Grant Thornton - How to grow our own future

The Business Magazine and Grant Thornton invited sector experts from the Thames Valley region to Reading IQ to discuss how to create, enhance and accelerate growth within UK businesses

What are the characteristics of successful growth?

Our roundtable attendees are all successful in their own right, many of them already growing rapidly. During the debate, similar characteristics became obvious within the group – a determination to decide their own future, to challenge the norm, be customer-focused, the best in their class, with talented and empowered staff, and willing to change. Perhaps these are the keys to growth?

Grant Thornton’s Jim Rogers gave his experienced insight into the characteristics of the people and culture of working in fast-growing businesses:

• “You can sense the wow of working in such businesses. Something hits you as you enter;, the offices are bright and open. Someone has obviously thought carefully about how the business should look, feel and sound like.

• “They often have ‘academies’ where they do research or train staff – resourcing their own development requirements.

• “The amount of time spent on their incentivisation and reward programmes is indicative.

• “Their very flat management structures say a lot. They have a problem, they take control, they sort it quickly. And, often, nothing else matters other than customer service.”

Are opportunities for growth being inhibited?

Richard Steer revealed that his company achieved double-digit growth over the past seven years, and now had a £30 million-plus turnover, with 60% of growth achieved organically, 40% by acquisition.

“One growth area has been through strategically acquiring smaller operators – as a form of consolidation, it improves our margins, allows us to take out operational cost, and extends our business model within our sector.

Cashflow was the inhibitor that Steer highlighted. JCA Coatings chose to adopt a fairly high-geared financial status, and it was not always easy to get additional funding for growth opportunities that arose. He was looking at alternatives to the obvious bank offerings.

One reason for JCA’s growth was its strategic decision taken during recessionary 2008. “We decided to accelerate our growth into new market areas rather than conserve cash, put on our tin hats and batten down the hatches. It felt like we were running one way and everybody else the other, but we wanted to be different. We saw the recession as an opportunity to get slightly ahead of the curve, to grow into business areas that naturally linked to what we did.” He exampled a car parts business bought out of administration, “bolted into our award-winning customer service operation that was already growing sales of our car paints. We were able to satisfy customers and suppliers and gain a secondary growth.

“I am acutely aware that I am only one of 135 and need a very good team around me to make things happen on the ground and deliver our objectives. My clear strategy for employing staff is to get the best that I possibly can and paying accordingly,” explained Steer.

David Phillips revealed that TSL had grown outside the UK broadcasting market. “Growing a system integration business in our home market was not a recipe allowing sufficient growth.” So TSL started to focus on long-term projects abroad and made some very useful contacts. “I am a firm believer that networking is a core aspect helping to develop and grow a business. It is about forming personal working relationships and not just about delivering a box of electronic products.

“For us, growing around the world has been absolutely crucial. When I joined TSL eight years ago, typically 65% of our business was in the UK, now frequently it is 65% overseas.

“Another core aspect of TSL’s development has been to assemble a very strong team of talented individual specialists, although that means you are prone to the perils of headhunting and have to offer very competitive salaries and benefits.”

TSL developed its own broadcasting products division to complement its systems integration arm. “But, the methodology of both businesses are completely different and so we recently split the businesses, and now the products side is enjoying very strong growth.”

TSL has taken the post-recession opportunity to make acquisitions, both to strengthen its technology offering and broaden its worldwide customerbase.

Peter West’s IT company Portal has grown rapidly – its current £21m turnover is up 50% on the previous year, which also grew by 45%. He put the growth down to three factors:

• Focus on customer satisfaction: “We have moved people from being bonused on the satisfaction levels of their clients rather than their own P&Ls. It has transformed the way our people approach their job in a very positive way.”
• Hiring excellent people within their field
• Corporate agility. “We’ve kept moving. The business is very different now from what it was five years ago. You have to do that in the IT business probably more than any other. If you don’t, and stay still, you are dead.”

Portal is now focused on the current IT buzz-areas of social collaboration and information management.

He exampled another area of Portal agility. “We recently dipped our toes into the acquisition world and bought a consultancy. It has enabled us to get where we want to be quicker than we could have done organically. You have to keep pedalling hard to avoid being left behind.”

