Inform

Strategic alliance with Challenge Consulting – driving multi-million pound client benefits

We’re delighted to announce the formation of a strategic alliance between Invigors and change management specialists Challenge Consulting.  Both firms will retain existing corporate structures.  The new working relationship comes in response to growing demand from senior management teams for advice on both expansion and dealing with the changed market dynamics.  The scope of their services starts at strategy and covers everything from commercial modelling through business design to change.

The two firms are already working together to drive major transformation projects with multi-million bottom line benefits in areas such as:-

• Operational and corporate restructuring
• Efficient operating platforms for flow and non-flow businesses
• Geographic expansion
• Development of new business units
• M&A strategy, implementation and integration

As specialists in asset finance and related sectors, Invigors provide advisory services across a range of business disciplines, including strategy and commercial development, geographic expansion, mergers, acquisitions and strategic alliances, research and intelligence, accounting, tax, training and professional development.

Challenge Consulting are change management specialists with an enviable track record in leading medium to large companies through major operational change programmes, design and implementation of new target operating models and  post implementation performance management.  They have expertise in several industry sectors, including Asset Finance and Car Leasing.  Previous work includes the design and development of new business models for both ING Lease and ING Car Lease, including integration of major acquisitions

With the combination of deep domain knowledge, leading edge business architecture and change management, we believe the relationship can offer unique value for clients seeking higher operating efficiencies and competitive advantage.  Why not give us a call?

For further information please contact either Peter Hunt or Chris Cooper
Peter Hunt, Partner, Invigors LLP, +44 (0)845 003 1000, e-mail peter.hunt@invigors.com
Chris Cooper, Managing Director, Challenge Consulting Ltd, +44 (0)1923 270001, e-mail chris.cooper@challenge-consulting.co.uk

Are you listening to your Salesforce?

Having an effective sales force and sales processes make sense.  The rewards for improvement are quick - increasing sales, improving efficiency, increasing customer and sales force retention and acting as a positive incentive for high quality recruits.   The payback of making changes (whether training or process driven) can often occur in the same financial year, the ROI benefits substantial.

Some time ago we carried out a major “Voice of Sales” survey for a client.  The logic was twofold.  Firstly as a diagnostic to identify and qualify areas for business improvement; secondly to determine the impact of a recent business reorganisation.

Not surprisingly, response rates were very high and the results drove positive change within the business.  These included:-

• Identifying and removing barriers to business within sales and middle office functions
• Identifying areas of training where significant value could be added to the sales people’s performance and career development
• Determining how communications and best practice sharing could be improved

An important bi-product from the survey was highlighting the different expectations of recent recruits and where existing process and service levels were lower than competitors.  By capturing this knowledge, our client was better able to win new business in competitive accounts and improve the induction and retention of new recruits.  New insights were also generated for resolving problem areas, such as commission calculation and payment structures. 

Acting on the survey results gave ownership of business solutions to the sales force and improved morale.

A Voice of Sales survey is a modest investment that creates the opportunity for a raft of commercial benefits, competitive advantage and fast payback.  It amazes me that more businesses don’t use them.

Find out how a Voice of Sales survey could improve your salesforce morale and effectiveness by calling Peter Hunt on +44 845 003 1000 or e-mailing peter.hunt@invigors.com.

Planning for Growth

Most businesses would claim to have some sort of strategic marketing plan, setting out the company direction and initiatives to support the achievement of financial growth targets, but too often the process is disconnected and the output of little or no value. The plan can turn out to be little more than a list of projects and tactics to justify the numbers and sits in a file from one year to the next.

At the core of a real strategic marketing plan should be competitive differentiation, or put another way, how to create and maintain superior customer value propositions (CVPs) to enable you to win and retain profitable business. But this can only happen if you start with a deep understanding of your market, your competitors and most importantly your customers.

All too often we assume that we have insight into the needs and behaviour drivers of our customers and prospects, however investment in this area is rarely wasted and provides the solid foundation on which you can confidently build the strategy.

This will usually involve external research in the form of interviews, surveys or focus groups, but don’t forget to look within, there is a vast amount of insight in the customer facing functions of an organisation. Gathering customer insight is a valuable exercise but there needs to be a process to take this market feedback and use it to define the customer value proposition.  Invigors, though its strategic alliance with Challenge Consulting, has a unique framework for the development of CVPs based on both internal and external feedback. 

A profound understanding of markets, competitors and customers means that you can begin to identify discrete customer segments, building CVPs to differentiate you in the market, attracting and retaining the right customers and deploying your resources in the most effective way.  Moreover, this process of CVP development should go beyond the formulation of marketing strategy into business process design and organisational change. By driving the CVP focus throughout the business, organisations can not only realise the benefits of a more profitable customer focus but also reduce costs in their business operations. Now there is the basis of a strategic marketing plan that really can support the achievement of financial growth targets!

