A matter of life and death

MANUFACTURING is not generally speaking a matter of life and death. But it was in Iraq, where the non-delivery of ceramic plates for an army flak jacket was in at least one case the difference between the two.

A report earlier this month by the National Audit Office sets out a damning catalogue of logistics shortcomings that casts a deep shadow over the overall success of the military mission.

Some troops in Iraq lacked basics such as desert boots or clothing, were given body armour without the armour and had no protection against chemical and biological attack, says the report. Meanwhile, tanks and other machinery had to be cannibalised to provide spare parts for front-line equipment.

In some cases supplies existed but no one knew where – up to 200,000 sets of plates for flak jackets ‘seemed to have disappeared’, according to the NAO. In other cases the gamble of reducing operational stocks to cut costs backfired because ‘the Department could not engage with industry early enough to allow the required items to be delivered in time’.

It was left to File on Four , a BBC radio programme, to spell out the sombre cost in human terms: some soldiers were crippled by boots that were the wrong size or fell to bits, while others preferred to buy their own equipment. Sergeant Steve Roberts, a tank commander who had ironically spent hundreds of pounds on his own kit, was killed after he gave up his body armour to more exposed infantry troops and his pistol jammed.

War, says Professor Mike Sweeney, a manufacturing specialist at Cranfield Management School, is the ultimate test of process and personnel management. In this perspective it emerges strikingly poorly from comparisons with another famous victory, England’s triumph in the rugby World Cup. In his autobiography, captain Martin Johnson reflects on the remarkable change in attitude wrought by coach Clive Woodward’s decision that the England players would no longer have to cart around their own luggage, stay in the cheapest hotels or travel cattle-class between fixtures.

It was the moment they began to be treated as world-beaters, Johnson says, that it dawned on the team that they could and should be. The new conditions weren’t a reward they were the measure of ambition and a means to the end of allowing them to concentrate 100 per cent on the job in hand. By contrast: ‘If you send me out in a hostile and dangerous environment with poor basic equipment and underprepared, what does that say about my value? What does that do for morale?’ asks Professor Sweeney.

The parallel is apt, agrees defence analyst Paul Beaver. ‘It’s boots on the ground that win battles – individual soldiers, not people sitting pushing buttons in fancy machinery,’ he says. ‘It’s utterly unacceptable that we are asking soldiers, sailors and airmen to put their lives at stake without giving every one of them the best possible equipment,’ – for the cost, he calculates, of about two joint-strike aircraft.

The UK has been extremely lucky to emerge from the conflict so lightly, Beaver believes. In several cases, skimpy preparations meant the margin between success and disaster was wafer-thin. For instance, the assault brigade with the crucial task of preventing Iraqi troops from blowing up the Ramallah oilfields got new machine guns the day before and had no time to practise with them beforehand.

Another source describes a frantic hunt for combat identification tape when it was discovered that US battle troops couldn’t recognise the profiles of British vehicles. It took an enterprising A rmy major to bypass Treasury rules and buy up the last remaining world stocks, and contractors and soldiers working through the night to get the job done, according to this report. Beaver says: ‘Essential supplies should be in the right place at the right time – people running around with Amex cards isn’t good enough. ‘Just-in-time’ is too often just too late – as it was, inexcusably, for Steve Roberts.’

Daniel Jones, a consultant and author of Lean Thinking , notes that beginners often jump on just-in-time logistics because they mistakenly think it is easy to do and automatically involves the drastic reduction of inventory costs. ‘It’s about linking activities in an unbroken stream, not running down stocks,’ he says. ‘It would be crazy to run down stocks below the level at which they can be quickly replenished.’

Professor Sweeney, who has experience of army thinking, argues strongly that the current defence department approach to supply is at odds with battlefield reality. He points out that rapid response – as all recent conflicts involving UK forces have been – requires an ‘agile’ supply chain which can react equally quickly.

The corollary is that previous price-driven supply relationships won’t work. Instead, says Sweeney, the department needs close partnership arrangements enabling strategic stockholding of items that take a long time to make, and steady building of supplier capacity, both human and mechanical, to turn on a sixpence when needed.

The other essential, observers agree, is the vastly improved tracking and control of supplies. At one stage 1,000 containers full of urgent supplies were reportedly floating around the Gulf but no one knew what was in them or their exact whereabouts. This led to massive over-ordering as commanders on the ground reordered goods already in transit, at higher priority. Just 8 per cent of top-priority orders were delivered on time, according to the NAO. This, too, is inexcusable. The ‘beer game’, which graphically illustrates the pitfalls of supply-chain mismanagement, is a first-year business-school exercise. Meanwhile, Jones observes, ‘consignment tracking isn’t rocket science any more – you can look up the location of a FedEx or UPS package on the web in real time’.

