs, but it may also make the workforce less flexible
• resentment amongst younger people, who perceive their career paths are blocked or impeded by older generations
• retirement plans may be out of sync with organisational needs (e.g. provisions for early retirement when organisations need to retain the talent)
• there may be low morale among employees financially unable to retire, and
• increased absenteeism due to health-related illnesses and disabilities.


But there are definite upsides to retaining older staff as Dr McClendon also concludes. An organisation can increase intellectual capital, experience and likely technical expertise. Therefore, an older workforce may be more productive given they have more experience. Older workers are much less motivated by career progression and promotional opportunities and, therefore, comprise a more stable workforce.

Consultants such as Accenture, Mercer, IBM, Deloitte and Hewitt - who are all now consulting in this aspect of human resource management - have spotted that many businesses are not aware of the effect of ageing employees on their business. As a consequence, they will have no plans in place to address the loss of skills that will occur as their older workers retire.

“What we are telling clients they should do,” explains Mary Sue Rogers, global human capital management leader at IBM Business Consulting Services, “is the diagnostic which asks when will you have this problem, because every business in the Western world will have it sooner or later. Then what is the strategic plan for how you’re going to deal with it? Certain roles and jobs tend to have a higher age profile than others. So it’s about looking at the jobs you have in the organisation, what skills they require and how ageing and retirement is going to affect them.”

Then, she says, it’s a matter of coming up with creative ways to meet the needs of the organisation by offering older workers incentives to join or to stay with the organisation.
Why creative? Because older workers, while they may be well motivated, loyal and their skills valuable, may not want to work full-time. They may not need to if their finances are well organised or, as they get older, they may find a full week’s work over taxing. It is a question then of coming up with an employment package which is mutually beneficial to employer and employee.

Senior consultant Kevin Wesbroom, of Hewitt Associates, says: “The biggest single win-win is the flexible or phased retirement approach. This is the ability, as far as the individual is concerned, to work less than the full-time work schedule. Typically, individuals might be looking to do three or four days a week, still having a significant involvement where they can. They can use the skills that the employer wants but it suits their lifestyle requirements. As far as the employer is concerned, it suits him because he’s got access to skills and will not have to pay as much for them as for a full-time person. He gets a motivated individual who wants to contribute and, therefore, is good value. Often, older people still have a love for the job and may not be driven by the financial attractions as they are probably more financially secure.”

In its October 2005 report, Tackling Age Discrimination in the Workplace - Creating a New Age for All, the London based Chartered Management Institute (CMI) concludes: “There is demand from employees for more flexible arrangements in relation to retirement. This may take the form of flexible working arrangements - 68% anticipate working part-time towards the end of their career, and 24% of respondents even say that this would be the most important factor in their decision-making on when to retire. However, only 34% of organisations currently offer all older workers the opportunity to work part-time.” An acid test would be for readers of this article to consider whether their firm has procedures of this sort in place. Another would be to cast you mind over your own organisation and imagine what would happen if particular older staff retired and left the business. What would be the impact of the loss of their skills, expertise and knowledge of the business?

The consultants are telling us that balancing the needs of individuals with the needs of employees is the most sensible way forward. Successfully managed, it might, in due course, even render redundant the principle of a statutory retirement age which is looking increasingly inappropriate for all concerned. But that is another story and, in any case, the pace of employers in dealing with the issues of retaining the staff they need is likely to be faster and more effective than waiting for the resolution of politically-charged debates in many countries over public sector pension funding.

Richard Willsher is a financial and business writer with a background in investment banking.


Shattering the Glass Ceiling

Filed in: ftse, ftse100, equality, norway, corporate, women

Norway has used powerful legislation to break down the barrier to women occupying senior corporate jobs. Could this be the way forward for other countries?

Shattering the Glass Ceiling
Richard Willsher
11 Mar 2008

Norway has used powerful legislation to break down the barrier to women occupying senior corporate jobs. Could this be the way forward for other countries? asks Richard Willsher

As of 1 January this year, 40% of board members of Norwegian public limited companies must be female. The legislation, passed in 2005, required that companies had two years to implement the new rules or face being closed down. Then, only 12.8% of Plc directors were female. Now the figure is close to the target, with 85% of companies complying and the remaining ones being given two more months to shape up.

