Tag Archives: Commercial

Risky Business by Jamie MacAlister

This book, written by a teacher at Hult International Business School and Ashridge Executive Education, seeks to identify how senior executives should develop a corporate strategy to deal with risk. So far, so worthy.

The first problem is to embrace what constitutes a corporate strategy. While the purpose of companies is pretty clear (to increase shareholder wealth), how to go about this is less so. For small businesses and many not so small businesses it is simple – sell more stuff to more customers, ideally at an increased margin. Achieving this can be very demanding, but that is the realm of tactics not strategy. Larger businesses, probably dealing with multiple products in multiple markets, must decide whether to invest and, if so, where. That decision is broadly called strategy and that is where this book is aimed.

The second thread, risk, is intended to be part of this. Clearly corporations that take a long time to develop strategy face the problem of the market places moving during their consideration of options, rendering the underlying assumptions questionable. Overlaid upon this are the risks of singular events, be they catastrophes, emergence of new technologies or loss of key contracts which again can dramatically alter the market.

Unfortunately for the reader the book never really pins down definitions of either. Instead it cites the hoary old chestnuts of Apple (Steve Jobs is a saint according to some business gurus), Proctor and Gamble (a company so large that it can borrow cheaper than most governments, and as such far from typical of the companies that most will work in), the inevitable bit of Sun Tzu and Clausewitz (taken out of context) and Napoleon.

To this the author adds a trite classification of business leaders into “tigers” or “elephants.” He goes on to develop a psychometric classification process that is as rich in catch phrases and jargon as it is devoid of insight, unless you consider sentences like “Good strategy means being choiceful about taking risk – its about taking the right risk” as anything more than a badly written statement of the obvious. (No, “choiceful” is not a word in my spell checker or any dictionary that I can find). And so it goes on. And on. And on.

The text is peppered with quotes from other business authors (many of them also from Ashbridge) which lead the author to also develop a theory of Creative Juxtaposition, whatever that means. Almost all the case studies I had read before, in more depth and with better explanatory context. Jargon aside, there is nothing new in this book, as the author actually admits in the penultimate paragraph. The cobbling together of other people’s ideas is neither compelling, necessary nor instructive. If this book is representative of Ashbridge – and that seems to be the intent – then it’s a spectacular own goal.

On the ARRSE site (where this review first appeared – it is reposted here with their kind permission) i had to rate it 1/5 as ARRSE has no facility for giving a rating lower than that.  On this blog there is no such problem.  It scores a big fat zero.

What I Want From the Next Government

With a little over 5 months before the next election we can all look forward to being bombarded with manifestos, promises and statements from those vying to rule us. This seems to be to be back to front, so I thought I would tell Dave, Nick, Nigel and (God help us) Ed what I expect from them. They can then contemplate the ways in which they will disappoint me.

I will deal with the topics more or less in order of my priorities and, where possible, share the arguments that lead me to the conclusions. However this is not a manifesto, so in the interests of brevity and clarity I will not necessarily develop them fully. Of course, I am happy to expand and expound upon request.


The simple fact is that the country owes £1,500 Billion, and this is still increasing in spite of the incredible efforts of those working in the UK private sector, who are delivering growth. The implication of this is that the tax take is at about the maximum that it can be, and therefore government spending has to fall, urgently. Five years of austerity and cuts via salami slicing has not delivered sufficient savings and it is unlikely to. We therefore need a plan B, which is a total restructuring of government spending.

The first step is for the government to publish where the money goes and what liabilities exist. This can only be achieved if the government adopts the same accounting policies that all other enterprises are compelled to, i.e. UK GAAP (or its replacement FRS102). The Civil Service will whine that this is not possible or appropriate; my answer is that if they don’t know how to do it they are not fit for purpose. The ONS is a start, but it needs to go much, much further. The accounts (which I think would be best generated by department or agency) should be published annually, possibly bi-annually. Once we have established where all the money is going we will be in a position to spend less of it.