John Heynen said the FMCG import and distribution business of RH Amar had grown from £46.9m turnover to £53m in the past two years, within a highly competitive sector. “Our USP is fundamentally around the quality of our people and the brands we put in front of our customers. We have secured growth by bringing new high-quality products into categories that we already supply, as well as to satisfy new and emerging food trends we have identified.”

Consolidation within the food service and wholesale sectors had also helped RH Amar’s trade.

David Murray mentioned the government-funded and private sector-driven Growth Accelerator scheme (www.growthaccelerator.com) currently assisting SMEs aiming to double their size in three years.

Richard Holmes of Grant Thornton, one of the facilitators of the £200m support scheme, explained that Growth Accelerator teams across the country provided practical help with business planning and development, access to funding, and innovation.

“There’s no point in dreaming of sustainable growth if the essential building blocks are not in place with the right plan at the right time and the right resources to seize market opportunities.”

Is lack of available finance still an inhibitor to growth?

“Yes.” said Steer, while admitting that JCA had got funding “on the last click of the roller coaster” as it rose to the heights that preceded the rapid recessionary downturn.

Banks had undoubtedly become more risk averse since 2008, not least because of Basel requirements on their capital holdings.

“We now tend to fund things ourselves because of lack of acceptable finance.

“A lot of hot air is spoken about funding by the Government and banks. Frankly, I find it tiresome. Apparently, JCA is a perfect customer for the banks, but it always seems too difficult for them to loan us money to help us grow. Unless you have a sure-fire winner, they are not interested in putting cash on the table.

“What the Government is trying to achieve in forcing banks to lend is frankly not filtering down to SMEs. Frankly, the sooner things move from hot air to reality, the better we will all be.”

Rogers agreed to an extent, but questioned whether all businesses seeking funding actually needed it, or were presenting their business propositions adequately – demonstrating proven core competency, a strong management team, a potential market, a disruptive business model, robust business plan, etc.

“If you have a disruptive business model there are a lot of funders around who are happy to get involved, but often lack of access to finance can be a bit of an excuse rather than the cause of concern – much of the time the problem is an internal management issue.

“Successful management teams with good leaders look outside to see what their business world really needs, then ensure internally they have the right systems, processes and people in place to deliver it. Of course, there will be 1:10 businesses that do have growth funding issues, particularly in that difficult spot between £2-5million.”

Phillips agreed with Steer on the banks’ funding appetite. “They give you the nice sales pitch but when it comes to signing on the dotted line they place so many restrictions that the funding is often unviable.”

Lawyer Emma Gibson: “Even where funding is in place and banks are supportive, it is still difficult to get the deal over the line. Banks are taking longer to make decisions and more likely to change their minds as deals progress.

“Those businesses that don’t need bank funding are the ones driving the economy at the moment.”

Companies are looking for funding from different sources – asset-based lending, invoice discounting, etc. These potential providers of finance are “really upping their game and filling the void left by the banks. New providers of finance, such as the Business Growth Fund, are typically not using traditional banks.

“The real issue is access to finance at the lower end, in my view £0 to £1m. There is a funding gap and in the LEP we are trying to see how that can be resourced.”

She felt the Government ploy of funnelling funding to SMEs through the risk averse banks was not working effectively. “The bank’s job is not to take risks, therefore we need to find a way of providing finance that accepts the element of risk. If we want real growth in the economy at the entrepreneur end, then that’s the gap we need to fill.”

 

More funding, more growth?

Ed Cooper asked Roundtable members whether they would have grown quicker if they had been able to get more funding.

“Yes.” came Steer’s reply. “Early in 2010, we had the chance to buy the No.1 company, when we were No.3. It was a gold-plated deal because we were buying it from our biggest supplier. It would have made us double the size of anyone else in the marketplace. It was a no-brainer.” Despite Steer’s company having made nine acquisitions in eight years, his bank “ didn’t want to know because it genuinely didn’t have the money to lend.”

West felt banks had been between a rock and a hard place for some time – lambasted for lending too much pre-2008; criticised for not lending enough post 2008.

Fortunately, Portal had strong cash balance to support its own growth. Would he have acquired more businesses if funding had been available? “Not necessarily. I wouldn’t want to buy a small consultancy dependent upon a few people by giving them money. I’d rather give them shares and ensure they are pushing for the benefit of the business.”

