THE COMPANY is a remarkable invention – in its public, limited-liability form, it is capitalism’s most influential social and economic innovation, a crucial component of the modern economy. The organisational revolution triggered by the joint stock company in the mid-18th century was just as important for the take-off of British living standards as the more familiar industrial one.

The historic genius of the 1862 Companies Act was to enshrine a bargain in which shareholders won the controversial prize of a limit to their liabilities if the company got into trouble, while the company was granted a distinct legal personality. In return for a lessening of their responsibilities, shareholders forfeited the claim to outright company ownership the company’s overriding obligations are to itself, including all its members.

It is to this delicate balance of interests that the company owes its resilience, its ability to co-opt and amplify diverse inputs, and its record of distributing its benefits widely. But it is also this balance which is now under attack, ironically not from anti- but from ultra-capitalists – top managers and their City counterparts who, in the name of short-term efficiency, are undermining the institution’s long-term role as the engine of economic progress.

Some of the besiegers are external and evident, notably the private equity (PE) and hedge funds hogging today’s financial headlines. Others are internal, in the shape of firms’ own senior managers. At first sight – and according to conventional theory – these two groups are in competition for the right to direct the firm’s resources on behalf of shareholders. This is the assumption behind today’s corporate governance, which sees the board’s job as ensuring management’s devotion to the shareholder’s cause by drawing up and monitoring performance contracts. Tighter ownership control over management is also one of the most important arguments made in favour of private equity.

A more persuasive diagnosis, however, is that internal and external groups are in cahoots, not primarily to create value, but to grab it from the company they are meant to be serving – a task eased by the fact that the heist takes place in private.

Out of the public company limelight – and conveniently unacknowledged in mainstream finance theory – a growing group of actors around the top of large companies – not just PE and hedge funds, but also investment bankers, traders and professional advisers – have a strong vested interest in what Karel Williams and other academics have christened the ‘economy of permanent restructuring’: a continuous round of deals, capital reorganisations and financial engineering that generates not only lucrative transaction fees but also, and increasingly, capital gains for intermediaries such as investment banks through their own PE and hedge funds.

You wouldn’t guess it from the self-congratulatory hype surrounding the City’s activities, but this asset-shuffling provides no benefit for investors as a whole (Warren Buffett, perhaps the world’s canniest investor, estimates that intermediaries and advisers now relieve equity investors of 20 per cent of the earnings of US business they would otherwise have received: ‘For investors as a whole, returns decrease as motion increases’).

Worse, by concentrating only on present efficiencies, the attackers make it harder for companies to focus on their most important job, which is to bring about as yet unknown future efficiencies through innovation.

The ultras view companies simply as a bundle of contracts and revenue streams, to be bought and sold like any other commodity, ‘a continuation of market relations by other means’. But enduring performance is more than an economic enterprise. Innovating means forgoing a portion of current returns to create the opportunities for greater returns in the future. To make it bear fruit in practice requires nurturing security, trust and the kind of stable human relationships that allow risk and experiment and tolerate mistakes. It requires treating all stakeholders as investors, not just shareholders – and reporting to them publicly.

If the public company didn’t exist, it would have to be invented. Even the raiders need it: without public equity, there would be no material with which private equity could have its way, and no way for it to sell its purchases back to the retail investor. Accountability is still the best way of ensuring that the company pays its dues to employees and society as a whole, rather than to shareholders or unscrupulous owners – which, of course, is what creates advantage for the raiders in taking it private.

The public company has its faults, but none so bad as when it adopts the balance-destroying methods of the raiders. Bad as they sometimes are, its inefficiencies pale beside the lack of transparency and monstrous distribution inequalities of the alternatives.

The Observer, 4 March 2007

TO ITS DEFENDERS, private equity is a new and purer model of capitalism: a different asset class which delivers sustainably superior returns, irrespective of the behaviour of stock markets. In its preferred narrative, private equity creates growth, sustains jobs and leaves better-performing companies in its wake. By contrast, TUC general secretary Brendan Barber described the phenomenon last week as too often the work of ‘amoral asset-strippers after a quick buck’.

Which is it? The answer matters. Last year private equity (PE) funds splurged $440bn on buying publicly traded companies and taking them private. This year investors, including banks, pension funds and insurance companies, will add an estimated $500bn (pounds 250bn) to PE war-chests. The funds are swelling and the prey is getting larger. This month a US real-estate company was taken private for $39bn. Sainsbury’s, at pounds 11bn, is in PE’s sights. Industry figures suggest $50bn and even $100bn deals are only a matter of time, potentially putting almost every company in the world ‘in play’.

But as PE stretches towards the biggest prizes, its claims are coming under fire. Business Week, hardly anti-capitalist, entitled its October 2006 cover story on PE ‘Gluttons At The Gate’, charting ‘a story of excess’ in which the fast-money mindset was leading to ploys at the edge of legality. An important US academic study found that while some PE funds provided high returns, when the enormous fees were stripped out, on average investors would have done better putting their money in the S&P.

