the Market Soul © 1999 - 2011 Headlines

Sunday 28 March 2010

Increased Friction Costs

We start today’s article with a cry for a return to common sense and a reduction in the unnecessary Friction Cost in the economic system (especially here in Britain).
Friction Cost, in economic terms is defined as:
  1. The implicit and explicit costs associated with market transactions.
  2. The total cost, both direct and indirect, of a transaction after commissions, interest rates, taxes, research, time, and other expenses. (Financial Dictionary)
What we will be focussing on today is the ‘hidden cost’ element of Friction Costs.  As in definition 2 above, it is the Total Cost, including the economist’s ‘Opportunity Cost’ than needs to be considered in this discussion:

We start of the debate with a quote from Dean LeBaron:

“Market inefficiency exists because we do not root out their basic causes. These causes are easy enough to identify, if one looks with enough dispassion and rigor.”
As we are entering a politically charged season, we want to remind everyone of the key word in the above quotation:


We believe that too many decisions and arguments are framed in the ‘emotionally charged world’ and that too few dispassionate thinking and analysis is applied to the really big questions and problems facing us today...

Let us briefly focus on an example of what we mean by ‘hidden costs’:

This is a criticism of British legislative fervour and spurious targeted ‘efficiency’ gains.  This leads to sub-optimal solutions.

Our actual real life example:

By April 2011, most businesses and individual subject to the ‘Self-Assessment’ tax regime must file online, irrespective of size or individual circumstance.  Nothing wrong with these facts so far.  However, we are still embroiled and faced with legacy Information Technology systems that cannot cope with the 21st Century IT revolution and government collection tax collection regime aspirations.

A typical example is where certain legal entities (Limited Liability Partnerships) are forced to file online, not with the HMRC’s system and software, but have to purchase additional commercial software to file (An example of a friction cost, that is not very clearly recognised).

Further to this, should the entity actually comply and file their tax return online and in time, the legacy systems at the HMRC, does not automatically recognise this fact, even though an acknowledgement of receipt has been issued by the HMRC’s system.
The actual Tax Return submission is acknowledged, but not the physical filing of the data.  The consequence is that a penalty notice is sent to each partner (another friction cost) and has two consequences:
  1. HMRC and The Treasury has made a false penalty determination, but the revenue gets recognised  in the HMRC’s accounts, therefore falsely inflating the tax takes
  2. The business has to incur another Friction Cost as they have to respond to the penalty determination and dispute the claim.
Therefore a compliance costs has escalated into an opportunity cost as the individuals in the firm have to allocate time and resources in dealing with more unnecessary compliance mitigation work by refuting the spurious penalty determinations.
When will we recognise in this country that the process should not be:
  1. Create a target
  2. Legislate the target
  3. Then build the solution process
  4. Beat up the citizens for not being able to comply
But Should be:
  1. Build the solution
  2. Integrate the solution
  3. Test the solution
  4. Create the target
  5. Legislate the target...
This way we will create a new culture of efficiency, compliance and citizenship that respects and endures the necessity of tax regimes to deliver wealth creating opportunities for all willing and able participants in the system.

theMarketSoul ©2010

Should you experience any taxation compliance challenges, please do contact us on theMarketSoul ©1999 - 2010
(Click the name for a link to your email client)
Further themes and related issue to the above debate are:
  1. XBRL compliance
  2. Annual Accounts submissions at Companies House

Saturday 20 March 2010

The Great Money Deception - Part I

We will interrupt our series of articles on ‘The Trouble with Innovation’ and begin to weave in between those conversations, a more fundamental argument to help enlighten the debate and understanding around the differences between ‘Monetary Economics’ and ‘Real Economics’.

The basic themes of this series of articles will be around growth and shrinking in the economy, value and money measurements.

This will be a layman’s guide to understanding the differences and principles of Monetary Economics.  We realise that in casual conversations with finance and business professionals, there is a basic misunderstanding of what Monetary Economics is and how it impacts on the broader or ‘Real Economy’.

Our quick and ready definition of Monetary Economics is this:  Money and currency is only a temporary measure of value.

