WELL, I was right about targets and foreign criminals. According to a Panorama special aired last week, the reason so many villains with exotic accents have vanished unhindered into the countryside at the end of their prison sentences is that, until last month, officials at the Immigration and Nationality Directorate weren’t answering prison officers’ phone calls asking what to do with them – they were too busy working out how to fulfil the Prime Minister’s party conference pledge to deport more failed asylum seekers than were applying to stay. ‘Losing’ prisoners in this way, of course, had the useful added advantage of heading people off from becoming asylum seekers in the first place.

Einstein said that doing the same thing over and over and expecting a different result was a definition of insanity. That’s what the obsession with targets is. Whether in business or public service, misuse of targets is the single most important reason for public cynicism, rock-bottom employee morale and failed improvement efforts. Targets wreck systems, driving up costs and making things worse. Can we dispose of them once and for all? Let’s try.

What’s wrong with targets? Yes, everyone has them – but whether in the public or the private sector, they have the same perverse results. The attraction of targets is their simplicity. But it’s a fatal one. As part of the misguided managerial obsession with quantification, they misapply partial, linear measures to a complex, shifting world. As Blair’s undertaking to magic away asylum seekers shows, they are basically a wish. Bearing no relation to the ability of the system to deliver it, they are arbitrary – they might as well be plucked from the air.

None the less, the pressure to meet them is real enough. As the Panorama interviewees confirmed, after Blair’s conference pledge, panicked managers in the immigration directorate ordered immigration officers to stop everything else and pursue failed asylum seekers. This is a good example of the way arbitrary targets become the de facto purpose of the system to the detriment of its wider goals. There are countless examples of this phenomenon: just last week a critical report on maths achievement noted that students were learning to pass the tests (thus meeting teachers’ targets) but not to do the calculations – they knew the answers but couldn’t add up.

Some targets do work- and that’s one of their biggest problems. Because they are products of one world view applied to another – reductive mechanical measures applied to non-mechanical systems – targets have unpredictable and quickly ramifying consequences. To cut waiting lists hospitals do easier, rather than more urgent, operations to meet exam pass rates schools exclude difficult students or encourage them into easier subjects and to hit City earnings targets companies overstate profits or cut advertising or R&D budgets. Enron was the most target-driven company on earth, and to meet its targets it tore itself apart. The reply to ministers’ repeated refrain that ‘the private sector has targets’ is: look at Enron.

Where they are accompanied by strong incentives, another side effect of targets is to undermine the integrity of the figures they are meant to apply to. An unfortunate primary school head was jailed for altering pupils’ exam marks, so he said, to make them reflect candidates’ real abilities in an under-resourced school. He got caught many others don’t. Everyone in the public services with experience of the way the figures are gathered knows they are a fiction, ‘managed’ or finessed as the only thing under the control of people caught in a dishonest and unjust system.

So isn’t the answer to set fewer, better targets? That’s what ministers always say. But ‘fewer, better’ is an oxymoron. The fewer the targets, the broader they have to be. The broader they are, the wider the range of unintended consequences and the more attempts to exert control multiply. Targets manage the remarkable feat of simultaneously imposing oppressive controls on people and losing control of the system. As the statistician W Edwards Deming observed tartly: ‘Targets achieve nothing. Wrong. Their achievement is negative.’ Since centrally set targets are the problem, the solution isn’t fewer of them: it’s to get rid of them altogether.

There is an alternative. Forget centrally set targets (which always wildly underestimate possibilities for improvement) and start at the other end – the customer or citizen. First, find out what demand is and how well it is being met (these basic figures are usually unavailable and invariably shocking when they are – see asylum seekers) second, redesign the system to remove all the things that don’t contribute to meeting that demand (lots) and improve those that do then measure the results and start again. The object for everyone engaged in the process is unchanging and relative: to make it ever easier for customers to ‘pull’ what’s of value to them and make it ever smoother for the system to deliver it. Since, in the case of asylum, the customer is the government, wouldn’t this be a good place to start?

The Observer, 21 May 2006

ANY COMPANY simultaneously suffering a succession crisis, a workforce in revolt, customers complaining about service quality and value, failing computer systems and a sex scandal would either be bankrupt or threatened with dismemberment by a private equity fund.

It can’t happen to a government. But that’s about the only consolation Blair and Brown can have as they contemplate their wrecked reputations for competence. It is ironic that an administration that sets such store by efficiency and private-sector methods should end up resembling Fawlty Towers. It is doubly so that with policy differences between the two parties hardly visible, the only terrain of differentiation is execution, or ‘delivery’, as Whitehall calls it: when management is the new politics.

It would be unfair to pre-judge the Tories as managers on their past performance in office. But what is unarguable is that with the exceptions of the Iraq war and John Prescott, all the government’s difficulties stem from faulty, or Fawlty, management at the highest level. While ministers submit every other part of the public sector to audit and inspection, it is their own failure that came back to bite them in last week’s local elections. In management terms, central government is not so much a black box as a black hole.