Supermarket groups routinely track delivery and inventory levels of 40,000 stock items with huge seasonal fluctuations – computer systems to do so have been around for years. What the multiples can do for trainers and toys, the department ought to be able to do for boots and body armour – in deadly earnest.

Simon.caulkin@observer.co.uk

Missing in action: catalogue of failure

* Body armour plates, 200,000 of which ‘seem to have disappeared’ since the Kosovo war

* Desert boots and clothing – a quarter of the Desert Rats fought the campaign in Northern European kit

* Nerve agent detector units – 40 per cent shortfall

* Nuclear, biological and chemical kit ‘misappropriated’ from supplies by troops desperate to get hold of them

* Spares for tanks and howitzers – German equipment is being cannibalised instead

* £14m worth of ammunition written off because of ‘reduced life expectancy’ in high temperatures also air-conditioning units

* ‘A robust tri-service inventory system… and an information system to support this technology’ even though the need has been known ‘since the Gulf Conflict in 1991’ (‘Operations in Iraq – Lessons for the Future’, MoD)

The Observer, 21 December 2003

In questionable company

THE COMPANY is an inevitable and remarkable invention. A prodigious amplifier of human effort, it is certainly ‘the most important organisation in the world,’ as John Mickelthwait and Adrian Wooldridge note in their brisk and entertaining The Company: A Short History of a Revolutionary Idea

It is the company, not blind market forces, that carries on the innovation and trade that push economies forward. As London Business School’s Professor Sumantra Ghoshal has shown, there is a strong correlation between national prosperity and the proportion of population working in relatively large companies. We live in an organisational, not a market, economy. It is the combination of companies and markets that did for communism, not military might.

Historically, too, the company has been a force for civilisation, thriving best in conditions of trust, honesty and respect for contracts. It provides people with identity and community as well as economic livelihood.

Yet this ‘unsettling organisation’, as Mickelthwait and Wooldridge call it, also has a dark side. Even though the company saw off the challenge of central planning, the end of history has turned out to be more eventful than many predicted. Part of the reason for that is the contradictions at the heart of our present-day corporations.

During the past two decades the shareholder-first principle has increasingly pitched companies into conflict with societies’ social and environmental priorities.

Pleading the pressure of capital markets, companies have plunged into an infernal cycle of ‘asshole management’: the pursuit of ever-increasing speed and efficiency in the name of shareholder value that has had the effect of dehumanising work, damaging the environment and stripping management of its moral dimension. The abuses at Enron, Tyco and WorldCom are the direct outcome of this reductionism.

Hence the paradox that although we are more dependent on the corporation than ever, and its potential for good has never been more urgently needed, it is going through a traumatic crisis of legitimacy.

Companies and those who run them have rarely been more distrusted – in polls of ethical standing, managers come out lower than politicians or journalists. Liability lawsuits – for obesity, firearms violence, even global warning – are piling up.

Does this matter? Yes, it does. With its Dr Jekyll and Mr Hyde sides struggling for supremacy, the company is standing at one of its periodic crossroads.

As Mickelthwait and Wooldridge show, this is not the first time that corporate excesses have been followed by a legal and emotional backlash. The cause of the joint-stock company may have been set back a century by the distrust engendered by the South Sea Bubble, for instance.

It wasn’t until 1844 that companies were freed of the need to obtain a special charter and 1856 before limited liability was automatically granted.

This time round, companies’ hasty adoption of corporate social responsibility programmes is not saving them from the increasing attention of regulators determined to limit surprise and prevent abuses.

Yet addressing the negative problem may run the danger of throwing out the positive, too. As Ghoshal points out, there is no evidence that (for example) splitting the top job or increasing the number of independent directors has any effect on company performance.

Meanwhile, these arrangements institutionalise the breakdown in trust between business and society, a trust that is at the heart of overall success and is abandoned at our peril, as Business in the Community chairman David Varney recently noted.

There is an alternative, however, which involves rejecting the determinism that lies at the heart of asshole management and returning to first principles. As history shows, the marvel of the company is that it is a separate ‘legal person’. It is this entity that owns corporate assets, not shareholders, whose rights are restricted to residual cash flows.

So the company has both the right and the obligation to fix its own purpose, to which employees contribute human capital and shareholders financial capital. It can choose to be an engine of stewardship rather than expropriation, a ‘collaborative’ organisation in which the interests of stakeholders converge in the knowledge that human wellbeing is integral to its purpose, not a tacked-on programme.

