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The transcript for ICAEW Insights In Focus podcast episode 35: 'Surviving the cost-of-doing-business crisis'.

Philippa Lamb: Hello and welcome to the ICAEW Insights in Focus podcast with news and analysis from the world of accountancy, business and finance. I’m Philippa Lamb and today we’re discussing business challenges including energy costs, recruitment and retention, and wage inflation. To explore those issues, we’re joined by ICAEW Head of Business Simon Gray, and Katy Davies, Managing Director at manufacturer CamdenBoss.

The headlines don’t make easy reading lately. The Bank of England says the recession is here, inflation remains a serious anxiety and sterling is still struggling against both the dollar and the euro. Perhaps unsurprisingly, business is growing nervous about what’s still to come. The latest ICAEW Business Confidence Monitor finds sentiment turning negative for the first time since late 2020, and all sectors and regions experiencing a cost-of-doing-business crisis. Simon, Katy, thanks very much for joining us.

Simon, you speak to ICAEW members in business daily. What do they tell you are their main challenges right now?

Simon Gray: There are a multitude of challenges that ICAEW members talk to me about. I would say the principal two challenges that I hear the most are centred around the cost of energy and access to skills, retention and recruitment of talent. They’re the two biggies at the moment. But there’s a plethora of other challenges facing businesses currently.

PL: Katie, you’re MD of CamdenBoss – can you tell us a bit about the company?

Katy Davies: We’re a medium-sized manufacturer based up in sunny Mildenhall in Suffolk. We employ about 120 people and we design and manufacture electromechanical components, connectors and enclosures for the electronics industry.

PL: Simon was talking about energy costs, but how exposed is your business to rising energy costs – even in the wake of the government support announced so far?

KD: In terms of our industrial processes, we feel like we’re an intensive energy user when our bill lands on the doorstep. By definition, we’re not a forge, we’re not casting metal, we’re not manufacturing plastic itself, even though it’s our main raw material – we’re just a very normal kind of industrial user of electricity. But it’s absolutely ravaged our budget this year. We had a fixed deal that ended partway through this year and just left us absolutely at the market’s behest. So it’s been really, really painful; really painful.

PL: And what do you make of what the government has offered you on that front?

KD: I feel like I have a very short-term reaction to it, because it’s just taken one thing off the list to worry about at the moment. We’d managed to fix a deal that lasts until May next year, so I just assumed that whatever the government came up with, we probably wouldn’t be eligible because we’re in a deal that’s not as bad as a lot of our other peers. It’s still more than a couple of years ago, we would have never settled for it a couple of years ago but for right now, it’s not too bad. It gave us a bit of surety in the short term. But to find out that the relief package would actually benefit us quite considerably, and that we were eligible, has just been brilliant, actually. So the very short-term view is that it’s given us some really definite relief. There is that fear that it’ll probably bite us somewhere else in the longer term, I’m sure, but certainly for now it’s taken stress off our plate. And I think what it’s done for us, as well as a lot of others ­– particularly manufacturers, I guess – is it’s just revised our business cases.

The other thing that we’ve done is instal solar panels on the roof, and they were commissioned just yesterday. Probably 12 months ago it wasn’t that high up on the pecking order. But now it’s a complete no-brainer.

PL: We haven’t seen much of a break between the pandemic and the challenges everyone is now facing. What has that meant for the resilience of your business?

KD: It’s been a long stretch, hasn’t it? It’s definitely been an endurance event. We have an inherent weakness within SMEs of relying on a small team of experts to carry around with them all the knowledge you could possibly need to ever run the business. And therefore, if somebody does leave or chooses to retire, you’re left a bit weak. I think certainly what it’s made us do is really look at our foundations and address our own business resilience in terms of making sure that we’re not just relying on people. Obviously the COVID pandemic brought that into sharp focus, as we were losing people through sickness. I think on the plus side, it’s been a stark reminder to all of us to make sure that business resilience is there to get you through, or at least take the sting out of the day-to-day tasks, so that our brainpower and our energy is saved for the difficult bits and the fancy footwork around the challenges we’re having to negotiate.

PL: That’s interesting. So you’re managing what you can, to futureproof you against the stuff you can’t?

KD: I’d like to think so, yes; that’s definitely our aim. It’s a long process. I think in terms of our own resilience, in terms of energy levels, mental health, and all of those things that we hear about a lot, I think we’ve got a very tired workforce. You can absolutely see it. Friends that I have working in the corporate finance space, for instance, are seeing owner-managers just saying, “I’m tired, I think I just want to sell my business. I can’t go through another crisis. I don’t know how much more I’ve got to give.” I think we’re really going to be mindful that on a personal level, everyone’s resilience has been challenged for a long time. And we’ve got some tired people, that’s for sure.

