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Business Growth introduction
Just over a year on
from the onset of the
credit crunch, and the
slowdown in the global
economy, the threat of inflation
and high oil price continue
to cast a long shadow over
corporate profitability and the
ability of executives to manage
their businesses. World financial
markets remain jittery and
susceptible to further shocks
from the banking system.
Consumer confidence is
undermined by weakness in the
housing and mortgage markets.
Yet against all this, opportunities
for growth still exist for those
small-to-mid sized companies
that are innovative, competitive
and nimble. From enterprise
resource planning, supply
chain management, customer
relations management, productlife
management and supplier
relationship management,
the use of technology and
business software solutions
can help companies stay ahead
of their competitors and ride
out the economic downturn.
This selection of articles,
each of which has appeared
in the pages of the Financial
Times, provides an overview
to business growth in an
economic downturn.
- sweeping away a
sector’s chaos
The financial system is
burdened with overlapping
legacy systems that are
impeding progress and
proper risk assessment,
reports Ross Tieman
- Ask the expert: US slowdown goes global
Just when many emerging
market companies were starting
to flex their muscles in the
global marketplace, the major
economies suffered in the wake
of the US subprime crisis and
the credit crunch that followed
- Adding IT to the SME toolkiit
Technology vendors are
focusing on small and mid-sized
enterprises and are finding they
struggle to cope with complex
systems, says Alan Cane
- How to move
forward from
guesswork to
hard facts
Any executive would like
to say they have the true
status of their organisation’s
business performance at their
fingertips. Whether they
really do will depend largely
on the state of the company’s
business intelligence systems.
By Stephen Pritchard
- From baby steps to
giant growth
Mothercare’s success outside
its UK home shows the
attractions of a franchising
model in an uncertain market,
writes Tom Braithwaite
- Reaping Huge
benefits from
some simple
tidying up
Complexity is a dirty word
in computing. The more
convoluted something is,
the more expensive and
difficult it is to manage, and
the more likely to go wrong.
By Danny Bradbury
SWEEPING AWAY A SECTOR’S CHAOS
The financial system is burdened with overlapping
legacy systems that are impeding
progress and proper risk assessment, reports
Ross Tieman
It sounds like an apocryphal story,
but Nigel Woodward, Londonbased
director of financial services
at Intel, insists it is true.
“At one of the big UK clearing banks,
the core accounting system still does calculations
in pounds, shillings and pence,”
he says. Decimalisation was introduced
in the UK in 1971, 37 years ago.
The scale of the IT transformation
needed in many areas of the financial
industry is mind-boggling. Cobbled-together
systems are still the bedrock of a
hugely expanded sector accounting for
an estimated 7 per cent of global gross
domestic product.
While bad systems did not cause the
present credit crisis, they probably contributed.
“Some big banks failed to keep
track of the risks as the volumes built
up,” says Intel’s Mr Woodward.
He uses the example of sub-prime
mortgages. When a bank bought a collateralised
debt obligation (CDO), “was
the transaction recorded and tracked
back to a residential property in Texas,”
he asks. “The bank might already have
had a full exposure to property in Texas
but didn’t know.”
Technology-enabled scale allowed
traders to run ahead of banks’ ability to
measure risk, he says. And when regulators
and auditors started demanding answers
about the scale of banks’ exposure,
extracting the information from fragmented
systems and databases was difficult
and timeconsuming. Hence revisions
to banks’ profit warnings, as the scale of
risk was progressively uncovered.
Jeremy Badman, partner in the
strategic IT and operations practice
focusing on investment banks at Oliver
Wyman, highlights the problem
that arose with credit default swaps, a
mechanism used by banks to lay off risk
that has turned into a market measured in trillions of dollars.
It started as a market where people
fixed deals by phone, recorded them on
a spreadsheet and faxed contracts. Backoffice
processing was manual. But as
volumes increased, settlement remained
manual, and three-month piles of unmatched
contracts built up - alarming
regulators over uncertain risk positions.
The lesson, says Mr Badman, is that
technology has to support innovation,
and processes must be “industrialised”
quickly when a new product is successful.
The trouble is that many financial
institutions find this hard, because they
rely on gummed-up legacy systems.
Rudy Puryear, global head of the IT
practice at consultant Bain, explains:
“Many of the IT solutions have been layered
on over 15 or 20 years or more. In
the 1990s everyone went out and wanted
to buy a best-of-breed solution and then
had to bolt that on to the legacy system.
Then everybody wanted web access, plus
companies have made acquisitions of
companies using different systems.
Almost every organisation I have
walked into has a huge amount of unnecessary
complexity in IT. It drives
up cost and it slows down response in
terms of time-to-market. We want IT to
be an enabler of change. Right now it is
very often like a block of concrete, adding
rigidity to organisations.”
His recommendations? “You have to
recognise that you have a complexity
problem and that it is bad. It is driving
up cost and constraining the ability to
respond to the market-place and it is
using up more and more IT dollars.
“You have to start saying you are not
going to introduce more complexity.
You have to create a future-state view
of where you want to migrate this to in,
say, five years time. You need to push
a lot of shared, common, off-the-shelf
solutions. So, as you make incremental
decisions, you can measure it against
how it helps you towards your desired
five-year target.”
One example of this kind of thinking
in action is Oyster, a ticketing system
for Transport for London, by which users
pay fares with a smart card, which
stores cash, and can be used to pay for
travel and other services.
>Jonathan Charley, head of banking,
Europe, at EDS, which advised on
Oyster’s creation, says it was built as a
stand-alone solution because “to integrate
it into an existing system would
have been a huge challenge”. The system
was built on an off-the-shelf package
of services-oriented architecture,
put together “like Lego bricks”.
Clipping on ready-made flexible units
that can take over tasks fragmented
across existing systems seems a promising
way forward. Charles Marston, who
previously worked in the interest rate
derivatives operation of a bank, founded
systems and software company Calypso
in San Francisco in 1997 to develop a universal
front and back office platform.
Today, Calypso offers an off-the-shelf
system that can be used to trade a host
of financial instruments, from spot foreign
exchange via derivatives to equities
and commodities, yet which also supports
straight-through back office tasks
such as settlement, and allows banks to
capture the data they need for risk and
capital management. About 80 institutions have bought the system, including
HSBC, Dresdner and Calyon.