To learn more about how Invigors' unique approach to building superior customer value propositions can drive business change and improved profitability in your organisation, contact Mike Roberts on +44 845 003 1000 or e-mail mike.roberts@invigors.com.

Tax Variation

It is customary in the UK market for mid to big ticket leases to include a tax variation clause.  The aim of these clauses is to protect the lessor against adverse changes in tax legislation during the term of the lease, although many clauses are written as “two way” so that where there is a beneficial tax change the benefit is passed on to the lessee through a reduction in rentals.  By contrast, smaller ticket and car leases are generally written “tax fixed”, with the lessor taking the risk of tax changes affecting the profitability of the lease, or may include a “one way” clause so that the lessor can increase rentals for an adverse tax change, but is not required to reduce rentals.

The changes to the rate of corporation tax and capital allowances announced in March 2007 will have triggered tax variation clauses in leases and will have left lessors wondering whether they should include such clauses in their standard leases for future transactions.  Whilst both the corporation tax and the capital allowance rate changes were announced as taking effect from 1 April 2008, each has transitional arrangements affecting any accounting period of the lessor which runs over that date and each impacts on transactions which had already commenced.  In addition, the timing of the legislation implementing them differs, with the tax rate set by the Finance Act 2007, and so effectively fixed by July last year, but the capital allowance legislation in the current Finance Bill will not become law until this summer.  This has left lessors with the problem of deciding when to prepare tax variation calculations, which is further complicated by the need to re-evaluate the lease to properly reflect the capital allowance changes (by contrast a change in the tax rate only could be dealt with through a much simpler calculation).  In many cases tax variation adjustments have been postponed until this summer, so that a single calculation can be prepared. 

In addressing whether tax variation clauses should be included in standard lease contracts for the future, lessors need to consider what the effect of a change in the tax rate or capital allowances would be on their profit, the likelihood of such changes (both adverse and beneficial) and the cost of calculating adjustments.  Given experiences with implementing tax variation clauses over the past year and the history of tax changes, it is likely that at least some lessors will now be deciding that the use of full tax variation clauses should be restricted.

If you want to discuss either the calculation of tax variation adjustments or your strategy for tax variation clauses please contact George Tonks on +44 845 003 1000 or e-mail george.tonks@invigors.com.

Improving credit management - new research

With the market indicating a worsening trend in overdue accounts, the "credit crisis" causing liquidity issues for many firms and margin pressure for good customers, in 2008 effective credit management will be more critical than ever for finance companies seeking to maintain current profit levels.

Many credit professionals will have limited experience of managing in a downturn.  Existing information requirements, processes, policies and skill levels may not be sufficient.

While much focus has been placed by finance companies on Basel II related credit analysis and risk-based pricing models, new research undertaken by Invigors and Leasing Life has highlighted that the most important drivers of improved credit management are likely to be training with both credit and sales departments, improved information flows and internal management focus.

The nature and scale of change required will vary between companies.  How ready is your organisation, how skilled are your people, how effective are your arrears management processes, do your communication and feedback loops between credit policy, sales and credit management really work?  These things can be quickly established with an independent audit of current operations. For more information contact Peter Hunt on +44 845 003 1000 or e-mail peter.hunt@invigors.com

Source: European Credit Research, Leasing Life 1/08, Q30. “How important are improvements in the following areas, in terms of increasing performance in credit management in your business?” n = 36

Funding Green Assets - Where's the action?

Despite the high profile given to the “green” sector and the emphasis on the need for finance in order to promote its growth, evidence on the ground suggests limited interest from lessors so far.  Invigors' recent research into the sector  has shown that, despite the availability of finance being a clear barrier to growth, neither vendors nor funding providers in the UK are being pro-active in addressing the problem.

The situation is most acute in the  small-scale renewable energy sector, which consists primarily of solar thermal (domestic and commercial heating), plus microgeneration from solar photovoltaic (PV) systems and wind power.  It's not hard to see why:-

• The sector is  subscale  – our research indicated that the total asset market in the UK is no more than £100m, hardly enough to get lessors excited
• The market structure is highly fragmented – although a number of major manufacturers have entered the sector, these are mainly component suppliers.  Actual installation is still a cottage industry (for example the largest installer of solar PV systems has a turnover of only £14m)
• Much of the demand is currently from the residential sector which will not appeal to many funders
• The availability of government grants has had a stop-start impact on the sector.

And of course with installations on buildings, the main finance requirement is for retrofit since in new builds any renewable component is simply reflected in the total price. Add in technical, performance and supplier risk and the overall appeal of the renewable sector is enough to challenge even the most determined lender.

