Exchange – Issue 1 by the marketing cafe

ISSUE 01

T H E S C OT T- M O N C R I E F F BU S I N E S S J O U R N A L

E XC L U S I V E INTERVIEW WITH

JOE FRANKEL O F V E G WA R E

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V E G WA R E F O U N D E R S E T S S I G H T S O N B I G G E R V I S I O N 11

W H AT S M Es S H O U L D K N O W B E F O R E G O I N G G LO B A L 04

O P T I M I S M F U E L S B O R R O W I N G 14

T E S T I N G T I M E S F O R P U B L I C S E C TO R CO N T R AC T S 06

I N V E S T I N G I N S U CC E S S 16

3 B I G P O S I T I V E S A H E A D F O R S COT L A N D 08

T E C H N O LO G Y H E A D S I N TO T H E C LO U D 18

F E R T I L E G R O U N D 10

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ON TRACK FOR SUCCESS Never a firm to stand still, Scott-Moncrieff works with a diverse range of clients across many of Scotland’s key economic sectors and through all aspects of Scottish life. One sector that is going from strength to strength is transport and infrastructure, which, with significant Government investment over the past few years, has been boosted by several capital projects – many of which are now coming to fruition.

With many major projects being delivered, and the benefits being felt both by main contractors and a strong supply chain, we are proud to support our clients in the transport sector as they take to the air, roads, rails and seas.

Highlands and Islands Airports Limited (HIAL) recently climbed on board with Scott-Moncrieff, appointing the firm in February 2014 to deliver external audit. With a network of 11 airports, connecting regional Scotland to over 30 UK and international destinations, HIAL serves Benbecula, Campbeltown, Dundee, Inverness, Islay, Kirkwall, Stornoway, Sumburgh, Tiree and Wick John O’Groats, and of course, the world famous Barra beach runway. Expect the auditors to form a queue to make a tour of this new client’s facilities!

Caledonian Maritimes Assets Limited (CMAL) has been a client for some time, and Scott-Moncrieff recently retained the organisation’s audit work after a competitive tender. CMAL owns the ferries, ports, harbours and infrastructures necessary for vital ferry services serving the West coast of Scotland and the Clyde estuary, so the services they provide are a vital lifeline for some of the most remote areas of the UK.

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The firm also works for Edinburgh Trams Limited, currently preparing to operate Edinburgh’s latest transport solution. With trams such a hit on the continent, Edinburgh is sure to benefit from a modern system running through the city, despite the well documented challenges faced along the way.

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Another client, and the operator of Edinburgh Trams, is the multi-award winning Lothian Buses Limited, which has been travelling with Scott-Moncrieff since 2001. While the firm delivers Lothian Buses’ external audit, corporate tax and VAT, the innovative company continues to go from strength to strength, with awards for many aspects of its operations, including sustainability, customer service and environmental credentials.

Wrapping up the Scottish transport sector is Transport Scotland, the national transport agency, for whom Scott-Moncrieff delivers corporate tax and VAT services. Transport Scotland is vital to making sure that Scotland’s businesses, communities and services are connected across road, rail, air and sea, underpinning sustainable economic growth.

Scottish Futures Trust (SFT) manages one of the largest PPP investment programmes per head of population in Europe at over £2.5bn. Transport is one of the key sectors for that investment and SFT works with Transport Scotland to deliver key routes including the M8/M73/M74 improvements and the Aberdeen Western Peripheral Routes. Scott-Moncrieff works alongside SFT having successfully retendered for its audit and that of its investment subsidiary.

S E C TO R - S P E C I F I C E - BU L L E T I N S W I T H T I M E LY N E W S & U P DA T E S

EXCHANGE HIGHLIGHTS

3 BIG POSITIVES AHEAD FOR SCOTLAND

08 FERTILE GROUND

10 Delivering central aspects of some of Scotland’s ‘hero’ projects are two international companies, Tecozam UK Limited (Spain), and BAM Rail bv (Netherlands), which are involved in the new Queensferry Crossing at the River Forth and Borders Railway, respectively. Both are UK arms of international groups, and Scott-Moncrieff has been working with them to ensure that their financial and tax processes are suitable for their UK operations.

