When Tony Blair remonstrated some years ago, ‘No company would consider managing without targets,’ he was nearly right. Whether organisations using them call it that or not, results-based frameworks for performance management have come to dominate management thinking in many parts of the developed world, in both public and private sectors – particularly in the UK. Broadly speaking, using outcomes-based thinking managers first define the desired results, then cascade the requirements down through the organisation and hold people at different levels accountable for their part in making them happen. The logical extension of this kind of performance management is payment by results (PBR), which has been eagerly adopted in many areas of social policy (NHS, employment, foreign aid). Like so much else in public sector management, its origins are to be found in the private sector, where in the form of bonuses and incentives it is ubiquitous in top management and throughout the financial sector.

Paying people for the results they achieve – it sounds rational and plausible; indeed it sounds like management’s Holy Grail. But if that is the case, why are two of the most enthusiastic proponents of results-based management, the banks and the NHS, conspicuous for producing outcomes that are the opposite of those they were set up to deliver – impoverishing the world rather than enriching it in the case of the banks and killing patients instead of curing them in NHS hospitals? And is there an alternative?

The answers that emerged from a fascinating and disturbing event organised by consultancy Vanguard in Manchester in March were, respectively: because people persist, and have a strong vested interest, in believing that making it work is a technical problem that we can solve if we’re clever enough; and yes, there is an alternative, and not surprisingly it’s the opposite of outcomes-based approaches – starting not from the back (the result) but the front (what’s happening now).

The event was entitled ‘Kittens are evil’, to make the point that like questioning the ‘aaaah-quotient’ of everyone’s favourite pet, casting doubt on outcomes-based management is heresy. Being a heretic can be uncomfortable – see Galileo and Luther – but sometimes there’s no option but to speak out. The Manchester event was the second in a series designed as a rallying-call for campaigners to take the initial steps down that route, the first having taken place in Newcastle on October 2012, organised by the North of England Transformation Network, Newcastle CVS and the KITE Centre at Newcastle University Business School.

The first step in turning today’s heresy into tomorrow’s new paradigm is to unpick the assumptions underpinning the current one. These turn out to be fairly heroic.

Number one, says keynote speaker Toby Lowe, research fellow at Newcastle University Business School’s KITE Centre and chief executive of Helix Arts, is that outcomes are unproblematic to measure (access his articles in The Guardian and Public Money and Management here and here). In fact, they are so context-dependent that in practice accurate measurement for timely management is impossible: ‘Our desire for outcome information outstrips our ability to provide it. Information about outcomes can either be simple, comparable and efficient to collect, or it can be a meaningful picture of how outcomes are experienced… It cannot be both.’

The second assumption is that effect can be reliably attributed to cause. The conceptual flaw here, says Lowe, ‘is that it is based on the idea that outcomes are the result of a linear process from problem through intervention to positive outcome’. But a moment’s thought indicates that attribution can only be done at the price of massive simplification in which a myriad external and contextual factors are weighted away or simply ignored. In combination, these two flaws yield what Lowe calls social policy’s ‘uncertainty principle’: the more we know about the outcome the more complex it becomes and the less we are able to attribute it to a particular cause. Yes, it’s a paradox: the more we measure, the less we understand.

Meanwhile, the side effects of in terms of the distortion of practice and priorities is reflected in almost every day’s news headlines. When managers are tasked with delivering ‘outcomes’ that are beyond their control, notes Lowe, they ‘learn ways to create the required outcomes data by altering the things that are within their capacity to control’ through creaming and other means of making the numbers without improving the actual outcomes. A good example: when a Vanguard team looked at A&E casualties at three NHS hospitals, it discovered that the nearer people got to the four-hour wait limit, the more likely they were to be admitted to hospital until at 3 hours 59 minutes everyone was admitted, irrespective of need.

More subtly, management by results can corrupt behaviour at every step in the chain. One view of targets is that they are a ‘Nelson’s eye’ (‘I see no ships’) game in which governments in effect collude with the gamers by taking reported performance improvements at face value, or alternatively by insisting that gaming is only carried out by ‘a few bad apples’, in both cases preserving the evidence base. A similar thing can happen to front-line workers, with even more worrying results. As Lowe notes, the relationship between worker and client is subtly reversed. The worker no longer asks the client ‘How can I help you achieve your goals?’ Instead, they ask ‘How can you help me achieve my targets?’ ‘Evidence-based policy is sought by government, but mostly the result is policy-based evidence’, is how economist John Kay sums up this corrupting process.

If, as even proponents admit, the real evidence base in favour of results-based management is so thin, and the casebook of distorting behaviour, unintended consequences, and outcomes the opposite of those expected, so thick, why does its hold remain so strong that it is still the default discourse? The answer, says Lowe, is that the acknowledged problems ‘have been treated as practical obstacles which can be overcome when, in fact, they cannot be “solved” because they are intrinsic to the theory itself.’ To denial is added formidable vested interest in the shape of the IT-based performance management systems that govern the way call centres and customer-service organisations operate throughout the UK public and private sectors. A final factor may be the pervasive short-termism afflicting those who report on such matters as well as carry them out, with the result that the ideological underpinnings of such management are never challenged or indeed examined.

As systems guru Russell Ackoff explained, if you are doing the wrong thing, then doing it better makes you wronger, not righter. So the ‘efficiency’ measures and large-scale IT-driven change efforts undertaken as remedies demonstrably make things worse. On the other hand, even if you start off doing the right thing wrong, every small improvement is a step in the right direction. If, as the evidence strongly suggests, outcomes-based approaches are the wrong thing, what is the right one?

