Things can get better (and you can do it on the cheap)

AFTER CHRISTMAS, the hangover. Good cheer will be in short supply in the new year for the BBC, the NHS and many other organisations in both public and private sectors that face debilitating rounds of cost-cutting.

This column has a better suggestion. Instead of saving pennies by shaving routine expenditure and delaying payments to suppliers, why not resolve to do things better – not just a bit better, but orders of magnitude better so much better, in fact, that they become cheaper?

No, I haven’t been at the port again. Economists will tell you that cost-cutting becomes progressively more difficult and expensive for every extra unit of resource saved, and they are right – if every increment is saved the same way as before. However, large savings in resources can sometimes be cheaper to make than small ones. This has been labelled ‘tunnelling through the cost barrier’ by Amory Lovins of the Rocky Mountain Institute (RMI), and it works like this.

If you build a house, the conventional idea is that the more energy-efficient it is, the more it will cost (double-glazing, thicker insulation). So a moderately more efficient house will indeed come out dearer, and diminishing returns mean that after a certain point any additional gains will be outweighed by the increasing cost of the improvements.

But this isn’t the end of the story. Suppose you install superwindows, superinsulation and superefficient appliances. Each one in itself is un-cost-effective. But if together they eliminate the need for central heating and air conditioning , they may actually reduce the total upfront investment. So the more ambitious house is cheaper to build, as well as saving much more in running costs.

Why is the idea that better means more expensive so deeply ingrained? Because people almost always look at design elements in isolation. As Lovins notes: ‘You can actually make a system less efficient while making each of its parts more efficient, simply by not properly linking up those components… Optimising components in isolation tends to pessimise the whole system – and hence the bottom line.’

What applies to engineering applies to business as well. The key is designing the process as a whole system. In manufacturing, long before the advent of ‘lean’, Richard Schonberger christened as ‘frugal manufacturing’ the dynamic by which, if they are systematised, sav ings multiply each other (the real definition of synergy).

He described it as the ‘pursuit of the zeros’: zero waste time, effort, movement between processing stages, work in progress and, above all, product no one wants. The shorter the time between order and delivery, and the more closely coupled the processes, the more resource-efficient the system – and, just as the well-designed house needs less heating and cooling, the well-designed factory needs less computer power for scheduling and planning, and less management to run it. Better is cheaper.

All this applies to services, too. Cost-cutting by decimating headcount at contact centres or back offices is laborious, costly, and on its own does nothing to improve service. Instead, the aim should be to redesign the process, as a whole system for the best outcome and then decide on the scale of inputs needed.

Yet the reverse is the general rule. For example, the government wants local authorities to use specialised document-processing IT to speed up the payment of benefits. But careful analysis shows that the principal cause of delay in benefits processing is not the back office but the front – getting ‘clean’ information from claimants that agents can act on. Councils that concentrate on the front end consistently clear claims in a week, instead of the 50-60 days that are standard, and barely need computers at all.

Or consider banks’ contact centres. These were set up with the idea that mass-production telephone factories would cut costs by processing calls faster than branches. But by distancing customers from branches, contact centres multiply the number of queries, creating the need for yet more contact centres, all answering questions that shouldn’t need asking in the first place.

Now the government is making the same mistake on an even grander scale by mandating shared-service centres for groups of local councils or departments. But economies of scale are irrelevant at component level. This was discovered the hard way by a US aero-engine manufacturer that reorganised production around a bank of state-of-the-art automated grinding machines for turbine blades. The machines were so fast that they slowed the system as a whole to a crawl, clogging it with huge batches and requiring expensive technicians to programme them. Replacing them with slower, simpler machines meant that grinding took longer, but the entire production process worked many times faster – and the cost was halved.

So cheer up. The hardest part is getting the brain around the idea that, for once, there is a free lunch.

The Observer, 31 December 2006

Galileo’s life shows there’s always room for doubt

BY A STREET, this column’s business text of the year is Bertolt Brecht’s Life of Galileo. In the declining years of communism, Brecht was less fashionable in the west than a second-hand Trabant. But, as demonstrated in this year’s thrilling National Theatre production, his complex reconstruction of the 17th-century Italian astronomer’s validation, then recantation, of the Copernican model of the solar system is as sharply topical as a Jeremy Paxman Newsnight interview.

If a chameleon-like ability to reflect and illuminate the times is part of what separates great art from the rest, then Galileo has it in spades. When Brecht wrote the first version of his play in the 1930s, the backdrop was the rise of fascism in the 1940s, the second version absorbed fresh resonance from the dropping of the atom bomb and the depredations of Stalinism. Today the play, a parable of human responsibility in the battleground of ideas, works equally persuasively as a critique of the ideologies and power structures of 21st century capitalism.

The most powerful jolt to the system the play provides is the revelation that ideas, beliefs and what you do (or don’t do) about them matter. Life is now so compartmentalised and polarised – working/private life, reason/emotion, routine/leisure, personal/political – and business imperatives so completely internalised, that we have forgotten that in the end life is indivisible. As Brecht shows, it is precisely this compartmentalisation, a kind of divide and rule, that makes people manipulable.