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OPTIMISM FUELS BORROWING

14 INVESTING IN SUCCESS

16 Designed by The Marketing Cafe Ltd. All correspondence to: Exchange Magazine, Scott-Moncrieff, Exchange Place 3, Semple Street, Edinburgh EH3 8BL, T: 0131 473 3500. © 2014 Scott-Moncrieff. All rights reserved. No part of this publication may be reproduced by any means without the written permission of the copyright owners. Although every effort has been made to ensure the accuracy of this publication, the publishers cannot accept responsibility for any errors or omissions.

INFRASTRUCTURE

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WHAT SMEs SHOULD KNOW BEFORE

GOING GLOBAL UK company growth could play a big part in helping the economy recover from recession, but SMEs should plan carefully before expanding overseas warns Eamonn Doyle, who bears the scars from tackling the American market, not once, but twice.

amonn Doyle has a track record in growing technology businesses, first with CityIS, which was acquired by the global visual communications specialist Viju in 2010, and then as CEO of Bloxx, the enterprise web security company now trading across three continents. Most recently he has moved into the travel and tourism space with Avvio, developers of hotel booking engine software. So he knows a thing or two about taking business abroad.

the do’s and don’ts of international expansion with Scott-Moncrieff business growth specialist Gareth Magee. “SMEs are not equipped to imitate the same expansion model as large corporations. Their pockets simply aren’t deep enough. My experience is, no matter what you think it will cost to gain a commercial foothold in a new country with different customs, rules and regulations, you can be sure it will end up costing much, much more. Realistic cash reserves are essential for survival.”

“The first thing I say to any company asking my advice about entering the US market is ‘don’t do it!’, ” laughs Doyle, who is taking time out from his hectic schedule to chew the fat about

So what advice does he give to entrepreneurs hoping to avoid the pitfalls of going global? Firstly, he says, company owners should examine their motives for international

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expansion closely and think very carefully about who they send in the vanguard. “Too often they will send their best salesman and this is a major mistake. International offices are not branch companies of the UK operation, they are start-up businesses. You need to send someone with entrepreneurial spirit and a founder mentality and skillset to cope with the administrative challenges of setting up the structure and contacts essential for your organisation to survive and flourish. If you don’t have the right person to send immediately, then wait until you do because this person is the magic ingredient that will determine whether you succeed or fail.”

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V I S I TO R S TO T H E E D I N BU R G H INTERNATIONAL BOOK F E S T I VA L , W H I C H W E A R E P R O U D TO SUPPORT.

The second mistake companies often make is to assume that it will be business as usual. “Wrong,” says Doyle. “In the US, you need to appear as a US company to prosper. Websites must be US focussed, using American language, spelling and case studies. The great work you have done in Birmingham or Aberdeen won’t cut the mustard in Chicago, it simply alerts people to the fact you’re not a US business.” A point which leads the discussion round to how businesses decide where to locate the start-up office. The US is a huge country made up of many distinctly different markets, time zones, cultures, laws, terminology and pay rates.

INTERNATIONAL OFFICES ARE NOT BRANCH COMPANIES OF THE UK OPERATION, THEY ARE START-UP BUSINESSES. Independent research to uncover nuances of the local market is advised and companies must be confident that their approach is appropriate and their product is flexible enough to meet local requirements in terms of its features, functions and engineering design, says Doyle.

IT DOESN’T TAKE LONG TO LEARN THE SUBTLE DIFFERENCES BETWEEN A US CUSTOMER ’S NEEDS AND THOSE OF A UK CLIENT.

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“It doesn’t take long to learn the subtle differences between a US customer’s needs and those of a UK client. At Bloxx we found that function does not always win. Our UK clients would persevere to successfully install the most effective solution whereas in the US they want fast and cheap – product benefits are of lesser importance. Also you find that US clients are hard-won and easily lost if your backup service is not up to scratch. They are prepared to take one risk if they haven’t done business with you before, and that is in selecting your company. If after-care is weak, the deal will collapse.” Would he consider breaking into the American market for a third time? Without a doubt.

INTERNATIONAL

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TESTING TIMES FOR

PUBLIC

SECTOR CONTRACTS

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MILES CYCLED BY THE F I R M ’ S P E DA L F O R S C OT L A N D T E A M TO R A I S E £ 8,3 9 8 F O R CA N C E R RESEARCH UK

Following the recent Cabinet Office review of G4S and Serco contracts, led by Scott-Moncrieff partner Nick Bennett, what can other public sector bodies be doing to avoid a similar scandal?

