How Badly Do We Need Credit Easing?

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Wed, 2011-10-05 12:07

There’s widespread agreement that the high street banks have had too much of a monopoly in the provision of personal and business loans for far too long. As a consequence, they are currently able to restrict supply, irrespective of demand, while they satisfy a conflicting need to rebalance reserves. Paradoxically, those worst affected are the start-ups and expanding businesses upon whom economic recovery depends.

In theory, credit easing - or anything else that breaks this log jam - is a good thing but is the introduction of an alternative funding source enough? Shouldn’t we be aiming higher? Why not provide a vastly improved service as well?

While risk-aversion may well have become institutionalised, the underlying reason for banks not lending to business is the low business survival rate and the difficulty in picking winners. This in turn stems from the staggering propensity of each successive generation of business leaders to repeat the mistakes of their predecessors. The consequences are increasingly draconian terms demanded by lenders or an increasingly “dragonian” share of the equity required by investors! To all intents, successful entrepreneurs are cross-subsidising the under-performing majority.

With small and growing enterprises, the survival rate is so low that investors have to assess dozens of prospective clients to find one which is investable. Investor syndicates typically build up a portfolio of twenty such clients, from which one or two major successes will compensate for the remainder.

These absurdly low survival rates have remained unchallenged and unchanged for decades. While each individual business is unique, there are relatively few ways for it to fail. That means every year, the same mistakes are being repeated hundreds of thousands of times. All too often, by the time the problem is recognised, diagnosed and corrected, it is too late. The UK’s GDP is £1.5 trillion. Needlessly huge numbers of failing and under-performing businesses must be costing tens if not hundreds of billions every year! If avoidable mistakes persisted to this extent on the flight deck or in the maintenance hangar, there would be utter carnage and airline travel would cease to exist!

Conversely, if the techniques used in the aviation sector and elsewhere were applied in business, survival rates would improve, releasing more investment for more applicants. That in turn would encourage more entrepreneurs to start more enterprises and deliver higher rates of economic growth on a more sustainable basis.

• What if there was a way to identify which applicants had the greatest chance of success?
• What if hidden knowledge gaps were revealed before the full consequences of mistakes took their toll?
• What if different strategies and techniques could be practiced without risking real people or assets?
• What if those who didn’t make the grade could see exactly why, make the improvements and re-apply?

The aviation industry has evolved numerous ways to eliminate repeat mistakes. Two in particular have made a profound difference and can be readily adopted by the business community:

• Confidential human factors incident reporting programme (CHIRP); instead of just seeking to attribute blame, focus on identifying systems or procedures which need modifying; eliminating recurring incidents to reduce the risk of accidents.
• Flight simulators; providing a safe, realistic environment where pilots can experience the incidents which can lead to accidents, practise early recognition and corrective action, experiment with different techniques and build confidence.

The Business Game uses a highly sophisticated computer simulation but requires only common sense to take part. It is both generic (using business principles which apply to most commercial organisations) and holistic - emphasising the need to balance the different interests of shareholders, staff, customers, suppliers and others; it’s easily accessible, scalable, affordable, tested and available now for use by our expanding community of Partners, Affiliates and Associates.

Simulations have helped the major airlines to reduce the accident rate to just one in ten million scheduled flights. We have a highly ambitious but achievable goal - to help halve the number of avoidable mistakes in business, and keep doing so until aviation industry standards are matched.

Doug Holman