The right thing – and the next step to establishing a better, more productive paradigm – is, logically, to reverse the wrong thing and start at the other end. If results, as Lowe puts it, ‘are emergent properties of complex adaptive systems’, so we can’t measure performance against them, what do we use as measures instead? That, says Andy Brogan, the second keynote presenter, depends on the answer to an anterior question: why do we measure?

Organisations can use measures in two ways: to learn and improve; or to create accountability. As with Lowe’s information dichotomy (information about outcomes is either complete on collectable but not both), accountability and learning are mutually exclusive: ‘the minute you use measures to create accountability, you can’t rely on them for learning, says Brogan, ‘because their validity is destroyed’ – a perfect example of Goodhart’s Law in action (‘Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes’, popularly restated as ‘When a measure becomes a target it ceases to be a good measure’, and named after Professor Charles Goodhart, economist and adviser to the Bank of England).

To illustrate the fundamental difference between the two kinds of measure, take the example of a local authority child protection department. It uses two standard measures for assessing children at risk. For those judged to be in imminent danger, it must carry out an initial assessment within seven days in 80 per cent of cases. For a fuller core assessment once the risk level is understood, the standard is 80 per cent within 35 days. Note that the measures are both arbitrary and illogical – seven days could be far too long for those in most danger, and the 80 per cent quota will be little comfort for the 20 per cent not covered. Be that as it may, the unit meets both standards, so under the red-amber-green (RAG) signalling system used to guide management priorities, it rates solid green: no management attention is required. The conversation among managers and workers is about making the numbers within the guidelines laid down in a compendious ‘yellow pages’, ie about demonstrating accountability. The result of success – meeting the standard – in this system is: relax, do nothing.

Now take the same department viewed according to a different measure: the end-to-end time from first referral to assessment completion – which of course is how it is experienced by the child or, say, the primary school teacher who has referred her to social services. The picture that emerges is very different. The ‘urgent’ assessment takes on average 16 days (‘far too long by any standard’) but can predictably take up to seven weeks, while the core assessment averages 55 days, not 35, but can equally take up to 161, or more than five months. Worse, because unbeknown to management the clock for the core assessment only starts when the case is formally opened and not when the initial assessment is completed, the true end-to-end time for the 35-day assessment can be anything up to nine months. ‘Now tell me Baby P and Victoria Climbié were one-offs’, says Andy Brogan, who collected the data, grimly. ‘They weren’t: they were designed in.’

So how could the department say it met the standards? Because the de facto purpose of its workers has become to avoid attracting managers’ attention by making the numbers, which, like customer service organisations everywhere, they have learned to do by recategorising cases and starting and stopping the clock in ways that are legitimate according to the official bible. ‘We’ve dialled down the value base or purpose and replaced it with making the measure,’ says Brogan. ‘It’s “for God’s sake hit 80 per cent because if not we’ll get hauled over the coals by management”. This is what happens when the measure is put there for accountability, not learning.’

To generate learning, a measure must be subordinate, and related, to purpose as defined from the customer or client’s point of view – in this case ensuring the child is safe in the shortest possible time. Then, the office conversation is about the available methods to do that, ie about improvement (recall that under the previous measure, the conversation is, ultimately, about how to do nothing). In all organisations, whether they are aware of it or not, there is a systemic relationship between purpose, measures and method. Where purpose comes first and measures are related to it, the job of workers and managers is to find methods that will meet the purpose better, as calibrated by the measures: a learning system. Where the measure comes first (as standards and specifications mandated by government and inspectors, for instance), it becomes the purpose and methods are correspondingly geared to meeting it, ie demonstrating accountability. Hence the paradox of public service organisations gaining three-star (or whatever the ranking system is) ratings and utterly failing their customers (Haringay social services), or bankers claiming their bonuses while pulling down the world; which in turn explains the more general one that in accountability systems no one is ever accountable (Mid Staffs, the banks), since they have always met the numbers.

Given how much attention is paid them (‘what gets measured gets managed’ is certainly true) it’s astonishing how much of the measurement that goes on in most organisations is useless. It is actually worse than that. As Deming rhetorically asked about targets, ‘What do ‘targets’ accomplish? Nothing. Wrong: their accomplishment is negative’. As in child protection, the wrong measures drive the wrong actions, which actually make matters worse, often by generating huge amounts of failure demand. In isolation static data points, averages, percentages and RAG systems say nothing about context, variation and predictability. Measuring to arbitrary targets and standards, as in the child protection example, keep managers blind to what is really going on. Measures of functional performance count activity, not attainment of purpose. These are all measures owned by the boardroom, of no help to anyone on the front line, where they should be used: why 80 per cent of assessments to be done in seven days? which 80 per cent? Perhaps most damaging of all are measures used as carrots and sticks to ‘motivate’ people – ‘Complete nonsense – I can’t overemphasize how flawed this idea is,’ says Brogan. These are accountability measures on steroids, making absolutely certain that the recipients will concentrate on the numbers, not the purpose. That is why they are called incentives. ‘Either people are motivated by purpose or they are motivated by the wrong thing,’ says Brogan. ‘Incentives aren’t the solution: they’re the problem’.

Organisations are too complex, human rationality too limited and contexts too infinitely variable for management ever to be scientific in the sense that numbers can substitute for judgment. Establishing purpose from which to derive appropriate measures sometimes requires difficult judgment calls. But this does not preclude scientific scrutiny of organisations and what they do as systems, albeit complex adaptive ones, so as to ‘understand and act on causes of performance variation in such a way that we can connect actions with the consequences they are having’, as Brogan puts it. This gives us back the lost idea of management as progress. By relating measures to purpose – what really matters to people? – and testing method against that – what is the current method achieving against purpose and why? Is it a good theory or a bad one? – managers grow the confidence to reject the ‘dangerous idiocies’ and haphazard, ideologically-inspired changes of management based on predetermined results and advance down a learning path in which the best we can do today is a certain step to doing it better tomorrow. ‘Centuries of science tells us that happens,’ says Brogan. It’s heresy today: but so once was the notion that the earth goes round the sun.