Now a group of UK academics at the Centre for Research on Socio-Cultural Change (Cresc) casts further doubt on the official line. In two working papers, Karel Williams, Julie Froud and others describe a PE business model almost entirely based on the mathematical effects of leverage and, instead of benefiting the mass of investors, is designed to enrich a tiny minority of partners who set up and run the funds.

Private equity is the smart new name for the 1980s technique popularised as the leveraged buyout. Here’s how it works. Funds raise money from wealthy individuals and institutions, which is used to buy a portfolio of operating businesses. A vast global pool of cheap capital allows the purchase to be highly geared, the fund putting up no more than 30 per cent of the purchase price and borrowing the rest. Returns on the debt (which is often sold on) are capped, so that when the company is sold or re-floated, the gains accrue to the PE funds as equity-holders. When the fund is wound up after 10 years or so, investors get their capital back plus a share of any profits.

The CRESC authors suggest that this model is not about value creation but value capture. PE is about ‘selling used companies’, says Williams, usually after having subjected them to a sharp cost haircut by closing factories or cutting the workforce, selling off freehold properties, or requiring them to pay a special dividend. Sometimes such measures impose discipline on lazy managers, in other cases it simply reduces the business’s future options. But in any case, what really makes the difference is leverage: shorn of its arithmetical magic, buyout funds would have underperformed public equity over the past two decades, the writers show.

What is special to PE, on the other hand, is the exceptional rewards it affords to the tiny group which runs the funds. These come from an annual management fee of up to 2 per cent of funds managed, and a 20 per cent share of the profits (the carried interest, or ‘carry’) when the fund is wound up. For a $15bn fund with a 10-year lifespan, management fees could total $3bn (irrespective of performance), while for a successful fund the carry could be several billion.

For two funds whose accounts the authors inspected, UK partners stood to take home pounds 7.5m and US partners $72m – each – after just five years. After 10, it could be much more.

There are two disturbing conclusions to be drawn. The first is that the official PE story is threadbare. As Michael Gordon, chief investment officer of Fidelity Investment, notes, PE ‘provides little real diversification from equities over time comes with higher risks because of leverage has far less transparency than a portfolio of listed stocks – and [commands] premium fees’. Like the buyout boom of the 1980s, it is a bubble that will end in tears – although whose is unclear, since no one knows who holds the ultimate debt that has funded the spree. Our pension funds, perhaps?

But the second worry is what PE leaves behind. Its hijack is confirmation that the traditional configuration in which the City existed to provide services to clients has been well and truly reversed. It is now the function of clients to make an ever more dominant City oligopoly richer through ‘an economy of permanent restructuring’. When a German politician described PE funds in 2005 as ‘locusts’ he was mocked. But by and large he was right.

The Observer, 25 February 2007

IN 2005, I wrote a piece singing the praises of the computer company Dell, along the lines that although Apple’s far sexier machines garnered all the hype, the real thing of beauty was Dell’s ‘direct business model’. By cutting out the retailer and delivering direct to the customer, this refined supply chain seemed destined to pull the company steadily away from its rivals. In the long term, therefore, the better bet was Dell.

How do those predictions look now? Far from sweeping all before it, Dell has lost market share and been overtaken as the world’s largest computer maker by a revived HP. After a run of missed targets, CEO Kevin Rollins, who had dwelt dreamily on the prospect of Dell becoming a $100bn company, has been swept away too, and founder Michael Dell has taken back the operational reins.

Meanwhile, Apple has gone from strength to strength on the back of the ubiquitous iPod and a strategic decision to aim its hardware at the home entertainment market. Even its computer market share has begun to pick up – the ‘halo effect’ from the iPod – although it still remains tiny compared with HP and Dell. And the launch of the hysterically ballyhooed Apple iPhone is still to come.

At the time, several readers responded sharply to the favourable portrayal of Dell. They accepted its supply chain was, and still is, a logistics marvel. But that didn’t mean that the customer service was the same. Dell had become so entranced with its own processes, they suggested, that it had lost sight of the fact that customers don’t buy supply chains, they buy computers. They couldn’t care less that Dell can assemble a computer in five minutes and dispatch it two hours later. They do care, however, about getting the right computer with the right parts and if they don’t, they do care, very much, about being able to talk to a real person about it – something that Dell, with its maddening automated phone menus and inscrutable website (two of its sources of pride), got badly wrong.

Dell made the classic nerd’s mistake of underestimating the human factor – the first and last link in the supply chain – and trying to fill it with IT. As most companies do, it put computers in charge of the thing humans do best and vice versa, thus making everyone unhappy.

