OUTSOURCING of information technology – and to a lesser extent business processes such as finance, administration or human resources – is now so prevalent that it has become the default: companies, and particularly the public sector, have to explain themselves if they don’t outsource, the underlying assumptions being that they are (a) missing out on automatic cost reductions attendant on shedding routine operations to specialists and (b) by the same token, handing competitive advantage to those who do.

Yet outsourcing is going through ‘a mid-life crisis’, according to Compass, a management consultancy. When Compass analysed 240 large outsourcing contracts in Europe and the US, it found that fully two-thirds were unravelling before the contract’s full term. Far from cutting costs, in many cases outsourcing ended up costing more than keeping the services in-house.

Terminating a contract in mid-term is expensive, but some buyers are finding that the cost of remaining locked in to an inflexible deal is higher still. Sainsbury and JP Morgan are two firms that have scrapped multi-million-pound deals (with Accenture and IBM) over the past couple of years to bring IT operations back in-house others probably would (and should) do the same, except that they no longer have the necessary expertise to do so.

Ironically, the inflexibilities are often negotiated into the contract by buyers, whose faith in the existence of large cost advantages is akin to a belief in alchemy, according to Scott Scarrott, Compass’s head of business development. ‘There’s no magic,’ he says. An outsourcer has to be 20 per cent better than the in-house operation just to cover set-up costs and break even. Factor in a margin for risk, overhead and profit and that rises to 40 per cent. That’s a handicap that can’t be offset by simple ‘labour arbitrage’ even in low-wage countries such as India, where high labour turnover and low productivity compound the disadvantages.

Yet buyers still insist on negotiating heavily legalistic, cheapest-possible deals with almost no ‘wriggle room’. They usually live to regret it. Two or three years in, buyers find that hardware costs have come down, while – under heavily back-end-loaded deals – costs are rising rapidly. By the end of a seven-year contract, some companies examined by Compass were paying 40 per cent more for their outsourced services than they would have by doing them themselves.

Scarrott stresses that this is not the type of deal vendors prefer, but it is the one that cost-obsessed buyers insist on. ‘For every bad vendor there are at least five bad buyers,’ he says. The mistakes are all the bad old management habits, speeded up and updated for an IT-enabled world: short-termism, wrong yardsticks (speed and labour costs rather than anything connected with the business), failure to retain know-how to manage the new relationship, inadequate attention to governance, and an unappealing combination of greed, laziness and cowardice that is manifested in the all-too-common practice of ‘lift and shift’ – simply taking an inefficient operation and handing it over to someone else to deal with, often, in the medium term, by sacking people. In short, outsourcing has become a classic management fad.

Depressingly, the public sector is a serial offender, adding to poor procurement a dogged failure to learn: a contract’s true value can only be evaluated after two or three years, but since those who do the deals are only concerned with procurement, that rarely happens. So outsourcing is frequently the worst of all worlds: the wrong solution to the wrong problem, done badly.

Given that IT outsourcing is three generations old, you might expect the lessons to have been learnt by now. A few companies, having found out the hard way, are indeed beginning to take a more selective attitude to the practice: lowering cost-saving expectations, bringing back some operations and retaining much more expertise even in those they outsource. However, Compass sees many of the same mistakes being made all over again as new industries, such as insurance, pile on the bandwagon.

Perhaps the most worrying aspect of this catalogue is what it says about companies’ underlying strategy. None of the hi-tech trappings or jargon can disguise the fact that ‘lift and shift’ represents the management equivalent of football’s ‘route one’ – heads down, hack the ball upfield and chase.

No wonder customers are unhappy. If they are cynical about customer service with a foreign accent, it’s because they know it’s an accurate reflection of suppliers’ reliance on low-cost and mass-production methods for dealing with them. That’s a model that has run its course – so shareholders should be worried, too.

The Observer, 13 May 2007

THE PAINFUL unravelling over the last year of the public and private lives of one of the UK’s most iconic businessmen, Lord Browne, is a sobering example of the pitfalls of the cult of leadership. Raising expectations far beyond the capacity of one human to fulfil them – neither BP’s successes nor its more recent failings were ever down to Browne alone – hero leaders often end up destroying themselves and wounding the companies that helped to make them.

The love affair with Leadership – capital L – is deep-rooted and pervasive, as a look at almost any copy of Harvard Business Review or Fortune will confirm. April’s HBR establishes both the tone and the assumed relationship with ‘What Your Leader Expects From You’. February offers ‘Discovering Your Authentic Leadership’, while January 2007 – a special issue devoted to ‘The Tests of a Leader’ – sports a cover picture of a shirt-sleeved executive (male, naturally) pumping press-ups on the boardroom table. ‘Leadership is for lone He-Men’ is the clear message: leaders are managers on steroids.