However despite this there is some upside to the market.  It's currently growing strongly, by around 40-50% per annum, driven by legislation and rising energy prices. Phase 2 of the Low Carbon Buildings Programme offers generous grants to the public sector for renewables installations, though it's much more stingy towards the residential and commercial sectors.  Also the Renewable Obligation Certificates (ROCs) have just been doubled for microgeneration – these are the “green credits” issued by OFGEM to renewable generators which can be sold on the open market.  Finally the feed-in tariffs offered by a number of utilities are starting to look more attractive, though nothing like as good as the subsidised feed-in tariffs in Germany (these are the tariffs paid by power supply companies for surplus electricity from microgeneration installations which is fed back into the local grid).

As a result, we’re seeing a number of niche financing opportunities and have started working with suppliers to create vendor finance solutions across a number of market sectors. 

With energy prices forecast to increase by up to 40% this year, it looks like the outlook for the green asset sector can only get better.

For a more detailed market review or to discuss specific opportunities in the renewable energy sector contact Richard Ryan on +44 845 003 1000 or e-mail: richard.ryan@invigors.com

Is your business killing your business?

Over the last couple of years, a wave of capital investment has meant that by simply holding their own in rising market, finance companies have enjoyed strong growth.  With capital investment forecasts around 2% for 2008, on top of market liquidity and cost of funds issues, finance companies will need to work a lot harder this year to hit shareholder expectations.

For many, M&A is a closed door.  Fortunately another profit growth opportunity – with lower corporate risk - is much closer at hand.

We’ve all heard the adage 80% of your profit comes from 20% of your customers.  Then ask the question, how many of the remaining 80% of customers are generating less revenue than it costs to serve them (i.e. losing you money)?  Only some of these will be necessary for scale economy reasons, or to maintain an important relationship. 

The questions to ask are deceptively straightforward.  How much revenue are you generating from each transaction?  What does it cost to win the business, get it through credit and put it on the books?  How does that vary by route to market and means of proposal capture?  What about process hand-offs and workarounds?   What effect does bad debt have on each type of business?

With the right analysis, you’ll be armed with a clear picture of where to focus your business for the greatest profit.  Herein lies the rub.  Vested interests and sacred cows will abound.  Following this path requires strong leadership and a business analysis capability removed from the politics of day-to-day operations, able to make recommendations based on profit and insight, not fiefdoms.

Loaded with this knowledge you’ll have two choices – either re-direct resources to operate within the new profit-centric business model, or downsize to focus on those areas that make you real money (remaining conscious of the step-down impact of reducing scale economies).  Obviously some actions will take time to have their full impact but equally, there will be quick wins that bring near-immediate bottom line results.

From working with clients we know this is not always an easy route, but it’s a very tangible way to improve profitability in 2008. To learn more about how Invigors can add insight to your business e-mail Peter at peter.hunt@invigors.com or call +44 845 003 1000.

Now is the time to think about expansion – or exit !

Grow

Given the current market turmoil this might seem a strange or an overly ambitious time to be thinking about expansion when there sometimes appears to be barely enough liquidity to keep going leave alone grow. As for exit; why do it when the market chatter is all about caution and big discounts to value?

The reason is that real money - or at least the foundation ideas to make real money – is laid down in times just like these. Market shocks are a great reminder to all of us of that great line – the future ain’t what it used to be! But, the smart money is on those who use this prompt to think the unthinkable – where are we really going; can I really deliver the promised plan; is my business really sound? Unless you are getting a resounding “Yes!” from your own conscience and immediate nodding heads from your senior management colleagues you have got some thinking to do.

Consider the following strategic challenges – they should be very familiar to you:-

• I want to grow in my region or country and have greater scale and presence in selected industry categories.
• I want to make initial acquisition(s) in Q1 2008 and have a target list by mid November.
• I enjoy success in my current verticals but want to access new or adjacent ones or acquire in my existing niches

How would you rather spend your days? Fighting in the trenches and arguing over 25 basis points in the run up to the quarter end or being brave and fighting on a different level? There are so many distractions for your competitors who will be focused on day to day issues. These are the people who are always surprised when a merger or acquisition is announced - how did they do that, where did that come from, how did they identify that, where did they find the time?

The answer is of course getting organised, being brave and just for once, finishing something you started! The key strengths of Invigors advisory team is being ready and able to guide you through all of these things. The actual negotiation of an acquisition is relatively straightforward but always gets the glamour. The secret to success is to make sure you and your company is organised for success – curiously this applies in equal measure whether you are the acquirer or the acquired.

The answer isn’t to set up a project team!  Generally the optimal organisation framework has 5 basic elements: Strategy, Operations, HR, IT and Financial. They are all interlinked but all must follow Strategy. If you get that right the rest is straightforward. A tactical initiative dressed up as strategy usually costs money!

There are numerous issues to consider under each pillar. These include:-

Strategy

• Do you know what you need rather than what you want?
• Are current threats to your business best answered by acquisition/alliances?
• What threats remain unanswered?
• Are current targets appropriate, do they expand existing presence or open new areas?
• Are current targets a good fit for your current operational model?

