Time for companies to ban the binge: Shedding pointless red tape could transform the way businesses work

BINGE management is the phrase coined by Donal Carroll, of consultancy Critical Difference, to describe a debilitating condition afflicting much of UK plc. Symptoms include hypochondria, panic attacks, addiction to dieting and round-the-clock consumption of miracle remedies.

In management terms most companies are overweight and some obese. Almost all are unfit and sluggish, spending too much time and effort pushing paper and not nearly enough lifting weights in the gym.

Like human addicts, companies (and particularly their representative associations) have the unattractive habit of seeking to blame everyone else for their ills. But much of the condition is self-inflicted. Consider the analogy of regulation at the national level. The Better Regulation Task Force (BRTF), established in 1997 to lighten the regulatory overhead, estimates that regulation costs the economy around pounds 100 billion or 10-12 cent of GDP a year – about the same as income tax.

Of that, it reckons that 60-70 per cent is related to policy – improving health and safety, protecting the environment and so on – and therefore has benefits as well as cost. While there is always scope for improving policy-driven regulation by increasing the ratio of benefits to costs, the main opportunity for improvement lies in eliminating the substantial 30-40 per cent of regulation which is bureaucracy, ie waste pure and simple.

Shedding pointless red tape could free up 1 per cent of GDP for economic muscle-building, the BRTF reckons. There is a behavioural hit, too: just as losing weight allows individuals to lead a more adventurous lifestyle, so cutting regulation should produce a bolder, more entrepreneurial economy.

Industry has by and large welcomed the BRTF recommendations, while urging it (and the government) to do more. But there is plenty to do to bring its own addictive behaviour under control.

GE reckons that 40 per cent of its $150bn revenues are devoted to administration and back-office functions. In less efficient companies than GE the figure will be much higher. Firms, therefore, have at least as much to gain from displacing resources from bureaucratic to productive purposes as the economy as a whole. So what scope is there for adopting better regulation guidelines inside firms?

As the task force recommends in a recent paper, the overriding principle is ‘less is more’. The first thing is to stand on the scales, measure the flab and resolve to remove it. But experience tells that reflex reactions generally do not do the trick. Caution is in order – it is important that the remedy should not make matters worse.

In slightly differing ways, in both public and private sectors, one of the most insidious problems is what the BRTF calls ‘regulatory creep’ – the instinctive tendency of administrators to inflate the importance of the rule book and constantly invent new refinements to it. In universities, schools, police and the NHS, it’s not so much regulatory creep as regulatory sprint, as local managers enthusiastically embellish centrally set targets with their own variations and extra demands, as a result of which many professionals feel they are spending so much time accounting and managing that there is none left for the original task.

In companies, the phenomenon takes the form of new management initiatives raining down from on high with little explanation or consultation. According to management consultancy Bain, on average, companies currently have 13 major management tools in use. But these tools impose their own costs. Thus, companies’ attempts to downsize and outsource have shifted cost from the waist, as it were, but as usual where there is no method, it simply reappears on the thighs or bottom. Automating offices transfers employment from clerks to IT support staff more subtly, shunting customer service into robotic call centres offloads costs on to customers who extract payment through churn, ill temper and viral bad mouthing.

Similarly, lemming-like outsourcing, it is now clear, may have cut the cost of some activities, but the price is a ‘hollowing out’ of larger commissioning skills, so that many organisations have lost the capability to design, specify and project-manage solutions to their own problems. The cost is tears and recriminations and yet another remedy that falls short of expectations.

In the end, few tools turn out to be real management innovations. They offer no differentiation, since mass suppliers are prescribing exactly the same thing for competitors. They end up being just another cost of doing business: yet more management overhead or burden that, like the ageing population, has to be paid for by a smaller and smaller productive workforce.

In the short-term both public and private sector managers should take to heart the BRTF’s ‘one in, one out’ principle, under which every new rule intro duced should be balanced by another removed. The government has in principle accepted the recommendation, borrowed from the Dutch, although there is little sign so far of much effect on the ground. (In fact, it could be argued that the better regulation apparatus, consisting of simplification targets, plans and units in departments and regulators, is itself a net addition to the regulatory regime.) It is also sensible to cost the impact of new rules, rather than simply taking the benefits on trust, and consider non-regulatory alternatives. Finally, what is the worst that can happen if we don’t do this? As the poet Allen Ginsberg once wrote, ‘It’s never too late to do nothing at all.’

Weight control of all types comes down to concentrating on essentials, self-discipline and constancy of purpose. Rule books, hierarchies and multiplying management initiatives grow up to compensate for the lack of these things. At least in Ricardo Semler’s account, the culture at Semco, the Brazilian engineering firm, is so strong that it needs practically no rules at all. So let’s make 2006 the year of managing in moderation and ban the binge.

Customers are not just for Christmas

CAN it be ‘bah, humbug’ time again already? Every Christmas the appeal to our better nature serves to throw into ever more grating relief the mendacity, or at least deliberate ambiguity, at the heart of so many companies’ business practice – and this one is no exception.

Thus the boss of GNER admitted last week that it was hard to find cheap fares on the company’s website, adding coolly that it would take a year to make them more accessible. The next day British Gas was taken to task by the Advertising Standards Authority for a misleading ad campaign – for the seventh time in a year. Happy Christmas, suckers.

However, don’t think that this is just festive behaviour:

* A leading mobile phone company worked out that it makes two-thirds of its profits by not telling customers they are on inappropriate tariffs

* Don’t even try to pin down a ‘real’ air fare: airlines deliberately change their prices hundreds of times a day to make it impossible for you to find out

* Banks make much of their profits from extra charges on customers who overdraw – and have algorithms for paying in cheques that make sure they do so as often as possible

* Companies using 0870 or 0871 phone numbers for customer service profit from keeping customers on hold while they work their way through the dreaded automated answering systems

* Loyal customers are often worst treated, paying more for services than ‘rate tarts’ who switch every few months. Loyalty, in effect, is a mugs’ game.

