May 2019 - The IFT

Property & the Economy

The next London and South East region members meeting of 2019 will take place on Wednesday 22nd May 2019 at Deloitte in London from 17:30 to 21:00.

Tom Simmons (Deloitte)

Tom is an Economist at Deloitte and will be giving a short update on the current economic climate.

Mark Bayley (Real Estate Advisory Services)
Real Estate is a major cost to corporate occupiers and is typically:
• A significant store of corporate value through property ownership
• A significant and often hidden financial liability
• Typically, the second largest annual operating expenditure
• A Prime focus for value creation and cost synergies
• despite this Real Estate is:
o A complex resource that is often under-managed
o Seldom represented at a senior level
o Often a reason why disposals fail to deliver shareholder value

Notice: This event is open only to members and associates of the IFT, if you are a member, please sign in to book. For more information on becoming a member please click here

Can Zero Based Budgeting fund your Growth Ambitions

This year’s PwC’s annual survey of CEOs showed a deterioration in business confidence. Tim Allen and Zena Alston speak to us about how companies can weather the storm and use Zero Based Budgeting (ZBB) to reduce costs and fund EBITDA growth.

The 2019 PwC CEO survey made for stark reading; 30% of CEOs projected a decline in global GDP growth, with confidence in their own organisational growth at the lowest level since the last recession. Whilst uncertainties may be temporary, the message is clear: organizations need to act now to drive EBITDA growth and understand what can come from within.

Successful ZBB programmes can drive out 15-30% of costs
ZBB has become a popular tool for companies to identify and drive operational efficiency. It is especially powerful when organisations have suffering operating margins within declining or slow growth industries. Traditional approaches to these issues has been to run autocratic top-down savings programmes. We caution against this, as it can lead to cutting in the wrong areas, meaning costs creep back in. It can also fail to establish a sustainable cost culture. However, ZBB views the budgeting process from a fresh angle, building future spend from the lowest possible level and addresses the spend culture in the process.

The three crucial pillars for when you are leading a ZBB programme

The first step in ZBB is visibility of costs, at the most granular level possible. Spend drivers then need to be justified at this level, rather than projecting spend using a top-down approach, relying on prior period results. Organisations need to review every transaction and classify these into cost categories, enabling better visibility of spend.

Recently, a European Postal Operator faced declining volumes and increased competition. They wanted to implement ZBB across their third party spend. Each category reviewed in turn against cost drivers (Specification, Demand, Price etc.) to identify savings. More on this is in the case study below.
One critical feature of ZBB is ensuring that owners are held accountable to their budget targets and any variations to plan are challenged. Clear reporting lines, roles and responsibilities ensure that employees understand their responsibilities for their spend areas. Organisations should also put in place performance plans linked to budget performance and to incentivise staff further.
Successful ZBB programmes also foster proactiveness through disciplined monitoring. Organisations can achieve this through standardised reporting – fixing the number of days after month closing, with each budget owner reporting up.
Jump-starting your ZBB culture
ZBB is an ongoing exercise, and employees need to be engaged in the process to encourage debate about the best use of resource in the organisation. However, instilling a ZBB-mindset requires buy-in up front. Typical change management strategies, such as clear communication about the purpose of the programme, sharing good examples of progress and strong leadership buy-in help create momentum.

Related articles:

Disruption in the automotive supply chain

The automotive industry is in the early stages of disruption events that will change the shape of the sector forever. This is being driven by numerous factors, most notably including:
• Decline of diesel. The impact of “dieselgate” continues to be felt across the sector, with European diesel sales expected to fall to 5.6 million in 2024 from a peak of 6.9 million in 2016. As a proportion of total vehicles sales this represents a drop from 52% to 37%.

• Changes in demand. More consumers are choosing alternative engines/power units, with petrol returning to the fore and, increasingly, hybrid electric and full electric powertrains. Whilst demand seems to be switching from diesel to petrol in the short term, the medium/long term outlook is that petrol vehicle volumes are likely to also decline. With forecasts of consumer demand remaining uncertain, anticipating future sales mix will prove challenging for both manufacturers and suppliers. In parallel new emissions standards in 2021 are emphasising the move towards power units other than petrol and diesel. This has the potential to cause significant under and over-supply. Unsurprisingly, capacity issues are already appearing as petrol engine component suppliers are reluctant to lay down new production lines knowing that volumes are in decline.

• Lifestyle changes. Younger generations are placing less importance in owning cars and indeed even having a driving licence. The transition towards Mobility-as-a-Service (Maas) has already commenced in major global cities, where policies such as congestion charging and car-free developments deter car ownership. The 2019 KPMG Global Automotive Executive Survey highlighted that 43% of automotive executives believe that half of today’s car owners will not want to own a car by 2025. The impact on the volumes and types of vehicles sold will be both significant and unpredictable.