UK GOVERNMENT CONTRACTS HELD BY THESE TWO CORPORATE GIANTS HAVE A COMBINED VALUE OF ALMOST £6 BILLION.

ast year’s scandal surrounding troubled government contractors G4S and Serco has put public sector governance firmly in the spotlight amid taxpayers’ calls for greater transparency and accountability. Hard pressed department heads operating in increasingly complex multi stakeholder environments are under more pressure than ever to manage outsourced contracts efficiently and effectively. Not only that, but ‘back office’ departments managing these contracts must achieve commercial balance in the face of looming spending cuts. Last year, our international network, Moore Stephens, was one of only two firms appointed by the Minister for the Cabinet Office to review the major contracts delivered by G4S and Serco. This wide scale review was prompted by the Ministry of Justice’s (MoJ) audit of electronic tagging and court services contracts held by Serco and G4S. UK Government contracts held by these two corporate giants have a combined value of almost £6 billion covering services in immigration, security, defence, transport and facilities management among others.

Reporting to an Oversight Group which included permanent secretaries, crown representatives and private sector nonexecutive directors, the public sector audit and assurance team at Moore Stephens, led by Nick Bennett, undertook the review over a five month period with the final report being published in December 2013.

of a criminal investigation by the Serious Fraud Office. Serco agreed to repay £68.5 million for its part in over charging on MoJ contracts. In a written statement to Parliament, Justice Secretary Chris Grayling said the MoJ audit had uncovered “serious issues relating to invoicing, delivery and performance reporting”.

“This was a very high profile review which drew on our combined expertise in analysing the complexities of contract management in a highly pressurised environment. The approach to the review was agreed with the Cabinet Office and National Audit Office and examined both the charging of services and the contract management arrangements in place. It gave us a unique insight into the issues public sector departments are facing as they drive greater value for the taxpayer in an increasingly commercial environment,” says Nick.

The Moore Stephens team found no further evidence of deliberate acts or omissions in other contracts outsourced by other government departments to Serco and G4S. The review did, however, find deficiencies in key controls being applied to the invoicing and payment processes across the majority of contracts, increasing the risk of overcharging. Many of these deficiencies were in the departments responsible for managing these contracts.

The wider review was triggered when the MoJ discovered significant irregularities in billing practices surrounding the Electronic Monitoring contracts with Serco and G4S dating back to 2005. This is now the subject

Nick has some sympathy for public sector staff struggling to meet spending cuts and driving value from the public purse whilst continuing to meet service users’ demands.

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The Contract Management Assessment model evaluates organisational development, project management arrangements, financial systems and controls, data analytics and value for money. The model was based on Moore Stephens’ experience as a pre-eminent provider of contract auditing to the European Commission. The firm also undertakes more than 800 reviews for United Nations agencies and another 650 audits for other international funding institutions. In undertaking contract management assessments, public sector department heads, worried about controlling complex contractual arrangements with the private sector, can gain confidence in governance structures and their ability to meet statutory and regulatory responsibilities. “Poor governance leads to lack of control, weak financial management and can result

With no further evidence of deliberate impropriety found beyond those on the Electronic Monitoring and Prisoner Escort contracts, both Serco and G4S are now working through a process of corporate renewal.

Outsourcing can be an effective way to introduce new and innovative ideas and methods into traditional public sector functions. However its long term success depends at least partly on public sector agencies clearly agreeing the measures of success at the outset. Profit will always be a driver in the private sector and public sector bodies must ensure that their internal contract management resources and procedures are sufficient and robust enough to ensure that public service objectives are always kept to the fore.

THE CABINET OFFICE IS KEEN TO ENSURE GREATER SCRUTINY IS APPLIED TO THESE LARGE CONTRACTS.

Nick Bennett is a partner specialising in public sector with Scott-Moncrieff, and Moore Stephens LLP, London. e: nick.bennett@scott-moncrieff.com

BILLION

£200

COMPLEX

PUBLIC SECTOR

PROFIT

CORPORATE GIANTS

INSIGHT

OVERPAYING SPOTLIGHT GOVERNMENT

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SCRUTINY

SUPPORT

£6 BILLION

UNIQUE

PUBLIC SECTOR

The Cabinet Office is keen to ensure greater scrutiny is applied to these large contracts. In Scotland, G4S and Serco continue to provide significant outsourced government work. Whilst the Cabinet Office advice does not extend to devolved functions, or indeed to the Scottish Government’s procurement policies, it may be time for devolved governments, local authorities and the health service to consider the extent to which they are similarly exposed.

