IT WOULD BE nice to think that the recent market turmoil signalled a return to management basics. After the era of what we might call sub-prime management, in which every problem of corporate performance was a nail to be battered with the hammer of massive debt or incentives, the drying up of cheap credit for financial engineering might seem to mean we can get back to the realities of satisfying customers, investing in employees and making honest products that turn an honest profit.
Or can we? As the tide of private equity subsides, the full extent of the damage done to the foundations of conventional management becomes evident. As the embodiment of no-holds-barred investor capitalism, private equity offers a starkly simple narrative of management. Managers are hired hands whose only responsibility is to maximise shareholder returns. In efficient markets there is no distinction between the long and short term, so today's share price is the only thing managers need to worry about. Under private equity, whatever the question, the answer is money.
Conventional management has no comparable grand narrative - only a paler version of private equity's ultimate efficiency story. It is based on all the same assumptions - economic rationality, agency theory, hierarchy, value appropriation - but in a less extreme form. Private equity won't go away, even if conditions are temporarily against it, and it has left 'conventional' management squelching on its foundations.
Where do we go from here? One place is London Business School's MLab, or management innovation laboratory. MLab, brainchild of LBS professors Gary Hamel and Julian Birkinshaw, opened last year with the aim of making over today's management rules. Although it brings together strands from several quarters, the immediate impulse for MLab's establishment was Hamel's frustration at the difficulty of persuading clients of his consultancy firm, Strategos, to innovate. Innovation, Hamel likes to say, is like getting a dog to stand on its hind legs: possible, but the moment you look away, the animal is back on four legs. Innovation requires a change of DNA.
It can be argued that innovation is the most important thing companies do. It goes beyond products, services and processes to embrace how organisations use resources. Yet while we are into Web 2.0, and technology and global interconnectedness combined make innovation and adaptability critical aptitudes for corporate survival, management is still firmly anchored in version 1.0.
'Management is stuck,' says Alan Mat cham, MLab executive director, who, after 10 years in the change-management practice of software giant Oracle, hardly qualifies as a woolly idealist. For 150 years, notes Birkinshaw, management has been geared to pursuing efficiency through principles of planning and control - specialisation, standardisation, hierarchy and the use of purely financial reward to motivate people. 'Many people believe these are a given and that from now on it's all incrementalism,' he says.
Yet it is increasingly clear that Management 1.0 is hitting severely diminishing returns. Private equity may 'work' in its own terms, but at the price of force-fitting people to organisations - and it doesn't do innovation. By entrenching the status quo, Management 1.0 has become the problem itself.
It was to get around this roadblock, and to channel the frustration of thoughtful companies running up against the inadequacy of current nostrums, that MLab was set up. It recently announced its first corporate founding partner, UBS, with which it will work 'to accelerate the evolution of management processes and practices that will define competitive success in the 21st century'.
MLab aims to reopen all conventional management's certainties and orthodoxies. At the level of processes, this is what its research partners are already doing. Thus, tired of the well-documented dysfunctions of budgeting, UBS is experimenting with alternatives. But behind these experiments shines the lure of an entirely new management model, one that rethinks organisations from top to bottom in light of today's knowledge and conditions: Management 2.0, in fact.
The project is controversial. As Birkinshaw notes, MLab changes the role of business scholars from observing and describing management practice to co-creating it. And such status and legitimacy as business schools and academics currently enjoy are intimately bound up with their theorising and legitimising of today's management model - of which private equity is the supreme avatar.
Can we make organisations fit for people? Do we need managers? Until we can answer such questions, a return to current 'basics' will offer little comfort or respite. 'We want to convince the doubters that a new theory of management is possible,' says Birkinshaw. MLab is a small step for management, potentially a giant step for mankind.
The Observer, 26 August 2007