Here are some howlers a management audit of the government might pick out:

* Bungled succession planning The most glaring mistake is entirely self-made. Like all bungled successions, the Blair-Brown stand-off wounds both individuals and the collective, wasting energy and paralysing decision-making. Succession crises are by no means unknown in the private sector, but even the weakest board would have fired one or both of the feuding pair by now.

* Confusing ends and means, and cause and effect This causes ministers to do things the wrong way around. Reform is a result, not a starting point – it’s impossible to know in advance, before establishing real demand and capacity and removing the waste from the system, what resources will be needed for a task. A textbook case of how not to do it is the campaign of the Department of Work and Pensions (DWP) to cut 30,000 jobs to meet arbitrary efficiency targets. The result: strikes, permanently engaged phones at call centres and increasing violence in benefits offices due to deteriorating service. This is reform in reverse: raising costs and worsening service.

* Poor procurement Having outsourced IT and management capability, Whitehall is a sucker for computer and consultancy salesmen. Bad clients get expensive and overdue projects. The total cost of the new NHS computer systems could in one estimate reach pounds 40bn. Minor in comparison, Defra’s new computer system for making farm payments is now five months late if, as is likely, it has not made them by the end of June, the department will face a pounds 20m EU fine.

Having obliged the public sector to install IT-enabled call centres, supposedly to free resources for the front line but actually doing nothing of the kind, ministers are perpetrating the same mistake on a much larger scale by bullying councils, police forces and even research councils to set up vast IT factories to handle routine administrative functions. These units will cut little cost and make waste harder to remove since it is now hidden in computers.

* Overestimating the gains and underestimating the cost of change projects The travails of the DWP is one example. So is the near meltdown of the NHS, which has been reformed so often (in fact subjected to every known form of mismanagement) that it no longer knows its arse from its elbow. More than anything, the howling down of Patricia Hewitt by NHS nurses is a symptom of change fatigue. Meanwhile, HM Revenue and Customs is so busy restructuring that it is unable to prevent VAT fraudsters making off with up to pounds 7bn this financial year, the equivalent of 2p on income tax.

* Failure to take a joined-up view The Treasury pensions catastrophe – Labour’s worst failure – is the most glaring example. At the ‘seriously dysfunctional’ Home Office – an extraordinary admission from a government that has run it since 1997 – the inability to get prison and immigration services to talk to each other is indeed a comprehensive systems failure problems in the probation service and the courts are nearly as bad. Managing by target aggravates the fragmentation. For example, some suspect that the Home Office’s carelessness with criminal deportees can be traced back to Tony Blair’s airy promise to waft away half of all asylum seekers in 2004. Simply releasing foreign criminals at the end of their sentence is one convenient way of reducing the numbers.

The late JK Galbraith once remarked that left-wing governments’ penchant for intervening meant that they needed to be better at management than right-wing ones. The truth is that practically the only areas the government has got half right – the economy and the railways – are the ones it has removed itself from. Everywhere else, ignoring Galbraith and its own heritage, Labour has marched management backwards. Meet the new boss, same as the old boss.

The Observer, 14 May 2006

WHAT SHOULD we think of failure? Personally, disappointment in the case of fired chief executives walking off with golden goodbyes, possibly rage or in the face of such unequivocal evidence of life’s manifest unfairness, perhaps more rational would be to join them and take the suckers for as much as you can.

In City Slackers (published by Cyan), Steve McKevitt charges that in today’s business the best route to success is failure: 85 per cent of grocery launches flop in the first year so do a similar proportion of new magazines, music releases and infant companies. In these circumstances, he says, the best way to the top is not to do something but to brand it, puff it or write it up. Hence the massive growth in marketing, public relations and media, self-serving sectors that connive with each other to part the client from the maximum amount of money with minimum accountability.

Slackers, he says (I interpret), are the apparatchiks who have learned that it is more profitable to manage the image than the substance. ‘There’s never been a better time to fail. The mediocre have inherited the [business] earth.’

It is true that companies contain huge amounts of waste and the vast sums (£2.5bn on PR in the UK alone) that companies spend to persuade people to buy stuff they don’t want suggests there’s something seriously wrong. Shouldn’t they be making what people want to buy?

Unfortunately, McKevitt doesn’t throw much light on this specific kind of failure. Marketers are addicted to fancy presentations and Powerpoint. Well, blow me! Lots of PR is a waste of time, and some journalists are fond of freebies? Wow! Ironically, he fails to realise more generally how fascinating failure is as a subject. If it’s any consolation, far from being a today phenomenon, failure is ubiquitous and constant.

In his brilliant Why Most Things Fail (Faber), economist Paul Ormerod notes that failure is ‘probably the most fundamental feature of both biological and human social and economic systems’. Of all biological species the world has known, 99.99 per cent are extinct. Ten per cent of all US companies fail every year. Notwithstanding huge quantities of computer- and brain-power, not to mention taxpayers’ cash, most government policies fail, even the most basic ones: poverty isn’t history, social mobility is falling, happiness is not increasing. There is an ‘Iron Law of Failure’, concludes Ormerod, ‘which is very hard to break’. Nor is this surprising. Even with a simple product, business is a complex process. There are just too many interconnections and interrelations for planning to have even a small chance of success. Big bets have unintended consequences that feed back into the system until it becomes too complicated to fix.