Of course, we need leaders to focus, decide, rally and sometimes inspire. From playgrounds to football teams to political parties, human groups do not remain leaderless for long. But the business need for heroic leadership – and its corollary, the lament for the lack of it that kicks off most articles on the subject – is something else again.

Where does the desire for heroes originate? One source is the quest for certainty. This intensifies as the world becomes more uncertain perversely, by raising expectations it also increases the likelihood that they will be dashed. Another source is the way the leader’s job is specified. Theoretically, the need for hierarchy, with a strong leader on top, stems from the idea that employees’ and companies’ interests differ, so a strong boss is needed to ensure the workforce does what is required for shareholders. The boss must also decide what they should do. Obvious, really: in any case, the alternative – running a company from the bottom up – is surely a recipe for chaos and anarchy?

Except that these notions are danger ous half-truths. In theory and in practice, hierarchy doesn’t work, and no one put the reason better then GE’s Jack Welch, himself an iconic manager. Hierarchy, he said, defines an organisation in which people have ‘their face towards the CEO and their ass towards the customer’. The more charismatic the executive, and the more centralised the power, the more perverse the effect.

Centralised power and decision-making, central planning by another name, is not only bad news for the customer. It leads to a cult of personality that wrecks good management. In Ego Check: Why Executive Hubris is Wrecking Companies and Careers (Kaplan), Mathew Hayward notes that chief executives who become celebrities are a danger both to themselves and their followers. They believe their own press, attribute success to their own brilliance and failure to the incompetence of others, and vastly overestimate their decision-making prowess. Success only supercharges this process, generating feelings of invincibility that make an eventual fall inevitable.

When CEOs become celebrities, their firms’ performance starts to decline, Hayward finds. Before their downfalls, Martha Stewart, Enron’s Ken Lay, Hank Greenberg at AIG, Sunbeam’s Al Dunlap, Dennis Kozlowski at Tyco, and WorldCom’s Bernie Ebbers all figured in laudatory cover stories in prominent business magazines. He also discovered that companies with starry CEOs pay more for acquisitions. And consider this: by acting as positive feedback, stellar pay can reinforce executive hubris and its damaging effects. Hayward writes: ‘By fostering false confidence, greater compensation can actually diminish our resourcefulness and productivity.’

At bottom, the cult of leadership is based on a false opposition. The opposite of top-down hierarchy is not bottom-up anarchy. It is what John Seddon of Vanguard Consulting calls ‘outside-in’, or, to reverse Welch’s image, turning the company through 180 degrees to face the customer rather than the boss.

Making the organisation demand-led instantly changes the role and requirements of the CEO. Of course, courage and judgment are still necessary. But they are no longer arbitrary, the product of supposed omniscience. Nor is the job any longer one of coercion, but rather to support front-line employees in serving customers. In short, the leader sets the context in which the interests of company and employees can, as far as possible, coincide.

As ever, be careful what you wish for. Outside-in, demand-led companies don’t need hero leaders, we should beware of creating them, and they should beware celebrity’s duplicity. As for investors, when a CEO makes the front cover of Fortune, or appears at the head of a ‘most admired’ list – sell.

The Observer, 6 May 2007

Anyone looking at New Labour’s decade through a macroeconomic lens might conclude it was the best of times.

After an uninterrupted run of growth, employment is consistently high and inflation (despite the recent blip) is low. The UK rates as one of the most market-oriented, business-friendly economies in the world, with (whatever the CBI says) a favourable tax regime and the lowest levels of product and labour market regulation in the OECD. The stock market is booming. For proof of the strength of the economy, look no further than sterling which, apart from a brief moment in the early Nineties, was last worth $2 in Mrs Thatcher’s day.

Yet reverse the lens and the New Labour decade looks very different. Since 1997 manufacturing has lost a million jobs, including those of the last British volume car manufacturer – a symbolic demise if ever there was one. Record company profitability notwithstanding, fewer people can look forward to a secure old age most will have to work longer, and harder, for their retire ment. Levels of engagement and trust at work are obstinately low. Since real salary increases have been hogged by the best paid, inequality with even medium earners has grown by leaps and bounds. The country is running the biggest trade deficit since records began. Meanwhile, much of the public sector is in disarray.

Most strikingly, despite being the focus of intense government effort, relative to traditional rivals the productivity performance of UK firms is mediocre – in terms of output per hour, free-market Britain still lags not only the United States but regulated Germany and even supposedly sclerotic France. It was, in fact, the worst of times.

How can two such different accounts apply to the same economy? Clues can be gleaned from a series of studies being carried out by the Advanced Institute of Management Research (AIM) which suggest that ministers’ views of management are naive. Broadly, the government thinks that improving company performance is about supply-side economics and best practice. To this end, the Treasury has singled out five ‘levers’ of productivity – competition, innovation, enterprise, investment and skills – and subjected each to major programmes of reform.

