THERE’S A case for saying that the credit crunch is all down to Charles Darwin.

Keynes wrote: ‘The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.’

Now, technically Darwin is a defunct biologist rather than political philosopher or economist. But his interest in economics was keen, and equally keenly reciprocated. One perceptive interpreter of On the Origin of Species , 150 years old this year, saw it as ‘the application of economics to biology’. As the crowning expression of Victorian individualism, continental writers argue, the theory of natural selection, with its underlying theme of competition and struggle, could only have originated in the laissez-faire England of the period.

Bastardised and coarsened, the concept of ‘the survival of the fittest’ (a phrase only later adopted by Darwin from Herbert Spencer) has powerfully shaped modern business. The robber barons of the early 20th century quickly latched on to the self-serving idea that ‘might is right’ – cut-throat economic competition was the normal state of affairs and the rise to the top of the strongest was part of natural law and the inevitable outcome of history.

This mentality persists, especially in the US, and indeed the idea of the inevitability, and desirability, of individual struggle in weeding out the strong from the weak is what distinguishes Anglo-American from Rhine capitalism. It perfectly informs the ethos of the financial sector over the last two decades, as well as the rise of the Russian oligarchs and the development of the virulent Chinese strain of capitalist competition.

Darwinism endows such phenomena with a veneer of scientific rationale. Republican senators’ reluctance to intervene to prolong the lives of US banks, the chilling belief of City traders in their own superiority, as uncovered in interviews by The Guardian‘s Polly Toynbee and David Walker, the self-justifying arguments in favour of stratospheric pay rises for chief executives and cutbacks for the less fortunate – all have uncomfortable echoes of the crude social Darwinism that influenced not only the robber barons but also the far greater 20th-century monsters, Hitler and Stalin.

Natural selection may be, as some argue, the most important idea in human history – the nearest thing to a ‘theory of everything’ to exist. Richard Dawkins, among others, has proposed a ‘universal Darwinism’ – a process of variation, selection and retention that applies to business, social and cultural phenomena as well as biology. In recent years, evolutionary versions of economics, psychology and ecology have all burgeoned.

But while such ideas are genuinely attractive and interesting, as the evolution of evolution ironically demonstrates, for practical purposes natural selection is a devious and treacherous taskmaster. If companies have no inevitable life cycle – some last for months, others for centuries – and don’t reproduce, how does the process work? Darwin himself, as cautious in his research as he was bold in his thesis, would no doubt be aghast at some of the wilder application of his ideas. His version of evolution is blind mutation is random, and outcomes determined by functional improvement.

Companies, on the other hand, are intentional entities, able to strategise towards long-term purpose – taking one step back to take two steps forward in the future, for example. What’s more, no one studying management could possibly argue that ‘progress’ was historically inevitable: indeed, the reverse argument can be made, that bad management is driving out good. As Ricardo Semler, the iconoclastic head of the free-form Brazilian company Semco, observes, most corporate forms are colossally inefficient as well as environmentally disastrous – an evolutionary nightmare. In this situation, there’s no time left for painstaking improvement on an evolutionary scale: only disruptive innovation will do.

Meanwhile, the simplistic ‘might is right’ case has been blown apart by the force of events. However it originated, the credit crunch is the meteorite that is causing the mass extinction of what now can be seen as financial dinosaurs. Suddenly the once mighty are so no longer – in the new credit-starved world investment banks are extinct, by the end of the year most hedge funds will have gone out of business, and even Russian oligarchs are finding food hard to come by.

As Darwin cautioned: ‘It is not the strongest of the species that survive, nor the most intelligent, but the ones most responsive to change.’ Or in the words of Orgel’s second law (after Leslie Orgel, an eminent biochemist of the 1960s – history doesn’t record his first law), ‘Evolution is cleverer than you are.’