The solution is to recognise failure for what it is: essential to success. Success can only be defined against non-success – failure. A world without failure exists only in the general equilibrium equations of conventional economics. Everywhere else, success emerges from what economist John Kay calls ‘disciplined pluralism’ – the programme of competitive experiment, failure and fresh experiment that drives an innovative economy.

Failure is as much part of innovation as success. Successful small advances become failures as they are leapfrogged by rivals. Feedback loops often work within an industry even as they fail in a company: Kay shows how today’s PC industry has been built on a mound of initiatives – remember Sinclair, Osborne, VisiCalc, the BBC Micro, IBM’s OS2? – that are now defunct. ‘Most initiatives which were crucial to the development of the industry were ultimately unsuccessful,’ he says. If success is the plant, failure – cynical, hopeless, or just unlucky as it may be – is the essential compost from which it springs.

The excitable Tom Peters once declared: ‘It’s not enough to fail. You must fail often and you must fail BIG!’ Of course, the caveat is that failure only works its magic if you learn from it. To borrow another of Kay’s examples, GE is successful not ( pace the press) because of the genius of its chief executives but because it allows challenge, argument and experiment. Small experiments fail, but they allow adjustment without betting the company.

Evidently, there are slackers everywhere who for their own ends deny the lessons. But blaming people who are set up to fail by the system they work in is equally culpable, and far more common. While failure that is learnt from is, paradoxically, a source of advantage, failure that is swept under the table makes more failure inevitable.

Ultimately failure will take care of City slackers (and overpaid CEOs and authors), just as it has taken care of slide-rule manufacturers and roughly 1,980 of the 2,000 automobile manufacturers that existed in 1919 – the more successful slackers are in extracting revenues from their clients, the more likely the latter will fail. ‘Evolution is cleverer than you are’, Francis Crick, co-discoverer of DNA, used to say. Out of today’s failure grows tomorrow’s (temporary) success. Welcome to the compost heap.

The Observer, 30 Aprtil 2006

LABOUR’S BEST management decision was to eschew management when it made the Bank of England independent. Its worst has been to ignore this example everywhere else. Despite its professed dedication to market disciplines, New Labour is the most micromeddling administration in history, creating detailed specification and prescription for everything from school lesson planning to the way documents are processed or calls answered in local government offices.

Since the government’s understanding of management is stuck in a mass-production model circa 1970 (similar to the one that has brought General Motors face-to-face with bankruptcy in the US), the results are not just mediocre: they are disastrous, full of perverse consequences that make the public sector harder to manage, and raise rather than cut overall costs. Ministers as managers are making things worse, not better.

The surprise 40 per cent rise in GPs’ salaries since 2002-03 is just the latest manifestation of management naivety. It is the outcome of a crude performance-management system that allots points for targets (for instance, seeing patients within 48 hours) and pounds for points. Last year, the first year of the new contracts, GP practices were expected to tot up 700 points out of 1,050. People with sufficient incentives almost always meet their targets, usually at the expense of unmeasured aspects (try booking an appointment with your doctor more than two weeks ahead). In fact the average score hit 950. This year it is higher.

The argument is not that GPs didn’t deserve extra pay, just that the government has learned nothing about system dynamics. It is now making a similar but opposite mistake with dentistry. Dentists, like GPs, are self-employed. Determined not to give away too much, ministers are driving dozens of practices outside the NHS altogether, with whole swathes of the country becoming toothcare-free zones.

Back in 1995, Sovietologist Ron Amann, then chief executive of the Economic and Social Research Council, delivered an elegant public lecture, ‘A Sovietological view of modern Britain’, which remains a telling and prescient analysis of modern public-sector management in the UK. The parallels between the two systems have become greater in the intervening years, not less. Paradoxically, the UK’s planning culture stems from the opposite impulse to the Soviet one: a desire to strengthen the market rather than control it. Hence the recasting of the public sector into quasi-markets, and the sharp division between purchasers and providers. But crucially they weren’t real markets with real customers: ‘The purchasers were an organisational proxy for the final customer, using their allegedly superior inside knowledge… to secure value on society’s behalf. From such little acorns do the great oaks of planning grow.’

And so do the games-playing and bureaucracy that all planning and budgeting exercises engender. The first casualty is the integrity of the figures as providers hide capacity to get an easier deal and purchasers second-guess them. With the mind-games comes distrust, leading to ever-intensifying attempts to quantify and rank performance. But as with GPs, providers learn quickly how to play the game, resulting in yet more measuring refinements – and more slippage in the figures, which are no longer comparable even if they could be trusted. The result is the worst of both worlds, information overload combined with imperfect knowledge, perfectly symbolised by aircraft hangers full of unread university and schools inspection documentation. Audit becomes the manufacture of ‘comfort certificates’, an elaborate exercise in self-deception that allows both sides to claim fulfilment of their targets but is fundamentally out of control – revealed by surprises like GP earnings figures or NHS financial deficits.

It is not just that the resulting system is inefficient, systematically underproducing and overconsuming, like the old Soviet Union. The ‘new’ culture now permeates every corner of the public sector. The auditable drives out the non-auditable, even where the latter is more important, defining organisational purpose and the priorities of employees.

