Be efficient, please customers, cut costs… that’s it

WITH EVEN Toyota forecasting unprecedented losses, managers contemplating 2009 may be tempted to echo Louis MacNeice in ‘Bagpipe Music’:

It’s no go my honey love, it’s no go my poppet

Work your hands from day to day, the winds will blow the profit.

The glass is falling hour by hour, the glass will fall for ever,

But if you break the bloody glass you won’t hold up the weather.

Storm warnings are indeed flying everywhere. But while there’s no point in breaking the glass, you can stop making the weather worse, as most management nostrums unerringly do. Do good business, please your customers and cut costs at the same time. Here’s how.

• Quit thinking about cost – give people what they want. Customers aren’t interested in your costs. They are only interested in being able to get from you a product or service with the minimum of fuss and the maximum of convenience – their convenience.

Any organisation that can consistently deliver this will win both gratitude and loyalty. But it will also keep costs to a minimum. If that seems counter-intuitive, think of it this way: if you give people what they want, and only what they want, you’re not paying to give them what they don’t want. Ergo:

• Forget productivity, work on quality. Improved quality (defined in customer terms this is important) leads to increased productivity for a disarmingly simple reason. Capacity, said Taiichi Ohno, architect of the Toyota Production System, equals work plus waste. Take out waste – anything that does not contribute to value for the customer and – hey presto – capacity, and therefore also productivity, increases in proportion.

• Stop obsessing about scale: think flow. In making a product or service, the critical cost is end-to-end – that is, measured from receipt of order to delivery. What determines end-to-end costs is not the cost of individual activities – taking calls in a call centre or making parts for a product – but the smoothness of flow between them. An organisation that delivers just enough effort to advance an item one step at a time from beginning to end will have lower overall costs and faster throughput than one building huge batches of parts at every stage to gain economies of scale. It’s even better if production is synchronised, not only internally but externally, with the market – but that’s difficult when demand is subject to wild swings, as at present.

Government and its agencies, egged on by the big management consultancies, are hooked on scale, which just magnifies the other traditional cost-containment mistakes. This is what drives the monumentally misguided rounds of enforced shared services among local authorities and other public-sector bodies. In most cases, these drive up end-to-end costs by fragmenting the flow and making it harder for customers to pull value – in other words, worsening quality.

• Size doesn’t matter. Big and remote is the mantra of the past, the driving principle of General Motors and other beached whales of the industrial world. Small and local is the most efficient way to deliver most services, and plenty of products too. Economies of flow and effort far outweigh dinosaur-like economies of scale. Scale, says Tom Johnson, a prominent accounting professor, is dead: ‘Beyond very small volumes, [it] is a concept that should be discarded.’

• Stop trying to performance-manage people focus on improving the system. Trying to cut costs by tightening individual performance measures is self-defeat ing. (’There’s no way they can raise my productivity faster than I can raise their costs,’ says an airline pilot meaningfully.) Fear – of punishment, ridicule, losing a job – is the biggest barrier to learning and improvement, which only happens when people control their working lives and are proud of what they do.

• Finally, forget about competition and build co-operation. The parts of a system – which includes customers and suppliers – have to work together. A system can only be optimised as a whole, to a recognised aim and purpose. Of course it competes with others in the marketplace, but the aim must be for everyone to gain – shareholders, employees and society- over the long term. Internally, competition is usually a wrecker.

by taking care of customers you serve the company’s financial goals, while the reverse is not the case. Of course, we’ve really sensed this all along – we’ve just forgotten it in the Gadarene rush to get rich quick,This is how you get to the truth that the results of which are forlornly strewn around us.

Like all the points above, the truth that profit is a by-product, and as such can’t be approached in a straight line, comes straight from the teachings of W. Edwards Deming, who was writing and lecturing 50 years ago. Pace MacNeice, it’s time to put back the clock and change the weather. Happy new year.

The Observer, 28 December 2008

A senseless system graduates without honours

THE 2008 university Research Assessment Exercise (RAE), whose results have been announced with a mixture of fear, loathing and exhaustion, is a classic example of the self-defeating performance-management drive that is overwhelming the public sector.

RAE results determine the research funding allocated to institutions by the Higher Education Funding Council, according to a formula that changes each time. The official line is that the assessment – 2008’s is the sixth since 1986 – is a success. It is ‘important and valuable’, to quote one vice-chancellor, in providing an accepted quality yardstick and a means of promoting UK universities abroad. Others argue that it helps to ensure accountability for pounds 8bn of public funding, the largest single chunk of university income. That sounds plausible: but as usual it conveniently airbrushes out other costs and consequences.

The first and most obvious of these is colossal bureaucracy. Government blithely assumes that management is weightless but the direct cost of writing detailed specifications and special software, and assembling 1,100 panellists to scrutinise submissions from 50,000 individuals in 2,500 submissions, high as it already is, is dwarfed by the indirect ones – in particular, the huge and ongoing management overheads in the universities themselves. As with any target exercise, the RAE has developed into a costly arms race between the participants, who quickly figure out how to work the rules to their advantage, and regulators trying to plug the loopholes by adjusting and elaborating them.

