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The troublesome threesome

Guy Strafford
Mar 13, 2013 4:45:00 PM

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Guy-New

March is budget month in the UK for the Government. And, unusually, it also is in the US. It is also usually the pivotal point in the year - as it becomes clearer whether the budget is going to be met or if it is time for remedial action. This March is shaping up to be no exception.

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In the US, the Sequester and implementation of massive mandatory spending cuts has dominated the headlines. Democrats and Republicans have once again failed to arrive at a compromise to stave off the cuts, which are expected to have wide-ranging impact: from the meat and produce industry, to transportation, to tours at the White House. At the same time, the Dow Jones Industrial Average continues to surge and recently reached a new record high aided by promising jobs data from February. With the debt ceiling debate on the horizon, the question looms: will political bickering and obstinacy derail the first positive economic indicators in some time?

In the UK, discussions shrouding the budget are around whether Plan A or A-plus really only serves to mask the one real necessity about George Osborne’s announcement - something has to change if we are to establish a meaningful platform for recovery. Recent stock market rallies will only sustain sentiment for so long – a more rigid framework to encourage growth has to be put in place. (I worry that the stock market rally is essentially based on relief no European governments / economies have collapsed, but they still could).

There are some business parallels. Macro changes to the operating environment are mitigated by making internal changes that insulate from the prevailing winds. Small percentage point reductions to supplier spend, which typically account for more than two thirds of a business' total spend, equate to a meaningful uplift in profitability, as well as relieving concerns from all stakeholder groups, be it investor pressure for dividend increase or employees’ desire for job security and prospects. I think that as businesses think about the tweaks that they need to make at this stage in the year, rather than worry about tax rates or reducing welfare as Governments do, they can put energy into driving more supply value. It has an unusually quick payoff and is in their sphere of control, helping keep budgets on track.

This time of year also puts non-labor cost ratios into perspective, when news of city bonus rounds emerges. Though often controversial, they comprise a comparatively low level of cost for most businesses when compared with the value that is often squandered through ineffective supplier management. The more helpful lesson for Government and business communities trying to promote growth is that when external impetus is on the wane, proactive, progressive measures to protect and promote growth from within can provide meaningful satisfaction for the general public, investors, employees or partners.

Back in Europe, we have recently conducted an analysis of the companies quoted on the Dutch AEX25 exchange and are looking forward to sharing those results with you shortly.

Spring is the time of change. While that might not instantly be obvious with Winter’s persistent grip still upon us, a development in a sunnier clime is worth watching in the short to medium term. The recent passing of Venezuelan President Hugo Chavez raises an interesting prospect - will new, green technology be encouraged in the region, or will Chavez’s oil legacy continue? With such extensive natural resources, Venezuela has the potential to play a very meaningful role in the world energy market, but its challenge will be the style and method of its engagement with existing global oil and gas frameworks. In particular, the Venezuelans have got to make a choice whether they draw on the expertise of the oil companies (which one can think of as suppliers in this context) as opposed to continuing down the route of self sufficiency. Perhaps if they think about the changing nature of business and the expertise and experience of innovation that suppliers can bring, they will stop trying to do it all themselves.

Has Spring sprung? Or are there chilly winds still on their way? We shall know soon.

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 Guy Strafford

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