Cost management the major challenge for growing businesses in a competitive state

MANSO Consulting principal Tony Manso has worked with many Western Australian businesses and didn’t hesitate when asked to name the main challenge they currently face.

“We have a clear and simple view on this issue – cost containment,” Mr Manso told a WA Business News boardroom forum.

Mr Manso – along with other sponsors of WA Business News’ annual Rising Stars awards, which highlight the success of fast-growing private businesses – shared his advice on what local companies need to do to sustain rapid growth.

“WA is a very expensive place to be doing business,” he said.

“Whether it be occupancy costs, human capital, professional services or inputs to production, the challenge will be how to control your costs while simultaneously enhancing or maintaining efficiency and quality.”

Participants in the boardroom forum agreed that securing the right staff at a reasonable cost would continue to be a critical challenge.

“Among the companies we talk to, competition for people is the big issue,” PwC Australia partner Scott James said.

“With the mining industry paying such large wages, they are struggling to compete to get people with the expertise they need.”

Integral Development senior consultant Lynda Folan anticipates this will be a long-term issue.

“Our biggest challenge for the next 20 years, if we look at the predictions of growth in China along with the ongoing expansion in the mining sector, will be getting people, getting the right people,” Ms Folan said.

“Our clients are indicating ongoing challenges, predominantly around capability and the ability to recruit and retain the right people.

“The gaps in capability are in a couple of key areas; leadership capability and in the domain of managing change.”

Starlight Children’s Foundation state partnerships manager WA Zoe Grose has heard the same story from her business partners.

“Every partner that I speak to has vacancies, and it’s all about recruitment, retention and salary expectations at the moment,” Ms Grose said.

“We need to be creative in terms of the non-financial benefits that we offer.”

Staffing solutions

Bankwest head of corporate and commercial banking WA Andrew Tolj said discussions with clients throughout the state highlighted the need to have a sustained and focused strategy for attracting and retaining talent.

“The market in WA is incredibly competitive, with almost full employment, meaning industry across the state need to focus on finding the right mix of talent to grow and sustain businesses,” Mr Tolj said.

He said the bank itself had seen the talent crunch and, in response, had broadened its approach.

“To meet our own demands for talent to sustain our growth we are currently using a talent manager in WA, to help identify potential recruits who are the best and brightest the state has to offer,” Mr Tolj said.

Forum participants agreed that chasing staff with higher salaries had already lumbered WA with high costs compared to other states.

“We’re just getting out of sync because the capabilities aren’t there,” Ms Folan said.

“Organisations are having to pay high salaries and are still obliged to develop the individual’s capability to an acceptable level before they are performing at full capacity.

“I think it’s a huge challenge for organisations and it’s not going to go away, it’s going to get more challenging.

“Perth is quite old school in terms of managing human capital and we need to get a lot more creative about how we manage our intellectual capital in the context of a growth economy.”

Mr Manso advised against offshoring as a solution.

“We’re seeing a bit of a herd mentality, in terms of offshoring and outsourcing overseas to tackle this issue, although we’re not convinced that’s the long-term solution,” he said.

Mr James recommended that employers look at alternative forms of remuneration.

“Other than cash, what can we offer our people to retain them and incentivise them?” he asked.

“We’re starting to see more equity-based schemes come into place at private companies.”

He acknowledged this wasn’t a simple solution, nor would it suit all businesses.

“That has its own challenges because if you provide equity to employees, how do you control the equity once they’ve got it,” Mr James told the forum.

“It’s privately held, there isn’t an open market for the shares, so what restrictions do you put on the equity they get?”

The role of strategy

Banksia Capital director Mark Dutton urged private businesses to spend time reviewing their strategy.

“A key challenge we find with smaller businesses is for the principal to make the time to step back from the day to day and be strategic and prioritise what will really drive share value,” Mr Dutton said.

“It’s not even necessarily the financial cost of doing a review or putting in any processes, it’s simply finding the time.

“It’s the classic scenario, of working in the business rather than on the business.”

Mr Manso believes some businesses need to take a step back to move forward again.

“We’ve seen some great examples over the years of businesses that have stepped back on their growth plans, preferring to invest in their brands, their systems, their infrastructure and their human capital in order to move forward, and its only two or three years later that the exponential returns and benefits eventuate,” Mr Manso said.