The result is an RAE rulebook of staggering complexity on one side and, on the other, the generation of an army of university managers, consultants and PR spinners whose de facto purpose is not to teach, nor make intellectual discoveries, but to manage RAE scores. As in previous assessments, a lively transfer market in prolific researchers developed before the submission cut-off date at the end of 2007, while, under the urging of their managers, many university departments have been drafting and redrafting their submissions for the past three years.

Meanwhile, the figures themselves can be interpreted in so many different ways that even insiders find them hard to comprehend. How many parents will know that, because the rules and ranking system has changed so much since 2001, it’s difficult to identify performance trends? That departments nominally teaching the same subject may figure under different assessment panels, so here too direct comparison is difficult? That some numbers are bafflingly rounded, while from the figures given it is impossible to calculate how many of a department’s staff have been submitted for the assessment exercise, and thus its ‘real’ research strength?

Not surprisingly, as the monster has become increasingly unwieldy, the intervals between the ever more onerous audits has steadily lengthened. After a gap that has stretched to seven years this time, RAE 2008, the last of the present format, is expiring exhausted – although it will rise again in 2013 as a system based on ‘metrics’, or citations, that promises to be equally controversial.

In the meantime, though, many thoughtful academics believe that much damage has been done. On a systems view, you can’t optimise one part of a system without affecting others. In the university context, what suffers from the research obsession (’publish or perish’) is teaching, especially undergraduate teaching. It’s not much use students choosing a university with internation ally known researchers if the researchers are too busy to teach. A teaching assessment exercise turned out to be too nightmarishly bureaucratic even for this government and has been abandoned.

Within research, there is little doubt that target pressure has distorted priorities, forcing researchers to work within the tight guidelines of a few established publications, discouraging unconventional views and making unpredictable discovery all but impossible.

Somewhat ironically, the narrow horizons have a particularly perverse effect in economics and business studies, where, judging by today’s melted-down financial sector, ‘paradigm shifts’ are needed more than anywhere else. They are unlikely to emerge, however, from learned journals that effectively privilege research for research’s sake over usable knowledge and are light years away from the concerns of inquiring managers.

Finally, the RAE is a potent symbol and vehicle for the bullying top-down managerial culture that has steadily eroded both the quality of working life and results in much of the public sector. This management style has given us Baby P and HM Revenue and Customs on the one hand, and General Motors and the financial collapse on the other. Universities should be part of the search for alternatives, not a reinforcement for today’s bankrupt model.

The Observer, 21 December 2008

Social care is Stalinist. That’s not an insult, it’s a fact

WHEN THE only response to repeated failure is a call to try harder and do better, you know there’s something badly awry with the premise. Einstein was right: insanity is doing the same thing over and over and expecting different results.

In social work, insanity is now squared. After social workers, it’s Ofsted’s turn to come under fire. If Haringey social work department got a ‘good’ ranking last year (as it did at the time of Victoria Climbie, incidentally), it must be because people were at fault. Inspectors didn’t inspect devious, cheating social workers closely enough, just as social workers were taken in by devious, cheating families.

The only explanation for the contradiction that isn’t entertained is the obvious one: the star-ranking system, for social work as for every other public service, is as broken and bankrupt as the ghastly management system it drives.

Comparing this rigid, dehumanised, top-down, IT-driven regime with Soviet central planning is not a cheap gibe. It is a precise parallel. The Soviet Union collapsed not because Russians are malevolent or backward but because it was systemically stupid – unable to learn and improve. This is also the case for almost the entire UK public sector. The only way to improve is to experiment and learn. This, within regulatory boundaries, is how market pluralism works. But our inspect-and-comply regime doesn’t allow experimentation. In fact, it is terrified of any deviation from procedure – as its reaction to Baby P and Shannon Matthews testifies.

Unsurprisingly, therefore, most public-sector managers conclude that their job is compliance with the rules. They get on by collecting stars. Ofsted’s boss is a former top school head. A few managers suspect that the centre isn’t always right, but that’s not how you succeed they can’t or won’t rock the boat. A tiny minority, meanwhile, is concerned and bold enough to go out on a limb to try something different. But such is the atmosphere of fear and paranoia that even when the results are promising – far better than the official targets – they daren’t broadcast them for fear of bringing down the inspectors’ wrath.

To experiment and learn you have to switch off the official targets and activity measures. But the inspectors’ job isn’t to reward experiment and learning it is to check the boxes have been ticked.

After a column on adult social care a few weeks ago, some council managers wanted to contact the brave souls I had described as having ignored official procedures and tried more direct ways of responding to need. I couldn’t oblige. For the experimenters, reporting success was more than their jobs were worth – and those of their council colleagues, since social care inspection marks affect the ranking of the authority as a whole. Publication of a longer paper detailing these promising experiments is in the balance because chief executives fear the consequences too much to allow the results to be verified and their identities made public. If this isn’t Stalinism, what is?

Thanks to the dedicated work of academic researchers at York and Nottingham, we know what’s wrong with social work (and many other public services). But, because of the reign of terror, we can’t build a head of steam behind what’s possibly right. Imprisoned in an iron cage, not just Haringey but the whole social-work system is rendered organisationally stupid – incapable of improvement, but not, alas, of getting worse as organisations are compelled by inspectors to do the wrong things ever righter.