But both these concepts are problematic. Productivity, the researchers suggest, is not primarily about inputs but the messy, complex, human process of turning them into usable outputs – ie, management, not economics. Since the Treasury’s levers are unconnected with what happens inside the firm, supply-side push has little effect: the supply of skills may have increased, but employers’ ability to use them hasn’t the world is awash with credit, yet companies still refuse to invest as much as counterparts abroad competition pushes companies on to the ‘low road’ of cutting costs and competing on price rather than changing strategy to move up the value chain.

This is bad enough. But there is more to come. AIM’s work on UK companies’ notorious reluctance to take up advanced management practices shows that the idea that there is something called ‘best practice’ that can be bodily transferred from one context to another is simplistic. Instead, companies need to look within themselves as much as outside to develop their own unique ‘signature’ processes. This is why Toyota remains way out in front of other car firms, despite all attempts to imitate it.

Establishing such processes involves building human and organisational capital – patient, painstaking work. But today’s institutional context might have been designed to make such long-term organisation-building impossible. The havoc visited on the public sector in the name of competition is the government’s deliberate attempt to match today’s deal-making frenzy in the City, and both make good practice harder.

The AIM research shows that, disquietingly, the UK productivity gap is even wider in services than in manufacturing. But what price Boots or Sainsbury’s developing distinctive processes when they are being turned upside down by private equity, or the threat of it or the NHS when it is being reorganised every two years by a government that doesn’t understand what management is?

The tale of the two economies is thus not just that they are growing apart. The two are increasingly at odds, with the function of what used to be thought of as the ‘real’ one more and more to supply the raw material for the bids, deals and exotic instruments keep the weightless one miraculously aloft. As Anthony Hilton wrote in the Evening Standard last week, ‘the entire UK economy has become, in effect, a giant hedge fund with a massive one-way bet on financial services – and no Plan B for the day when the City goes off the boil.’ If and when it does, the costs of the government’s failure to understand the managerial economy will be high – for all of us.

The Observer, 29 April 2007

PERMANENTLY CAST in the long shadow of Whitehall, local government has long been the poor relation of politics – the purveyor of bins, parking tickets and Asbos as opposed to high strategy. But, as yet unreflected in dismal voting totals, things are stirring in some town halls, which are the scene of an ‘untold story’ of change and new thinking about what a local authority should be doing, according to a defiant Moira Gibb, chief executive of London’s Camden council.

Camden is a good test case. Including the airy heights of Hampstead and Primrose Hill, as well as the less salubrious areas around King’s Cross station, the borough is ethnically, linguistically and socially diverse, populous and challenging. Labour-controlled for nearly four decades until last year’s local elections, it has always been an unrepentantly ‘big-government’, high-spending council. Yet although it was highly rated, financial pressures (for example, staff costs had soared by 37 per cent since 2002) were forcing the council to scrutinise every aspect of its organisation, cost structure and ways of providing service.

Caught in the jaws of a cost squeeze, and facing rising expectations and inflex ible government targets, many local authorities are tempted by a big-bang, ‘solutions-driven’ approach, usually involving partnership with an IT supplier to install large-scale contact centres and computer systems, with applications and services back-fitted into them. Camden considered and rejected this option, choosing to ‘solve problems’ rather than ‘apply solutions’, with the aim of transforming itself one step at a time.

The first fruits are a council-wide efficiency programme with the avowed aim to do things better as well as cheaper. ‘It’s a job convincing people that the two things go together,’ admits Gibb most, including a vociferous local press, believe that the only way of doing more is by increasing resources. But the better (and cheaper) way of increasing capacity is to stop doing things that add no value, such as bureaucratic processes, and do more valuable things instead.

Unlike the ‘solutions’ approach, this in turn involves spending time first to understand the problems that need to be fixed and what residents actually want, which usually has more to do with how the council interacts with residents.

A good example is the council’s work on housing. Faced with demand for housing that vastly outstrips supply, Camden had created a bureaucratic industry to defend itself. The penny dropped, says Michael Scorer, deputy director for customer service, when the council began looking at the issues through the lens of the resident with a problem, rather than that of a landlord.

Instead of obsessing about its own scarce accommodation, Camden now offers people options, including moving out of London, or into the private sector, which it undertakes to help them achieve. Some residents have been helped on to the first rung of the property ladder none, claims Camden, is left in B&Bs or hostels. As the emphasis shifts from doing what’s legally compliant to addressing real needs, results improve. The critical moment is the first, says Scorer: asking people what they want. ‘That puts them in the driving seat – they make the decisions. And the whole bureaucratic industry is gone.’

Even better is Camden’s treatment of the homeless and rough sleepers: new arrivals are quickly identified, assessed and plugged into a well-honed procedure for getting them back into a more settled, independent life. Clearly better, it is also cheaper to tackle the issue directly and early. Scorer claims some ‘inspiring stories’ – not a phrase that is often associated with local government.

