Insights
Insights are commentaries on the world around Critical.
Archive: 2010
Summer 2011: Germany's Energy Policy Shift Signals a Business Opportunity
According to MoneyWeek, Angela Merkel's somewhat surprising volte face on nuclear energy creates an opportunity for investors. Approximately 22% of Germany's energy requirements were met by old and new nuclear reactors, making them the second largest contributors after coal-fired stations. Now there's a review of the existing nuclear capacity and a block on new developments. The seven oldest of Germany's seventeen nuclear power stations have been summarily shut down. Irrespective of whether or not this is simply pre-election posturing that will be reversed at some point when reality reasserts itself, the fact is that suppliers of fossil fuels (especially gas) and developers of 'green' energy supplies will be rubbing their hands. Germany plans to double the contribution of renewable energy (i.e. alternative and greener sources) by 2020.
Most renewable energy supplies are still in their infancy and, although they lack the capacity for Fukushima style catastrophe, their control systems still have some way to go before they may be thought of as fully mature.
So, in parallel with the opportunity for stock market speculators, there's also an opportunity for companies like Critical Software Technologies. Critical has, in recent years, majored on systems that provide for structural health monitoring so that capital-intensive systems are able to implement and benefit from condition-based maintenance.
Take wind farms for example, particularly those offshore. From the tip of the turbine blades to the base of the concrete structures upon which they're mounted, there are major long-term stresses at work. Key components of these structures have to be maintained which means, in practical terms, that they have to be replaced - an expensive business. In the absence of any other information, wind farm operators have to take a punt on how long they may reasonably leave components in place before it becomes absolutely necessary to undertake very expensive maintenance.
Clearly, it's a major expense to swop out a key component of a wind turbine whenever it's done. Leaving components in situ until they fail is unthinkable for all sorts of economic and safety reasons. The answer, surely, has to be to monitor the stresses on key components in real time during actual operations so as to determine when maintenance activity is required. When it's not required, it's not undertaken - it's as simple as that. This is an approach very well understood by those few pioneering companies that were bold enough to pursue an alternative to traditional maintenance regimes.
Before we go very much further with the development of large-scale alternative energy generation schemes, there's a case to be made for ensuring - by regulation - that their control systems are capable of detecting potential operational problems so that they may be mitigated before they cause serious disruption. Currently, systems tend to be reactive such that millions of pounds worth of damage, to say nothing of untold inconvenience, would result before it was possible to do anything about it.
Those developing alternative energy could learn a lot from the aerospace sector which is at the forefront of monitoring critical systems. Taking a few lessons on structural health monitoring from aerospace engineering will help the alternative energy sector meet its undoubted challenges, tempting more firms to enter what is still an immature sector, and to play their part in helping both the UK and Europe head off the blackouts that may well result from flawed energy policies.
Spring 2011: Views from an SME
Latest figures from the Department for Business, Innovation and Skills (BIS) show that there are approximately 4.8 million private sector enterprises in the UK. There are small ones (>= 49 people), medium ones (50-249 people) and large ones (http://stats.bis.gov.uk/ed/sme/) . Critical Software Technologies has something of a split personality in this regard. Its parent compant in Portugal has now gone beyond the end of its grace period and has to accept that it is now no longer an SME: it has far too many staff to satisfy the definition. Critical Software Technologies Ltd in the UK is still quite clearly an SME, but it is disqualified by virtue of its parentage from claiming some of the advantages that are made available to SMEs.
99.3% of all these enterprises are small, 0.6% medium and just 0.1% large. 22.8 million people work in the private sector, just under 60% of them in SMEs that also account for around 50% of private sector turnover. Those last two statistics for just this country's small private enterprises (i.e. not including the medium ones) would be an astonishing 48% and 36% of employment and turnover respectively.
Here are some suggested answers to questions that aren't answered in the BIS statistics.
+Which companies' directors are most viscerally aware of what it really means to be in business? SMEs.
+Which companies' directors have the greatest chance of lobbying politicians and other influencers? Large ones, the 0.1%.
Hmmm... Here are some more:
+Which companies are more likely to enjoy a more monopolistic trading position, having acquired smaller and probably more innovative competitors? Large ones.
+Which companies are less bothered by over-regulation (employment and H&S etc legislation, aka red tape) because they can afford to staff up a bureaucracy within their organisation? Large ones again.
+Which companies can almost squeeze the life out of small entrepreneurial companies in their supply chain partly because they can afford to and partly because they're barely aware they're doing it? Yes, large ones.
One of the government's avowed main strategies is to stimulate the private sector to compensate for rapidly increasing public sector unemployment. To do that, it is going to have to create the conditions for growth so that innovative, entrepreneurial SMEs can start to expand. Unfortunately, such companies are facing more difficulties rather than less right now.
+Part of the deal the banks signed up to, in return for being bailed out with taxpayers money, was that they would start lending to business again. However in May we learned that, while their lending to large companies was reasonably on track, their lending to SMEs was falling woefully short of the target. Bank of England figures show that in the first three months of 2011, the top five UK banks were falling short of their commitment by £2.2Bn per quarter (Source: BBC).
+While the banks are lending to large companies, but are much less willing to help small companies manage their cashflow, large companies continue to use their muscle to lean on their suppliers. Companies with more than 500 employees paid their invoices an average of almost thirty-seven days late - that's over and above their agreed terms - in the fourth quarter of 2010 (a whole day later than the same period in 2009). That's almost twice the average lateness of companies with a handful of employees. (Source: Experian)
In some respects, Critical Software Technologies is blessed in having a blue-chip customer base. No matter how long it takes, it's a virtual certainty that invoices will eventually be paid. Sadly, even those of the company's customers that would normally be reasonable payers think nothing of 'losing' invoices for a while, or expecting forbearance when implementing yet another change of accounting system. It's clear that the procurement and accounting staff in customer organisations have no concept of the scale of the problems they are causing their suppliers, but the suppliers have no option but to accept such situations as part of the rich pattern of business life.
