BA must be reflecting that there’s no such thing as a cheap lunch. When it sold off its in-flight catering arm to Swissair in 1997, it only seemed to be doing what everyone else was. Outsourcing, together with its sibling, offshoring, has become a seemingly unstoppable management bandwagon.

Outsourcing adviser TPI estimated that major outsourcing deals – those worth more than $40 million (£22m) – totalled $58 billion last year, while adding in smaller deals and related consultancy would multiply that figure several times. The UK spent £2.5bn on outsourcing advice alone in 2004, much of it in the public sector. BA itself has more than 2,000 outsourcing relationships in place.

For BA, as for other companies, there is a management rationale for outsourcing a function previously done in-house. The doctrine of ‘core competencies’ suggests that an organisation is better off cultivating the few things it is distinctively good at and farming out the rest. This is not new: companies have always had to make trade-offs between making or buying.

However, what made outsourcing a hot ticket was its application in the 1990s to IT, which not only lent itself to outsourcing as a function by the same token, other functions based on it, such as HR and administration of all kinds, could also be hived off to third parties. Services as well as manufacturing could be taken apart, farmed out, then reassembled seamlessly at the point of delivery.

As a result, a growing army of eager vendors queued up to offer an increasing range of processes that went deeper and deeper into the heart of the firm. At the height of the internet boom, excitable observers were suggesting that conventional companies would eventually disappear, being replaced by fluid networks that constantly reconfigured themselves. ‘Outsource everything except your soul!’ exhorted arch-guru Tom Peters.

As with much in management, however, outsourcing has a less obvious agenda. To find out what is really driving its exponential increase you have to look at the incentives. The major impetus is not what it does to operational but to financial performance.

Taking assets off the balance sheet increases reported return on assets at a stroke, just as the reduction in headcount boosts revenues per employee. Moreover, it is far easier for the firm that is outsourcing to use market pressure to cut costs – by threatening to switch suppliers – than it would be to do so internally. In effect, it offloads the difficult task of operational improvement to the supplier.

Lower costs drop straight to the bottom line higher earnings leveraged by high price-earnings ratios boost the share price rising shareholder value increases executive pay – at least in the short term.

The financial engineering angle explains why outsourcing is so much more important in the Anglo-Saxon economies, with their emphasis on shareholder value, than in continental Europe. By the end of the 1990s, US manufacturing firms were outsourcing between 50 and 70 per cent of the value they added. But in the long run operational considerations have a nasty habit of reasserting themselves – as is happening with BA.

Suppliers’ margins cannot be squeezed ad infinitum, particularly when there are only two of them, as in the case of global airline caterers, and both are in financial trouble. BA has already had to improve the terms of its contract with Gate Gourmet to allow it to survive, thus negating part of the point of the deal.

As many companies are finding, outsourcing has hidden costs that over time diminish its apparent advantages or even wipe them out. These are simply not captured in the economic model. The most obvious is control when things go wrong, as at Heathrow.

But basic operational knowledge is also a casualty. When Gate Gourmet’s new owner, Swissair, collapsed, the caterer was bought by Texas Pacific, a private-equity group. Private equity, too, is all about finance: companies are loaded with debt and sweated mercilessly with a view to being sold on as soon as possible. So Gate Gourmet was under huge pressure to drive down costs (mostly labour) from both its customers and its owners.

If the airline had still been in charge, it would have known the strain and risk to which it was submitting its supply chain. It would have also known that its baggage handlers and support staff were not only members of the same trade union as the catering workers – they were their husbands and brothers. Whatever they say in public, companies typically outsource to cut costs. But because they fail to look at the process as a whole, they often end up increasing them.

In BA’s case, the airline estimates that the summer chaos has cost it at least £30m, but who knows the real total in terms of damaged reputation and lost custom in the future?

Conventional wisdom says that companies should never attempt to outsource problems or risk, and for once it is right. The only way to make outsourcing work is to know as much about the function and to put as much work into managing it as the company you have handed the job to. In which case, of course, you might equally well do it yourself.

The Observer, 4 September 2005 2005

IN ONE of Jorge Luis Borges’s haunting, enigmatic fictions, Tlon, Uqbar, Orbis Tertius, the narrator comes across an encyclopedia reference to an invented parallel universe. With its own language and literature, complete in every detail, the planet Tlon operates on a seductively different logic from that of the ordinary world, which by the end of the story it is well on the way to supplanting.

Borges wrote his story in the 1940s. Writing today, he would set his story among the mirrors, labyrinths and forking paths of management, which often seems to be constituting a similar parallel world with its own hermetic laws and behaviours. One of the telltales of this world is a language that has become untethered from normal meaning. Sometimes it floats free of reality altogether.

Gourmet, as in Gate, is a good example. I mean, I’ve had airline food that didn’t actually taste awful. I’ve even had airline food that was OK. But gourmet? Come on.