‘Better and Cheaper’, announced last October, has a distance to run before it becomes a way of life. One component – ‘workforce remodelling’, including cutting staff costs – has aroused suspicion among some of Camden’s 4,200 non-teaching staff, but Gibb believes that in the main they are responding positively to the ‘simple, friendly, fair and enabling’ values that the borough’s services need to embody – and to residents’ reactions to the improvements in visible services, such as housing and parking. Not to mention the budget: this year Camden froze its council-tax take and increased spending on services by 4.3 per cent.

As confidence grows, many councils like Camden, high-performing in government terms, are chafing at what they feel are obsessive controls exerted by Whitehall. If the idea of ‘place-shaping’ – jargon for moving the emphasis from providing services to a broader role of advancing the wellbeing of a community and its citizens – is to mean anything, councils must be free to exploit their great asset: being close to the ground. Gibb says: ‘The government isn’t taking advantage by moving to the next step.’

‘Place-shaping’, for once, is about purpose, not process. Having imagined the end, government needs to will the means.

The Observer, 22 April 2007

BY TURNING ITS 2007 annual report into a 454-page, 1.5kg WMD for the postal system, HSBC may have been hoping to bring down the current reporting regime at a stroke. Yet while there is widespread agreement that present rules leave much to be desired, reducing the reporting story to the need to slash overweening bureaucracy is disingenuous to say the least.

It is certainly true that regulation has increased, is increasing and, in some areas, probably ought to be diminished. The HSBC report contains 133 pages of notes explaining how the figures are affected by the application of the International Financial Reporting Standards (don’t ask), which came into force in 2005. Some senior executives complain that IFRS makes many company results harder, not easier, to understand.

But it is worth asking how we arrived at this unsatisfactory position. The background is that for a supposedly ‘hard’ discipline, accounting is actually surprisingly ‘soft’, a matter of opinion as much as fact (one measure of the fuzziness of today’s accounts is its failure to illuminate the often enormous gap between balance-sheet values and what a com pany is actually worth, tellingly ascribed to ‘intangibles’). As a result, one longer-term trend has been an attempt to make the numbers paint a better picture by adding more and more of them.

The desire for ever greater quantification has been evident in all areas of management, even in non-financial areas. For at least half a century, managers and management academics have conspired to play down judgment and play up numbers as the basis for decision-making – managers with the aim of making management ‘easier’, and academics to render the discipline more ‘scientific’.

Management can’t somehow be made simple or scientific – it was WE Deming, a statistician (although strangely ignored in the mainstream management literature), who observed that the most important costs in business are unknown and unknowable. Some senior managers now lament that their juniors are so addicted to numerical targets that they can’t work without them – their ability to make anything more than the simplest judgments has almost disappeared.

The tendency for detail to proliferate has been abetted by another enduring trend: the aggressively rules-based approach to accounting of many US firms, which takes the view that anything that isn’t specifically forbidden is allowed. The result is a constant testing of the boundaries of the permissible, and a minuet with regulators in which every accounting innovation is greeted with a new regulation to block the loophole. Sometimes the boundary-pushing becomes so fierce that legislators are provoked into drastic action, as at the end of the last decade with the excesses of Wall Street, Enron et al. The resulting Sarbanes-Oxley Act is a monster that, while not addressing reporting as such, has become a monument to the box-ticking and compliance approach which now dominates many annual reports.

There is a third reason why authorities have found the urge to tinker with reporting rules irresistible: for all their length, most reports are amazingly uninformative. Yet none of the specifications makes it impossible to paint a true, fair and even entertaining picture of a company’s performance.

Take Berkshire Hathaway, a large conglomerate with widely spread interests and revenues of $99bn. Its annual reports consists of 82 pages all told. It contains a letter from the chairman and CEO, Warren Buffett, which is not only a model of clarity about the company’s situation, warts and all it is also a great read, studded with one-liners, anecdotes and nuggets of real wisdom about investment and management in general.

Companies may be right that reporting rules are confusing, and that regulation has reached the point where the preoccupation with preventing miscreants from getting away with bad stuff is making it disproportionately difficult for the good guys to do their legitimate job. But for all the above reasons – bad maths, bad behaviour and bad English – they deserve limited sympathy: they have largely brought the rules and regulations they complain of on themselves. As long as they continue to behave as in the past, testing the edges of legality, and sometimes crossing it, they are unlikely to persuade either legislators or the public to get off their backs. The remedy is therefore in their own hands.

No one reading Berkshire’s report could fail to understand the nature of the business, the principles on which it is run, the mistakes it has made in the past, the influences on its present and future performance, and, not least, the character of those who run it. If more companies could show they understood their business so well, they would remove much of the pressure for ever more detail – as well as making the postman’s lot a happier one.