Case study: Criminal behaviour: trust, mistrust and bad measurement – Simon Guilfoyle, West Midlands Police

In the 1980s card game ‘Play Your Cards Right’, explained police inspector Simon Guilfoyle, players have to guess whether the next card in a sequence laid face down on the table will be higher or lower than the previous one. Of course, there is no way of knowing: the values could be anything between 2 (low) and ace (high). But many police forces manage performance by the same luck of the draw. One static data point – the crime rate in an area for one month – doesn’t tell you anything useful about the next month’s figure – and the fact that one is higher or lower doesn’t say anything useful either. It’s only when the data is expressed in a control or capability chart, with upper and lower control limits, that it is possible to see whether a variation in performance is predictable natural variation or something that needs special attention. Targets further confuse the situation. Guilfoyle’s theory of targets states that all numerical targets are arbitrary; and no target is immune from causing dysfunctional behaviour. For example: Saturday night drunks in a town centre can be handled in two ways: under ‘Section Five’ or as drunk and disorderly. In each case they can be cautioned, charged or fined £80 on the spot after a night in the cells. The only difference is that Section Five offences are reportable and drunk and disorderly are not. So the local commander’s priorities may well determine what happens on the street: if the target is to reduce crime figures, rowdies will dealt with as drunk and disorderly (non-recordable); if to boost detections, they will be recorded (and detected) under Section Five. Also, a unit under pressure to reduce crime may avoid taking offenders off the streets early in the evening, at the risk of serious harm occurring if real violence occurs later – clearly the ‘wrong thing’ viewed from the perspective of the public. The moral of the story, said Guilfoyle, is that purpose, measures and method are related; you mix up measures and priorities with targets at your peril.

Case study: Measurement in health and care – Andy Brogan, Vanguard Consulting

‘Demand is rising. The system is unsustainable’. This, said Vanguard’s Andy Brogan, is unchallenged wisdom in health and social care, and both data (rising numbers of GP consultations or visits to A&E) and common sense (ageing population, a system constantly at capacity) seem to support it. The NHS response is the ‘Nicholson challenge’: top down attempts to find £20bn of productivity/efficiency gains by increasing throughput and ‘doing more with less’. But the real (unasked) question is: is value demand rising? From a Vanguard sample, the answer is that in health and care an astonishing 86 per cent is failure demand, ie the result of something not done or not done right first time. Counterintuitively, one of the chief drivers of burgeoning failure demand is the efficiency drive that is supposed to alleviate matters. So for example a GP practice that attempted to improve access by restricting appointments to eight minutes and patient concerns to one per visit found that by increasing failure demand it had actually made the access problem worse, such that 1.5 per cent of repeat patients were absorbing 50 per cent of the resource. Efficiency is not effectiveness, and to distinguish between the two it is essential to understand demand in context. For example, for ‘Velcro man’, an elderly, apparently increasingly needy widower, the ‘solution’ to improving his life was not ever more domestic care but shirts that were easier to put on so that he could go out and meet friends: in his case ‘demand’ shrunk from £1000s per week of domestic care to a strip of Velcro inside his shirt. Understanding demand and treating people as individuals not numbers are thus keys to taking practical action, said Brogan. ‘Our hypothesis is that if we do this in a disciplined way we’ll be more effective versus the “lagging” measures [demand on GPs and A&E, etc] – and the early signs are that we are’. At that point there is an opportunity ‘to get more efficient at being effective’ (ensuring people have the predictably right skills, kit and access to specialist advice) – in other words, at meeting the real Nicholson challenge.

Case study: ‘I’ll have an outcome please, Bob’ – Ian Gilson, Perfect Flow

Outcomes are hard to argue with. But to those charged with delivering them, they seem to be answers plucked from a standard pack of outcome cards, according to Ian Gilson, director of logistics consultant Perfect Flow. For instance, ‘Our communities should be a great place to live’ is the desired outcome for a social housing provider. But a ‘great community’ is multi-faceted and made of many services and no two people have the same idea of what it is. So what does that desired ‘outcome’ mean to workers in a lettings service and how do they make it happen? Under top-down outcomes-based management, the board sets the outcomes, managers convert them into measurable KPIs and targets and workers ‘go do’. At the coalface of the lettings service the ‘agreed’ outcome translates into ‘get new tenants in quickly’ (because empty properties weaken communities and lead to ASB), with targets for quick turnround times and standardised methods (regulation decoration and fittings) to achieve them. Oh, and by the way, there’s a budget cut of 20 per cent this year… The consequences are the opposite of those intended. By standardising the work, targets remove the environmental context that gives it meaning. So… to meet the targets, managers fudge the figures by reclassifying voids from short to long term, shoehorn people into the wrong property and cut corners on repairs. ‘We’re messing with people’s lives here,‘ said Gilson. In one case an elderly lady was hurried into a new let with three major repairs outstanding, and five properties changed tenancy 10 times each, with £25,000 spent on each one. Meanwhile, predictably five weeks after the new tenant moves in, eviction proceedings begin because no one has helped them apply for benefits. All this is done on time and budget, meeting the targets but with no one thinking about the real outcome: high tenancy churn, more empty properties, less neighbourliness… not such a great community, in fact. In a redesigned letting service, on the other hand, workers take time to find the right tenant, agree the right works and handover date, carry them out before they move in (the property is a customer too), and help tenants with benefit claims. In other words they do what matters to the tenant, according to measures that drive understanding and improvement of the service, not accountability. Doing the right thing in reletting may seem to take longer and cost more in the short term – but it reduces the cost of the overall service, while making it more likely that tenants will stay, look after the property, form relationships and be a good neighbour – essential components of a great place to live.

