William Ham Bevan 6 Sep 2018 04:19pm

Spending money to make money

With disruptors such as Brexit, AI and a skills shortage on the horizon, businesses may be reluctant to commit to longterm investment. But, asks William Ham Bevan, can they really afford not to?

Caption: Illustration by Bratislav Milenkovic

In the latter half of the 20th century, analysts and journalists had a universal metaphor for the problems of the UK economy: the British Disease. While its exact symptoms were a matter for debate, low productivity was held to be its most obvious and debilitating consequence. Today, commentators are more likely to speak of the UK’s “productivity puzzle” or “productivity gap” than evoke chronic illness, but the same cure is always mooted: long-term investment.

Figures from the Office for National Statistics and Bank of England show that productivity, defined as output per worker-hour, has effectively flatlined since the financial crisis of 2008, and continues to lag behind other industrialised nations such as France, Germany and the US. Over the same period, capital investment has remained sluggish. So is there a general failure in business to address long-term business planning, and to invest in the technology and workforce needed for the future?

If there is, it’s perhaps understandable. Brexit, and the chaotic nature of the negotiations to achieve it, is like a looming foothill that blocks all view of the challenges beyond – such as the impact of disruptive technology and artificial intelligence (AI), potentially catastrophic training and skills shortage, and vastly increased competition from emerging markets. Mark Freebairn, partner and head of the financial management practice at Odgers Berndtson, says: “There’s a huge dichotomy between business having to think about long-term growth development and having to react to short-term challenges. This is certainly causing more consternation than it was, and a more significant debate about planning and capital investment.”

Others have suggested that short-termism is a trait that’s stubbornly intrinsic to UK business – a classic symptom of the British Disease. It’s an idea that’s revisited time and again in opinion columns, but one that’s rejected by leadership author and social entrepreneur Jo Owen, founder of the UK’s largest graduate recruiter, Teach First.

“For the last 40 years, people have been complaining about this,” he says. “We’re so short-termist that we couldn’t possibly succeed in industries with very long lead times, for instance aircraft engines, pharmaceuticals, oil and gas, telecoms. But hang on – aren’t those the areas where the UK has some real world leaders? The short-termism argument doesn’t bear scrutiny once you look at the evidence.”

Accusations of poor distance vision, believes Owen, should be directed at successive governments rather than at the business community. He says: “Governments are only focused on the next ministerial announcement, getting through the electoral cycle and proving value for money. In terms of their contracting processes, they’re following the birdie strategy – ‘cheap, cheap’. That’s all the civil servants really understand, which means one thing after another gets diluted until it’s useless.

“See social care for instance, with so many providers going out of business. See Carillion, taking on contracts that were simply uneconomic and could never deliver what was needed. So if Britain has a problem with short-termism, it’s a publicsector problem.” Investing for growth is today’s most pressing economic issue, according to Iain Wright, ICAEW’s director of corporate and regional engagement, and formerly an MP, minister and chairman of the Business, Innovation and Skills Select Committee.

However, Wright cautions against playing a blame game or caricaturing British industry as having a “head in the sand” attitude. “I think that’s unfair and inflammatory language,” he says. “Look at the volatile environment. It’s perfectly acceptable for companies to look at Brexit and think, ‘well, let’s hold off for a quarter or two and see if the picture becomes any clearer’.”

Freebairn agrees that a “wait-and-see” approach to long-term investment is a logical reaction from businesses to the uncertainties of Brexit: “Imagine if I told you that it was very likely, within five years, that a devastating natural event would knock half your house down. It may be that you’d normally spend £15,000 a year on remedying wear and tear. But if I asked what you planned to spend over the next five years, your answer would be ‘I’ve got no idea – you’ve just told me half my house will be destroyed. I don’t know which half, but I certainly don’t want to spend anything on that half.’

“That’s the situation businesses are in. Of course, they have to do something: just as you’d have to fix your house’s boiler or shower if they broke. But you probably wouldn’t go out and buy the very best you could. You would try to mindset, and accept that uncertainty is not a temporary aberration but a fact of life. “It’s important to frame this in a wider context,” he says. “Since the financial crisis of 2008, there has been volatility. At the risk of sounding flippant, it’s the new normal. That noise in the system is always going to be there, with rapid technological change, increasing competition from elsewhere in the world. Successful companies will have to navigate that, determine what their proposition is, and then they can invest to ensure it’s properly executed.”