The Observer. 18 January 2009

IN RETROSPECT, one of the most remarkable things about the events of 2008 is that there weren’t any. In 1968 the streets of Paris and London rang with protests over the Vietnam war and class solidarity in 1984 the miners went on strike for more than a year. By contrast, over the past year, banks, jobs and money in colossal quantities have disappeared with barely a murmur of dissent, let alone the explosions of outrage that you might expect.

This apparent fatalism is no doubt partly numbness in the face of figures that are truly incomprehensible. Where the liabilities of high-street banks are multiples of GDP, and a single hedge fund is responsible for write-offs that equal the UK’s defence budget, it’s hard to feel anything other than helpless.

More insidiously, it is also a measure of how completely the message of ‘One Market under God’ (to quote the title of an entertaining and telling polemic by Thomas Frank) has been internalised.

Yet outrage and contempt are sometimes in order, not least to ensure that we don’t get fooled again. Even now, some would argue that the crunch is the result of a bold experiment in financial innovation gone wrong – a mistake, certainly, but justifiable in the sense that, if it had come off, the resulting era of ultra-cheap money would have led to the prospect of capitalist prosperity without end.

Another view would be that the reasons why it nearly came off also meant that it couldn’t – the reliance on personal incentives untrammelled by any wider sense of responsibility left the system permanently teetering on the knife-edge where risk shades into outright fraud. As such, the disasters of 2008 are not an aberration but the culmination of a rewriting of the management project that now leaves many companies with a vacuum at their centre.

What’s been lost over the last three decades is only now becoming clear. Some of the warning signs were already visible in the succession of increasingly frequent panics and scandals of the last decade and a half – Enron, the dotcom boom, LTCM. Less obviously, the last 30 years have seen a steady erosion of balance between stakeholders. While layoffs of staff – ‘the most important asset’ – were once a last resort for employers, they are now the first option. Outsourcing is so prevalent that it needs no justification. And the company’s welfare role is now so attenuated that it barely exists. First to go was the notion of career more recently, the tearing-up of company pension obligations is another unilateral recasting of the conditions of work – a historic step backwards – that has aroused barely a ripple of objection.

The justification for this behaviour is, of course, the pressure of the market. But this is to disguise a betrayal. As a class, ever since the separation of ownership and management in the 19th century, managers have always occupied a neutral position at the heart of the enterprise – neither labour nor capital, but charged with combining the two for the benefit of both the company and society itself.

Everything changed in the 1980s, however, with the advent of Reagan, Thatcher and Chicago School economists who preached the alignment of management with shareholders in the name of ‘efficiency’. In effect, ‘efficiency’ came to mean short-term earnings to the detriment of long-term organisation-building; what was touted as ‘wealth creation’ was actually ‘wealth capture’, from suppliers, clients and employees as well as competitors, on the grandest scale since the robber barons. Its purest expression was private equity.

Managers never looked back. As late as the 1980s, a multiple of 20 times the earnings of the average worker was perfectly adequate CEO pay. But under the compliant gaze of shareholders and remuneration committees, performance-pay contracts boosted the ratio to 275 times by 2007.

As we now know, ‘performance pay’ was a misnomer, an incentive for financial engineering that has destroyed value on a heroic scale. But it’s not just shareholder value that has suffered. By severing any common interest between top managers and the rest of the workforce, fake performance pay has fatally undermined the internal compact that makes organisations thrive in the long term.

Perhaps the most poignant emblem of this dereliction is the British pub. The pub is the archetypal small business – the simplest, most rooted organisation there is. Pubs have thrived for centuries. But they are now closing at a rate of around 30 a week. Part of this is due to changing social habits. But it is also the case, not to put too fine a point on it, that pubs have been rogered frontwards, backwards and sideways by financial whizzkids who piled them with complex debt and left them desperately underinvested – at the same time extracting exorbitant fees for the privilege. The death of the local is a fitting monument to a bankrupt management model. It’s time to get angry.

The Observer, 11 January 2009

This article appeared in Management Today. See the rest of it at http://bit.ly/bb51zB

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

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

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

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

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

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

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.’

THE CV

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