THE SYSTEM for training and employing the UK’s junior doctors was always a bit of a black box. Traditionally, the annual announcement of placings was followed by a period of furious informal horse-trading as individuals and institutions swapped places to get as close as possible to their real preferences. They were usually successful. To the government, however, this was a mess that it decided to reform, using an IT system to match applicants precisely with posts.

The result was a disaster. It wasn’t that the computer didn’t work. It was too precise. While the removal of ‘give’ in the system made it tidier, it also took away the flexibility in timing and negotiability that made it work. Messy is sometimes more efficient than neat and tidy.

The government’s error is a common one. Obsession with order is the malady of modern management. According to the splendid A Perfect Mess: The Hidden Benefits of Disorder , by Eric Abrahamson and David Freedman, ‘organising’ – decluttering junk-piled desks, closets and spare rooms – is a $100m-a-year industry in the US and growing. Organisations are also compulsive tidiers, addicted to diagrams of boxes and col oured lines, even though these are often more wishful thinking – a sort of naming and taming – than description of reality.

In fact, liberating as this book is, the euphoria at discovering you aren’t a freak if your desk is untidy – just human – is rapidly swamped by a wave of despondency as you realise how determined organisations are to stamp out deviance. The point is that because randomness is an essential part of nature (goodbye evolution without it), all organisation comes at a cost – the cost of carrying out the classifying and sorting, and the subsequent, less obvious, cost of complying with it, or preferring one form of organisation over another.

Reasonable organisation owes everything to context – the Japanese ‘5S’ good housekeeping policy (‘sort, straighten, sweep, standardise, sustain’) makes perfect sense in a busy factory but is anal lunacy when applied to the position of a stapler or paper clips on desks in a revenue office (I’m not kidding).

When costs outweigh benefits, organisation becomes over-organisation – the denial of humanity. It’s surprisingly common. Ever get the feeling that these days all change is for the worse? You’re right – and it’s to do with over-organisation. The parallel growth of regulation and organisational stupidity, for example, is not coincidence: it is driven by obsessive classifying of every form of risk or failure, aided and abetted by the use of computers to analyse the figures.

Or take the ubiquitous automated voice-response systems used by call centres. In effect, these are crude ‘categorisation engines’ designed to force human variety into arbitrary categories. Unsurprisingly, these categorisations fail to match customers’ needs in a huge percentage of cases, breeding contempt and despair – and causing half of them to take their business elsewhere.

Such counterproductive classifying reflects a propensity, common to all institutions, vastly to overestimate the importance of formal organisation. A report by consultants Booz & Company notes that companies have a knee-jerk tendency to ascribe both problems and solutions to organisation – in both cases misguided. While restructuring and organisational change are often the first resort of managers, they don’t even figure in the top 10 for effectiveness, according to Booz.

Of course, a degree of creative disorder is not the same as slobbishness or lack of discipline. Newspaper deadlines impose tight timing and resource disciplines no one would want doctors and nurses to ignore infection procedures for the sake of creativity. The difference is well illustrated by Google, as described in this column last week. Managerially, Google can only be described as a mess, with what looks to others like an unfeasibly large amount of play in the system (not least the 20 per cent of time allowed to developers to pursue their own projects). But its aim – to organise the world’s information – certainly is not, and its disciplines of fierce product reviews and thrashing out important issues transparently are anything but. The results suggest that Google has the balance much righter than most conventional companies.

So before you guiltily vow to turn out and reorganise your sock drawer, filing cabinet or sales organisation, think again. Of course you don’t want to be crushed by an avalanche of books and papers, as happened to one pathological hoarder in the US. But comfort yourself with Abrahamson’s finding that work messiness increases with education, salary and experience and remember that a pinch of mess, randomness and redundancy is as essential for innovation and robustness as salt in food.

As Albert Einstein, who apparently maintained his desk in a state of stupendous disarray, sweetly inquired: ‘If a cluttered desk is a sign of a cluttered mind, of what, then, is an empty desk?’

The Observer, 3 August 2008

YOU CAN love Google or hate it – or perhaps a bit of both (see my colleague John Naughton’s surgical probings of the past two weeks) – but you can’t deny its extraordinary effectiveness. In January 2008 it had 65 per cent of the online search market and the share is increasing. Better (for Google), of every dollar spent on search advertising, Google snaffled 77 cents. According to one report, in the second quarter of 2008 that proportion rose to 110 per cent, meaning advertisers were not only shovelling all their new ad spend Google’s way, but simultaneously yanking some away from Microsoft and Yahoo!.

That franchise has won Google a market capitalisation of $150bn, profits of $4bn and 20,000 employees. Last week, consumers voted it the UK’s No 1 consumer brand. Not bad for a ‘one-trick pony’, as one analyst must now regret calling it, that only went public in 2004.

