SCIENCE, INNOVATION and skills is the new government mantra for UK plc. Gordon Brown’s emphasis in the pre-Budget report on the three magic words only reinforces the message delivered by the five-year science strategy and the DTI’s sudden metamorphosis from dull trade and industry bureaucrat to the caped miracle worker of technology and innovation. British enterprise needs to turn off the crowded ‘low road’ of competition through low wages and other input costs and join the more select class of competitors purring along the ‘high road’ of high wages, high investment, and high added value.

Few would disagree with this prescription. There’s little future in competing on commodity products and services with China and India. The CBI may be exaggerating slightly when it says there will soon be no unskilled job vacancies in Britain, but not by much.

However, although in that sense the notion of ‘moving up the value chain’ is uncontroversial, let no one think it will be easy. It is much more than individual firms deciding to spend more on R&D. Innovation and non-innovation are not the mirror image of each other, but completely different things. Shifting the economy from one to the other poses the biggest peacetime challenge to the economy for at least a century.

The challenge is twofold. The first, emerging from research by the Advanced Institute of Management Research, is to do with the institutional framework which conditions the way business operates. To a marked degree, economic policy over the past 20 years has favoured market-type reforms: privatisation, labour and financial market liberalisation, curbing trade union power. Britain is now one of the least regulated, most business-friendly countries in the world.

The good news is that the companies which have survived this dose of market discipline are fitter than they were. The bad news is that ‘business-friendliness’ is a two-faced ally. In Britain’s case, market-based institutions have encouraged firms to compete through just those low-cost production factors – particularly cheap, flexible labour – that are now keeping it in the slow lane. Outsourcing is a striking example of service companies playing the cost card (when a portion of its customer base, incidentally, might prefer quality).

So one task for managers and policy-makers is to ween companies off today’s institutional supports (eg, financial engineering and cheap labour) and proactively begin to craft new ones – close-coupled supply chains built on trust and a more skilled workforce, for example.

The second challenge is transforming the institutions of the firm itself – and that may be even harder. In a research report commissioned by Microsoft on the future role of trust in work, LSE’s Dr Carsten Sorensen points out that innovative services cannot be managed in the way companies have always managed mass production.

In a seller’s market, where the only issue was to meet production quotas, companies could get by turning out standardised products using command-and- control methods with a hierarchy to enforce them – basically, central planning. That never worked very well – see the Soviet Union – and still doesn’t, but for services the results are even worse.

This is because services, and even more innovation, are subject to huge variation at the point of delivery. This means that the knowledge critical to delivering them is ’emergent’ – it appears as part of the process.

‘It is at the front line of the supply chain that decisions emerge they cannot be decided in detail beforehand,’ says Sorensen. In other words, they cannot be commanded. Traditional command-and- control breaks down. There is no alternative to a bottom-up approach.

In Sorensen’s view (and naturally Microsoft’s), technology and trust have the potential to reconcile the need for individual autonomy on one hand with that of performance management on the other. Indeed they do. But that does not make it a foregone conclusion. Even Microsoft accepts that technology on its own is not the answer: used to command and control, it can actually erode trust and make innovation less likely, not more.

And for many reasons, command-and- control is heavily ingrained in the British management psyche. One is the institutional framework already referred to. Another, as Sorensen perceptively notes, is culture. This is partly a matter of class: in the UK, management is a position, not a role, and the position is one of superiority, ie, command. In contrast to Sweden, where highly paid individuals are trusted to manage themselves, ‘there is perhaps in the UK with significantly lower labour costs a tradition of employing one person to do the job and two to check the job is done’. Piquantly, the UK’s obstinate productivity gap may be something to do with the proportions of chiefs and indians: having too many managers who add no direct value and not enough skilled workers who do.

This may be why, in another piece of Microsoft research, British workers are so lowkey about the prospects for innovation. Six out of 10 office workers complained that it was complicated and difficult to get good ideas turned to money-making account, and three out of 10 feared they would lose ideas or fail to gain support to put them into action.

Strengthening the UK science base, persuading companies to do more R&D and getting them to invest in the skills of their workers are all a necessary part of making UK plc more innovative. But they may be the easy part.

As Microsoft UK managing director Alistair Baker puts it, unless there is a change in the historical command-and-control management mentality, ‘no amount of IT investment, however innovative, will deliver the desired productivity gains that we must see to keep Britain competitive’.

The Observer, 5 December 2004