Operations

• Can the target be absorbed within your existing management structure or are additional skills required?
• Will the target’s existing management be retained?
• Is site consolidation mandatory for an acquisition; what experience do you have of split site management?
• Where will the acquisition fit within your company; who will it report to, does additional management capacity exist or are new senior resources required?
• Can the existing site cope with material expansion of staff?
• Has the acquisition project manager been identified, what size project team will be required, what reporting framework and steering group will be constructed and by when?

IT

• How flexible is your existing IT framework; does the target have better systems; can they run independently or need integration – which way?
• Does your IT management have sufficient experience or bandwidth to support parallel or integrated operations?

Financial

• What financial disciplines or parameters must be met or have been included within the medium term plan: minimum returns (ROE, ROEC, ROI, others), what C/I ratios need to be maintained?
• In addition to the Capital acquisition budget, are appropriate Revenue budgets in place to cover related acquisition costs for year and 2008?
• What flexibility is acceptable in initial post acquisition phase, which integration or investment costs can be included or excluded?
• What timetable exists for medium term planning – are the planned M&A operations budgeted for 2008 and what assumptions are built in for 2009-11?

HR

• Are there any Union recognition constraints?
• TUPE provisions can be expected to apply; will there be any harmonization of terms difficulties with existing staff?
• What provisions are needed for pension plan valuation and integration arrangements?
• Are relevant professionals available within the necessary timetable to perform these tasks?
• Will the current HR framework require support during the acquisition process – how will that be achieved?
• Do the identified project team participants have the available capacity or have ‘backfill’ resources been identified to cover their current roles?
• Have these additional costs been included within the current budget?
• What has the gap analysis between required and available internal skills revealed?
• What are the plans and costs for additional resources and skills?

Sell

If on the other hand, your view is that now is the time to think about the golf course or the distant mountains of Machu Picchu, this is also the right time to plan the exit. Current market turmoil should not affect your medium or long term plans. Obviously you need to maintain the correct growth shape and demonstrate that the business is durable – but the planning stage is just as important for you as the acquirer – except that you might need to be even more prepared!

Preparing for a potential acquirer’s due diligence is one of the best corporate makeovers available to any CEO. If you don’t have the appetite for searching questions – or even worse, don’t know have the answers, then put it off for while BUT use the time to discover how your business works – it is probably different from how you imagine! There is plenty of additional profit in understanding the basics of any business – if a sale doesn’t look likely because of what you find it should still make you a better business.

An acquisition process is lengthy, time consuming, all absorbing and totally distracting. To endure it you must be certain of success – and for that you need to be fit and ready for the long haul.  Taking an external view of your company will sharpen up the management team. It should prompt serious and searching questions about where the company is going.

If you can’t see a clear way forward and aren’t able to present the detailed financial and necessary operating procedures in a simple and straightforward way, then nor will an acquirer. Your aspirations for price, available equity stake, retention as a non executive will all turn to dust if your review is not robust and you don’t follow up on the ‘fix’ list.

The asset finance sector retains the same attractions as it did before the current crisis – and it will do so again. We have a good mix of well run mature business with proven scope for expansion and new companies with the BIG IDEA. If you don’t fit these criteria now then work towards it – the market will return so be ready for it.

These are exciting and opportunistic times. All of the above are of course challenging for any management team but they are eminently doable – without too much effort on your part.  Specialist advisors such as Invigors have completed this task many times – from both sides of the fence. Now is the time to talk to us about moving your business up where it belongs.

Invigors has the insight, the ideas and the impact to make a difference.  To contact Chris about this topic e-mail him at chris.boobyer@invigors.com or call +44 (0) 845 003 1000.

Not more strategic planning!

As part of their annual planning round, many readers will currently be involved in a strategic planning process – and feeling quite dissatisfied with the whole affair! 

Compare aims against reality.  Let’s say the aims of strategic planning are to develop a winning business model over the medium-long term while responding to changing market conditions, prepare executives to deal with future uncertainties, generate a common executive ownership and stimulate new areas for innovation.  Unfortunately reality often revolves around existing notions of surviving the next twelve months, not looking foolish in front of the CEO during group sessions or the challenge process and not spending too long on the strategy when there’s proper work to do.  Clearly a mismatch.

Time is at a premium and all the reasons for minimising the strategic planning process are extremely valid.  However, creating durable competitive advantage takes some thinking and investment, whether it’s based on operational excellence and a new IT system, up-skilling your workforce or M&A activity. 