But the stupidity is cancerously self-replicating. Not only is every other public service, trapped in its own cage, similarly blocked from learning it feeds stupidity on to others as massive and cumulating amounts of ‘failure demand’ (see this column last week).

Imagine a struggling family in Haringey or Dewsbury. The breadwinner loses their job. Because the benefits and tax system take a dysfunctionally long time to react, they have problems with housing arrears and council tax. Financial problems lead to aggro and eventually a ‘domestic’, to which the police are called. At that point all the children are automatically referred to social care. Confronted with the consequences of a quite different problem – the failure of the benefits system – and a huge workload of similar cases, do social workers fill in dozens of pages of forms for each child, as the system demands, thus ensuring they have no time to deal with worse cases? Or gamble that these children, although vulnerable, are less at peril than others who have been referred through suspicion of real abuse? Mostly – rightly – they gamble but the stage is set for another Baby P, another round of demonisation and a further self-defeating turn of the screw from HM Inspectorate.

The only logical end to this nightmare is that no social worker will work for Haringey and inspectors will outnumber social workers two to one. Is that what ministers want? If not, then what?

the Observer. 14 December 2008

Too many mistakes means too many managers

AS THEIR finances go into meltdown, companies are scrambling to cut costs across the board – in every place but the right one. According to a new study on global productivity by Proudfoot Consulting – tellingly entitled ‘A world of unrealised opportunities’ – UK managers are fiddling while their companies go up in flames, spending more than half their time on admin and unproductive activities, compared with just 11 per cent on improvement-oriented training and active supervision. Partly as a result, frustrated managers believe that nearly 40 per cent of potential productivity improvements in the next two years will be left on the table.

Proliferating bumf shows the size of the problem. Thirteen reports a month thump on to UK managers’ desks, more than anywhere except, for some reason, Brazil. More than half are no help in getting the job done, managers say they would like to slash paperwork by 40 per cent, again the second highest figure in the world. All in all, managers in Britain spend nearly a day a week doing things that have no impact on productivity – an 8 per cent increase on last year.

While shocking – aggregated up, time thus wasted would be the equivalent of several per cent of GDP – this is hardly a surprise. Three years ago, General Electric estimated that administration and back-office functions were costing no less than 40 per cent of its revenues. Think about that for a moment. What’s considered one of the best-managed large companies spends $60bn a year on stuff that adds no direct value to customers – or, in plain English, is wasted. At less tightly run ships, the proportion is likely to be much higher.

What’s going on here? After all, companies of all descriptions have been downsizing and outsourcing for decade. In manufacturing, the labour content of advanced products is down to a few per cent. Service personnel are notoriously underpaid (except in finance…) and overstretched – witness dismal customer satisfaction levels. So where’s the fat?

As the GE and Proudfoot figures suggest, the answer lies in indirect costs, or overheads: finance, human resources, marketing, IT, legal – and, of course, management itself. It’s not just, as Proudfoot suggests, that middle management is weak and the workforce lacking in training, although that is true. The fact is that almost all organisations today generate hideous quantities of waste – although it is usually unrecognised, because that is the way they do business.

Take, for example, the contact centres that are the staple of the outsourcing industry. As customers, we know they are always busy – but most of their work is waste. Vanguard Consulting, which specialises in service organisation, estimates that, in financial services, 20 to 60 per cent of all calls represent ‘failure demand’ – demand caused by a previous error. In telecoms, the police and local authorities, a staggering 80 or 90 per cent of calls occur because of the same failure to provide proper service the first time around.

Putting this another way, if organisations were set up to deliver what custom ers wanted in the first place, at least half their call centres wouldn’t need to exist, along with their attendant managers, HR people and expensive IT systems. But the same principle operates throughout organisations. Management feeds on itself. Because of a chronic disconnection between the work and the customer (whether internal or external) at every level, there is a mushrooming need for people to take calls, chase progress, and reschedule and redo work that would be unnecessary if service flowed smoothly to the customer.

According to accounting professor Tom Johnson, in most organisations ‘each person whose work eventually serves customers’ needs is ‘shadowed’ by another whose job is to keep track of other people’s work or patch up mistakes that slip through’. By eliminating the need for such people, companies could cut their short-term operating costs in half, he believes.

In a benevolent circle, by producing things more closely in line with customer demand, they would reduce their dependence on advertising and marketing spending too. As Vanguard’s work with service organisations has shown, there is a paradox here. Counterintuitively, managing costs directly causes overall costs to rise, because managers are looking at the wrong thing. If they manage value to the customer, they cause costs to fall – because they are no longer paying to provide what the customer doesn’t want, for rectifying mistakes, and for managing all that pointless activity.

Costs can’t be suppressed, or at least not for long. They can only eliminated by designing value in. Until companies get that message, overheads in most firms will continue to rise faster than revenues, productivity will stagnate – and managers will spend most of their time on the equivalent of twiddling their thumbs.

The Observer, 7 December 2008

Guess what? Self-interest is bad for the economy

IF YOU THOUGHT you felt the earth shudder on 23 October, you were right. When Alan Greenspan told the House Oversight Committee ‘I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms’, the effect was the same as Frodo and Sam casting the Ring of Power into the fires of Mount Doom at the end of The Lord of the Rings : the edifice of 21st-century management shook to its foundations.

