Panorama and HSBC: wasted airtime

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Parking emotions to one side, companies percentage of total government tax income has been relentlessly trending down in every major economy for over 50 years. Given the size of savings needed to support the illusion of austerity to the bond markets (but don’t look too closely at booming public sector debt levels), the content of this weeks Panorama was sold heavily as a “look everyone, large amounts of money squirrelled away by the rich here”. Sounded like an interesting perspective, so I recorded it on iPlayer and watched it on the 40 minute train journey into London this morning.

Unfortunately, largely content free. You could summarise it as:

  • A Whistleblower in an HSBC facility in Switzerland leaked account details of many people holding large amounts of money in accounts there
  • Many people ended up coughing up extra tax money to HMRC as a result of the data leak
  • the bank gave advice to wealthy clients to lower their tax bills through schemes designed expressly for this purpose
  • Bank says they’ve reformed such practices
  • another Whistleblower says in her experience, they have not
  • Director at the centre of managing HSBC at the time was ennobled and hired as an advisor to David Cameron
  • more could be done (lots of see saws between the words “Avoidance” and “Evasion”)
  • err, I think that’s it

It then got surreal when the politician interviewed was one widely known as one whose £1.8m trust fund is fed from her fathers company that pays an effective tax rate of 3%.

So, the pursuit of a journalist who could do a thorough job and come out with some compelling (and actionable) story here remains unfulfilled. In the meantime, a few people are watching my question on Quora for which I can find no answer:

What benefits accrue to the UK by permitting large amounts of money to be held offshore in British Crown Dependencies and British Overseas Territories?

Any ideas? I sometimes wish I could get John Lanchester (one writer who is thorough and funny too) to have a crack at answering that.

Ians Brain goes all Economics on him

A couple of unconnected events in the last week. One was an article by Scott Adams of Dilbert Fame, with some observations about how Silicon Valley was really one big Psychological Experiment (see his blog post: http://dilbert.com/blog/entry/the_pivot/).

It’s a further extension on a comment I once read by Max Schireson, CEO of MongoDB, reflecting on how Salespeoples compensation works – very much like paying in lottery tickets: http://maxschireson.com/2013/02/02/sales-compensation-and-lottery-tickets/.

The main connection being that Salespeople tend to get paid in lottery tickets in Max’s case, whereas Scott thinks the same is an industry-wide phenomenon – for hundreds of startup companies in one part of California just south of San Francisco. Both hence disputing a central ethos of the American Dream – that he who works hard gets the (financial) spoils.

Today, there was a piece on BBC Radio 2 about books that people never get to finish reading. This was based on some analysis of progress of many people reading Kindle books; this being useful because researchers can see where people stop reading as they progress through each book. By far the worst case example turned out to be “Capital in the Twenty-First Century” by Thomas Piketty, where people tended to stop around Page 26 of a 700-page book.

The executive summary of this book was in fact quite pithy; it predicts that the (asset) rich will continue to get richer, to the expense of the rest of the population whose survival depends on receiving an income flow. Full review here. And that it didn’t happen last century due to two world wars and the 1930’s depression, something we’ve not experienced this century. So far. The book just went into great detail, chapter by chapter, to demonstrate the connections leading to the authors thesis, and people abandoned the book early en mass.

However, it sounds plausible to me; assets tend to hold their relative “value”, whereas money is typically deflationary (inflation of monetary values and devaluation through printing money, no longer anchored to a specific value of gold assets). Even the UK Government factor the devaluation in when calculating their future debt repayment commitments. Just hoping this doesn’t send us too far to repeat what happened to Rome a couple of thousand years ago or so (as cited in one of my previous blog posts here).

Stand back – intellectual deep thought follows:

The place where my brain shorted out was the thought that, if that trend continued, that at some point our tax regime would need to switch from being based monetary income flows to being based on assets owned instead. The implications of this would be very far reaching.

That’ll be a tough sell – at least until everyone thinks we’ve returned to a feudal system and the crowds with pitchforks appear on the scene.

For Enterprise Sales, nothing sells itself…

Trusted Advisor

I saw a great blog post published on the Andreessen Horowitz (A16Z) web site asking why Software as a Service offerings didn’t sell themselves here. A lot of it stems from a misunderstanding what a good salesperson does (and i’ve been blessed to work alongside many good ones throughout my career).