Remarkable as this is, it is matched by its management style. Make that non-management. In a Q&A at ManagementLab’s recent California conference, Google’s chief executive, Eric Schmidt, honoured the theme of ‘inventing the future of management’ by making it clear that ‘management’ has always taken second place to what the company set out to do. While it worries ceaselessly about what will ‘scale’ – as you do when you’re growing at 50 per cent a year – it will not be adopting anyone else’s management approaches any time soon.

So how does Google work? The company was not planned, says Schmidt it emerged from the happy failure of founders Sergey Brin and Larry Page to understand they had actually left college. Google tried management once, Schmidt arriving in 2001 to find that Brin and Page had promoted five engineering executives to provide organisation and direction. A few months later, he recounts, they did a ‘disorg’, getting rid of the management and instead requiring 150 people to report to one individual – ‘an interesting experience,’ notes Schmidt laconically, which deliberately limits the power of anyone, including the CEO, to micro-manage. Since then, management experience has been treated as a recruiting minus rather than a plus, ‘because if you came in with experience you would apply old models to new problems’.

For a long time Google did not have a strategy either, apart from a ‘top 100 list’ of priority projects (actually about 250 so much for the company’s famous numeracy) around which groups self-organised. It now does, to an extent, only working on problems that affect many people maintaining a self-organising, auction-based advertising model focusing on developers above all – and it has worked, ‘to a point’. Whether it will continue to do so at current scales is a different matter.

Schmidt’s role is correspondingly unusual. Decision-making, he says, is the ‘wisdom of crowds’ model. Every issue, no matter how small, is debated – and seniority does not count. To get the best decisions, one of his most important tasks is to identify dissidents (good decisions require disagreement), but then to establish a deadline to prevent discussions from continuing indefinitely.

Basically, Google management boils down to a few immovable principles around which things just evolve. People’s sole job is innovation – ‘it’s amazing how many smart young people there are who just want to keep doing stuff’ – with total transparency and ferocious product reviews to instil discipline. To this end it hires the smartest people (but rarely managers) uniquely for a company this size, the founders sign off every single hire. Next, it treats them ‘as if they were the only asset. Other companies say that, whereas we understand that in an innovation model it’s only about the people and the innovation engine.’ Among the conditions is that employees can spend 20 per cent of their time on their own projects, another powerful deterrent to micro-management.

The other fundamental principle is the need to make its own management decisions. As the fastest-growing company in UK history, says Schmidt, Google has faced every management problem ever invented, but simultaneously rather than in sequence. In an unpredictable future there will be plenty more. ‘I try to anticipate the problem and say, ‘OK, you guys, you think you’re so smart, what are we going to do about this?’ And that provokes the internal debate.’

With its huge market share, Google is in the fortunate position of depending more on tweaking the dials of its advertising than extra sales to make its quarterly figures. But Schmidt sharply rejects the idea that the company is too different to offer any general management lessons. Any company, he says, can ensure it makes decisions on fact and gets the issues on the table concentrate on essentials and above all listen to employees. Founders, youth and courage – Google’s other vital assets – may not be reproducible, but those things are.

The Observer, 27 July 2008

With recession perilously close, the credit crunch is presenting a generation of British managers with a novel and unwelcome prospect: managing through adversity. Though busts are as much part of the cycle as booms,managers appear no better prepared this time than last.

Thus, business shows ‘a startling lack of forward planning’ for changing economic cycles, the Hay Group reported in May. Half the firms surveyed said their strategy was wrong for present conditions. ‘The credit crunch is nine months old – but they were reacting to events rather than planning and preparing. Very few were thinking about recovery, and that’s quite worrying,’ says Hay associate director Russell Hobby.

At the CIPD, director Linda Holbeche agrees that executives who have experienced only good times may have been ‘a bit naive’ in their response to signs of impending downturn. Her fear is that when a crisis does bite they will panic and revert to bad habits – kneejerk headcount reductions in the private sector and reorganisations and blanket freezes in the public to try to get more out of people. This is underlined by Lynda Gratton, professor of management at the London Business School, who points out that the economy has changed hugely and now revolves far more around knowledge than making things. ‘The temptation is to manage for cost, but the big issue is managing for value,’ she says. ‘The question people need to ask is, am I adding value? Research shows that managers do a huge number of things that add cost, not value.’

As executives are discovering the hard way, managing in the real world is very different from managing in a bubble. Over the last decade, they got used to finessing their way out of difficulties through mergers, manipulating balance sheets or other kinds of financial engineering but as the era of cheap credit vanishes, the emphasis switches to risk containment – making the most of what you’ve got.