A new stratum of managers materialised to juggle the pressures and technicalities of the phoney markets. In this light it’s not surprising that productivity gains from Labour’s extra public spending are so debatable. Much of it is auto-consuming, devoured by the direct and frictional costs of proving that it is not being wasted, or of devising methodologies to make things work better.

And the madness is not going away. Tellingly, commenting on the Chancellor’s budget speech, the FT’ s Martin Wolf likened it to a Soviet commissar’s discourse on tractor planning, containing plans and targets for every cranny of British life – children, skills, education, science, environment, enterprise and even (most Soviet of all) Olympic athletes. It took 75 years for Soviet central planning to crumble under the weight of its own contradictions. E-enabled and computer assisted the UK version may be, but it’s still a Soviet tractor at heart.

The Observer, 23 April 2006

ALL CHANGE! The traditional cry of the London bus conductor at Tottenham Court Road seems to have become the working slogan of every organisation in the land. According to consultants McKinsey, at any time up to 15 of the FTSE 100 are ‘transforming’ themselves and a further 50 changing in less extreme ways.

At the same time, there seems almost no part of the public sector immune from being turned around or inside out. After three major reorganisations, seven substantial ones and another one planned in nine years’ time, the NHS may be spending more doctor- and nurse-hours being reformed than practising medicine.

The need for constant change is now so accepted that few people question it. But the results of all this frantic activity should give pause for thought. McKinsey’s research underlines just how high the stakes are. Successful transformation (BP and RBS come to mind) can and does turn ugly ducklings into swans even leaders have huge headroom for improvement. ‘In value terms, successful change pays off big time,’ says Colin Price, a director in the London office.

On the other hand, failed transformation a la Marconi is far more common than success. Confirming previous research, McKinsey calculates that more than 70 per cent of corporate metamorphoses turn the ducklings into something even uglier if they don’t end up barbequeing them: 61 of the Forbes 100 companies of 1987 had disappeared from the list by 2003.

McKinsey naturally wants organisations to continue to change, so it accentuates the positive. Despite the poor average results, successful change, it says, is a matter of getting a number of things right at the same time: a rigorous programme architecture, emphasis on both short-term performance and long-term corporate health, high aspirations, embedding gains in processes in procedures, changing employees’ behaviour and transforming leadership. None of these is optional, McKinsey insists. They have to work together as a ‘bundle’. Conversely, the minute something is thought of as a silver bullet it stops being part of the solution and becomes the problem.

Although McKinsey is concerned to isolate the secrets of success, in mirror-image the analysis also casts light on failure. Because change works as a whole, you can’t pick off parts of it. Successful change generates energy, says Price unsuccessful change consumes it, using it up as friction instead. In this light, the desperate attempts to salvage General Motors and its former subsidiary, parts-maker Delphi, through massive downsizing, look more likely to turn lights off than on. It seems obvious that many public-sector ‘reform’ programmes are similarly a drain on the batteries rather than a boost, pitting as they do different parts of the system against each other.

In a revealing interview in the British Medical Journal last week, the previous deputy chief medical officer noted that reform in the NHS had been a ‘deceit’. There was an extraordinary gap, he said, ‘between highly motivated frontline staff and the systemic dysfunctionality’ they work in. As well as better work organisation, they needed to focus on using processes and technology to deliver high levels of quality of care. Short of that, ‘throwing money at the problem only allows us to do more of what we have always done’.

Just as successful change is self-reinforcing, each round of bad change makes the next one more difficult. In the NHS, successive waves run into each other before the last one is completed, leading to cynicism and tacit resistance. ‘The cycle of perpetual change is ill-judged and not conducive to the successful provision and improvement’ of services, the Health Select Committee said of the most recent changes.

In truth, something as large and complex as the NHS is simply not amenable to a ‘big fix’ imposed from the centre. There are too many actors and interests and no lever to pull them all in the same direction. Centrally planned change of this kind, replete with targets, awards for effort and elaborate substitutes for markets, works little better in Whitehall in 2006 than in the Kremlin in the 1980s and for all the same reasons: perverse incentives, distorted priorities and corrupted information.

Structural reorganisation and strategic change allow CEOs to be seen to be doing something to justify their salaries, but activity isn’t the same as improvement. Companies ignore the much profounder transformation that comes free from paying attention to humble work organisation and incentives.

The invisible secret of the best companies is that they are always changing, because it is part of the job of frontline workers and managers to improve the system every day. You might call it ‘distributed change’, which manages to combine continuity with a constant adjustment to the market that makes more wrenching transformation much rarer. As Don Fabrizio sums it up in The Leopard , Giuseppe Di Lampedusa’s marvellous novel on political and social change: ‘Everything must change so that everything remains the same.’

The Observer, 9 April 2006

GORDON BROWN’S establishment of a panel of the world’s biggest business cheeses to advise on globalisation and competitiveness, and another to ‘promote London as the world’s leading international centre for financial and business services’, prompts a question that will almost certainly never be raised in either forum: are these objectives compatible? Or will the City’s continued rise make it harder rather than easier ‘to achieve what we have not achieved since the first days of the Industrial Revolution – to become the best location for scientific R&D and world leaders in the new enterprises of the future’, as the Chancellor earnestly put it last month?