Because purpose is shared, it can operate on distributed initiative and leader ship rather than hierarchical command and control trust rather than sharp incentives.

The choice is a poignant one, because the paths diverge. Crucially, management’s starting assumptions are self-fulfilling. An organisation run on ‘asshole-management’ principles breeds people motivated by greed and power who don’t care how they get it – in a word, ‘assholes’. Enron is the locus classicus. The converse is also true.

Which company will provide the next evolutionary chapter? The odds are on the assholes, because that’s where the weight of conventional theory lies. But that’s not inevitable: as Mickelthwait and Wooldridge usefully remind us, legally the company was shaped by political decisions – and political decisions can reshape it as well.

The Observer, 14 December 2003

In-house and back on track

LAST month Network Rail announced that it was bringing all its pounds 1.3 billion annual maintenance business in-house and restructuring itself around its main routes – that is, to fit with its operating company customers. A total of 18,500 people will be transferred from the private engineering companies to the track operator in the biggest shake-up since rail privatisation in the mid-1990s. The move is also unusual. Insourcing of any kind runs so counter to trends that it is worth stopping to ponder what it means.

Conventional wisdom of the past 20 years is that the more companies can outsource routine tasks to specialist providers, the better. ‘Outsource everything except your soul!’ exhorted Tom Peters. What started with catering, security and other low-level tasks now embraces training, logistics, IT and even HR. IT outsourcing particularly is now a massive business.

The argument for outsourcing is that it imports market discipline. ‘You can see what the service costs and change the provider if you aren’t satisfied,’ says Iayn Clark of International Strategic Management, a provider of specialist services for ad hoc assignments – due diligence for banks and high-level training, for example – for which organisations cannot cost-effectively maintain full-time teams. In theory, too, specialised providers of ‘commodity’ services should be able to do it more cheaply through focus, economies of scale and access to the latest technologies.

But, as ever, the reality is more complicated. Even a cursory look at the literature reveals that at least half of all outsourcing projects fail to live up to expectations. Only a few save substantial amounts, and even outsourcing providers suggest cost-cutting is not the place to start. Once the profit margin of the provider and cost of managing the contract – anything from 4.5 to 10 per cent of the fee – are taken into account, the figures look a lot less attractive.

Experience also shows, counterintuitively, that it is rash to outsource something you do badly or don’t know much about. Faced with a supplier whose core competence is negotiating contracts and knowing what the costs really are, you’ll end up locked in and paying too much in the long term if not in the short. This is the paradox of outsourcing: to do it properly you have to know as much about the function as the provider, in which case why not do it yourself.

But why would you want to do routine stuff in-house? Back to Network Rail. In this case, what suffered was not cost (at least not directly) but quality. Faced with declining payments to take account of anticipated efficiency savings, the companies protected shareholders and prof its by cutting costs at the sharp end, with unfortunate results for the operation as a whole, to say the least.

Network Rail’s predecessor, Railtrack, was also fatally split, with the needs of shareholders fighting for priority with those of the network. Boundaries between companies are shifting all the time. There will always be a flow of work in and out. But it should be guided by principle, not fashion.

And what happened to the rail network is a classic example of outsourcing for the wrong reason: the fashionable fallacy of treating companies as if they were markets. The idea was that by contracting in the market, and managing those contracts, Railtrack (as it then was) would be able to use its maintenance resources more efficiently. And not just for maintenance: there was so much outsourcing going on at one stage, according to one employee, that the company had outsourced the outsourcing process.

But companies aren’t markets. They obey different operating logic and have different roles. Markets evolve blindly, guided by the invisible hand towards the most efficient short-term use of resources. Unfortunately, although Railtrack didn’t realise it, there is no guarantee that short-term efficiency coincides with the larger purpose of the company. For companies do have purpose. That is their point. They are intentional entities. They can choose to sacrifice some short-term efficiencies for the sake of innovation that increases their store of resources in the long term.

Ironically, it is only now that it is no longer a private-sector company in the normal sense that Network Rail can develop that long-term dynamic efficiency by focusing on the things it should be doing: hence the reorganisation. ‘Our focus is now on engineering: rebuilding and maintaining the railway,’ says a spokesperson.

Having already taken one contract back in-house, precisely to get a hands-on feel for how maintenance was being managed and costed, Network Rail believes it can save pounds 200 million to pounds 300m from the overall bill – and do it better.

But even if it weren’t cheaper in the short term, if Network Rail is to build its organisational vocation as a great engineering company – which it must do for long-term efficiency – then maintenance has to be in-house.