The most successful ones i’ve worked with tend to work there way into an organisation and to suss the challenges that the key executives are driving as key business priorities. To understand how all the levers get pulled from top to bottom of the org chart, and to put themselves in a position of “trusted advisor”. To be able to communicate ideas that align with the strategic intent, to suggest approaches that may assist, and to have references ready that demonstrate how the company the salesperson represents have solved similar challenges for other organisations. At all times, to know who the customer references and respects across their own industry.

Above all, to have a thorough and detailed execution plan (or set of checklists) that they follow to understand the people, their processes and their aspirations. That with enough situational awareness that they know who or what could positively – and negatively – affect the propensity of the customer to spend money. Not least to avoid the biggest competitor of all – an impression that “no decision” or a project stall will leave them in a more comfortable position than enacting a needed change.

When someone reaches board level, then their reference points tend to be folks in the same position at other companies. Knowing the people networks both inside and outside the company are key.

Folks who I regard as the best salespeople i’ve ever worked with tend to be straight forward, honest, well organised, articulate, planned, respectful of competitors and adept at working an org chart. And they also know when to bring in the technical people and senior management to help their engagements along.

The antithesis are the “wham bam thankyou mam”, competitors killed at all costs and incessant quoters of speeds and feeds. For those, i’d recommend reading a copy of “The Trusted Advisor” by Maister, Green and Galford.

Trust is a prize asset, and the book describes well how it is obtained and maintained in an Enterprise selling environment. Also useful to folks like me who tend to work behind the scenes to ensure salespeople succeed; it gives some excellent insight into the sort of material that your sales teams can carry into their customers and which is valued by the folks they engage with.

Being trusted and a source of unique, valuable insights is a very strong position for your salespeople to find themselves in. You owe it to them to be a great source of insights and ideas, either from your own work or curated from other sources – and to keep customers informed and happy at all costs. Simplicity sells.

SaaS Valuations, and the death of Rubber Price Books and Golf Courses

Software Services Road Signs

Questions appear to being asked in VC circles about sky-high Software-as-a-Service company valuations – including one suggestion i’ve seen that it should be based on customer acquisition cost (something I think is insane – acquisition costs are far higher than i’d ever feel comfortable with at the moment). One lead article is this one from Andreessen Horowitz (A16Z) – which followed similar content as that presented on their podcast last week.

There are a couple of observations here. One is that they have the ‘normal’ Enterprise software business model misrepresented. If a new license costs $1000, then subsequent years maintenance is typically in the 20-23% of license cost range; the average life of a licensed product is reckoned to be around 5 years. My own analogue for a business ticking along nicely was having license revenue from new licenses, and support revenue from maintenance (ie: 20% of license cost, for 5 years) around balanced. Traditionally, all profit is on the support revenue; most large scale enterprise software vendors, in my experience, assume that the license cost (less the first year maintenance revenue) represents cost of sales. That’s why CA, IBM and Oracle salespeople drive around in nice cars.

You will also find vendors routinely increasing maintenance costs by the retail price index as well.

The other characteristic, for SaaS companies with a “money in this financial year” mindset, is how important it is to garner as many sales as is humanly possible at the start of a year; a sale made in month 1 will give you 12 months of income in the current financial year, whereas the same sale in month 12 will put only 1 months revenue in the current fiscal. That said, you can normally see the benefits scheduled to arrive by looking at the deferred revenue on the income statement.

Done correctly, the cost of sales of a SaaS vendor should be markedly less than that of a licensed software vendor. Largely due to an ability to run free trials (at virtual zero marginal cost) and to allow customers to design in an SaaS product as part of a feasibility study – and to provision immediately if it suits the business need. The same is true of open source software; you don’t pay until you need support turned on for a production application.

There is also a single minded focus to minimise churn. I know when I was running the Individual Customer Unit at Demon (responsible for all Consumer and SME connectivity sales), I donated £68,000 of the marketing budget one month to pay for software that measured the performance of the connectivity customers experienced – from their end. Hence statistics on all connectivity issues were fed back next time a successful connection was made, and as an aggregate over several 10’s of 1000’s of customers, we could isolate and remove root causes – and hence improve the customer experience. There really is no point wasting marketing spend on a service that doesn’t do a great job for it’s existing users, long before you even consider chasing recruitment of new ones.

The cost per customer acquired was £30 each, or £20 nett of churn, for customers who were spending £120/year for our service.