‘It’s a challenging situation,’ says Elisabeth Marx, partner at headhunter Heidrick and Struggles. She says many companies are finding gaps in their top teams. What’s missing is not only team members with experience and a track record of managing through tough times, but the necessary personal qualities, too.

No one knows how the crunch will develop or its long-term effects. This puts a premium on leaders who can not only handle the pressure of day-to-day operations but who are also comfortable with uncertainty and can adapt fast. There is, too, a motivational angle. ‘It’s important to be realistic – but at the same time to project confidence so that gloom doesn’t become self-fulfilling,’ Marx notes.

Companies shouldn’t rely on the downturn to stop their best employees from looking around. In many sectors there is a talent shortfall. How companies treat those they lay off will have powerful long-term effects on those they want to retain, too. Even when growth returns, few think it will be back to normal. The companies that succeed in the upturn will be those that have learned the lessons of the downturn: the ever-increasing importance of human capital and a much more respectful attitude to risk.

The Observer, 13 July 2008

ASKED TO name employee-owned firms, most people would have difficulty getting past one finger of one hand: John Lewis. A few might have heard of ad agency St Luke’s. If pushed, those of a certain age might mention the ill-starred Meriden Co-operative, set up by Tony Benn to make Triumph motorbikes for a period in the 1970s.

In fact, chides Patrick Burns, executive director of the Employee Ownership Association, co-ownership isn’t the same as co-operative, which is about voting rather than ownership, and the clumsily named co-owned sector – companies where employees have a chunk of the equity above, say, 25 per cent – has an estimated turnover of around pounds 25bn, which makes it a larger component of the UK economy than agriculture.

There is very little systematic data on employee-owned firms in Britain (there is much more in the US), but it turns out that John Lewis is far from unique. Burns reckons that there are at least 200 either fully or partly employee-owned outfits in the UK, excluding co-ops, quietly making a good living in almost every market sector in the country – from Unipart (automotive) and Wilkin & Sons (jam) in manufacturing to Loch Fyne Oysters, Divine Chocolate, Central Surrey Health and a couple of care homes, and a whole slew of design and consultancy groups, of which the best known is probably Arup.

Even at a cursory glance, the list contains more than its fair share of interestingly different and successful firms. And this, according to a new report by an all-party parliamentary group, is no coincidence. Far from being quirky exceptions that prove the normal publicly traded rule, co-owned companies, says the report, are ‘exceptional mainstream companies’ operating successfully in competitive markets across the public and private sector. The co-owned model, it adds, ‘offers enormous potential for the UK economy’.

This is because of the performance dividend the model seems to generate. What most people experience as the ‘John Lewis effect’ appears to hold across the sector. ‘It stands to reason,’ says Burns. ‘When people know it’s to some extent their company, it releases huge productivity increments’ – a permanent boost of 4 percentage points, according to a US survey. In fact, ‘researchers now agree that the case is closed on employee ownership and corporate performance’, notes the US National Centre for Share Ownership. It adds: ‘Findings this consistent are very unusual.’

This doesn’t make it easy. There is a catch, but a logical one. Employee share ownership on its own makes little or no performance difference. It is only when it is combined with open and participative management that it delivers the goods. This makes intuitive as well as empirical sense, and accords with separate findings about the so-called high-performance workplace. As one company put it in evidence to the parliamentary group: ‘Co-ownership is perhaps half the equation of productive employee engagement. Of equal importance… is co-control: an employee’s feeling that he or she can genuinely effect change within the organisation. This is something that may be a likely, but not inevitable, consequence of co-ownership.’

It also means, as the Employee Ownership Association’s Burns points out, that companies ‘have to be brave twice over: sharing power as well as equity’. However, the payoffs are clear. As well as superior productivity, co-owned companies report higher levels of employee engagement, exceptional standards of corporate responsibility, and greater responsiveness to the needs of change and innovation.

Contrary to the expectations of outsiders, employee-owners are highly realistic about the implications of changing circumstances, sometimes more so than the board. In one case, aware of impending hard times, employees volunteered a pay standstill. This, of course, is one reason why the trade unions habitually distrust co-ownership but on the other hand, in times of difficulty they show impressive ‘durability under fire’, preferring to adjust pay rather than jobs when business is slow and preserving employment throughout the business cycle none of the Employee Ownership Association members is called Persimmon or Bovis or Redrow.

The UK is bad at asset transfer. Given the poor record of trade sales and the divisiveness of private equity, the parliamentary group argues that we would all be better off if more people were aware of the advantages of employee buyouts. The parliamentarians are not alone in believing that the model may be particularly suited to emerging public-sector markets, where ‘the social objectives of co-owned firms, married with the more equitable distribution of resources among employees, makes co-ownership a far more palatable option for outsourced public services than traditionally run plcs’.