Yet business and science are no more divisible from politics than humanity is from the life of the senses. In the play’s first version, Galileo was a hero and martyr (if a fallible one) to science: he recants, but redeems the betrayal by copying in secret his long-awaited Discourses , which are smuggled out to provide a ray of truth in a darkening world. In the second version, in a typically ambiguous Brechtian twist, the events are the same – but Galileo has failed his greatest test, which wasn’t the science but recognising what it stood for.

In a world where intellectually ‘everything is in motion’, he acknowledges there was a critical moment when ordinary people were ready to rally to reason and turn the telescope, the instrument of his cosmological discoveries, on to the activities of ‘their tormentors, the princes, landlords and priests’. Having taken science out of Latin and into the marketplace, he was for that instant as strong as the authorities. He could have called their bluff – they knew that Galileo was right – but instead succumbed to their threats, even though he now knows they were hollow. ‘Had I stood firm,’ he says, ‘the scientists could have developed something like the doctors’ Hippocratic oath, a vow to use their knowledge exclusively for mankind’s benefit. As things are, the best that can be hoped for is a race of inventive dwarfs, who can be hired for any purpose.’

Science for science’s sake is a fearful trap – its point is not ‘to open the door to infinite knowledge but to put a limit to infinite error’. One day, he predicts, the gap between science and mankind will yawn so wide that ‘your cry of triumph at some new discovery will be echoed by a universal cry of horror’.

But just as Brecht’s play is only nominally about the Catholic church, neither is it just, or even mainly, science in the firing line. Today those keeping people in ‘a pearly haze of superstition’ about their place in the world are the popes and cardinals of business – chief executives, investment bankers, consultants and PR and press cheerleaders, all with a vested interest in preserving the discredited belief that the shareholder is the fixed centre of the commercial solar system round which everything else – employees, customers, suppliers, society itself – revolves in orbit.

With his ambivalent attitude to authority and lack of illusion about human frailty, Brecht is particularly good about the sophistries and blandishments that keep power in place. He knows how little it takes to subvert even those of goodwill, and how bold the powerful are in support of their privilege. At one stage, the new pope, a mathematician, notes irritably that it’s impossible to sanction the use of Galileo’s star charts, as sailors are demanding, while condemning the theory they are based on. ‘Why not?’ replies the Inquisitor. ‘It’s the only way.’

Brecht also has no hesitation about the antidote: doubt. ‘Disbelief can move mountains,’ he says somewhere else, and the pleasure and necessity of doubt occur throughout the play. The role of knowledge is to turn us all into doubters. It’s a suitably downbeat message for what has been called an ‘optimistic tragedy’, and even more so for a later age caught between fundamentalisms – and not just religious ones. Just remember it when you read another pompous book about customer delight, the inevitability of soaring executive pay, or the need for great leaders. ‘Unhappy the land that has no heroes!’ says a follower bitterly when Galileo recants. ‘No,’ says Galileo. ‘Unhappy the land that needs heroes.’

Happy Christmas.

The Observer, 24 December 2–6

How Michelin put the bounce back into its rubber farms

SUSTAINABILITY, like social responsibility, is a much-abused term, often more about public relations than substance. But Michelin’s Brazilian Ouro Verde (‘green gold’) project shows that that doesn’t have to be the case.

In 1999, the French tyre company’s rubber plantation near Salvador in the state of Bahia seemed to be in unstoppable decline. The price of rubber was falling. So was the yield of the 9,000 hectare estate as its 2.5 million trees reached the end of their productive lives. Worse, the plantation was affected by a leaf blight, Microcyclus ulei , which devastates seedlings, making regeneration, already uneconomic, even more problematic.

The obvious thing was to sell the estate to someone who could use it better. And this was what the company did – but not in the way you might expect.

Most sales of this kind are about exit from responsibility. Ouro Verde was the reverse. When Michelin was considering its options, says Lionel Barre, the ebullient Frenchman in charge, the company found itself looking at a puzzle with a number of oddly shaped pieces.

First, although Brazil provides only a fraction of its requirements, Michelin needed more rubber. Natural rubber is an essential ingredient in tyres of all kinds. They consume 70 per cent of the world’s output (one large tyre for an earthmover uses the annual production of five rubber trees), and demand, largely fuelled by growth in China, is steadily growing.

Although microcyclus is currently confined to South America, where the rubber tree originated, it will almost certainly one day spread to Asia, where 90 per cent of today’s crop is grown. Apart from the tyre manufacturers, 30 million people depend on rubber, many of them growing it in small family-owned plantations. Developing blight-resistant strains of Hevea brasiliensis , the rubber tree, was crucial for the industry’s future. And that, after 10 years’ painstaking work, was what Michelin’s Bahia labs, alone in the world, were on the brink of achieving.

Then there was the forest. Everyone knows about the Amazon rainforest, but the situation of Brazil’s Atlantic rainforest, running sporadically down the coast from Salvador to Rio, is even more dire. Just 5 per cent of the original coverage is left, and 3,000 hectares of that, 3 per cent of the total, belonged to Michelin. But this was enough to provide a home for several endangered animal and bird species as well as a comprehensive repository of the habitat’s fabulous plant diversity.