The Observer, 15 April 2007

EATING OUT is one of life’s greatest pleasures. Part performance art, part physical gratification, a good meal refuels spirit as well as body. Yet when did you last have a memorable – not just expensive – meal in a restaurant? What’s on the plate has to emulsify perfectly with service, atmosphere, expectation and, not least, the bill. If just one element fails to gel, the pleasure seeps away.

That makes running a restaurant one of management’s stiffest challenges and one that most establishments fail. The food is uninspiring, the performance pretentious or sloppy, and all too often you come away feeling vaguely cheated, whether by ambitious prices and mean portions, pressure to buy expensive extras and wine, or mistakes on the bill.

But it doesn’t have to be like that. In his fascinating Setting the Table: The Transforming Power of Hospitality in Business (HarperCollins), Danny Meyer recounts how he built one of America’s most consistently successful restaurant groups, both gastronomically and financially, by giving, not taking. As the subtitle of his book suggests, Meyer, who made his name with the Union Square Cafe and now presides over 11 New York establishments, has made his creed ‘enlightened hospitality’, and it is what distinguishes his restaurants from the rest.

Hospitality, Meyer suggests, exists when the other party to the deal is on your side. If that sounds glib or gushing, it’s a measure of our cynicism, since deep down we have learned that most businesses are not on our side: they are out to fleece us of as much as possible while still keeping a straight face about customer service (small print, hidden extras, unfathomable tariffs – you name it). But service, Meyer insists, is not the same as hospitality. Service is the technical delivery of the offering; hospitality is how the service makes the recipient feel. Hospitality is an individual transaction, which is, crucially, what prevents the performance becoming rote. Both are needed for restaurant success.

This is a management philosophy built on optimism and generosity, and it runs right through the operation. It also inverts the usual business priorities. Because performance depends on everyone being at the top of their game, it starts with the staff, who are recruited for attitude over aptitude (there is no shortage of good applicants fleeing the fear-driven kitchens of others). Their priority is being hospitable to customers. Next comes the community. Most of Meyer’s restaurants have been launched in run-down areas that needed a boost – good business in two senses, because rents are lower, while investing in the community generates the proverbial rising tide that lifts all boats. Investors come last, after suppliers – but they aren’t complaining either, since they too have received rich portions from Meyer’s patient, generous approach.

Which, of course, is the decisive counter to the inevitable reaction that all this is too good to be true in today’s unforgiving environment. Consider that restaurants are one of the most brutal (in all senses) businesses in the world, legendary for failure rates, overpowering egos, staff turnover and chef burnout – and that New York adds to these a fickle public and the toughest critics around. Yet Meyer’s restaurants evoke extraordinary loyalty and come consistently high in their respective rankings year after year. This is no flash in the pan.

In any case, as Meyer makes abundantly clear, optimism and generosity are by no means a soft management option. There’s no getting around vicious competition, so standards are uncompromisingly high. Meyer talks of the ‘blood sport’ of competing for the city’s best staff. Yet he is just as uncompromising about the destructive effects of internal competition – as when an award turned the head of a young waitress at the Union Street Cafe, causing deep disruption and resentment (the opposite of hospitality) until she left.

Setting the Table is far more than an engaging book about establishing and running restaurants: it is studded with reflections that have wider application to business and management. By basing his enterprise on a cheerful, optimistic vision of human nature, Meyer sets up a direct challenge to the dominant game theorists, transaction-cost economists and management scholars who put economic man, the rational utility-maximiser, at the heart of their desiccated equations. While he cordially accepts that there are other ways to run an organisation, by recognising that management can be a powerful amplifier of energy and excellence or the reverse, Meyer has effectively turned his restaurant group into a purveyor of hope, optimism and humanity as well as good food. It’s an uplifting message. ‘There is almost no downside to a hospitable, charitable assumption,’ Meyer asserts.

So nice guys do win. Or, as he puts it: ‘No amount of generosity has so far succeeded in putting us out of business.’

Enjoy your Sunday lunch.

The Observer, 8 April 2007

OUTSOURCE EVERYTHING except your soul,’ the excitable guru Tom Peters once exhorted. And companies all over the world have responded with a will. Want someone to build you a computer or a fridge? Old hat. How about a complete car or even a house? Done.

Increasingly, it’s not just making things but the services attached to things that are on the move. For example, quietly doing away with the need for a local distribution centre, some Western companies are carrying out critical parts of their distribution activities – sorting, labelling and even placing goods in displays – alongside factory operations in the Far East, ready for direct shipment to individual stores in the UK or France.

But you ain’t seen nothing yet, according to some interested parties. Expanding at anything from 30 to 60 per cent a year, the IT services companies that have been India’s economic growth engine for the last 15 years are living proof that outsourcing appetites are growing rather than shrinking. And leaving behind routine coding and customer-service centres, firms such as Tata, Wipro, Infosys and Satyam have their sights fixed on the wider services sector that makes up two-thirds, to a value of pounds £3 trillion, of the world’s GDP. Although, notoriously, haircuts remain immune to export, an increasingly variety of services will be ‘virtualised’ – sliced and diced at different global locations before being reassembled for final delivery.