The cynical may shrug, but that’s showbiz. Caveat emptor. As Groucho Marx put it: ‘The secret of success is honesty and fair dealing. Fake that, and you’ve got it made.’

Yet the long-term costs of the Groucho model of business are catastrophic. Some of the examples above are taken from a book out next year ( The Ultimate Question , Harvard Business School Press). In it Fred Reichheld, a senior consultant at Bain who has made a career of studying customer loyalty, graphically maps the differing effects of what he terms ‘good’ and ‘bad’ profits.

Good profits are self-sustaining because customers not only come back again for repeat purchases, they become advocates for the company – a virtual marketing department. Apple customers are a good example. Bad profits are the reverse. Instead of creating value for customers, behaviour like that above appropriates value from them.

But it’s a mistake to think that ripped-off customers are passive. They find ways of getting even that exert a huge toll on offenders. In a mirror image they become an anti-marketing department: an invisible army of detractors, each of whose negative comments typically cancels out several recommendations. Detractors complain more, make more calls on customer service and are a hidden drag on growth. They cost more and spend less. Angry customers depress employees, compounding the effect. And to neutralise their influence requires ever greater effort by the companies.

Figures in some industries – credit cards, mobile phones, cable TV and, sad to say, at least in the US, newspapers – are now so high that compa nies are having to pedal more and more furiously just to stand still. It makes the apocryphal customer-service director all too credible: ‘Our new automated ordering system has sped everything up: we’re losing customers faster than ever before.’

Statistician W.E. Deming said that the most important costs in business were unknown and unknowable. In this case it seems hardly coincidence that so many companies find it hard to grow consistently and so few provide a service that customers can be positive about. Yet very few managers are able to make the connection. The capacity for self-deception is stunning: while 96 per cent of directors responding to a Bain survey said their company was customer-focused and 80 per cent declared that they provided superior service, customers in other surveys rated just 8 per cent of the firms they dealt with as superior.

Bad profits are the result of short-term management by the numbers, aided and abetted by the notorious unreliability of conventional customer-satisfaction surveys. Instead, Reichheld proposes that managers should pay attention to a measure of, simply speaking, the ratio of promoters to detractors. Bain calculations seem to confirm that the relatively rare firms with a high positive ‘net promoter score’ have superior growth and profitability those with low scores – the vast majority – struggle to keep afloat, not least because their destructive tactics are generating as much negative as positive word-of-mouth advertising.

Reichheld’s analysis of good and bad profitability rings horribly true – and the next month will doubtless bring many new examples of the latter to the surface. But, as readers of this column may already be concluding, the difficulty will be putting the score into practice without depriving it of its integrity. If it is made into a target on which pay and prospects depend, the ‘net promoter score’ will cease to be a reliable measure, however persuasive the initial concept. When ‘making the NPS numbers’ becomes the end rather than the means, priorities are likely to become distorted and people lose sight of the underlying purpose.

The best companies intuitively understand that good service is not about loyalty programmes, satisfaction surveys or CRM, it’s about allowing customers to pull the value they need with the minimum of fuss and effort. If you provide that kind of customer service, you won’t need ‘customer service’ at all. And the NPS will, deservedly, go through the roof.

The Observer, 11 December 2005

Forward, not back, says Porritt

ONE OF business’s quaintest boasts is that it lives in the real world. Actually, the world that it inhabits is a fantasy one: only in a dream could it endlessly consume its own natural capital and expect society to absorb the ever-mounting costs of its profit-maximising ways.

But real reality is beginning to intrude. On the day this column was written, in a discussion on the Today programme the government’s past and present chief scientific advisers agreed that human-induced climate change was the ‘the most serious challenge that humanity has faced in its history’. And the day of reckoning is approaching fast. Just one example: when Chinese car and paper use reaches US levels (no longer unthinkable), it will absorb all current oil and paper production.

Optimists suggest that technology will solve all that. Ultimately, however, the grim reaper in the shape of the second law of thermo dynamics trumps even free-market capitalism. So if capitalism is the problem, what is the solution?

Jonathon Porritt’s answer, in his chunky Capitalism as if the World Matters , is… capitalism. Capitalism, he admits, ‘is the only game in town’. Not only is there no time to conceptualise any other big idea, but in its most important institutions, companies and markets, capitalism possesses the only instruments that can credibly turn the situation around.

Porritt spends much time justifying this position, no doubt looking over his shoulder at his colleagues in the green movement. But it’s not as surprising as it looks. Although it’s true that industrial processes and consumerism have brought us to the present pass, some islands within it are already compatible with sustainable concepts. While ‘lean’ manufacturing, for example, is often portrayed as being about resource productivity (doing more with less – and there’s plenty to do here, given that 90 per cent of materials extracted for building consumer products ends up as waste), its real significance is that it reverses the demand cycle, the process only beginning with a customer order. It also works best with local sourcing and long-term relationships.

But the real point is a larger one. Capitalism is a system, albeit a sub-system of the biosphere as a whole. What’s key to its drive and momentum is not some metaphysical concept like the ‘free market’ or even the profit motive. It’s the ecology of capitalism: the dynamic, systemic interaction of markets and companies together, each obeying its own distinct logic, within the rules of the game. Companies compete to provide better solutions, markets decide on winners and losers and regulation decrees what success is.

Regulation is not some kind of foreign intruder in this process – a tiresome armchair umpire – but an integral part of it. Consider Formula One. The story of Formula One is intense technological competition within specifications laid down by a governing body. Each time an advance threatens to make races less competitive or attractive to watch, new regulations are imposed, driving further innovation. Like a sailing boat’s forward movement, innovation is driven by the twin pressures of competition (wind) and regulation (water) on the teams (keel).