It should be possible to create a “light-touch” planning process that provides results that are somewhat more compelling than will be served up in many businesses over the coming weeks and months.  This is best shaped around the individual needs of the company and can also be done as a stand-alone exercise outside the planning round, for example in response to a sudden change in market conditions. Here’s my starter for what the process should look like:-

• Build the basic data pack for today’s business – financials, market and competitor positioning, KPIs.  Don’t spend too long on this.
• Strategic conversations with key stakeholders in the business – the board, rising stars, customers, sales people, etc. Identify the key themes, competitor initiatives, issues and risks underpinning the medium-term competitive environment and how your business might succeed.  Take into consideration broad issues like technology developments, social behaviours, regulation, and so on.
• Qualify and quantify the key themes, issues and risks.  Understand how individually they might play out, their impact and interdependencies. 
• Scenario planning.  Pull together the key themes to generate a vivid picture of future market conditions - this will help executives make sense of the wide range of drivers they are experiencing, against which they can now start to plan.  Bring your key stakeholders together to identify a future vision for the business, how it will be profitable and beat competition.  Establish development milestones to get there.
• Generate the financial plan and where appropriate, the investment case for new development.  Develop a timescaled roadmap to manage implementation.
• Communicate the vision, implement, communicate, implement some more, communicate some more.  Make sure everyone stays aligned to your winning future.

The result of this approach is a clear, practical, shared corporate vision of how to succeed, with milestones and a business case against which the business can map its progress.  Having identified key, future-changing themes, an ongoing market intelligence process can be developed to ensure executives have early warning of any changes to their business assumptions. 

Because the process is not steeped in “here and now” operational issues of the business, it can be outsourced to a skilled facilitator to manage.  The investigation of market trends and development of a sensitivity-rich financial model can also be outsourced.  Invigors already provide all these services to clients.

As well as giving executives more time to stay on top of day-to-day issues, this generates more thinking time for business leaders and greater independence while considering key issues. If you would like to learn more about how Invigors can add value to your strategic planning process, contact Peter at peter.hunt@invigors.com or call +44 (0) 845 003 1000.

How will the credit crisis impact on asset finance?

We have all heard recently about the USA’s sub-prime lending problems and that this is having a knock-on effect around the world, so how will it affect the availability of funding for European asset finance operations?

The general consensus amongst serious economists seems to be that this is a correction which was bound to happen following the progressive relaxation of credit criteria over recent years, which had resulted in margins and amounts lent not properly reflecting risk. Consequently we can expect to see more restrictive lending criteria and a widening of margins for risk. Coupled with this, we must remember that banks need to lend in some way to make any profit on funds deposited with them.  Which takes us back to the old cliché that there will always be someone to lend to a good quality credit.

At the top end of the asset finance market are companies within large bank groups. They are primarily if not exclusively funded by their parent bank, so their credit standing is wholly dependent on the parent. Similarly, the credit standing of captives will be at least strongly influenced by their parent’s status. Which takes us on to the independents, with nothing to fall back on in support, and it is these who will need to consider their position most carefully.

For subsidiaries of bank and strong prime groups, the issue will focus more on the extent to which they are prepared to take on customer exposures, than whether they can borrow to finance these. Because of the underlying credit driven culture in typical bank groups, we should expect to see a lower risk appetite. However, this may manifest itself in a variety of ways, rather than just reduced levels of lending. In particular this could involve a move to more secure forms of lending eg leasing or HP rather than unsecured loans, shorter finance periods, or a greater proportion of “up-front” payment/ rentals. Similarly other asset finance companies will be reassessing their own lending criteria, which is likely to result in a reduced borrowing requirement.

Taking the crystal ball out, the likely funding position for independents is:

• various short term crises when liquidity in the markets dries up as an immediate response to further shocks.  Asset finance companies need to plan ahead to ensure they have appropriate headroom in facilities to accommodate their own lending commitments;
• borrowing margins will increase. In particular spreads for different credit risks will widen. The normal market reaction in this situation is an overreaction, with a subsequent settling back towards, but still well away from, the previous position;
• apart from the short term blips, funding should remain readily available for asset finance companies who can demonstrate that they remain solid credit risks.

The last of these begs the question of which asset finance companies are still considered by lenders to be solid credit risks. This will come down to issues such as the nature and quality of the company’s own customers, the level of reserves to absorb potential bad debts and the quality of management. But, as Northern Rock has seen, it is the perception of each of these by the lender that matters, however irrational that view may be, not the company’s view.

If you'd like to discuss the implications of the credit crisis with George you can contact him at george.tonks@invigors.com or call +44 (0) 845 003 1000

Unlocking Value in Vendor Finance – Where’s the Key?

Invigors recently initiated a study into how vendors and financiers could unlock more value from their vendor finance programmes. Our initial research focus on vendors has revealed some interesting insights into some of the issues they face.

Could do better

The research covered a range of small to mid-ticket asset finance programmes, from IT to mechanical handling and construction equipment. Although penetration levels understandably varied by type of asset, 50% of vendors interviewed enjoyed penetration rates of less than 20%, though half would like to increase this level to over 50%. There is clearly an opportunity here for funders to research what is realistically achievable and audit the programme to identify and break down barriers.