Self-interest as the driver that, like an invisible hand, permits individuals acting on their own behalf to benefit society as a whole goes back to Adam Smith. But Smith at least realised the drastic inequities it would cause and proposed measures, including progressive taxes, to mitigate the worst effects. No such caution has been in evidence since the 1960s as the concept has become the central belief around which all Anglo-American corporate governance, and thence management as a whole, revolves.

Self-interest (and the need to guard against it) is the reason for dividing the chairman and chief executive’s role, just as it is for setting executive and non-exec directors against each other self-interest justifies and encourages individuals to demand vast pay (including in the public sector) without thought for the consequences finally, a near religious faith in the power of self-interest to both motivate and police is the foundation on which, as Greenspan now regrets, Wall Street’s rocket scientists erected the teetering superstructure of debt instruments crashing down around us.

The real-world consequences of a commercial universe with self-interest at its heart thus give the lie to previous assumptions about how individuals and organisations work. In this sense, Greenspan’s mea culpa might be likened to the Vatican’s admission in 1992 after a 13-year inquiry that Galileo had, after all, been right (‘It’s official – the Earth moves round the sun,’ as the Chicago Sun-Times caustically put it at the time).

Common sense suggests a number of reasons why self-interest-centred commerce is as flawed a model as an Earth-centred solar system. Self-interest contains within it the seeds of its own destruction. It drives for reward, but once rewards reach a certain size it can no longer function as a discipline. When rewards were less high, self-interest was tempered by the need to nurture the reputation a career depended on. With salaries at current stratospheric levels, however, self-interest provides no such restraint, since careers are redundant.

Anyone who has done one big deal – or worked in the City for more than a few years – never need work again. Far from being a restraining influence, in these circumstances self-interest promotes a short-term focus on transactions that in turn amplifies its second baleful impact: increasing distrust. As anyone not blinded by fundamentalist zeal must see, the obverse of the coin of self-interest is lack of trust – and both are self-reinforcing. The swelling of self-interest is in direct proportion to the draining away of trust, the cumulative results of which are now visible all around us.

An interesting recent article in the science weekly Nature , signalled by a correspondent, laments how dependent economics is on unproven axioms, and how resistant to empirical observation. In the physical sciences, notes the (physicist and hedge-fund manager) author, researchers ‘have learnt to be suspicious of axioms. If empirical observation is incompatible with a model, the model must be trashed or amended, even if it is conceptually beautiful or mathematically convenient’.

Not so in economics, whose central tenets – rational agents, the invisible hand, efficient markets – derive from economic work done in the 1950s and 1960s, ‘which with hindsight looks more like propaganda against communism than plausible science. In reality, markets are not efficient, humans tend to be over-focused on the short term and blind in the long term, and errors get multiplied, ultimately leading to collective irrationality, panic and crashes. Free markets are wild markets’ – for which classical economics has no framework of understanding.

In fact, it’s even worse. It isn’t just that, as the author points out, economics has been remarkably incapable of predicting or averting crises such as the present credit crunch through the medium of management based on its faulty assumptions, it has actually helped to cause it.

It’s an error to think that management, or even economics, can ever be a ‘hard’ science, not least because of their self-fulfilling premises. That doesn’t mean they are unworthy of study and understanding. On the contrary. But, as Greenspan sorrowfully acknowledges, the first step on that path is to bow to empirical observation and stop trying to prove the Earth is the centre of the universe.

The Observer, 16 November 2008

Heaven-sent chocolate, with profits to match

ALONG WITH the election of a black President and the end of 30 years of Reaganomics, here’s another thing to celebrate this week: the 10th anniversary of Divine Chocolate.

Actually this juxtaposition is less forced than it sounds, since in a small way the founding of Divine Chocolate in 1998 was a deliberate counter to Reaganomics. It was an attempt to demonstrate an alternative to unregulated free trade and the market pressures that allow powerful multinationals and their shareholders to benefit from low commodity prices – prices that keep the farmers who grow the crop in such poverty that few have ever tasted the final product.

In theory (as sceptics pointed out at the time), the idea of creating a new brand in an overcrowded arena couldn’t work. Chocolate is a cut-throat, advertising-led global business dominated by big multinationals – Cadbury, Mars and Nestle own 80 per cent of the UK market, half of which goes through the supermarkets.

As a Fairtrade enterprise, Divine gave itself another handicap by deciding to compete in the mass-market rather than the premium segment while paying higher-than-market prices for its cocoa, plus a Fairtrade premium to fund community projects.

Furthermore, Divine is co-owned by a group of organisations with differing agendas, including alternative trading company Twin, which set it up, Dutch microfinancier Oikocredit, Christian Aid and, at 45 per cent the largest shareholder, Kuapa Kokoo, the Ghanaian farmers’ cooperative whose cocoa is Divine’s raw material (this courtesy of Clare Short at the Department for International Development, whose loan guarantee allowed the cooperative to participate in the company as owner rather than just supplier).

Finally, admits Sophi Tranchell, Divine’s feisty and articulate managing director since the beginning, neither she nor the first sales manager knew the first thing about UK food retailing. ‘I just thought, it’s a great bar of chocolate and a terrific story – how could it not work?’ she says. ‘It’s a good job we didn’t know what we were doing. If we had, we probably wouldn’t have started.’