It is hard to see organisations such as the CBI, to which Porritt unsurprisingly gives short shrift for its kneejerk rejection of all regulation, in the role of an F1 team, welcoming new regulation as a stimulus to innovation, leading-edge branding and new partnerships. In fact, it is an irony of the present situation that trade and employer associations find themselves in the parodic position of denying capitalism’s adaptability while progressives who have for years ignored this quality have turned into its most enthusiastic supporters. Writes Porritt: ‘What one suspects they don’t like is the idea that the self-same market forces that they venerate may well turn out to be the most powerful driver of change in our inevitable transition to a sustainable economy.’

It’s true that in this vision many large companies would be propelled out of their comfort zones, obliged by competition to focus much more on the dynamic processes of innovation than the static ones of collecting rents on their existing advantage.

But some leading companies have already made this step. GE is not a name that springs readily to environmentalists’ lips, but (crudely) its decision earlier this year that saving the planet was great business was more significant than the totality of corporate responsibility programmes to date.

Belying the whingeing of corporate pressure groups, companies like GE and some of the motor companies are now calling on governments to tighten environmental regulation to level the playing field and prevent rivals from free-riding on low minimum standards.

Naturally, this is in their commercial interests. But that’s the point. As Porritt emphasises, looking for significant results from corporate responsibility is pointless – it’s a distraction and a fig leaf (not least for governments) at best when the current rules of the game, entirely financially framed, make bad behaviour rational. As with F1, what’s needed is rules – comprising both carrots and sticks – that bend the purpose of the whole system to competitive innovation and make bad behaviour irrational. And only governments can frame those.

Just how far there is to go in this respect – and just how far governments lag behind the leading companies – was illustrated last week when the Chancellor casually tossed aside the requirement for firms to include an operating and financial review (OFR) in their annual reports. The OFR, in preparation for years, is just the kind of statement of long-term sustainability that is needed to complement the financial snapshot.

Despite its initial promises, bringing the government to sticking point on the environment will be tough. In the meantime, Porritt is right to emphasise the opportunities in sustainable development rather than the well-rehearsed Doomsday scenarios. As the environmental movement has learnt the hard way, proving that a course of action is wrong isn’t enough by itself to change anything.

Porritt’s book is a brave and important working draft for an essential positive alternative. It’s not always an easy read – but then saving the planet isn’t trivial either. As the distillation of unparalleled experience on the frontline and formidable reading, it is the best account of where we are now and how we might move ahead. He’s right that the world matters and right again that saving it requires us to recycle rather than throw away every scrap that we’ve learnt about managing companies and markets.

The Observer, 4 December 2005

Compliance, the corporate killer: Boards cannot focus on strategy if they’re forever box-ticking

ACCORDING to a study by the consultancy Booz Allen Hamilton, of all the value destroyed by the largest US companies between 1999 and 2003 (including Enron, Tyco and friends), just 13 per cent was the result of failures of regulatory compliance or board oversight. Eighty-seven per cent was caused by strategic or operational error.

In other words, investors’ health is, now as ever, at much greater threat from managerial cock-up than conspiracy. As Bob Garratt, visiting professor at Cass Business School, puts it: ‘Think of Marconi, Equitable Life and Morrisons – the issue here isn’t financial propriety, just basic competence.’

Yet, over recent years, the governance agenda has increasingly been driven by the former, impropriety. Britain was the early leader in code-setting: starting with Cadbury in 1992, through Hampel, Turnbull and finally Higgs in 2003, a succession of reports and ensuing codes have elaborated and refined the apparatus of corporate control.

Other jurisdictions have enthusiastically followed: there are now 273 governance codes in place around the world, according to Garratt. The current culmination of this trend is the US Sarbanes-Oxley Act, Sox for short, which takes a giant step further by making executives personally responsible for signing off the accounts, on pain of criminal sanction.

Now investors need to be protected from fraud, of course – but the effect is nullified if the cure exposes the patient to an even greater hazard. The results of governance’s reverse Pareto effect (spending 80 per cent of attention on the state of the stable-door lock and 20 per cent on whether a contented horse is still inside) are now coming home to roost.

Interviewing chairmen, directors and other usual suspects for a new report, The Role of the Board in Creating a High-Performance Organisation , researchers John Roberts and Don Young found that the constant pressure on boards to spend more time on investor relations and meeting regulatory requirements was diverting attention from strategic and operational issues, thus perversely increasing the chances of corporate failure.

This likelihood was greater for those boards that they characterised as ‘investor-driven’ – that is, highly reactive to often conflicting short-term shareholder pressures and in which non-executives were cast in a primarily policing, compliance role. By contrast, ‘strategy-led’ companies aim to resist short- term City pressures in favour of long-term improvement. Their boards operate as a unified team, and non-execs are expected to be more than policemen, adding value by acting as a resource whose distinctive knowledge is available to the rest of the business.

Everyone agrees that the intentions behind the codes were good, but, especially in the US, regulation has gone ‘miles too far, as even the Sox authors acknowledge’, says Garratt. The orgy of box-ticking has ‘developed into a bonanza for the people who got us into this mess in the first place, who are gold-plating the already onerous requirements. This is the theatre of the absurd.’ Not only is compliance expensive – pounds 50 million and up for a UK firm, says Garratt – but it is also eroding the propensity to take risks. Sarbanes-Oxley is a greater threat to capitalism than Karl Marx, he concludes.

The effects are less marked in the UK, where the codes explicitly mention the need for boards to contribute to strategic direction. But the direction of travel is inexorably the same. This is not surprising, since all contemporary corporate governance principles share the same theoretical underpinnings: the enormously influential agency theory.

In brief, agency theory suggests that the prime role of the board is to ensure that executive behaviour is aligned with the interests of shareholder-owners. Otherwise, self interested managers will use their superior information to line their own pockets. This is the justification for the separation of the chairman and CEO roles, huge senior executive salaries, the overriding requirement for non-exec independence, and much more.

Putting the theory into practice, however, has revealed at least three main faultlines. First, prescriptions based on it don’t seem to work. ‘Good’ governance according to the codes may or may not prevent fraud (Enron ticked all the boxes at the time), but it doesn’t by itself stop catastrophic strategic mistakes nor is there any evidence that it improves performance. As the report notes, governance is necessary but not sufficient to create high performance.