PL: Simon, what do you make of the support for business we’ve seen from the government so far? Obviously, this is a brand new administration, but good points, missed opportunities – what’s your feeling?

SG: I think the energy bill relief scheme for businesses could have come a little bit sooner; I’m glad it’s here now. I talked to businesses about that last week, when it was announced. The initial reaction was great, it’s here, we’ve got some comfort for six months at least. But the bigger question is, what happens after six months? What I’m getting from businesses is that businesses like certainty, and we’re living in a very, very uncertain world. I think in terms of policy decisions, it’s almost this stop, or start, stop and then potentially reverse, which makes it very, very difficult for businesses to plan. Some of the announcements that came out last week in the mini budgets – around corporation tax, national insurance – were welcomed; IR35 – again, welcomed. But it’s this not being certain where policy direction may go in the next six to 12 months, or even sooner, that is really hurting businesses’ ability to plan and do what they do best, which is operating in an environment of stability. We’re in a very unstable world at the moment.

PL: Is there a sense that perhaps the focus is very much on big business rather than small businesses – SMEs?

SG: I think bigger businesses are better able to weather the storm. They have more expertise in house, they have the cash reserves to be able to survive during a difficult period. Smaller businesses are the backbone of the UK economy. There are pressures on skills that smaller businesses are going to feel much more acutely. And in a smaller business – I used to run a small business myself – you are running a business, you’re doing all sorts of different things in that business. As Katy said, you’ve got your eye on many, many different balls, you’re spinning lots of different plates. It’s a very different environment. And with so many things happening at the moment, that are impacting business, in a smaller business you’re going to feel it much, much more for a multitude of different reasons.

PL: And things like corporation tax aren’t an issue, are they, for small business?

SG: Well, the thing is, with corporation tax you’ve got to be making profits to pay tax. If your business isn’t sustainable, because of the challenges that it’s facing, and it’s not profitable, currently, with the squeezes on margins, so you’re not quite sure where your business is going, then while maintaining corporation tax at its current level is welcomed, it’s not the most pressing issue for businesses. You know, it’s nice to have that rate come down, but is it going to encourage more people to start businesses? It is going to encourage more people not to consider selling their businesses now, because of the challenges they’re facing? I’m not sure it is.

PL: Katy, we’ve got the government’s short-term energy plans confirmed but there is a lot of uncertainty ahead. How are you adjusting business operations? You’ve talked about resilience and how you’re trying to safeguard the organisation, but what about actual business operations?

KD: The shock of COVID and having to alter operations sent us back to basics on a lot of fronts. So, have we got the most sensible processes in place? Are we overegging anything because we used to have a bit more time in our day, because we were used to just ordering something and it would arrive with no sweat? From a business operation standpoint, I think it’s accelerated us on a journey to look at lean principles and challenge everything that we do. It’s driven us to look at more digital solutions. It’s hard to tease out what’s driving what, because we’ve had such a complex set of challenges. Certainly from a resilience standpoint, the ability to access amazing digital solutions to help us do things has definitely accelerated us in that direction.

Focusing on energy and sustainability is interesting. On a lot of calls or in discussions with other business owners, they are saying, ‘Oh, well, we’ve just parked the sustainability agenda.’ But it feels nice to have right now. The workforce can easily engage with it, it’s very relatable; they understand what it is because they have the same focus domestically. From a business operations standpoint, it’s definitely accelerated. On my site, sometimes it looks like there’s nobody here because they’re so hot on turning the lights off – they just want to feel like they’re helping with something. They’ve got a domestic energy challenge, and they know that at work, it’s not dissimilar: if they leave lights on when they leave a room, that’s coming out of the funds that pay for their salaries. It’s very lovely that we’ve got people looking to help. So our sustainability agenda is accelerating a bit, because people can contribute to it quite easily. It’s having a really interesting impact on our business operations in ways that I hadn’t necessarily expected at the start.

PL: That’s really heartening, isn’t it? But it sounds like you’re having supply chain issues?

KD: Again, trying to tease out what caused what or what happened is difficult. It’s partly COVID-related, partly Brexit-driven – we’ve had to adapt a lot in terms of our supply chains; and again, going back to resilience, we’ve had to whittle down our partners. When you’re in a stress situation, in any walk of life, you like to work with people that you can trust it. It’s been fascinating, in the last couple of years, seeing the behaviour you get from some of your customers and some of your suppliers: ‘Right, we’re in this together, guys, let’s help each other out.’ And we really work together, it’s been great from that relationship standpoint.