More sophisticated definitions include the Wikipedia definition as: “Monetary economics is a branch of economics that historically prefigured and remains integrally linked to macroeconomics.[1][2][3][4][5][6] It provides a framework for analyzing money in its functions as a medium of exchange, store of value, and unit of account.”

Another definition is:  “An economic theory, the proponents of which argue that economic variations, such as changes in prices and output, are primarily the result of changes in the money supply. (Thus, the Federal Reserve Board is the most important economic policymaker in the country.) Proponents of monetarism believe that changes in the money supply precede changes in other economic variables, including stock prices, and that a rational policy calls for moderate, steady increases in the money supply.” (See the link monetarism).

Now we can get bogged down in definitions and we realise the dangerous of always taking the top two or three definitions offered by Google search at face value.

An example of a textbook definition of monetarism is: “a range of views which emphasise the role of money in the operation of the economy system”.  At this point we need to mention that it is a contrast to Keynesian economics, which is being applied in various degrees in most Western governments at the moment, in order to support the Economic System as a whole.

However, Michael Foot, an ex Labour Opposition leader in 1983 made unhelpful comments such as: “monetarism is a worldwide disease” (The Economics of Taxation, Prentice Hall, 7th Edition, we linked to the 9th Edition).

Turning to an analysis of the Wikipedia definition we focus on the key phrases of ‘measure of value’, ‘store of value’ and ‘unit of account’.

Nowhere in this definition does it mention measurement of output or production, the key building block of the real economy.

Therefore, we conclude this first introductory article by making the clear distinction between money as a measurement tool and unit of account and real output or production being the building blocks of economic activity.

In the next instalment of this article we will define output, activity and production and then start making the stark contrasts between what monetary and real economics really are.

Let’s get the basics of economic language right and move on towards a better appreciation and understanding of the intricacies and interplays of economic discourse and activity.

theMarketSoul ©2010

Wednesday 17 March 2010

The Trouble with Innovation – Part 5

As CeBIT 2010 ended this series of articles will move forward from the baseline discussed do far.
In the last article Part 4 we alluded to Risk and the positive Risk Management strategy of Value Based Principles.  In order to conclude the next two steps into Value Creation Chain, we need to focus on ‘Value Management’ and ‘Value Measurement’.
Firstly then, value management:

Managing the Value

We highlighted the seven Value Drivers in the previous article and below we elaborate on what lies behind the logic of each:

1. Sale Growth Rate

As the starting point profit and growth planning must set a solid platform to help drive the organisation forward.  Whether the approach is to focus on product or market development, or a combination of both, we help identify the resource allocation pressure and decision points, in order to maximise the return on effort invested.
As a top line focus point Sales Growth helps galvanise the organisational management and employees to identify suitable market opportunities to pursue to overall sales or set-off objectives.

2. Operating Margin

Operating margin becomes the focal point for operational efficiency and cost management strategies.  During the recession most organisations have looked long and hard at this particular area, partly because sales growth have suffered quite severely, but also  because they have realised that in any growth cycle such as we experienced between 2003 – 2007, ‘organisational operational  padding’  have added unwarranted inefficiencies to their operating processes.
The conundrum at the moment facing most organisations is the question of how to drive sales forward and upward, with the reduced operational cost base in place.  The two major levers of Sales Growth and Operational Cost need to be manipulated with the utmost delicacy and ‘a very steady hand on the tiller’.

3. Cash Tax Rates

It is a given that the focus of most western governments will be on maximising Treasury tax takes over the next few years, in order to manage the huge fiscal stimulus packages introduced to support the economies.  We expect quite a militant and aggressive approach in this area and a deluge of mitigation and profit extraction strategies to drive this ‘opportunity cost’ of business (your licence to operate fee) down.  This is an area best left to the specialist is the area, however, it is still a value investment of your time to keep a beady eye on this ‘hidden value driver’.

4. Fixed Capital Investment

Financing and timing are the two major factors to consider in Fixed Capital Investment area of your business.  A creative off balance sheet financing strategy might assist in extracting value in this area; however, the key issue is to have the capital infrastructure in place to support your organisational objectives.  Taking advantage of distressed assets values might will set up and gear the organisation towards supporting the initial Sales Growth driver.