As Peter Van der Vorst, chief financial
officer of Sybase, an integration,
data management and platform company,
points out, one of the biggest
challenges for many financial firms is
keeping pace with the need to process
vast and booming volumes of information
at appropriate speeds.
So Sybase has just launched a product
called RAP, designed to handle algorithmic
computer-based trading,
service the data needs of the quantitative
analysts who write the algo programmes,
and deliver the data needed
to monitor trades for risk management
and compliance.
Retail institutions, too, are finding
legacy systems an encumbrance to business
development. Nationwide, a UK
building society, has decided to embark
on a wholesale system renewal using
an off-the-shelf solution from software
house SAP.
Darin Brumby, divisional director for
business systems transformation at Nationwide,
says shifting to a new platform
will enable it to introduce new products
- different kinds of account, for example,
and a suite of mortgages - that the
current system cannot support.
It will also allow improvements to
front and back office organisation. It is
tantamount to creating a new building
society around the changed market and
customer needs. Although it is costly,
“we think there is a good first-mover
advantage”, he says.
SAP and US rival Oracle believe a
pre-integrated offering is the best solution.
Over the past few years they have
been positioning themselves for the colossal
orders that are beginning to flow
as financial institutions start replacing
legacy systems.
Rajesh Hakku, senior vice-president of financial services at Oracle, reckons the company has spent $30bn buying best-of-breed suppliers and
developing a pre-built application integration architecture.
This one-stop-shop purchase of a core banking architecture with the features of
your choice that are all promised to work seamlessly has won some other big converts. Citibank, the world’s biggest with
350,000 staff, is among them, replacing 59 versions of its old corporate banking system with a single Oracle solution, in
which, for example, a base in Singapore
services 14 banking operations in Asia. It
is, says Mr Hakku, the biggest legacy system
replacement ever.
The idea is that each bit can access all
the data, and off-the shelf packages of
analytics, for example, will keep a bank
compliant with Basel II regulations,
credit risk, and liability management,
while assuring the flexibility to add in
regulatory changes without complicating
or compromising performance.
“Two plus two equals five, if not 11,” Mr
Hakku says.
It sounds like nirvana. And today, maybe
it is. But will it still be the best answer
in 10, or even five years? “We know that
things will change,” says Mr Hakku, “but
the basic requirement will always be to
look at core data in certain aggregations.”
David Hunt, head of technology consulting
at Capgemini Financial Services,
agrees on the importance of data,
but cautions that the IT industry still
does not necessarily deliver all the right
answers. “What we are not good at, as
technologists, is doing that low-cost,
throw-away innovation,” he says.
Yet financial services firms need to
experiment with products as consumer
technology changes.
Today’s private bank customers “may
be happy to come to the office and have
a fat cigar, but their inheritors might
want to bank on their X-box 360 or mobile
phone,” says Mr Hunt.
Tomorrow’s systems won’t just need
to be agile, he says. In consumer, as
well as investment banking, they will
need to support rapid innovation of
products, and rapid industrialisation
of those that succeed.
It is a far cry from the days when they
wrote that program in pounds, shillings
and pence. Financial businesses are
learning that they cannot see far into
the future. System designers must learn
not even to try.
Jerry Norton, head of financial services
at consulting and software group
Logica, deserves the last word. A layered
approach that separates fundamental
systems from distribution channels
can help. But fundamentally, it’s
about philosophy, he says. “Most other
things - consumer products, even buildings
- have a design life-time.”
Sure, a general ledger doesn’t change
much. But isn’t it time systems were sold
with an end-of-use date warning?
ASK THE EXPERT: US SLOWDOWN GOES GLOBAL
Just when many emerging market companies were starting
to flex their muscles in the global marketplace, the major
economies suffered in the wake of the US subprime crisis
and the credit crunch that followed
How damaging has the economic
slowdown in the US,
Europe and developed Asia
been on the emerging economies?
What pressures have spiralling
inflation through high commodity prices
put on global markets?
Mauro Guillén is Director of the
Lauder Institute and professor of international
management at the Wharton
School of the University of Pennsylvania.
His answers to readers’ questions
are appearing on the following pages.
How successfully, do you think,
have Asian emerging economies
decoupled themselves from the
struggling Western markets? Will
rising domestic demand save them?
Sohaib Naim, Karachi, Pakistan
Emerging
economies have historically been at
the mercy of developments in the richer
parts of the world.
Over the last two decades, however,
their economic performance has become
increasingly “decoupled” from Europe
and North America. This may appear to
be paradoxical because the globalization
of markets for goods, services and money
was expected to bring about more convergence
and coordination, not less. Can
globalization and decoupling both be taking
place at the same time? The answer is
a resounding “yes.”
Emerging economies have become
less dependent on rich markets for
three reasons:
First, as you point out, they have
developed more of a domestic market,
not just for consumer goods but also
for investment in equipment and in infrastructure
(which is not always tied
to exports). If consumer and business
confidence does not fizzle, growth in
emerging economies is likely to continue its upward trend.
A second way in which decoupling
has taken place is due to changing patterns
of trade. Emerging economies are
increasingly trading with each other,
thus buffering themselves from the
present downturn in the United States
and most European countries.
Although China is hugely dependent
on the U.S. market, it is less so today
than a decade ago. Chinese exports to
the other three Bric countries, for instance,
have surged by more than 50
per cent from last year, and it is also
selling ever larger quantities of goods to
the oil-rich Middle East. South Korea
and Taiwan have also benefited from
the development of other emerging
economies, which has enabled them to
diversify away from the U.S. market.
A third important factor is that prices
for raw materials and energy are not
likely to fall as a result of the downturn.
This is due to surging demand from
China, India, and the fast-growing Latin
American economies. Thus, emerging
economies that are big producers
of commodities will not be hurt by the
downturn in the U.S. and Europe, at
least not as much as in the past.
In summary, emerging economies
are likely to continue growing even as
the rich part of the world slumps. Keep
an eye on inflation, though. It could
spoil the party.
Would you be able to provide an
outlook for commodity prices
and the Brazilian economy in particular?
Miguel Castellanos, Ft.
Lauderdale, FL
I do not see a fall in commodity
prices any time soon. There are two key
developments to watch:
The first is to wait and see how deep
and long the economic downturn in the
U.S. and Europe will be. If it proves shallow
and brief, as a growing cadre of economists
are predicting, then commodity
prices will remain at record levels.
A second issue to keep in mind is demand
from emerging economies with a
rapidly expanding domestic consumption
and capital spending.