‘This is a question of democracy in Norway, of reaching a balance of participation in society,’ explains Ragnhild Samuelsberg, spokesperson for the country’s Ministry of Children and Equality. ‘This legislation is an important step towards equality between sexes and a more even distribution of power, and of wealth creation in society. This law secures women’s influence in decision-making and in the economy.’

The initial reaction of the Confederation of Norwegian Enterprise, the NHO, to such a draconian approach by the Government was predictably aghast. There were cries of alarm that businesses employing large numbers of people might actually be forced to close just because they might lack a handful of women at board level. Even now, Sigrun Vågeng, the NHO’s executive director, labour market and social affairs, rails against the threat of company closures as a punishment that is disproportionate to the crime, but importantly the NAO is fully supportive of the principle of equality in business.

Vågeng has been besieged by enquiries from the world’s press asking for comment on the measures and she concedes that Norway, a small country with huge oil wealth and with a history of social democracy, may be able to go about things differently than some other countries.

‘Women in Norway have always had a job outside the home. Almost everyone can find kindergarten places for their children. We have a high birth rate and high participation of women in working life. At the same time, the unemployment rate here is less than 2%, which means that all companies are looking for competent, highly skilled employees. When you look at Norway you have to look at our culture and infrastructure, and when you have so little unemployment you look for a high level of diversity in the workplace and you try everything to make sure you get the right person for the job. We desperately need more women in the private sector. We had to do something, so that is why we have turned this legislation into a positive. And even if I am against a quota-led approach and believe that you should be on the board because you are competent, not because you are a man or a woman, I can see that the discussion we have had as a result of this law being introduced has been good for us.’

The issue of women board members has been widely discussed elsewhere, but research carried out by Cranfield University School of Management demonstrates how few women participate at senior level in major listed companies. The Female FTSE Report 2007 finds that only 11% of FTSE100 directorships are held by women, which falls to 7.2% for the FTSE250. Female executive directorships amount to a mere 3.6% of all directorships; 3.9% for the FTSE250. The FTSE100 includes a number of international businesses such as Royal Dutch Shell, Anglo American, Unilever and BHP Billiton, so in many ways it reflects global practice. The picture looks even worse once you drill down into particular sectors. Although, for example, supermarket group Sainsbury’s leads the pack among the FTSE, with three female directors out of board of 10, in science, engineering and technology company boardrooms 92% of directors are male, according to the Cranfield research.

However, there are those who believe that quotas and statistics are the wrong way to go in the first place and that passing laws is not the solution. ‘Legislation is a rather simplistic approach to what is a rather complex issue,’ says Sarah Churchman, a human resource director responsible for diversity and inclusion at PwC in the UK. ‘It’s not about fixing women or treating them in a tokenistic way, it is about making everybody aware of the opportunity cost and the cost to business of ignoring a huge portion of the talent pool. And it is not that women are necessarily being excluded deliberately, it’s the subconscious stuff that prevails.’

Glenda Stone, CEO of Aurora Network, the women’s networking organisation agrees: ‘Quotas belong to decades gone by. If companies are smart and progressive, they are going to understand why a diverse mix on their boards makes good sense… Diversity of perspective, experience and wisdom brings a better product, so a diverse board is absolutely critical.’

‘Employers need to see the business benefits,’ says Marion Seguret, senior policy adviser to the Confederation of British Industry’s employment and diversity group. And she goes on to explain that they also need to understand the risks because if the board is made up of middle-aged, white males, the ability of a business to manage for a future where women among diverse populations are likely to be very significant stakeholders is likely to be impaired.