Phillips said TSL had also used its own cash for two recent acquisitions, one involving an earn-out element.

Heynen agreed that increased availability of funds might not have changed his business growth strategy. “When we spotted a food trend and couldn’t find a brand or a company willing to support it or to buy, we simply developed our own brand – COOKS & Co.” His company was fortunate to be fully capitalised too.

 

Performance Bonds: can you guarantee your work?

Phillips complained about advance payment guarantees (APGs) and performance bonds (PBs) being increasingly required by end customers, particularly those overseas, as proof of UK banking support for the supplier.

“These are causing significant challenges at the moment, not least because they reduce the amount of working capital available in our business and this capital is of course much needed in managing our project-based business.

“If I undertake a £10m project the customer may well want a PB of 5-10%, around £1m. To meet that, I could dip into my working capital but I need that to fund my purchases from suppliers because the customer pays me slowly in milestone work-phases.

“When I go to the bank to borrow the money to cover the PB, they insist on a cash collateral securitisation, so effectively they are taking my £1m and putting it in a bank account that I can’t touch to fund the project. It’s self-defeating. Regardless of our reputation of 26 years, and proven business record, the banks just don’t do it. They are not risk averse, they are frightened.”

Gibson agreed that APGs and PBs were a growing concern for companies of all sizes. Through the LEP and the Government’s department of business, innovation and skills she was pushing for special funding to support such guarantee requirements

Bank relationships: past, present … and future?

Grant Thornton’s Holmes stressed that not all banks, or bankers thought the same way. Some will be willing to fight your client corner harder than others, he observed. “It is the person you deal with that matters.”

Phillips agreed: “The relationship director role is very important, because they should be immersed in my business and understand its SME dynamics, know if we as management individuals are trustworthy or not. They should be our advocates inside the bank to say we are good guys, so give them some money.”

Holmes said that at the start of the recession knowledge of clients businesses was poor in some banks. “The business may have been the bank’s client for 20 years, but if it went for a loan for the first time, the bank sometimes knew virtually nothing about them.”

Steer confirmed the lack of business and client awareness within some banks and the need for aware advocate relationship directors. “The problem is convincing the unseen credit teams in their glass towers, who don’t know you from Adam.”

New banks are waking up to this lack of client relationships, added Holmes and approaching business banking in fresh ways. “Hopefully that will cause others to raise their game.

“There are banks now coming into the market with fresher ideas, more prepared to listen, get involved and take a calculated risk based on previous performance and potential. They just have a different outlook.”

Gibson noted: “Banks have had so much EU and UK government legislative pressure placed on them to do X, Y and Z that as a result the relationship manager’s role has completely changed. Rightly or wrongly, the banks are altering responsibilities internally on company client relationships, so you won’t necessarily get the advocate you need.”

 

Recruitment and retention of talent

Murray queried if lack of skills, either shopfloor or management level, were inhibiting growth.

Phillips saw two resourcing concerns within the broadcast sector:

• Experienced workers with 15-20 years service, but perhaps not the most up-to-date technology skills

• Young creative workers, interested in broadcast and but potentially lured to other technology spheres by salaries or lifestyle image

TSL had tackled the issue eight years ago by creating its own graduate recruiting programme, going direct to universities in Southampton and Salford, and getting broadcast industry experience curriculum-included. “When their course ends, having covered what my business needs, we employ the plum candidates. Within six to nine months they are contributing to our business, rather than being a long-term drain as you train them. That’s been an extremely successful pro-active policy for our business.”

Recruitment headhunting of their graduates was a problem, Phillips admitted.

Heynen: “You have to accept there is a real war over talent.” Staff retention needed to be more than just paying increasingly higher salaries. “The challenge for smaller businesses is how to put more on the table in terms of a flexible reward package to make them a preferred employer.” Along with an acceptable salary, factors such as breadth of responsibility, empowerment, opportunities to broaden experience, flexibility and the work/life balance needed to be considered more fully.

Steer agreed that appropriate reward and recognition is essential, but so is awareness of suitable talent. “Within our industry field, which is quite small, we aim to know everybody through our personal contacts and networking.”