SPENDING CUTS EFFICIENTLY

OBJECTIVES

HIGH PROFILE

in overpaying for services. Taxpayers and service users will lose out without systems in place to monitor return on investment and performance delivery. Our depth of experience in governance, risk management, procurement and contract management within health, central, local and devolved government allows us to provide valuable additional support to internal departments charged with driving best value from the contracts they award to the private sector,” says Nick.

SCANDAL

“The public sector spends over £200 billion on goods and services each year and managing outsourced contracts and partnership agreements efficiently and effectively demands robust procedures. In our findings we were able to highlight areas of strength and integrity, but also significant weaknesses which are now priorities for the government to address,” he says.

PRESSURE EXPOSED

DEFENCE

BIG POSITIVES

AHEAD FOR SCOTLAND

There’s a popular saying in the investment world which I believe has resonance for Scotland in the turbulence ahead – “Let the trend be your friend”.

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M E M B E R S O F S C OT T I S H C O U N C I L F O R VO L U N TA RY O R GA N I S A T I O N S ( S C VO ), WHO BENEFIT FROM O U R F R E E VA T A N D TA X H E L P L I N E.

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THERE IS MORE TO SCOTL AND THAN PETROCHEMICALS

mid the noise of the European election, the independence referendum, a Westminster election in 2015 and elections to the Holyrood parliament in 2016 it will be hard to discern a trend of any sort, least of all one that is business-friendly. It’s not just that business concerns tend to be pushed down the agenda during political campaigns, but the uncertainty also prompts customers to delay purchases or investors to defer funding. And with many reasons to delay over an extended period – with serious complexities were Scotland to vote for a separate tax and regulatory regime and possibly even a separate currency - the outlook for business has seldom looked more uncertain. What trend could possibly be a friend? THERE ARE THREE THAT SHOULD HELP BUSINESS CONFIDENCE AND ACTIVITY:

ECONOMIC RECOVERY

The first is that the economic recovery is set to continue through 2014 and beyond. Business and consumer confidence is on the up. Numbers in work are at record levels. Mortgage lending has sharply improved. House prices are rising. UK forecasts have been raised and some now predict growth could hit three per cent in 2014. Nor is Scotland missing out. From consumer spending to Scottish Chambers of Commerce, and Bank of Scotland employment surveys, business confidence has been steadily rising.

RECENT FIGURES SHOWED THAT THE TOTAL NUMBER OF BUSINESSES IN SCOTL AND HAS HIT A RECORD 343,000.

BUSINESS DYNAMICS

The second is the underlying change underway in business activity. The economy emerging from recession is different in composition and in dynamic from that which entered it. There is an upsurge in business formation. Recent figures showed that the total number of businesses in Scotland has hit a record 343,000. Of this total, 341,000 or 99 per cent comprise small and medium sized enterprises (SMEs). These now employ 1.1 million. The biggest growth – 73 per cent of the increase in the year to March 2013 – was in the ranks of sole traders and unregistered businesses, many of them active in e-commerce. Much macro-economic modelling and commentary fails to capture this dynamic. Micro businesses are not seen as employment generators and are thus deemed insignificant for the purposes of macro-economic forecasting. But this misses the reality that many micro businesses are outsourcing work to other like-minded micro entrepreneurs. Individually they may be insignificant. But collectively, this latticework of micro businesses is a dynamic and growing force. There is more to Scotland than petrochemicals and public sector spending. The scale of change wrought by the internet is compelling. An e-commerce survey conducted for Scottish Enterprise estimated that 200,000 direct jobs and £9.7 billion of Gross Value Added are associated with Scotland’s £31 billion a year of e-commerce sales (of which about £8 billion are over the internet). The relevance for Scotland is that broadband and Wi-Fi dissolve the barriers of location and geography. They enable people to work from locations of their choice, in attractive surroundings and with the minimum of environmental damage and intrusion. EXCHANGE | 09

OPINION

AND PUBLIC SECTOR SPENDING.

THE RELEVANCE FOR SCOTL AND IS THAT BROADBAND AND WI-FI DISSOLVE THE BARRIERS OF LOCATION AND GEOGRAPHY.