Apple, on the other hand, has been much more successful with the way it relates to the customer. Wrong-footing the pundits, it has proved retail stores are the right way to sell devices that demand to be touched and seen. Its products’ ease of use and Apple’s seamless integration of software and hardware go some way to justifying the closed proprietary system the company has maintained. iTunes and iPod tantalisingly foreshadow a future where customers can ‘pull’ with minimum effort just the elements they need rather than having products bristling with features they don’t want foisted on them by costly marketing and increasingly intrusive ads.

But – a very big but – Apple has come a cropper at the opposite end of its operations. The murkiness surrounding the backdating of Apple stock options, including, allegedly, a batch to CEO Steve Jobs himself, betrays an equally significant flaw (in fact, Dell may have to restate its earnings too, although the issue is reportedly not stock options).

Interestingly, each company reflects the strengths and weaknesses of its founder – both now firmly in control – as if they were imprinted in their genes. Jobs’s ‘reality distortion field’ sets the high expectations that drive Apple’s brilliant innovation cycle but it may also have persuaded the company that it wasn’t subject to the normal rules of governance. Michael Dell’s obsession with low costs and perfecting the supply chain have fuelled impressive profit and revenue growth, but ultimately caused the company to disregard the rules of customer service. Both are forms of arrogance that ought to give shareholders serious pause for thought.

In Apple’s case, the seriousness is not just that the company is in Jobs’s image the company is Jobs. If he were forced to resign, it’s hard to see how it could survive the loss of its driving force. For Dell, the issue is the reverse: it’s not clear how putting the founder back in control will remedy a problem that he as chairman failed to see, and which the system that he designed so clearly ignored.

Either way, the moral of the story is that strong differentiation and character is necessary, but not sufficient, to keep a company successful. The genius and charisma of a founder in one domain shouldn’t blind either them or the company to the need to complement them in others where they are weak. It’s a reminder and a warning that, in the long run, the company that thrives is the one that satisfies all its stakeholders, from customers and employers to society as a whole in the shape of its regulators. They are the ones that decide its fate, not Steve Jobs or Michael Dell.

The Observer, 18 February 2007

READING Russell Ackoff’s slim new volume, Management f-Laws (with Herbert Addison and Sally Bibb, Triarchy Press), is like being pricked by a series of delayed electric shocks. At first glance and on their own, the book’s 81 short aphorisms, paradoxes and put-downs seems nothing special. The first shock comes as the implication sinks in, followed by a chain-reaction of secondary ones as the first implication interacts with subsequent ones, until shocks are going off all over and you are left in no doubt that you are in the presence of one of the profoundest and wittiest brains ever to engage with the bizarre human activity called management.

This, although unconventional, turns out to be an entirely logical way of laying out a management book. Not for nothing is Ackoff, now 87 and as busy and iconoclastic as ever, known as the dean of systems thinking, and as he explains, the new book – subtitled ‘how organisations really work’ (f+laws = flaws, geddit?) – is the result of a lifetime of observing and identifying the regularities in managers’ behaviour that explain why so much of their activity is ineffective. The result is a kind of exhilaratingly contrarian com mon sense that is the exact opposite of conventional wisdom.

Take the apparently gnomic ‘A corporation’s [external] boundaries are generally much more penetrable than its internal ones’. He means that, because of rigid, ring-fenced internal functions, competition between rival departments is often fiercer than with nominal commercial rivals. Because their pay depends on the outcome of this warfare, managers are often less free with information to their peers than to outside counterparts. So they often know more about their rivals than about their own company.

The usual remedy for these ‘silo mentalities’ is to force people to share information, but that only makes the internecine warfare more deadly. Instead, the only way out of the mess is to change the underlying incentives: recognise that you can’t improve the performance of the whole by optimising one or even each of its parts, and, rather than rewarding people on the performance of their own department, reward them on what they contribute to the performance of others.

Or take ‘The less managers understand about their business, the more variables they require to explain it’. Yes, that figures. But the deeper point is that it explains why companies are unable to act: not understanding what’s relevant, managers demand all the information they can get, and a massive oversupply of irrelevant information becomes a much worse management problem than a shortage of the relevant.

In turn, this serves as illustration to f-Law 73, addressing the difference between wisdom, understanding, knowledge, information and data: ‘To managers an ounce of wisdom is worth a pound of understanding’. Unfortunately, managers pay far more attention to knowledge, information and data – the least important content of their minds – because they are ‘hard facts’, and almost none to wisdom – the most important.

And from there: ‘Information, knowledge and understanding enable us to do things right, to be efficient, but wisdom enables us to do the right things, to be effective. Science pursues data, information, knowledge and understanding: what is truth but the humanities pursue wisdom: what is right.’

Leadership versus management, development versus growth, ‘power over’ versus ‘power to’, what and what not to measure, the importance of mistakes, the disastrous results of teleconferencing and audio-visual aids (‘PowerPoint projectors are not visual aids to managers. They transform managers into auditory aids to the visuals’), conversations in the lavatory, jargon, men’s handwriting and many other manifestations are squeezed for comparable insights under the pressure of Ackoff’s implacable scrutiny.