The right work culture was important too. “We are a growing dynamic business, we pay well, but we don’t offer the frills like some companies. We do provide an interesting, challenging and secure position in an environment in which they are empowered and can do a good job. Our staff turnover is very low.

“I have built staffing from 22 to 135 and am in touch with every one of those players in our team. I won’t draw an organisational structure chart. The second an employee asks if they are more senior than another colleague, you’ve got it all wrong.”

West: “In some ways, particularly in IT, you need to keep refreshing the talent base. You get imagination and creativity from young minds. It’s the kids who come up with the clever ideas and know where the future is.”

Cooper: “There is a definite culture change among graduates. They are looking to be involved with well-aligned, clearly driven entrepreneurial businesses that know where they are going. There is also growing awareness that small businesses can offer a good employment environment with flexibility and high rewards that don’t always have to be monetary. Small businesses can create drive and incentivise their employees with much more meaning than larger entities.”

 

You can’t beat a good execution . . .

Murray asked if successful growth needed a clear consistent long-term strategic plan or whether businesses needed to be nimble and adaptable to their changing markets.

West: “We like to think we have an idea of where we are going, but often our future can be opportunity driven. Either way, it’s important that you nurture that business growth opportunity in the right direction, and get the right talent and resources to support it. If we had stayed where we were five years ago, we would have been out of business now.”

Heynen: “It’s easy to spend a lot of time focused on defining the best strategy; it can become all-consuming. Although it’s good to have a strategy, your success actually depends upon how you execute it. Have you got the right resources? Is the management team properly qualified? Can it lead? Are you genuinely empowering your staff? Is the company culture right?"

Rogers mentioned that growth itself could endanger a company’s success. Issues vary at different stages of the business life-cycle and good companies need leaders and management teams flexible enough to handle those changes.

Execution of planning was key. “A poor strategy well executed is much better than a good strategy poorly executed. It’s relatively easy to establish strategy and appropriate KPIs, it’s the operational execution of those aspects that show the real strength of successful businesses.”

Steer agreed. “Strategy needs to be executed well from 1-10. Too many businesses get to 5,6 or 7 then get distracted and fail to execute the final bit from 8-10 where all the value is.”

 

Do we still lead from the front?

Rogers suggested the leadership role has gradually changed. It used to be much more directional, telling staff what to do. Now it is more consensual, engendering greater involvement and staff empowerment. “There is a mantra: If you want to go quickly, do it yourself; if you want to go far, do it together.”

Phillips claimed Internet access to knowledge was a key driver of this change. “Directors used to gain knowledge from their studies and experience and pass it on to their staff; now knowledge is out there online for everyone. Whether it’s good or bad knowledge, people are now finding it out for themselves.”

Stressing the vital need for accurate and good quality knowledge Gibson admitted, “Everyone is an amateur online lawyer nowadays.”

Phillips added that customers were now smarter too, thanks to the Internet, often using it for research and comparison when involved in contract negotiations.

Rogers: “Businesses should not underestimate the power of the Internet.”

 

Generating ideas for growth . . .

Steer wasn’t a fan of the staff suggestion box process, but JCA had recently introduced monthly boardroom briefings by middle managers “about activities and challenges in their world, and what we can do as a board to remove obstacles to their progress.” Everyone gets more informed and involved with the business, he explained, enabling better company decisions.

Heynen supported staff involvement and empowerment. “Our sales guys love the fact they can pick up the phone and have a chat with the chairman or the MD about the business. And often, the chairman or the MD will go out in the field and bring back ideas to the boardroom.”

Commercialising ideas from the floor up happened in TSL said Phillips because project work involved extensive work onsite with clients and other contractors. “We are constantly modifying our system designs based on experience in the field. We also keep very close to our suppliers, particularly through product training courses. We learn from them, but equally we feedback our suggestions to them.”

West said good practice and achievement was shared within Portal. “We sell social collaboration to others, but we also use social collaboration in our own business to communicate our achievements and improvements throughout the company.”

. . .and the value of walking into work feeling stupid

Heynen: “It is such a positive force for beneficial change and growth if you can get the culture right; where staff feel privileged to work in your business environment and know they will be listened to and can impact the future.”

Steer: “It’s about genuinely allowing people to show initiative and take an element of calculated risk in what they do. One of our core beliefs is to challenge the norm, not accept that ‘We’ve always done it that way’, but instead always aim to make the business the best that it can be.”