DESTINATION SCOTLAND

And the third “friendly trend” through 2014 is the global attention and interest in Scotland and what Scotland has to offer – from the Commonwealth Games in Glasgow through the Ryder Cup and the continuing drives to promote Scotland as a global tourist destination. There is also the keen international attention that the independence referendum will inevitably attract. This is both a challenge and an opportunity for Scottish business to take advantage of the spotlight and show what Scotland has to offer by way of products and services.

Amid the political noise and tumult, here are three trends we can count on as being potentially great friends for business in the period ahead. Bill Jamieson is former Executive Editor of The Scotsman and now runs the Scot-Buzz website to promote business and enterprise in Scotland. e: wbjamieson@supanet.com

LAND & ESTATES

FERTILE GROUND

As the least populated country in the UK, it is little wonder Scotland has a proud history of making the abundance of land work. The land and estates sector has faced some significant difficulties recently and while many issues persist, landowners and estates are working hard to overcome financial challenges.

orward–thinking landowners have recognised that the key to future prosperity lies, to an extent, in flexibility and taking calculated risks. Renewable energy has become an important income source and many landowners now have their own wind turbines, selling the excess back to the Grid. Others have reaped the benefits from installing biomass boilers, and accessing Renewable Heat Incentive (RHI) payments. These are currently extremely generous; although this may not be the case for long. However, diversification is not just about renewables. On many estates you will now find refurbished cottages for holiday lets, a range of leisure and sporting activities and some farming estates are opening their doors to the public by establishing a farm shop or running a ‘pick your own’ business – all of which can generate good revenues.

In the quest to establish a profitable enterprise there are a number of valuable grants available such as the Empty Homes Loan Fund which has replaced the Rural Empty Property Grant, designed to support the restoration and refurbishment of old buildings into much needed housing in rural areas.

FINANCE REMAINS A THORNY ISSUE, WITH MOST L ANDOWNERS UNSURE HOW LONG THE BANK WILL CONTINUE TO SUPPORT THEM. But wider support is critical too. Recent campaigns to promote British food, and particularly its use within NHS trusts for example, will contribute to a steadying of the ship. However, more can always be done EXCHANGE | 10

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T R E E S W E S AV E D L A S T YEAR THROUGH OUR RECYCLING

by governments and the public sector to support farming and domestic produce. Finance remains a thorny issue though, with most landowners unsure how long the bank will continue to support them, resulting in a constant juggling act between losses and the servicing of debt. This is where alternative income streams such as RHI can be extremely helpful, but only more open partnership between lenders and landowners will effect any real change. While challenges in the landowning community remain, with little prospect of imminent let-up, this sector has shown remarkable resilience and an appetite to adapt to maximise their future profits. Morag Watson is a Director of Tax and Head of the Renewables, Land and Environment Group. e: morag.watson@scott-moncrieff.com

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OUR CLIENTS

VEGWARE FOUNDER, JOE FRANKEL SETS SIGHTS ON BIGGER VISION

The stellar growth of the UK’s first and only completely compostable food packaging company Vegware is testament to the vision of its founder, but ‘have-a-go’ businessman Joe Frankel says the road to success is a bumpy one. 2 013 IN NUMBERS

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OF OUR CLIENTS EXPRESSED THE HIGHEST L E V E L S O F S A T I S FA C T I O N F O R B OT H OV E R A L L SERVICE AND CHARIT Y E X P E R T I S E I N T H E 21S T A N N UA L C H A R I T Y F I N A N C E S U R V E Y.

athematician Joe Frankel was living in Berkeley, California, and enjoying a successful academic career when his wife returned home one day from the San Francisco farmers’ market with a spoon that reminded him of his childhood. It sowed the seeds of a business idea which today is fast becoming a global brand, achieving 901% UK growth in five years and ranking as Scotland’s third fastest-growing firm of 2013 in the Deloitte Fast 50. The then 30-year-old, who was rubbing shoulders with some of the biggest names in technology, was imbued with the entrepreneurial spirit prevalent on the West Coast of America at the time, and already knew that he wanted to start his own business. The sampling spoon felt like the old bone cutlery he remembered from his

grandmother’s house, and proved to be the turning point in his career from academic to entrepreneur. “I was fascinated that a piece of cutlery which had such a nice feel was made from vegetable matter and was also completely eco-compostable,” says Joe, who immediately set about tracing the supplier. “I went back to the farmers’ market and eventually traced the company who supplied the potato and corn starch the cutlery was made from. An idea was forming that I could perhaps set up an e-commerce company selling other people’s products.” It was an idea that grew into Vegware, the zero waste food packaging company which nowadays conducts its own manufacture and counts the biggest contract caterers and food distributors, UK government offices and the NHS among its customers.