Trivial, perhaps. But it matters because the name is an affront to common sense and makes you query the company’s good faith, grasp of reality, or both. The uncertainty deepens as you read the company’s website’s references to ‘passion’, ‘world class’ and (full house!) ‘our most valuable resources – employees’. When you get to ‘We communicate in an open way and promote inspiring teamwork we treat our colleagues, customers and suppliers with respect and dignity we pay market competitive salaries and offer adequate social security,’ you know you’re no longer in the universe inhabited by most people: you are deep in Tlon.

As in the Borges story, management’s parallel universe is supported by a comprehensive literature in which imaginary concepts and attributes are earnestly described and referenced, as if they really existed. ‘Passion’ and ‘delight’ are such parallel concepts. So is ‘excellence’ (well to the fore on the Gate Gourmet website).

In Hard-core Managemen , Jo Owen notes that there is a huge gap between the ‘excellence industry’ touted in the literature and the daily reality of management.

He observes tartly that, although the official story of management over the past 20 years is one of transformed professionalism through re-engineering, core competencies, customer relationship management, outsourcing and shareholder value, the reality for customers has not changed. We still spend 20 minutes getting a reply from a call centre and tear our hair trying to make a new gadget function.

In fact, like ‘excellence’ and ‘delight’, any management superlative is suspect and should probably be shot on sight. ‘Best practice’, for example. Best practice doesn’t exist except in the world of ideals, and never will, because it is contingent. It implies there’s one right way, which is a mirage, and that anyone using it has reached nirvana. As Owen also remarks, there are no final answers in management: the key is knowing the right questions.

This is one reason why ‘solution’, as in IT and increasingly management in general (even The Guardian sells ‘recruitment solutions’), is also a giveaway of parallelism. ‘Solve’ is transitive a solution without a problem has no function, like yin without yang. Translated into most people’s language, a ‘solution’ is a consultancy for mula or fancy piece of IT kit looking for a buyer. ‘The solution of every problem,’ Goethe figured out two centuries ago, ‘is another problem.’

Parallelists often concede that the value of IT solutions is not intrinsic – IT is an ‘enabler’. This is another paranormal idea. In our world, IT often crashes, locks in, disables other courses of action and obliges people to obey its rules rather than the other way round.

In the managerial world, on the other hand, it effortlessly ‘enables’ almost everything a manager finds desirable – its apogee being a current TV ad for networked services, showing literally a parallel world in which fish, desks, phones, people, bikes and other elements fly together and apart somewhere over an urban skyscape while a voiceover intones about seamless, secure, personalised transactions taking place (naturally) 24/7.

Some of this is so abstract it is almost devoid of meaning. A bank currently claims to be ‘leveraging its global footprint to provide effective financial solutions for its customers by providing a gateway to diverse markets’. Some is wishful thinking. But it’s not always harmless. As on Tlon, the abstractions of the invented world progressively impinge on the real one.

At the university where my wife works, professorial salaries used to be set by the vice-chancellor using his judgment on the basis of a one-page letter written by the academic. To increase ‘transparency’, a new vice-chancellor introduced two new written steps in the procedure involving department and faculty heads and a system of ‘feedback’. As a result, salaries are no more transparent, but the process has become twice as cumbersome and bureaucratic.

It transpires that ‘transparent’ in the management universe does not mean ‘see-through’, it means ‘formal’. Ironically, the new ‘improved’ process can be instantly bypassed by any professor who invokes the brutal (and actually much more transparent) law of today’s academic transfer market: pay me more or I’ll take my research record somewhere else.

In Borges’s book, the invented universe is a hoax, the all-encompassing creation of a secret society. But that does not prevent it taking over the world. Is management a hoax? In a recent survey of 3.5 million employees worldwide, research firm Sirota Survey Intelligence found that most workers did their best work when managers were out of the way. Management bureaucracy, blame-placing, inconsistent decision-making, delaying and time-wasting all interfered with their ability to do their work properly. In other words, the less management the better.

Preventing ourselves falling into the parallel universe is partly about questioning management’s self-replicating assumptions. But it’s also a matter of language. In the words of another famous parallelist: ‘When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean – neither more nor less.’

‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’

‘The question is,’ said Humpty Dumpty, ‘which is to be master – that’s all.’

The Observer, 28 August 2005

A READER – the source of most of this column’s best subjects – sent me an interesting chart last week (right). It shows the incidence of reported crimes near a pub in Bromley, Kent, from August 2000 to November 2004. Is there a link between extended drinking hours and more violence? In the case of the Tiger’s Head, the answer is yes – violence doubled when hours were extended. When the late-drinking licence was revoked after 18 months, crimes fell again, to less than half the previous level.