The Observer, 13 July 2008

LORD LEVER was talking of advertising when he famously remarked that he knew that half his spending was wasted, but not which half. The same might be said of management consultancy, which shares with its sister professional service the gravity-defying ability to keep on growing, despite the lack of any real proof that it does any good.

In fact, the unstoppable progression of the management advice industry is monument above all to the power of faith and the need of senior managers for reassurance. At least in Britain and the United States (other countries are less greedy users) it has become just another cost of doing business.

It may seem remarkable that a trade that is unregulated, has no qualification nor proven corpus of theory or practice, and no statutory standing, should now be worth upwards of $100bn a year worldwide, accounting for 4 per cent of operating costs, or pounds 2,000 per employee, in a cross-section of private sector companies interviewed by the National Audit Office in 2006. Or that almost all large companies should be advice junkies, or indeed that many of them should be headed by ex-consultants or that its senior mem bers should flit with consummate ease between the private sector and the public sector, which they have done so much to make safe for their own ilk.

In fact, as Chris McKenna showed in his masterly study of the rise of the suggestively entitled ‘world’s newest profession’, this shadowy status is much to the big consultancies’ advantage, giving them a Macavity-like ability to vanish from the scene of crime, while others have to stay and take the rap. Thus, management consultants were as deeply involved in devising Enron’s innovative structures as its accountants, but Andersen, the auditor, was brought down in the fall of the energy company, while the consultants emerged unscathed.

Better yet, consultants have been huge beneficiaries of the post-Enron legislation they themselves helped to bring about. To diminish conflict of interest, 2002’s Sarbanes-Oxley Act required directors to run tough management compliance checks, while barring auditing firms from carrying them out. The result has been a field day for consultants, who already a decade ago made up one in 13 of the US managerial workforce.

It is conceivable that the same lucrative pattern of double benefit is about to repeat itself. In recent years, the major consumer of management consultancy has been financial services – in 2007, UK consultancy firms pocketed pounds 1.7bn from the financial sector for advice alone, according to Accountancy Age includ ing IT consulting and implementation, the figure would be much higher. As we know, this advice has at best not prevented client companies from making some very bad management calls. If, as seems likely, tighter regulation results – for example to manage risk or control incentives – guess who will be in pole position to monitor it.

The other huge consultancy consumer is the public sector. Central government and the NHS were respectively second and fifth largest advice markets in 2007 – and the NHS would have undoubtedly ranked higher, above the whole of manufacturing industry, if IT was included. In fact, it’s hardly an exaggeration to say that under New Labour the public sector has been a test-bed for reform-by-consultancy. According to the NAO, the public sector spent pounds 2.8bn on consultancy in 2005-06 – that’s 28 per cent of the total UK market. This works out at a remarkable pounds 10,000 per public sector employee, or 11 per cent of all operating costs.

As to value for money, the NAO’s judgment that it’s impossible to assess wider benefits, but that ‘there is some way to go before central government overall is achieving value for money from its use of consultants’, probably goes for the private sector too. The big consultancies, after all, have given us the IT-dominated mass-production service factories that are as customer-unfriendly, unpleasant to work in and inefficient in the private sector (bank and mobile phone contact centres) as in the public (HM Revenue and Customs).

And if, as recent research suggests, the most promising management practices are not someone else’s but lurking hidden in an organisation’s own values and traditions, who is more likely to excavate them: a bright young consultant straight off the MBA production line, or its own employees?

The lucrative catch-22 of management consultancy was neatly foreshadowed by Niccolo Machiavelli in 1513. There was, he declared in The Prince , ‘an infallible rule: a prince who is not himself wise cannot be wisely advised… good advice, whoever it comes from, depends on the shrewdness of the prince who seeks it, and not the shrewdness of the prince on good advice’. The more you need it, the less likely you are to be able to use it. Consultants are not going to be out of a job any time yet.

The Observer, 6 July 2008

IN PRIVATE, Labour politicians acknowledge that managing by targets has gone too far. ‘You see, public services were so bad we had no choice,’ is the current party line. Now, the voices add soothingly, ‘we can back off a bit and allow choice and the public to drive improvement’.

If only it were so easy. Loosening the reins suggests that the horse was pulling the cart in the right direction. In fact, the past 10 years’ ‘reforms’ have done such a thorough job of roughing up and desensitising the beast that urgent remedial action is needed to socialise it again.