According to Dianah Worman, adviser on diversity at the Chartered Institute of Personnel and Development, it is the culture of the boardroom that has to change. She says that while women may not know how to work in the boardroom, they may also not be very attracted by such an environment. They may well be looking for a more flexible working environment where they can exercise their talents and also accommodate the other aspects of their lives. Churchman agrees and adds that corporate cultures are often old and difficult to change, so what is needed is not board numbers for women but change that meets expectations that women may have to do interesting, remunerative work that may not necessarily be the main focus of their lives.

So to legislate or not to legislate and establishing quotas in the Norwegian manner therefore misses the point. Joining the ranks of the ‘middle-aged white blokes’ that tend to sit on company boards looks distinctly outmoded. Worman says that a variety of approaches to change are necessary if companies are to tap into the 50% of educated talent that they may be under-using. The development of these processes is an international one and Maxime Cerutti, who is responsible for gender issues at Business Europe, the Brussels-based organisation that represents business confederations throughout the EU, says that each member country has its own approach, while the over-arching lead from the European Commission is to pursue an agenda of equal pay and equal participation in business. Stone summarises the position succinctly: ‘It’s about making work work for those people you want to hold on to.’ And for sure, Norway’s forthright approach has set a lot of people thinking about where they stand on the issue of women’s involvement in the upper echelons of corporate life.

Richard Willsher is a financial and business writer with a background in investment banking.

Innovate or Die

Filed in: it, china, google, kaizen, virgin, innovation, apple, japan

Innovation is no magic bullet. In the highly competitive, globalised business environment of the 21st century, it is not about coming up with just one great product or idea. If a business wants to survive, then new ideas and continuous improvement need to be hardwired to its foundations

Innovate or Die
Richard Willsher
18 Jul 2006

Innovation is no magic bullet. In the highly competitive, globalised business environment of the 21st century, it is not about coming up with just one great product or idea. If a business wants to survive, then new ideas and continuous improvement need to be hardwired to its foundations. Richard Willsher reports

Take three well-known brands: Google, Virgin Atlantic and Apple. They regularly grab the headlines in the business pages and also other parts of the media and, yet, it can easily be argued that these phenomenally successful businesses in very different fields did not start out by doing anything very different from their competitors. Google offered a search engine, but then so did Yahoo, AltaVista and many others. Virgin Atlantic flew passengers across the Atlantic in direct competition with many established carriers. Apple produced computers, and so did plenty of other companies.

What links the three of them is how they went one or more steps further than their competitors, and how they introduced new ideas and concepts that enabled them to vault over their competitors and take market share. Google’s search engine was based on innovative search technology. Virgin Atlantic offered a range of new benefits that others had not thought of (see box below) and Apple continued to occupy the technological and moral high ground as well as, more recently, moving into mobile entertainment with the iPod. Significantly, the iPod was a direction that was new for Apple and it developed a technology that raised the bar well above the then existing offerings, and forced competitors to follow.

“In the travel business, Virgin Atlantic took entertainment to great lengths in economy [class] - not just the choice they offered on the headset, but continual screening of classic BBC comedy on the screen in front (at a time when other airlines offered one film on an eight-hour flight). As if that were not enough, live entertainment - [such as] jugglers on certain flights to New York and back. Perhaps even more interesting was Virgin’s offering in their Business Class-Upper Deck. While most airlines tried to outdo each other on legroom, Virgin’s Upper Class offered neck masseurs, chauffeur-driven limousines, a bar you could sit at in mid-air - they treated you like a real high-flyer…”
Eating the Big Fish by Adam Morgan


All three have continued to innovate since their early days. They have established their reputations by coming up with exciting new things to attract and engender loyalty in their customers. This is not only part of their culture, it is a key characteristic that defines their brands.

So innovation has to do not only with what a business does but the way it does it. In his book, Eating the Big Fish, Adam Morgan explains and illustrates the concepts surrounding challenger brands. He cites Apple and Virgin Atlantic among the most famous challengers. These and others share key characteristics, such as occupying a position of thought leadership, challenging the bigger fish in their market - the larger, richer and/or more established brands like Microsoft or British Airways. Challengers are also slightly quirky, out of left-field, as compared with their bigger mainstream rivals. This, of course, points to continuous innovation in the way that they present and manage their public image.