Questioning the country’s most vibrant success story might seem perverse. As charted in a Treasury budget paper, the City of London is the leading international financial centre in the world: global No 1 in foreign equity and foreign exchange trading, cross-border bank lending, derivatives and as a secondary market for international bonds. It is the fastest-growing hedge-fund market. Whereas rival financial centres in New York and Tokyo largely serve domestic economies, London’s growth is global. This is reflected in the pounds 19bn trade surplus chalked up by financial services in 2004, up 9 per cent over 2003.

The City of London increasingly dominates the UK economy. Financial and business services account for 45 per cent of the UK corporate tax take. The financial district’s high earners (on pounds 100,000-plus) pay 25 per cent of all income tax. Forty per cent of the capital’s employment is provided by the financial sector.

Given that all advanced economies are increasingly service-based, what does the emergence of what might be called the derivative economy mean for non-City businesses? Well, recall that banks and financial services grew up to serve industry and commerce, and it is from industry’s revenues (as well as from individuals) that their own still have to come.

Recall, too, that despite Brown’s assiduous attentions (hence the new panel) UK productivity and investment, including financial services, remains low compared with rivals. Is there a connection to be made here? Plenty of people would argue yes.

At least three recent reports have catalogued how corporate directors increasingly feel obliged to dance to a speeded-up, short-termist City tune. One suggests that the UK investment climate is the least favourable in the world for building high-tech and knowledge-based companies.

This should be a reality check, at the very least, on the Chancellor’s ambitions for the UK as a technology hub. A minion might also alert him to the absence of UK firms from today’s tech-based sectors. That ought to tell him something about the relationship of productivity to the City – as should the fact that, apart from GlaxoSmithKline, the sole large native high-tech firm available to represent the UK on his advisory panel on globalisation and competitiveness is Rolls-Royce.

He would have been better off with two items of readily available reading matter. As a helpful reader suggests, one would be anything written by the late WE Deming, who was practising joined-up management 50 years before New Labour thought it invented it.

The second is Warren Buffett’s 2005 letter to Berkshire Hathaway shareholders. Buffett is the world’s most successful and least active investor. Berkshire Hathaway doesn’t have an ‘exit policy’ for its investments because it never intends to sell them. Berkshire eschews debt and invests in simple companies (‘if there’s lots of technology we won’t understand it’) with good management: insurance, utilities, Coca-Cola, AmEx and a variety of manufacturing and service sectors. Berkshire has conjured growth in book value of 305,134 per cent since 1965, an average annual gain of 21.5 per cent.

Buffett understands all about productivity. In his letter, he notes that, despite record losses from Hurricane Katrina, Berkshire’s insurance companies still made a profit, largely because of productivity gains that mean they can offer customers outstandingly good value at low prices. Rocket science or what? He also understands what undoes productivity. In an aside on ‘how to minimise investment returns’, he notes that the ‘frictional costs’ to investors of employing brokers, managers and other professional help (some of it bearing ‘sexy names like hedge fund or private equity ‘) may now be eating up 20 per cent of the earnings of US business.

Buffett also describes Berkshire’s great difficulties (and losses) unwinding derivative contracts entered into in the 1990s by its reinsurance business. He believes they should be a warning to all managers and regulators – the more so since the victim was a minor player with a conservative owner.

Since then, the number and complexity of global derivative contracts has mushroomed beyond calculation, with unknowable consequences in the case of a financial Katrina. When Berkshire exits derivatives, Buffett sums up, his feelings ‘will be akin to those expressed in a country song, ‘My wife ran away with my best friend, and I sure miss him a lot’.’

So let’s keep the City in perspective.

The Observer, 2 April 2006

IT USED to be said that people were more likely to change their spouse than their bank. Getting a cheque book was the first service relationship and, having signed you up early, the bank could expect loyalty (or inertia) to keep you a customer for the rest of your life.

Today, a person’s first commercial relationship is likely to be with a mobile-phone company, and for a third or more of customers it will last less than a year. Mobile phone penetration in several countries, including Britain, is now more than 100 per cent, meaning that a growing number of customers have two or more handsets, and some young ones are so technologically savvy that they reportedly switch Sim cards between phones to take advantage of special rates at different times of day.

So where does that leave loyalty? How can companies retain customers who are so quick to trade in, up and out? This matters a lot to industries such as mobile phones which initially experience such heady growth in an expanding market that defections don’t matter. But with every available customer signed up, sometimes more than once, the industry’s free minutes have run out. In future, one company’s growth can only be another company’s shrinkage.

As the retention war hots up, churn rates have if anything increased, now hovering around the 30 per cent mark, even higher in pre-pay, where customers are still more promiscuous. Churn deals operators a crashing double whammy, reducing revenues as it raises the cost of customer acquisition. Last year a report by researcher Analysys found that the cost of winning a new customer could be 12 per cent of the total lifetime revenue he or she brings in. In all, churn in 2003 cost western European operators more than pounds 6.5bn, the report estimated.