‘Just like manufacturing,’ says Ramalinga Raju, founder and chairman of £750m Satyam Computer Services, the fourth-largest of India’s leading IT posse. Healthcare, where a scan may be carried out in one country, processed in another, and sent to a third for another opinion before being sent back home again, is one example. Animation for filmmakers is another. So is architectural and other design – and why not legal and other professional services, asks Raju, who believes that even the smallest service firms will soon be able to take part in the globalisation tango.

India’s exuberant IT firms have come a long way since their founding by a few hopeful pioneers in the wake of the economic reforms of 1991. Then regarded with amused condescension – like Japanese car manufacturers in the 1970s – they were given a boost when the Y2K panic and massive international over-investment in optical fibre combined to multiply both demand and the subcontinent’s ability to meet it remotely.

However, there’s no fluke about their subsequent continuing rise, although Indian firms concede that US suspicion of foreigners since 9/11 has helpfully made it easier to export work from the US than to import people. From their early status as ‘body shops’ – providing cheap invisible programming grunt work – Indian firms have steadily increased in both confidence and competence, simultaneously grabbing market share and moving up the industry value chain.

IT services now account for 8 per cent of Indian GDP, and industry revenues could total £50bn by 2010, according to estimates. These runaway totals suggest that customers buy the story that Indian suppliers can undercut big international vendors such as IBM and Accenture on price and beat them on quality.

While Indian companies are still small relative to the international giants, they are growing much faster – and the multinationals are increasing their Indian presence. ‘An Indian company as the next Microsoft? Why not?’ muses one IT executive. The industry confidently believes it is set to become the service hub for the world, just as China is in manufacturing. For this, however, the Indian outsourcers must meet some tough challenges. One is a looming shortage of qualified manpower, aggravated by high labour turnover rates – more than 100 per cent in some call centres. Depressingly, India has not managed to free itself from some of the West’s worst management habits, just as it has enthusiastically adopted its most excruciating jargon.

In terms of offerings, they must match software quality with an ability to innovate and lead. ‘Customers are no longer coming to us to cut costs – that’s a given. They are saying, ‘What can you do for us that will transform our business?’&’says one senior executive. In effect, through the virtualisation of services, customers want their suppliers to provide not just computer programming or applications, or even the management of their entire IT infrastructure, but entirely new business models – the as-yet-unimagined equivalents of the downloads that have altered the music business forever.

Can the Indian firms go beyond IT to innovate? The best argument that they can is the rapid and imaginative evolution of their own business models. In time, though, a la Tom Peters, they must surely run up against the corporate version of the body-mind problem. Can a company have a soul without a body? Just how much can a company outsource and still keep its own identity? Indian software is pretty good, but it hasn’t yet solved that one.

The Observer, 1 April 2007

IF I SUGGESTED that there was a link between, on the one hand, Gordon Brown’s commitment last week to ‘greater choice, greater competition, greater contestability and greater accountability’ in public services, and on the other MAD, the doctrine of mutually assured destruction that underpinned nuclear strategy during the Cold War, you might conclude that the strain of writing about management for a living had finally taken its toll.

But in that case, you haven’t been watching The Trap, Adam Curtis’s BBC2 three-parter on the genesis of our current ideas about freedom. If you had, you would know that the connection is the Nash Equilibrium – the creation of the eponymous mathematical genius John Nash, portrayed by Russell Crowe in the 2001 movie A Beautiful Mind

Nash was one of a group of theorists at the Rand Corporation, a military think- tank, who worked on game theory to model likely Russian responses in a nuclear confrontation. The equilibrium – for which Nash won a Nobel Prize – was a model showing that if every player acted with self-interest and suspicion and tried to outwit opponents, no one would have anything to gain from unilaterally changing strategy: the outcome would be a balance of terror.

If such thinking ‘worked’ in international relations (there was no nuclear war), could it apply to social and economic behaviour too? Yes, chorused a posse of US economists led by James Buchanan, who, borrowing from Adam Smith, eagerly theorised that the interplay of individuals rationally pursuing their own selfish interests could produce not warfare or anarchy, but the opposite: a dynamic, self-adjusting social order.

You can sense a near-religious fervour here. We already have a system – the free market – under which consumers can vote every day for what they want, instead of every five years as in politics! And that’s not only more democratic but also cheaper, because it means we can get rid of all those bureaucrats, who as we now know have just been (rationally) feathering their nests at our expense! There is no such thing as society! Order out of freedom: no wonder it looked like the end of history, the final triumph of democracy and free markets.

This in crude form is the ‘public choice’ theory that was at the heart of Thatcherism and Reagonomics, and that finds its echo in the Chancellor’s words last week. Still not convinced? Then we can telescope the connection into just one degree of separation.