The latter is growing swiftly in China,
India, Brazil and elsewhere, and it is not
always linked to exports. Infrastructure
spending, in particular, will continue
to grow at double-digit rates in many
emerging economies, fuelling demand
for all sorts of raw materials.
Energy prices are also likely to continue
growing as demand in emerging economies
expands, supply bottlenecks go unresolved,
and political uncertainty remains high in
certain oil-producing countries.
Brazil is the country of the future,
and this time around it could well realize
that potential. Its macroeconomic
outlook is strong. Demand for Brazilian
manufactures as well as raw materials
is likely to continue growing in the medium
run.Another promising development has
to do with the recent oil finding offshore.
I am personally very optimistic.
Brazil is a major exporter of commodities,
but the largest category is actually
transportation equipment and parts
(about 12 percent of the total). GDP
growth is robust, and inflation low.
Now Americans can’t afford to
buy made-in China-deer hunting
hides that hang in trees and other
rubbish to clog up their garages,
how much will this affect Chinese
and other Asian exporters?
David
Lyttle, New Zealand
I agree that Americans have spent
way too much on consumer durables
and non-durables they really did not
need. What’s worse, most have borrowed
in a variety of ways in order to indulge
in such short-sighted behaviour.
The decline of the dollar, though
in part driven by the yawning gap in
monetary policy across the Atlantic, is
mostly a reflection of the ballooning fiscal
and trade deficits, and the low savings
rate.
Asian exporters will be affected by
these developments, but one should
keep in mind that, as their domestic
consumer markets grow, they are increasingly
selling to each other as opposed
to the United States.
Having said that, a long and deep
downturn in Europe and the U.S. would
hurt them, but not as much as, say, 5 or
10 years ago.
What will be the real impact of the
slowdown on Third World countries?
Jimmy, New York
I do not believe Third World, i.e.
truly poor, countries are being hurt by
the slowdown in the U.S. and Europe.
As long as emerging economies continue
growing, demand for energy and raw
materials will remain solid.
I see the problem in a different area,
namely, food prices. Increased demand
from the rapidly-growing emerging
economies and wrong-headed biofuel
policies have caused a quintupling in
the price of some staples such as wheat,
corn and beef. This, and not the slowdown,
is devastating some of the poorest
countries in the world.
How will China retain their subsidies
in the wake of a decreasing
trade surplus? Will the Chinese
resort to deficit spending?
Phil Vernes, CT
I am deeply concerned about
gasoline subsidies in China, which run
at billions of dollars a year. It is simply
foolish for them to continue this charade.
The longer it goes on, the harder it
will be for people to adjust to the harsh
reality of high energy prices. I sincerely
hope that they will gradually eliminate
the subsidies. This is a no-brainer.
What is your feeling about the effects
of recent crises on Russia, as
a major producer of energy products?
Would it be easier to cope
with inflation inside of the country,
who owns natural energy sources?
Vlad Kamlyuk, Ireland
Russia is enjoying a boom in commodity
and energy markets. Prices are
likely to remain high for the foreseeable
future, so there will be little incentive for
the country to change direction.
I say this because the downturn in the
U.S. and Europe is unlikely to reduce
global demand by much, as emerging
economies are still growing and “decoupling”
has taken hold. Inflation is indeed
a problem, but definitely not the most
important one in the long run. Russia is
running the risk of becoming too specialized
in raw materials and energy (already
about 80 percent of total exports).
Russian manufacturing was not in
good shape to begin with, and the last few
years have been devastating. Many of the
country’s most talented scientists and engineers
migrated during the 1990s
Wage inflation makes it difficult for
firms to compete internationally. The
service sector is run by state bureaucrats,
and there are alarming signs of lack of
transparency, even corruption. While
increasingly wealthy, Russia could and
should avoid wasting its human capital
and its many other resources.
How, in your opinion, would high
commodity prices affect the economic
recovery of Central and
Eastern European nations and, in
particular, the Baltic states?
Maksim
Greinoman, Tallinn, Estonia
High commodity prices are generally
detrimental to Estonia, Latvia and
Lithuania because of their dependence
on imports, their large trade deficits,
and the inflationary pressures (which
have thwarted their entry into Europe´s
monetary union). They do benefit from
price increases to the extent they export
raw materials such as timber, but on the
whole they are mostly hurt by it.
The three Baltic states have grown
very rapidly over the last few years
thanks to a construction boom and
to privatization. But the competitiveness
of the manufacturing sector has
been undermined by rising wages.
The three countries need to increase
productivity if they are to succeed in a
fully integrated Europe.
Do you think the Sarbanes-Oxley
legislation in the US and other such
accounting procedures forcing
companies to write down losses are
more responsible for current problems
than anything else? If that
is the case, shouldn’t there be efforts
to introduce a better system?
Nitesh Bansal, India
Sarbanes-Oxley has been (justifiably)
blamed for inducing a number of
problems, including the loss of global
competitiveness of U.S. financial markets
and of corporate America in general.
Writing down losses in asset values,
however, is a reasonable and highly desirable
accounting practice prevalent
around the world, which predates recent
regulatory changes.Investors expect company accounts
to reflect the present market value of
their assets.
We are living through a crisis that is
fundamentally one of declining confidence.
If companies were able to carry
assets on their balance sheets at the
inflated values of the recent past, investor
confidence would plummet. I would
then fear a drastic drop in stock market
turnover, further fuelling the liquidity
problems afflicting the global economy
since last summer.
Given the improvement in fiscal
position of emerging market countries,
their increasing important
domestic demand and their infrastructure
spending plans – do
these elements combined justify
a re-rating in the relative premium
investors should seek vis-ávis
developed markets? Should
emerging market equities demand
a premium to developed market
equities in the coming years?
Jim Sheffield, Charlottesville, VA
International investors demand
a premium if they believe that there
are unusual risks. Improvements in fiscal
position, trade surpluses, inflation,
and robust domestic demand may or
may not reduce the risks. While many
emerging economies are now enjoying
fiscal and trade surpluses, inflation is
picking up speed.
Inflation can worsen trade balances
and the exchange rate, thus generating
risk to the international investor. Some
analysts argue that fiscal surpluses,
while a sign of discipline, may also increase
the ability of the government to
make the wrong decisions, thus generating
uncertainty.