Plenty will cause offence rather than thought (there’s an f-Law for that, too). He shows that the more directors are paid, the less likely they are to contribute to their company. He argues that ‘business schools are as difficult to change as cemeteries, and for the same reasons’, and notes the paradox that most companies are centrally planned, command-and-control organisations that would not have looked out of place in the Soviet Union. (Although I think he is wrong to say the answer is to bring the market into the company in the larger system of the economy, markets and organisations have different functions and logic.)

Ackoff makes management a pleasure to read about, even when it’s plain that 90 per cent of it has been diverted into doing the wrong thing righter, in his phrase (this paradox thing is catching). It’s no disrespect to Bibb, who takes on the impossible job of commenting on Ackoff’s sallies, to say that her responses function mainly as a foil to his densely packed wisdom and wit. Ackoff is unique – more’s the pity for the rest of us.

The Observer, 11 February 2007

THE JUSTIFICATION for big business – and the management principles which govern it – is that it is the engine of economic development. There is no such thing as an advanced economy without large companies (a measure of India and China’s progress is that they are quickly developing them). Roughly speaking, the greater the density of organisations above pounds 10m in size, the higher the standard of living.

However, for the West, this description no longer applies. One of the topics the global business elite discussed at Davos was the ‘soggy middle’ – the resentful perception that while the engine is steaming merrily ahead, it has quietly slipped its coupling and left the middle-class train in the station.

Thus, economist Paul Krugman notes that ‘even households at the 95 percentile – that is, households richer than 19 out of 20 Americans – have seen their real income rise less than 1 per cent a year since the late 1970s’. In the UK the median disposable household income has progressed at the same leisurely pace. Meanwhile, those aboard the first-class coach – last stop, Davos – are travelling in ever more extravagant luxury. Over the same period the incomes of the top 1 per cent in the US have doubled those of the top 0.01 per cent have risen fivefold. Again, the story in the UK is similar.

One even more uncomfortable estimate was on offer in Switzerland: in the largest 1,500 US companies, the take of corporate profits appropriated by the top five executives has doubled to an astonishing 10 per cent in a decade. That’s $40bn, which would make a sizeable dent in the pensions deficits that, in the US and UK at least, are in the process of ensuring that the now stationary middle-class coaches will in the future be shunted sharply, and permanently, backwards.

Let’s ignore for a moment the complacency, incompetence and cowardice of the companies, the actuaries and, above all, the Chancellor, who have presided over this wholesale tearing-up of previously agreed contracts, and recall that no more than a decade ago ministers and City types routinely boasted of the UK’s Rolls-Royce pensions system and castigated the Continental economies for not following its lead. Now we are asked to believe that the engines of progress in the third- or fourth-richest economy in the world, where the labour share of national income is at a historic low and the capital share at a historic high (another Davos insight), are suddenly enfeebled. Not only are they unable to improve the living standards of their employees, they can’t even prevent them falling.

What, then, are big companies for? Increasingly, the answer seems to be: to keep the City and a tiny minority of top earners in the extravagant style in which they are cocooned. While 70 per cent of large UK firms with company-wide final salary schemes have abandoned them since 2003, an unchanged 80 per cent of directors are still so covered they still retire at 60 and they still build their pots twice as fast as the rest of us. Last year the average FTSE 100 director’s pension was pounds 168,000.

Yet Davos man should be worried. If the engine argument falls, there is no earthly remaining justification for these inequalities, or the management principles that perpetuate them. Rather, they can be seen for what they are: the scaffolding that holds in place an upside-down world in which it has become the function of individuals to serve organisations, rather than the other way round. In this chilly, Orwellian universe, individuals dance to the tune of the organisation – faster! harder! longer!. And the organisation dances to the tune of the City’s dealmakers and financial engineers, all under the Panglossian gaze of the government, which decrees that the pain is for our own good.

In fact, what was being experienced in Davos was a forewarning of economic and social global warming. The ‘soggy middle’ is nature’s way of saying that our economic and management practices are as unsustainable (to use another favourite Davos word) as our environmental ones. The inequalities are already fracturing psychological and social contracts within organisations – witness the dire levels of engagement and trust measured in umpteen surveys, and in society as a whole. How long before they lead to open breakdown and conflict?

Sustainability is not just about green issues – without their social and economic equivalents, environmental initiatives are just greenwash. It’s also about being fair, secure, in control of the job, and, unfashionable as it is, relatively equal. All these are proven contributors to job satisfaction and thence to productivity and, as Richard Layard and other economists are beginning to show, to overall happiness and welfare, which are the point of economic activity.

Runaway engines are dangerous as well as unproductive. It’s time to re-attach this one to the train before the brakes fail – or it is blown up by disaffected passengers.