Yet work it does. Divine is not just a worthy project – ‘heavenly chocolate with a heart’ – which is, among a raft of other plaudits, The Observer‘s Ethical Business of 2008.

It is also a profitable one. On turnover that rose to pounds 10.7m, Divine last year made pre-tax profits of pounds 635,000, allowing it to pay a dividend for the second time. In 2007 it launched in the US, giv ing it a foothold in a $13bn market with huge potential.

Tranchell has a campaigning background, and campaign is the best description of the first attempts to get Divine chocolate in the shops. First to take it was Tesco, which promptly took it out again. The Co-op then placed it in a few outlets, as did Sainsbury and, oddly, Iceland. The first real breakthrough came through a Christian-Aid-orchestrated assault on Sainsbury that got Divine into 350 stores – in effect national coverage.

The second turning point came when the Co-op, wanting to make a big statement about Fairtrade, decided to source all its chocolate bars, including own-label offerings, through Divine. ‘That gave us the income and time to grow the brand, develop new products, and sell them in,’ says Tranchell. The company is now in drinking chocolate, boxes and bakery as well as bars.

For Tranchell, the lesson of the company’s first decade is a cheering one: that consumers do have power and, if given the opportunity, will use it. The key to getting them to act is personalising the story. ‘I never met anyone who didn’t like the chocolate,’ says Tranchell. But neither customers nor retail buyers knew anything about the farmers who grew the stuff. The same was true the other way round: many farmers had never seen, let alone eaten, a bar of chocolate.

Making consumers and producers visible to each other has a revelatory effect. Tranchell is clear that Divine has to be ‘fantastic chocolate – people won’t buy it if not’. But after that, of huge resonance is farmer ownership. The message goes down particularly well in the US, where ownership is part of the American dream. In fact, at least in the US, it is a stronger message than fair trade.

So what next? Further expansion, obviously, particularly in the US (so far, says Tranchell, sales are holding up in the crunch). Beyond that, she’d like to develop more involvement for UK employees, John Lewis-style, to match initiatives to reinforce the functioning of the co-op. She’d like Divine to become a model for others to follow she says: ‘It’s a good way of doing business’. As her company moves from simple trading that improves the daily lot of poor farmers to fulfil the long-term goal of creating capital for those who previously had none, yes, it is. In more ways than one.

the Observer, 9 November 2008

Hot prospects for a company with a conscience

JOHN CLOUGH smiles wryly at the news that the number of fuel-poor has just increased by a third to 3.5 million. As chief executive of Eaga, a green services company whose job is to help people out of fuel poverty, he can’t ignore the prospect of a few hundred thousand more homes to insulate and heat. As the son of a Northumberland miner who can remember huddling around a coal fire to keep warm, he shivers at the thought.

Newcastle-based Eaga – originally the Energy Action Grants Agency – is a company for which the time ought to have come and the same might go for the forthright, charismatic Clough, its driving force. The inspired offspring of the public sector, Eaga is now a publicly quoted company co-owned by employees, ‘selling’ low carbon and social inclusion – ‘public-sector values delivered in a very effective way’, as Clough puts it.

The company could be a poster-child for post-crunch capitalism, the embodiment of Peter Drucker’s definition of the socially responsible business, turning ‘a social problem into economic opportunity and economic benefit, into productive capacity, into human competence, into well-paid jobs, and into wealth’.

For this, thank a series of bold, entrepreneurial and fortuitous decisions. Eaga came into being in 1990 to manage a pounds 25m contract to insulate and draught-proof poorly built homes under the government’s Heating and Energy Efficiency Scheme. Clough was employee number 1, of five. The luck (or genius) was for Whitehall to establish the organisation as a company limited by guarantee, rather than as an agency, which allowed for a relatively easy transition to the employee-owned business – modelled on John Lewis – which it became in 2000, with 150 on the payroll.

From then on, things speeded up. As Clough intuited, the partnership ethos was a good match for the daily job of improving the homes and living conditions of the less well-off. A clean sweep of the government’s Warm Front residential energy efficiency contracts in 2005 was the cue for Eaga to stop just managing programmes and start delivering services itself. Since then, it has built its own insulation and heating companies – what it proudly calls its ‘national blue-collar delivery capability’ – both organically and through acquisition.

By 2007, though, the company’s ambitions were running ahead of its means. Clough and his colleagues could see other and much bigger issues looming.The move to a low-carbon, inclusive society, he predicts, will throw up a whole range of environmental issues to solve: not just energy efficiency, but access to technology and, in the future, water as well. ‘In a 50-year time frame, the needs – and opportunities – are enormous.’

As early proof, Eaga has picked up a pounds 200m contract to deliver Scottish Power’s commitments to reduce overall carbon emissions, and will earn pounds 500m from the BBC to carry out the digital switchover. Building on its work on fuel poverty, it has developed a one-stop benefits advisory service which has enabled a third of enquirers to claim, on average, an extra pounds 1,500 a year. It is now busily expanding into the social housing sector.

To get into these markets, Eaga needed to take a risk on the balance sheet. The partnership trustees had been signalling for more than a year that this kind of expansion would be impossible without access to the capital markets, says Clough. So after some heart-searching – and scrutiny of eight different options – Eaga went public in June 2007 in an IPO that valued the company at about pounds 450m and handed each partner a pay out of around pounds 100,000. With the Eaga Partnership Trust holding 37 per cent of the shares, and individual partners a further 11 or 12 per cent, the co-ownership ethos is secured, believes Clough, while others can invest in it too.