Case study: Living the life you choose – Rick Wilson, Community Lives Consortium

CLC, said chief executive Rick Wilson, exists to help people with learning disabilities live their lives within communities in South Wales. It supports 260 people through 700 staff delivering 17,000 hours of support (personal, social, housing, mobility, skills and behaviours) a week. The work is demanding, involving individuals, their families, and local or health authority managers in complex networks. Recounting a Vanguard-inspired redesign, Wilson described an organisation facing up to the realisation that existing patterns of service delivery were both unsatisfactory and unsustainable in the light of growing demand and expectations and increasingly constrained resources: could personalisation be balanced with cost reduction? The first step in answering the question was to define CLC’s purpose: ‘supporting people to live the life they choose’. Deceptively simple but actually ‘honest and profound’, it immediately revealed that CLC had been operating to a quite different, shadow purpose: supporting the commissioner to discharge her duty of care, with implied design principles (focusing resources on what mattered to the commissioner, controlling people to get the work done, working to evidence compliance with the law) to match. Redesign began with Service Delivery Plans (a statutory requirement), then drawn up on the basis of a 21-page form comprising 175 questions with 25 supporting assessments and planning tools. It found a fundamental contradiction: while customer satisfaction scores were high (satisfying the regulator), when it asked people what kinds of life they wanted to live they gave completely different answers. Of the 14 steps in the service plans, just three had value for those supported – interestingly, much of the waste was not (as anticipated) caused by regulation but by the organisations own caution and culture. In the radically simplified redesign, CLC now produces genuinely personalised plans, drawn up with the person rather than the local authority care manager, and in different formats, videos and pictures as well as written documents. Instead of measuring process (compliance), measures now focus on ‘helping people and their support team to create a clear dialogue about what they want, and then to assess whether the team is capably responding to those requests’. Results strongly suggest that person-centred working is more efficient as well as helping people to be more in control of their services, enabling front-line managers to spend 30 per cent less time on admin, with corresponding saving in hours of support staff. Redesign is now being carried out in other areas of work. Perhaps equally encouraging, CLC has taken the commissioner on the same journey, changing the nature of what the she wants and expects. For Wilson, ‘This is only the start.’

Vaclav Havel, the writer and first president of the Czech Republic, put it like this:

‘Though my heart may be left of centre, I have always known that the only economic system that works is a market economy. This is the only natural economy, the only kind that makes sense, the only one that leads to prosperity, because it is the only one that reflects the nature of life itself. The essence of life is infinitely and mysteriously multiform, and therefore it cannot be contained or planned for, in its fullness and variability, by any central intelligence’.

Ironically the left has in many respects been a shrewder operator of capitalism than capitalists (think of the social-democrat economies of Northern Europe). But, as the Havel quote hints, it has been less clear thinking about markets, to which the left gives too little attention because it persists in conflating them with ‘capitalism’ as a whole, and by extension with big business, which is the current economy’s most conspicuous beneficiary.

The confusion between capitalism and business on the one side with the market economy on the other, and the baleful consequences that result, was one of the main topics explored by John Kay in a characteristically subtle (and completely unreported) LSE lecture at the beginning of June. Capitalism, said Kay, was no longer a helpful framework for thinking about the economy. The economic significance and value of capital markets were greatly overstated. Big companies being almost entirely self-sufficient as to capital needs (think of Apple’s $150bn cash pile) the so-called capital markets in practice serve the purpose of financial engineering and releasing capital, while the stock market is just a casino for secondary investors to gamble in. Financial-market considerations get allotted far too much attention and say in corporate affairs, from governance downwards.

It’s not surprising that the right, making the same conflation as the left, should fail to make the crucial distinction between being pro-market and pro-business. But it is dismaying that the left has been seduced, or seduced itself, into favouring the interests of existing business over the interests of the real market economy, that is the markets for goods and services. The consequences came into sharp relief in the ‘intellectual vacuum’ that greeted the crisis of 2008, charged Kay, when having spent 100 years preaching the takeover of capitalism’s commanding heights, the left was so terrified the system might collapse under the weight of its own contradictions that not only did it not nationalise the banks in order to run them down in an orderly fashion, it spent vast amounts of taxpayers’ money propping up dysfunctional companies in a way that practically guarantees another crisis in a few years time.

Being in favour of markets, said Kay, does not require genuflection at the altar of greed, scale, competition red in tooth and claw, rational economic man, or market perfection. Rather, it recognises that in conditions of radical uncertainty, where it is impossible for anyone to predict the future, or even the range of futures possible, the market economy’s ‘disciplined pluralism’ does a better job of both exploring new possibilities and closing down failed ones than the alternatives. Neither necessarily fair nor efficient, like democracy it is the least worst option; like democracy too, being socially embedded, it needs constant, pragmatic care and attention to keep it functioning properly.

Nurturing a functioning market economy requires very different policy prescriptions from those currently offered by either right or left. Through the price mechanism and ease of market entry and exit, the market economy is above all a process of discovery. Privileging value creation over value appropriation, it needs, said Kay, a ‘steady stream of unreasonable optimism’ in the shape of entrepreneurs willing to take their chances with innovative new products and services.