I think we’ve also seen some really disappointing stuff in areas of our supply chain. For instance, without naming any names, we have a supplier this week where we’d already placed an order, then they came back to us and said: “Yep, we’re going to ship it, but you’ve got a 750% price increase.” And you think, what have you done that for? Now I’m going to completely eradicate you from my supply chain, because I don’t want to work with somebody who does that to us. We’d already confirmed our own price to our customer.

PL: So you’ll take the hit on that?

KD: Yes. I’m not going back to that customer, absolutely not. But you think, it’s really disappointing. And it’s very short-termist when we need to be coming out of this collectively stronger and with a better working relationship. So yes, supply chains are definitely challenging. Again, it’s really hard to tell, but I had a conversation with my team, where we reflected on life after Brexit: had it got easier, or had we just got very British about it and stopped moaning because it just is what it is? I think the teams are dealing with it very well, but it’s taking up such a massive amount of their day, when it really didn’t at all in the past. Back then you’d place your order, wait for it to arrive, then here it comes, out it goes again – all very straightforward. Whereas now, it’s negotiating shipping container availability, shipping routes, where is the ship? How long is it going to take to get here? Is there a strike at the ports? All of that complexity is really taking up their day. So yes, supply chains are really challenging for us.

But again, what we’re looking to do is be a bit optimistic. We’ve definitely seen that push for reshoring to the UK, and that’s going to be interesting, with our customers and with the market. We can’t compete on cost all the time with China – it’s a totally different set-up over there, a totally different labour structure. But for that peace of mind, somebody is able to whizz along the A11, come and visit us and see where their stuff is getting made, see where it’s been dispatched and, if the worst comes to the worst, come and pick it up themselves. That’s certainly a trend that I think and I hope is going to continue for a while yet.

PL: Simon, that’s a great analysis from Katy, really rational, and there’s good stuff. But there are some serious challenges. Let’s take a look at your business confidence monitor, because that tells us sentiment has turned negative across the board – all sectors, all regions. I know your data highlights labour shortages and wage inflation as really significant issues?

SG: In our business confidence monitor, Q3 has turned into negative territory, and I don’t think there’s any surprise there. It’s gone negative across all regions. London is flatlining, it’s at zero. And the end of the period for the business confidence monitor was mid-July for that Q3 result, so we are now 10 weeks on and arguably things have got a lot worse since then. I know we’ve had some reliefs announced, but the situation is becoming more complex, more uncertain.

Wage inflation is a very interesting factor here. I can speak on this as somebody who spent 12 years in the recruitment industry. And I talked to businesses all the time, about their challenges with skills, retention of staff and recruitment. The cost-of-living crisis has now bitten people hard, so there is increased pressure on businesses to pay staff more to help them with the challenges they’re facing at home. Linked to this, there’s been a reduced supply of labour post-COVID, with less people looking for work, unemployment at record low levels; so businesses have had to chase skills harder, and to chase skills harder you have to pay people more. So there’s a number of different factors leading to pressure on wages. In certain sectors, where skills are very hard to find, because those skills take years to develop, the pressure is even more – you can’t suddenly magic somebody up with the right skills, it’s going to take two or three years to train them.

Businesses have been very creative when it comes to wage inflation. One of the challenges with paying somebody an increased wage or an increased salary is once you do that, it’s baked in. In six months, if raw material prices come down, you can pass that on to your end customer. But if you suddenly start talking to your staff about cutting wages that they’ve got used to earning, that’s not going to go down very well. So businesses are being creative and they’ve looked at other things that they can do. Could they pay a bonus? Could they provide food at work? To help with the cost-of-living crisis, some businesses I talked to are giving a winter allowance to some of their staff, who were the lowest paid in their workforce, to help them get through the winter and pay their energy bills. Wage inflation is probably one of the biggest risks, I would say, to the economy. And I think this is where the Bank of England has some quite big concerns, because it’s a different type of inflation. And as I’ve said, once you have wage inflation in the system, it’s self-perpetuating and it’s very hard to get it out. We’re seeing increased strikes across a number of different industries. We’re seeing a lot of pressure now to raise wages, and for businesses, of course, it’s eating into margins; they’re worried about what happens long-term. At a macroeconomic level the Bank of England will be concerned – wage inflation is here to stay. But we need to stop inflation; we need to get back to that 2% target.

PL: Katy, what is happening in your sector? Are you having problems hiring and keeping the right people?