For proof, look no further than Alan Johnson’s inexpressibly depressing announcement the week before last of a ‘compassion index’, the results to be published on an official website, to show how kind hospitals are to their patients. This is so tragic that it’s hard to know where to begin (although I already have an idea of the ending). But let’s try.

The question is not whether compassion is desirable. It should go without saying that it is vital. For at least 50 years, it has been known that recovery from injury or illness is a delicate joint venture in which dedicated medical care and will and optimism on the part of the patient feed off and reinforce each other. A health service without compassion is therefore a contradiction in terms – compassion indeed figured among the important reasons the NHS was set up in the first place. In such a context, the question that needs answering is: how and why did compassion get lost that it now has to be inspected and audited in again?

The culprit is the dehumanising, Soviet-style regime of league tables, inspection and audit by which the UK public sector is now run. Some of the NHS tale can be unpicked in The Guardian blogs (http://tinyurl.com/5b4ymh) that followed the compassion story. But the pattern is common to many public services.

First, simplistic targets (waiting times, exam results, detection rates) take away from professionals the duty to use independent judgment and make them accountable to inspectors, auditors and ministers rather than the citizens they are serving. Then, to deal with the mountainous bureaucracy that targets generate, the next step is to break the professions in two. As a Guardian blogger noted, over the last decade nursing has been turned into an academic and ‘managerial’ discipline, with wards turned over to managers and the basic caring component (bathing, feeding and comfort) hived off to less trained, lower-status heath care support workers. Exactly the same process of separating out the menial, ‘volume’ tasks from the rest can be seen at work in schools (classroom assistants) and the police (community police support officers), all in the vain quest for economies of scale.

The result is professions that are increasingly administrative rather than vocational, and services that from the user’s perspective are fragmented and disjointed. In a hospital ward, cleaning, feeding and bathing, administering medicine and managing are the province of different people, some of them agency or outsourced. With all these handovers, is it any wonder that too often needy patients go unfed and wards uncleaned, or that the UK record for hospital-acquired infections is abysmally poor?

Belying the talk of loosening reins, the inevitable next step in this ghastly cycle is for ministers hastily to invent new targets to plug the yawning holes in the service that citizens fall through: in the NHS case, first for MRSA and now compassion. Already managers are said to be talking of ward surveillance by webcam to check compliance with the ‘bare below the elbow’ clothing rule. Next up, the smile police? How many times does it have to be said: targets drive a vicious circle of fragmentation and distorted effort. They lead to more targets to correct the unintended consequences, leading to increased monitoring by IT and removal of judgment to cut costs, leading to the demoralisation of service providers and (as Max Weber would have recognised) a bureaucracy that is superbly impartial in providing monumentally impersonal service to everyone. In short, a regime that is not just uncaring and uncompassionate – it is systematically so.

It is also, uncoincidentally, catastrophically wasteful and expensive. Compassion (and cost effectiveness) can’t be bodily inserted into the NHS like an implant, or by ‘backing off’. Both can come only from going back to basics: abandoning the Orwellian ideology of public choice inherited from Thatcher and the doomed attempt to manage costs by substituting computers and scale for trust and community. As for the idea of measuring smile quotients, let the last word (I told you I had an ending in mind) go to The Guardian blogger who noted that ‘if some jumped-up bean counter comes near me with a ‘compassion index’, they’ll get it administered rectally’.

The Observer, 29 June 2008

SYMBOLICALLY dispatching conventional management by launching a model of the pointy-haired boss from the Dilbert comics and a copy of Frederick Winslow Taylor’s Scientific Management into lower space was easy. Following up the fireworks by getting 30 of the biggest names in management, from academic heavyweights to well-known chief executives, to spend two days in California last month figuring out what to put in their place was rather harder.

‘Inventing the future of management’ in a couple of days – the task of the ‘renegades’ convened at Half Moon Bay by London Business School’s Management Lab and its founders, Gary Hamel and Julian Birkinshaw – was an ambitious ask. Yet the very presence of such a group under one roof was eloquent testimony to the urgency of the underlying premise: management is broke and needs fixing. For both good and bad, management is today’s most important social technology, and ‘we need to debate its fundamental underpinnings’, as the distinguished scholar CK Prahalad put it.

Most participants agreed that although modern management had achieved much, like all obsolescent paradigms it had itself now ossified into a formidable barrier to progress. The charge sheet against it is long. It does exploitation better than exploration yet efficiencies are running out of steam. Consumer cynicism leads to increasing marketing budgets for diminishing returns. Employee disengagement is at record levels. Too often, internal change only comes about through crisis or coup.

Even worse than wasting resources, today’s zero-sum management imposes ever heavier burdens on society as a whole: witness the credit crunch, colossal inequalities and the pillaging of Earth’s resources without provision for the future. Citizens trust neither big companies nor their bosses. In short, a discipline that evolved as a technology of compliance to enable mass production is simply unable to address the much wider issues involved in building organisations fit for the 21st century.

