BBC gets what it deserves on profits reporting

Am I the only one who gets frustrated with the way the BBC news reports company results? Every news report seems to focus on, "This very large company (with highly paid directors) made (some large number with billions in it) profits last year. That is £(a huge amount - far bigger than a national lottery win) every day (from you the consumer)".

Yet they never seem able to say, "Actually they turned over £120bn and therefore their return is less that 4%." It is as if they only seem to judge profitability in absolute terms converted to some daily average.

I have put below example extracts from news postinsg from the BBC website. In each case, I have included the link, so you can see what I mean, as these are usually the only references to relative profitability.

Shell, the Anglo-Dutch energy giant generated profits of $22.94bn (£13.12bn) - up nearly a third on last year when it set a UK record with profits of $17.59bn. http://news.bbc.co.uk/1/hi/business/4672716.stm

There is no mention of turnover or return on assets. The main emphais here was that oil prices have risen, so they seemed to make a windfall profit from that. Perhaps they did. It is really hard managing a business where your raw material prices are volatile in a range of 300%. Frankly, I would include some slack in that one.

BT is battling a decline in its fixed line businessTelecoms giant BT has unveiled a slight rise in profits for the first half of the year. Pre-tax profits before one-off costs rose 3% to £1.13bn in the six months to September 30, compared to one year ago. http://news.bbc.co.uk/1/hi/business/4423890.stm

At least in this article it mentions But BT profits fell in the second quarter to £489m from £571m - thanks to the £70m cost of setting up Openreach. But still no mention of profit as a
rate of return. It is useful to know that profits have risen 3%, but against what base?

Texas-based Dell said it expected profits of 21 cents to 23 cents per share in the second quarter, way below analysts' forecasts of 32 cents. ...The group is investing $100m on customer service, which Dell views as crucial to its market position. http://news.bbc.co.uk/1/hi/business/5203452.stm

Now this looks like it has been picked up from a US service and re-published, but it is the same thing. Profits per share is useful if you are looking at return on your shares. It only tells you a little about the group, but you would not hear this on the BBC news broadcasts.

Another one:
Swedish telecoms company Ericsson has said profits are still falling since last year's £1.2bn ($2.2bn) purchase of loss-making Marconi. Net profit for the second quarter of 2006 was 8.29bn kronor ($600m; £323m), 2% down on the same period in 2005. http://newsvote.bbc.co.uk/1/hi/business/5202106.stm

Again, no information about what this means.

I have pulled these off the website and I accept that these are necessarily short stories, but it is also (more) true of the news reporting. I am yet to hear on the "Today Programme" a mention of return on capital, or return on assets.

Question: Are these companies actually doing well, or would I be better investing my money in a savings accont rather than BT shares?

Now the BBC has been receiving its own medicine over its own profits. A search for "BBC profits" on google produces over 9 million hits. Many of the discussions about licence fees, BBC worldwide profits and salaries for their executives have had the same flavour as they apply to all other company reports. (Well, at least they are being consistent)

Whereas the Times online reported:
THE BBC’S commercial arm is planning an expansion of its international activities, which could lead to it starting as many as six channels in countries such as the United States and India. It believes that it can boost last year’s trading profits of £89.4 million by selling British television, magazines and new media to the world, providing a top-up to its £2.9 billion licence-fee income.

Slightly more interesting, as I can tell that all the fuss is about £90m profits compared with £2.9bn licence fee income. (but not much help).

Let me cut to the chase.

If the BBC persists in reporting business matters in such a simplistic and misleading way, they only serve to propogage a view that commercial organisations are bad things. They're not.

What disappoints me is that people like Evan Davis (the BBC's economics editor) are excellent, far sighted insightful reporters. Yet the main news reporters get away with reporting that seems to carry an agenda of "large corporates make excessive profits out of you".

It is only with some amusement that I see that the BBC has been getting a dose of its own medicine, but it does not solve the problem.

I am going to say this loudly.
BUSINESS IS GOOD and a force for good.

The world is a better place for capitalism.

Your pensions are invested in these companies, so you have a right to know the return on assets, investment and capital.

Unless business is reported in a way that informs and supports they will continue to perpetrate inaccurate thinking about business. Just look at the way they have rammed down our throats through the years that maths is difficult and science is complicated (and needs fancy graphics and esoteric music to fill in gaps, rather than assume we can understand such things). As a result, look where we are as a nation with numeric ability.

So, rant over. But I so wanted to get that off my chest.