One of the revelations of The Trap is that Alain Enthoven, the guru behind Thatcher’s internal market NHS reforms of the 1980s, was US assistant secretary for defence under President Johnson, and before that – one guess – nuclear and game theory strategist at the Rand Corporation. ‘Consumer choice, competition and strong incentives to modernise’: no, not Brown, but Enthoven’s NHS prescription for New Labour, circa 2000.

The Trapss bringing together of a number of strands, including psychiatry, medicine, politics, economics and management, is wide-ranging and controversial. But a virtue of its broad historical context is to bring into sharp focus otherwise-puzzling aspects of the agenda that New Labour has pursued since 1997 even more zealously than the Tories before them.

In this perspective, the assault on professionalism – teachers, doctors, lecturers, police – suddenly appears not an unfortunate byproduct of policy: it is the policy. Ministers want doctors and lecturers to be motivated by money and league tables. It is only by ridding them of pesky notions of doing good or knowing best that game theory and public choice can be made to work.

Left to themselves, humans obstinately refuse to be bad enough for these grotesque theories to come true. When Nash tested his system games on Rand secretaries, he was bemused that they insisted on co-operating instead of betraying each other every time. Only later did it transpire that Nash himself was suffering from paranoid schizophrenia, believing everyone, including work colleagues, was out to get him. In fact, it turns out that the only people to reliably exhibit the behaviour required to make the equations work are psychopaths and economists.

That sounds bleakly funny, until you consider the implications. As the economists’ experience suggests, self-interest can be learned. The trap is that this is what organisations in both public and private sectors, all based on the same reductive assumptions about human nature, are teaching us. Slowly but surely, organisations are remaking us in their own stunted and cynical image. If this extraordinary and unprecedented experiment ‘succeeds’, the ‘Stalinist’ epithets attached with such glee to Brown last week will also take on a new and more sinister meaning.

The third part of The Trap is on BBC2 at 9pm tonight.

The Observer, 25 March 2007

I GROANED last week when, as happens to business journalists several times a year, I was rung up by a polling firm canvassing my views as an ‘opinion former’ on how a client company ranks across a range of criteria. The interviews are tiresome and (I think) pointless the only reason for doing them is the contribution to charity that the company makes in return.

But that creates problems. The honest answer to most questions (‘How do you rate x for innovation?’) is, ‘I haven’t a clue’. But it’s embarrassing to admit that. (These are well-known companies, you’re an ‘opinion former’ and they’ve paid for your views.) So instead you extrapolate from what you do know, usually financial performance. If it’s a successful company, it’s a fair bet it’s OK at innovation, too. The reverse is also plausible.

In other words, you infer a correlation between performance and something else. But in the words of the immortal Bo Diddley, ‘You can’t judge one by looking at the other’ – it’s an optical illusion, a ‘halo effect’, and it renders most of that expensive ‘opinion-former’ research worthless. The same fault vitiates grander surveys, such as Fortune ‘ s ‘most admired’ list, out with the usual fanfare this month. When a company such as Dell or Sony tumbles sharply down the list it’s usually because of poor financial results, but the rankings under all the eight headings that make up the index tend to fall in tandem.

Does this matter? More, perhaps, than you think. As Phil Rosenzweig charts in his feisty and entertaining new book The Halo Effect, from which these insights come, problems of research methodology and corrupt data bedevil much management literature, turning it into reassuring parables rather than reliable guidance based on empirical evidence. Such data are particularly dangerous, he charges, when used to support prescriptions about how to succeed – the ‘mother of all business questions’ – which has generated a lucrative line of management best sellers from Peters and Waterman’s In Search of Excellence (1982) on.

Most of them, Rosenzweig shows, are undermined by halo effects, among other manifestations of pseudoscience. Unusually, Rosenzweig, a professor at Swiss management school IMD, has the temerity to name names. For example, In Search of Excellence , the original management blockbuster, is taken to task for the elementary error of looking only at ‘excellent’ companies, which is like trying to identify what causes high blood pressure without using a control group of non-sufferers. It is also a good example of the halo effect at work. If you start by choosing a group of successful companies and ask managers to account for that success, it would be surprising if they didn’t mention listening to customers, good people management, strong values and strategic focus. But these are a rationalisation after the event. Describing success doesn’t explain what caused it – strong values could equally well be the result of success as its cause. ‘Whether these things drive company performance, or whether they’re mainly attributions based on performance, is a different matter. Peters and Waterman went searching for excellence, but they found a hatful of halos.’

Rosenzweig also gives a seeing-to to Jim Collins and Jerry Porras’s Built to Last and Collins’s Good to Great , perhaps the most influential management volumes of recent years. Both earn ticks for comparing the ‘great’ exemplars with a control group of less successful companies. But each is riddled with halos and other delusions: delusions of rigorous research (it’s quality not quantity that counts), of lasting success (company performance fluctuates, with a tendency to revert to the mean), and of ‘organisational physics’, the idea that, to quote Built to Last , there exist ‘timeless principles of enduring greatness’ that apply everywhere.

