Treasury tightens the screws on OS: will job losses follow?
Always useful to monitor the written and spoken questions in Parliament: if you use theyworkforyou.com (and who wouldn’t?) you can set up an alert each time a phrase is used in Parliament (either house), or an MP appears, and get taken to the relevant page.
The latest interesting fact to emerge is that Ordnance Survey is expected, for the financial year just ended, to up its return on capital employed (ROCE) from the usual 5.5% to 6%:
Adam Afriyie (Shadow Minister, Innovation, Universities and Skills; Windsor, Conservative): To ask the Secretary of State for Communities and Local Government what financial return on ordinary activities was expected from Ordnance Survey in the year ending July 2008.
Iain Wright (Parliamentary Under-Secretary, Department for Communities and Local Government; Hartlepool, Labour): The financial target for the year ended 31 March 2008 was derived from the three-year target for 2004-05 to 2007-08 set down in the Ordnance Survey Framework Document 2004. This target was to achieve no less than 5.5 per cent. per annum return on capital employed (”ROCE”), averaged over a three-year period, with the return defined as surplus on ordinary activities before interest and dividends.
The target figure for ROCE for the year ended 31 March 2009 was increased to a return of not less than 6 per cent.
(Emphasis added)
That’s interesting, and if we get a moment it might be useful to see what that sort of increase in ROCE means for the OS’s profits and especially costs: we have heard that Vanessa Lawrence, OS’s chief, has warned staff that there might be redundancies in the coming year.
It might seem perverse to you – it does to me – to increase the ROCE demanded from an organisation that relies on third-party sales of its products as a recession bites, which would tend to mean that (a) those third parties are going to have less money to spend (b) some of those third parties might go out of business. “Capital employed” tends to be a fixed number (staff aren’t capital, they’re operating costs), and is hard to change.
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March 17th, 2009 at 8:34 am
Difficult to gauge what rate of return is fair from a monopoly largely built from taxpayers money. The Treasury asked for 5.5% (for the year to 31/03/08), the CLG Minister then increased the target to 18% (advice from OS?) and the OS actually made a 31% return (see note 22 of their accounts). Is this fair or a form of indirect taxation?
In the face of constant complaints (from 2002) about the price of OS products and the restrictiveness of the licensing terms surely someone with authority must have questioned it?
Even on the basis of profit/expenditure the return works out at about 25% – and this assumes that the OS is run economically efficiently despite the lack of competition in most of its markets.
The previous year the OS had to write off almost £14 million from a failed software programme. Despite this it managed to average over 2 ½ times the profit required by Treasury over a three year period.
No wonder the Power of Information Task Force report calls for urgent reform.
March 17th, 2009 at 7:11 pm
OS definitely are crying wolf about their financial position. Their ROCE is a rip off when all the Treasury (not the most sympathetic shareholder!) want is 6%. To overshoot to this level is not simply good luck, it’s blatantly being opportunistic to the maximum possible.
I hear the rumblings about possible job losses, and redundancy is always painful, but this is a high tech industry and no-one can afford to stand still on efficiency. It seems that the introduction of Sir Rob Margetts with his financial experience in the real world has got this message across.
But the scalpel needs to cut deeper. Current profit sits on top of huge sales, marketing, and legal function costs on which OS has turned into an aggressive monopoly that has eyes only to self-perpetuation. The current structure does not recognise the need to price products on their individual costs. It simply puts a massive overhead across all OS’s product range and thus guarantees that it will make a return on investment.
The Trading Review must get under the financial surface to set a fair price base for OS value added resellers to gain access to data at the same charges that OS charges its own product development teams. This would ensure a vibrant market. Products that are currently premium priced to hit a small but dependent group of customers might then be replaced by cheaper more appropriate products.
Assuming the Trading Fund Review doesn’t opt for a marginal cost pricing model (sorry FoD!), this change in approach need not cost UK PLC a loss of income. The increase in the volume of sales may be enough (even in the short to medium term) to take up the slack in an elastic market.
The opportunity offered by the Trading Fund Review mustn’t take a short term view. Look what the head-in-the-sand view did for the Banking industry (RIP).
Dan Macdonald