“The future is inherently unknowable,” says Owen. “Once, the belief was that the great man in Whitehall could design the future. Those days ended with Thatcherism, and instead people started believing that the captains of industry could plan the future. That was the heyday of all those consultants with their 2x2 grids – the McKinsey lot. What’s remarkable about all that is that the future bears no resemblance at all to what they envisaged.”

Even if it’s impossible to design the future or for that matter to predict the exact nature of the challenges just over the horizon, some trends are unmistakeable. It is widely accepted that the UK is already facing a long-term skills crisis, with companies across the board finding it difficult to recruit the right candidates. Without significant investment in training – both from the government in improving vocational education, and from companies in upskilling their workforce – the skills gap could get wider, and the effects of Brexit may well exacerbate the problem.

A survey by online recruiter Totaljobs published in February found that two thirds of employers believed they would struggle to find enough skilled professionals this year, and 50% thought leaving the EU would make the situation worse. On top of that, there are the consequences of AI in the workplace to consider. Owen says: “Previous revolutions have devastated unskilled and semiskilled labour. What is slightly different this time is that I think AI is coming after the middle-class jobs – not to replace them completely, but to hollow them out to the extent that the more routine bits of managerial work will be taken over by AI.

“That drives a challenge for education if it is simply focusing on literacy and numeracy; essentially, what it’s doing is churning out second-rate computers, and there’s not much of a future for those. The future is for people who are eager to provide real personal services, like social care, nail bars or plumbing, or doing very high-end work: creativity, managing politics, aligning agendas – things that computers are not great at, yet.”

It’s something of an irony that businesses will almost need to invest in the very technology that’s behind such disruption; but this is another area where government intervention could be necessary. At its simplest level, this could mean giving companies the fiscal tools to help with upgrading equipment, such as through enhancing capital allowances.

However, those operating in the high-technology industries that have been hailed as the new powerhouse of the UK economy may find obstacles in their way when they try to finance long-term growth. Holmes believes that banks must overcome their reluctance to lend against intellectual assets rather than physical ones. Otherwise, it will be down to find a way of eking things out so it was still running when the five years were up and you knew which half of the house was being knocked down.

“It’s a challenge, and what I find confusing is that people expect businesses to be more prescient than they’d be about their own houses. Politicians have to tell business what’s going to happen, so they will be able to plan for it. But there isn’t anyone who will tell you what Brexit is going to be – and until that happens, you’re trying to manage in a vacuum.” Wright fears that the amount of time taken up by Brexit could be as damaging as the uncertainty of life outside the EU itself.

He says: “What worries me is that it is occupying the government to the exclusion of everything else. There are these pressing problems with the ongoing competitiveness of the British economy, but attention isn’t focused on this. Does this mean that we’ll have a lost decade where some of the fundamental structural problems, like connectivity and infrastructure, are not being addressed?”

It’s an opinion shared by Frank Holmes, founding partner of Gambit Corporate Finance and a former ICAEW Best Chartered Accountant in Practice. He says: “Brexit isn’t the be-all and end-all. We need to address the socioeconomic issues of how the world of work is changing, and how we’re going to deal with our social structures when people have more leisure time or multiple jobs. Those dynamics will really affect the inequality of our society – they’re the bigger issues ahead of us.”

So what should businesses be doing to improve their long-term resilience? Wright believes that thinking and investing ahead is only part of the solution. To prosper, it will be necessary to adopt a new alternative lenders (or state entities) to pick up the slack. He says: “As entrepreneurs come up with more fantastic inventions, it’s difficult to see how the banks will address their collateral requirements with intangible assets, as opposed to good old plant, machinery and property.

That’s a mindset they’ll need to get comfortable with; because if all they’re going to do is continue with secured lending, they’re going to miss a trick. They may end up being displaced, with so-called patient capital coming in to support a more diverse funding solution.” For all the risks of investing for change in such an uncertain environment, the consequences of being frightened into inactivity are even less appealing. And although the set of problems facing business today may be extreme, they’re far from unprecedented.

“The point is, we’re always in the midst of a profound revolution. It’s just the nature of the revolution that changes,” says Owen. “Everyone will wave their arms and say this is the first time all this has happened, because it makes a great speech. But think about the advent of the railways, or the arrival of steam power, and Britain going from a rural to an urban society. That’s revolution. It happened. We have to take what’s happening now seriously. But in 20 years’ time, I guarantee we’ll be talking about a different revolution.”