The second step is for it to become unlawful to set a budget that involves a deficit. The blithe assurances of ministers and officials over the past years have dumped a huge burden on the economy and the people who have to service the debt (and at some stage repay it). Most of these people weren’t born at the time the spending was incurred so their consent was not explicitly given. Taxation without representation started the US War of Independence. So far taxation before conception has not triggered social upheaval, but as the consequences become clearer I’m not confident that the peace will hold.

The government’s accounts should be examined by those capable of doing so and free from political affiliations. Rotating it through auditors, including accounting firms other than the big 4, should avoid that potential problem. Each firm gets to do it once, at commercial rates. Smaller firms could form consortia were there a manpower shortage. The audit would have the same objective as any commercial audit, i.e. to produce a true and fair view of the country’s financial position.

In terms of running the economy the government actually has little to do. It must provide a legal framework and provide that infrastructure which cannot be provided by other means. As the government is bankrupt its capacity for major spending programmes is limited. It has no business trying to run companies competing in open markets.

It should instead look in particular at enabling a wider adoption of crowdfunding solutions to allow more investment of wealth into the SMEs that produce growth, rather than chasing the small number of fully listed companies. Investment in real estate should not be encouraged.

In terms of taxation it should take the minimum possible commensurate with delivering the services required, plus a bit to reduce the debt. Where possible taxes should be hypothecated so that, for instance, the income from road tax, fuel taxes etc. should be applied to transport and environment. If there is a surplus then the tax should be cut. Indirect taxation (e.g. income tax) should be used for defence, welfare and the like.

Before looking at the spending departments in detail, we need to address the elephant in the room. Our economy functions differently to the ones in Europe, but too much of our law comes from there, and is therefore beyond correction and development by the UK government in the interests of the UK. Saving the UK is unlikely to be achieved by staying in Europe.


As it stands the EU is not working. Its accounts are a mess and its policy is (understandably) focussed on saving the Euro. Whether this is wise or possible is not relevant.

I expect the next UK government to produce detailed rational arguments for staying, renegotiating (if possible) or leaving as they see fit. After a period of serious public scrutiny I want a referendum (no later than May 2017 and earlier if possible), the results of which to be enacted in the shortest possible time, or one year – whichever is faster.


According to ONS data, the single largest slice of government spending is on Social Protection and Personal Social Services which will consume £253 billion in 2014. That is £9,800 per household. This simply can’t be right and a huge amount of this spend must be tied up in the administration of a complicated system. The only data I can find is for 2011-12, but that gives a total benefit spend (i.e. the money handed over to recipients) as £160 billion. Allowing for a bit of inflation, the inescapable conclusion is that the benefits system is costing over £80 billion to administer. That’s just ridiculous – it’s almost the size of the entire education budget.

The system needs complete reform. I think Iain Duncan-Smith is doing well on this; but with £80bn to save he needs further encouragement. It should not be difficult to establish the income required for an individual to exist at various ages and locations. If his/her income is short of that then the government should top it up. This involves means testing, but that is reasonable and necessary to ensure that money goes to where it is needed, and only where it is needed. As HMRC has all the data that it needs it should be possible to automate much of this process from existing software and data. If Tesco can tell where I shop, what I buy and what I am likely to buy tomorrow (which it can through its Clubcard) it’s not unreasonable to expect the government to know what I earn and what I need. If HMRC management says it can’t be done sack and replace them (which is what would happen in the private sector).


I want an explicit admission from the government that the state pension scheme is in fact a Ponzi scheme and, unsurprisingly, is in huge trouble. Moreover, those who will be paying for the pensions were not consulted. The pension system should be subsumed into the welfare system (i.e. means tested).

Private pensions should be liberated further from state control. It’s the pension owner’s money and he can do what he likes with it. It is unlikely that the public pension will be so generous as to encourage the feckless.

Public sector employees should be required to fund their own pensions rather than impose a burden on future taxpayers. They won’t like this, and will probably strike. But my children were not created to pay the unfunded pension of someone in the public sector.