In the long run, I would focus the attention
on the institutional structures
of emerging economies, on the ability of
governments to credibly commit to a set
of policies in the long run, and on the
functioning of the judiciary and the political
system in general. I personally believe
that there is plenty of “institutional”
risk in emerging economies in spite of
the relatively favorable macroeconomic
outlook. As a result, I would continue to
demand a premium.
Is the current stagflation (in the
US and some EU members) here
to stay, given the current level
of global competition? Now that
the Brics nations and major oil
exporters are fast emerging, is
the world geared up for dramatic
changes in the activities of multilateral
institutions in dealing
with issues of global concern?
Augustin Dufatanye, Reykjavik
We are all hoping that stagflation
will not be here to stay. But the signals
and the indicators are not too encouraging.
The biggest threat is inflation in
emerging economies, which could derail
the only engines of growth that exist right
now. In the U.S. and Europe, inflation
must be kept in check.
Regarding multilateral institutions,
there has been a flurry of activity redesigning
their roles and the voting power
of different countries. We are definitely at
a crossroads, for two reasons.
One is the rise of the Brics, that is, their
increasing weight in the global economy.
The other is the trade imbalances resulting
from the rise in commodity and energy
prices. On the positive side, we are
better equipped today to deal with these
issues than 35 years ago. Economies and
markets are much more flexible today.
But people will need to absorb much of
the shock in the form of unemployment,
relocation, and the like.
It seems that the markets are being
roiled in a battle between recession
and inflation. The Fed Reserve has
an ability to raise rates and possibly
decrease the risk associated with
inflation. What can we anticipate,
should recession be the overriding
factor in the US ,and what are the
long term effect on world markets?
Should the US Congress intervene
and attempt to control the price
rise for oil as suggested?
Robert J.
Arnell III, Hardwick, Vermont
Policymakers are definitely in
a bind.
An economic slowdown with inflation
is not only difficult to deal with
from an economic point of view; it is
also an explosive combination politically.
Some groups in society detest inflation,
while others have a more tolerant
attitude towards it.
In the U.S. I would not expect any bold
action until after the November election.
There is still hope that the worst of
the credit crunch is over, or nearly over,
and that the slowdown will be shallow
and brief. But we still do not have
enough information to make that call.
Regarding the U.S. Congress, I very
much doubt that they can affect oil prices
in the short run. In the long run, legislation
could encourage both conservation
and supply expansion. I would hope
the right incentives are introduced for a
massive investment boom in alternative
energy sources, especially hydrogen automobiles,
wind, and solar.
Lastly, the present biofuel incentives
need to be revisited, given their impact
on agricultural markets
How can India maintain a 7 per cent
to 8 per cent GDP growth over the
next 15-20 years but keep inflation
between 3 per cent and 4 per cent?
Aspi Contractor, USA
As a net importer of commodities
and energy, India is indeed prone
to fierce inflationary pressures, and this
could derail the very robust GDP growth
that the country has been experiencing.
With elections coming soon, it is not clear that the government will do what would be best in the long run.
Prime Minister Singh might be tempted to strengthen the base of support for this party, but the public-sector deficit is already quite large.
The best recipe is to continue introducing reforms and deregulation, especially in the infrastructure and energy
sectors of the economy. Policymakers need to signal very forcefully that they will not let inflationary expectations build up.
Taxes on investment and other burdens could be lessened so that both portfolio and direct investment flows into the country at increasing rates. India needs
more foreign investment to fuel growth, especially in the service sector.
What’s your view on the countries
of the old Soviet Union? Some of
them can hardly be called emerging
markets.
Dilmurad, Nashville,
Tn USA
I am quite optimistic about the prospects for the former Soviet republics
bordering on the European Union, assuming they work hard to create robust political and legal institutions over the next decade or so.
The central Asian republics are a different story. They do not have too many options. They are not natural manufacturing
enclaves, given their geographical location. They are subject to strong geopolitical influences. Some of these countries have been growing very quickly.
The largest, Kazakhstan, continues to grow at 5 or 6 percent, but inflation, deficits, and the credit crunch could slow down the economy.
In the long run, the central Asian republics need to come up with some
mutual understanding as to how to create a common market. It does not make sense for them to operate in isolation of each other.
What is the engine for recovery in
the United States if it is not housing,
autos, capital spending and
commercial construction? These
are the typical interest rate sensitive
areas that normally lead you
out of a recession. Rates are actually
higher than before the Fed
started lowering rates for most of
the above and these areas will remain
weak through 2009 and some
of them will be weakening through
2009-10.
Alex Sinclair, Rancho
Mirage, Ca
The U.S. economy’s best chance for recovery lies in its flexibility, its ability to adapt to change. We have already seen a surge in exports in response to
the weak dollar. Unfortunately, federal, state, and city governments are deeply in deficit, so they cannot help out by accelerating
infrastructure spending and the like. Perhaps the most important “engine” is confidence. Consumers and lenders need to regain
their mutual confidence. This trust has been shattered over the last 12 months in the wake of the subprime crisis. The damage has not yet been contained,
and it is spilling over into many different areas. An economy so dependent on domestic consumption cannot possibly grow robustly if there is a lack of confidence among economic actors. The key
is to a recovery lies in rebuilding the
foundations of confidence. The Fed and the new president elected in November will have to work hard to put the pieces back together.
The global credit crunch seems to
have made Spain awaken to the
risks of its economic imbalances.
What is your perspective on Spain’s
ability to deal with the crisis? How
do you see Spain in the future,
more like Germany or Italy?
Carlos
Colomer, Madrid, Spain
Spain faces a difficult situation.
The signs of trouble were already
visible a few years ago, but they were
crowded out by the construction boom
and the excellent performance of Spanish
firms across the board.
The Spanish economy has long suffered
from three interrelated problems:
sluggish productivity growth, an inflation
differential with the euro area, and
meager expenditures on innovation and
research and development. The credit
crunch has added to the problems.
While Spanish banks are very solid
(and did not participate in the subprime
market), they are no longer lending
money to each other, and they have tightened
lending practices. Spanish firms are
shielded from the slowdown because of
their massive presence in Latin America.
But the problems with productivity, inflation,
and innovation remain.
Spain has recently overcome Italy in
per capita income. This is in part due to
Spain´s successes, and in part thanks to
Italy´s many problems, especially with
its politicians.
Spain has done well after privatising,
deregulating, and opening the economy.