5. Working Capital Investment

Liquidity and liquidity risk management are the key focus areas in maximising value in your working capital management processes.

6. Cost of Capital

A one-off opportunity to positively manage the organisational cost of capital down has emerged at the end of this recessionary cycle; however, it is up to the astute organisational leadership to take advantage of the opportunity.  We recognise that a multitude of factors currently exist which might make taking advantage of this unique opportunity quite challenging, however, if the platform and measurement dashboards, combined with the organisational structure and resources are in place to take advantage of the historically low cost of capital rates, we encourage every organisation to take advantage of this potential opportunity.

7. Planning horizon

Clearly understanding that a longer term timeframe is genuinely beneficial, combined with regulatory factors encouraging the long view at the moment, will help the organisational leadership grasp both drivers of value in this factor, namely the current departure point and value calculation and the ultimate exist strategy value or Terminal Value of the organisation.

Measuring the Value

Graphical Key Performance and Risk Indicators combined with Short Interval Cycles (SICs) focus management effort on taking corrective action very quickly.  The unique pro-active dashboards help turn around the reactive Management Information Systems and becomes a vital and integral part of the overall strategic management philosophy underpinning the Risk Based Value Management practice be have developed.
In the next article we will focus on measuring the value in more detail and on Entropy, an article posted by a fellow blogger at Cheap Seats.  We will draw our inspiration from those thoughts.

theMarketSoul ©2010

Monday 15 March 2010

The trouble with Innovation – Part 4

Risk! This will be the main theme of this part of the series we are investigating. As highlighted in part 3 Risk Management and Sustainability are key factors to consider in unleashing Innovation and creativity in the organisation’s life cycle.

However, in the word life-cycle we already have a clue as to the inevitability of decline and ultimately the death of the enterprise, per se.

In the current climate, Risk Management has a pure Compliance and Regulatory connotation.

We assert that there are two sides to the Risk Management coin:

A Negative and Positive approach to Risk Management. In the negative worldview, risk is associated with mitigating and loss prevention strategies, namely compliance and regulatory requirements in addition to downside risk alleviation.

A Positive Risk Management framework would look to the up side and Value Creation potential of enterprise governance frameworks.

The overall philosophy and practical application of the model is embodied in a sound risk management framework underpin by the convergence of Internal Auditing and Financial Controls and the Value drivers inherent in the Value Based Management approach, namely

(1) Creating Value

(2) Managing Value

(3) Measuring the Value created

The focus in measuring and managing for value and thus superior organisational performance is encapsulated in performance and investment drivers such as:

a. Sales Growth

b. Operating Margin

c. Cash Tax rates

d. Fixed Capital Investment

e. Working Capital Investment

f. Cost of Capital

g. The Planning Period

Creating Value

The departure point in creating value ultimately has to have Innovation as one of the factor inputs required to create Economic Value in any organisation. This in combination with other economic factor inputs such as capital, land and labour are the foundation building blocks of any organisational sustainable growth approach.

Therefore, combining resource inputs such as capital and labour with innovation, in the right mix and during the right time frame are the sustained growth drivers in any organisation.

In the next article in this series we will address the next step in the Value Based Management framework, namely ‘Managing Value’ and the further step of ‘Measuring Value’.

theMarketSoul ©2010

Friday 12 March 2010

The trouble with Innovation – Part 3

In this part of our discussion regarding Innovation, we want to turn the focus to the UK market place and some unsung heroes, some tirelessly working in the trenches, others ‘fishing in the ocean of opportunity’ at the moment, not being ‘on assignment’.

We are referring to Independent Consultants and Senior Interim Managers.  How exactly they fit into the innovation debate will hopefully become clearer very soon.

And the main issues and theme we need to explore is that of Trust.

Part of the challenge most Independent Consultants and Interim Managers find themselves facing is the fact that engaging assignments and workflows don’t always flow or fit together.  The challenge is that when on assignment, they are not feeding or seeding the pipeline enough for when the current assignment ends and when the assignment has ended, their next role or project might be weeks of months away from coming to fruition.