The Observer, 4 February 2007

IT’S ALL very well going green, but some companies seem keener about that than they are about their employees. A survey by management consultancy Hudson found that three-quarters of senior executives would do an annual cull of their workforce to boost productivity and performance. One in six think they could get rid of 20 per cent of employees without damaging performance or morale nearly half reckon firing up to 5 per cent a year would be a good thing.

Even though only 4 per cent actually carry out this threat, it is still a revealing, even breathtaking, finding. This is what executives really think of their ‘most valued asset’: fodder to be disposed of against a mechanical target. Not only that, it utterly ignores their own contribution to their employees’ underperformance, raising so many questions it’s hard to know where to begin.

But let’s try. In another survey, the Chartered Institute of Personnel and Development noted that if Britain at work was a marriage, it was ‘a marriage under stress, characterised by poor communications and low levels of trust’. Only 38 per cent of employees feel senior managers and directors treat them with respect, and 66 per cent don’t trust them. Around a quarter of employees rarely or never look forward to going to work, and almost half are leaving or trying to. ‘The findings suggest many managers aren’t doing enough to keep their staff interested,’ said the CIPD’s Mike Emmott. The result: underperformance, low productivity and high staff turnover.

The last UK survey for Gallup’s Employee Engagement Index makes similarly grim reading. In 2005 just 16 per cent of UK employees were ‘positively engaged’ – loyal and committed to the organisation. The rest were unengaged or actively disengaged – physically present but psychologically absent. And it is getting worse: since 2001 the proportion of engaged employees has fallen, while those actively disengaged have increased to 24 per cent.

Gallup puts the cost to the economy of active disengagement at pounds 40bn, as employees express their disenchantment by going sick, not trying, leaving, or threatening strikes. The culprit, says Gallup, is poor management. ‘Workers say they don’t know what is expected of them, managers don’t care about them as people, their jobs aren’t a good fit for their talents and their views count for little’. Disaffection grows with tenure, so ‘human assets that should increase in value with training and development instead depreciate as companies fail to maximise this investment’.

In a perverted way, then, employers are right when they says there’s something the matter with their workforce. It’s just that they are in total bad faith about where the blame lies. In any case, bottom-slicing the ‘worst’ employees is likely to make things worse, not better. Yes, forced ranking is a way of life at GE, and Microsoft does it too, but there is no evidence that it has a causal link with their success and in most cases it usually does more harm than good.

Forced ranking rests on the idea that the performance of the whole is the sum of those of the individual parts. But the sports pages confirm that teams with the most talented individuals doesn’t always win – see Chelsea and Real Madrid. At least as important is the context. Here again football supplies the evidence. Alongside many successes, the Pre miership has plenty of disconsolate foreign players – bought because of their undoubted star quality abroad but who fail to deliver in the English setting.

Of course, individual ability makes a difference: Man U will beat Hartlepool 99 times out of 100. Sometimes companies do have to get rid of people, particularly if they recruit them incompetently. But forced ranking introduces fear and competition, and while in (economic) theory these optimise individual performance, in (management) practice they pessimise collective performance.

Consider research on nursing in the US, which shows that units with the most ‘talented’ nurses and a ‘heads-will-roll’ attitude to mistakes never learn, because clever nurses find ways of compensating for flaws and quietly correct mistakes to avoid reporting them. But units that report many more mistakes are actually safer. They emphasise teamwork and encourage nurses to report errors. Because learning is shared, individuals and the collective both get better.

This is the authentic magic of management: getting outstanding performance from ‘ordinary’ resources by multiplying individual and organisational talent. Fighting over who gets most of a fixed amount of it and jettisoning the rest, on the other hand, is a mockery.

The Observer, 28 January 2007

MARKS & SPENCER’S return from the corporate valley of the shadow of death – even ultra-cautious chief executive Stuart Rose has said the ‘r’ word, conceding that the company has moved from the emergency to the recovery ward – is cheering and instructive in several ways.

First, the story was, and is, a sharp reminder of how few companies there are that people actually like. M&S, the BBC, perhaps Boots and John Lewis – they can be counted on one hand.

Which is why, as a colleague remarked, when M&S fell from grace in the 1990s, it was – like the weather and the England football team – something to talk about in the pub a grumble, yes, but that’s very different from the sheer delight at the downfall of Ratner, and the schadenfreude that greeted the discomfiture of Shell or the toppling of BP or HSBC. Even the travails of Morrisons or Sainsbury’s were met with indifference. But we didn’t want M&S to be taken over by Philip Green: what would become of the nation’s socks and knickers?

In the end it was a close thing. Just in time, M&S worked out just why it was that we liked it (something Boots is still trying to do), stopped trying to be a go-go dancer and returned to its value(s) proposition. With relief, people started buying its food and clothes again.