In fact, even in today’s chilly financial climate, the tighter constraint on Eaga’s growth may not be capital but people. ‘In the established parts of the company, the level of engagement that co-ownership gives is palpable,’ Clough says and maintaining and strengthening it is primordial. Eaga pays a lot of attention to recruitment and induction, and works hard to convince those acquired (there are now 4,500 partners in all) of the virtues of an open, respect-driven management style. And if it can’t? ‘Rome fell because it ran out of Romans,’ notes Clough. ‘The hardest thing is to part with effective people who make the numbers but don’t share the ethos. But it’s stick or twist and if they stick, these are the values we ask them to live by.’

As everyone acknowledges, that takes work – including on outside shareholders, who at the moment don’t much care about partnership, just whether Eaga meets its numbers. If the credit crunch teaches anything, however, it’s that the numbers are only as reliable as the manner in which they are made. Here, too, Eaga may be able to teach the city slickers a thing or two.

The Observer, 2 November 2008

Gore-Tex gets made without managers: Hi-tech pioneer WL Gore is weathering the crunch well, says CEO Terri Kelly, because it is mercifully free of bureaucracy. Simon Caulkin talked to her

In most companies, turning down the founder and chief executive’s request to look after a pet project would be a career-stopper for a young engineer on her first assignment. But WL Gore and Associates is not most companies. And Terri Kelly, the engineer in question who became its president and chief executive in 2005 – only the fourth in the company’s 50-year history – tells that story to illustrate a couple of Gore’s most singular characteristics.

At Gore – a $2.4bn, hi-tech materials company that most people know best for the Gore-Tex fabric that waterproofs their anoraks and walking boots – no one can tell any of the company’s 8,500 associates what to do. Although there is a structure (divisions, business units and so on) there is no organisation chart, no hierarchy and therefore no bosses. Kelly is one of the few with a title.

As she acknowledges, that makes her job rather different from that of most CEOs. Bill Gore, who set up the company with his wife Vieve (short for Genevieve) in the family garage in 1958, wanted to build a firm that was truly innovative. So there were no rule books or bureaucracy. He strongly believed that people come to work to do well and do the right thing. Trust, peer pressure and the desire to invent great products – market-leading guitar strings, dental floss, fuel cells, cardiovascular and surgical applications and all kinds of specialised fabrics – would be the glue holding the company together, rather than the official procedures other companies rely on.

Traditionalists looking at Gore wonder how it works. Kelly laughs – as she does frequently – and counters that it works just fine, particularly in chaotic times like these. The financial crisis is also a management crisis and the symptom, she believes, of a wider issue: a deficit of trust. Gore, however, has ‘focused on generating value through trust – with our associates [the privately-held company is co-owned by the Gore family and the workforce], suppliers and customers’. Counter-intuitively, the best governance, especially in troubled periods, is the absence of external rules: Gore would rather rely on fiercely motivated people who, having internalised true north, have no fear of challenging leaders to justify decisions, and leaders who know they can’t rely on power or status to get themselves out of a fix.

In Gore’s self-regulating system, all the normal management rules are reversed. In this back-to-front world, leaders aren’t appointed: they emerge when they accumulate enough followers to qualify as such. So when the previous group CEO retired three years ago, there was no shortlist of preferred candidates. Alongside board discussions, a wide range of associates were invited to nominate to the post someone they would be willing to follow. ‘We weren’t given a list of names – we were free to choose anyone in the company,’ Kelly says. ‘To my surprise, it was me.’

Similarly, Gore doesn’t have budgets in the sense that most companies do. ‘When I joined we didn’t have a planning process – budgeting wasn’t in the vocabulary,’ she says. Gore now does a better job of planning investment and forecasting, she maintains, but it still tries to avoid the games-playing and inflexibility of the traditional budget. ‘Budgets hinder associates from reacting in real time to changing circumstances,’ she says. Most of Gore’s investment will only have an impact years ahead: ‘We don’t want folks making short-term decisions that are not in the best interest of the long term. The planning and investment horizon have to match.’

Gore also seems to reverse the usual notions of economies of scale. Kelly cites Bill Gore’s counter-intuitive belief in the need ‘to divide so that you can multiply’. When Gore units grow to around 200 people, they are usually split up. These small plants are organised in clusters or campuses, ideally with a dozen or so sites in close enough proximity to permit knowledge synergies, but still intimate and separate enough to encourage ownership and identity. An accountant might complain that creates duplication of costs Gore believes those are more than offset by the benefits smallness brings.

A Gore lifer, Kelly joined the company as a process engineer in 1983 after graduating with distinction from the University of Delaware with a degree in mechanical engineering. (It’s perhaps no coincidence that, like leaders in many of the most interesting of today’s companies, she has no formal business education – and no regrets at having missed out.) She cut her teeth as a product specialist with the military fabrics business – a unit she eventually led – before moving to head the global fabrics division. Here she helped set up a fabrics manufacturing plant in Shenzhen, China, Gore’s first fabrics plant in Asia, now at the centre of one of the company’s fastest growing operations. While leading the fabrics division, Kelly also served on the enterprise team overseeing Gore’s strategic direction.