There is in effect no clear matching of supply and demand in the market place, as most assignments and engagements are won on relationships and not pure experience, skills and competencies.

That is particularly true if you ‘swim down the narrow channel’, by this we mean only follow one strategy in procuring your next assignment; which generally means you speak mostly to Executive Search or other Recruitment Consultancies.

It is in this area that we feel very little positive innovation and engagement has occurred over the last few years. 

Now we acknowledge that the internet has potentially speeded up and shortened the entire recruitment cycle significantly, however, is this innovation or just advancement?

Our assertion is that the internet was pure advancement, not innovation in this sector.

It is furthermore our belief that most searches and matches occur on a pure issue of timing and serendipity alone.  There is no effective clearing house to match skills to needs in a way that clears the market effectively and efficiently.  For this we evidence a report commission by ExecutivesOnline in September 2009 (see ExecutivesOnline Interim Management Trend Update) in which it was found that 48% of Interim Managers where ‘Not on Assignment’ as of September 2009, the euphemistic phrase for being out of work.  If there were such a ‘clearing house’ the unemployment rate amongst Interim Managers and Independent Consultants would have been  markedly lower, but probably higher than the national Unemployment rate, due to a variety of other  socio-economic factors, including luxury factors such as choice, to mention but one.

Sustainability and risk management and more specifically innovation in these two critical business management areas are what we desperately lack at this key juncture in our economic cycle.  We will address these two themes in further in future articles.

To conclude our assertions made in part 3 of our exploration on the trouble with innovation is that now there should be an opportunity created to more effectively match supply and demand in the labour market.  However, there is a fundamental disconnect between public sector and private sector and permanent and temporary work.  This statement is a blatant generalisation, however public sector and permanent employment does not conform to pure market driven principles, where tenure is protected, to some extent, from external market forces.  On the contrary many an independent consultant has had to contend with the shock of a new equilibrium and have realised that to ‘stay in the game’ they have had to adjust their prices downward, sliding back down the supply curve, in order to try and find the intersection with the demand curve.  On oversupply of consulting and interim management talent has ensured that the market clearing price for services have been adjusted markedly lower, than was the case before the credit quake of 2008 – 2009.

So what we are looking for is innovative new business models that will ensure the exploration of a new and sustained equilibrium and market for talent and talent matching in the future.

theMarketSoul ©2010

Tuesday 9 March 2010

What do you do?

One of the comments we picked up on during the CeBIT 2010 fair was this: 

At around 80% of the exhibitor booths it is very difficult to figure out what the company does or sells.

Now we might split hairs over the accuracy of the 80% estimate, but we want to focus on the underlying theme in the message.  Are you making it clear exactly what you do?

And this is exactly where we run into some major difficulties.  There are a multitude of issues and factors to consider in marketing what we sell or do.

However, what we have experienced in the past is that it is mostly a process drive issue.  If you sell only one or two products or service lines you focus almost exclusively on the customer or client.  Transform the organisation into a multiple portfolio product and services supplier and the situation is vastly different.  It has something to do with the organisational life-cycle.  Mature organisations are so often tied up in bureaucratic inward focussed processes that they lose sight of the ultimate objective of serving their customer base as effectively as possible with internal processes promoting efficiency. 

However, what tends to happen is that the customer gets neglected, the sales message distorted and the internal political processes and empire building takes over.  Egos drive the internal bureaucracy, the buck gets passed from silo to silo and the organisational drift away from value creation is well and truly established.

And not focussing on the key sales message of what we offer our customers and the consumers in large is very evident in your display and ‘sales pitch’ at exhibitions and fairs.

Therefore, go back after the event; think about the core purpose of value creation, value management and value measurement the mantra of Value Based Management and combine this with a Risk Based Approach to managing the processes and get everyone in the organisation to understand and apply Value Based principles so that you can serve you true constituency, namely your customers first. 

This will please the shareholders as economic value gets created and the other stakeholders will benefit in proportion as long as the focus is in the right place.