HAD WE GONE FOR BANK FUNDING, I HAVE NO DOUBT THAT VEGWARE WOULD NOT EXIST TODAY.

PLANTING A DIFFERENT FUTURE Adopting what he describes as the Californian approach to business, Joe began to plan a different future. “In the US, businesses start with their vision of where they want to be and then work back to understand what they need to do to get there. I suppose we were very aggressive in the beginning and if I hadn’t had that exposure during my time in California I may have adopted a less risky British approach to the business.” So by autumn 2006 he had set up a website, found a fulfilment house, and Vegware was born.

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Turnover at Vegware this year will pass £6.5 million, and the company has picked up many sustainability and business awards along the way, most recently winning the Queen’s Award for Enterprise in Sustainable Development, the UK’s highest accolade for sustainable business success. So, now that they are the biggest players in the market, what is next for the Edinburgh-based eco entrepreneurs?

Joe Frankel with Dominic Marjoram, Sales Director and Lucy Frankel, Communications Director

CHOOSING THE RIGHT PEOPLE Back in the UK in 2007, Joe met his future business partner Dominic Marjoram over a shared love of bluegrass and beer. A clinical neuroscientist at Glasgow University, Dominic was also enthusiastic at the prospect of growing a business and began to reduce his university hours to focus on Vegware. By 2008 the pair realised they were onto something good, and that in order to grasp the opportunity they would need to be more than part-time business hobbyists. The next milestone came when Joe’s family offered to cover his mortgage payments for five months, allowing him to commit fully to developing Vegware. By 2009 and still working from a garage, with just a website and an 0845 telephone number, the business partners had grown turnover to £1 million when they decided it was time to write a business plan and to seek investment. “Had we gone for bank funding, I have no doubt that Vegware would not exist today,” says Joe. “We had already raised £30,000 from friends and family, who continue to own 2.5% each of the company, and we wanted private investors who would work with us to develop our market.” Enter venture capital firm Bradenham Partners through an introduction by Kelvin Capital. “Anybody will tell you that it is important to choose your business partners carefully. Bradenham have great experience in

contract catering, in managing people and keeping them on board. They are very savvy investors and we value their advice and enjoy a direct relationship with them. Good people come first in any good business and we enjoy similar relationships with all our professional advisers.”

DURING JANUARY 2010 WE WERE LOSING £1,000 EACH DAY. BUMP IN THE ROAD However, almost immediately the UK economy took a tumble and Vegware hit a major bump in the road to success. Sales all but disappeared and for six months Bradenham’s investment was used as a war chest just to keep the company going. Joe recalls it as a frightening time. “During January 2010 we were losing £1,000 each day. Despite our best efforts there was absolutely nothing coming in from the outside world so I remember making the best of it and spending time sledging with the kids. Suddenly, around March 2010, our customers began to restock and we haven’t looked back.”

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“We are extremely proactive in building our brand and web presence to develop awareness of Vegware, and already operate in Europe, South Africa and North America, and we will continue to expand internationally. Our ultimate goal is to create the world’s best brand of eco-disposables. We have diversified, offering zero waste consultancy and design and have ideas in the pipeline that could be patented,” says Joe, who adds that he believes global success is dependent upon local knowledge and having the right business model in place to manage risk. For someone who has already achieved national recognition for sustainability and business acumen culminating in a visit to Buckingham Palace, it’s obvious that Joe Frankel has clearly worked out how he will achieve his vision.

OUR CLIENTS

GLOBAL SUCCESS

FUELS BORROWING

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CHILDREN GIVEN PRESENTS B Y O U R S TA F F T H R O U G H F R E S H S TA R T A N D H O M E L I N K’S C H R I S T M A S PRESENT APPEAL

PERHAPS A GREATER FOCUS ON ASSISTING CREDIT APPROVAL RATHER THAN ON DISCOUNTING RATES IS NEEDED.

hree years ago, businesses were all focusing on reducing debt as much as possible – and, ideally, never being in debt again. Perhaps a little unrealistic, but an understandable reaction to the banking and economic collapse. Today, there is a return to an acceptance that gearing is good for business, and part and parcel of recovery. The appetite for growth and the desire to borrow may be returning. There is a feeling, however, that the banks are going to struggle to keep pace. Two aspects, in particular, are concerning.