The more interesting development is if someone can finally break the assumption that to sell Enterprise software, you need to waste so much on customer acquisition costs. That’s a rubber price book and golf course game, and I think the future trend to use of Public Cloud Services – when costs will go over a cliff and way down from todays levels – will be it’s death. Instead, much greater focus on customer satisfaction at all times, which is really what it should have been all the way along.

Having been doing my AWS Accreditations today, I have plenty of ideas to simplify things out to fire up adoption in Enterprise clients. Big potential there.

What do IT Vendors/Distributors/Resellers want?

What do you want? Poster

Off the top of my head, what are the expectations of the various folks along the flow of vendor to end user of a typical IT Product or Service? I’m sure i’ve probably missed some nuances, and if so, what is missing?

Vendors

  • Provide Product and/or Services for Resale
  • Accountable for Demand Creation
  • Minimise costs at scale by compensating channels for:
    • Customer Sales Coverage and Regular Engagement of each
    • Deal Pipeline, and associated activity to increase:
      • Number of Customers
      • Range of Vendor Products/Services Sold
      • Customer Purchase Frequency
      • Product/Service Mix in line with Vendor objectives
    • Investment in skills in Vendor Products/Services
    • Associated Technical/Industry Skills useful to close vendor sales
    • Activity to ensure continued Customer Success and Service Renewals
    • Engagement in Multivendor components to round out offering
  • Establish clear objectives for Direct/Channel engagements
    • Direct Sales have place in Demand Creation, esp emerging technologies
    • Direct Sales working with Channel Partner Resources heavily encouraged
    • Direct Sales Fulfilment a no-no unless clear guidelines upfront, well understood by all
    • Avoid unnecessary channel conflict; actively discourage sharing results of reseller end user engagement history unless presence/relationship/history of third party reseller with end user decision makers (not just purchasing!) is compelling and equitable

Distributors

  • Map vendor single contracts/support terms to thousands of downstream resellers
  • Ensure the spirit and letter of Vendor trading/marketing terms are delivered downstream
  • Break Bulk (physical logistics, purchase, storage, delivery, rotation, returns)
  • Offer Credit to resellers (mindful that typically <25% of trading debt in insurable)
  • Centralised Configuration, Quotation and associated Tech Support used by resellers
  • Interface into Vendor Deal Registration Process, assist vendor forecasting
  • Assistance to vendor in provision of Accreditation Training

Resellers

  • Have Fun, Deliver Good Value to Customers, Make Predictable Profit, Survive
  • Financial Return for time invested in Customer Relationships, Staff knowledge, Skills Accreditations, own Services and institutional/process knowledge
  • Trading terms in place with vendor(s) represented and/or distributor(s) of same
  • Manage own Deal Pipeline, and associated activity to increase one or more of:
    • Number of Customers
    • Range of Vendor Products/Services Sold
    • Customer Purchase Frequency
    • Product/Service Mix in line with Vendor objectives
    • Margins
  • Assistance as needed from Vendor and/or Distributor staff
  • No financial surprises

So, what have I missed?

I do remember, in my relative youth, that as a vendor we used to work out what our own staffing needs were based on the amount of B2B revenue we wanted to achieve in each of catalogue/web sales, direct sales, VARs and through IT Distribution. If you plug in the revenue needs at the top, it gives the number of sales staff needed, then the number of support resources for every n folks at the layer before – and then the total advertising/promotion needed in each channel. It looked exactly like this:

1991 Channel Mix Ready Reckoner

Looking back at this and comparing to today, the whole IT Industry has gotten radically more efficient as time has gone by. That said, I good ready reckoner is to map in the structure/numbers of whoever you feel are the industry leader(s) in your market today, do an analogue of the channel mix they use, and see how that pans out. It will give you a basis from which to assess the sizes and productivity of your own resources – as a vendor at least!

Avoiding the strangling of your best future prospects

Escape Velocity Book Cover

I’m a big fan of the work of Geoffrey Moore, whose seminal work “Crossing the Chasm” i’ve cited before (in fact, the one page version is the #1 download from this blog). However, one of his other books is excellent if you’re faced with a very common issue in High Technology companies; having successful, large product line(s) thats suck all the life out of new, emerging businesses in the same enterprise. The book is “Escape Velocity”:

Unlike Crossing the Chasm, i’ve not yet summarised it on one sheet of A4, but have outlined the major steps on 14 slides. It sort of works like this:

The main revenue/profit engines in most organisations occur between the early and late majority consumers of the product or services; that can last a long time, denoted by the Elastic Middle:

Product Lifecycle

That said, there are normally products that sales will focus on to drive the current years Revenue and Profit targets; these routinely consume a majority of the resources available. Given a fair crack of the whip, there are normally emergent products that while not material in size today, are showing good signs of growth, and which may generate significant revenue and profits in the 1 to 3 year future. There are also likely to be some longer term punts which have yet to show promise, but which may do so in a 3 to 6 year timeframe:

3 Horizons

The chief way to categorise products/services against the relevant Product Horizon is to graph a scatter plot of revenue or profit for each line on one axis, against growth on the other (10% growth is a typical divider between the High and Low growth Quadrants):

3 Horizons to Category Power

Any products or services on Horizon 0 needs to be shielded from core resources and to be optimised to be cash generative while it lasts. The other product/service horizons are segregated and typically have a different go-to-market team (with appropriate Key Performance Indicators) assigned to each:

Focus Areas

The development pattern for Horizon 2 products are typical of the transition from “Chasm” into the “Tornado” stage on the normal Chasm lifecycle diagram. It’s a relentless learning experience, ruthlessly designing out custom services to form a standard offering for the market segments you target:

Free Resources to Context

As you execute through the various sales teams and move between financial years, there’s a lot of introspection to ensure that the focus on likely winners continues is appropriately ruthless:

Action

The sales teams driving Horizon 2 offerings should be seeking to aim high in customer organisations and drive strategies to establish a beachhead, then dominate, specific focus segments. In doing so, be mindful that a small supporting community tends to cross reference each other. Good salespeople get to know the people networks that do so, and work diligently to connect across them with their colleagues.

Trusted Advisor

The positioning of your Horizon 2 offers tend to vary depending on price and benefit; this in turn looks about like the findings from another seminal work, “The Discipline of Market Leaders”. That book suggested that really successful companies put their relentless effort into only one of three possible core competences; to be the Product Innovator, to be Customer Intimate or to be Operationally Excellent:

Benefit Sensitivity

Once you have the positioning, the Horizon 2 sales team relentlessly focus on the key people or organisations that make up their target market segment(s):

Drive to Share of Segment

The number of organisations they engage differ markedly between Enterprise (Complex) and Consumer (Volume) markets:

Target Customers

So the engagement checklist needs to address all these areas:

Target Market Initiatives

The sales team need to be able to articulate “What makes their offer different”:

Differentials

Then pick their targets:

Growing Horizon 2

Above all, be conscious who your competitors are and where you’re positioned against them:

From Whom

That’s largely it. Just a process to keep assessing the source of future revenue and profits, and ensuring you segment your sales teams to drive both this years business, and separately working on the green shoots that will provide your future. And avoiding what often happens, which is that the existing high revenue or high profit lines demand so much resources that they suffocate your future.

You can probably name a few companies that have done exactly that. Yours doesn’t need to be the next one now!

Cutting Software Spend: a Checklist

Arrow going down

No real rocket science, but if you’ve been put in a position to try to make savings on your software spend, this is the sort of checklist i’d run down. It is straight off the top of my head, so if there are nuggets you know that i’ve missed, please throw a comment at the end, and i’ll improve it. The list applies whether you are looking at a single organisations spend, or are trying to reconcile the combined assets from any company merger or acquisition.

General rules:

  1. Don’t buy new when you have redundant assets already
  2. Be mindful that committing to buy in volume is lower unit cost than buying individually
  3. Beware of committing to spend over several years where the vendor prices any agreement assuming straight line deployment toward your total user base at the end of the term. Assume most of the deployment will happen much faster – and that your projected spend will front-load with large true-up costs at annual contract anniversaries.
  4. Don’t pay extra for software updates where no updates are planned in the license term
  5. Don’t pay for software you’re not using!

