Here in the UK the news isn’t good. It’s almost impossible to ignore the news in the media. Just in case you’ve been living under a rock; I’ll recap the last 18 days. We’re in a recession and it’s official.
“Britain is facing “arguably the worst” economic downturn in 60 years which will be “more profound and long-lasting” than people had expected”
– Alistair Darling (UK Chancellor) in the Guardian, Saturday 30th August 2008.
A timetable to disaster (skip ahead if you’ve been reading the news)
On Sunday 7th September the US Government announced their action plan to rescue (i.e. financially shore up and manage) the two central businesses to the US housing market, Fannie Mae and Freddie Mac. These companies provide wholesale financial products to lenders which in turn provide the mortgages for 30% of the US suburban housing market. This is the same market that caused the so-called “Credit Crunch” that we’ve been hearing about all Summer.
Lehman Brothers who employed over 25,000 staff with an average take-home pay in excess of $300,000 USD (each) were told today that they’ll receive a their last salary payment in September. Lehman Brothers’ debts equate to a quarter of the UK’s yearly GDP. Unfortunately the US Government didn’t bail out Lehman Brothers and left this Wall Street institution to go to the wall.
Wednesday 17th September 2008, the US Government, ten days after shoring up Fannie Mae and Freddie Mac are back again rescuing another central business to their economy, AIG. AIG is an insurance company which (amongst other things) insures bonds and loans between banks. That’s another issue itself; here in the UK, banks lend to each other at competitive “trade” rates. Those rates are up today to 5.9% – a whole 0.9% higher than the bank of England base rate; a sign of mistrust between bankers.
Lloyds TSB purchases HBOS for a quarter of its value this time last year and saves HBOS from instability. The new combined giant bank, technically not allowed under competition laws is allowed to exist only because of the state of the UK economy. There are no plans to break them apart after the disaster has passed.
The current state of play
In the UK, we have no “rainy day” funds. Inflation (4.7%) is above target (2.0%) and rising and the average increase on fuel and food bills (real inflation) is up by about 30%. The Housing market is falling and it’s getting almost impossible to raise finance and investment. As an entrepreneur, I’ve had some business plans this year with other potential businesses which have had to go on hold since even small investment is proving difficult to acquire.
Starting a venture – not a good time to start.
The water is cold and choppy and there is precious little support for you if this is the time you choose to cast away your newly incorporated business raft, good luck to you. Don’t forget that in a warm sunny economic climate, 9 in 10 businesses fail. Definitely be ultra careful if you are planning your first venture and have no business experience.
Looking for a new job? Watch out.
Bear with me here.
Have a look at the following picture. It shows the top 100 companies and their share price movements. Blue is up and red is down.
Red = bad. And these are our Top 100 companies
Working Lunch (BBC) Tuesday 16th September.
Company directors perform a lot of day to day duties, but primarily the responsibility of a company director / board of directors is to maximise profit for a company’s shareholders. Customers reading this, take note – excellent products backed with first class customer service increase sales which in turn drives profit. I’m not suggesting directors are heartless corporate machines (I am one!), but yet in order to lift a falling profit margin putting it simply there are only two goals:
1. Increase income (more sales, expansion)
2. Decrease expenditure (reduce costs)
One of the quickest and often easiest ways for a larger company to reduce costs when increasing income is not forthcoming – is to make staff positions redundant. A curious thing happens to a company’s stock price when they announce big layoffs – their profitability goes up (at least in the short term) and with the announced profits comes an increase in share price. The red squares turn blue, investors receive dividends and everyone is happy. Except the ex-employee with a mortgage and a family to support. Throwing some people off the ship can save the ship.
Generally if you have two years’ continuous service with an employer you may qualify for a redundancy payment. If you’re new to a firm within two years you may be considered for redundancy on a first-in-first-out basis. Even if you are a fee earner turning over a net profit for your firm. I know as I’ve been made redundant before. It was right before Christmas just after having put down a big deposit on a flat as a newlywed too.
A repeat of 1926?
I can say with certainty that the IT industry won’t be affected like it was in 1926 (largely because there wasn’t an IT industry in 1926).
I’ll leave the crystal ball stuff to the guys on the news.
What about the Micro ISV? Who will buy software now?