Finally, there were the people. Many of the plantation’s 250 workers had been with the company for many years. Just 25 per cent of adults in this part of Brazil have formal jobs, and even a few jobs, says Barre, would be too many to lose.

Rearranging the pieces wasn’t easy. But they finally locked together in a model public-private partnership. Michelin retained responsibility for the infrastructure, including an upgraded processing plant, labs and nursery, and sold the bulk of the plantation operations – not as a block, but in 400-hectare parcels – to 12 of its Brazilian managers.

To attract low-interest development financing for the purchase, it devised long-term business plans for the new enterprises based on replanting with resistant seedlings raised in the nurseries – combined, crucially, with rows of cocoa trees to provide financial and ecological diversity and quicker initial returns. ‘I haven’t bought the farm – I’ve bought the project,’ says a new owner.

As part of the project, a new village, with medical centre and school, is being built to house the tappers and their families, financed by a federal loan organisation and managed by Michelin and the municipal council. The Michelin research unit is also providing resistant seedlings and technical assistance for replanting small neighbouring farms.

So far, after just two years, Ouro Verde’s results are beating all expectations. The new owners have created 250 secure jobs (tapping is year-round manual work that can’t be mechanised) in an area of poverty and high unemployment. The financial results of the co-operative that unites the 12 growers are ahead of schedule, and it is drawing up plans to build a processing plant for the burgeoning cocoa crop, keeping more added value in the production area. The rainforest is being protected and actively developed into a network of corridors connecting existing forest areas.

Michelin gets more rubber (although producers are also free to sell to others). Natural rubber, of course, is a sustainable resource, unlike oil-based synthetic varieties. The trees absorb carbon, shelter wildlife and play a useful role in the forest environment. Michelin also gains in legitimacy, and satisfaction, by proving it can benefit all stakeholders – customers, workers, suppliers and society – as it benefits itself: a living reproof to the impersonal numbers-driven transactions of today’s finance capitalism.

Michelin’s Brazil operations are, says Barre, a profit centre like any other but, by taking a broader view, ‘we grow, and the community grows with us’.

The Observer, 17 December 2006

If only their firms grew as fast as their pay packets

HEADLINES ABOUT soaring directors’ pay have become so regular that we are suffering what might be called fat-cat fatigue. Even so, the news in the 2006 Directors’ Pay Report from Incomes Data Services that average total pay for chief executives of FTSE 100 companies shot up by more than 40 per cent this year should raise more than eyebrows.

For comparison, the IDS pay databank shows wage settlements for the year running at 3 per cent. Chief executives in the biggest UK companies now earn 98 times more than the average of all full-time UK employees: pounds 2.9m, up from pounds 2m a year ago. Last year’s CEO pay increase alone was 31 times greater than the average full-time wage.

A longer-term perspective shows the divergence is not only growing but speeding up. In 1983, according to figures produced by researchers at the Centre for Research in Socio-Cultural Change (CRESC) the ratio of CEO pay to the average was nine to one. (The figures can be found in Financialisation and Strategy , Julie Froud et al, Routledge.) By 2000, with real CEO pay growing at a steady 25 per cent a year, year in, year out, it had reached 39 to one. To paraphrase the US senator: ‘A million here, a million there, and pretty soon you’re talking about real money.’

What justification is there for the growth of such extreme disparities? None of the usual explanations holds water. Market forces? As the Work Foundation and others have demonstrated, the idea that there is a global market for CEOs that impartially sets their rates is a myth. What there is is a ‘going rate’, diligently attached by remuneration committees and consultants to US figures, which tows the total ever up. Today’s going rate has doubled in the past five years. Not so much a market, then soaraway executive pay is more a case of market failure.

Could it be a reward for running risk? The Work Foundation has taken a pop at this one, too. In The Risk Myth , published last week, Nick Isles shows that last year turnover of FTSE 100 chief executives stood at 14 per cent compared with 18.3 per cent for the economy as a whole and 23 per cent for the private sector. One CEO in the period was declared redundant, but he picked up pounds 5m in compensation. That’s the kind of risk many people would be happy to run.

Even when a CEO does get the sack, he (typically a he) will have seen his pay double twice over his seven years in the job. Meanwhile, there is good evidence that those with lower status and less control over their jobs suffer more ill health and die earlier – so relatively less risk for CEOs there, too.

So could it be that the incentives motivate CEOs to make a huge difference to their companies? Nope. The CRESC researchers found that, for all the performance waffle, FTSE 100 firms are basically ‘GDP companies’, jogging along at 3 per cent growth a year, just like the economy. Although over time market capitalisation has grown faster, that’s overwhelmingly the result of the 1990s stock market boom and the flood of investment capital into the market – so the work of investors, not managers.