Its biggest enemy is vested interest and concentrations of economic power which since time immemorial have given shelter to predators and rent-seekers more interested in using their position to extract value from employees, customers and society as a whole than in undertaking the harder, uncertain work of product and market innovation. Castles on the Rhine, 10 per cent commissions on shares, lobbying and entertaining in expensive restaurants to shore up established interests, are all manifestations of rent-seeking. More insidiously, and worryingly, the version of strategy espoused by Michael Porter, ‘the most cited scholar in economics and business…[whose] ideas are the most widely used in practice by business and government leaders around the world’, is all about identifying ways of ‘avoiding competition and seeking out above-average profits protected by structural barriers’ – in other words, rent-seeking. Small wonder that potlical lobbying has become a more lucrative occupation for CEOs than developing relationships with customers and suppliers.

Unfortunately, regulation based on behaviour, rather than structure, is also vulnerable to rent-seeking as individuals seek constantly to push the envelope by treating any activity that is not formally outlawed as permissible. The result, noted Kay, is ‘regulation that is extensive, intrusive and ineffective’ – the worst possible combination. Meanwhile, in sector after sector public policy has confused the health of the industry with the health of individual firms, protecting vested interests to the detriment of experiment and the development of new markets.

Can we get a better functioning market economy? Yes – but only if the left understands that that means getting tough on business and breaking up the concentrations of power that are solely dedicated to prevent others nibbling at their over-calorific lunch. Unless and until it does, public policy will continue to be undermined by ‘a wealthy elite that is pulling strings not behind the scenes but quite publicly – people who are not traditionally wealthy, but who have acquired wealth through rent-seeking and value extraction’.

Read my new piece on policy tsars in Guardian Comment is Free here

It’s amazing how governments don’t get it even when it hits them between the eyes. When Google chairman Eric Schmidt recently professed himself ‘perplexed’ at the row about corporate tax, and Apple’s Tim Cook followed up with the unapologetic, ‘We pay all the taxes we owe, every last dollar’, they were actually pointing out the bleeding obvious. Ministers should be careful what they wish for. Boasting about making the tax regime ‘the most competitive’ in Europe or whatever is like birds of paradise ornamenting their nest sites with shiny coloured objects to attract a mate: no surprise if a) rivals try to outdo them in gaudiness, and b) those courted choose the most attractive nest. Schmidt and Cook were doing no more than calling the government’s bluff.

Slightly less obviously, they were calling the bluff twice over. When Schmidt shrugged, ‘that’s capitalism’, he was right – up to a point. What he should have said was capitalism ‘as currently formulated’, or capitalism ‘as practiced in the Anglo-Saxon world for the last 30 years’. Its rules were not handed down on tablets of stone, to remain fixed for all time. They were man made. And to put it bluntly, if Apple, Google, Starbucks and Amazon pay the minimum amount of tax, arbitrage tax regimes and play governments off against each other, it is because under the system devised by the free-market fundamentalists who hijacked management in the 1980s, that’s what they are meant to do.

For three decades the official mantra of management has been that the business of business is business, and the only purpose of that business is to make money for shareholders. Under this dogma, minimising tax, like minimising payments to suppliers and employees, is not a management option but an obligation. To make sure there is no backsliding, managers are deliberately incentivised to act like shareholders by awards of shares and share options that are triggered when they hit their earnings targets. The whole thing is locked in place by governance codes, sanctioned by governments of all stripes, that cast shareholders as principals and managers as their agents, who have to do what they are told.

Right on cue, Schmidt duly opined that minimising tax was his fiduciary duty. Rubbish. As the formidable legal and governance scholar Lynn Stout (see my review of her book The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations and the Public here) puts it, ‘corporate law does not, and never has, required directors of public corporations to maximise shareholder value.’ For good measure, she adds, shareholders are neither owners nor principals of public corporations, and there’s no good evidence that the body of shareholders (outside the charmed ring of top executives and a few privileged funds, that is) actually gain from shareholder primacy anyway.

In other words, ‘fiduciary duty’ is a self-serving canard that has been repeated so often, and now has such a weight of vested interest behind it, that it has acquired the status of received truth. When an audience of the great and good at the London Business School’s recent Global Leadership Summit was asked to select the No 1 priority of the CEO, the largest chunk replied ‘maximising returns to shareholders’. Asked whether they would go ahead with a profitable strategic investment opportunity if it meant posting lower profit figures in the meantime, a majority of executives answered no.

However, while Schmidt et al are right to say it is up to government to draw the lines on the playing field, and cooperate with others to change its dimensions and the rules of the game if they don’t like the way it is being played, they are also being disingenuous. They know perfectly well that they have made it extremely hard for governments to do these things – directly by lobbying with all their considerable strength for exemptions and privileges but also indirectly by lulling governments into letting them grow so big that, as it now turns out, many of the largest firms have become too large to regulate, let alone to allowed to fail.

So is there no hope of movement? Let’s not give up quite yet. At a Tomorrow’s Company lecture recently, no less than the global boss of McKinsey, Dominic Barton, told an audience of the City great and good that capitalism was in crisis, that shareholder primacy – ie exactly the form of governance and management that is today’s conventional wisdom – is to blame, and that humanity has a mere 10 to 30-year window to get it right before disaster is irreversible. He is of course right. The engine of capitalism, the public limited company, has broken down. It has become a predator on rather than a creator of value, a generator of privilege and inequality for the few rather than of jobs and well-being for the many. The stock market, now a machine for taking money out of the corporate sector rather than putting it in, on both sides of the Atlantic is in steady decline.