So, the checklist:

  1. If there is a recommended software list to be deployed for a new employee, be sure to engage HR with a weekly list of leavers, and ensure their license assets are returned to a central pool. Licenses in that central pool should be reallocated out of that pool before electing to go forward with any new purchase. I’ve seen one company save 23% of their total desktop software spend just by implementing this one process.
  2. Draw up a master list of all boxed software (termed “Fully Packaged Product” or “FPP”) that appears to have been historically purchased by the organisation. The associated licenses are normally invisible to the software vendor from a purchase history point of view. Two main uses: (a) it forms a list of what should or could be purchased at more favourable terms in the future using an appropriate volume licensing agreement and (b) it’s a useful defence if your CFO receives a spurious “demand for unpaid licenses” from a vendor. I’ve seen one case of a subsequent reconciliation of previous purchases result in an unsolicited £6m invoice being settled for £1.8m instead.
  3. Likewise, compile a list of the various software licenses purchased, per vendor. This is often complicated because a single vendors products can be purchased from multiple sources, and there are several licensing programs in every vendor. You will often find purchases made for a specific project, where an organisation wide reconciliation can take overall licensing and support prices down – but only if centralising the negotiation supports each projects goals. I have seen one such reconciliation of a vendors licenses in one large multinational company run to 80 pages (and a huge discount to bring in an end-of-financial year renewal), though most result in a 1-2 page reconciliation. You then have the data to explore available change options with a vendor or reseller of your choice.
  4. Ensure that the support levels purchased are appropriate for the use of the products. There is no point paying “Software Assurance” for the remainder of a 3 year term if no new version is scheduled to be released in that timeframe (most effective resellers will have visibility of these release pipelines if you can’t get them directly from the vendor). Likewise, you probably don’t need 24/7/365 support on an asset that is used casually.
  5. Finally, don’t buy support on products that you’re no longer using. While this sounds like a flash of the obvious, knowing what is and isn’t being used is often a lengthy consolidation exercise. There are a variety of companies that sell software that can reconcile server based software use, and likewise others (like Camwood) that do an excellent job in reconciling what is present, and used/unused, across a population of Windows PCs. Doing this step is usually a major undertaking and will involve some consultancy spend.

If the level of your buying activity is large enough to be likely to attract the attention of a vendor or reseller salesperson visiting you in person, a few extra considerations:

  1. Be conscious of their business model; it is different for PC software vendors, Enterprise Software Vendors and Vendors predominantly selling “Software as a Service” or Open Source Software based subscriptions. Likewise for the channels of distribution they employ between themselves and your organisation – including the elements of the sales processes a reseller is financially incented to follow. Probably the subject for another day, but let me know if that’s of any interest.
  2. Know a resellers and vendors fiscal quarter year, and particularly their end of financial year, date boundaries. The extent to which prices will flex in your favour will blossom at no other time like these. The quid pro quo is that you need to return the favour to commit your approved order to be placed before their order cut off schedule.
  3. Beware getting locked into products with data formats exclusive to or controlled by one supplier; an escape route with your data assets (and associated processes) intact ensures you don’t get held to future ransom
  4. Consider “Software as a Service” subscriptions wherever possible, aka pay in line with the user population or data sizes actually employed, and flex with any changes up or down. You normally absolve your IT dept from having to update software releases and doing backups for you in the price, and you should get scale advantages to keep that price low. That said, (3) still applies – being able to retrieve your data assets is key to keep pricing honest.
  5. Always be conscious of substitutable products. Nothing oils the wheels of a larger than expected discount from a vendor than that of the presence of a hated competitor. If it’s Microsoft, that’s Google!
  6. Benchmark. If you’re trading with a reseller with many customers, they have an unparalleled view of previous deals of similar dimensions to your own – including past discounts offered, special deal allowances and all the components needed to lower a price. At the very least, an assurance that you’re “getting a good deal”. I have seen one example of a project deferred when it became apparent that the vendor was giving a hitherto good customer a comparatively poor deal that time around.
  7. For multinational companies, explore the cost differences in different territories you buy through and use the software in. I did one exercise for a well known bank that resulted in a 30% drop in their unit costs with one specific vendor – two years running.

So, what nuggets have I missed? Comments most welcome.

Brilliant Budget (but please look away from the debt)

Pie Chart showing UK Government Debt

It feels a bit churlish after the Chancellor delivered a stack of pension related changes things that help me personally, but in the background I suspect something much bigger may come back to bite us all. Something just doesn’t reconcile in my brain, but park the picture above for a moment while I explain why.

While waiting for a phone call for a planned Interview by the Daily Telegraph after the Budget Speech yesterday, I threw some data into a graph the way I normally do if I don’t understand something. Picking at the result of this sort exercise is a step of me being inquisitive, trying to reconcile things that, at face value, don’t appear to add up.