In fact, it’s now well established that today’s very high pay inequalities are harming rather than advancing company performance. In settings where people need to work together to produce results – most places – unequal rewards are felt as unfair and demoralising, and damage co-operation and teamwork. Surveying the literature in their essential Hard Facts, Dangerous Half Truths and Total Nonsense, Jeffrey Pfeffer and Robert Sutton report that in all kinds of organisations, ‘dispersed rewards have consistently negative consequences’. That goes for universities and even sports teams. One study of baseball – a game that places great emphasis on individual performance – found that players on teams with highly unequal pay performed worse, particularly the lower paid, and so did the teams as a whole. They were also less successful financially.

If sky-high pay is unfair, unjustifiable and harmful (which it is), why does the juggernaut keep on rolling? CRESC argues that top managers have just reaped the rewards of being in the right place at the right time. Despite the rhetoric, the emphasis since the 1980s on shareholder value has not actually improved returns to shareholders. What it has done is switch the focus of corporate governance from all stakeholders to shareholders alone, and more precisely to the problem of aligning the interests of managers with those of shareholders. As they see it, the answer to this problem is incentives the only question is what kind.

Ironically, however, the beneficiaries of ‘shareholder value’ are not shareholders but managers, who, with the full blessing of Uncle Tom Hampel, Cadbury, Greenbury and all, used governance reforms and the 1990s bull market to clean up. They can’t believe their luck. Perhaps Woody Allen had in mind the man in the corner office when he observed that 90 per cent of success was showing up.

The Observer, 10 December 2006

Friedman’s unethical rot made wrongs into a right

SUMMING UP his own achievement, Milton Friedman, the celebrated Chicago economist who died last month, wrote: ‘Judged by practice, we have been, despite some successes, mostly on the losing side. Judged by ideas, we have been on the winning side.’

He was too modest. Friedman was regretting his limited, as he saw it, influence on macroeconomic and social policies. But in today’s most pervasively experienced social-science discipline – management – his triumph is pretty much complete.

Indirectly, Friedman’s doctrines, and those of the Chicago school in general, have worked themselves to the heart of management theory (and many of the social sciences), and thence into every cranny of practice. Every chief executive who claims that ethics and morality have no place in business and that their only job is to maximise shareholder wealth every business school teaching courses in corporate governance based on agency theory or organisation design based on transaction cost economics every City firm shrugging off the break-up of a company as the inevitable consequence of globalising capital markets, is practising Milton Friedman. And is practising, moreover, an ideology, not a science.

Friedman himself made no bones about this. He called the ideology ‘liberalism’ (which sounded more ‘radical’ than conservatism), and as the late Sumantra Ghoshal noted, it rested on two fundamental convictions. First that social theory had no place for ethics, which should be left to the individual. And second that, humans being imperfect, the problem of social organisation was as much a negative one ‘of preventing bad people from doing harm as of enabling good people to do good’.

To repeat, there is no ‘evidence’ for these propositions: they are philosophical, not scientific, positions. But this ‘ideology-based gloomy vision’ has come to dominate economics and other social sciences, especially management, with incalculable consequences.

Just as the course of economics has been shaped by what has been termed ‘physics envy’ (the desire to become a ‘hard’, testable science), so management’s cultural cringe is to economics. By adopting Friedman’s liberalism, with its exclusion of ethics and intention and assumptions of self-interest as the basis of human behaviour, as its starting point, management at a stroke could present itself as a science: a kind of deterministic mechanics emphasizing command and hierarchy to squeeze efficiencies from reluctant workers, and sharp incentives to align managers’ with shareholders’ interests.

No matter that the underlying view of human nature is at best grotesquely partial nor that the liberal management model doesn’t seem to work (Enron yawning inequalities ever-increasing work intensification the ransacking of the planet). If enough people believe and act on the underpinning propositions, self-fulfilling prophecy ensures they become ‘right’. Far from losing the battle of practice, via management, Friedman’s shivery achievement is to realign human behaviour with his own pessimistic assumptions – thus making the ideas come out ‘right’ too.

This is bad enough. But another consequence of using opportunistic individuals as the unit of management analysis is the undertheorising of the organisation. Pace Adam Smith, wealth in today’s societies is created not by the invisible hand – individuals transacting in the market – but by the visible hand of co-ordination in organisations acting, in Ghoshal’s description, as ‘marshalling yards’ for society’s resources. We live in an organisational rather than a market economy, so the quality of that co-ordination is critical: management matters.

Tell that to Gordon Brown. The reason the Treasury still puzzles over lagging UK productivity, and the public sector refuses to improve in line with the billions thrown at it, is that he persists in treating these as economic rather than organisational problems. A good example is the application of crude incentive pay to public-sector professions, where any gains in individual effort are more than offset by demoralisation of those less well treated, destruction of teamwork and other unintended consequences. Obvious in economic terms, in management this is just illiterate. Management is not that deterministic.

Even in areas such as corporate social responsibility, all isn’t as it looks. For instance, at a recent international conference celebrating CSR, participants crowed that Friedman’s well-known objection to it as incompatible with capitalism ‘is being overtaken by events’. Yeah, right. It so happens there’s just one instance where Friedman is happy to admit the case for CSR: where it’s used as a PR stunt under cover of which management can get on with its real job of making money for shareholders. Most CSR, alas, is just that.