Second, the theory is viciously self-fufilling. As even its main progenitor, Michael Jensen, now acknowledges, the share options that he advocated as the remedy for agency problems didn’t so much align directors’ self-interest as create it. They generated perverse incentives for fund managers and executives first to collude in hoisting share prices above their underlying value and then to use any means to keep them there Enron, again, and the internet bubble are the classic examples. It encourages the idea that, opportunism and greed being the norm, anything that isn’t explicitly banned must be OK this, in turn, justifies the need for even tighter controls. Hence Sox.

Third, even the description of market actors as agents and principals collapses in today’s market conditions. Where there is a reported 90 per cent churn of FTSE stockholdings annually, the idea of ownership and the primacy of shareholder rights, the fountainhead of agency theory, simply dissolves.

Paradoxically, if we want companies to create value rather than destroy it, boards may need to pay less rather than more attention to corporate governance as it has come to be understood. To be clear, this is not a matter of ignoring investors, but of creating their own code and thereby snapping the cord that is too often used to yank investor-driven boards around between conflicting priorities. Boards’ first responsibility is the long-term sustainability of the organisation, not complying with investor demands for certain kinds of board structure and composition. Good governance is a means, not an end not just about seeking conspiracies but averting cock-ups, too.

The Observer, 27 November 2005

Putting the ‘man’ into manager: Simon Caulkin on the legacy of the late Peter Drucker, guru before his time

PETER Drucker, who died last week just before his 95th birthday, once said that the 20th century would have been impossible without management. It was a typical Druckerism: no one before him would have conceived of management in such large, even flamboyant, terms – and in doing so he helped to make it come true, with all that that means in terms of both good and ill.

As he proclaimed himself (he was never one to hide his light under a bushel), Drucker was the first to identify management as a distinct function and managing as distinct work with its own responsibilities. In Concept of the Corporation (1946), an analysis of General Motors, he put forward a seminal view of the company as not just an economic but a social entity (GM, in the middle of a bitter 113-day strike, hated it and tried to have it suppressed).

He also claims to have given currency to such now-familiar terms as ‘post-modern’, ‘privatisation’ and ‘knowledge work’. He predicted a time when companies would be owned by employees’ pension funds (‘pension-fund socialism’), wrote presciently of corporate responsibility long before it became a fashion, and was way ahead of the field in picking up the importance of not-for-profit organisations (the focus of his eponymous Foundation, set up in the 1990s).

For all these things he is unreservedly lauded. At Judge Business School in Cambridge, Charles Hampden-Turner, a seasoned international observer, notes that he was a guru before there were such things and his work as a consultant pre-dated academic striving for ‘relevance’. ‘He got there long before anyone else – the work he did half a century ago is remarkable,’ he maintains.

Charles Handy is another admirer. ‘Drucker was the great conceptualiser,’ he says. ‘Management research looks backward he was able to look forward. He had the gift of seeing the future in the present and showing us what it was.’

Part of Drucker’s authority derived from his experience and the extraordinary range of his reference, uncommon in business. Born in Vienna, where his family knew Sigmund Freud and the great economist Joseph Schumpeter, Drucker as a student interviewed Hitler before being forced to emigrate from Frankfurt, where he was by then working, after he had a publication burned by the Nazis. Together with his great cultural and historical erudition, this experience provided a unique framework for his ideas on management.

Management, as Drucker saw it, was a ‘liberal art’. Of course, profit – a tax on the present to provide for the future – and the disciplines to make it were absolutely necessary. But profit did not justify itself: ‘Free enterprise,’ he wrote in The Practice of Management (1954), ‘cannot be justified as being good for business. It can be justified only as being good for society.’

For Drucker, the heart of management was people – orchestrating individual effort so that it became more than the sum of its parts, amplifying strengths and neutralising weaknesses. Management was thus the dynamic, lifegiving part of business but more than that, it had a stewardship role, as protector of institutions from ‘the dark forces that lurk just beneath the thin veneer of civilisation that we had thought to have repaired during and after World War Two’.

There is some irony here. On the one hand, Drucker is venerated by his peers and regularly tops the poll in surveys of the most respected management thinkers. ‘Drucker comes in head and shoulders above everyone else,’ says Des Dearlove, of Suntop Media, producer of ‘Thinkers 50’. ‘In a fad-driven industry, that’s a remarkable achievement.’ On the other hand, never have his views about business been less fashionable.

Although a professor of management for half a century, Drucker was never a conventional business academic, and his brand of ideas-based rather than research-based scholarship – what the late Sumantra Ghoshal termed ‘the scholarship of common sense’ – was increasingly edged out of the mainstream as business schools tried to turn management into a science.

Drucker himself was aware of this, and made no secret of his disapproval. ‘I am not a fan of business education in its present form,’ he observed in 1999. ‘Management education has focused far too much on (a) being academically respectable, which means forgetting that management is a practice, not a science, and (b) believing quantification is management.’

He admitted being ‘appalled – and rather scared – by the greed of today’s executives’. ‘I have said frequently that it is both obscene and socially destructive for chief executives to get a $20m bonus for firing 10,000 workers,’ he said. ‘And I am not impressed by the way many businesses – including old friends and clients of mine – are being managed.’

But this too is part of Drucker’s complicated legacy. Among his other firsts, he invented not only the importance of management but also, perhaps inevitably, the importance of managers – with less favourable consequences. As Chris Grey of Judge Business School points out, Drucker was uniquely of his time and place, and when in the 1950s and 1960s he held up to corporate managers the flattering mirror of themselves as new cultural and economic heroes, they were dazzled by what they saw.

That they revelled in the image, but progressively trivialised before abandoning the humanist substance that Drucker had erected to carry it, was not his fault, but it was deeply wounding. There is similar ambivalence around management by objectives – perhaps his most famous management prescription. While many admire the negotiating of individual and corporate aspirations that were characteristic of his original version, others believe that with hindsight it was the first step on the road to the crude regimes of rigid imposed targets and quantification that he hated and that dishonour so much management today.