As the audience was well aware, the City has historically played a bold and pioneering role in the development of the institutions of capitalism, from the joint-stock company in the 17th century, to the insurance market in the 18th and the stock exchange in the 19th. It is now urgently time for an equally radical initiative – to reshape the modern corporation and its management for the very different planetary conditions of the 21st century. As before, it will require the joint best and most creative efforts of government, the City and business; it also needs the business schools to plot a path out of the sterile cul de sac that they have marooned management in for the last 30 years. The task is daunting but not impossible. It’s been done before; why shouldn’t we do it again?

Read my Foundation Forum summary on ‘Power and its unspoken side effects’ here

Read my article on the patient ownership of Warren Buffett, FT Business Education,13 May 2013, here.

Ever come across ‘confusion marketing’? I bet you have, even if you didn’t realise it at the time. It’s when products or services are bundled in such a way that you can’t make meaningful comparisons, as in energy and phone tariffs for example. Travel fares, where there’s no way of establishing what a ‘normal’ fare is, are another.

In a world where the customer really was king, an oxymoron such as confusion marketing couldn’t exist. In fact, it is only one of a disturbing number of examples where what you’d think ought to be the normal aim of management – in this case giving people what they want – has been stood on its head, becoming in the process its own opposite.

The gulf between business hype and reality is of course nothing new. But this is something darker, more sinister, and much bigger. The first time I became aware of the phenomenon was talking to a young woman who worked in the HR department of a large French utility which had suffered a spate of staff suicides. She explained that instead of being deployed to keep staff happy, the department’s creativity was now being used to devise ways of making their lives so difficult that they would leave without the need to pay redundancy. Transferring people from one end of the country to another or sending office staff to work as call-centre agents were two favourite ploys.

Other parts of the HR repertoire have undergone a similar reverse metamorphosis, like a butterfly reverting to grub. Both appraisal and performance management were originally touted – and in the official literature still are – as benign means for enlightened companies to make sure that the interests of employees and company are shared. Now, however, they have become anti-HR – simple means of coercion. As a paper by the Scottish TUC, self-explanatorily entitled ‘Performance Management and the New Workforce Tyranny’, put its, performance management has become synonymous ‘not with developmental HRM and agreed objectives but with a claustrophobically monitored experience of top-down target driven work’.

The language of management rings hollow. ‘Consultation’ doesn’t mean listening but the reverse, telling you what’s going to happen anyway; while the only thing that ‘enhancement’ applies to is the convenience of the supplier, as with self-service checkouts at supermarkets. Curiously, enhancements of corporate computer systems always require more and less convenient effort by the user; in newspaper offices, for instance, new systems invariably move copy deadlines forward, not back. In the same way, somewhere along the line ‘synergy’ lost its positive-sum connotation and is now just a fancy term for cost-cutting.

Writing on farming minister David Heath’s attack on farm wages last year, Polly Toynbee noted: ‘These days certain killer words flash out instant red alerts: ‘reform’, ‘flexible’, ‘harmonise’ and ‘modernise’ all signify their opposites. Heath’s ‘plans to modernise the agricultural labour market’ mean taking farm workers back in time. His plan for them to be ‘harmonised with the rest of the economy’ won’t feel harmonious when it ‘leads to a more flexible labour market’ to ‘end an anomaly requiring farmers to follow outdated and bureaucratic rules’.

Perhaps most strikingly Orwellian is the furore over Jobcentre sanctions – a double reversal in which the hijacked apparatus of performance management is used to coerce staff to do the opposite of their job: in this case stopping benefits for those deemed insufficiently diligent looking for work. ‘It’s all about stopping people’s money’, said a Jobcentre worker describing being put on a ‘work improvement programme’ with the aim of upping his sanction rate. ‘It’s perverse: suddenly in your job you’re not looking to help people into sustainable work, which is what you’re employed to do, but trick them into not looking for work’.

No wonder the language of management is so barbarous, reflecting the contradictory sense and sheer ugliness of the concepts beneath. But the damage is not just aesthetic. As these perversions take hold, whole organisations find their purpose being subverted. For universities, getting high marks in the research evaluation exercise becomes more important than the research itself. You might think that more students wanting to study social entrepreneurship at business school was an optimistic sign – which in itself it is. But how many schools will encourage it when they know that acceding to the demand could drag them down the all-important league tables (rankings take account of graduate salary levels, which are obviously lower in social entrepreneurship)? ‘I do think that a business school that encourages social entrepreneurship is quite brave,’ reflects one academic – and quite a lot won’t be.

Little by little, this is the route that leads to such macabre reversed-out versions of themselves as banks that impoverish people rather than enrich them and hospitals and care homes that kill their patients – organisational vampires whose positive purpose has been sucked out of them and replaced by predation and rent-seeking. At this stage, as the aftermath of the financial crisis has demonstrated, capitalism itself has gone into reverse, incapable of assuring even the basics of a good job and a rising standard of living except for the pampered few, and relying increasingly on the cons like confusion marketing and enhancements that aren’t to make ends nominally meet. Politicians increasingly desperate for a resumption of growth are in for a long wait. It’s capitalism itself that needs a reboot, and that takes a lot more than economic stimulus.

Interviewed on local radio last week, Keith McNeil, the chief executive of Addenbrookes hospital, Cambridge, confirmed that the trust was offering incentives to wards to discharge two patients a day by 10am. A ward managing two discharges a day for a week will get £1000, while perfect performance for a month will attract £5000, with the dubious additional bonus of having the chief executive spending a day on the ward doing whatever it wants him to. Wards are also being encouraged to compete for the awards.