In fact around 70% of vendors believed that the barriers to increasing penetration rates were internal, rather than down to their finance provider or their customer base.

Looking at this in more detail it seems that lack of focus at the point of sale is the main issue, other factors such as lack of senior management support for the programme, or lack of strategic focus seemed to be less significant.

How can finance providers address what is clearly a vendor issue? Well, better knowledge of the vendor salesforce or reseller base though insight surveys would be helpful in developing the right strategy. At a tactical level this should be coupled with specialised salesforce training and better integration of finance with marketing initiatives.

4 Year Itch

The study has revealed a market more dynamic than we expected. 60% of vendors had changed their finance provider within the last 2 years and around 40% expected to fundamentally review their primary funder within a similar period. Again this highlights the importance of keeping a close working relationship which can be maintained through regular programme audits, facilitated joint workshops and regular satisfaction surveys.

The relationship between vendor and finance provider seemed somewhat mixed. On a positive note, 80% of vendors felt that their finance provider understood their business quite, or very well. Tensions existed however in the relationship of around half those interviewed, primarily in areas such as resource constraints, delivering against commitments, “open book” financial arrangements and conflicting objectives. Is this a wake-up call for some providers to start treating the programme more like a relationship? Perhaps a more formal, focused approach using facilitated workshops will enable both parties to work through the issues and reach a common understanding.

Measuring value – a missed opportunity?

Despite some criticism over conflicting objectives, most vendors felt that their programme metrics were reasonably well aligned with those of the business. And when it came to measuring the value of their finance programme, over half of those surveyed thought that they’d done this satisfactorily. However only 14% considered that this had been done “very well” as a joint exercise with their finance provider, pointing to a missed opportunity to build the relationship and understand the programme value together.

Quality not Quantity

Looking at the support provided by finance providers in more detail it’s apparent that there some other concerns. Although vendors are generally satisfied with the quantity of people resource allocated to their finance programmes, 40% have some concerns about the quality of these people. There is a similar pattern evident too when it comes to training. Maybe time for a skills audit and specialist training programmes? And is the quality of training sufficient? Research feedback suggests that finance providers should review their requirements against vendor expectations, not just taking a narrow view of internal constraints.

If you would like to learn more or take part in Invigors research programme on vendor finance, then contact Richard Guilbert on +44 (0) 845 003 1000 or e-mail richard.guilbert@invigors.com.

UK Government “consults” on tax changes

Various tax changes affecting leasing and other companies were announced in the March 2007 Budget. Most of these, including the reduction in the main rate of corporation tax from 30% to 28% with effect from 1 April 2008, are included in the Finance Act 2007, which became law in July. However, the proposed changes to capital allowances, which are due to take effect from April 2008, are the subject of a consultation paper issued by HM Revenue & Customs and HM Treasury on 26 July (for comment by 19 October). Whilst it is a consultation paper, much of the information within it simply provides more information on the Government’s intentions, with the consultation element limited to inviting comments on three specific issues. Capital allowances on cars are covered by a separate consultation process, with firmer details expected in October.

The Government intends to reduce the main rate of writing down allowances for plant and machinery from 25% to 20% from April 2008. This is not an issue on which it is consulting and neither are the transitional arrangements. For a company with a year end of 31 March, the rate applied to the plant and machinery capital allowance pools will reduce from 25% to 20% for the year to 31 March 2009. For other companies, there will be a hybrid rate for the period straddling 1 April 2008, using a time apportionment for the length of the periods before and after that date, so that the rate for a 31 December 2008 year will be approximately ¼ x 25% + ¾ x 20% = 21.25% (the final calculation will probably use days rather than months) and then the 20% rate will apply to all assets within the pools for the year ended 31 December 2009.

By contrast, the writing down allowance rate for “long life assets” (those with an expected economic life of over 25 years) will be increased under the proposals from 6% to 10%, with similar transitional arrangements. However, any long life asset acquired from 1 April 2008 will qualify for the full 10% allowance in the year of acquisition.

“Fixtures that are integral to a building” acquired from 1 April 2008 will also go into this 10% allowance pool (and, with long life assets, be excluded from “short life asset” treatment). The Government is inviting comments on how “integral fixtures” should be defined, but proposing that there should be the following short list of items covered by the term:

• lifts, escalators and moving walkways;
• central heating systems; and
• air conditioning systems.

However, it is indicated that electrical and water systems may be added to this list.

The Government is also consulting about the introduction of an Annual Investment Allowance (AIA) for expenditure on plant or machinery, to replace the current First Year Allowances for SMEs. A single AIA for expenditure of up to £50,000 pa will be available to each individual company and to each group of companies.