In this context, finding loyalty does still exist is both a surprise and something of an indictment of industries such as mobiles that have ignored it. ‘Given the death of deference and authority, we wouldn’t have expected loyalty to be valued for itself,’ says Bob Tyrrell of Global Futures Forum, who researched the issue for mobile operator O2. ‘But we were surprised to find very positive attitudes. A comfortable majority say that loyalty matters as much as ever – particularly young people.’

However, that does not mean it is easily given. Businesses lag far behind family and friends, workplace relationships and clubs in evoking feelings of loyalty, Tyrrell found. That might be expected – but less so is the fact that many of the things firms do to serve customers actually make things worse. Loyalty being closely linked to personal interaction, impersonal responses from automated call centres evoke huge hostility (when will they learn?). Interestingly, loyalty marketing can itself be damaging. ‘Customer apartheid’ – different levels of service for different segments – is resented, and rewards tend to provoke cynicism rather than faithfulness.

‘Loyalty is a powerful word,’ says Charlie Dawson of The Foundation, a marketing consultancy. He points out that the mobile industry has brought the situation on itself by training customers, in effect, to look for the best deal. ‘If you don’t switch, you’re left on the mug’s rate and that hardly makes you feel great.’

O2 says the research is helping it to take these issues to heart. ‘As an industry, we haven’t served customers as well as we would have liked,’ admits customer director Cath Keers. In recognition of the need for a better human touch, the company, Britain’s largest mobile operator, hired 2,000 new workers to deal directly with customers and culled 500 managers. It also decided to tackle the damaging perception that serial one-night stands are more advantageous financially than a long-term relationship. Here, as well as rewarding good customers, Keers says it is building on the idea of ‘episodic loyalty’ – attachments that vary over time. Prolonging these episodes is a matter of keeping pace with the growth of the customer, says Tyrrell, so that when a pre-pay customer moves to a contract they will be happy to move within the company rather than shop around.

The key is to stop resisting what the evidence is saying (that current marketing methods are part of the problem), then be bold enough to simplify hugely overcomplicated products and tariff structures. ‘They are completely tied up in their own technology,’ Dawson says of most of the operators. ‘They just can’t see it from the customer’s point of view.’

Keers points to the figures to show that O2 is moving in the right direction. In the year to December 2005, churn rate for pre-pay was down from 37 to 30 per cent, and for contract from 30 to 27 per cent. Overall customer numbers were healthily up in the last quarter, and service indicators are improving. It’s only the start, she concedes, but given a few more years, maybe the mobile operators will be in a position to teach the banks something about the difference between inertia and loyalty – and not before time.

The Observer, 25 March 2006

TO LOSE one top executive may be regarded as a misfortune. To lose two, even if the second is honorary president, looks like carelessness. Pace Oscar Wilde, the boardroom ructions at Vodafone, the world’s largest mobile phone company, are earnest rather than funny, speaking volumes about succession and leadership assumptions in the UK’s largest companies.

It is often argued that succession planning is, or should be, one of the most important roles that boards undertake. Yet despite the lip service, most large firms have either unsatisfactory succession plans or none at all, according to US research (and the US is better than elsewhere). The reason is partly psychological. Although a temporary contingency plan for what happens if a chief executive falls under a bus is obvious common sense, formal succession is like planning your own funeral – even more sensitive because the current CEO may not be the best judge of the successor.

As a result, although it is inevitable, the need to replace a leader always takes a company by surprise. The results of this permanent unreadiness have been all too visible at Marks and Spencer, Rentokil, and J Sainsbury as well as Vodafone effects include leaders who stay too long (or who hang around in emeritus positions looking over the shoulder of the new person, as at Vodafone), abrupt strategy lurches, compromise appointments, and drooping performance because senior managers take their eyes off the ball to plot against each other rather than competitors.

In a further twist to the tale, sagging performance leads to briefer CEO encounters and more short-termism, in turn creating greater pressures on the next one in the hot seat. According to consultancy Booz Allen, underperforming European chief executives get just 30 months before they are given the boot (compared with 4.5 years in the US), ‘an astonishingly and counterproductively short period of time… the threat of rapid dismissal focuses existing CEOs on short-term performance, preventing them from completing (or even launching) the transformations that many European companies need’.

But Vodafone’s travails illustrate something else. Of course who is in charge matters, but it matters more at Vodafone – where differences over strategy are reflected in a struggle between the new and old guards – than it would at a more stable firm. To illustrate, consider the acknowledged Exhibit A of succession planning, GE. GE makes a fetish of management development. Its chief executives are always appointed from within, enjoy tenures vastly longer than the norm, and are regularly feted as the world’s best managers of their day.

But you can turn that around. The reason that GE’s CEOs are so effective may be that they are the products of, and work in, a brilliantly effective system. Crudely, it may not have mattered if it was Jeff Immelt or one of his internal rivals who inherited Jack Welch’s mantle. Part of the CEO’s importance is symbolic. As as former GE manager points out: ‘Jack did a good job, but everyone seems to forget that the company had been around for over 100 years before he ever took the job, and he had 70,000 other people to help him.’