Not surprisingly, much of the meeting was about ground-clearing. Why do companies (and advisers, and academics) find it so hard to innovate in the ways they get things done, as opposed to in products and processes? Has management reached the end of its history? Is it a matter of new tools and techniques, or a complete recasting of the terms of the debate? How can management become more experimental?

Firm conclusions aren’t – yet – on offer. But some pointers emerged. Strikingly, just one of the four (admittedly maverick) chief executives present had any kind of management training – which is hardly comforting news for business schools (‘Companies come to us to provide remedial training, not innovation,’ sighed Hamel).

What’s more, for all these companies – organics retailer Whole Foods Market, Indian outsourcer HCL Technologies, manufacturers WL Gore and Seventh Generation, and design group Ideo – do-it-yourself management was their strength, not weakness. All had realised that it ain’t what they did so much as the way that they did it. So while the firms showed wide managerial differences between them, they were rigidly consistent internally, reflecting fierce belief in the power of both systems and an underlying purpose beyond making money.

‘Maybe our strength is not having been influenced by other companies,’ mused Gore’s Terri Kelly. ‘We think of the organisation as a system to be optimised for all stakeholders,’ said John Mackey, of Whole Foods Market. ‘Profits are a by-product.’

Little of this, of course, is exactly ‘new’. Likewise, some of the ‘grand challenges’ emerging from the discussions – the need for higher purpose, distributed direction and strategy-making, building of community and citizenship, increasing trust and driving out fear – have a familiar ring. Indeed, although there are intriguing prospects for innovation in the internet, harnessing the ‘wisdom of crowds’ and perhaps games, for some participants the main effort should be going into propagating the essence of what’s known. ‘We already know a lot,’ said Stanford’s Jeffrey Pfeffer. ‘We need an implementation, as much as an innovation, engine.’

However, what is new, and news, is the Lutheran challenge that the renegades effectively nailed to the front door of today’s management edifice: management must break out of its sterile debates and crack the conspiracy of silence that prevents the biggest issues from being aired – building organisations fit for the planet and for humans, and ones that are as adaptable as their environments, for a start. Of course, say the organisers, this is just the first step. But Half Moon Bay makes it easier for others to follow – and harder for the rest of the management community to avoid answering the question: where do you stand?

The Observer, 22 June 2008

SOARING EXECUTIVE pay is high on the European political agenda: the French denounce ‘perfectly scandalous’ rewards for executives in underperforming firms and brandish the threat of action at European level, the German Social Democrats are pushing for legislation to curb excess, the Luxembourg Prime Minister calls runaway executive pay a ‘scourge’ and even the pragmatic Dutch are considering legislation that would step up taxes on executive windfalls and pension contributions.

And the UK? Trust New Labour to head off anything that would make capitalism less safe for the extremely wealthy. ‘We will resist calls that have been made for direct regulation of executive pay,’ the Treasury minister soothed an audience of bankers last week. ‘Of course remuneration packages should be strongly linked to effective performance, and incentives should be aligned with the long-term interest of the business and shareholders. But I’m clear that executive pay is a matter for boards and shareholders, not for governments.’

No comment, then, on the HSBC pay scheme that could see its top six executives taking home a total of pounds 120m – 12 times their annual salary – over the next three years nor to the barely credible news that despite the financial carnage of the past few months, the City paid out a record pounds 12.6bn in bonuses for the first quarter of 2008.

This, be it emphasised, from organisations that were founder members of the ‘Gadarene sub-prime club’ described by Robert Heller here two weeks ago, HSBC having had to earmark pounds 5.3bn to cover bad loans, while the bills for the rest of them are unknown but almost certainly still climbing.

Such insensitivity in the middle of a credit crunch for which these institutions bear partial responsibility could only be perpetrated by people as remote from the concerns of their customers and employees, not to mention the larger society, as the man in the moon. The isolation effect is, of course, one reason why huge pay differentials are so invidious, and why they cause such offence in the rest of Europe.

It’s worth reminding ourselves of the assumptions embedded in such largesse, here taken for granted, to which other cultures object. Consider the notion, implicit in the HSBC differentials, that each of these privileged executives is at least 100 times more important than their minions on average pay. This seems less than self-evident to continental observers, who point out that not only is there no evidence of correlation between high pay for top individuals and superior corporate performance, but a striking number of corporate outperformers, even in the Anglo-Saxon world, pay their high flyers conspicuously modestly – John Lewis, Whole Food Markets (the most productive US retailer), Southwest Airlines, Amazon and Japanese Toyota. This may be no coincidence, since there is evidence that where work settings require even modest interdependence and co-operation, companies with the widest pay differentials do worse than more egalitarian rivals.