The third area of consultation is around the introduction of a scheme to enable the current enhanced capital allowances on environmentally beneficial assets to be surrendered for a cash payment, where a company is in tax loss. The aim of this proposal is to reduce the cashflow disadvantage suffered (particularly by small companies) from not being able to benefit from ECAs until the company becomes tax profitable, which could be many years after the expenditure is incurred.

These changes in corporation tax rates and capital allowances will have a significant impact on the asset finance industry, changing the evaluation of new leases and affecting the relative attractiveness of leasing and purchase products. In addition, tax variation clauses in extant leases may be triggered and “sale for tax written down value” clauses and calculations will be affected.

If you would like to discuss the impact of these changes on your business please contact George Tonks  at george.tonks@invigors.com or call +44 (0) 845 003 1000. A longer version of this article is also available on request.

Office Furniture Disposal - with a green twist

Any company which has relocated will no doubt recall having rooms full of odd furniture that does not match the corporate standard, is not adequate or is even in a state of disrepair. When leasing office furniture, lessors are often concerned about the possibility that it will be returned or may have to be collected from lessees during a lease’s lifecycle.

No doubt facilities and asset managers alike will recall the despair felt when trying to store, plan the sale or dispose of this furniture. Often the answer is to pay a company to take old furniture away and dispose of it. Determined owners may even hunt hard to find an organisation that will pay them a small amount of cash for old items. But have you ever considered the hidden costs in these actions?

The most obvious costs are in the time spent in various ways, such as phoning, meeting and vetting, potential buyers. Then negotiating, managing removals and invoicing - time that could be spent more productively on the day job. Sometimes there are storage costs incurred to warehouse the mountain of desks and chairs until buyers arrive and gradually take them away.

But have you ever considered the environment in this process? Often buyers of used furniture will dispose of anything other than the best items, which means furniture ends up in a land fill site.

Now there is a green option which has a great ethical and charitable twist, Green-Works. Green-Works is a registered charity dedicated to diverting office furniture away from landfill.  Through its partner franchises and carriers Green-Works provide a national service on an industrial scale, stopping many thousands of tonnes of furniture from ending up in landfill. 

To minimise the quantity of furniture being recycled Green-Works has established a unique joinery remanufacturing capability in collaboration with the DTI to explore best practice options, divert materials that can not be immediately used away from simple recycling and supply office furniture for sale to commercial organisations and the third sector (charities, voluntary organisations and social enterprises).

Green-Works is a social enterprise, providing job opportunities for a wide range of socially disadvantaged people. An independent assessment recently demonstrated the massive social benefit flowing from Green-Works’ endeavours.

Following the principles of the “waste hierarchy” Green-Works seeks to reuse before recycling. The practical outcome of this strategy is that Green-Works has a constant supply of office furniture for sale to commercial organisations and the third sector.

Now lessors can confidently finance or even lease office furniture knowing that they can access a secondary market and collection services. As Green-Works are a charity all this makes ethical and environmental sense, you never know, this could also be a business opportunity – with a green twist!

You can find out more about Green-Works by visiting www.green-works.co.uk, calling 0845 230 2231 or e-mailing info@green-works.co.uk. David Bloomfield, Sales and Marketing Director will be pleased to help you.

Think Private Equity!

Say “private equity” and people get scared. More than ever, over recent weeks populist media attention seems to have caricatured private equity firms as slash and burn asset strippers, focused on ripping out costs for a quick buck.  My recent experience says otherwise, and suggests there are lessons to be learned from this highly effective investor group.

A few headline ideas stand out that can be applied to businesses regardless of their ownership structure.

Focus on profit, develop a medium term vision

Identify and focus on market segments, customers and operations that generate high value – this may be only a small part of your existing business! Then work out how to get a highly profitable, defendable leadership position in that area within a 3-5 year period. Often this means moving outside the existing business (and traditional thinking), but in a very focused manner. Focus will drive relevant scale and the development of key intellectual capital.

Getting this clarity means a strongly analytical, objective evaluation of the business, often best handled through independent, external facilitation.

Right-shape the business

With your new-found strategic focus, some operations will become non-core and should be divested. With acquisition values remaining high, now is a good time to make these moves.

Re-shaping the business in this way clarifies management direction and frees capital for accelerated reinvestment in the core, growth operation. Remaining operations may be flabby or mis-directed and should be restructured appropriately. It is perhaps during this phase that private equity firms get their unenviable reputation.

Invest for the future

Restructuring and growing a business in three years doesn’t happen with fresh air. Especially in the early stages, private equity firms invest heavily to realise rapid structural change.

Move fast (but thoughtfully)

With a clear strategic goal, action plans are generated for immediate execution. Private equity firms seek to shorten reporting cycles, transferring capability, responsibility and accountability while monitoring progress closely to ensure delivery of the plan.