In this context, its pounds 200m ‘Plan A’ (because there is no ‘Plan B’) to go carbon neutral, extend sustainable and ethical sourcing, and help people live healthier lifestyles, announced last week, is another shrewd and well-timed step back to the future. It could even be a masterstroke.

The economics of local and ethical sourcing are less straightforward than they might seem – for many food categories a surprisingly large proportion of a product’s vehicle miles are accounted for by shoppers driving to the local store. Even so, the move back to UK sourcing, at least of food, and the emphasis on free-range and fair trade undoubtedly respond to people’s desire to vote with their purses. Not only is the national supply of reasonable Y-fronts safe – from now on our underwear could be fairly traded.

It is a similar story with the setting- up of a Supplier Exchange to share best practice and innovation among suppliers and ‘help… them secure funds for investment’.

Close support of its UK suppliers was, of course, one of the practices that helped M&S win so many UK ‘most admired company’ awards in the 1980s and 1990s that the prize in that particular form was abolished.

How do we know that this isn’t greenwash and the company means what it says? Ultimately, we don’t; we have to trust it. But M&S knows that, and it is also well aware that as an exclusively own-label company, it can’t hide behind manufacturers’ labels. It needs this stuff to be part of its DNA – and if it’s not part of its DNA, its customers are liable to get very cross indeed.

For, as many companies have become aware, pinning your ethical colours to the flagpole isn’t an easy option. It subjects you to a level of scrutiny that those who keep their heads down may avoid, and raises expectations that can turn against you if you let people down.

In the same way, being held in affection as a ‘national treasure’ also works both ways. Affection can support you through a bad patch (provided it doesn’t last too long: many people would dearly have liked Rover to create a car that they wanted to buy), but affection unrequited or scorned can create a terrible backlash.

However – another cheering thing – ‘Plan A’ can also be viewed as an acute competitive move. For once, this is not a race to the bottom, but the reverse. M&S’s eco-plan, followed later in the week by Tesco, raises the bar not only for the rest of the retail industry, but also for the corporate great and good who will make up the CBI’s climate-change task force, also announced last week.

Faced with the retail example, they will hardly be able shrug off the challenge. It raises the risk for those who choose not to move in the direction of sustainability, and more generally is a significant blow to the fundamentalist view that the only job of business is to create value for shareholders.

The final reason for pleasure is that, as in other fields, cheating the grave is a hard thing to do. Particularly in these unforgiving times, few companies get, or take, a second bite at success. Many firms succumb to ‘strategic drift’, where strategies are judged according to how well they fit with what worked in the past, rather than with changing market conditions.

Others, like M&S, seem to forget the roots of their competitiveness – in customer and supplier relationships – as they lurch off in pursuit of the gods of shareholder return.

Now that it is back on track, M&S still has to make sure that it marries its enduring values with the new environment, and ‘Plan A’ is part of that attempt. Welcome back.

The Observer, 21 January 2007

TWO RECIPES for fixing the NHS were on offer in the media last week. The one that garnered the headlines – Sir Gerry Robinson’s televised attempt to galvanise Rotherham General Hospital – demonstrated that leadership and common sense are sensible and important. But it came suspiciously close to business reality TV, and Robinson’s idea that one million-dollar supermanager can kick the service into shape is dangerous and deluded – as with all calls for heroic leadership, the counsel of someone who has run out of substantive ideas.

As shareholders of American DIY chain Home Depot (where a failed chief executive has just departed with a payoff of $210m) are the latest to testify, charisma and even common sense are useless unless the owner knows what to do with them. He, or she, needs method.

Which is where the second remedy comes in. More modest, but also more encouraging, was Peter Day’s In Business programme on Radio 4, which looked at the application of Toyota’s production principles to healthcare. Some people’s hearts will sink, or swell with indignation, at the very idea. But the difficulties with the approach are not what people think they are, and they are far outweighed by the potential benefits.

The beauty of the Toyota system is that it concentrates rigorously on doing only what the customer (internal or external) wants, when they want it. Compared with Western systems, it’s tortoise versus hare: rather than seeking efficiency by speeding up individual activities, it focuses on improving the flow through the entire system by keeping those activities to the absolute minimum. Result: a race-winning combination of higher quality and lower cost. As Malcolm Jones of the consultancy Productivity Europe points out, Toyota hasn’t made a loss, or closed a factory, for 40 years.

It sounds simple, and in one sense it is. You start with the demand and design a system to satisfy it. In A&E, for example, most of the workload is minor complaints or, increasingly, referrals from NHS Direct that aren’t really emergencies at all. Often even serious incidents are predictable, like drink-fuelled injuries on Saturday night. A system designed to handle predictable demand dispenses with the need for complicated scheduling and automatically increases capacity to cope with truly urgent cases.

It takes time, but whole hospitals are gradually being converted to these principles. And as they convert, miracle of miracles, capacity increases. Firms organised along these lines habitually find that they start insourcing activities they can do better and more cheaply than others, so little headcount reduction is involved. There’s no reason why the same should not be true of the NHS.