Thanks largely to Friedman’s influence, it’s not economics but management that is – literally – the most dismal discipline. He may have had the last laugh but it’s no joke for the rest of us.

The Observer, 3 December 2006

Innovation’s back, but does that change anything?

INNOVATION GOT a bad name in the dotcom years, being more about finding new ways of parting unwary investors from their money than customers. Since then it has taken a back seat as companies hunkered down to cost-cutting and efficiency drives. Now, according to an article in the November issue of Harvard Business Review , in the constant seesaw of fashion it has moved back to the top of the corporate agenda, with the same companies seeking to rediscover the forgotten secrets of growth.

But what kind of innovation? It would be nice to think that this time around, taking on board the lessons of the past, companies would focus on real needs, not least the urgent ones that they themselves have created in previous waves of capitalism: the greatly compromised health of the planet, the welfare of those at the bottom of the pyramid, and the desire of the better-off for personal rather than mass-produced goods and service and for relationships based on trust and honesty rather than rip-off.

Some hope. In another recent issue of HBR , the lead article proudly showcases the new-found ability to print pictures, jokes and trivia questions on crisps -that’s right, crisps – as a triumph of worldwide innovation. Another business magazine shows how a credit-card company has harnessed new profiling techniques to sell cards to those who can least afford loans, boosting its profits through late payment fees.

A different reaction is for companies to persuade themselves that they are innovating by doing complex financial deals. Last week’s extraordinary frenzy, in which a record $75bn was committed to takeovers in a single day, is a new high (or low) point in that respect. This year’s transaction totals are likely to overtake the $3.4 trillion and $3.3 trillion notched up in 2000 and 1999 respectively. Driving them, commentators agree, are globalisation, a commodities boom, the availability of vast amounts of cheap capital and the incentivised zeal of investment bankers to keep the flow of deals going. Nothing here about customers, you notice, for whom most such deals are of stupendous irrelevance, simply creating an even wider gap and even more impersonal relationship between them and the ultimate management.

In some cases this will come to look like fiddling while Rome burns. Particularly where the internet puts power in their hands, customers are taking over the innovation process, bodily reshap ing industries that are resisting what they want. Take the so-called Web 2.0 phenomenon. It’s not established companies that have pioneered the key businesses of the second-generation internet but geeks and customers who scorn the commercial offerings pushed at them by industry leaders and instead create new ones to meet quite different demands of interchange and self-expression.

The model was the music industry, at first dismantled by consumers using peer-to-peer networks to get what they wanted rather than what the music companies wanted to give them, and then put together again in a different form by a quick-witted computer company, Apple, using the smart integration and cute design of the iPod and iTunes software. Now customers are moving on to pick apart other industries that have failed to respond to their changing needs.

The media, for instance. Take the rise of the bloggers. This is no simple accident of technology, but the price newspapers are paying for having treated readers as passive consumers without bothering to find out more about them as news users. In the same way, artificial TV reality shows are being challenged by the mushrooming growth of permanent reality spaces like YouTube, MySpace, Etribes and others, and 3D virtual-reality sites such as Second Life.

No one knows where these trends will end. Of course, traditional media companies are pitching in to buy up anything with Web 2.0 pretensions, however remote. But as the AOL-Time Life debacle graphically showed, there is no necessary synergy between old and new media, and unless attitudes to customers change radically, they may find that the benefits of innovation are not easily bought.

The irony is that opportunities to make things better for customers are all around. In yet another recent HBR article, the owner of a noted restaurant explained that it had built its high reputation by carefully managing mood as well as food. ‘We have to assess and understand how our customers are feeling right now & and then do whatever it takes to make them feel better’ & not by hovering over the wine or asking how the food was at each taste but adjusting service – speeding up, slowing down, being conversational or leaving well alone – according to the mood of the table. The aim is that each table should score no less than nine out of 10 for mood, and as staff work discreetly to push the score up, ‘they develop a wonderful confidence in their ability to handle difficult situations as a team’.

Not rocket science – but real innovation nonetheless.

The Observer, 26 November 2006

‘Ello, ‘ello, ‘ello – can I have that in triplicate?

‘I NEEDED a drink, I needed a lot of life insurance, I needed a vacation, I needed a home in the country. What I had was a coat, a hat and a gun. I put them on and left the room.’ Thus Philip Marlowe, Raymond Chandler’s private eye, in Farewell, My Lovely. Chandler’s Bay City is admittedly a bit different from, say, Newport Pagnell. Still, the revelation that, confronted with a crime, the modern English policeman’s weapon of choice is the photocopier, closely followed by the Biro, black, and forms, for the filling in of, is a graphic indicator of just how far removed today’s law has become from the mean streets where crime actually happens and whose inhabitants suffer it.

Along with a cast of local no-hopers and lowlife, office stationery features largely in Wasting Police Time, an entertaining and sobering account of one direct-response (ie local beat) policeman’s experience of life on the front line in ‘Newtown’, a settlement of 60,000 somewhere in the north of England.