Or take the assumption that ‘alignment’ of top executives with shareholder interests through large bonuses is necessary and desirable. For non-market fundamentalists, that is the problem, not the solution. Today’s credit crunch is at least in part attributable to the crazy incentivisation of Wall Street’s and the City’s finest, without regard to the wider interest. After all, it wasn’t ordinary HSBC employees who blew pounds 7.5bn on the company’s floundering US sub-prime arm, or devised the derivative depth charges that are blowing holes in the financial sector all over the world.

More generally, those outside our system can see that sky-high salaries are a direct consequence of the doctrine of shareholder value, which requires a small group of identifiable individuals to be held responsible for the performance of the whole enterprise, heaped with incentives and given carte blanche to do anything that shifts the share price fast – never mind that it is a travesty of how companies really work.

Hence the grotesque two-tiered management edifice that has grown up in Anglo-American companies over the past 20 years, in which the menial work of operations – producing, dealing with employees, suppliers and customers – is almost entirely divorced from that of those on the top floor, whose activities are to do with financial engineering, masterminding deals and issuing performance standards for everyone else to enable the company to fulfil the promises made to the capital markets.

In this light, even if some political capital is being harvested, continental scepticism about the boardroom pay hijack is both understandable and logical. As for us, having made a considered and decent intervention to temper the excesses of low pay, an equivalent at the other end of the scale is now urgently needed. A High Pay Commission, anyone?

The Observer, 15 June 2008

YOU MIGHT not immediately think of the TV show Who Wants To Be A Millionaire? as a cutting-edge guide to business decision-making. But consider the panicky moment when contestants have to reply to a question to which they don’t know the answer. Should they: a) phone a friend b) eliminate half the answers to leave a 50-50 chance or c) ask the audience? The final answer, Chris, is c): the combined insights of many make an appeal to the audience a much more reliable joker than a call to the brainiest, most supportive individual friend.

Now think of a corporate chief executive making decisions – in effect, answering questions about the future. Like a Millionaire contestant, he or she will be able to call the answers in some cases, intuit in others – and quite often, with only partial knowledge about an uncertain future, will just have to guess. In that case, our chief will probably call in ‘experts’ (consultants) or consult one or two like-minded colleagues on the board. Unfortunately, to their unfailing discomfiture, experts are not only often not right, they are nearly always outgunned by a large enough group of non-experts. (In a small way, it has been shown that the best-informed people in a company are usually smokers – because the shivering huddle outside the entrance is a random sample from different departments who would never normally meet and trade information.)

So, unlikely as it sounds, breadth trumps depth. Take, for example, the experience of giant US electrical retailer Best Buy, which has just bought half of the retail business of our own Carphone Warehouse. Unhappy with the way its sales forecasts were working out, Best Buy ran experiments inviting a broad range of employee volunteers, armed with a bare minimum of historical and current information, to estimate future sales performance. In each case, the crowd was around 99 per cent accurate, substantially better than the supposed ‘experts’ – the sales teams that traditionally compiled the figures.

Management Innovation Lab co-founder Gary Hamel notes that it’s near impossible for a tight group of senior executives to foresee all the consequences of big, complex decisions. This is why so many projects – for example, merger and change programmes – go off the rails. Even senior executives admit they get a quarter of their big decisions wrong, a proportion that their underlings would probably double. To broaden the basis of decision-making, Hamel suggests that firms should set up an internal ‘market for judgment’, a virtual stock exchange giving workers the opportunity to trade securities based on big new projects which would pay out only if those projects were successful. In such a scheme, the price would clearly reflect employees’ estimates of the likelihood of success.

The wisdom of crowds (identified in James Surowiecki’s book of the same name) suggests that the democratisation of decision-making is not a matter of woolly liberalism – there is a strong economic, practical and political justification. Put bluntly, it could help avert corporate disasters and smooth the path of big changes. If the crowd had been consulted on the likely outcome, would Northern Rock have relied on the money markets so long, or the investment banks have pushed securitisation of sub-prime mortgages to such elaborate extremes?

As well as making for more robust decisions, putting the crowd to work could help eradicate another widespread corporate ill: chronic lack of engagement. In its latest global survey, Towers Perrin finds that just 21 per cent of employees around the world are positively engaged with the organisation they work for, in the sense of being willing to go ‘the extra mile’ to make it a success. Fully 44 per cent are disenchanted or positively disengaged, while a further 42 per cent are ‘enrolled’ – meaning well-disposed but not to the extent of providing the discretionary effort of the fully engaged.