Investment purchases. I foresee that purchases of business to consumer (B2C) software, games and other entertainment is likely to reduce since global inflation eats away at consumer’s disposable cash. In my experience, B2C software tends to reflect high street spending patterns (e.g. more sales at Christmas, less in the new year) whereas corporate spending on B2B software tends to peak in the months around April when corporate budgets are agreed and have a low in the summer when purchasing staff take their holidays.
I’m reserving judgement on the general B2C market, suffice to say that there is always room for a small and fast software provider like us to do what we do best: Professional, quick and straightforward software solutions to people’s problems.
Can you give a positive example?
Sure! I’ll use one of our own products as an example.
My strategy with our software products is to develop products that always make a return on investment for our customers. I strongly believe that a positive ROI on a product is the main reason that a business should consider purchasing software.
All our business software either SAVES our customers money, or makes them more PROFITABLE
Gateway Solver’s “CIS Solver” module was praised by a local authority earlier this year who said about it, “This will save me 2 days of work a month!”. It will pay for itself in the first month and thereafter the customer goes into profit. They are so much the better for having our software than not. This particular software product also helps protect our customers in the event of a tax investigation, by ensuring timely tax returns and printable receipts.
And a bad example?
Spending will almost certainly reduce on speculative software ventures. Scott Kane said recently, “I do not believe it’s a time to create the next FaceBook or even Google“. However take a look at this company who are doing just that. An innovative search engine software company called, “True Knowledge” in Cambridge, England are creating a new context (question) based search engine. England is not a competitive location to start a software company and they’re also taking on Google at what they do best. And they’re doing this in a recession. Good luck, guys. You have balls. I genuinely wish them all the best, and note that they are actually receiving venture funding. If anything it proves that Venture capital is still out there, it’s just harder to find. On the other hand, they might have been lucky to get funding in July, before the recession officially hit.
Any business advantages?
I’ve noticed computer hardware is becoming much cheaper. I estimate perhaps 50% or so, depending on the product over the past six months, depending on the product. Consumer electronics (flatscreen TV’s, etc) also appear to be falling in price.
Summary please!
- If you can develop and market a solution which solves a problem and that is priced at a point at which it is worth more to the person or company than the cost on the ticket, you’re still going to be doing good business and may be able to grow throughout the recession. My experience is that I’m receiving more business, particularly interest on the consultancy side of the business from customers looking to streamline and automate the IT operations of their business. Investment motivated purchases are great for both us as a supplier and our customers – we’ll work with you to help you increase your profit margins.
- Small, established businesses with low overheads and empowered management can navigate the ice bergs that larger businesses cannot.
- Don’t seek to change career unless you have a good reason to do so. Life is too short to be stuck somewhere that makes you unhappy, however bear in mind the situation on board your new ship. The grass isn’t always greener.
What’s happening at Evolved Software Studios?
We can change and move quickly if we need to, but haven’t found the need lately. I’ve spent a little more this month on office and productivity equipment which should help increase the effectiveness of the company. Software services such as Software Monitor (www.software-monitor.com) are still in development and we’re in discussions with payment partners on a solution. iPortis is currently looking like a good partner for this venture. As I mentioned earlier; Software Monitor will allow software companies to improve the effectiveness and reliability of their software, incorporate licensing and subscription models and track user activity (within reasonable limits). We still purchase hardware and software from our suppliers and our customers continue to come back to us with purchases of software products and consultancy services.
Incidentally, yesterday our secretary noticed a newly opened Starbucks in the business park, just 100 meters down the road from my home office. Those who know me might have heard of my recent love affair with the Starbucks Mocha Frappucino. It is pure liquid software in a cup. And now it’s barely 100 meters from my office door.
I wonder if I can surf their free wireless Internet connection from home? 🙂
What are your thoughts on the current economic conditions? Do you disagree with anything I’ve written above? Tell me!
Hi Mike,
First — glad Starbucks isn’t so close to me, I drink way to much coffee already! 🙂
Interesting – today in Australia the Federal government has effectively made short selling of stocks illegal. Probably saved us a good deal of pain in the short term. Not sure how the US bail out will go in terms of long term, but in the short term it may slow the trend we’ve been seeing to some extent. Thing is though, a lot of players have the itch now to be reckless, precedents there now, shall be interesting, if not alarming at times, to see how it pans out. I still think the potential is depression, rather than recession though. Unfortunately the longer it’s held off, the more likely that becomes.