On the brighter side, the Red Tape Challenge that's just been launched (http://www.redtapechallenge.cabinetoffice.gov.uk/home/index/) at least offers a prospect of some of the twenty-odd thousand new business regulations introduced under the last regime being scrapped. (Labour was very fond of using statutory instruments rather than legislation.) Critical will use the Challenge as a channel to lobby against the issues that affect it the most:
+The issues surrounding the income tax treatment of employees working on secondment from a European parent company have cost Critical Software Technologies dearly, not only in terms of penalties incurred by reason of failure fully to comply with complex regulations, but also in terms of management time that would have been far better spent focussing on how to defeat foreign competition both at home and abroad.
+The VAT issues arising from the provision of services across borders both within Europe and beyond cause untold confusion and require the company to incur costs in terms of expensive professional advice.
+Employment legislation designed to protect vulnerable people on the factory floor is often wholly inappropriate when it comes to ending professional relationships. One size does not fit all - disaffected professionals have the potential to cause enormous long-term damage to a company far beyond any effects that could be caused by someone fulfilling a relatively simple function on a production line.
+Some Health & Safety requirements are wholly inappropriate for companies that virtually exclusively employ professionals, but nevertheless the hoops have to be jumped through, and the costs borne.
The government would stand a better chance of achieving its aims if it could somehow ensure that those responsible for successful, high-growth SMEs were more involved in creating the conditions for SMEs to thrive. All too often the agencies that are set up, ostensibly to do this, are populated by too many people who have had, and lost, jobs in the public sector, in banking, or in big companies. People whose background has given them an authentic looking veneer: they appear organised, analytical and persuasive, but to believe they necessarily understand what makes small, growing companies tick is often misguided.
In our region, we have high hopes for the Solent LEP, one of the first Local Enterprise Partnerships to be approved and set up. Critical Software Technologies is playing its part, by being one of its founding corporate members. Time will tell whether the LEP approach will get the support it needs to be successful. Watch this space.
Winter 2010/2011: Into Somerset
We were recently invited to a round table with Into Somerset, an organisation set up to stimulate inwards investment into the county. The purpose of the invitation, which was extended also to Agusta Westland, Thales and BAe Systems AeI, was for the leaders of Into Somerset to gain a better understanding of the issues faced by industry when looking to either set up or sustain businesses in a part of the country which is not at the top of most lists of likely places to start a technology business.
Our ready acceptance of the invitation was driven by twin motives of wishing to contribute to an area where we're just setting up shop, and to learn the views of others with similar interests. As it turned out, our fellow industry contributors were all established players in the area, whose continued presence is key to its prospects.
The location of our UK HQ, Southampton, is perhaps not at first sight the most obvious choice. However, Southampton does have a lot going for it. The city hosts one of the top universities in the country, and it provides us with very flexible accommodation on its Science Park. The fastest growing regional airport in the country is a few minutes away, as are mainline stations that see us in London in little over an hour. The M3 and M27 motorways run close by, allowing easy access to recreation in the Meon Valley, Test Valley and New Forest from the suburban living possibilities of Portsmouth, Fareham, Eastleigh, Winchester, Bournemouth and of course Southampton itself.
Somerset on the other hand seems to tick rather fewer boxes. The UK has always been far too London-centric. Investment in roads that far from London is focussed largely on the motorways that radiate from the capital. The M4 therefore serves north Somerset reasonably well, and the M5 tourist route to Devon and Cornwall gives a serviceable connection to Bristol. Beyond that, the road network is not good. The Great Western Railway offers a reasonable connection from Taunton to London, and obviously the Bristol area is easily accessible by rail from there too. Places like Yeovil are somewhat off the beaten track, with distance and the number of intervening stops working against rapid transit.
Bristol and Exeter Universities would both claim to be in the same league as Southampton, but only Bristol is located geographically within Somerset. Both are working to develop science parks, but neither yet has anything to speak of.
Outside of Bristol, Somerset hosts relatively few technology companies (with a few shining exceptions, such as Agusta Westland). This means that for start-ups, there are few customers on the doorstep. From the point of view of larger companies, it means that their supply chain is tenuous compared to that to be found in, say, the Thames Valley or the West Midlands.
All four companies presenting to Into Somerset were agreed that the really major issue is the attraction and retention of top quality staff at a range of levels of age and experience. Innovation is the key to success in technology businesses, and that depends to a great extent on younger staff who tend to have more energy and enthusiasm, to say nothing of their more recent exposure to the latest academic research during their undergraduate years. These are the very people that it is hardest to find in Somerset. Somerset youngsters go away to university in the usual way, but there is little to draw them back. They, and others new to the area, may well accept jobs in the county later in their careers. Typically this is when they have settled down with family responsibilities, and have gained the maturity to appreciate what a more rural lifestyle has to offer.
Into Somerset leaders know that if they are to attract significantly more business into the county, they will have their work cut out to make the business environment sufficiently attractive to overcome some of the historical disincentives. From our point of view their initiative in supporting the creation of the Yeovil Innovation Centre, with its flexible and affordable office space, is a big step in the right direction. Without it we would have had great difficulty in finding the right commercial deal for our first independent move into the West Country.