Drucker, says Henry Mintzberg of McGill University, was indeed ‘the father of modern management, with everything that that entails. His contribution was phenomenal. He was also a wonderfully warm and engaging human being.’ As Mintzberg suggests, the contribution and the humanity go together. If managers are to make sense of their difficult inheritance, they will need the latter attributes just as much as the business insights and wisdom of the founding pioneer.

The Observer, 20 November 2005

They wanna sell you a story…:

I F YOU had to write your organisation’s obituary, what would it say? Would there be any mourners? Has it made any difference to anyone? Would the world be worse off without it? Would anyone actually notice?

Faced with this question, say Klaus Fog and Christian Budtz, most chief executives are struck dumb, with no idea how to reply – a telling indication of the tenuousness of their companies’ hold on their purpose and meaning. If those inside the firm cannot encapsulate the core story, how can those outside be expected to understand it?

Both Fog and Budtz, of the small Danish communications group Sigma, believe that in a world of trivia, artifice and information overload, ‘the story’ is critical not just to a company’s brands, but to its whole existence. In most companies it is lost under accretions of history and bureaucracy it takes the obituary test to uncover and reinvigorate fundamentals.

Together with Baris Yakaboylou, Fog and Budtz have written a book about their findings (Storytelling: Branding in Practice, Springer). Significantly, Fog and Budtz have a newspaper and media background, but for all of them ‘the story’ is primordial.

The argument goes like this. In the West, we live in a world of material excess. Almost everything is in oversupply and whatever it is, you can probably buy a knock-off Chinese version that is cheaper and not much inferior to the original (which was probably made in China anyway).

Given this, traditional marketing methods lose their effectiveness, which is why so many brands are in trouble. This is partly a matter of messages becoming lost in the clutter – each consumer is exposed to an estimated 3,000 messages a day, almost all extolling a product’s features and how much better it is than rivals. But more importantly it is because, while companies have not changed, we have: we are not even listening to this kind of advertising any more.

Fog and Budtz invoke Abraham Maslow’s hierarchy of needs: consumers’ physical needs having been satisfied, they are now looking for sense or meaning, something they can use psychologically to realise their own potential.

Here is where the story comes in. Stories go back as far as humankind, for the good reason that the world is incomprehensible without them. By establishing relationships between things, a story permits meaning and memory. Plain lists are notoriously hard to remember: stories and theories act like mnemonics, allowing elements to be strung together and interrogated. Uniting emotion and intellect, stories can recount a complex technological narrative with breathtaking economy.

An example. A journalist in San Francisco is trying out his iPod as he waits for a bus. A young woman joins him at the stop, also with an iPod. Observing her neighbour, she wordlessly switches their earphones, so each is suddenly listening to the other’s music. As her bus arrives, she switches the earphones back, flashes a smile and is gone.

Now, some people will hate that story. But, says Fog, it encapsulates Apple’s cool ease of use in a way the company has never been able to do with its computers. No accident then that only now is the Mac making inroads into the Microsoft-Intel dominance as it bathes in the radiance of the iPod halo.

The important story can come from almost anywhere. What first drew Fog’s attention to the phenomenon was the launch of the world’s first digital hearing aid in 1997. Developed by a then little-known Danish company, Oticon, the device was presented as a ‘computer in the ear’ devised by the best audiologists and computer specialists. However, to the company’s surprise, in testing users reported not only that they could hear better, but that they experienced an unexpected flush of well-being. How could that be?

A neurologist friend of the CEO identified it not as a psychological but a physiological effect. With the computer filtering out the extraneous noise, the brain is freed up to do other things, such as noticing the surroundings, the food being eaten, and so on.

The scientific story was picked up by the Washington Post and then other media. By launch time, the company had a full order book and a reputation as a digital pioneer. Its stock price trebled in a year.

Underlying these stories are several key points:

* the story must be authentic: with all that practice, consumers home in on bullshit

* a corollary of the above, the story comes first. It cuts across the silos of marketing, sales and advertising

* the story is ‘out there’ – it’s a question of finding not creating it (a good place to look is the customer-service department’s filing cabinets)

* you cannot control it: it’s what consumers do with it that matters. ‘Viral marketing is having a good enough story to tell your friends,’ Budtz says. An unfavourable story travels as fast as a favourable one, maybe faster.

Of course, storytelling has always been part of marketing. In public eyes, 3M was a boring industrial company until the often-told invention of ‘Post-it’ notes established it as an innovator. It could be argued that the whole global bottled-water industry is ultimately built on the legend that 2,000 years ago Perrier was an essential ingredient of rest and recreation among the Romans.

What is new is that a brand without a narrative has literally lost the plot. On the other hand, with a strong enough story it can not only survive but rewrite its own obituary. The cult notebook Moleskine, now expensively on sale at a stationer near you, has served as a jotter for writers and artists from Van Gogh to Hemingway. Bruce Chatwin never undertook a journey without a stock – until the small French manufacturer stopped making them in 1986.

‘Now,’ recounts an insert in the revived version – a perfect example of the product-as-story – ‘the Moleskine… has set out again on its journey. A witness to contemporary nomadism, it can once again pass from one pocket to another to continue the adventure. The sequel still waits to be written, and its blank pages are ready to tell the story.’

The Observer, 13 November 2005

Get stress out of your system

LIKE Victory in Europe and the Queen’s birthday, stress is now considered to be so important that it has its own day. Stress Awareness Day, which was on Wednesday, hopes to raise awareness of the condition and to ultimately achieve a 20 per cent reduction in work-related stress levels by 2010.

Stress at work is serious: it costs pounds 3.7 billion and 13 million lost working days, according to estimates by the Health and Safety Executive, with the unknowable costs thought to be much higher.