Remember that a Value Based Management approach has a key value driver focus and it is both a skill and art in getting the balance right.  In future articles we will elaborate on the seven key value drivers which underpin the Value Based Management approach.

We want to conclude the ‘What do you do?’ question with a short note on performance management and bonuses.  At a broad level part of the issue underlying performance bonuses is that the focus is mostly on divisional or individual business unit performance, rather than on enterprise performance.  Again the epitome of the silo and bunker mentality.  Unless the enterprise can thrive and is sustainable, it does not matter how successful the individual business unit or division is.  Successful business units can always be divested of if the choice is made by the executive leadership team and then the unpleasant consequences of dancing to new master’s tunes are an inevitable opportunity cost to individuals. 

So rather than fall into the trap of financial underperformance, wasted energy and frustration, ensure that we understand Enterprise Value Creation and Enterprise Value Measurement, to ensure longer term sustainable business practices.

theMarketSoul ©2010

Saturday 6 March 2010

The Trouble with Innovation – Part 2

theMarketSoul decided to talk to some delegates and attendees at CeBit 2010 with respect to the problem and challenges faced by Europe in particular, regarding Innovation.

The statements made in the previous blog post did not go down well with the mixed German, Belgium and Italian (see The Trouble with Innovation - Part 1).

To recap briefly we stated that Europe did nor posses two critical factors to cradle and encourage innovation, one being a common language and two a raw capitalist model that pursued profit above all else.

With the pure profit motive there is a problem in any case and we will address this in later discussions, suffice to say we will make a distinction between profit motive and creating value.  From an economic perspective we believe strongly in the superior notion of ‘Creating Value’ over the pure profit motive and the current credit quake (Comments from a lay-economist on the credit quake 2008) has created the opportunity for us to reflect and re-evaluate our current economic models.

However, to return to our Innovation discussion the defence the Europeans put up against our controversial statements were this:

Agree with the language issue, through heavy accents, disagreed partly with the profit issues, however we had not discussed anything regarding Protectionism.

True, we hold our hands up to this accusation.

So to throw or lob stones back across the Atlantic pond to our US cousins; the States very, very fiercely protects its own market and interests.  Intellectual Property and property rights are very well developed and ingrained in the psyche of the American nation.  But the logical question to our European colleagues are this:  So why do the Americans protect their IP and Innovation so well, but we tend to give it away, losing out to both the Americans and Chinese in the process?

For this we weren’t presented with a coherent argument yet, so it is a theme we shall explore further other the next few days, whilst attending the CebIt 2010 trade exhibition.

Europe does have the framework and platform in place in order to coherently create and then enforce property and Intellectual property rights, however, integrating culture and therefore nation state laws into a single European framework is not any easy endeavour and should not be attempted without a clear focussed vision.  Therefore, we treat all the issues with kid gloves and the Lisbon Treaty and ratification processes most countries adopted does bear serious questioning and potential legal challenge.  We are not aware of any serious tests in this arena, but acknowledge our ignorance and would appreciate further clarification, should we have the wrong end of the argument in our grasp.

Therefore in conclusion of this post, we have invited two questions to be clarified:
1.       How can Europe better protect its Intellectual Property and Innovation from leaving the Greater Continental Europe?
2.       Are there any legal obstacles in the European integration project that hinders Innovation protection and enforcement of IP and other property rights?

We look forward to finding out the answers over the course of the next few days, whilst on our Continental European jaunt.

theMarketSoul ©2010

Thursday 4 March 2010

The trouble with Innovation - Part 1

Today we address one of the critical and key factors of production, it is a factor we have severely neglected addressing earlier in this forum.  It is about Innovation

Speaking to a few delegates and attendees at CeBit 2010 we found that most people view Innovation as a key driver in advancement.  Yet we have a big problem with innovation in Europe.

Our model is broken! 

If we investigate some of the underlying factors ‘driving’ this problem, we would point the finger at the social experiments we embarked on over the last two centuries in Europe.  The simple fact is that we just did not get on with each other.  There are two ways of accumulating wealth very quickly, one of them being to steal it and the other is to trade activity to get it.  However, in both choices you side require a lot of the other factors of production, namely land and capital and labour.