An action-based performance culture is created, demanding (and paying for) high quality management who can make a real difference to the business. Reward structures are aligned with the company’s clear strategic goal (usually through equity).

The asset finance market is characterised by mature, unwieldy business models, in many cases offering products and services that are almost identical to their competitors.  As a result, few achieve rapid volume or high levels of profitability.  Invigors can provide independent guidance for those companies brave enough to look hard at their existing operations to create a more profitable, fast-growing, right-shaped business. Private equity returns don’t come without pain, but can be worth it!

Update on the UK tax regime for leasing and other recent UK tax developments

UK Budget 2007

The UK Budget statement on 21 March introduced a number of tax changes which will have a significant impact on companies involved in UK asset finance. The main headline is that the standard rate of corporation tax will reduce from 30% to 28% from April 2008, although the rate for small companies (those with tax profits of up to £300k) will increase from 20% to 22%. Alongside this, there are substantial changes to the capital allowance regime from 2008/09 for plant and machinery.  In particular:

• the main writing down allowance rate will reduce from 25% to 20%;
• the rate of writing down allowances on “long life assets” (those with an expected life of over 25 years, but excluding railway assets and ships until 2011) will increase from 6% to 10%.  Writing down allowances on fixtures will be brought in line with long life assets. The leasing of long life assets is less common now, following the introduction of the long funding lease rules from April 2006, which restrict lessors’ rights to claim capital allowances;
• a new “annual investment allowance” will be introduced for the first £50k of expenditure on plant and machinery. It appears that this could be equivalent to a 100% first year allowance and could well replace the existing FYAs for SMEs, although the Government has not yet decided on the detail. However, the current 50% first year allowance for small businesses is being extended from April 2007 for a further year;
• there is a further consultation paper on capital allowances for cars, with a proposal that cars emitting up to 165 g/km of CO2 will be brought into the main capital allowance pool (20% WDA) and other cars into another pool with a lower rate of writing down allowances (which is indicated to be at 10%); cars emitting up to 120 g/km will continue to attract 100% FYA. The 165 g/km level is also proposed as the limit above which there will still be a restriction for the tax relief a lessee can claim in respect of rentals. Various aspects of this regime still need to be resolved.

The precise mechanics of implementing these changes is unclear, although they may well apply for the first accounting period ending after 31 March 2008. It appears that the new WDA rate will apply to the whole of the main capital allowance pool as at the implementation date, so including assets acquired prior to that date.

The changes in corporation tax rates and capital allowances will affect lease rental calculations. Overall the changes will typically result in an increase in lease rental rates, although in the short term rentals may fall as early year tax losses can be relieved at 30% whilst later tax profits are taxed at 28%. Tax variation and lease documentation will need to be addressed.

Asset finance companies will also be affected by the extension of the “sale of lessor companies” rules and changes to car VED and company car tax levels.

Electing into the long funding lease regime

Following the introduction of the new leasing tax regime in April 2006, lessors can elect to have leases taxed on the basis of the accounting profits. The Government’s aim is to help lessors avoid the additional administrative burden of preparing separate tax calculations.  However this election can also give benefits to lessors whose leases are for relatively short periods or for leases of plant or machinery that does not qualify for capital allowances. The final Regulations covering such elections have now been published. These confirm that any election will apply to all “eligible” and “qualifying incidental” leases in a company, although a leasing group can be selective by writing leases in separate companies.

Long funding lease rules – the “lease term”

A significant factor in determining whether a lease is a long funding lease under the new tax regime (so that the lessee rather than the lessor is entitled to capital allowances) is the “lease term”. In particular a lease cannot be a long funding lease unless the lease term is in excess of 5 years. The definition of the lease term in the Finance Act 2006 left some areas of doubt about how it should be interpreted and the guidance notes issued by HMRC in August 2006 provided only limited help. Further examples have now been provided by HMRC and it is expected that these will be incorporated into their formal guidance in due course. These provide additional clarification on how HMRC intend to interpret the “lease term” and are helpful for many lessors, particularly those involved in vendor schemes and similar arrangements.

Software

Discussions with HMRC are continuing about the tax treatment of software finance. The latest correspondence from HMRC seems to be designed to provide comfort that providers of software finance will not be left with excessive tax costs, although clarification is still needed on some aspects of the wording. It is hoped that the current uncertainty will be resolved soon.

VAT Bad Debt relief

HMRC have recently changed the calculation of VAT bad debt relief for HP and similar instalment finance agreements. The old “straight line” allocation basis has been accepted by HMRC as inequitable and, under the new rules, the allocation of instalments received from customers for VAT purposes is brought in line with the allocation used for accounting purposes, increasing the amount of bad debt relief available.

For more detail on any of these issues or to discuss the tax position of your leases, contact George Tonks (george.tonks@invigors.com) on 0845 0031000