Phil

KPI Strategy workshop:
What is important for your organisation to measure, and How to construct meaningful KPIs

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If you are only measuring what you have the ability to measure, rather than what you want to manage, that may be fundamentally flawed and provide no insight to performance at all. What needs to be determined is what measures are important and how will you measure them? We don't know all of the answers, but we can explain how you can figure this out.

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• What type of measurement framework is right for your organisation?

During the briefing, we won't necessarily answer all of your questions, but we can help you to better understand the underlying issues and provide insights into how you can answer these for yourself.

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Looking forward to seeing you there.

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PS if you are interested in a version of this presentation, drop me an email.

Satisfying the accountants,
or a deeper cultural issue


My son came home from his sixth form studies last week and told me that he had been invited in to see and act as the questioning audience to a series of business studies AS level presentations. The business studies students were practising presenting their business cases to some other students, who were not doing the business studies course.

He was aghast and highly critical. In one case there was a loan of £13,000 from a bank to fund a business starting in a small office. The loan was used to fund income for the staff and other revenue items, rather than going into assets like furnishing the office. Where was the security? Moreover, the business case presented contained no figures for interest on the loan. In another case, a student was running a business that somehow would gather £100 worth of income a day from selling novelties and accessories alongside the main ice cream business.

Now, my son, in typical teenage manner, was simply disgusted by the lack of simple business acumen. How could they make such simple and glaring business case mistakes such as not including interest from a loan, funding revenue from capital and dramatically over-estimating the amount of sales that might accrue from a sideline?

But I wondered if this was really the issue. You see these business studies students were being asked to present a business case. That implied that it was a viable business case. In other words, it was a business model that worked and made money.

It raises a really important question: if they were to present a case that clearly showed the business was not viable, would that be an acceptable answer? Or to put it another way, is demonstrating that the business is not viable, as valued as making an apparently viable business case?

My point is that it is the quality of the thinking behind the case that is important, not whether the case seems to be viable. So, as you may have seen in many organisations, the figures were massaged to get an acceptable answer. These students were meeting their tutor’s expectations of a viable business case, not a realistic one.

If you think this is an extreme case, talk to any Venture Capitalist (VC). I recall one telling me that he had had a business case presented to him only that week. In itthe company grew from none to 20% of revenue coming from overseas. They had no overseas marketing spend, no experience and no overseas sales force, agents or distributors. Apart from that it was fine.

I call this sort of explanation, strategy by hope and magic.

But there are two deeper malaises here. The first is trying to satisfy the accountants (or in this case the tutors) with a business case that clearly does not work, but has the right answer at the end. By setting an expectation that they must produce both a business case (or not) and one that is viable and profitable, they are painting their students into a corner, driven by expectations rather than business reality. It is as acceptable to demonstrate that this business or investment is not viable as it is to make up numbers that suggest it is viable. That is a triumph of hope over reality. It is suggesting that 3X6 = 32.

Secondly, it is even worse if the students then try and implement these plans only to find out that they are completely unrealistic AFTER they have started spending some money. The purpose of planning and business cases is not to make the business case. The business case is the result. The purpose is to examine the business case and test its viability. Have we considered all the aspects? What footfall would we need to generate £100 of side revenue? What rate of loan and what security would be required? If we went to an angel investor instead, would the terms be different?

It is the thinking process that is more important. As Napoleon once said, “I care nothing for plans. It is the planning that is important.”

And that is what these students should be learning. Damn, if they were going to sit in front of each other, they would ask questions that are designed to check the thinking behind the plans. What assumptions have you made? Does it work? Is it tested? Is the market there? How do you know? What evidence do you have? Do you have the skills?

I only hope that these business studies students learnt the deeper lesson from these sessions. It is not about being shown up and missing pieces of the case. It is much more about running the business in your head as if you are running that business and seeing what is needed to make that happen.

One, and ONLY ONE, dimension of this is the finances. All the other aspects, like where will you sit, how will you reach these customers, do you have the knowledge, will it actually work, are just as important. Any VC will tell you this. Anyone who has watched Dragon’s Den (where business ideas are pitched with no warning in front of potential investors), will see people ripped apart for not having thought through their propositions.

So, be willing to say, “This is not viable!”. Believe it or not, not every business idea is a money maker. You only have to look at the vast number of insolvencies and business closures to realise that. As long as that result has been done with a thorough analysis, and the options have been considered, that might be the best and correct answer.

VCs and investors do it every day. It is their job to reject business cases. It is ours to also reject such cases if they are not viable.

Have you seen this sort of behaviour? Let me know what you have seen and how you tackle it

Phil

Environmental strategy and an environmental scorecard for measurement

I have just been in conversation on a performance management forum and wanted to vent my spleen a bit.