Ongoing improvement is key to the Japanese management concept of kaizen. This established a method to reach down into every aspect of how a business is organised, particularly in manufacturing, so that every process and job and behaviour is subject to continuous scrutiny. This might mean, among other things, doing something better, faster, with less waste, more cleanly, to produce better quality or to aid the overall teamwork in the enterprise.Kaizen has become woven into the fabric of businesses that are leaders in their markets. And it points to a definition of innovation as being both what the customer sees and also what lies beneath the surface of a product in the way its producer operates its business.

But the need for innovation is more serious than an exercise in management theory or in branding and marketing. At a presentation to businesspeople in Milwaukee, Wisconsin, in March this year, the management guru, Tom Peters, starkly set out the reason why it matters to US businesses in the context of the increasing competitive threat posed by China. “The only way we’re going to survive is to innovate our way out of the box,” he said. “We’re down to one idea, which is innovation.” The thrust of innovation is not merely ideas, it is putting those ideas into action, getting innovative things done. As Jean-Philippe Deschamps, professor of technology and innovation and management at the IMD business school in Switzerland, put it: “It is companies that innovate, not academics.”

And Professor Deschamps points out that some businesses are better at it than others. In the automotive sector, he refers to Ford and General Motors being in a “dismal state” as compared with Toyota, whose work in developing hybrid, fuel-efficient engines has been massively successful. In retailing he compares Marks & Spencer’s traditional offering with highly successful and innovative players such as Zara and H&M. In aviation, the success of the low-cost carriers such as Easyjet and Ryanair stands out against the long-established flag carriers that are weighed down with institutionalised practices and are having to play catch-up in the cheap flight environment. In financial services, on-line banking and insurance providers have threatened the market shares of the high street banks and large insurance companies, forcing them to consolidate or develop on-line channels in response.

When it comes to how companies innovate, Professor Deschamps points to people as the vital ingredient. Especially so in businesses with rigid, institutionalised structures where employees are forced to adopt silo mentalities, caring only about their own narrowly defined part of the operation. This, he says, is particularly prevalent in large financial institutions. This view is shared by Tom Peters, who advocates “loathing systems”. “Treat every enterprise system, every established procedure, as guilty until proved innocent…”

In order to do this, people need to be brought in from outside the business who are, by nature, predisposed to challenging the established order, who bring with them experience from other environments and who do not match the classic profile of existing employees. These people are likely to introduce change and a new way of doing things. Also significant is the extent to which major firms in industries such as pharmaceuticals, medical technology, IT and telecoms often innovate by contracting out their research to smaller, fleet-of-foot firms or acquiring either ideas or businesses that can bring them new products or capabilities. They accept that they cannot produce the sort of innovation they need by themselves, or they may simply redefine themselves as conduits to market rather than, say, researchers into ground-breaking drugs or software.

The end result of accepting the need for continuous innovation is that the size, shape and rationale of traditional businesses have to change and/or be restyled and/or be presented in a different way. The bottom line is that the greatest risk facing businesses is that of not innovating fast enough or radically enough. Standing still is not an option; it is a matter of innovating to survive.

Richard Willsher is a financial and business writer with a background in investment banking.

Endgame at the Exchange

Filed in: deutsche börse, london stock exchange, new york stock exchange, lse, euronext, omx, instinet, nyse, nasdaq

Is it the beginning of the end for local and national stock exchanges?

Endgame at the Exchange
Richard Willsher
01 Jun 2005

Is it the beginning of the end for local and national stock exchanges? asks Richard Willsher

2005 has already witnessed considerable corporate activity in stock markets on both sides of the Atlantic. Not only in the day-to-day nip and tuck of securities trading but in the very structure, technology and ownership of the markets themselves. The London Stock Exchange (LSE) has received rival bids from Germany’s Deutsche Börse and Euronext, the European cross-border exchange. Euronext has also joined with the Milan based Borsa Italiana to bid for MTS SpA, which operates the Italian bond trading platform. In the Nordic area, OMX in March acquired the Copenhagen Stock Exchange to add to its Helsinki, Stockholm, Riga, Tallinn and Vilnius exchanges. The New York Stock Exchange (NYSE) has announced that it intends to merge with electronic trading company Archipelago Holdings Inc. Also in New York, NASDAQ Stock Market Inc said that it had agreed to buy Reuters’ Instinet, the electronic communications network and institutional trading business.