Is lack of experience outside the company a disadvantage, or an essential qualification for running Gore? It is hard to imagine an outsider being able to understand, let alone manage, a distinctive culture such as this. Kelly argues that the ability to develop its own ways of doing things is crucial to the company’s success. Proof of the importance of the ‘Gore factor’ is the company’s consistently high ranking in ‘good places to work’ surveys – the UK arm, with units in Livingston and Dundee, headed the Sunday Times Best Companies to Work For list four years in a row.

Most companies find safety in numbers, ending up broadly resembling their industry counterparts in strategy, products and management processes. For the consequences, look no further than the credit crunch, which has overwhelmed the copycats in the financial sector.

Kelly, on the other hand, spends most of her time on emphasising difference and preventing people from reverting to the conventional wisdom that in other firms would be the norm. This is a fine line to tread. Protecting the core heritage is one thing not allowing anything to change is another. Where Gore has tripped up in the past, she says, has been in confusing the core values, which don’t change, with the practices for getting things done, which do. So in the late 1980s there was a furious argument over whether ‘structure’ was bureaucracy and therefore bad and counter-cultural. ‘We didn’t pay enough attention to accountability and decision-making and who was actually leading. It was a good exercise for us to understand the need to distinguish between practices, which change with time, and who we really are, which doesn’t. Otherwise you’re paralysed.’

Although at present, Gore is being prudent with investment plans, cutting back on hiring in areas most exposed to the downturn, Kelly is not rowing back from the promise that the company will double in size over the next few years. As a private company, Gore doesn’t release detailed figures, but it is no secret that the balance sheet is strong and the company has been in the black every year in its history. It doesn’t lack opportunities, whether geographical or technical, nor is it constrained by ability to invest.

Growth, then, will largely be dictated by its ability to assimilate new people. ‘It’s all about how we bring new folks in, get them to understand our values and focus leadership on fitting it all together,’ Kelly says. ‘For our associates to know we aren’t constrained by markets or finance, just by our own culture – that’s a good problem to have. It’s all in our own hands.’


Name Terri Kelly

Age 45

Career 1983, graduates summa cum laude from the University of Delaware joins Gore as process engineer, becoming leader of military fabrics business 1993, becomes one of three global leaders for its fabrics division, helps set up firm’s first Asian fabrics plant in China 2005, chosen as Gore’s fourth president and CEO by peers

Family One of four mechanical-engineering daughters of an engineer father. Lives in Delaware, married with four children

The Observer, 2 Novemeber 2008

When it came to the crunch, MBAs didn’t help

IT’S NOT just in finance that the inquests have begun. What part have the business schools and business academics played in the implosion of the world’s banking system? That was the question posed in a letter to the Financial Times last week by Nottingham University Business School’s Professor Ken Starkey.

Hedge funds, private equity, investment banking, venture capital and consulting – the high priesthood of financial capitalism – were overwhelmingly MBAs’ preferred job destinations, he noted. Now the schools needed to ‘reflect on the role of the MBA and MBAs in the carnage of Wall Street’ and consider ‘how management education has contributed to the mindset that has led to the excesses of the last two decades’.

This isn’t the first time that theory and theorists have been called into question. Three years ago the London Business School’s late Sumantra Ghoshal caused a furore by writing that business schools did not need to do a lot more to prevent the emergence of future Enrons they just needed to stop doing a good deal of what they were doing already.

But the questioning takes on a fresh urgency as the crises grow bigger. In this context, the issue is not just the implication of economics-dominated MBA courses in practices that are now seen to be unsustainable. ‘There seems to be no sense of history,’ Starkey complains. ‘How come we haven’t learnt anything from Enron, the dotcoms and Long Term Capital Management?’

Trapped until now in a stampede to emulate the American model, business schools elsewhere need to step back and see how they could, and should, frame the issues differently, he says. The Holy Grail is not to turn them into professional institutes (as two Harvard professors proposed in another FT article the same day) but the more modest one of ‘doing better social science’. They should move away from unquestioned US positivism and the dominance of neo-classical economics towards a broader perspective allowing insights from other areas, including history, literature and art.

Could it happen? Starkey is not the only one who senses an opportunity for the market to move in a new direction. The ‘elite’ business schools are doomed to remain locked in increasing competition for a (presumably) shrinking pool of apprentice masters of the universe. But for others, says Professor James Fleck, dean of the Open University Business School, Europe’s largest, the time is ripe to go beyond the fake certainties of the Anglo-American version, with its emphasis on analytics and separate functions, to develop a more inclusive, less lopsidedly right-brain approach to management.

Most of the world is not well served by the structures or assumptions of financial capitalism. If we could lift our eyes from the financial chaos, Fleck argues, we would see that the world is at the start of a huge technological upswing. As a consequence, there is terrific, unsatisfied demand for people to manage this innovation in ways that benefit more than a tiny financial elite. Management, in the sense of ‘making a difference’, could be the enabling technology of the 21st century. Who better placed to undertake such a project, and rethink the intellectual underpinnings of capitalism, than European business schools?

