James Baird: Cautious new firms to pull us from doldrums

CORPORATE Scotland has hardly heralded in the new year and who can blame it? Absent is the sense of anticipation that might be expected at the dawning of a new decade and absent is the relief that the worst could actually be over.

Granted, there is tentative talk of improvement. But it is almost always tempered by fear of a double dip recession or anticipation of a painful recovery.

For once though, this is not just Scots living up to their reputation for being dour and pessimistic. The speed and scale of the downturn have dealt enormous blows to the very heart of the Scottish private sector, and in particular to two of its "national" financial institutions – Royal Bank of Scotland and HBOS: no longer independent, now tied up in internal surgery rather than global expansion, no longer the flagships of Scottish business.

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British Energy fell into foreign ownership under France's EDF Energy in 2009, meeting the same fate as ScottishPower in 2007 and Scottish & Newcastle in 2008. It was not a good year for Scotland's largest companies. Equally, amongst the biggest private companies, some surprising names have seen their market position weakened while others are mired in resolving the debt position that fed previous growth.

Financial services and real estate were the sectors which were hardest hit across the board last year. Retail struggled too, despite stronger Christmas trading, and a strong cultural heritage was not enough to sustain the food and drink sector.

Tourism fared better, with more domestic holidays taken in the UK as a result of the recession, although for Globespan the year ended with more dismal headlines for Scotland.

Not surprisingly, the oil and gas sector, including the likes of Dana Petroleum, PSN and Wood Group, was the strongest performer in 2009, buoyed by the steadily rising price of oil.

There was some welcome light in an otherwise gloomy year: Weir Group, Aggreko and Clyde Blowers all delivered strong performances, making further headway into emerging and growth markets. They are showing that global businesses can operate from a Scottish HQ with the right balance of measured ambition, control of business fundamentals and, above all, strong management.

But 2009's main legacy was to see the cost of credit soar and sources of capital dry up leaving many businesses sailing close to the wind on bank covenants or, in the case of the more fragile business models or those who'd mortgaged up their company's future based on a property punt, sunk.

So what can we expect from 2010? What will drive Scotland's recovery? The general consensus amongst economists is that it is unlikely to be a year of significant growth and that Scotland's gradual recovery will lag behind the rest of the UK. But how can the Scottish Government and the major corporates ensure that they are at least leading us in the right direction?

There are a few green shoots emerging. In the stricken financial services sector it is encouraging to see that Tesco Personal Finance has installed its HQ in Haymarket and expects to increase its headcount from 250 to more than 400.

Standard Life has a new bullishness about the future and HSBC has announced 70 jobs in its Edinburgh contact centre. Virgin Money is also seeking to swell its numbers in the Capital. These might go some way to mitigating the further job losses expected from RBS and HBOS.

Renewables and technology are two industries generally regarded as being key to the future of Scottish business and it is very possible that they will be areas of growth. But the traditional industries like manufacturing, food and drink and transport are just as likely to contribute, and they already have the greater scale to do so.

Time will tell whether the improvement in retailers' fortunes in December was a one-off Christmas bonus or the start of a more permanent return to spending by consumers. Either way, retail is unlikely to be at the helm of recovery but will hopefully help the cause.

These glimmers of hope alone won't be enough to drive Scotland out of recession, particularly in the light of uncertainties surrounding the political environment. There is the likelihood of a new UK government being installed in Westminster, which Alex Salmond and his cabinet will need to form a relationship with before they face the battle for their own re-election in 2011.

No doubt the Scottish Government will continue to push for greater economic control, particularly over taxes. If it succeeds, it must build and deliver a tax regime that invites business and entrepreneurs to settle in Scotland rather than discouraging them from doing so, or worse still, driving those already here away.

What Scotland must create in order to rise from recession, and indeed to protect itself from future downturns, is an environment that encourages, promotes and rewards entrepreneurship. That means a Scottish Government that wants the nation's private sector to flourish as much as, if not more than, its public sector. It means halting any further decline in Scottish education standards. It means avoiding threatened funding cuts to our world class universities, but also helping the universities deliver research and innovation that is relevant to business and has realistic commercial value – that can be turned, in Scotland, into business cashflow. It means creating an environment – business and domestic – that encourages talent to come to Scotland. It means more world class business leaders born and bred in Scotland.

But there is another vital element to recovery and that is the exercise of sensible caution and strong management. A cautious entrepreneur, whether starting up a fledgling business or leading a large multinational, has one eye on the opportunities presented by new products and services, emerging markets and potential acquisitions, with the other eye firmly fixed on cash flow.

Suggestions from the latest Deloitte CFO (chief financial officer] Survey are that many CFOs are operating this way already. While revenue-raising strategies such as new products, new markets and M&A have returned to this year's "to do" list for many CFOs, reducing costs and increasing cash flow remain the top priorities for 2010. It's an approach that we'd recommend to CEOs and the First Minister as well.

Without that sensible caution and tight management of the finances, we can only speculate which of Scotland's biggest names from the corporate sector will be on the next decade's casualty list.

• James Baird is senior partner for Scotland & Northern Ireland, Deloitte