In other words, good firms don’t need leaders to make a vast difference. Bad ones do. One motor industry study found Toyota was unique in that a change of CEO made no difference to its performance at all. Changing CEOs at the firm, notes Stanford University’s Jeffrey Pfeffer, is like changing lightbulbs: the system is so robust that the difference from one to the next is minimal.

In turn, this gives some clues about what succession committees should be recruiting leaders to do. If the company is successful, the successor should probably be internal and incremental. If the firm is wobbling and there is a presumption in favour of change, an outsider may be the best choice. Beware of charisma, however. Strong egos who believe their own hype are some of the most dangerous people on the planet, habitually overestimating their power of control and the degree to which success is due to them alone, and underestimating the difficulty of change.

In fact, large-scale change has such a poor record that companies need to be absolutely sure they really need it. Is it Vodafone’s global growth strategy that is running out of steam, or its execution? If the latter, then a strategic review won’t help just as the replacement by the present Vodafone CEO of old-guard senior managers will not buy much time if the system they work in is flawed.

A good succession arrangement, on the other hand, is one that reverses the vicious circle of constant change. It makes each succeeding appointment decision easier – by making execution the strategy and building a reliable system that delivers it over and over again. The job of the leader is to make the transition to the next one as boring and unremarkable as possible. In light of which, the column inches devoted to Vodafone’s need for strong leadership may bode ill for investors. As Oscar Wilde also noted: ‘When the gods wish to punish us, they answer our prayers.’

The Observer, 19 March 2006

THE WEEK before Marks & Spencer proudly announced the first high-street range of T-shirts and socks made with Fairtrade-certified cotton, accidents at three Bangladeshi factories producing garments for western firms left hundreds of workers dead or injured. The incidents went unreported in the British press. Campaigners estimate that since 1990 more than 350 people have been killed and 2,500 injured in similar incidents in Bangladeshi garment factories.

It was a grim reminder of the high price of cheap goods. In the global economy, the acts of consuming and producing are separated by ever-increasing distance and time. Behind the supermarkets, replenished overnight with the cornucopia of fresh food and the other products that construct our daily life, lies an intricate network of supply chains stretching back invisibly to every part of the world. But these links don’t just transmit goods. When the supermarkets do promotions or boast of ‘everyday low prices’, the pressures ripple back through the middlemen down the length of the line. It takes periodic pickets of Parliament by British farmers, or French smallholders strewing cauliflowers or manure over the Champs Elysees, to call attention to the harshness of life at the end of the chain, where there’s nowhere else for the pressures to go.

Sometimes, as in the Bangladeshi garment trade, the harshness is a matter of life and death. It is the same with coffee.

By value, this is one of the five most important commodities traded in the international economy. Its price is quoted on exchanges in New York and London. There are just four main buyers of the crop: Kraft, Nestle, Procter & Gamble and Sara Lee. But the beans are grown by 15 million poor farmers working smallholdings around the world 70 per cent of the world’s coffee is grown on farms of less than 25 acres.

The world’s coffee-producing zones coincide with a map of extreme poverty. So what happens when the price of coffee falls, as it did with the collapse of the International Coffee Agreement in 1989, and again in 2001, when overproduction meant that prices to producers tumbled, in real terms, to a 100-year low?

The answer is that people die. If they don’t die, they grub up the coffee bushes, take their children out of school and join the exodus to city shanty towns and slums, says Harriet Lamb, director of the Fairtrade Foundation.

When coffee goes off the boil, whole countries suffer 60 per cent of Ethiopia’s foreign earnings come from coffee. Nicaragua is similarly dependent.

The idea of fair trade comes from various sources in the Netherlands and Germany, as well as the UK. One strand derives from the old Greater London Council, where activists wanted to use its buying power to develop a counterweight to the unfair trading system.

Michael Barratt Brown, a pioneer of the movement, says former colonies depended on a single product, which they had to export to survive. Then the World Bank encouraged other countries to plant the same cash crops to pay the interest on their debts. As a result of increasing surpluses, despite growing demand, the price of these staples fell for two decades or more.

On the ground, that meant that while brokers, manufacturers and – most of all – supermarkets profited, the growers were trapped ever more firmly in poverty. The pattern is the same across many crops grown in poorer countries.

A good example is chocolate. In West Africa, where 70 per cent of the world’s cocoa-bean crop is grown, grinding poverty is endemic. Some farms were run with child slaves, the US State Department found in 2001. Child labour is still widespread, with hundreds of thousands of children doing hazardous farm jobs instead of attending school.

For several countries in the Caribbean, bananas are another key crop. In 1999, prices plunged to historic lows, while under World Trade Organisation rules, growers faced losing access to their European markets. In Dominica, the number of banana producers fell from 11,000 to 700. With nothing to replace farming, unemployment soared, the social fabric began to fall apart. Gangs formed, guns and drugs proliferated and crime rocketed.