But these reforms need to be further
deepened. Spain lacks Germany´s
discipline and innovativeness. Germany
is an export machine; Spain runs the
second largest trade deficit in the world
after the US
The issue right now is whether Spain will avoid a prolonged slowdown or
even recession or not. The next few
months are crucial, especially in terms
of job destruction.
Can it be said that the subprime
crisis in its totality is a ”zero-sum”
game? If the banks have lost money
some body has gained in the
transactions, so the wealth in the
economy as whole has not been destroyed,
only it has been redistributed.
So how this is creating slowdown
in the economy as a whole?
Bikramjit Bhawal, Italy
The subprime crisis has wreaked
havoc on the balance sheets of major financial
institutions in the U.S. and Europe.
That in and of itself is a major problem
that no other gains obtained by other
economic actors can possibly compensate.
Financial stability is very important.
It should also be remembered that the
credit crunch is a crisis of confidence,
and it will be very difficult to rebuild.
There have been ”winners”, to be sure,
including those who shorted financial
stocks, the buyers of certain securities
at bargain prices, and others.
But the pain being felt around the
world is huge. Let us not forget that
many people are losing their jobs, their
homes, or both, as a result of this crisis.
Plus consumption, a major driver of economic
growth, is on the decline. Wealth
has been wiped out in many different
ways because the prices of many different
kinds of assets have declined sharply. We
are now paying for the excesses of the last
few years, and for the lack of appropriate
regulatory oversight
I wished the wins were big enough to
offset the losses. Unfortunately, this is
not a zero-sum situation.
ADDING IT TO THE SME TOOLKIT
Technology vendors are focusing on
small and mid-sized enterprises and
are finding they struggle to cope with
complex systems, says Alan Cane
The past few years have seen a
marked change in the marketing
of software and services.
Vendors such as SAP and
Oracle, which had previously confined
their attention to the giants of the business
world, have begun to court small
and medium-sized enterprises (SMEs)
with a cornucopia of new products.
“So many companies that have traditionally
focused on large enterprises
are now going into the SME market. It
is amazing. Everything is about SMEs,”
says Joslyn Faust, principal analyst specialising
in the SME market for Gartner,
the consultancy.
But, she warns, it is not necessarily
to everyone’s benefit. “Many of these
vendors do not understand that it is a
totally different business model. Service,
support and pricing are all very
different. The products need to be very
simple and they all need to work together.
SMEs are worried that the IT
they are offered will prove to be too
complicated, too costly or that the vendor
will consider them too small for
proper support,” she says.
Buying consumer-grade technology
is one answer for very small firms.Eilert Hanoa, chief executive of Mamut, a European provider of integrated software and internet services
for SMEs, shares Ms Faust’s concerns: “There is a misconception within the SME sector that technology
is expensive and that it is a luxury a small business cannot afford. Most SMEs have few people to turn to for
technology advice and this has led to an abundance of fear, uncertainty and doubt when buying IT.
“This sorry state of affairs has been compounded, and in some cases encouraged, by an IT sector that has done
the SME sector a disservice by downsizing enterprise applications for the SME market without addressing their need for less complexity.”
SAP, however, one of the world’s
largest software groups, has seen a significant change in its mix of customers over the past 10 to 20 years. At one time
it was a provider of enterprise resource planning (ERP) software only to large corporates, it now estimates that 70 per
cent of its customers - about 35,000 globally - are SMEs.
Simon Etherington, head of the SME
division for SAP in the UK, says the sector
is covered by a three-product family:
Business One, an out-of-the-box
business management system for companies
with less than £30m-£40m in
turnover; Business by Design for larger
groups; and Business-all-in-One for
vertical industries. These products are
generally marketed to customers via
channel partners who can offer technical
help and business advice.
Are there any companies too small for
an SAP offering? “If there are, we haven’t
found them yet,” says Mr Etherington.
But he warns that IT is no magic bullet.
The customer, he says, must have
a clear vision of what it wants to do,
where it wants to go and how it thinks
IT can support its objectives.
He says that SMEs may have an advantage
because they see their business
processes - essentially what the business
does - more clearly than bigger enterprises.
And any IT investment must
be treated as a business project rather
than an IT initiative, he counsels.
Dawn Baker, head of marketing for
the small business division of Sage, the
UK accounting software group, concurs:
“Small businesses have to make monthly
decisions based on cash flow. So an owner
may be faced with the dilemma of whether
to take £100 extra as a bonus or use it
to buy a piece of software.
“Another option, especially for businesses
at the upper end of the SME
sector is to look into hosted versus onpremises
software solutions, as this
might provide a higher degree of flexibility
with less up-front investment.
Either way, any investment in IT should
be linked to a business plan.”
Big-ticket technologies such as ERP
are not alone in being reconfigured to
fit a smaller customer. Virtualisation -
running a number of operating systems and application packages on the same
server - is becoming increasingly attractive
to small companies, not simply
because of savings on the cost of servers
but because of disaster recovery and
business continuity.
Martin Niemer of VMware, a leading
vendor of virtualisation software, says
that companies with only four or five
servers and fewer than a dozen staff are
virtualising their servers as a protection
against downtime, “which could cost
them a huge amount of money”.
Typically, VMware consolidates applications
from 10 machines on to a
single server. The latest servers can run
as many as 30 virtual machines.
So how do we define an SME or SMB
(small and medium-sized business)? Definitions
vary geographically. In Europe, a
small company might have 10-49 employees
and a medium-sized one, 50-250. In
some regions, 5,000 people might still constitute
a medium-sized company.
Smaller concerns are generally seen
as more flexible and agile than their
larger competitors. Simon Devonshire,
head of SME marketing for O, the mobile
operator, says small businesses are
typically quicker to adopt new technologies
than large corporates.
“This is largely the consequence of a
difference in the attitude towards technology
in small versus larger businesses.
In large corporations, new technologies
such as the latest handheld mobile device
and laptops are often viewed as a privilege,
restricted to senior management.
“Small businesses are more likely to
recognise the business benefit that a
new technology will bring as opposed
to seeing it as a status symbol.”
Again, the technology cannot be deployed
unthinkingly.
Michel Robert, managing director of
the European hosting group Claranet
warns that SMEs must be sure their
investments will move the business on.
“Most SMEs don’t care if the technology
is the newest or the fanciest or the
quickest. They care about reliability
and about whether it will take them in
the right direction. SMEs cannot afford
to experiment and get it wrong.”