The retirement age should continue to increase, although of course those with sufficient wealth in their pension pots can retire whenever they like. Those senior citizens unable to work will be covered by other welfare payments.


The NHS should be broken up into manageable parts, which should transferred to a range of ownerships, predominantly in the private sector. Any funds generated from the sale should be applied to reducing the national debt.

The government should pay insurance premiums for those on welfare and consider making private health premiums tax deductible. Given that health care cost £4,000 per household it should be possible to provide a pretty good insurance solution, with individuals able to buy more extravagant cover if they like.

Diabetes is a problem caused primarily by sugar. So tax sugar and apply the revenue to the health service budget.

Coordination of the availability of suitable heath facilities (if necessary) should be led by county councils. The role of the Department of Health should be trimmed to one of supervision and inspection.


The state education model should mimic the private education one; each school should be owned in trust and run by a board of governors who appoint the headmaster, secure funding and set salaries etc. The governors are mostly elected. They are unpaid, but insured.

The role of the government is simply to collect and distribute fees, following the pupil. Pupils should be free to attend whichever school they like. The level of fee will be set by the governing body on the basis of the operating and maintenance costs. Their accounts will be subject to inspection and challenge by the charities commission and/or the Department of Education and/or Local Education Authorities (if the latter remain necessary).

Teaching hours shall be extended to match the working day. Access to and participation in sport shall be increased.

Technical colleges shall be re-introduced to produce an alternative to academic education, the transition being made at 16 (i.e. post GCSE). The number of places at university shall be reduced as a proportion of the school leaving population to reflect the number that actually graduate, as opposed to the number that enrol.


I want a government that is able to acknowledge that something has gone terribly wrong in the MOD, as evidenced by our near-disastrous performance in the Iraq and Afghan wars. That is going to require a Defence Secretary (or his nominee) who commands sufficient respect to demand answers and impose solutions, a latter day Cardwell. Either Senior Officers advised Cabinet to proceed as they did, or the advice they gave was ignored. In the former case the Senior Officers were incompetent, in the latter case spineless. In either case they were massively over-promoted. The system that enabled this needs addressing, urgently.

We need far greater integration with reserves and a structure that reintegrates the armed forces with the communities that they serve. The super-garrison may or may not be the best structure.

The Armed Forces are almost certainly too small. A plan needs to be put in place for their expansion. This is likely to be particularly challenging for the Navy given their addiction to aircraft carriers and the exorbitant cost of new destroyers and submarines. But more ships are necessary, particularly if we are to leave Europe. A review of the need for the carriers, including cost benefit analysis, should be conducted and made available to the public.

The funding of the nuclear deterrent to be made part of a separate service (albeit one with manpower on secondment from the Navy).


Given that there is no money, HS2 & 3 are to be scrapped unless the private sector is prepared to take it on.

Runways to be authorised at both Heathrow and Gatwick, and regional airports and internal flights to be further facilitated. If this requires an Act of Parliament, so be it. But the runways are to be built with private money.


Irrespective of the decision on Europe, the aim of foreign policy will be to turn the Commonwealth into a free trade area in as short a time as possible.


Build nuclear power stations. Stop subsidising absurd offshore wind.


The right of recall should be enacted, and the sanctions available against miscreant MPs should be increased.

The Boundary Commission should become independent and its decisions binding.

Political parties should have their budgets capped, and the amount allowed to be spent on elections also capped. Under no circumstances will parties be funded from taxation, so the cap will set on the basis of the total raised by the poorest party (on a per candidate basis).

The House of Lords to be restructured by a body that includes no-one who has ever been an MP. Until a solution is found, and approved by referendum, there should be no further appointments to the House of Lords.


That’s it. I hope that adoption of this agenda, or similar ones, will prevent this country being bankrupted again by misguided politicians. It should also shake the executive branch into reforms that suit it to the 21st Century, without losing the long traditions of probity and service.