KD: The skills challenge is twofold. You’ve got the skilled part, and you’ve got the labour availability part. I think it’s very sector-specific and very regionalised. For instance, talking to some of my colleagues in manufacturing based in the West Midlands, you’ve got a real concentration of specific skills, and that is driving crazy things in terms of wage inflation, because they’re fishing from the same pool. They’re all fighting for the most skilled machinists or whatever specific discipline it is. I think, in the east – certainly along the A11 corridor – we’ve got a lot of manufacturers so there’s definitely competition among businesses for local labour pools. But actually, labour availability seems to be OK. As a company, we are very committed to our people strategy, so I like to think that we are creating an environment where people like to work. I think that counts for an awful lot, especially at the moment where people are going through a rough time. And we’re very lucky that we don’t have anybody in the local area that has done something really crazy to fracture the wage structures that we’ve got here, and certainly nowhere near what colleagues are seeing in the West Midlands.

PL: As you say, in the eastern region it’s a more diverse employer landscape, so you don’t face those issues of more concentrated employment competition?

KD: It’s just a different challenge. I think we’re in a different type of competition.

PL: But you want to hold on to your workforce, you want to build a relationship with them that’s long-term, that’s sustainable. You’re helping them out now. But the rising tide lifts all boats, doesn’t it? So presumably, the pressure to put up pay is going to come? Do you see yourself having to raise prices as a result of that?

KD: It’s a really hard balancing act. With the supply chain challenges that we’ve talked about, we’re still seeing price increase after price increase, and there is a point at which we just can’t sustain it without passing price increases on to our customers. We’ve already got some customers whose orders are cooling off a bit because all of a sudden, their product is probably priced out of the market. And if they pass on all the costs, it gets to a point where you just can’t sustain it, so stuff just stops. But there’s only so much that we can continue to absorb and, you know, the release valve that we’ve got is our pricing to our customers. So we try to be fair, we try to be open and transparent with those customers so that they can see what is driving it. But it’s the only outlet valve that we’ve got beyond shedding heads when we’re not very large business – we haven’t got many heads to shed. Do we need them all? Well they’re all busy – everybody’s working really hard.

PL: Simon, what about ways of working, did the pandemic change people’s expectations around work? Are you seeing structural change across the board?

SG: Hybrid working, and how people work, has really changed the landscape. And it’s caused additional challenges in the labour market and the ability for businesses to secure skills. For example, in Katy’s business, hybrid working – aside from office staff – is probably not really an option. In other businesses, it is. Businesses have told me is that if somebody’s looking for a job, now you have a national and to some degree, an international opportunity. One of the things with levelling up and retaining skills in a region is that people can now work wherever they’re paid the most if they’re working on a hybrid basis, and maybe travelling one day a week, if that, to an office. So I think we’ve seen the landscape change. And I think businesses are still very uncertain as to how to respond to the demands of employees who, if they can have it, want the hybrid working office and flexibility. I don’t think business has quite yet worked out where the line in the sand is. Is it two days? Is it three days? Is it fully remote? And it’s wait and see, watch what one business does.

Then there’s been this four-day working week trial. That’s delivered mixed results. One of the things that we haven’t necessarily touched on, but is related to all of this, is productivity. We have a fairly poor track record in the UK on productivity in recent years. One of the ways that we can try and achieve this very ambitious growth target that’s been set up by the government is that we can work smarter to increase productivity. But that generally requires investment – is now the time for businesses to invest? There’s a whole host of factors at play here. And it’s a bit like trying to juggle jelly – it’s quite difficult to keep all those things moving in the right direction. Which do you prioritise? But the productivity question is a really big supply-side question that we need to answer in this country.

PL: But we don’t yet have hard data on how that actually plays into productivity, do we?

SG: Yes, we’re putting big bets on the demand side: trickle-down economics to drive economic growth. But you know, what the business confidence monitor told us, and what I still hear, is that in many businesses, order books are strong. The challenge, as Katy’s alluded to, is on the supply side, and how do you access those raw materials? I was talking to a business the other day that’s got a 50-week lead time, just to get parts that go into their production process. That’s not sustainable. And this is a 50-week lead time at a higher price. Katy talked about pricing, and you asked a question about passing on prices to customers. It’s very tricky. You might have had an annual price increase a few years ago, but I hear of businesses now raising prices on a six-monthly basis, some even on a quarterly basis, because they have to, to survive. And of course, that spills through the supply chain and lands with the end customer, which puts more pressure on the cost-of-living crisis, the end consumer.