He points to the dangers of growing
complexity, which SMEs may be illprepared
to deal with. He recommends
outsourcing the bread-and-butter operations:
“This will allow you to focus
the technical resources you have on the
future and on innovation and on aligning
IT with the business.”
The impact of the internet on SMEs
has been particularly strong. While a
couple of decades ago, an SME might
be considering what accounting package
to buy, today it is chiefly concerned
with connectivity.
Chris Stening of Easynet, part of the
BSkyB group, says the company has
seen an exponential demand for broadband
from SMEs driven by e-mail, web
traffic and online applications.
“There is a
misconception within
the SME sector that
technology is expensive
and that it is a luxury a
small business cannot
afford. Most SMEs have
few people to turn to
for technology
advice and this has led
to an abundance of fear,
uncertainty and doubt
when buying IT.”
Eilert Hanoa, Mamut
“The internet has changed the way
small businesses think about themselves,”
he says.
A company can use a cleverly designed
website to make it seem larger
than it really is: equally, a failed internet
connection can quickly cost a small
company more than it can afford.
A survey carried out among UK
SMEs by Quocirca, the consultancy, for
Easynet Connect, the company’s SME
network, says connection has become
vital for many: “While a quarter of
companies could work for days with no
internet connection, most companies
require failures to be fixed inside a day.
For one in four, time to fix is even tighter
at less than an hour and for some no
break is acceptable.
Are there simple guidelines that
SMEs should follow in their adoption
of IT? Joslyn Faust of Gartner suggests
that potential buyers should not focus
on price too strongly. “Free or almost
free does not mean stress-free,” she says,
adding that new additions must work
with existing equipment if the company
is not to have problems as it grows.
She also says it is important to make
sure that the vendor understands the
customer’s business. “Too many do
not understand these vertical markets,
which leads to frustration for their customers
as they get up to speed.”
There are heartening signs, she says,
that vendors are working towards the
idea of “one-stop shopping” for SMEs.
“That is what SMEs have always wanted
but what they have not been able to have
because of the state of the market. It takes
a few years for vendors to get it right.”
HOW TO MOVE FORWARD FROM GUESSWORK TO HARD FACTS
Any board-level executive worthy of the name would like to say they have the true status of their organisation’s business performance at
their fingertips. Whether they really do will depend largely on the state of the company’s business intelligence systems.
By Stephen Pritchard
The pressure on managers to
make better use of company
data - and better understand
how their organisations are
performing - has put business intelligence
technologies at the top of IT
spending in the last two years, ahead of
security and compliance.
“The CIO has been the custodian of
information, and he or she is looking for
a layer [of technology] that helps bring
data services together and helps provide
an information source for the business,”
says Don Campbell, chief technology officer
at BI vendor Cognos.
“The CEO is looking for decisionmaking
tools to help guide his company.
Companies have made a great investment in collecting the data, but
now want to derive value from it.”
This shift has made BI the focus of a
buying spree by enterprise technology
vendors: in March, Oracle paid $3.3bn
for BI specialist Hyperion, and this
month rival SAP agreed to buy Business
Objects, for €4.8bn ($6.8bn).
These deals are significant, and not
just because they represent continuing
consolidation in the market for large
business software systems.
Companies sellingenterprise resource planning (ERP) software, such as SAP and Oracle, recognise that
boards of directors want more than
just the raw data that systems such as
ERP produce. They want to be able to
analyse that information to support decision-
making and to make more accurate
forecasts and plans.
Unfortunately, better decision-making
demands far more than just plugging
in a business intelligence application
to the company network.
A large enterprise might well have
a dozen or more business intelligence
systems, data mining systems, enterprise
performance management suites
and reporting and analysis tools. This
creates a huge burden for the CIO to
support, and leaves line-of-business
managers unsure of which sources of
data to rely on.
As a result, companies are often forced
to deploy a further set of tools on top of
their existing data warehouse and business
management technology, in order to
produce a consistent set of reports
Conventional business intelligence,
whether done in a standalone tool or
in a spreadsheet such as Microsoft Excel,
is based mostly on analysing past
data. This information is typically days,
weeks or even months old.
But companies increasingly want up
to date, or even “real time” business intelligence
data. They might want this to
enable senior managers to make accurate
decisions more quickly, but it is just as
likely to be driven by a need to give frontline
staff better tools to make choices
when they are in front of the customer.
“The trend in the past 18 months
has been away from [analysing] data from last year and last week, to data
that is hours old,” says Royce Bell,
CEO of Accenture Information Management
Services.
The technology to do this is also improving.
One benefit of the deal between
SAP and Business Objects, according to
SAP co-chief executive Henning Kagermann,
is that Business Objects will be
able to use SAP’s know-how to allow
much faster, “in memory” analytics for
customers.
To date, companies needing real time
or operational business intelligence
have had to turn to smaller, more specialist
solutions.
Secure printing and cash management
company De La Rue, for example,
uses portal based BI software from
QlikView to enable its customers to
monitor the performance of banknote
sorting machines in their cash centres
in real time.
According to Jon Ryley, responsible
for the project, maintenance costs on
the sorting machines - which cost between
£400,000 and £1m each - has
halved, and in-service uptime has improved
considerably. The data has enabled
De La Rue to cut its operational
costs, and its customers can make better
use of their expensive equipment.
The challenge for companies is to take
such specific applications and tie them together
across the business, both to reduce
costs but also to improve the consistency
of the information they deliver.
“Real-time business intelligence is
theoretically possible but is so expensive
that few people want to do it,” says
Andreas Bitterer, research vice-president
at Gartner.
“But the move towards real-time
technologies is reducing latency [in
BI], which is helping companies to
use BI with operational data. They are
moving from gathering data weekly or
hourly to every five minutes, so you can
base business decisions on more or less
real-time events.”
For some companies, the analysis
and reporting capabilities included in
ERP or CRM (customer relationship
management) will be sufficient. Both
Oracle and SAP’s recent acquisitions
have significantly added to their BI
functions, and other vendors, including
Microsoft, have also worked to improve
BI within their applications.
Cosalt, a supplier of maritime safety
equipment, is using the business intelligence
functions in its ERP system - from
vendor IFS - to track sales performance,
especially from smaller orders.
“The system has improved what we
call our bread and butter sales. We are
targeting orders under £10,000, because
we had focused on big orders, but 70 per
cent of our business is from smaller deals
and tracking them has made a big improvement
year on year,” says managing
director Winston Phillips.