‘Stress makes people stupid,’ in the words of Daniel Goleman in Emotional Intelligence. It stops them thinking straight and doing their jobs properly. It makes them give up psychologically before they start.

It is also on the increase. In a recent survey by the Chartered Institute of Personnel and Development (CIPD), 40 per cent of employers reported a rise in stress-related absence. Innumerable individual surveys find employees complaining of increasing stress as workloads and pressures intensify, leading to steadily declining job satisfaction, particularly in the public sector.

Human Resources magazine talks of ‘a silent epidemic’. The government is so concerned that employers now have a legal obligation to have effective stress-minimising policies in place in the workplace. But hang on, there’s a bit of a contradiction here. Where are these pressures coming from? From the organisations that are now being enjoined to install stress-management schemes.

Stress is the physical symptom in individuals of the darker side of organisational life. In a recent pamphlet, Demos talks of ‘hyperorganisation’: the relentless spiral of pressure from capital markets (and governments apeing them) for ever more effort and efficiency – faster! longer! harder! Workloads, change, targets and management style all figure largely among stress generators, according to the CIPD. But even this is not enough. Increasingly, as Madeleine Bunting noted in her book Willing Slaves, organisations demand not just physical effort, but employees are made to feel guilty if they don’t give their souls too. No wonder people feel stressed.

Unfortunately, applying stress-management techniques to this kind of systemic issue is like treating leprosy with sticking plaster. To stay with the medical metaphor, stress is the management equivalent of MRSA: an organisation-induced complaint for which palliatives and partial targets (who decides which 20 per cent are de-stressed?) are not an acceptable answer.

Like absence, with which it is closely related, stress doesn’t need managing with yet more policies, techniques, and check-boxes. It needs getting rid of, so it doesn’t require managing at all. That might sound fanciful, but it’s not. Consider the causes of stress, classified by the HSE as to do with (overdemanding) workload, (lack of) autonomy, (poor) support, (low-trust) work relationships, (unclear) roles and (incomprehensible) change.

But turn these around and they become stress neutralisers rather than creators. Research on what makes for a ‘good’ job invariably emphasises control over work as the number one determinant, fol lowed by good relationships and support, a clearly understood role and security. As the Work Foundation points out, stress is psychological, pertaining to the individual.

Where the right psychological ingredients are in place individuals turn hard work and change into a positive challenge and opportunity for growth. And control over the job, clarity of roles and all the other elements of the good job aren’t just stress-moderators for individuals: they are essential components of good management in the 21st century, the only way organisations can move from today’s outmoded mass-production management systems to the flexible, customer-centred organisations of tomorrow.

Control, or autonomy, is critical. One of the most important qualities distinguishing ‘lean’ from traditional management systems is the placing of decision-making control with the people who do the work – enabling the assembly-line worker to stop the line when there’s a problem, or the call-centre agent to decide individually how to respond to a customer inquiry or complaint, for example. This is more efficient as well as more humane, or to put it another way it eliminates human as well as material waste.

So why is lean management, despite some lip service, still so much the exception, rather than the rule? For the answer, we need to go back to control. Most Western companies are run from the top down. In this view, managers have to give orders (that’s what hierarchy is for), otherwise workers wouldn’t know what to do. Given that initial premise, it’s not surprising that most managers respond to any performance challenge by tightening control, not loosening it. A good example is the way mobile communication devices, touted as a means of liberating people from office constraints, are in practice becoming the opposite: an additional means of surveillance which, in the words of one recent report, ‘will simply translate into round-the-clock working for some employees.’ Thus the remedy makes things worse. No amount of well-meaning policies can prevent these tendencies from generating more stress.

Turning organisations inside out so that orders come from customers, not remote senior managers and their computer schedules (more logical, no?) goes completely against the grain for most managers, whose instinct is always to turn the pressure up and then try to mitigate its worst effects. But this just increases their own stress.

Better to bite the bullet. Giving control back to people who perform the principal customer-related tasks not only removes one of the principal causes of work-related stress for individuals but given proper support it can halt the vicious circle of hyperorganisation and set in train a benevolent one of engagement and improvement that benefits the entire organisation. In other words, de-stress the system, not individuals: that way everyone benefits – including top managers, some of the (self-created) worst sufferers.

The Observer, 6 November 2005

Short-term gain, long-term pain

THE FT reported last Tuesday that salaries for senior City of London staff rose 9.2 per cent in the year to September – before the annual bonus round, which promises to be high. On the next page, an international productivity comparison showed that in financial services – covering high street banks, pension and insurance advisers, international banks and investment institutions – the UK ranked 14th out of 15 countries.

Some mistake surely? The official line is that financial services are one of the UK’s most profitable and internationally competitive industries, a pointer to the sunny uplands of post-industrialism. Meanwhile, in accord for once, the Prime Minister and Chancellor lose no opportunity to laud the City of London for its exports, job creation and power of attraction – British dynamism at its best. In short, the City is the UK’s jewel in the crown.

That’s the authorised version. But the gap between feeble productivity on one side and soaraway profits and salaries on the other supports a quite different construction that puts a less comforting slant on the Square Mile.

In this interpretation, the City doesn’t give a used fiver about productivity, either its own or that of its clients in the wider economy. For itself it doesn’t have to, being an oligopoly that can charge fat margins whatever its methods: ‘The usual relationship between inputs and outputs doesn’t apply,’ notes Don Young (www.havingtheircake.com), one-time Redland director and now consultant and author.

To the contrary: the enormous profits and salaries that are the norm in investment banking are the result of ‘perhaps the biggest case of market failure the world has ever seen’, in the words of Evening Standard City editor Anthony Hilton. Witness the inability of either savings institutions on one side or client companies in the ‘real’ economy to keep the banks’ eye-watering fees in check. In truth, they have no incentive to. It’s not the institutions’ money, after all, and since their fortunes, and the salaries of their fund managers, depend on measuring up well against their rivals in the next comparative league table, they are willing to pay almost any price for a good deal that puts them ahead.