These moves add to, and accelerate the trend towards, integration and consolidation of the world’s securities markets as widely predicted for some time. In 1999, Dr Patrick Dixon, the British futurist and thinker on global change, wrote in a Time Magazinearticle entitled ‘The Future of Stock Exchanges’: ‘There is an unstoppable drive to create a single pan-European exchange’ The industry is in for a huge shakeup’ Global trading around the clock will soon be a reality. We must take hold of the future, or the future will take hold of us’’ Four years and share price crash later, research by IT sector analysts Gartner (1) concluded: ‘Integration and consolidation will transform the roles of financial exchanges, clearance and settlement organisations and market data vendors by 2008.’

Their predictions look to be taking shape and an unstoppable momentum has gathered pace. These radical changes are being driven by pressure in several key areas of operation. The first is the need for greater liquidity. The more securities an exchange trades, the greater its economies of scale and the cheaper it can deliver its services. The second driver is for global reach. A glance, for example, at the stocks listed on the LSE and the origin of new issues over the last decade paints a picture of an international exchange to which issuers from all over the world have come to list their shares and raise capital. Clearly, a country the size of the UK could not on its own sustain an acceptable rate of growth in the number of securities listed on its principal exchange.

A third driver is towards efficiency. Investors, whether they are institutions or private investors, are constantly seeking swifter and cheaper dealing arrangements, as well as higher levels of performance in settlement, reporting and information provision. And this leads to a fourth driver, the need for exchanges to make money through alternative revenue streams. The monopoly services that they once traditionally delivered have been eroded by other providers and other technologies. On-line dealing services are playing the role formerly performed by traditional stockbrokers. Rival settlement systems are fighting for market share. Various information providers are now delivering price information and other data. Stock exchanges have to figure out how to make more money. And all of these fields are not confined by time or geography as traditional local or national stock markets have been.

The big questions are: What are they confined by? Why haven’t we got a single global stock market yet? And can we see who the winners and losers will be in the battle for supremacy?

In Europe, Ralph Silva, a senior analyst at Tower Group, sees a variety of cultural and other barriers to integration, despite the increase in cross-border moves by European stock exchanges, such as the creation of Euronext and bids for LSE. On the one hand, there are difficulties in integrating technology platforms, especially as the quality and efficiency of their systems can differ significantly from one market to another. Local regulation, legal practices, and accounting regimes all inhibit cross-border consolidation. He adds that the preference for using a local exchange, both among companies raising capital and for investors, is a strong driver against full-scale integration. Rather, he sees continent-wide systems providing a backbone for local access being a likely future outcome. A single European exchange is not a realistic option, he believes.

A different game
In the US the game is playing out in a rather different way. Gartner’s David Furlonger and David Schehr wrote in their commentaries on the recently announced moves involving NYSE and NASDAQ: ‘If both mergers go through, the combined companies will control 90% to 95% of all US equity trading. How much does a level playing field promote competition if there are only two players? While it might be logical to open up the market to foreign exchanges, this is not likely to happen as long as the US maintains its highly protectionist attitude towards the equity markets.’ There seems to be little role for any of the US regional exchanges in this scenario other than to seek merger opportunities. They see the end of the NYSE’s ‘outmoded’ outcry trading model, but also see ‘a number of cultural, political, regulatory and technical integration issues [which] threaten the success of this merger [with Archipelago.] In the end, NYSE and NASDAQ will ‘‘tear at each other as a price war develops, each with its own advantages and disadvantages…’