How To Fix The Deficit

A deficit arises in any organisation when expenditure exceeds income. For a company or individual if this is not immediately resolved an unpleasant trip to the bankruptcy courts is likely. Prudent companies and individuals therefore maintain reserves for a rainy day and prudent executives keep a close eye on cash flow. What may or may not constitute a profit is debatable. Running out of cash is not.

Some governments have one other option, which is to run a deficit by borrowing money on the international bond markets, pledging to pay it back with future taxation. This is analogous to using a credit card to pay off an overdraft, and to anyone not cursed with a degree in PPE seems a bad idea. Eventually you run out of credit card or, in international finance jargon, you suffer a bond strike – no one wants to buy your bonds. At which point the government is screwed, as are the people who elected it and, tragically, those under 18 who didn’t vote for it, but get the liability anyway. About the only good news for the UK is that we haven’t had a bond strike, yet. If you run lots of one year deficits you get an accumulation of debt called the national debt.

Time for some numbers. The best source of these would be the ONS, but their website is too detailed so I have used Wikipedia. (It tells you something about government when it’s hard to get to the numbers…). Of course, these are all government numbers, so they may be subject to revision etc. But they’re the best I could find and the message is stark:

In 2014:

  • UK GDP will be £1,470 Billion
  • Tax Receipts will be £648 billion
  • Government spending will be £732 Billion
  • The UK national debt will reach £1,272 Billion

Two key observations:

  1. This year, like every other year for over a decade the government is spending more that it raises.  2014’s aspiration is £90 billion.  Or, to put it another way, of every £10 that the government spends is borrows £1.50
  2. The national debt is approaching the size of the entire economy, and represents twice what the government raises in taxation.

The statement of the obvious is that this is unsustainable and we must be getting close to the point at which the bond market will decide that they have had enough.

Now, in any household or company facing insolvency what you do is simple and unpleasant (but less unpleasant than bankruptcy). Unfortunately there are few in government with corporate experience, so I’ll outline it for you here.




Only at the end of that third stage do you get to celebrate. So let’s look at how the government spends money. The chart below is pretty self-explanatory. The data is from:


141001 UK Govt Spending

The first number worth noting is the £53 Billion spent annually on debt interest. That is 8% of all government spending is paying the cost of the borrowing that governments (of all persuasions) have racked up to date. This amount can only continue to rise until we have a government that actually balances the budget. The next thing is “Other.” I don’t know what constitutes other, but at 8% of the budget if I was the chancellor I’d bloody well find out and stop it. The third point is that much of this seems to be covered by euphemism. I guess Public Order & Safety is pretty much the police and Social Protection is welfare, benefits and pensions.

So balancing the budget requires a cut in expenditure of £90 Billion from £640 billion (we can’t cut the interest bill). That is 14%. If we think that we have had austerity so far, we ain’t seen nothing yet. So far pay freezes for public servants have delivered a little, but given the magnitude of the problem that is simply shuffling the deck chairs on the Titanic. The government either has to stop doing something or impose a pay cut on public services. If 50% of the cost of government is wages that represents £365 billion per year. A 5% cut to public sector pay would therefore save £18 billion per year. This is what Ireland did. A  5% cut to manning levels would be better, as these workers would then be redeployed into the public sector where they would generate wealth.

Social protection, at £222 billion comes out at over £8,500 per household. This seems very high given the low level of unemployment and that the UK average income is around £23,000.  Surely one in 3 can’t be on benefits?  Part of it must be pensions, which could be easily reduced by accelerating the rate at which the retirement age is increased.  Today.  Most pensioners caused the deficit – why should they be immune? This level of government provision has only been made possible through bankrupting the country. The older generations are living beyond their means, and it is the young generations who will be paying for it.

But the stark reality is that cutting alone is unlikely to solve the problem. What can be done to increase income or realise cash?