Many would welcome such a move. At Leicester School of Management, Professor Martin Parker notes that, though long submerged under the ‘there is no alternative’ discourse, an undercurrent of resistance to the market managerialism of the past 30 years has always sub sisted – and not just in the public sector (where, duly adapted, it has ironically been practised with terrifying thoroughness). The surprising rage and venom hissing through the blogs commenting on a recent Economist leader about bankers’ pay show just how deep it runs in the private sector too.

Little of this surfaces in formal management research, however. Analysing 2,300 articles published in prominent journals in 2003 and 2004, Parker and two colleagues found business-school researchers overwhelmingly concentrating on narrow technical questions rather than the larger social and political issues – the environment, war, workers’ rights, the distribution of wealth – which business has signally failed to provide answers to. While the piece, (‘Speaking Out: The Responsibilities of Management Intellectuals’), pre-dated the financial crash, in one sense it reinforces it – underlining that in terms of what academics actually publish, little seems to have changed since Enron, or even the dotcoms.

The underlying question, says Parker, is whether business schools can contribute to the solution rather than the problem. One way of doing this, he suggests, would be to reformat themselves as ‘Schools for Organising’ that can teach and learn from a multiplicity of different forms – ‘and do not simply reproduce the ideology of people called managers’.

The Observer, 26 October 2008

High earners need to be brought down to Earth

IF, AFTER 30 years of effort, the only solution on offer to a problem is to ‘try harder’, you know there’s something wrong with the premise. So it is with City pay. The credit crunch has written it out in huge red letters: incentive pay may work for Chinese peasants, but in situations of any complexity, and especially where the quality of the decisions made is only apparent in the long term, pay that truly reflects performance is not only unachievable: the attempt to make it so is catastrophically counterproductive.

In a recent interview, ex-Lloyds TSB chairman Sir Brian Pitman disarmingly noted that banking was essentially a simple commodity business. Unless you are brilliant at identifying undervalued assets (ie, you are Warren Buffett) or a venture capitalist who can transform an idea into an income stream, the only way to bump up profits is by taking greater systemic risk (known as ‘beta’ in the trade).

If, in the first half of this decade, British banks have been colossally profitable, it is because highly incentivised bankers have devised ever more complex instruments to disguise risk as value creation (‘alpha’). The crunch may have dramatically revealed the difference between the two, but the bonuses have already been paid. Systemically, high profits, high pay and high risks go together and they do so because – an exquisite irony – as long as banks act in unison, they will be underwritten by a tacit but iron-clad state guarantee.

As Martin Wolf wrote in that well-known socialist organ the Financial Times , ‘either banking should be treated as a utility, with regulated returns, or it should be viewed as a profit-seeking industry that operates in accordance with the laws of the market, including, if necessary, mass redundancies’. Since the latter is unacceptable, he concluded, we have to move towards the former – and regulation must include pay above all.

In this context, the dire warnings from the free-market champions about the perils of interfering with today’s pay-setting methods take on a surreal air. If companies and shareholders really are ‘better at setting salaries than bureaucrats’, as The Economist affirms, given that ‘better’ has resulted in the almost complete meltdown of the global financial system, what, please, would ‘worse’ look like?

The same objection applies to the argument that paying bankers less would choke off innovation. If this is innovation, give us less of it. Let’s be clear: the cause of the crisis is not impersonal economic entities such as capital flows, asset bubbles or credit default swaps it is the behaviour of human beings strongly incentivised to devise fake innovations, and pass off ‘beta’ as ‘alpha’, in ways that, as a torrent of impending investigations and court cases will soon show, were on the very edge of legality if not beyond it.

As for the final argument, the tired old threat that if City folk aren’t paid 10 times more than anyone else they’ll leave – let them. Bloated way beyond ‘normal’ size, in bubbles of their own, the City and Wall Street were destined to deflate anyway as the economy rebalances away from financial smoke and mirrors towards the boring, neglected tasks of long-term investment, innovation and organisation-building.

Beyond that, the offshore island that is financial services needs re-attaching to the real economy. One way of doing this is via pay. Since the bureaucrats are now shareholders, we have a one-time chance to do so. As Will Hutton has noted, despite official disclaimers, the government is in the business of running banks, whether it likes it or not. It has already told them to stop paying dividends and start lending again.

But it should also be thinking far more radically about pay. It’s the whole system of corporate governance, based on aligning executives and shareholders, that’s broken. That’s what we’ve been trying vainly to make work for 30 years. It’s time to face up to the evidence: it is simply a recipe for increasing pay whatever the performance. This year, FTSE 100 CEOs’ pay climbed by a ‘gravity-defying’ 11.5 per cent, according to IDS. And, bang on cue, the FT reported last week that companies are already softening performance targets ahead of the downturn.

The government should take on board what a slew of top-performing companies have known for years – internal equity in pay is more important than external. Directors shouldn’t be aligned with shareholders: they should be aligned with the company as a whole. If that puts off some candidates, fine. John Lewis has no trouble attracting good people despite limits on top pay and bonuses that are shared equally. Whole Foods Market (publicly quoted, note) is even more extreme, paying its top people no more than 19 times its least paid. That was once the norm there’s no intrinsic reason why it shouldn’t be again.

The cover of The Economist last week bore the headline ‘Saving the system’. The point, however, is to change it.

The Observer, 19 October 2008