In this account, an outgrowth from the pseudonymous PC David Copperfield’s seditious blog (, the ordinary policeman’s lot is not a happy one (although there is sardonic and surreal humour aplenty). However, the main hazards in his life are not violence and organised crime, but police management – proliferating bureaucracy and the ranks of internal and external auditors who seem more interested in whether targets are met and procedures complied with than catching criminals.

Thus, one day Copperfield finds himself the single uniformed response officer for the whole town, in a station otherwise full of office-based specialists, task forces and community support officers (‘a government idea that ensures a cheap, uniformed alternative to police officers on the street, while allowing police officers themselves to get on with writing reports, filing and stapling’) – a not very terrifying prospect for even the fairly incompetent villains of Newtown. Needless to say, staffing is scheduled by computer.

But even when he gets out on the streets, he doesn’t stay there long. As the individual officer’s margin of discretion is eroded, more and more must be recorded for subsequent audit. Just talking to a couple of loitering youths must be noted and later entered into the computer. A straightforward arrest for vandalism takes an entire shift of longhand form-filling, leaving just half an hour for ‘policing’. As Copperfield notes, the system makes the administration of crime more important than reducing or solving it. ‘Greater numbers of police are not the answer to rising crime,’ he writes. ‘There are enough policemen, it’s just that they are all sat behind desks.’

Some of what he does is strictly pointless – like interviewing witnesses for cases that have already been settled. This nonsense is the nightmare byproduct of diminishing discretion crossed with detection-rate targets. Under national crime reporting standards, every complaint, from a fight in a school playground to a murder, must be recorded as a crime. That means it has to be investigated and solved. The result is straightforward: to keep detection rates up, forces solve easy cases.

‘Detecting’ the playground scrap, which in the past would have been dealt with by a ticking off, is a simple matter of getting one party to admit to hitting the other, with the promise of no further action taken. Better: get the other party to admit a thump too, even though no charges will be brought, and that’s two detected crimes. ‘Cleverer still, what if, during their scuffle, someone’s bag got knocked on to the ground and the handle was broken? I don’t know about you, but that sounds very much like criminal damage to me. Now you’re talking! THREE detected crimes!’

Naturally, all this has unintended consequences elsewhere in the system. One casualty, as in all target regimes, is police crime figures, many of which are meaningless. But there are individual tragedies, too. As Professor Rod Morgan, chairman of the Youth Justice Board, noted on Newsnight last week, police get no points for brokering commonsense solutions, but they do for ‘bringing people to justice’. So they do, with the result that too many youngsters have criminal records for trivial offences, the system is clogged – and police officers spend time writing up cases that will never come to court or have already been filed.

Even allowing for a bit of exaggeration, the picture Copperfield paints is not reassuring. Yes, he says, people may overestimate the incidence of crime, but they overestimate far more the number of coppers on the street. In any case, why should we expect the police to be different from the rest of the public sector, where target bureaucracy and top-down management sap front-line energy in the same way? In a black aside, Copperfield remarks that rather than trust the soothing official line, he’d rather have ‘a gun and a few acres and I’ll take care of myself, if it’s all the same to you’. Maybe Bay City isn’t so far away after all.

The Observer, 19 December 2006

It’s not just academic – now Oxford must act

GIVEN THE pervasive stereotypes it has bred about itself – dreaming spires, lost causes, undergraduates out of Evelyn Waugh and dons out of Anthony Powell – it’s easy to cast current arguments about the management of Oxford University in similar terms: academic port-sippers waging a vain last-ditch attempt to hold back the 21st century.

But it’s not so simple. Running a university is tricky. Unlike the NHS, British universities have not had an injection of funds to help square the circle of dramatically boosting output with no fall-off in academic standards. In addition they are full of clever, opinionated people whose job it is to disagree with each other.

At Oxbridge, these starting conditions are vastly compounded by two more: the division between the university and the colleges, to whom most dons owe primary allegiance and a centuries-long history of being unique. New Zealander John Hood, Oxford’s controversial vice-chancellor, is the first outsider to head the university in 900 years.

Other universities have dealt with the management issue by brutal centralisation. They are no longer administered by academics but by highly paid managers as likely to be consultants as professors. They have bulldozed through sweeping changes, using government research and teaching assessments to control academic staff, and funding procedures to dictate academic and other priorities.

The Observer, 12 November 2006

In government terms, this has been largely successful in getting academic institutions to do as they are told, even though the costs are high: war between managers and academics, unspeakable bureaucracy, and a haemorrhaging of young talent from a teaching profession where, for most, morale is as low as pay.

Oxford has never undergone this managerialist revolution, and that is what the current fuss is all about. So far, like Cambridge, Oxford has done wonders in competing in a world market for education with a fraction of the resources of its north American rivals. In international league tables, Oxford and Cambridge are consistently the only non-US entries in the global top 10 and even top 15. But Oxford is falling behind arch-rival Cambridge, and even the anti-reformers concede that change is necessary.

The university badly needs money – it loses pounds 5,000 a year for every undergraduate, and will post a deficit this year. More money requires tough decisions, but tough decisions is just what Oxford doesn’t do: decisions are cloaked in opac ity and take too long there is no method of resolving contentious issues and there’s a glaring lack of external input and expertise.

