Thursday, 9 July 2009

June's Business Bloop Award

It is some time since we have awarded Business Bloop of the month. This is not due to shortage of candidates, but because we have been very busy on the launch of our new business Achievement Coaching International. To find out more about this go to the website http://www.achievementcoachinginternational.com/ .

One candidate is Total Oil who nearly won the award earlier this year. For the second time this year their contractors at their Lindsey Oil refinery provoked a wild cat strike. (one is unfortunate but two sounds like carelessness) The project is 6 months behind schedule with 100 million euros of additional costs. Under pressure from Total the contractors effectively caved in to the strikers, thus demonstrating that illegal strike action can still be an effective weapon in an industrial dispute. So there is now the potential for the UK’s industrial relations clock to go back 25 years. Quite an achievement all round when you think about it.

However even this has been eclipsed by the joint efforts of National Express and the Department for Transport (DfT) to bring about the collapse of the East Coast rail franchise. Having significantly outbid competitors in 2007 with a pledge to pay the government £1.4bn to run the service till 2015, National Express’ assumptions of 9 – 10% annual passenger growth have been shattered by the recession. After 5 months talks with the DfT recently broke down and National Express announced they would cease funding its East Coast subsidiary later this year.

This prompted the Transport Minister Lord Adonis to announce a temporary nationalisation of the line, and mutter darkly about stripping National Express of its other two franchises. Under the cross-default rules if an operator walks away from one franchise, it risks losing its others. So having risked a knock out bid to win the East Coast franchise, National Express may now be threatened with losing the whole of their rail business. Not too good for a company capitalised at just £428m, facing £460m debt refinancing next year and with predators, notably First Group, circling.

National Express insists that Lord Adonis has no legal powers to strip them of their other two franchises. In Dad’s Army the catch phrase was “Don’t Panic!” – in this case it’s “Let’s Pannick!” – as National Express have appointed Lord Pannick QC to advise them. We wonder just how confident they really are!

The key question though is how did National Express get into this position and is there a lesson for the rest of us? The easy answer is that they bid too much for the franchise and several commentators and competitors said so at the time. However a study of the motivations and decisions of two people get you nearer the root cause. These two people are Richard Bowker, until recently Chief Executive of National Express, and Lord Adonis himself.

Bowker arrived at National Express via Virgin Trains and the Strategic Rail Authority (where ironically he had taken the Southeast franchise off Connex). He had played a big part in designing the franchising contracts. Who could be better qualified to lead National Express and grow its rail business? Unfortunately National Express promptly lost two of its existing franchises on renewal, Midland Mainline and Central Trains. At two nil down, far from taking the rail business forward, Bowker appeared to be taking it rapidly backwards and was understandably desperate for a deal. Hence the bid for the East Coast line had a strong flavour of Win At All Costs about it.

Was Bowker just unlucky? With passenger numbers growing at 11% p.a. at the time of the bid without the recession it might have all worked. Our question is, did he consider the Competitive Strength of the National Express business when assessing the risks of his bid?

Competitive Strength is about understanding:

  • how capable a business is compared to those that want to beat it AND

  • how capable it is of mitigating the impact of those forces out there that can cause it to be beaten

Our own assessment of National Express’ Competitive Strength is that it was Comfortable at best and the losing of two franchises indicates that it was deteriorating towards Constrained. In this condition the company was very vulnerable to The Abyss “those forces out there that can cause it to be beaten” and so it has proved to be. Bowker therefore, through a combination of either ignoring or not understanding the company’s Competitive Strength condition and his own need to shore up his personal reputation and position, took risks with shareholders’ money that had not been fully and thoroughly assessed.

Equally the government, by ignoring or not understanding the same factors accepted the highest bid which, predictably in our view, has turned out to be the highest risk for the taxpayer. Lord Adonis has stated that he will not renegotiate a franchise “on principle” because then other train operators would seek to do the same. This sounds like sense on the face of it, though he if he has not been “renegotiating“, what has the DfT been talking to National Express about since February? Also, according to Lord Adonis, out of the 16 franchises, the only one in trouble is the East Coast.

Lord Adonis’ hard line has gone down well with elements of Old Labour and any new Secretary of State will find it hard to resist playing to the political gallery. He invited himself on to BBC’s Today programme to announce the temporary nationalisation. That may be good for Lord Adonis but is it good for the taxpayer? Probably not. Franchise contracts come with a revenue sharing or revenue support mechanisms to prevent excessive profiteering or failure. In reality, unless the passenger growth figures in National Express’ bid were maintained throughout the contract, it was very unlikely they would have paid the government anything like £1.4bn. In fact it has been calculated that the actual sum at stake in the present circumstance is £150 - £200m.

So it is not about the numbers at all and it is not about luck. The root cause of all this is the way the personal agendas of two powerful individuals became the dominant influence in decision making. The Business Bloop Award is for decisions that contain an “oops” factor that leads to unwelcome consequences. National Express has already experienced some of these, with more to come, at significant cost to their shareholders. Lord Adonis’ “on principle” stand on renegotiation has already effectively bounced the taxpayer into revenue support on the East Coast through the temporary nationalisation. He has no hope of re-assigning the franchise at a decent price. There is more bad news to come for the taxpayer.

So we award June’s Business Bloop of the Month jointly to Richard Bowker and Lord Adonis for reminding us to beware of clever people whose decisions are mostly about demonstrating how clever they are, without consideration for the people they are really accountable to.

Business Bloop of the Month Award is brought to you by Steve Goodman & Tony Ericson. It is one of our "Excellence Quartet" of blogs promoting the cause of Excellence as the key to prosperity. Each blog has a new article each month using a recent business/financial topic to highlight different perspectives and conclusions from those obtained using conventional thinking and techniques. You can read the other three blogs at - Exceeding Expectations - You're having a laugh ... seriously - Capitalism or ... Common Sense .

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