Against the backdrop of these global industry challenges, consideration also needs to be given to where vehicles will be made in the future. Recent press announcements have demonstrated the risk that a significant proportion of vehicle production in the UK could move to mainland Europe, save for some specialist manufacturers with a strong British heritage.

Suppliers are facing an uncertain future

So what does this mean for suppliers? In short, this will lead to significant challenges, specifically around areas such as:
• Demand forecasting – can suppliers accurately forecast likely demand for components in the short/medium term?
• The need for a diversification strategy to change the product portfolios to those more appropriate to future requirements, e.g. electric vehicles.
• Cost reduction – can fixed costs and overheads be reduced sufficiently to match the likely reduction in volumes that many component manufacturers could experience, recognising that the many suppliers are highly operationally geared?
• Transport and relocation costs – can suppliers factor in additional freight or relocation costs if OEM manufacturing facilities move elsewhere?
• Funding accessibility – anecdotal evidence indicates bank funding for suppliers may be hardening as funders attempt to determine who the relative winners and losers will be.

Manufacturers are facing difficult decisions
There may also be significant issues for manufacturers as they manage their supply chains:
• How and when do they communicate intentions regarding plant closures or volume reductions?
• Which suppliers are likely to struggle as a result of the systemic market changes and the OEM specific changes in their portfolio?
For turnaround professionals these challenges create opportunities to support clients – from cash forecasting and control to stakeholder management and strategic change implementation. In addition, for those suppliers who experience medium/long term decline in volumes (e.g. diesel engine component suppliers) there is likely to be a need for more substantive solutions from key customers and/or M&A transactions to ensure distressed suppliers are able to reach the end of their supplier contract without further material risks.
What is clear is that conventional remedies such as bailments and changing payment terms are unlikely to be sufficient for some of these challenged supplier situations and we will see more radical and innovative solutions being effected. These could include OEM’s bringing suppliers in-house, the creation of run off platforms and turnaround professionals stepping in to support component manufacturers for prolonged periods.
Only time will tell what the extent of the impact will be of these disruption events but all the indications are that when it comes it will be significant.

Jo Wright leads Key NPQEL module for Education CEOs

The Department for Education has created a programme for Executive Leaders. One of its purposes is to develop the skills, knowledge and behaviours that a high-performing executive leader needs.

De Novo’s founder, Jo Wright, was approached to lead a session which formed part of the Managing Resources and Risks module of the programme. The workshop took place towards the end of last year and was well attended by aspiring and serving executive head teachers and multi-academy trust (MAT) chief executive officers (CEOs).

The main take away points for the attendees were:

Heightened awareness of why organisations fail and the warning signs
Importance of a more ‘business-like’ culture and thought process to identify and deal with issues promptly
The need for greater commerciality to achieve a better business model, operationally and financially
The significant impact a strong Finance Director with appropriate skill set can make
The tangible benefits of identifying and investing in talent, upskilling management and recruiting quality leaders
Importance of a diverse skills mix in Governors to support, challenge and hold leadership to account
The challenge of identifying and dealing with the vast amount of uncertainty – debated key risks, ways of mitigating them and the need to contingency plan
A focus shift is required from reporting on issues to actually resolving them – clearer roles / responsibilities and accountability are critical to speed up the process
The need to constantly embrace change to secure sustainability long term
How key the right cultural attitude is to evolving an organisation, and the amount of time and effort required before it embeds
War stories and case studies of both Colleges and Corporates, demonstrated where the timing of issues being addressed was the difference between success and failure

The lively session concluded with a discussion about ways of trying to future proof and secure long-term sustainability. Positive feedback from leading education services provider, Cognition Education, who organised the course included:

“Just want to say an enormous thank you for your time and input, I understand it was a really informative session, and very well received.”

“Just a word of thanks for your input today. It was really great, and the attendees really enjoyed the session. We kept drawing on it all day as we worked through the materials so thank you again.”

Iconic Events in the Restructuring world over the past 12 months

“ Iconic Events in the Restructuring World over the last 12-months”:
Carillion a Year On: Ross Connock PwC
• They said the Group was too big to fail
• Were the signs there ?
• Impact of media coverage before the collapse
• When did PwC get the call…
• Involvement of other panel firms
• Government and political impact on the situation
• PwC’s strategy to soft land the contracts
• Funding the ongoing contracts
• Impact on supply chain
• Review into what went wrong in the Group
• The position today
• Lesson learnt
• Initial Q & A

“Blood Hound Land Speed Record Rescue”: Andrew Sheridan FRP
• Background
• Richard Noble’s vision
• Objective
• Funding structure
• What caused the financial failure of the project
• When did FRP get approached
• Strategy to protect the project
• How was funding interest achieved
• The importance of media coverage
• The funding solution
• The project today
• Initial Q & A

Notice: This event is open only to members and associates of the IFT, if you are a member, please sign in to book. For more information on becoming a member please click here