Supposedly ‘self-governing’, in practice, the university is ‘the least democratic institution I know’, says John Kay, who used to head the university’s Said Business School. ‘They don’t realise it, but everyone you talk to speaks of the university as ‘them’, not ‘we’. They’re wedded to an unworkable model.’

So what kind of change is it to be? How can the place be made more agile without destroying what makes it unique? The vice-chancellor, who put dons’ backs up just eight months into office with a (defeated) attempt to introduce individual appraisals, is pushing proposals by an official working party which, while leaving formal primacy of Congregation (Oxford’s ‘parliament’ of 3,700 lecturers and fellows) intact, would separate out academic affairs from finance and organisation. The latter would be the purview of a 15-strong council, on which external members would have a majority.

The proposals are fiercely resisted by critics who believe they are the first step towards centralised business-style management. They charge that the trappings of democracy are a sham, and that Congregation will be powerless to hold to account an executive that is determined to play down Oxford’s traditional emphasis on teaching humanities to bright but low-paying undergraduates and play up the government’s numbers game: recruiting higher-paid staff to university faculties rather than colleges, incentivising them to concentrate on funds-generating research, and switching the teaching emphasis to higher-paying postgraduate students from abroad.

They point to the hard-ball tactics used by Hood at a rancorous and inconclusive Congregation meeting last week as a portent: ‘If you think Congregation will be able to hold back an aggressive and secretive management team, you’re smoking dope,’ says Peter Johnson, a management fellow from Exeter College. Johnson, in previous life a management consultant, argues that the proposed governance architecture is in any case more suitable to a machine bureaucracy than to communities of professionals – and past its sell-by date even in the commercial world.

Kay agrees that there should be an open debate about what the university aims (and can afford) to be before deciding on governance that has to choose between the centralised model or deliberately doing the opposite. Either way, the stakes at the next debate on the proposals, on 28 November, are high: if Oxford doesn’t reform itself, there are dire hints (blackmail, say the antis) that the government may take a hand.

Rule one: think the worst and it will happen

MOST OF the story of modern management is a quixotic struggle to substitute numbers for judgment. ‘Managers start off trying to manage what they want, and finish up wanting what they can measure,’ sighed strategy guru Igor Ansoff. But management is essentially a moral, not a numerical, occupation. The proof is the self-fulfilling prophecy.

Expectation is management’s secret weapon. It is the self-fulfilling prophecy – a grander name for the power of expectation – that turns it into an instrument of mass destruction or the reverse, a powerful amplifier of trust and co-operation.

First described in the 1940s by sociologist Robert Merton, the mechanism by which belief creates its own reality is unique to social science. In the physical sciences, human attitudes have no effect on reality: all the Pope’s authority could not make the sun orbit the Earth. Not so in human affairs, however, where even if a proposition is ‘wrong’ to start with, if enough people believe and act on it, de facto it becomes ‘right’.

Management writers Jeffrey Pfeffer and Robert Sutton have identified 500 research studies on the self-fulfilling prophecy. They show that, to a remarkable degree, performance depends on expectation, whether or not objectively justified. ‘Independent of other factors,’ writes Sutton, ‘when leaders believe their subordinates will perform well, positive expectations lead to better performance. And the converse holds for poor performance.’ Managers’ theories about performance and ability are self-fulfilling.

One effect of this is to turn the company into a battleground between two rival views of human nature – with reverberating consequences, because the self-fulfilling mechanism means that one of them will eventually make itself ‘right’. Suppose managers assume that employees are basically lazy and self-interested, and must be coerced into doing a good job. They will then use hierarchy, tight supervision and incentives and punishments to make them comply. But research evidence is that the more people are treated as naughty children the worse they behave, justifying even more repressive methods. The circle is not only self-fulfilling but vicious. A company built on assumptions of self-interest and opportunism progressively recasts employees in its own misshapen image.

Meanwhile, a company that functions on the basis of trust and co-operation creates a system in which honest, co-operating people flourish. The more it flourishes, the more the norm is reinforced. The self-fulfilling prophecy makes the company quite literally into a force for good.

The battle of expectations, and consequent adjustment of ‘reality’, occurs along the management ideas chain. Studies show that students on MBA and economics courses (unlike others) come to embody the assumptions of rational self-interest that underpin the teaching. MBA students become less concerned with customers and ethical concerns the longer they study. Self-fulfilling individual self-interest is reinforced at the next level by business-school rankings, in which the salary effect of taking the course is a high-ranking criterion. But the self-interest is learnt, not hard-wired: a self-fulfilling assumption.

Or take incentives. They are ubiquitous, but be careful, because incentives work, most powerfully, to teach people to expect them. One snag is that people who come for incentives leave for better ones, so the ratchet moves ever upward. The inexorable rise of chief executive pay is an awesome example of double self-fulfilling prophecy, incentive expectations being compounded by learnt self-interest and all the doctrines based on it, such as agency theory and options – which is why nothing seems to be able to slow it down.