The discussion was, the Balanced Scorecard needs another perspective in addition to financial, customer, process and learning and growth to represent the environment.

I argued that you could put any environmental measure for an organisation within this framework as a theme and not destroy its structure.

He argued that "I know you were being illustrative in your answer, but your reply does not address the significance of something like Kyoto and its impact on management reporting. IMO everyone who has an interest in PM should beware specifically of chapter 40 of that agreement which sets out some national level PI's related to the environment and sustainability. As I see it, the key point about Chapter 40 is that the PI's are defined for use at Government level, and Government will pass the necessary measures into law that will force organizations, profit and none profit, into reporting on them. Indeed Chapter 40 effectively demands such reporting be placed on the statute book of signatory nations with much the same level of precedence as financial reporting. The UK Government and other signatories have already implemented a number of measures as a direct result of Kyoto. Other Governments are doing the same kind of thing. Search for "Sustainability Report" on Google, and the first entry (I found ) links to a Canadian government site, a home page graphic of which clearly states "measuring sustainability"

I am not at all sure that sustainability reporting, as a global issue, fits into K&N's scorecard model, which is ultimately profit driven, as it seems to me that sustainability is more about managing something that has a more general social impact (although I accept entirely that profits will be affected and therefore can be linked in the classic K&N sense). That aside, given the level of effort being focused on activities related to such reports on matters, it seems to me that it is legitimate, if only on a practical data management basis, to have"Environment" as a fifth perspective.

So I replied:

"Ok, thanks for the detail - must admit I spent 30 seconds making up that model with 4 perspectives. So, having read your more detailed description,for which I thank you, I would like to emphasize three points and demonstrate them with an example based upon what you have written".

a) Being systematic, what is the system we are referring to? It is the corporate that is in the context of government legislation. The system boundary is the corporate. Customers, suppliers and the government are outside it. So are the lawyers. (We can do the strategy map for government late if you get them to pay me lots of money)

b) What you are describing is Just a Theme of the perspectives. In fact I spot 5 potential themes here - all of which illustrate that the perspectives apply . Along side this companies themes of making some sales, managing costs, complying with health and safely and possibly another 5 themes to do with the environment. They might have an interest in

i) monitoring the legislation to ensure they comply

ii) complying with the legislation

iii) Innovate around how they comply with the legislation

iv) report statutory compliance

v) use PR to influence their customers and investors.

PS having worked with environmental specialists in a water utility I have made this work in practice - I am not making this up. Now let's look at the perspectives:

Financial:
Well, there is the cost of compliance (i & ii), the cost of innovation (iii), the potential cost/risk of non-compliance (iv) and the value of improved cost of capital as well as the social costs of environmental failure/improvement (Just simply think triple line accounting here - it works fine)

Customers:
There seem to be at least 4;
- Actual customers that give money - real customers!
- People in the community potentially affected by
- who might incur the social cost
- Legislators/Government - who want you to comply or pay up
- Investors - who might be influenced to lower the cost of capital

Processes - and their potential L&G pieces

Well that is trivial from the themes now (you see clever design of the themes means that these things just fall out)

One for monitoring legislation - you will need the skills and contacts to do that (L&G)

One for compliance (and the cultural piece of embedding environmental thinking in the activities of production/maintenance (L&G)

One for Innovation/R&D - though you could add more depending on the detail you want - and or course developing the environmental or R&D skills (L&G)

One effective reporting - I put it here to distinguish it from the compliance - again audit skills or something (bear with me I make this up to illustrate the story)One for PR - you get the picture and can work it out yourselves...

As you can see, they are JUST THEMES of the strategy. I may not have perfect content, as they are illustration - the important thing is we are using these to tease out the underlying structure and system. They lie vertically across the four perspective quite comfortably and don't need another perspective, as you can see.

c) Someone out there will be wondering whether this is just compliance or how you differentiate yourself and at which level in the hierarchy of corporate scorecard this lot applies.

The answer is on about selecting levers of control in an organisation - is this about compliance, reporting what we have to do, differentiating ourselves or a core belief.

That is up to the management to decide.

Finally, just to emphasise - it is just a (vertical) theme. Otherwise you will introduce new (horizontal) perspectives for financial compliance,Health and safety, innovation, customer service, sales, cost reduction and every other potential theme of the strategy (as people amazingly do). Guess what when you ask how are these related to the other themes in a cause and effect framework - there is not an answer. Why - because its orthogonal.

Anyway we'll see how it goes.

Phil

Welcome to the Excitant Blog

Here I get to write about things to do with strategy , management, business models, performance, management thinking, strategy planning processes, strategic thinking and other stuff that comes to mind.

Phil