But hang on a minute. If, as one consultant interviewed on Day’s programme put it, gaining these benefits for the NHS is ‘about putting together the broken processes’, why is government policy so intent on fragmenting them? Isn’t separating out activities and hiving them off to the private sector (what the Keep Our NHS Public campaign, www. keepournhspublic.com, calls ‘patchwork privatisation’) the very antithesis of Toyota-like flow?

Yep, that’s exactly what it is. Since the government is obsessed with traditional economies of scale, most private-sector providers are engaged to optimise activities (building hospitals, offshoring medical secretaries) rather than create economies of flow. Worse, under the profit motive, they have no incentive to streamline the activity or, God forbid, get rid of it altogether, as Toyota would.

As Vanguard Consulting’s John Seddon points out, this structure locks unnecessary activity and high cost into the system. ‘If something can be done better, it is a matter of method, not ownership,’ he says. ‘And if we can get massive savings at the same time as improving public services, why wouldn’t we want taxpayers to reap the benefits rather than shareholders?’

With its crude behaviourist belief in monetary incentives both for individuals and organisations, the government hopes the internal market will drive efficiencies into what can hardly qualify any more as an integrated health service. Yet to state what ought to be obvious, while Toyota is a private sector company, it is not a market. Its success – the lowest costs and most consistent quality in the business – is bound up with the fact that it is a single organisation unified around a shared set of values in which cooperation rates a lot higher than competition.

So the lessons of Toyota come out rather differently from what you might expect. Large size is no barrier to efficiency – although smaller than the NHS, Toyota’s 264,000 employees make it large by any other standard. You don’t need a market to lower transaction costs, but the opposite: trust and cooperation, which also lifts morale by restoring control to the front line. (Toyota swaps largely anonymous leaders with as little fuss as changing a light bulb.) And far from being dependent on the profit motive, its method – flow – is as applicable to the public as the private sector. What’s not to like?

The Observer, 14 January 2007

RESEARCHING a history of modern China, Jonathan Fenby notes that the Great Leap Forward of the 1950s introduced a planning system with two sets of targets. Meeting the lower set of central government goals was mandatory, the second, pitched higher, to be achieved by extra effort. Copying the centre, provincial plans also had two tiers, the first aligned with the higher set of central plans and the second more ambitious still. This multiplication continued down the administrative ladder until, by the time the plan was implemented on the ground, the figure had gone up five or six times.

One target was grain. Of course it was impossible to meet, but because their jobs depended on the result, officials lied or faked the results by gathering the entire village crop into a tiny area and pretending it was representative of the rest. The consequences were tragic. Taking the official fictions at face value, the remote government requisitioned much of the reported – and almost all the real – crop for distribution to cities while, in mass commune canteens, the rural populations were encouraged to eat as much as they liked. When the short-lived binge was over, it was too late to avert mass starvation, and between 20 million and 30 million people died.

This may be the most extreme example of damage by fixed targets. But in a small way the same corrupt process of arbitrary target-setting, fiddling numbers and offloading blame is played out every year in 99.9 per cent of all capitalist organisations that use the budget as their overarching management tool.

You think I exaggerate? In a report published by Business Intelligence, entitled (sorry) Reinventing Planning and Budgeting for the Adaptive Enterprise, Jeremy Hope, co-founder of the Beyond Budgeting Roundtable, is quoted as describing the fixed-performance contract (the budget being the prime example) as ‘a management weapon of mass destruction’. Analysing what really happened at companies such as Enron, Tyco and WorldCom, he says: ‘You can trace the problems back directly to aggressive targets that were linked to incentives that drive short-term actions.’ Unlike in China, these cases directly cost few lives – but the destruction of livelihood and value was on a Stakhanovite scale.

Budgeting is now so completely taken for granted as the central pillar of management that managers are surprised to find it has not always existed. Dating from a time when manufacturers could pretty much sell what they made, it was a means for multi-divisional companies to co-ordinate production, allocate resources and costs, and make sure that people did what was required to achieve the schedule. For classic mass-production, command and control by the budget made sense.

But in an age where everything is in oversupply, this model no longer works. It’s no longer managers who decide what will sell, but customers. Logically, the budget, the hallmark of command and control, no longer works either. To quote Hope again: ‘We persist with this belief that we can predict and control performance over the next year. Therefore [the budget] becomes a rigid plan that’s difficult to change. It becomes near impossible to respond to unpredictable events.’

Assailed by external volatility, the budget is also undermined by dry rot from within. A classic example of Goodhart’s Law (which says that the minute you use a target to manage by it loses its value as a target because you can no longer trust the figures) budgets are typically used to do several things: set targets, forecast, and establish incentives for remuneration. As the BI report says, as a result it does none of them well and requires ever more effort – up to 30 per cent of senior executives’ time – to make it work at all.