Another problem with incentives occurs all over the public sector. As with the new GP contracts, to get people to concentrate on a few headline measures, the government sets targets and incentives for reaching them. This has two effects: doctors find ways of meeting the targets, so payments go through the roof but also by definition their motivation changes. (Extrinsic) incentives drive out (intrinsic) professionalism: but which doctor would you rather go to, one who is motivated by money, or by doing a good medical job? No wonder patients are dissatisfied and doctors conflicted.

Some dilemmas raised by the power of expectation are less clear cut. In his provocative book Weird Ideas That Work , Sutton suggests that one good way to approach innovation is to decide to do something that will almost certainly fail, then convince yourself and everyone else it is bound to succeed. You can probably see what’s coming. Statistically, almost all innovations flop, but telling the truth will make failure certain. Conversely, the one thing you can do to change the odds at least slightly in your favour is to ignore the evidence and persuade yourself and others that it will be a triumph.

What to do? Most management books won’t tell you, but deciding which ‘reality’ you want may be the most important decision a manager ever takes.

The Observer, 5 November 2006

The shaky marriage of capitalism and virtue

ROLL OVER, Milton Friedman. At a huge conference in Cleveland last week on ‘Business as an Agent of World Benefit’, billed as ‘the largest outpouring ever of research and thought on global corporate citizenship’, thousands of executives, academics and government officials assembled to face hundreds of papers and presentations challenging ‘the trade-off illusion’ – the idea that a company must choose between benefiting society or benefiting shareholders.

It could hardly have been a more portentous occasion. A group production by the UN’s Global Compact, the US Academy of Management, and Cleveland’s Case Weatherhead business school, the forum was nailed to the increasingly popular idea that, as Kofi Annan put it, business interests are more and more dovetailing with the UN’s objectives for development and world peace.

‘Today, leading businesses realise that the world’s problems can become business opportunities – perhaps the business opportunities of the 21st century,’ declared the conference website. To this extent, mused the Academy of Management’s Professor Nancy Adler, Friedman’s objection to corporate citizenship as incompatible with capitalism ‘is being overtaken by events’.

So that’s OK, then? Are we near, or at, a tipping point when a new era of business practices dawns, based on the linking of financial goals with social purpose and when, fortified by this handy convergence, business will move seamlessly from creating some of the world’s most awkward development, environmental and social problems to solving them?

To which the reply can only be, not so fast. It’s true that the business case for corporate social responsibility (CSR) has never been more forcibly put, or more widely believed, including, genuinely, by company executives. There were also some inspiring stories and presentations at the forum. CK Prahalad’s assessment of the upsurge in corporate activity to stimulate commerce and development among the world’s poorest people eloquently counterpointed the well-deserved award of the Nobel Peace Prize to Muhammad Yunus and microcredit Grameen Bank. A keynote on the potential of advanced energy and resource productivity induced hope and despair (so why isn’t everyone adopting these techniques?) in equal measure.

Yet there are limits to what CSR can do on its own, and reality is not served by downplaying them. They are most clearly outlined in David Vogel’s The Market for Virtue (Brookings Institution Press), a sober review of the field that notes while voluntary action by companies has produced some important gains – in working conditions in some developing countries, in fair trade, in reducing greenhouse gas emissions and in getting many companies out of Burma – its potential to bring about lasting change in corporate behaviour is much more modest than enthusiasts suppose.

‘The main constraint on the market’s ability to increase the supply of corporate virtue is the market itself,’ Vogel writes. ‘There is a business case for CSR, but it is much less important or influential than many proponents of civil regulation believe.’ Thus, despite the new conventional wisdom, and earnest endeavours by researchers to prove it, there is no evidence to show that ‘responsible’ companies are more profitable than irresponsible ones, let alone a causal link between the two. Neither, alas, does socially responsible investing produce higher returns than the ordinary variety.

CSR, says Vogel, is better thought of as a strategy like any other. For some companies – think John Lewis, M&S, Timberland, the Co-op – it makes positive business sense as a key part of their brand and customer and employee appeal. For others – Shell, Nike, Dell – it is defensive, a way of containing risk and warding off unwanted attention. At least initially, says Vogel, ‘their objective was not primarily to use CSR as a source of competitive advantage, but to prevent it becoming a source of competitive disadvantage.’

The argument that CSR pays is attractive but disingenuous and often untrue, recalling Archbishop Whately’s maxim: ‘Honesty is the best policy, but he who is governed by that maxim is not an honest man.’ Maximising resource efficiency or minimising environmental damage may make financial sense, but then it’s not CSR, it’s responsibility to shareholders.

The bald fact is that a few companies in a few high-profile sectors do some CSR because it suits them and doesn’t cost too much. Most don’t, and the capital markets don’t make them.

If companies are serious about responsibility, as Vogel says, they need to do more than go ‘beyond compliance’ themselves they need to push governments to raise compliance standards, level up the playing field and eliminate the free riders. CSR is shareholder capitalism’s guilty conscience, but it leaves the justification of shareholder primacy intact. And some guilt it can’t assuage: in the late 1990s, one company was highly rated by ethical investment funds and garlanded with environmental awards. Its name was Enron.

The Observer, 29 October 2006