If neither of these two options are open to you then you need to follow the slow road of progress.  But here is where Innovation comes to the fore as an enabler. 

The USA is a far better incubator and fertile soil for entrepreneurial and innovative development.

In Europe we lack the cohesion of two factors that drove American innovation:  (1)  A common language (English) and (2) a common goal (making money).

Irrespective of the language issue, we treat ‘raw’ capitalism with disdain and suspicion in Europe, whereas the States embraces this  with open gusto, so much so that the current administration is frustrating its efforts to burst forth once more as a power house of  growth. 

Now we are not advocating abandoning regulation per se, what we would ideally like to see is innovation in the Regulatory space too, where regulation is thought through on an end to end basis, with due consideration for the law of unintended consequences that knee jerk regulation sets in motion.

So the hope in Europe now is this:  We have been building the platform for collaboration for a while now, with the EEC, EC and EU experiments and we now have continuity at the top with an appointed President and Foreign Secretary.

Lets bury the hatchet and utilise the platform of collaboration in order to launch and harness the power of ‘Innovation Incubation’, thereby eliminating the wasted effort and duplication of processes currently taking place and shaping our European hinterland.

Let’s explore these ideas further in future posts.

theMarketSoul ©2010

Wednesday 3 March 2010

Signals and Green Computing

theMarketSoul is at CeBit 2010 in Germany this week.  Arrived yesterday and what struck us immediately is the focus on Green Computing.

This makes us think and turn to the issue of signals.  Signals in a system and economy, whatever people interpret, analyse and utilise to make and take decisions on.

And then how very ‘unsophisticated’ we are about the application and utilisation of the information these ‘measurement instruments’ and signals give us.

Humans have impacted this planet for around 20,000 – 50,000 years (more accurately around 10,000 – 15,000 years that we have measured ourselves), the plant has been in existence for around 3 – 5 billion years, so when we talk about the timeframe involved in measuring the human impact on the planet , the fact that purely on a matter of scale, our impact is statistically insignificant compared to the timescale that the earth has existed.

And so it has been with the money supply and economic signals the sages of our time, namely Central Bankers and economists had to interpret.

The problem comes down to a lack of appreciation, not through any fault of our own, except for the general failures of the education system, to teach and turn out conveyor belts of ‘Analysts’, rather than going further and moving into the space of innovation where the key skills set of Synthesis is required.

For years we gorged on the over supply of credit and money, however widely Money Supply is defined, and the measurement instruments at our disposal had failed to keep us from ‘banishing Boom and Bust’ cycles.  It is almost as if the more measure and the more we interpret the data, the further we move away from finding the answers we require to ‘keep the beast on a sustainable course’.

So has it been a failure of the measurement instruments or the people interpreting those measurement instruments or have we ‘chopped the timeframe into too small chucks’; meaning that we either overreact or sometimes do not act enough to intervene and steer a clear course through the mists and hidden obstacles on our life’s journey.

This is where we return to CeBit 2010 and the Green Computing issues.

It seems that the Computer and ICT industry has now reached the maturity point where they are confident enough to re-engineer the processes and scale of ‘things they do’ in order to help reduce their ‘Carbon Footprint’. 

Cloud Computing, no matter how you define it, still means that somewhere, someone has to own large tracts of real estate to house the computer farms on.  This in turn consumes energy and as a by-product increases carbon emissions. By moving some or all of your computing and application needs from your own servers and desk tops to  someone else’s, the fundamental truth still remains that all you have really achieved it to outsource and move the problem up the value chain somewhere.

However, the question really is what the landscape will look like in 50 years time, when on reflection we can look back at the way and shape of the world, with problems and challenges packaged into new shapes and sizes.   Of that theMarketSoul has not seen very much evidence at CeBit 2010 yet, but there is an awful lot of real estate and distance to cover at CeBit 2010, so watch out for some more information and or a retraction in due course.

The blog today was brought to you by Wireless Technology.

theMarketSoul ©2010