Increasing government income either comes through a higher level of taxation on the current economy, or a constant rate of taxation on a growing economy. The great hope was that growth would deliver a proportionate increase in tax revenue without hurting anyone and the problem would be solved. Sadly though, this has not happened. The growth is being delivered but it is not translating into increased revenue.

The 2014 tax take of £648 billion represents 44% of GDP. Although GDP has grown by 3% (i.e. by about £43 Billion) this has not delivered an additional £18 Billion of tax. Why? The chart below shows where the UK tax take comes from (same source as expenditure):

141001 UK Govt Income

Again, if I were Chancellor I would be worried about “other” constituting some 15% of my income. I guess that includes inheritance tax and capital gains tax.

National Insurance and Income Tax come from employment. If wages are flat, then receipts will be as well, and wages are flat at the moment. Corporation tax is raised on commercial profits. While there are lots of games that multi-nationals can play, most of this comes from SMEs and for those profits are flat, reflecting the reduced margins that companies are operating on. VAT is a tax on consumption, only actually paid by individuals (most companies are VAT registered and can therefore nett off VAT paid against VAT collected).

Of the £648 Billion raised, £425 Billion is paid by individuals (VAT, NI, Excise Duty and VAT).

The total raised is flat because although the economy is growing well it is achieving this through tight cost control. This keeps wages and prices flat, and reduces corporate profits. While this may or may not change (and those who think it might will need to come up with a compelling reason as competition is now global) as it stands the Treasury can only increase the tax take through raising taxes. If margins are tight then this will not help and it could be that the tax take would fall further. There is some evidence that reducing taxes (particularly corporation tax) boosts the tax take as more companies will domicile in the UK. But the prudent course for the purposes of this debate is to assume that the tax take is constant.

The only other option for balancing the books is to sell assets for cash. At the moment the government has significant holdings in two banks (which caused part, but by no means all, of the national debt). Its holding in RBs cost £44Billion and is currently worth about £26Billion. The holding in Lloyds is worth around £15Billion and it may make a profit of about £2Billion when that is sold down. In terms of the numbers facing the UK that is a rounding error.

I can think of only one asset that might solve the problem, and that is to sell off the NHS. At the moment it’s a money pit and it is perfectly possible for private companies to run hospitals – BUPA does for a start. Rather than running one of the largest employers in the world the government would just have to find some way of underwriting health insurance for those who can’t afford it. Every other county in the EC manages this, so there are plenty of precedents and costing models.

The immediate benefit is that government expenditure falls by £140 Billion, which balances the budget and leaves a surplus of £30Billion or so before the costs of providing healthcare insurance to the poor. That is about £500 per head. As a 51 year old that would reduce my personal healthcare cost to about £1 per day. Bargain.

The next benefit is that as the likely buyers will be domiciled in the UK and making a profit, corporation tax will rise. Similarly the insurers will do more business, invest more premiums into the economy and make more profit.

But the greatest benefit of selling the NHS is that it generates a capital income. So what’s it worth?

BUPA has revenues of £9.1 Billion and a net operating income of £0.638Billion, or 7%. Assuming that the NHS could achieve the same, it would generate a net operating income of £9.8 billion. Treating that as earnings and applying the customary prudent p/e ratio of 10, that makes the NHS worth about £100 billion to take straight of the national debt. Of course, people more talented than me might be able to get much more for it.

Reducing the national debt by £100 Billion (to a still shameful £1,170 Billion) is a 8% reduction. This should reduce annual interest payments by the same proportion, saving £4 Billion per year which would put the government into surplus. That alone would get out AAA rating back, and further reduce the cost of debt.

Of course, it won’t happen as the British public are irrationally fond of the NHS – in spite of a spate of scandals that could only happen in a state run enterprise. And of course the Unions (which includes the BMA and the RCS) would be dead against it. But then unions are inherently socialist and oppose all privatisation as it emasculates them. But, as any objective observer can see, privatisation worked well for BA, BT, and British Gas and very well for the UK, which in 1979 was in another socialism induced debt crisis. It would work well again.