In all these cases, it has taken a reforging of the links between the ends of the supply chain to start to break the vicious circle. The key, says Barratt Brown, whose alternative trading company, Twin, helped to launch Cafedirect in 1988, was discovering that consumer power could be harnessed to producer power. The move of fair trade from charity purchase to the supermarket shelves was critical, enabling significant quantities of the raw material to be bought at fixed, above-market prices. In turn, that allowed more producers to plan ahead, and invest in quality and sustainable methods – with some left over to put back into the community.

As important as anything, agree Lamb and Barratt Brown, is the sense of empowerment that fair trade gives: equipped with a computer to look up prices on world exchanges, a coffee or banana growing co-op is no longer a group of marginalised dirt farmers but small-scale international businessmen with choices and links to the consumer.

Neither Lamb nor Barratt Brown exaggerates the gains. ‘We’re just on the starting blocks,’ says Lamb. But if the problem is huge, there is evidence that, within its limits, fair trade works, bringing more benefits, including intangible ones such as cultural revival, than even its champions expected. People don’t have to wait for governments, human beings people don’t have to be prisoners of markets. They can move them.

‘The need is as great as ever,’ adds Barratt Brown. ‘But it gives hope. It’s worth fighting for.’

The Observer, 12 March 2006

HEROIC LEADERS are a disaster. Seventy per cent of mergers fail. In most organisations, financial incentives cause more problems than they solve. There is no connection between high executive pay and company performance (well, there is – the wider the pay differentials, the lower the commitment of the less well paid). The main result of many consultancy assignments is another consultancy assignment. All ‘silver bullet’ or ‘big ideas’ on their own are wrong.

These are not theories, but facts. Yet companies trip over themselves to buy others, launch change initiatives, introduce pay for performance, flit from one big idea to the next – and pay their CEOs stratospherically. It’s hardly surprising so many go belly up. If doctors were as cavalier with the evidence, a lot of their patients would be dead and many medics would be behind bars.

The last is a line from what bids fair to be one of the management books of the year. Hard Facts, Dangerous Half-Truths and Total Nonsense (Harvard Business School Press), by Stanford professors Jeffrey Pfeffer and Robert Sutton, is a compelling tour of management conventional wisdom and why it so often turns out to be unwise, untrue and a stranger to fact – bollocks, in fact. Every potential manager should be made to read it before they are allowed to be in charge of anything, even a whelk stall.

So why don’t managers make judgments on evidence, as doctors at least try to do? The book pinpoints a number of factors, many of which come down to the human factors economic theorists carefully exclude. They overestimate power, fail to cut losses, underestimate cost and difficulty, and ignore the lessons of failure. They put too much faith in superficial impressions and repeat what worked in the past. Or they fall back on unexamined but deeply held ideologies. (An unqualified belief in anything, except the likelihood of being wrong, is a certain predictor of tears ahead.)

Another factor is the messiness of the market for ideas, not least the quantity of information and the self-serving interest of gurus in talking up successes and downplaying the side effects of their prescriptions. People prefer simple solutions, even if there aren’t any: ‘If someone tells you they have the answer,’ one candid guru noted, ‘they probably haven’t understood the question.’

Less obvious is the effect of facts on conventional leadership. If only the facts matter, it shouldn’t matter where they come from. That undercuts the traditional justification for hierarchy: that the boss knows best. Facts force the boss to choose between being ‘in control’ and being right. Many choose the former.

All this sets up a bizarre corporate amnesia – a kind of conspiracy not to learn in which organisations find new ways of repeating mistakes in an endless loop. They are suckers for half-truths – more dangerous than total nonsense because they are not entirely wrong, except when treated as whole truths, in which case they become total bollocks. Pfeffer and Sutton line up a number of these, often naming names, showing how some of management’s ingrained habits of thought cause them to undermine their own organisations.

Thus, leaders do make a difference, but not as much as you might think, and more on the downside. Yes, strategy and recruiting good people are important. But strategy is usually overrated, to the detriment of implementation and overestimating raw talent can impede learning. It’s no use putting good people to work in a crappy system conversely, putting people in a good system and expecting them to improve increases their individual and group capabilities – another example of the (ignored) self-fulfilling nature of so many assumptions.

Incentives do incentivise – but be careful what you wish for. As W Edwards Deming said, people with sharp enough targets will probably meet them even if they have to destroy the company to do so. And what about change or die?The trouble, they say, is that companies are so bad at it that ’empirically it is change and die’.

It’s a weird paradox. Despite management’s obsession with hard numbers, many organisations are a fact-free zone, swirling with untested assumptions. Horrifying sums of money are committed on superstition or whim. Thus, fact-based management is really triple-distilled common sense. It’s hard. It requires judgment, practice, help, humanity and wisdom. It needs scepticism and experimentation. It needs reasoned optimism and learning, and, as F Scott Fitzgerald put it, the ability to function while holding two contradictory ideas in your head at the same time.

Ironically, applying such honed common sense is a great recipe for competitive advantage because so few do it. Despite the heroic efforts of the professors, this will almost certainly continue. As Peter Drucker says: ‘Thinking is very hard work. And management fashions are a great substitute for thinking.’

Which is why most companies and managers will continue to ignore the facts, make the same mistakes and perpetrate the same old bollocks: not fact-based so much as voodoo management.

The Observer, 12 March 2006