FIRSTLY, THERE IS CONCERN THAT THE GOVERNMENT’S INITIATIVES ARE WIDE OF THE MARK. First came the National Loan Guarantee Scheme (NLGS), launched in March 2012. The scheme allowed banks to borrow at a cheaper rate and then pass the savings on to businesses. Standard lending conditions applied and businesses were encouraged to approach their “usual relationship manager”, a notion that for some was a challenge, and for others, almost impossible given the extent of senior staff changes. Isn’t this type of rate promotion in danger of missing the point? With interest rates as low as they are, surely the priority for most businesses is the availability of credit, not a percentage point reduction in interest rates for those who have secured it?

Next came the Funding for Lending Scheme (FLS) in July 2012, again providing funding to banks at below market rates. Anecdotally, bankers have expressed a fear that these schemes have not brought the change that businesses have been hoping for, rather, just delivering discounted rates for those who are already credit approved. Indeed businesses ‘in financial difficulty’ are not eligible and overdrafts are excluded. The statistics don’t seem to offer much encouragement either – according to the Bank of England, gross lending to UK SMEs in 2013 show little, if any, improvement over 2011. Indeed, although FLS statistics focus on its impact in lowering the cost of consumer borrowing, business lending fell in the quarter to June 2013. Surely we should be arguing for greater use of the existing Enterprise Finance Guarantee (EFG) scheme? Like its predecessor, the Small Firms Loan Guarantee Scheme, it exists to encourage banks to lend where there’s a lack of security - the Government guarantee significantly reducing the bank’s exposure. Take up since its launch, though, seems to have been patchy. Clearly the Government needs to be seen to be providing, and promoting, a range of measures, but perhaps a greater focus on assisting credit approval rather than on discounting rates is needed.

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SECONDLY, WE NEED MORE THAN A SHIFT IN POLICY – THE ‘REL ATIONSHIP’ IN REL ATIONSHIP BANKING IS GOING TO BE KEY. When the crunch came, no-one was left untouched. The banks had to react – jobs went, branches closed and long-standing teams were broken up. Inevitably, relationships with SMEs and advisers were lost. The pre-crunch lending model was clearly flawed, but to recover, the relationship banking approach has to be re-established. Many of the familiar faces may have gone, but the new relationship managers are working hard to get up to speed with an increasingly optimistic market. It will take work on all sides to regain the position. SMEs need to be open to building new partnerships, banks need to invest in these relationships, and intermediaries need to do the legwork to re-open the channels of negotiation. The net result will be positive for us all. If we’re to lead Europe’s growth then it’s time to take a few positive steps towards getting back to business - but they’re steps that we will all have to take together.

Gareth Magee is a partner and business adviser with an interest in SME funding. e: gareth.magee@scott-moncrieff.com

FUNDING

Recent news coverage reports that the UK will lead Europe’s growth over the next five years; strong words indeed. But there does seem to be a noted upturn in confidence. For SMEs, this is resulting in a renewed attitude towards debt.

INVESTING IN SUCCESS When a pioneering new model of financing social enterprise projects was launched, few could have predicted how wide reaching the benefits would be.

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OFTEN WE FIND CHARITIES WILL MODIFY THEIR BEHAVIOUR IN ORDER TO ACCOMMODATE

HOURS OF CSR ACTIVITIES THAT S C OT T- M O N C R I E F F S TA F F CA R R I E D O U T.

THE REQUIREMENTS OF THEIR FUNDERS.

ondon-based Social Finance’s innovative approach to funding charitable activities is receiving plaudits from across the country. The organisation has developed and implemented its Social Impact Bonds (SIBs) in no fewer than five projects across England. Based on payment by results, it has changed the nature of the relationships charities have with their funders. The Peterborough Prison SIB was first to market, promising a reduction in re-convictions of short sentence prisoners with investors’ funds distributed across a spread of rehabilitation service providers. A measured reduction in re-convictions means the ‘Commissioner’, in this instance the Ministry of Justice, provides a return to the investors, allowing the lenders’ money to be reinvested in other social projects. The results of the first year have been encouraging with a 6% drop in reoffending rates compared to a national increase of 10%. However, the SIB will be measured on longer term reoffending rates. SIBs offer exciting new benefits for the charitable sector. For a charity considering establishing a SIB the relationship can reap benefits beyond the traditional donor model. With investors on board, charities can tap into a new type of partner that has a vested interest in the success of the project, leaving the charity free to devote time to delivering the best services.