Disruptive thinking needs to achieve something that benefits your business, Heynen commented: “As human beings we all develop habits, and ways of doing things. At work we tend to do the same, but my company likes to encourage the ‘walk-in stupid’ attitude. Come into work as if it was your first day. Assume you know nothing. The challenge then is how to do what you need to do, but with a fresh purpose and in a different way.”

 

Should profit be THE key growth driver?

West felt turnover and profit were both good growth indicators, but less obvious factors that add business value and sustainability were more important. “Factors such as improving our technical competence, reputation and regard within the market, long-term contracts, adding value for our customers, and selling solutions rather than products. Business value growth is a difficult one to KPI or put on our P&L, but I don’t mind if our turnover or profit reduces too much if I can see that we are progressing in these added value areas.”

Rogers said profit and turnover were obviously critical for M&A evaluation purposes, but agreed that other factors helped businesses differentiate themselves and establish the value of a business for prospective purchasers. “If there are seven similar houses for sale in a street, people look for the advantages of one against another.”

Gibson: “When it comes to M&A, such factors help create unique business values that can’t be replicated.”

Rogers added that many companies should determine how big they wanted to grow. “A lot of businesses don’t go beyond £50-60m because they come to the end of their business lifecycle or the core competencies of their management. A good question is: ‘Who is the best owner of my business?”

Heynen: “Our company has a record of sustained growth spanning more than 65 years, so our challenge is to continue building on that, as well as delivering against our short and mid-term goals. Turnover and profit are both important, and that really means being focused on providing our sales team with the information, knowledge and resources that contribute towards that aim.”

Phillips highlighted profit margin erosion in his industry. “Nowadays we are running twice as fast to earn half as much profit. Everyone is into smarter buying today with technology, ‘me-too’ products, and stronger procurement teams pushing the prices down. Every customer wants a deal. No-one sells at their list price.”

Steer countered that JCA had grown its gross margin by 10% in the past three years, while achieving double-digit growth. “There are incredible downward pressures so you have to be focused on turnover. No matter how well you manage business costs and margins, unless you are pouring enough into the top there won’t be enough running through the business. Frankly, turnover has to be the principal driver, then margin management and profit can be addressed.”

Ironically, said Steer, JCA had run close to breaches of bank loan covenants purely because it was trying to invest in growing turnover within its business.

 

Is the Government succeeding as a growth facilitator?

Murray asked if the Government should “get more involved with business through schemes such as the Growth Accelerator, or should it get out of the way?”

Phillips: “There is too much politics coming from the Government. They see things as soundbites and headline grabbers, but they don’t deliver on what they have said. As businesses and SMEs we have got to stand on our own two feet and work with people who want to work with us. The Government has become too media-centric and often their publically stated policies don’t flow down to us SMEs.”

West was less scathing. “The Government has to try to keep doing something to help, but admittedly I have not seen many SMEs benefit from any Government grant or scheme.”

Heynen: “It’s far too simplistic for the Government to say it will remove all the red-tape. You have to understand what legislation is required to allow businesses to grow. If getting the economy growing is their No1 priority, they need to live up to that promise, and that’s not necessarily through monetary aid.”

The last word went to Holmes: “Having worked with several government initiatives over the years, I firmly believe this Growth Accelerator scheme is the best yet. It is focused on sustainable growth and companies that have the ability, commitment and management drive to achieve that growth. It is also supported by experienced high-calibre coaches who don’t get paid by the Government if they don’t reach objectives agreed and signed off by the participants.”

 

Participants

Ed Cooper: Director, VitalSix, business management consultants, Reading

Emma Gibson: Corporate partner, Shoosmiths lawyers and director of Thames Valley Berkshire LEP

John Heynen: Commercial director, R H Amar, fine food distributors, High Wycombe

Richard Holmes: Growth manager, Grant Thornton (website)

David Phillips: Managing director, TSL (Television Systems), Maidenhead and Marlow

Jim Rogers: Partner, Grant Thornton, Winnersh

Richard Steer: Managing director, JCA Coatings, Reading

Peter West: FD, Portal Partnership, IT business consultants, Bracknell

David Murray: Managing editor and publisher of The Business Magazine, chaired the discussion