Renewal stays outside (as it was in the days of British Rail), but understanding maintenance will enable it to make more informed and timely decisions about rebuilding, Network Rail believes. Maintenance is its soul, and has to be treated with due reverence.

The Observer, 30 November 2003

Milk of corporate kindness

WHY has Tetra Pak, the very private Swedish packaging firm owned by the Rausing family, launched a pounds 4 million national advertising campaign, its first ever? The company concedes that it is an unusual step for a firm that has no direct relationship with consumers.

The short answer is that Tetra Pak wants to persuade us of the environmental and food goodness benefits of buying milk and juice in its paper-based cartons. So far so normal. But a longer answer says something very interesting indeed about responsibility and sustainability – not as an irrelevant business cost, as many claim it is, but as a strategic competitive weapon.

First, some background. Tetra Pak, founded in the 1950s, is one of the world’s largest packaging companies for milk, juices and other drinks. It produces 100 billion aseptic cartons a year worldwide, equal to 5 per cent of the overall market for liquid food packaging.

Tetra Pak has always had a strong sustainability streak. Founder Reuben Rausing was prompted to devise the original tetrahedron-shaped carton by observing the massive waste of food through perishing as it moved through the supply chain. ‘Packaging should save more than it costs,’ he said. The firm’s current strap line ‘Protects what’s good’ refers both to the carton’s claimed food-protection qualities and to the fact that, being paper-based, it is a renewable resource.

The reason for calling attention to these properties now is, as the company freely admits, competitive. In its core market – dairy – carton is coming under increasing pressure from plastic. Paper needs to fight back. But what makes the campaign of general as well as particular significance is the terrain the company has chosen to fight on.

Shifting the competitive arena from, say, price to environmental performance certainly entails costs – not just pounds 4 mil lion to raise the awareness of the UK public, but the hugely greater costs of making sure the company can actually meet its environmental claims. These are: ensuring and certifying sourcing from sustainable forests, increasing eco-efficiency and becoming carbon-neutral in manufacturing, and improving the UK’s lamentable record in carton recycling. Through the UK trade association, it has helped set up this country’s first reprocessing plant capable of separating carton substrate from its thin protective layers of aluminium and plastic.

The conservative view of this social and environmental do-gooding, articulated by economist David Henderson and Martin Wolff of the the Financial Times and traceable back to Milton Friedman, is that it is not just a distraction but a dangerous dereliction of the duty to maximise value for shareholders. The business of business is business if shareholders want to clean up the environment, they can choose to do so themselves.

Tetra Pak challenges this head on because in effect it makes a business case for environmental responsibility. As a new study by Forum for the Future for the DTI, Sustainability and Business Competitiveness , points out, the business case has hitherto been as elusive as rugby player Jason Robinson – definitely there, but impossible to pin down and quickly out of sight. Tetra Pak hauls it back into view, while the report suggests how it works in practice.

Briefly, the study supports recent findings by the Work Foundation and others that shareholder value is best served by not putting shareholder value first (which is one kind of answer to the corporate social responsibility conservatives). It also reiterates the importance of intangible assets: in a competitive and increasingly weightless economy, companies need to orchestrate ‘unique, or hard-to-replicate, capabilities, competencies and quasi-assets’ to innovate their way out of competition and stay ahead of the game.

This pretty much describes Tetra Pak’s strategy. It accepts the costs of improving its environmental performance because it plays to and reinforces its distinctive strengths. Both plastic and carton are cheap and technically recyclable, offering little potential for differentiation. But only carton comes from renewable resources. So Tetra Pak has an obvious interest in increasing consumer awareness of the issues around renewability and recycling.

But it also has an interest in meeting its promises. Reputation, as the report points out, is now understood to be an important source of competitive advantage. To support it, the company obliges itself to upgrade its manufacturing performance. It also has powerful incentives to innovate both to lower costs and to make it possible to make even higher environmental claims. That is indeed what it is doing, seeking in the long term to find renewable alternatives to aluminium and plastic.

In this perspective Tetra Pak’s environmental spending makes sense as an investment, not a self-imposed expense, since it thereby makes itself more sustainable in the future. This is the other answer to the CSR doubters, and it suggests, provided useful measures can be developed, that ‘corporate sustainability management [could shift] out of public affairs into business strategy,’ according to the report. This is about internal management, not external reporting. ‘Our view is that management of key stakeholders and environmental impacts is central to the successful management of many companies.’