Last Year

Just before the Chancellors last Autumn Statement, I was asked by my pension provider if it would be okay to give my name to the Daily Telegraph, nominally to interview me afterwards at its effect on Jane and I personally. I think because we had a SIPP plus an ISA, and there were rumoured changes to them. In the event, really little happened to either, so none of my words, nor our photographs, were used. However, one thing really bugged me, and has done ever since.

I don’t normally listen to politicians at speaking at Westminster, and indeed don’t read any Daily or Sunday Newspaper. I buy the Economist 4-6 times per year (normally when they run a Technology Quarterly, or when something topical on the cover grabs me), but outside that, I tend to dip into articles by authors I respect on the Internet at large. One of these is John Lanchester in the London Book Review, whose financial journalism is very matter of fact, entertaining and his logic backed up with well researched facts.

Brilliant Journalism

John Lanchester wrote one story in January 2013 entitled “Let’s Call it Failure“. If there’s only one article you read all year, this should be it; 4,507 words of journalism of the highest order. The one thing that my brain locked onto was, that all the talk about austerity and budget cuts, that the total amount of government spending was still headed relentlessly up every year.

With that in mind, the thing that struck me during the Autumn statement was that every statistic of financial news was a hockey stick of relentless improvement, but every number quoted, without exception, was a future projection. If you laid the actuals leading up to those projections onto the exact same graph, I think most people would think the authors were on crack. Bad, worse, worse, (into projections), better, better, better.

Up stood Ed Balls, the Shadow Chancellor, and I thought he’d zero in on that like a rabid dog. Instead, we got given a bit of a random rambling and wide derision, but no useful repost. With that, I largely shook my head and went back to my work.

Budget 2014

Fast forward to the March 18th 2014 budget. The Telegraph asked again if they could interview me afterwards (they had our pictures ready to go too). So, I bought three newspapers in the morning, summarised the structure of what I was likely to say, and for the second time ever in my life, listened live to a Government budget related speech.

As before, the Chancellor was heavy on future GDP percentage increase projections, leading to decreases in projected borrowing, crossing the line to having income exceeding spend sometime in 2018. On the face of it, progress. This time, no mention of further targeting of the Welfare budget, which I know is 2/3 spent on pensioners and health related measures, both deemed off limit to any reduction (OAPs tend to be voluminous and willing to turn up on Election Days).  Last time, there were big cuts to this planned, which I opined at the time was an unprecedented direct assault on the less well off and those in need.

However, the need for borrowing is the delta between income and spend in the current account. The Chancellor made no mentions of any statistically significant further budget cuts (just caps on previously planned reductions, tied to the consumer price index into future years). The goal appears to be to have income to exceed total spend sometime in 2018 now driven primarily by a flurry of GDP percentage increases. So, in these times of austerity, the assumption of most people is that Government spending will continue to slow, glide over a peak and then begin to fall. Now look at the graph I posted above; this assumption is patently false. Why?

Debt Levels

One notable thing in the John Lanchester piece were the original projections back in the 2010 budget, where we were planned to pass into balanced inputs/outputs by 2014. Instead, we made little progress, and indeed had some big cash injections into the current account, like that of 4G Spectrum Auctions, and of absorbing £28 Billion reserves from the Royal Mail Pension Fund. The gotcha with taking all the assets of the Royal Mail pension fund as cash into the current account is that all it’s future liabilities and funding shortfall are booted unceremoniously into the UK Governments future borrowing requirements. So borrowing is still rising, despite all the austerity we can all feel. But then GDP is a pain to predict, where even the so-called “Office of Budget Responsibility” forecast it consistently wrong, and from what i’ve read before, it’s conversion to Government income is not a direct mapping. So, to turn back to that original John Lanchester piece; in one part of it, he defined what “Gross Domestic Product” was, which disabused me once and for all of thinking GDP was a measure of money volume. It’s not:

It concerns a technical economic factor called the multiplier, and that in turn involves us in a discussion of what GDP is and how the economy works. Imagine for a moment that you come across an unexpected ten pounds. After making a mental note not to spend it all at once, you go out and spend it all at once, on, say, two pairs of woolly socks. The person from the sock shop then takes your tenner and spends it on wine, and the wine merchant spends it on tickets to see “The Bitter Tears of Petra von Kant”, and the owner of the cinema spends it on chocolate, and the sweet-shop owner spends it on a bus ticket, and the owner of the bus company deposits it in the bank. That initial ten pounds has been spent six times, and has generated £60 of economic activity.