Why would he want to incentivise people to get rid of two patients a morning? Let’s look at what’s really going on here. The background is that like all NHS trusts, Addenbrookes needs to be financially as well as clinically sound. Under a regime of payment by results it gets paid for what it does, so it needs to maximise throughput, keeping keeping patients in for as little time as possible consistent with their clinical needs. If patients ‘block’ beds by staying longer than necessary, often because they are thought to be too infirm to return safely to their own homes, then tightly scheduled elective surgery may have to be postponed, or admission of acute cases may be delayed for lack of beds.

So at first sight, getting people ‘to do their discharge planning pre-emptively, so that when patients are ready to go, they can be moved efficiently and quickly from those beds, so that other patients who need those beds can be moved into them’, sounds sensible.

But hang on: given that pressure to get patients out of the door is already heavy enough that no one can be unaware of it, what does McNeil want clinical staff to do differently? Of course, he says, ‘all of my clinical colleagues know that patient safety comes first’, so that no one will be put at danger. The whole point of incentives is to indicate management priorities: so the introduction of at least the shadow of a conflict of interests, at a time when the whole medical profession, and nursing in particular, are coming in for heavy chastisement for lack of care in the wake of Mid Staffs, seems questionable to say the the least.

One health commissioner is confident that confronted with incentives ‘most clinical staff’ will continue to do the right thing, but that there may be a temptation to hold back patients to the next morning who could have been discharged the evening before, or alternatively to discharge people before they have completed all the follow-ups, like seeing the occupational therapist, say, at the price of calling them back later. More insidiously, doing things in a hurry could cause corners to be cut, leading to subsequent readmissions. ‘The tendency is to make everything sharper and quicker,’ she says. ‘You can understand why he [McNeil] wants to keep things moving, but it doesn’t always add up, particularly for the frail and elderly.’ Getting it right first time, she says, may seem slower and more expensive in the short term, but in the longer run it is likely to be much more cost effective.

Andy Brogan, a consultant at Vanguard Consulting, currently engaged in some interesting work on demand in the NHS, notes that the contradictory play of incentives is ironically one powerful reason why the system is becoming so overloaded. There is an incentive for hospitals to get people in and then one to get them out again, and for various reasons (not least that getting them out depends on relationships with other agencies, each driven by its own incentives) they are better at the former than the latter. ‘The trouble is that incentives at the back end are a blunt instrument,’ says Brogan. ‘It’s like giving a brain surgeon a chain saw – you take out the tumour, but the danger is that the rest of the body goes with it too.’

More than that, one of the reasons that incentives are perceived to be necessary at the back end is the perverse incentives that drive admission at the front. Thus the effect of the four-hour wait limit in accident and emergency (A&E) is to increase the number of hospital admissions as patients approach the cut-off point, whether they need to be admitted or not: better to take them in, with all the bureaucratic expense involved, than risk breaching the target (for chief executives still a sacking offence). Brogan’s work at a sample of three hospitals shows that partly because of these extreme short-term pressures 50 per cent of admissions are short stay, in and out within two days. Some of these of course are perfectly legitimate medically, but many are repeat presenters who have pitched up at A&E as a last resort because they can’t get their problems solved elsewhere.

It’s true that, as comments on a previous piece have pointed out, distinguishing between value demand (what that we want and are we are here to do) and failure demand (the result of not doing something or not doing it right the first time) is more difficult in health than in other settings. Nevertheless, there is more than an element of the absurd in ‘introducing incentives to get rid of people who shouldn’t be there in the first place,’ as Brogan puts it. The moral of the story: it’s not just in the private sector that incentives are dangerous. On the one hand they provide a conflicting de facto purpose to the original one, with potentially dangerous consequences (have we learned nothing from Mid Staffs?); on the other when applied to efficiency measures that are also detached from purpose, they inevitably make things worse, not better.

Over the last 30 years, employers have jettisoned one by one all their original social obligations: first career, then pensions, and now even the promise of rising living standards – by 2020 an ordinary family will be bringing in 15 per cent less than in 2012, according to the Resolution Foundation. Completing the offload of responsibility to employees, employers are now busily abandoning the job, as they increasingly sign their workers up to euphemistically named zero-hours contracts.

The ultimate flexible labour arrangement, zero-hours deals hold workers on standby but offer no guarantee of work, pay, holiday or sick pay, or education and training. Such contracts originated in traditionally low-paying sectors such as retail, bars and restaurants and call-centres, but surveys show they are now making inroads into white-collar domains like journalism, the law and university teaching, where the number of establishments using them increased tenfold from 2004 to 2011. Although numbers are small, they are increasing fast, rising 25 per cent in 2012 and more than 150 per cent since the autumn of 2005, according to the British Labour Force Survey. In the NHS alone there are now 200,000 such contracts, up 24 per cent in the last two years. Up to one quarter of employers are using them.

Contracts like these of course represent the antithesis of traditional employer-employee relationships, and of official HR rhetoric – as with performance management, this is another example of apparently benign HR morphing into its evil opposite. Although the arrangement may suit some people who might otherwise be unemployed, the advantages are clearly on the side of employers, enabling them to switch between quiet and busy periods without the cost penalty of carrying full-time employees to cover the difference.

But the cost to the latter in terms of, unpredictable working patterns, up-and-down earnings and general insecurity is heavy. Although earnings are often low, claiming benefits is a nightmare when they and hours are so erratic, while being on constant standby makes it impossible to supplement meagre pay by taking a second job. The consequence, according to labour expert Guy Standing, is a burgeoning ‘precariat’: ‘It is induced inertia, an impediment to social mobility and in most cases it is degrading’ – the resulting stress and demoralisation a reminder that, as New Scientist has put it, austerity is not just an experiment with the wealth of nations but their health too.

The phenomenon ought to be just as worrying for policymakers, not to mention sensible employers, as for workers.