So competition will be fierce on both sides of the Atlantic but not because of the limits imposed by technology, rather because of other intervening cultural factors. And no one can afford to be complacent. The mighty LSE says it is not averse to a merger, which may be code for its recognition that no stock exchange can afford to be an island anymore. In its 7 March statement following the withdrawal of the pre-conditional offer by Deutsche Börse, the Board of the LSE said: ‘As previously stated, the Board believes that a combination, on the right terms, of the London Stock Exchange with another major stock exchange could be in the best interests of shareholders and customers. The London Stock Exchange remains willing to continue discussions with Euronext about the possibility of an offer that fully values the London Stock Exchange and is capable of implementation’‘

We do not yet know which stock market model will win through, although commentators offer a variety of possible successful business models, technology platforms and scenarios. They also have half an eye on the booming Asian markets, where demands for both business capital and accommodation of investor appetites are expected to burgeon. All of the major trading platforms are scouting the region for opportunities to roll out their offerings and scoop the opposition.

So how does a visionary see the future playing out? Dr Patrick Dixon, speaking to the writer last month, says the fundamentals of the situation he described in 1999 have not changed and have not been adversely affected by the intervening bust. What is holding up further consolidation are ‘regulation and emotion.’ ‘We are now in a totally virtual world where we can trade in almost every market using the internet. Multiple listings by large corporations in different markets makes no sense, nor do the regulated hours in different markets. Further fundamental restructuring is inevitable and soon we will be able to buy and sell everything on the internet [including securities] 24 hours a day, just as we can currently do on e-bay.’

It seems, then, that there is an accelerating trend towards global stock market consolidation and integration, but whether this is the end of the beginning phase, or the beginning of the end, still remains to be seen.

(1) The Stock Exchange of the Future by Peter Redshaw, David Furlonger and Ralph Silva. Gartner, 19 November 2003

Richard Willsher is a financial and business writer with a background in investment banking.

Blip, Bubble, Burst

Filed in: ftse100, china, close brothers, warren buffett, private equity, 2007, mortgage

Was this start of a major equity market downturn after the long bull run?

Blip, Bubble, Burst
Richard Willsher
07 Jun 2007

Recent turmoil in global equity markets suggests something is happening, but what? Richard Willsher investigates

In late February the Chinese stock market took a sharp, one-day dive. This set off a series of tumbles in major stock markets around the globe. The FTSE100 fell back by almost 2.5% and the Dow by almost 3.5%. It did not stop there. For several days the international markets had the jitters and continued on a downward path. Was this the start of a major equity market downturn after a long-lasting bull run? Or was it merely a blip, a temporary interruption after which normal index appreciation would resume? Or, then again, was it the first tremor stemming from something deeper and more fundamental beneath the surface of the global economy?

Looking at the trend lines of the world markets, it now seems to have been a mild aberration. Nothing as strong or as potentially cataclysmic as the ‘market adjustment’ of May 2006. And index watchers and stock price commentators can often be accused of market myopia of the type criticised by the veteran world’s greatest investor, Warren Buffett, who has always advocated the long view. But then it all depends where you start to draw your trend line or when you bought your stock.

‘Markets are always vulnerable to major corrections,’ comments Mike Lenhoff, chief strategist at Brewin Dolphin Securities, a UK stockbroker and the country’s largest independent investment manager. ‘And this one occurred very rapidly. It reminded me of the one we saw last May, which was more serious and lasted much longer. But the rebound we saw from that volatility took the market to new highs.’ He is generally upbeat about the buying opportunities that market corrections bring about, but sees markets continuing to be vulnerable, especially in the light of rising interest rates in Europe, including the UK, and in the US, and the drop in the earnings of major corporates after a four-year period of strong earnings growth.

Both of these point towards broader economic performance and factors beyond the immediate sphere of stock market influence. It is some of these issues that could drive a blip to become a more serious burst bubble or trigger a recession, particularly in the US.

For example, rising interest rates in the US have contributed to a severe crisis among those most at risk from over-borrowing. The result: more than 40 lenders, in particular mortgage lenders, to the sub-prime sector have collapsed or filed for Chapter 11 protection from their creditors. The number of personal bankruptcies has shot up. The same is true in the UK where the number of individual voluntary arrangements (with personal creditors) and small business bankruptcies has burgeoned. Unsurprisingly, a number of accounting firms are building up their insolvency practices, while corporate finance houses are gearing up their restructuring teams.