Tetra Pak’s experience demonstrates another important proposition: the importance of the interaction between regulation and markets. Part of its business case is indirectly made by the regulatory obligation to recycle, which plastic manufacturers met with PET containers. Carton manufacturers then had to seek competitive advantage on another front: with further environmental improvements.

There is an even larger implication, however. Tetra Pak is one example of the power of market forces to generate environmental innovations when that’s what is driving competition. It follows that ‘if there is a strong case for corporate sustainability, then business could play a major role in environmental protection and social development’ – a point also made in a recent report by AccountAbility. That may seem a long way from an ad for a milk carton, but to adapt the pay-off from one of them: ‘No business is environmentally perfect, but at least we’re working on it.’

The Observer, 23 November 2003

Work smarter, not harder

‘WE’RE just not a high-performance economy. We don’t want it enough,’ says Rebecca Harding, lead researcher on a ground-breaking study of UK productivity by the Work Foundation.

The report, The Missing Link: From Productivity to Performance , was sponsored and led by business and takes a novel line on a problem that has dogged the UK for well over a century, defying the best efforts of countless panels, task forces, commissions of inquiry and academics. UK productivity lags behind that of the US, France and Germany by 15-25 per cent depending on the measure used, a gap that makes everyone in the country pounds 6,000 worse off, according to a Treasury calculation.

Why has the gap been so persistent? Part of the reason, suggests the report, lies in the different language economists and companies use to frame the issue. Economists tend to attribute productivity differences to quantitative factors such as capital investment and workforce skills, both areas in which the UK trails. That may be true as far as it goes, but it’s not very far. Unlike markets, which evolve blindly, companies are entities that make choices about organisation and strategy. So they need to be looked at through a lens that tries to identify why they don’t make the choices that lead to higher productivity, and what actions they could take to do so.

Fundamentally, the report found that companies simply don’t see productivity as a useful measure. High performance is seen as a much more useful way of approaching issues of underperformance, say the researchers, who have constructed an ambitious ‘high-performance index’ to measure the difference between good and poor performers and indicate where the latter need to raise their game.

The Work Foundation identified five areas that companies need to manage to drive high performance and business success: customers and markets, shareholders and governance, stakeholders, people, and innovation and creativity. Measuring companies across these broad areas, says Harding, yielded some startlingly consistent results.

At top level, as Harding suggests, the UK is too attached to the status quo to be a high-performance economy. The gap is as much one of creativity and innovation as productivity, with performance undermined by risk- aversion and low skills. Unlike in other countries, the institutional framework is fragmented, so that partnership is rare.

And having exhausted the market reforms of the 1980s, too many companies are still trying to improve performance by making people work harder rather than smarter, with swiftly diminishing returns.

However, the findings at firm level also provide important pointers to what it takes to move forward. First and most significant, top performance is holistic. Not only are high performers consistently superior over all five areas than the laggards, they manage the interdependencies between them better, so that the total is more than the sum of its parts.

Focusing disproportionately on just one of the areas, such as shareholder value, is likely to damage performance. By the same token, ramping up capital investment is not the answer. ‘This disposes of one-dimensional management fads and silver bullets,’ says Harding. Instead, ‘high performance requires an integrated approach, optimising strategy and delivery rather than ‘cherry-picking’ objectives.’

In turn, the key to delivering the synergies is people. The report says: ‘Managing the spaces in between can only be achieved by a workforce that sees the big picture and is enabled and motivated to act, with middle managers able to translate strategy into workforce goals.’

Also necessary (and often lacking) are ambition and adaptability. Aspiration provides the will and stamina to adapt, and adaptability is needed to ride the shocks. Depressingly, just 43 per cent of the sample had an explicit growth goal. The evolving organisation is held together by a common purpose focused on growth and risk-taking, well summed up by Will Hutton as ‘organisational vocation’.

The benefits of high performance for productivity are strikingly large. The Work Foundation model shows that companies in the top half of the index are 42 per cent more productive than the bottom quartile. The average UK firm is 25 per cent off the productivity pace of the top performers. Every 1 per cent improvement across the five areas is reflected in a 0.7 per cent productivity gain.

The implications of the work are clear and in some respects common sense. When it comes down to it, productivity is not about economists’ measures of quantities of capital and labour, but qualitatively how well they are combined and managed.

The biggest intangible is management, and there is no ‘solution’ to underperformance and low productivity that does not engage with the reality of the UK’s woefully undereducated and untrained management cadre.

In turn, enlightened holistic management needs a supportive governance framework that doesn’t put the shareholder cart before the company horse. Shareholder value, like productivity, is the result of high performance, not the cause of it.

The Observer, 16 November 2003