are already in a better place, free from the annual constraints of securing funding, and free to focus on developing new approaches to delivering services in the best possible way.” But there are still challenges to overcome. Charities will have to be sure that they have the energy for the job, that their goals are realistic and that staff are results driven. What’s more, it’s critical that effective processes are in place to efficiently manage these outcome dependent contracts. Scotland’s first SIB was developed on a smaller scale last year by YMCA in Perth together with the Department of Work and Pensions. The Living Balanced programme was launched to support young people in Perth into work, training or education and £300,000 was secured from local businesses – investors who knew the work of the organisation and wanted to benefit their community, attracted by the possible upside of a return on their investment. “The SIB structure provides a consistent, sustainable cash flow over an extended period of time, one reason why it’s such a powerful

tool in creating effective provision in the community. YMCA is then released to focus on creating consistent, high quality provision for local young people,” said Ian Marr the then CEO of Perth YMCA, who has since become Chief Executive of Aberdeen YMCA and is now developing a SIB financed project aimed at reducing teenage pregnancies. Designed to drive better value from the public purse, SIBs have undoubtedly opened the doors for true innovation in social programmes and public services. Investors and commissioners need robust project appraisal systems in place but, as payment is by result only, there may be greater appetite from governments to back pioneering approaches that could deliver better outcomes. At the same time, taxpayers can take comfort from knowing their money is invested in programmes which work. Gillian Donald is partner and head of Scott-Moncrieff’s Charity Group. e: gillian.donald@scott-moncrieff.com

SOCIALIMPACT IMPACTBONDS BONDS––IN INBRIEF BRIEF SOCIAL Social Impact Bonds are an innovative way of attracting new investment that benefits individuals and communities.

“Often we find charities will modify their behaviour in order to accommodate the requirements of their funders. Instead of delivering their service in the way that is right for their clients, they are being driven by other forces.” explains Gillian Donald, head of Scott-Moncrieff’s charity group.

They are a form of outcomes-based contract whereby public sector ‘commissioners’ commit to pay for significant improvement in social outcomes for a defined population.

“As we’ve seen from our involvement in Peterborough, even before the outcome of the initiative has been measured, the charities

Financial returns are paid to investors by the public sector commissioners on the back of improved social outcomes. If outcomes are not delivered, then investors may not receive a return and have effectively made a charitable donation.

Investment is sought to fund the Social Impact Bond and the services, which are delivered by service providers with a proven track record.

EXCHANGE | 17

SOCIAL INVESTMENT

2 013 IN NUMBERS

TECHNOLOGY

95%

TECHNOLOGY HEADS INTO THE CLOUD Our world has changed. On average, we all now have at least two devices connected to the internet. Most of us (whether we know it or not) are permanently hooked up to the cloud.

ntil recently, businesses took care of their day to day finances with the aid of software which was downloaded onto desktops. Business managers needing to query anything with their advisers would have to send a back up to the firm’s office by email or post creating additional administration and delay. Now online accounting, using cloud based software applications, is beginning to revolutionise the way businesses of all sizes interact with their advisers. Unlike desktop software packages requiring up front capital investment, the new wave of cloud accounting apps are instantly available for a token monthly fee, and there are no costly software upgrades or updates to worry about.

OF OUR CLIENTS S A I D T H E Y WO U L D RECOMMEND U S.

CLOUD REIGNS FOR POWERMAPPER More and more businesses are developing an appetite for the cloud. Mark Rogers, CEO of Powermapper Software which specialises in website analysis tools, switched to online accounting package Xero because he wanted a user friendly system and better access to the management information he needs, when he needs it. Satisfied that storing accounts in Xero is much safer than storing accounts on a laptop in your office, Mark can now access real time information concerning his business immediately on multiple devices from anywhere in the world. What’s more, he has given permission for his professional advisers and management team to do the same, saving time and improving communication. His online accounting package is also linked to his business bank account which cuts out any need for manual input of bank transactions. Forward thinking professionals have embraced online accounting and businesses looking for efficiencies and flexibility are recognising the many benefits of today’s working practices.

Lucy Wright is a Manager in Scott-Moncrieff’s Business Advisory Group. e: lucy.wright@scott-moncrieff.com Scott-Moncrieff is a Silver Partner of Xero

EXCHANGE | 18

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