The challenge for businesses, as they
grow, is to tie such systems together to
create an “enterprise” view of business
intelligence. Companies also need to take
on board emerging capabilities - such as
enterprise performance management -
and the pressure from a new generation
of knowledge workers to have BI analytics
tools on their desktops.
Rather than rely on specialist analysts
to compile reports for the CFO
once a quarter, more firms want to use
the latest BI systems to support decision-
making from shop floor or call
centre to boardroom.
A large data warehouse with the latest
data mining and analytics tools is
the tidiest solution, but it inevitably
means a hefty investment in both cash
and development time. None the less,
companies in sectors as diverse as retail
and energy have made such investments,
and seen significant financial
returns. But the warehouses have to be
well engineered to fulfil this task.
“It is still a challenge for most organisations
to create a BI system to optimise
their enterprise performance, and
do so in a timely manner,” says Eddie
Short, vice president and global leader
of business information management
at Capgemini. “Traditional BI involves
building huge data warehouses, and
that brings with it a lot of latency.”
For smaller companies, and those
that cannot justify a state of the art data warehouse, the hope is that specific
business intelligence projects, or investing
in a centralised BI system that
draws data from the underlying business
applications, will bring most of the
benefits. But the benefits will not come
without both effort and investment.
FROM BABY STEPS TO GIANT GROWTH
Mothercare’s success outside its UK home
shows the attractions of a franchising model
in an uncertain market, writes Tom Braithwaite
In 1984 Mohamed Alshaya, the
young scion of a wealthy Kuwaiti
dynasty, educated at Wharton
business school and working at
Morgan Stanley in New York, received
a telephone call from his father.
“You had better come back to the
family,” said the elder Mr Alshaya,
with a summons Mohamed had always
known would come. Business school
and the bank had been mere staging
posts before a return to the family
company. But before the journey home
there was one last educational stop for
the suave son - a stint on the shop floor
in a Mothercare store in Manchester.
The apparently unlikely link that then
developed between Mothercare and the
Middle East is much closer today. The
UK mother-and-baby products retailer
has been the most important partner
for M H Alshaya, which has expanded
from a relatively small family conglomerate
into one of the world’s most successful
franchise operators.
Franchising has its share of believers
and sceptics. Critics argue that allowing
a third party to manage your brand
and take profits off the back of it can
never be the right way to proceed.
But now the model may be coming
into its own. Retailers in the US, UK
and much of Europe are seeing the fallout
from the credit crisis translate into
slowing sales. Those that laid the foundations
early for expansion in emerging markets are reaping the dividends
as fast overseas growth helps offset the
torrid markets at home.
“This is an incredibly important
time to push hard,” says Ben Gordon,
chief executive of Mothercare. “The retail
markets are being built now. The
brands are being built now.”
Alshaya now operates 116 Mothercare
stores, but it also has dozens more
branded stores in the Middle East and
as far as Poland and Russia, with brands
ranging from Topshop to Starbucks.
This year the company expects turnover
of more than $2bn (£1bn), up from
$1.6bn last year.
“Mohamed, on the back of Mothercare,
has built a £1bn company,” says Mr Gordon,
whose admiration for his Kuwaiti
partner’s success is plainly reciprocated.
For the brand owner, the appeal of
franchising lies in its low-risk structure
and speed: little capital has to be deployed,
the franchisee bears most of the
cost of store openings and staff, pays
cost-price for the products and a royalty
to the franchiser when they are sold.
“Some people say to me ‘Gosh, you’re
giving away net margin,’ “ says Mr Gordon.
“Then I say: ‘We are charging a
royalty and frankly you’d have to do
pretty well to outperform’.” Today, the
company - with a market capitalisation
of less than £350m - has about 500
stores in 48 countries and international
sales are expected to overtake the UK in
the next few years.
“We have got 400 stores in the UK
with a 60m population,” says Mr Gordon.
“You’re not expecting that ratio
in India but in Greece we’re more than
that [ratio] now. If you did it yourself,
you’d do it at a 10th of the speed.”
The structure also mitigates the difficulty
of operating in countries where
local laws and culture can prove testing - even insurmountable - barriers. “Pigs
are cute in some countries and offensive
in others,” notes Mr Gordon. Purple,
says John Lappas, the Greek franchisee
for Mothercare, is funereal in Greece
but fine in Romania, where Mr Lappas
has recently introduced Mothercare.
More practically, pushchairs with broad
wheels are good news in sandy countries
but also in snowy ones.
Retailers in the US , UK
and much of Europe
are seeing the fall-out
from the credit crisis
translate into slowing
sales. Those that laid
the foundations
early for expansion in
emerging markets are
reaping the dividends
as fast overseas growth
helps offset the torrid
markets at home
Choosing the wrong partner in franchising,
however, only crystallises the
risk. As the chief executive of one franchiser
recalls: “The franchisee started
opening stores without telling us, which
is a no-no. They broke the rules. They
were effectively stealing from us.”
Trust is essential for both parties, with
both able to affect brand value and both
invested financially and emotionally in its
success. Mr Lappas attests to the importance
of the relationship with the retailer’s
management: “Mr Ben Gordon is the
perfect manager. We feel confident that
we will not die with them.”
Mothercare allowed its new Indian
franchisee to develop its own billboard
advertising campaign, with the slogan
“Baby is coming . . . “ plastered all over
Mumbai. BS Nagesh, chief executive of
Shoppers’ Stop, Mothercare franchisee
in India, says he values that freedom
and wryly notes the principal benefit of
becoming the Indian franchisee of one
of the world’s leading mother-and-baby
brands: “With a never-ending population
boom we could see the opportunity.”
That confidence was not so great in
the past decade. Both Mr Alshaya and
Mr Lappas say they were worried by
Mothercare’s dwindling success in the
UK and un-impressed with the previous
management’s ability to cope, a development
that underlined the risk for a
franchisee of owning a business built on
a waning brand
Increasingly, however, retailers are trying
to have their cake and eat it. Gavin
George, head of retail at financial services
company Ernst & Young in the UK, who
has helped retailer New Look launch in
Russia and Argos launch in India, says:
“We ensure that every franchise agreement
has a buyback [clause].”
Zara, part of Spain’s Inditex group,
has always preferred to have full control
of its overseas stores and has
bought bigger slices of joint ventures
and franchises in Germany and Russia.