As for company executives, they are in no position to counter the influence the City wields over their investment strategies. City and media pressures to meet performance targets now govern senior executives’ lives, research shows, while governance codes have become more ‘investor-centric’. At the same time that going against the City grain is career-limiting, those who comply with its dictates can expect rapid elevation to the elite of super-earners, albeit not quite on City scales, since that is what they are measured on.

In this context, clients’ productivity is simply irrelevant, since institutions are no longer investors in any real sense. Short-term pressures on fund managers mean that ‘churning’, as opposed to long-term holding, is rife. This has been given a mighty boost by the rise of the hedge funds, which are now estimated to account for up to 45 per cent of stock market trades in London and New York.

Unregulated, opaque, with close ties to or sometimes owned by the banks themselves (conflict of interest, anyone?) – hedge funds, Young points out, don’t even pretend to invest in the future of companies. They bet on the movement of share prices, often not even owning the shares they are speculating with, borrowing them instead.

The results of the de facto collusion between the City and top management are incalculable. One, in whole or in part, is the pensions crisis. Pleasing the institutions has been a powerful if unspoken reason why managers have rushed to close their defined benefit schemes with such unseemly haste (albeit ensuring that their own schemes remain largely untouched). How else to account for the fact that last year, at the height of the pensions concern, the top 100 UK companies paid out pounds 39 billion in dividends, nearly four times as much as they invested in their final pension schemes?

Another consequence is the emphasis on the deal. Hence City veneration for companies such as Rentokil and Hanson, and in the US Enron and WorldCom, even as they run themselves into the ground. Never mind the evidence that they mostly destroy value: deals provide fee income for investment banks and share movements for hedge funds to bet on. They are the only conceivable way that companies can reach the short-term targets that institutions have obliged them to set – and if they don’t, well, breaking up the company will do just as well. ‘If your company doesn’t enable me to meet my short-term investment objectives, no matter how misguided my judgments, it is the company that must give way – even if it is destroyed,’ as Young sums up the institutional attitude.

As usual, Keynes had it right when he predicted that capital development as the offshoot of a casino was likely to yield dodgy results. The deal-orientated, short-term form it has taken in the UK leaves no time, money or understanding for the patient organisation-building work that is the foundation for enduring companies and real wealth creation, nor for large-scale investment in technology. It is no accident that the UK supports so few big high-tech firms (farewell, Marconi, dismembered and sold off last week) and noticeable that the exceptions, the pharmaceutical and aerospace companies, have what is effectively a regulated relationship with one of their main buyers: the government.

The City retains barely a shred of its initial purpose of supplying capital for long-term corporate development, now only for deals, which may be why the number of SE-quoted companies is shrinking. Yet its influence is pervasive. It is the spiritual home of asshole management, the source of the relentless demand for overperformance that demoralises employees, causes managers to jeopardise their companies and, as City court cases demonstrate, can easily tip over into bullying and harassment.

The tail is wagging the dog, the means has become the end. It’s symbolic that the vast bonuses announced for City accountants last week have been generated not by creating new enterprise but by compliance work – policing the governance rules that have been installed to control the excesses of the deal culture itself. Alchemy or what? No wonder the government loves it.

The Observer, 30 October 2005

Bloated firms not watching their waste: Too many companies squander both time and employee goodwill

JEFF IMMELT, chief executive of GE, laments that 40 per cent of GE consists of unproductive administration and back office work. He wants to halve that in five years.

Management consultancy Proudfoot calculates that on average a whopping 37 per cent of all working time is wasted – that’s equivalent to 7.5 per cent of UK GDP. A Mercer-Gallup survey finds that while 73 per cent of workers are ‘disengaged’ from their organisation, 19 per cent would happily sabotage it.

GE rates as one of the best managed companies in the world (hang on to that for a minute). Many lesser firms are so cluttered with waste and bad feeling that they can barely move.

Take General Motors, which last week announced a net quarterly loss of $1.9 billion. GM had already jettisoned its parts supplier, Delphi – which has just gone into Chapter 11 and is demanding drastic pay reductions from its 33,000 US employees.

Now GM is selling a controlling stake in its finance arm, its sole profitable business. It has also negotiated a $3bn reduction in healthcare costs with the trade unions.

But these can only win temporary respite. The truth is that both GM and Delphi are in a death spiral. Their real problem is not healthcare costs, the official excuse, even though the latter total $1,500 per car. It is a business model that ensures that for every car sold, GM realises $6,000 less in dollars than Toyota. In other words, even discounting health costs, GM is $4,500 per car less effective than its Japanese rival.

The responses are another twist on the downward spiral. Who would want to work for an outfit that demands pay cuts on one side while setting aside 10 per cent of its equity as a bonus for management when it emerges from Chapter 11, as Delphi has done? Whose only reaction is quarrelling with the union, like GM?

Never underestimate the power of disengagement. As an airline pilot noted with a malevolent grin when faced with similar cutbacks, ‘There’s no way they can cut my wages faster than I can raise their costs.’

As that suggests, the full-service airlines are also in a death spiral, and for much the same reasons. The fact is that the business model of GM, the legacy airlines, and indeed most of the world’s large traditional companies, is played out, knackered, off its perch – the Norwegian Blue of business models.

Consider GE. GE, remember, is the most admired, best managed old-paradigm company in the world. Its training is legendary, its top managers exceptional, its commitment to good practice unquestioned, the pressure to perform so relentless that the lowest performers are culled each year. So if this paragon is only 60 per cent productive, what hope is there for anyone else?

The Proudfoot 2005 international productivity report throws some light on this. It found that almost everyone was ‘busy doing the wrong things’ to raise productivity. Thus, while executives (and ministers) think it is all a matter of capital investment, in fact it’s much more important to get the most out of existing resources – eliminating wasted time, for instance. It’s management, stupid.

‘The tendency to exaggerate the importance of new projects… is also reflected in over-optimistic expectations of cost savings and productivity gains from offshoring [and outsourcing],’ adds the report.