As ever, it is the public purse which picks up the bill for private failure in the shape of rising benefits for the working poor – yet more proof that welfare is what happens when the labour market, not government, fails. What’s more, the further shift the trend signifies to a transactional, affectless, commitment-free working relationship is not only a sinister step towards a truly Orwellian futurel: it goes against the grain of everything we know about what makes successful, high-achieving workplaces work.

Great workplaces are not created by fear but by security and commitment. Committed workers perform better than uncommitted ones, are more willing to go the extra mile and less likely to leave. But commitment is a two-way street, requiring people-centred management of which zero-hours contracts are the diametrical opposite. This path does not lead towards the high road of an advanced knowledge economy in which a highly skilled workforce turns out innovative products and services for demanding and sophisticated customers but the reverse: the low-skilled, low-paid, low-commitment commodity economy ghoulishly predicted in Larry Elliott and Dan Atkinson’s Going South: Why Britain Will Have A Third World Economy by 2014. The UK has proportionally more low-paid workers than any other developed nation except the US, and it is creating jobs of lower status, with lower skills and lower rates of pay than any of its immediate rivals.

To put it in perspective, the rapid uptake of zero-hours contracts is taking place from a very small base: 200,000 out of a workforce of 30m. Clearly pressures of recession make them look increasingly attractive to hard-pressed employers. But they are no longer a novelty, and are spreading between as well as within the traditional sectors. Past history strongly suggests that without a countervailing force, arrangements that start out as experiments, such as zero-hours contracts and ‘crowdworking’, where people bid for small work tasks online, are here to stay as employers get used to the advantages of a spot market in labour and become increasingly reluctant to give them up, even when the economy recovers. Some observers predict that in the long term few except the most elite professions will be untouched by the trend. So be afraid for yourself and your children. Next stop, slavery?

Pay, both low and high, is a sore that is always about to erupt into an open wound. Last week it did once more, and rarely have its complaints and lessons been so clear: an object lesson in the destructive power of financial incentives.

‘High pay fed ethical “vacuum” at Barclays,’ shouted the FT’s splash on 4 April over an article on lawyer Anthony Salz’s report on the bank, commissioned after its three senior managers had resigned in the wake of the Libor fixing scandal. The report detailed how ‘warped pay levels’ at the top led to an ‘entitlement culture’ that twisted the bank’s entire approach to business, favouring ‘transactions over relationships, the short term over sustainability and financial over other business purposes.’ Salz noted that the bank’s 70 top managers earned well above the industry average and in 2010 pocketed 35 per cent more than peers at other banks – a wholly unjustifiable premium in an already overpaid industry. ‘Some bankers have appeared oblivious to reality,’ says the report, adding: ‘Elevated pay levels inevitably distort culture, tending to attract people who measure their personal success principally on compensation.’

Just the day before, there were equally indignant headlines over the £10.5m fine imposed by Ofgem, its largest ever, on energy supplier SSE for ‘prolonged and extensive’ mis-selling in which many customers who were told they would save money by switching ended up with more expensive contracts. Customers were exposed to misleading statements, inaccurate and misleading information on SSE’s charges, and misleading comparisons between SSE’s charges and costs of other suppliers, Ofgem said. A former SSE salesman told the BBC that colleagues ‘would do almost anything’ to meet their targets and make their commission, including scouring local obituaries in order to sign up the recently deceased on fake contracts. Since sales auditors were on commission too, they had no incentive to stamp down on bad behaviour. It wasn’t just doorstep and telesales that failed customers, concluded Ofgem in justifying the record fine, but a management that had no effective control over its sales effort.

Salz’s 244-page report apparently cost a truly staggering £17m. Yet like all the others it signally fails to draw the only conclusion possible from the evidence so expensively collected. Despite the clear evidence of guilt, no one is ever actually found to blame and the authors are reduced to impotent scolding of the ‘culture’ of entitlement, greed or making the numbers which has swept everything else aside.

Well, you can read the missing bits here for (almost) free.

The guilty parties are those at the very top that have put in place and maintain a self-serving pay and performance system that might have been designed to produce perverse if not criminal results. And they are still doing it. The problem with incentives is not execution – the way they are done – they are the problem.

Ironically, it’s all there in the reports which spell out in black and white everything you need to know about why. It’s simple. Incentives change behaviour – as they are supposed to. They motivate people to think about the money and do what it takes to make it. It’s no use managers (or ministers) saying, ‘Yes, but of course they have to think about the job too’. Incentives both legitimatising and demanding self-interest, systematic self-interest is unsurprisingly what you get. You can either use incentives or not. You can’t switch them off for part of the time (which part?) and on again for the rest.

Incentives vampirise the organisation’s purpose, sucking the heart and soul out of it and leaving the shell of the numbers. Making the numbers (meeting the incentives) becomes the de facto purpose, which is why it produces perverse results, in turn giving rise to a whole industry of remuneration consultants and business academics dedicated to devising new and better ways of implementing them. But the perverse results are inherent, and the more complex the scheme, the perverser they become.

Again, the reports spell it out. Incentives don’t attract the best; they attract people who measure their success by what they are paid and will do anything to get it. How much more evidence of their effects do we need? Bending purpose grotesquely out of shape, they have palyed an increasing role in every scandal of modern times, culminating in the wholesale corruption of the financial sector which almost brought down the global economy in 2008 and with whose effects we are still ineffectually struggling.

As John Kay puts it: ‘We have dysfunctional structures that give rise to behaviour that we don’t want. We respond to these structures by identifying the undesirable behaviour and telling people to stop.’ The only way of making bankers and salespeople stop putting their own interests before those of their customers is to get rid of what caused them to do it: incentives – all of them, commissions and all.