Research by Close Brothers, a leading City corporate finance house with a strong restructuring advisory business, shows that many corporates across Europe are very highly leveraged and that a great deal of this debt is poorly rated, meaning that the probability of default was relatively high to begin with. Andrew Merrett, a director of the European special situations group at Close, says: ‘There is a huge escalation in the amount of debt companies are carrying. Many of these loans are equity by another name, and have been made to borrowers of poorer credit quality. This in itself will cause default rates to rise whatever happens in the wider economy. But, with the upward pressure on interest rates, these structures will be severely tested. And there’s going to be fall-out.’

A similar fall-out looks probable in the private equity industry where, increasingly, higher earnings multiples are being shelled out for business acquired by private equity funds. But, significantly, these deals have also been fuelled by high proportions of debt to equity. There are now concerns among regulators, both in the US and at the UK’s Financial Services Authority (FSA), that the failure of a major private equity deal is now ‘inevitable’. This, the FSA believes, may pose a risk to the banking system, and in November 2006 it published Private Equity: A Discussion of Risk and Regulatory Engagement, listing no less than six reasons why it fears that private equity now poses a significant threat.

Another series of significant events in the private equity sector may be about to occur. Some of the world’s major firms, including Blackstone, Kohlberg Kravis Roberts and the Carlyle Group, among others, are believed to be considering public listings, a sign that may be interpreted as the smart money cashing out at the top of both the private equity boom and the stock market upswing.

Soaring commodity prices may also be ripe for fall. Though when this is likely to occur is uncertain, as commodities analysts speak of a supercycle in certain commodity markets which tends not to correlate with stock market cycles. However, falls in commodity prices would be likely to aid corporates and national economic indicators. In addition, there are some other factors which may work against the risks of downturn too, according to Lenhoff. ‘The good news is that you’ve got valuations in equity markets that are still very favourable… it is not as if equity markets are overvalued… they are still attractively valued. Secondly, you’ve got a lot of corporate activity, a lot of mergers and acquisitions and that has been a very supportive feature behind the strength of equity markets and, indeed, their recovery from that sell-off that we saw at the end of February.’ He adds that both of these factors could be negated by a global recession, however.

Faltering demand
Meanwhile, the US economy is slowing down and massive amounts of debt are fuelling consumer spending, while the US personal savings rate has fallen significantly. Over the last several years it has been US consumers who have driven demand in the US, which is now faltering. However, the Federal Reserve chairman, Ben Bernanke, expressed confidence at the end of February when he said: ‘My view is that, taking all the new data into account, there is really no material change in our expectations for the US economy… we are looking for moderate growth in the US economy going forward’. Remarks by his predecessor, Alan Greenspan, that recession in the US was ‘possible’ appeared to counter this view. A 1 March report from economists at the Royal Bank of Scotland (RBS), entitled Understanding Recent Market Turbulence, commented ‘it is still early days and further volatility is possible given the potential for downside surprises in upcoming US data releases’.

What effect all this will have on investors’ confidence over the longer term, say through the rest of this year, remains to be seen. The RBS report says that investors may become more risk-averse and this will tend to cause falls in equity markets, especially while interest rates are high. Other economists, notably at US financial services group Wachovia and the London-based Schroder Investment Management, have predicted that the US will have a soft landing in 2007 as interest rate reductions cushion the slowdown. Meanwhile, there is one factor above all others that may support markets going forward and that is cash. There are still massive amounts of cash from wholesale investors, from corporates and from the central banks of the Far Eastern economies. At the very least this cash needs a home and, as long as the pressure to invest it exists, the financial markets will be the beneficiaries, whether in equities or, more likely, highly-rated fixed income instruments. This wall of money on its own may act as a substitute for ebbing confidence, at least in the shorter term.

Richard Willsher is a financial and business writer with a background in investment banking.