“Few businesses see the advantages in such a strategy and it’s very rare that we come across a business that has a clear, formal strategy in place to supplement their management plans.”

He said the lethargy towards investing in strategy development seemed to be hindered by a general lack of understanding of the benefits and the initial investment required.

Mr James echoed the call for private businesses to invest more in their own strategy and systems.

“Most of these companies have got great ideas, they are entrepreneurial, they have a great product or service in a defined market and someone wants to buy it, so off they go,” Mr James said. “That’s where business process stops for them; they don’t have structure, they’ve got no systems.”

He said poor systems and processes was one factor that could stop businesses accepting big contracts that would deliver rapid growth.

“That’s a big risk,” Mr James said. “Businesses need to ask whether they are mature enough to take on that kind of opportunity.

“Do they have the working capital behind them; do they have the know-how to service the contract? Sometimes the right decision is to walk away.”

Private equity

Mr Dutton said private equity investors such as Banksia could assist private businesses with strategy development.

“As an aligned shareholder with backgrounds in strategy and finance, that’s an area where we help post any investment,” Mr Dutton said.

He said Banksia followed three key steps when evaluating opportunities.

“We start by looking at the quality of the business model. Another key ingredient is the quality of the management team to execute that business model, and the third aspect is, what are the market opportunities?

“Is the market growing, are there big competitors, what are the opportunities to take the business to the next step?”

Mr James said he had observed more businesses looking at private equity as part of their finance solution, primarily to raise capital.

“It’s also a partial exit mechanism, particularly for companies in mining services,” he said.

“They are winning massive contracts, their earnings are looking healthy, and they see it as a good time to talk to private equity to achieve a partial exit and to take the business to the next level.”

Mr Dutton said private equity also enabled business owners to de-risk their personal balance sheet.

“They’ve taken the business to a certain point with their own borrowings, and it gives them a chance to take away the personal guarantees or the mortgage over their house as well as draw on the additional private equity funds to grow their business organically or by acquisition,” he said.

Bank finance

The boardroom forum participants mostly agreed that access to debt finance was highly variable.

Mr Manso likened it to the two-speed economy mentality.

“Banks are very much open for business, provided you are in the right industry, with a successful, mature business,” he said.

“In these circumstances funding is generally freely available.

“Conversely, many SMEs and emerging enterprises are being starved and stifled due to the onerous and virtually insurmountable funding barriers being imposed by banks.”

Mr Tolj offered some advice on how businesses could maximise their opportunities.

“From a banking relationship perspective, companies need to manage working capital closely as they build a profitable business,” he suggested.

“Ultimately the need for management to be across key business drivers is vital. Timely provision of management reports and working closely with key advisers goes hand in hand in with enabling companies to grow and build profitable businesses for the future.”

Watch competitors

Another tip was for private businesses to be vigilant in watching their competition.

Mr Manso said many businesses found their market space quickly becoming overcrowded, which ultimately led to a one-dimensional battle on pricing.

“We try to encourage businesses to move into a market space where competition is less intense,” he said.

“They need to think beyond existing demand and customers, such as targeting non-customers and evaluating who may be using other products or services as a substitute for theirs.”

He advised that traditional approaches such as customer surveys and competitor analysis offer few insights and no answers.

Mr Dutton said another strategic option was to buy competitors, to increase market power.

“At previous businesses we’ve invested in, that would not have happened if we hadn’t come on board as a shareholder to supply the extra capital plus provide the expertise and time to support the management to conclude those acquisitions,” he said.

“To develop a business from being one of four competitors to having a dominant market share by acquiring one or more competitors can create a huge amount of value.”

Red tape

Mr Manso delivered a parting comment on government and red tape.

“Government regulation is one of the largest impediments to enhancing business efficiency,” he said.

“Many enterprises, if not all, are overwhelmed with the layer upon layer upon layer of government imposed laws, rules and regulations.

“When that’s combined with sound, self-imposed corporate governance, risk management and internal control protocols, very few resources remain to focus on the value adding elements for their businesses.

“Unfortunately, we have little confidence in either local, state or federal governments taking a serious and logical step towards simplification for businesses, since the opposite seems to be their preference.”

• For more information go to: www.rising-stars.com.au.