The source of the ills can be narrowed down further. According to Proudfoot, three-quarters of the wasted time is down to poorly planned and managed work and inadequate supervision. Supervisors, Proudfoot found, were spending more than half their time on administration and non-value-adding activities all managers overestimate their effectiveness.

Proudfoot sees the answer as a better and more tightly operated command and control process. ‘Having a well designed and effective management operating system,’ says the report, ‘is the single most important change firms can make to improve labour productivity.’

Well, yes. Yet while there is undeniably scope to make existing conventional systems work better, GE’s experience graphically demonstrates their limits. Beyond a certain point, planning and command and control aren’t the solution – they’re the problem.

Ever more detailed budgeting, forecasting, planning and allocating are not only non-value-adding (think of all those management man-hours and complex IT sys tems), they are often value subtracting – for all the planning, GM spends too much time building motors no one wants to buy.

The tragedy is that there are perfectly viable alternatives. It took 25 years before anyone copied the successful low-cost, point-to-point model of Southwest Airlines (which pays its pilots 50 per cent more than some rivals).

No western carmaker has fully absorbed the lessons of Toyota, even though they’re hardly a secret. It gives competitors guided tours of its plants, for goodness sake.

When Toyota took over responsibility for GM’s plant in Fremont, California – a factory afflicted with world-class levels of drug and alcohol abuse – the same workforce promptly doubled productivity and quality, with no extra pay.

In complex human systems, autocratic control is an illusion. The only way of retaining control is to give it away, producing to real demand and placing decision-making on the front line, nearest to the customer. This is the case for service companies as well as manufacturers.

GM is probably past hope. But unless it can make the shift, even GE will struggle to bring its management overhead much below that crippling 40 per cent.

The Observer, 23 October 2005

Doing the right thing – for a change

WHEN Tony Blair at the Labour Party conference invoked ‘the patient courage of the changemaker’ to describe the mission of his third term, he was making three colossal assumptions:

1) change is good

2) change will be unthinkingly resisted

3) given sufficient patience and courage, one-off change can be achieved by managerial effort, after which the organisation will have been successfully turned round and will be facing in the direction the changemaker intended.

When the Prime Minister added that in every case in retrospect he wished he had pushed his reforms further, he was effectively turbo charging these assumptions.

Yet each one of them is as trustworthy as an Alastair Campbell denial. That change is inevitable, non-stop and pervasive as never before is the biggest management cliche of all. As Chris Grey, professor of organisational theory at the Judge Institute, puts it in his indispensable and subversive Studying organisations, change has become a fetish.

Yet this self-serving narrative is undercut time and again by both statistics and common sense. Job tenures have not shortened, and full-time employment is still the norm. On many measures the world economy is no more globalised now than at the end of the nineteenth century. Despite the internet, the laws of economic gravity still operate. And it is hubristic narcissism to think that change today is more wrenching than it was, say, during the Industrial Revolution in the late eighteenth century.

In fact, the most salient fact about today’s change is how much of it, rationalised by the fetish, is both self-created and self-defeating. The fatal starting point is the idea that change can – and must – be imposed by the ‘changemaker’ top down. Thousands of examples show that this is a fantasy, and both theoretical and practical considerations suggest why.

Remote atop the already distant management factory, the change leader has no way of knowing how his/her decisions, however ‘courageous’ and ‘patient’, will play out on the ground. So unintended consequences abound – targets being a prime example. But even if managers could foresee the myriad theoretical consequences of a course of action, they would still run up against human agency.

On the one hand, organisations can’t afford to switch human initiative off: a leader can’t do everything alone. But on the other, agency has unpredictable results – people disagree. In the presence of agency, the idea that organisations can be redirected like machines is futile.

Either way, top-down change is an unwinnable battle against unintended consequences, which eventually mandate further change to mitigate the damage. In this sense, as Grey puts it, ‘change management’ is ‘a perennially failing venture’, doomed to reproduce itself in a never-ending loop: change as stasis.

There’s no better example of this self-perpetuating tread mill than the original English patient, the NHS. As Polly Toynbee noted recently in The Guardian , since 1948 the NHS has been ‘reformed’ on average once every six years. New Labour has easily surpassed that. The current overhaul is not only the third in eight years it neatly returns the service to where it was when it came in, although under different terminology.

In this orgy of motionless change, the work is not managing hospital beds or patients, let alone health, but change itself: the mad bureaucracy of targets, relationships that have to be reforged, jobs redescribed and reapplied for – and now new IT and office systems embedded to implement payment by results.

In only one respect can this round of ‘reform’ be said to be succeeding – that of deliberately destabilising the service. The avowed aim is to make it easier to import change. But that is a dangerous game, the likely consequences magnified by the fact that in dealing with the NHS the government doesn’t seem to be able to distinguish between an organisation and a market.

This matters. An organisation is not a market. It has different functions and logic, and treating one as the other is a howler, as sure a means of creating confusion and make-work as the other self-generated reforms. The changes are designed to make health (and education, and as much of the public sector as possible) into a market. To work, a market needs clear rules and strong competition so that good solutions come to the fore and weaker organisations have an incentive to improve.

But where does strong competition come from? From – duh – vibrant organisations, with the autonomy, confidence and capacity for real change: to devise new and better ways of meeting the needs of customers (this is called R&D). The market disposes, but it needs organisations to propose in the first place. The two are symbiotic. The situation in the public sector, with complicated pseudo-markets and organisations crippled by central targets and constant interference, is the worst of all worlds, rule-bound, bureaucratic and unpredictable.

In the final analysis, as Chris Grey suggests, the narrative of change is most often not one of rationality but of ideology: a power play, a cover for the attempt to impose one version of ‘efficiency’ (the market) over another, and to discredit those who disagree as self-evidently retrograde, if not evil. Not so much the patient courage of the changemaker, then: more the self-righteous delusions of the fundamentalist.

The Observer, 16 October 2005