One reason they don’t and can’t is the especially treacherous ‘delusion of absolute performance’: performance is relative, not absolute, which means that the idea of a company achieving success by following a simple formula, irrespective of what competitors do, is just a myth. The margin between success and failure, what’s right and wrong, is deceptively narrow, and (despite Bo Diddley) the one can become the other almost overnight.

Rosenzweig attributes the success of the management blockbusters to the authors’ ability to spin reassuring, inspiring folk tales which hold out the promise that high performance is within reach of anyone with persistence and focus. In themselves, of course, these things probably aren’t wrong, and may even help. But although necessary, they are not sufficient. There are no simple answers to complex questions with many interdependent variables, and managers who believe that there are simply end up taking their own press at face value, a recipe for (relative) failure. As Field Marshall Slim once wisely put it: ‘No news is ever as good or bad as it seems at first sight.’

The Observer, 18 March 2007

THE SPANKING new steel and glass buildings housing India’s exuberantly growing IT companies could be in Reading or California – until you visit the dusty, worn emergency staircases at the back, which seem 25 or 50 years older, as in a sense they are. Although new buildings are mushrooming, along with demand for contact centres to handle the world’s IT infrastructure and customer service needs, cranes on Indian building sites are rare. Much of the lifting is done by hand or hoist: hence the worn steps. During construction, the stairs serve as home to entire families of builders.

Although the glancing relationship – and glaring contrast – between the rich and poor Indias has struck onlookers for decades, the rise to world prominence of the country’s IT industry has given it new poignancy. Some go as far as to argue that up till now the financial benefits of India’s remarkable IT success have been felt as much by foreign companies and their shareholders as by Indians, apart from a wealthy few.

It wasn’t out of order, mused Nobel economics laureate Amartya Sen last month, to wonder whether the IT firms couldn’t be doing more to connect the rural poor to their thriving economy. India has defeated many attempts to bridge the divides of caste and wealth, but that just might be about to change, as the first generation of IT entrepreneurs starts to bring its wealth, confidence and technological prowess to bear on development. The results have implications far beyond domestic borders.

There is one reason for optimism here: self-interest. As well as the need to avert a backlash against the sector’s ostentatious material success, Indian IT firms are running out of suitable staff to run their burgeoning call centres. One option is to offshore, in turn, to Vietnam or the Philippines. But what if they could find a way of using the country’s 700 million rural poor – many undereducated or uneducated, and nearly half earning less than a dollar a day for a family of five?

This is the solution pioneered by the Byrraju Foundation, a not-for-profit organisation whose initial funding was provided by Ramalinga Raju, founder of India’s fourth-largest IT services company, Satyam. The foundation, which claims to be the first non-profit group run on Six Sigma quality lines, initially aimed to target rural health. But it rapidly became clear, recounts partner Verghese Jacob, that lasting health gains were impossible without better education and sanitation and that even together these advances were at risk unless they could be locked in place by new village livelihoods. The foundation now espouses the larger intent of securing ‘holistic, sustainable rural transformation’ by releasing human potential.

The need for sustainability has triggered real innovation – for example in water treatment, sanitation and waste management systems, which are handed over to be run, at a small profit, by the villages, and franchised on to others.

IT is employed for its ability to achieve rapid increases in the scale of these advances, and others in education, adult literacy and the virtual delivery of healthcare. Remarkably, the adopted villages (currently all in the central state of Andhra Pradesh, where Satyam is located) are achieving 100 per cent targets in literacy and coverage of diabetes and hypertension patients, and are driving startling improvements in India’s dysfunctional education system.

But the headline-grabber is undoubtedly the three village call centres the foundation has set up with Satyam (all its operations are handled through public-private partnerships, which leverage the initial funding four or five times). The contact centres are small, with about 100 places, and work two shifts, allowing employees, often women, to balance other commitments. Jacob reckons there is a pool of up to 90 million villagers to do data- and transaction-processing tasks such as reconciling expenses and sorting resumes.

So far, customers are Indian, but Jacob sees no reason why the centres shouldn’t move up the value chain to serve global customers who need help by telephone.

Suffering none of the employee churn that bedevils urban establishments, the village contact centres turn out work that is ’50 per cent cheaper and 25 per cent better’ than their city counterparts, claims Jacob.

So is this – along with an unrelated Satyam-supported non-profit initiative to establish India’s first comprehensive ambulance emergency service – just another worthy but token genuflection to corporate social responsibility? Perhaps not. First, say the foundations, the effort is sustainable. Second, taking a lead from the Indian software industry’s formidable quality reputation, the processes are proven, capable of being replicated and scaled up.

Development and transformation as proven routines? If that’s the case, it’s not only the poor who should be taking notice.

The Observer, 11 March 2007