So it’s a really challenging thing and reshoring, onshoring, is something I think we need to look at more closely – Katie mentioned it – to bring our supply chain closer to home. Obviously, that reduces our cost of delivery as well. There’s been inflation in freight costs, which is starting to come down, thankfully. But that all takes time. And we find ourselves in a situation in this country now, where we’re very clear on what the challenges are, and we need a solution now. But unfortunately, the real robust solutions to address many of these issues are not something that you can deliver in the short term. They’re medium to longer term – real infrastructure changes, policy changes, that take time to bring in. We almost haven’t got the tools right now to address the problems we have, because the tools that we really need take time to bed in.

PL: We’ve mentioned regional differences but what about levelling up? We haven’t heard much about that lately. We had that White Paper in February, outlining training and education as an area of focus for government – I think £3.8bn was pledged for skills investment by 24/25. What do you think’s going to happen with that now?

SG: Levelling up has been around for many years in various different guises. It’s hard to argue with a proposition that we need to take some of the heat off the London economy and distribute some of the wealth out to the regions. But how we do that is a really big question. I read the Levelling Up White Paper, and there are some very ambitious plans in their 12 missions. But what I saw from that paper, and what ICAEW members have told me is yes, in principle, it all make sense, it all looks like a very, very sensible thing to do.

But the difficulty is the implementation and the action behind the mission – how we actually do that on the ground. Our regions operate in different ways; there are different political landscapes in regions. You’ve got certain regions that have electoral mayors, there’s others that don’t; some regions have devolution deals, some don’t. So we’re not really on a level playing field to even begin that task of levelling up. And one of the key elements to levelling up is making sure that we have people in the right jobs, developing the right skills for the needs of the businesses in the regions. It has gone off the boil a little bit, we don’t hear about it too much at the moment.

Levelling up will need to come back onto the political agenda fairly soon. But I think it’s deprioritised based on energy and the other challenges that businesses are currently facing. Linked to energy and the energy crisis – and Katy talked about this a moment ago – I do think we have a huge opportunity in this country, around green skills. We don’t train and we don’t develop enough green skills to deliver the green energy that we need in this country. And then linked to that, of course, we have the access to kit, which we’ve talked about in terms of the supply chain. But I do think that’s a really big opportunity. And that’s where the regions could play a key role: localised supply of energy, all of these considerations that are currently going on in the energy sector, do feed into levelling up, and levelling up has a part to play in that.

PL: Katy, the plan back in February was to put employers at the heart of the skills and training. But what support would you need as a business to make that a reality? I appreciate you have your own initiatives, but what would you need?

KD: The skills landscape is just so fascinating, and so complex. We’ve got a lot of employers using the current pressures as a bit of a ‘glass half full’ moment. Because we have labour pressure, we are seeing employers looking at different routes for bringing people into their business and upskilling themselves, because they’re having to. It’s put a firelighter underneath things that probably should have always been happening – ex-offender recruitment is a good example. I think the skills situation is so complex, it would be interesting to see what it looks like with levelling up.

Speaking to other employers, it’s not even just a manufacturing issue. Without making this question into something too big, I think there was so much dissatisfaction with the current education system that is feeding the labour force. I quite admire Liz Truss’s bravery and the boldness that she’s started out with. If she’s very brave, it would be amazing to see education addressed in a more radical way, so that we get people coming into the workforce who are better equipped to deal with the creativity challenges we’re looking. The apprenticeship levy is a really fascinating one. I think the problem that we’ve got with it, certainly from my view of the world, is that we’re a levy payer – we spend about 250% of the levy that we pay over to the government, because you can overspend and it’s a great cheap way of getting our existing staff upskilled, just as it is getting new apprentices into the workforce. So I definitely haven’t, from a personal standpoint, much of a problem with the levy.

If we’re looking at the skills that we need, I need my guys to be to be trained up on how to use CNC machines, which are the bread-and-butter machines in our production area: they are set to a programme to cut out pieces for the parts that we then manufacture. So there’s the cutting tool and the very technical bits of programming – that requires capital investment from the colleges to be able to train people on how to use those bits of kit. It’s not cheap, but they’re getting paid per head the same as people that are just offering business studies qualifications, which require a desk and a chair, so it’s a real challenge for us. The support that would mean the most to me is support for those education providers who allow us to get the technical bits done, and to continue to support businesses with either incentives or some sort of mechanism to support the internal training we do for those staff – although to a degree, we’d need to do that anyway. So the biggest thing for me is training providers, to make sure we’ve got that pipeline coming.

PL: Simon, Katy, thanks for being with us and sharing your thoughts on what we know so far. Some clarity, I think it’s fair to say, but a lot of questions remaining unanswered, and obviously business confidence is clearly suffering.