UK fashion retailer Next has bought its
franchisee who operated in the Czech
Republic, Slovakia and Hungary. Marks
and Spencer bought out its joint venture
partner in Greece and the Balkans.
Although the franchise model has
fallen in and out of fashion over the past
decades, it may be that the close relationship
such as that between Mothercare
and Alshaya becomes rarer as the biggest
brands come to feel increasingly confident
about operating in emerging markets.
That offers potentially greater rewards
for those companies with the
skill and capital to go it alone, but it also
extends the list of pitfalls they must face
directly - from legal risks to the more
arcane but equally explosive elements
of pigs and the colour purple.
Saturation forces British brands to
eye overseas opportunities
A number of global brands have
been at it for years: McDonald’s and,
subsequently, Starbucks are prime examples
of US companies building their
businesses by embracing international
franchising as a lower-cost, lower-risk
alternative to wholly-owned stores.
But in pure non-food retail, American
companies are not such an important
force in franchising and international
expansion. Spain’s Zara and
Sweden’s H&M have been the leading
movers in fashion over the past decade.
And a large number of UK brands have
been quietly expanding overseas for
some years.
“UK brands are more known to the
Indian consumer than the American
brands,” says B.S. Nagesh, chief executive
of Shoppers’ Stop, the Indian
department store operator and Mothercare
franchisee. “I, as a middle-class
[shopper], could relate.”
From a retailer’s perspective, barring
the current economic slowdown,
the US offers decent medium-term
growth opportunities and some big
names in the US, such as American
Eagle, have seen no need to expand
their operations overseas.
Gavin George, head of retail at Ernst
& Young, the financial services company,
argues that for the UK, on the other
hand, staying put is foolish.
“For us, there isn’t much choice any
more,” he says. “If the UK is either mature
or saturated, the pressure to move
elsewhere is compelling.”
From a retailer’s
perspective, barring
the current economic
slowdown, the US offers
decent medium-term
growth opportunities
and some big names in
the US , such as
American Eagle, have
seen no need to expand
their operations
overseas
REAPING HUGE BENEFITS FROM SOME SIMPLE TIDYING UP
Complexity is a dirty
word in computing.
The more convoluted
something is, the
more expensive
and difficult it is to
manage, and the more
likely to go wrong.
By Danny Bradbury
Unfortunately, because computing
infrastructures develop erratically,
many businesses end
up with hundreds of poorly
documented software applications, installed
by forgotten development teams
and long-departed managers. Many of
these applications do the same thing, and
they rarely talk to each other.
Some companies try to consolidate
applications; boiling them down to a
simpler set of systems. One such is UK
transportation giant, First Group.
Darin Brumby, its CIO, explained: “A
lack of business ownership and sponsorship
of projects in the past had led
to a sea of data, but no information for
the decision makers.”
First Group’s consolidation process
is part of a larger initiative to stabilise its IT operation and bring it in line with
the needs of business managers. The
company is also one year into what Mr
Brumby sees as a three-year programme
to cut the complexity of its applications
base; it has already cut its 300 software
applications by 50.
It is reaping the benefits. Four years ago, the company had different inventory management and maintenance
systems for its businesses, meaning that it could not centrally control stock and had limited insight into its warranties. Replacing the applications
with SAP’s enterprise resource planning (ERP) system enabled the company to use a single application for inventory and maintenance acrossall 20 of its operating companies.
“The benefits were enormous,” says
Mr Brumby, “not only in process controls
and improved operational efficiency
but, more importantly, we were
able to embed the standard operating
procedures of the organisation into that
platform, which of course you can’t do
with 20 separate platforms.”
Application consolidation can deliver
big cost-savings, says Eric Stephens, enterprise
architect for health insurance
company Excellus BlueCross BlueShield
of Rochester, New York. It takes more
people more time to maintain arcane
collections of interconnected software,
and as the applications age, the skills to
maintain them may disappear.
Another driver is agility, says Mr
Stephens. He is working on a project to
whittle the company’s 500 applications
down to about 35. The health insurance
sector is heavily regulated, which
forces the IT department to make lots
of compliance-driven, time-consuming
changes to its software.
“Having an ecosystem of software
that’s easy to maintain helps with agility
and adapting to market changes, but
also lets you drive down costs,” he says.
Excellus’s rationalisation programme
involves listing each application along
with the business functions it serves.
The team ended up with a spreadsheet
documenting software attributes in 70
columns.
Four years ago, the
company had different
inventory management
and maintenance
systems for its
businesses. Replacing
the applications with
SAP’s enterprise
resource planning
system enabled the
company to use a
single application
for inventory and
maintenance across
all 20 of its operating
companies
This data was given to a consultancy.
It mapped each application on to a grid,
with one axis describing the business fit,
and the other describing the technical fit.
This gave Excellus information on which
applications to ditch, keep, or replace.
Consolidation can be a slow process
that only delivers benefits over time and
boards with short-term expectations
may eschew such strategic initiatives.
Excellus’s board was willing to fund
the project as part of a wider initiative
called IT Evolution, which aimed to
align the company’s IT with the way the
business worked.
Sometimes the opportunity for change
arises because the business is in a state of
flux. George Glass, chief architect at BT,
is reducing 3,500 applications to 500. He
was able to do it partly because the company
wanted to replace its telecommunications
network with a new one designed
to support internet protocol.
This initiative, called the 21st Century
Network, needed big changes in the
application base. “If you’re having to do
it anyway, do it right, with strong engineering
principles, with disciplined design
practices,” says Mr Glass. His team
decided to set out its application needs
in terms of the services they would provide
to customers. They defined 14 core
functions the applications must support,
and came up with 160 services that
these functions had to provide, such as
enabling customers to check for availability
of a BT service. They then began
to develop them.
Reusability figured heavily in Mr
Glass’s strategy. A software service that
enabled a customer to check for product
availability might initially be used to
check for, say, the availability of broadband
services within a certain postcode.
Over time, however, developers might
enhance that service to support other
types of product and customer.
Consolidating applications is as
much a cultural as a technical challenge.
Persuading BT’s software developers
to adhere to reuse standards was
one of the toughest parts of the process,
says Mr Glass.
He got the go-ahead from management
to tie developer compliance into
performance reviews and bonuses, which
gave his team the power to drive the message
home. BT has deployed 61 of the 160
services and has switched off 719 of its
software applications. It hopes to close
another 1,000 in the next year
Editor: Robert Orr
Art Direction: Erica Morgan
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