And that makes a difference: TP calculations show that firms with the highest proportions of engaged employees sharply outperform those where engagement is lower. Perhaps the key factor in engagement is making people feel that they matter and that includes respect for their qualities, and using those qualities, particularly their intelligence, to the full. Surowiecki writes: ‘The only reason to organise thousands of people to work in a company is that together they can be more productive and more intelligent than they would be apart.’ The bigger the decision, the more important it is to bring the collective intelligence to bear – and the more likely, alas, that most companies do the opposite, holding discussions behind closed doors and announcing courses of action only when there is no going back.

But in theory and in practice, hierarchy is not a solution to problems of cognition or co-operation. In the words of management researcher Warren Bennis, reflecting on the strength of ‘great groups’: ‘None of us is as smart as all of us.’

The Observer, 25 May 2008

ADULT SOCIAL care, on which the Prime Minister has just launched a public consultation, is widely considered a financial timebomb. A postcode lottery, social care for the elderly and vulnerable is both expensive (£13bn) and bad. And it is getting worse: a combination of an ageing population and stretched budgets means that people have to be ever needier to qualify. Even official figures concede that already 280,000 people with real need get no care at all. With more over-65s than children, and with over-85s the fastest-expanding population segment, at this rate the costs of care will quadruple over the next half century.

A gloomy picture, then. Yet there is another side of the equation. Commentators and politicians alike, locked into the tunnel vision that capacity increase can only come from extra resources and obsessed with who pays the bill, are ignoring an equally critical issue: how the services are delivered. Here the bad news – the dire performance of the present care system – has an unexpected silver lining.

Think of it this way. By definition, the capacity of any system comprises activity that adds value – that helps meet a person’s need – and activity that doesn’t. At present, the care system is so full of non-value-adding activity (chasing paper, duplication and form-filling) that there is huge potential for improvement. ‘It’s chock-full of waste,’ says one insider.

Ironically, although we know the ‘cost’ of care, we know almost nothing about its true economics. Because councils are geared to meeting the standards of regulators rather than the demands of individuals, care suffers simultaneously from a surfeit of information about activity – the ‘what’ of care – and a dearth of information about real demand.

For the same reason, official ratings give no guidance to the real experience of users. It is a familiar story: a council can meet all its targets (two days to make an appointment, 28 days to make an assessment or pass it on to someone else), yet the bewildered recipient waits months, even years, for care from departments that are set up to ration standard chunks of provision, not handle individual variety. It may be only then that the needy person finds they can’t afford the financial contribution required or they have got worse in the meantime, so the process starts all over again.

The government’s prescription for this nightmare is the same as it applies to all other public-service ills: ‘choice’, in the form of personalised budgets that allow users to buy their own care, and scale. Both are problematic. Care workers note that personalised budgets, arising from frustration with the awful state of present arrangements, will probably benefit some well-placed, articulate users. But since they offer no help in understanding or improving the system, the most vulnerable may need advocates to use them – surely the role of social care in the first place.

Scale, meanwhile, largely means outsourcing to drive down costs. Carers are often appallingly paid and turnover is high. At the same time, the traditional supply of volunteers has been extinguished by the need for certification and training. Dedicated social workers spend their energy fighting the system to do the best for their clients. For all their efforts, the result is a fragmented, impersonal universe in which attempts to manage costs in the short term drive them up in the long. ‘It’s a lobotomised system,’ says another close observer, that can’t even see how bad it is, or the dynamic that is making it worse. Continuity and reliability are non-existent, while dissatisfaction is off the scale, in turn ratcheting up further demand on the system.

What is the alternative? We badly need to understand real demand for care (as opposed to what councils deliver). To do that, some local authorities are experimenting with reversing current practice: rather than ‘dumbing down’, they are ‘smartening up’ the system by placing expertise in the front office, where people can reach it directly. By putting the brains back in the system, care workers can assess need on the spot, cutting delay from months to days. And by understanding and meeting need directly, care workers can keep people independent longer by simple means – a walk-in bath or shower, or social activity, for example. If they later need further provision, it can be supplied quickly without more form-filling, since the case is already known.

In the long term, prevention at the first sign of need is likely to be much cheaper than cure when it becomes critical – even more so because it removes knock-on burdens on other public services, such as the NHS. It also clearly reveals other wasteful elements in the system, like the reporting bureaucracy, for what they are. Finally, when all the progress chasing, duplication and recycling of applicants is stripped out, some of the double- and triple-counted demand simply evaporates. Some councils report an effective increase in capacity of 30 to 40 per cent. Maybe, speculates one insider, ‘the timebomb isn’t as fearsome as we thought’.

The Observer, 18 May 2008