Managers have been uneasily aware of these failings for some time: GE’s Jack Welch, no less, once described the budget as ‘the bane of corporate life’. But while everyone agrees that the present situation is unsatisfactory, companies have been held back by the lack of an obvious alternative. If it’s the budget that holds the whole management edifice together, won’t the organisation just fall apart without it?

The great value of the present report is that it shows that the answer is no. Alongside the well-known example of Svenska Handelsbank – budgetless since 1972 – it outlines how organisations as diverse as Boston Scientific, Henkel, Tomkins, Herman Miller, Statoil and Scottish Enterprise have successfully stripped off the budget straitjacket to make themselves capable of managing more strategically. While individual solutions vary, all have separated goal-setting from forecasting, and, crucially, recast incentive systems. Rolling forecasts typically take the place of annual projections that are out of date the day they are made. All have broken the tyranny of the fixed performance contract.

But most companies still have to root out and destroy the hidden WMD at their heart. There will be more budget misery, more corporate scandals – in short more great leaps backward – until they do.

The Observer, 7 Janary 2007

AFTER CHRISTMAS, the hangover. Good cheer will be in short supply in the new year for the BBC, the NHS and many other organisations in both public and private sectors that face debilitating rounds of cost-cutting.

This column has a better suggestion. Instead of saving pennies by shaving routine expenditure and delaying payments to suppliers, why not resolve to do things better – not just a bit better, but orders of magnitude better so much better, in fact, that they become cheaper?

No, I haven’t been at the port again. Economists will tell you that cost-cutting becomes progressively more difficult and expensive for every extra unit of resource saved, and they are right – if every increment is saved the same way as before. However, large savings in resources can sometimes be cheaper to make than small ones. This has been labelled ‘tunnelling through the cost barrier’ by Amory Lovins of the Rocky Mountain Institute (RMI), and it works like this.

If you build a house, the conventional idea is that the more energy-efficient it is, the more it will cost (double-glazing, thicker insulation). So a moderately more efficient house will indeed come out dearer, and diminishing returns mean that after a certain point any additional gains will be outweighed by the increasing cost of the improvements.

But this isn’t the end of the story. Suppose you install superwindows, superinsulation and superefficient appliances. Each one in itself is un-cost-effective. But if together they eliminate the need for central heating and air conditioning , they may actually reduce the total upfront investment. So the more ambitious house is cheaper to build, as well as saving much more in running costs.

Why is the idea that better means more expensive so deeply ingrained? Because people almost always look at design elements in isolation. As Lovins notes: ‘You can actually make a system less efficient while making each of its parts more efficient, simply by not properly linking up those components… Optimising components in isolation tends to pessimise the whole system – and hence the bottom line.’

What applies to engineering applies to business as well. The key is designing the process as a whole system. In manufacturing, long before the advent of ‘lean’, Richard Schonberger christened as ‘frugal manufacturing’ the dynamic by which, if they are systematised, sav ings multiply each other (the real definition of synergy).

He described it as the ‘pursuit of the zeros’: zero waste time, effort, movement between processing stages, work in progress and, above all, product no one wants. The shorter the time between order and delivery, and the more closely coupled the processes, the more resource-efficient the system – and, just as the well-designed house needs less heating and cooling, the well-designed factory needs less computer power for scheduling and planning, and less management to run it. Better is cheaper.

All this applies to services, too. Cost-cutting by decimating headcount at contact centres or back offices is laborious, costly, and on its own does nothing to improve service. Instead, the aim should be to redesign the process, as a whole system for the best outcome and then decide on the scale of inputs needed.

Yet the reverse is the general rule. For example, the government wants local authorities to use specialised document-processing IT to speed up the payment of benefits. But careful analysis shows that the principal cause of delay in benefits processing is not the back office but the front – getting ‘clean’ information from claimants that agents can act on. Councils that concentrate on the front end consistently clear claims in a week, instead of the 50-60 days that are standard, and barely need computers at all.

Or consider banks’ contact centres. These were set up with the idea that mass-production telephone factories would cut costs by processing calls faster than branches. But by distancing customers from branches, contact centres multiply the number of queries, creating the need for yet more contact centres, all answering questions that shouldn’t need asking in the first place.

Now the government is making the same mistake on an even grander scale by mandating shared-service centres for groups of local councils or departments. But economies of scale are irrelevant at component level. This was discovered the hard way by a US aero-engine manufacturer that reorganised production around a bank of state-of-the-art automated grinding machines for turbine blades. The machines were so fast that they slowed the system as a whole to a crawl, clogging it with huge batches and requiring expensive technicians to programme them. Replacing them with slower, simpler machines meant that grinding took longer, but the entire production process worked many times faster – and the cost was halved.

So cheer up. The hardest part is getting the brain around the idea that, for once, there is a free lunch.

The Observer, 31 December 2006