In a sense, no one is any better off; and yet, that movement of money makes everyone better off. To put it another way, that first tenner has contributed £60 to Britain’s GDP. Seen in this way, GDP can be thought of as a measure not so much of size – how much money we have, how much money the economy contains – but of velocity. It measures the movement of money through and around the economy; it measures activity. If you had taken the same ten quid when it was first given to you and simply paid it into your bank account, the net position could be argued to be the same – except that the only contribution to GDP is that initial gift of £10, and if this behaviour were replicated across the whole economy, then the whole economy would grind to a halt. And that, broadly speaking, is what is happening right now. People are sitting on that first tenner.

Hence the Government derives income from taxing the flow of money, and the OBR has to make a guess on not only how much money is in the economy, but to guess the multiplier to see how intense it’s flow is. That then gives an approximate mapping to tax income, which can then offset the projected spend. And despite the historical variances (which always appear to be much better than actuals achieved), the Chancellor has queued quite a few spending plans built on those assumptions.

Strange Income Sources

The curious thing about previous estimates (that resulted in a shortfall), was that the economy nevertheless grew slightly based largely on a one time positive of PPI claims on financial institutions. Fines from the LIBOR fixing scandal would usually in turn also benefit flows, but the Chancellor elected to give this to charities – albeit ones likely to have to spend the money rather than pocket it into their reserves (read: savings).

HS2 – all quiet – wonder why?

But – how do projects like HS2 work? Currently estimated to cost £42.6 Billion. Experience in other similar projects suggest the effect is to move the London commuter belt out to Manchester, a lot of whom are going to wave as it flies by places en route through the West Midlands. A lot of the financial analysis will suggest that the government will get an infusion of cash (as they did with HS1 between London and the Channel Tunnel, in that case £2.1Bn from a Canadian Pension fund), which will be paid with guaranteed returns to that source over the next 20 years. So, the government gets a short term wad of cash, but throws it into liabilities as a flow of debt repayments, with interest, long into the future.

This mirrors the way PFI projects work; the cost-benefit analyses are constructed on the belief that there will be tax income from the project, albeit in a lot of cases the private companies use various techniques to avoid paying that tax on a grand scale. Tax haven and avoidance city. For a sobering read, have a read of “The Great Tax Robbery”, written by ex-HMRC inspector Richard Brooks (and now resident at Private Eye magazine). He’s fairly convinced that the Government (by their actions, rather than their words) openly encourage corporate tax avoidance to feed their need to keep PFI projects off UK current account books. However, his wording is a bit more careful than mine is likely to be if I dared repeat the gist of the various examples he cites:

Austerity?

So, what’s all this austerity thing about? Ed Milliband’s reply was accurate, that we can all feel a drop in living standards – particularly the current Governments targets of the less well off. A lot of problem statement puffery, but nothing tendered in the time available for an alternative set of proposals (if they exist – no evidence that stands up to any statistically valid scrutiny yet).

As a country, we’re borrowing at unprecedented levels, and the hunger for more debt is rising like topsy. We’re largely fueling our existence from large one time shots into our current account, which add to more long term debt. The cost of servicing that debt is equally huge, so all eyes on the bond market, and ratings of our ability to pay back our debts. If it looks like we’re not tightening our belts with our spending enough, we may give the impression we’re not being prudent, and if our credit rating downgrades, the increase in interest charges alone may send us swirling into a downward spiral.

One other funny in the future projections is that the Government apparently adjust the future spend levels, playing the consumer price index inflation in to deflate the currency value of our future loan payments. That helps dampen the apparent spend projections quite markedly (a bit like a snowball, but in reverse). Yet the graph still heads relentless upward regardless.

What have the Romans done for us?

So, it’s all a bit of a shell game, and our current debt levels are 10x that of those in 1980 the last time we all felt deep austerity – just before the financial markets were deregulated. So far, i’ve not found how the graphs subdivide into what the spend categories are. The Government appear to have not decided to reign in final salary pensions that the rest of us had to, based on commercial affordability. And things like Trident, HS2 and countless other money sinks are also still in the future mix. And UK Government debt levels are still rising relentlessly.

The only historical precedent is that of the fall of Rome, where the currency ended up being devalued into oblivion leading to an eventual collapse. Something successive UK governments appear to ignore – so far. I wonder if it would be more prudent to systematically reduce our current huge, relentlessly growing debt levels. Harold McMillans warning concerning “selling the family silver” are now ignored, and i’m not sure the new owners have our own long term interests at heart.