The chart looks like a simple graph. In fact, it’s much more. ‘It’s immensely powerful – there are so many applications in local government and the public sector,’ says Bromley councillor Tony Owen, who drew this one. It’s a ‘control’ or, better, a ‘capability’ chart, and it measures a process’s capability and variation – failure to understand which, according to quality prophet W Edwards Deming, is ‘the central problem in management and leadership’.

As targets are to conventional, dysfunctional, management, measures of capability and variation are to the positive systems alternative. The exact opposite of the poisonous ‘WMD’ (weapons of management destruction) described on this page two weeks ago, such measures are, alas, criminally neglected – utterly ignored by boards, ministers and Whitehall policy wonks alike. Yet it is no exaggeration to say that their better understanding and use would do more to stabilise the NHS, improve public finances and raise UK productivity generally than all the government targets and interventions put together. (Actually, the latter necessarily make things worse, and not the least of the beauties of capability/control charts is that they show you why. Read on.)

The control chart was invented by Dr Walter Shewhart, godfather of the modern quality movement and mentor of Deming, in the Twenties. ‘Control’ here is slightly misleading: Shewhart saw it above all as an aid to predicting performance and thus management judgment and decision-making. It can take many forms, but at its simplest – as in the Tiger’s Head example – it depicts the working of a process over time.

A critical component of the chart is its control limits, based on the calculation of standard deviation, which show the extent of natural variation in the system. Around the Tiger’s Head, under standard opening hours, reported crimes per month could total anywhere between 12 and zero and under extended hours 25 and zero. Anything inside the control limits is ‘normal’, part of the system, and the process is stable or in control. A point outside the control limits, on the other hand, is evidence of an abnormal external cause that needs to be investigated, and if necessary removed, to make the process stable again. Only when the process is stable is predictability renewed.

The control chart has been aptly described as ‘the voice of the process’. Unless it is heard, managers have no way of knowing if any particular number is a natural variation or something that warrants intervention. This is a critical distinction: if managers mistakenly tamper with a stable process, believing an occurrence is exceptional, they introduce an external cause, which destabilises it. Targets do the same thing.

If a system is stable, as a matter of logic you can only force it to deliver a target beyond its limits by improving it, distorting it or fiddling the numbers. It’s impossible to know where and what to improve without a process voice to tell you – so, in the absence of capability measures, distortion and fiddling are the inevitable result. If the system is unstable, meeting the target is useless, because you have no way of knowing if you can do it again. Thus does the current public-sector regime of targets and interventions make systems work worse, raising costs and destroying morale thus Deming’s insistence on the importance of the leadership task of interpreting and acting on variation.

Traditionally, control charts have been thought of, if at all, in terms of manufacturing industry. But this is a misconception, says Cranfield Management School’s Steve Mason: ‘There are many applications they could be used for, including at board level. We need to get boards away from looking at columns of spreadsheet numbers to something more meaningful.’

Another strong advocate, no stranger to these columns, is John Seddon, whose consultancy, Vanguard, puts capability measures at the heart of a philosophy that has helped a number of public- and private-sector organisations to performance improvements that make a mockery of official targets: benefits payments in four or five days against an official target of 50, or cutting resolution of IT helpdesk enquiries from days to hours. ‘The test of a good measure is whether it helps in understand ing and improving performance,’ he says. ‘That’s exactly what systems measures – of which control charts are one – do, and targets don’t.’

The puzzle is why these measures are so scandalously neglected. ‘There are few of us teaching them, and they don’t figure in MBA curricula,’ says Mason. It probably doesn’t help that they are part of the unsexily titled subject of ‘statistical process control’, identified exclusively with nerds in white coats. Another reason is that so few people in the public sector have worked in environments where their virtues are recognised. ‘Where I worked, at Philips, if we supplied Sony with more than a couple of faulty parts per million, we’d be out as a supplier,’ says Owen at Bromley council. ‘Here, 20 per cent of the holes in the road are unfilled.’

But although no one who ‘gets’ systems measures ever returns willingly to targets and specifications, even in the private sector the gains are all too often reversed by senior managers who take fright at the implications. This, says Seddon, is because those measures are part of a package – a systems view of the organisation – and can’t be applied piecemeal as a handy ‘tool’.

It’s hard for managers to accept that, from a systems perspective, their function of devising top-down financial plans and budgets is the source of all the subsequent variation with which the inhabitants of the system have to cope (or not) as best they can. What is that if not the biggest leadership issue there is?

The Observer, 21 August 2005

IT’S THE great paradox of the information age: companies – indeed, organisations of all kinds – are drowning in customer data but starved of useful knowledge. The consequence, says John Orsmond of Data Vantage, a database specialist, ‘is corporate amnesia on a grand scale’.

Every customer contact generates data. But the more companies fall over themselves to invest in contact centres and accompanying customer relationship management (CRM) and other expensive and complex database ‘solutions’ to collect and store it, the less they seem to have in the way of ‘answers’. ‘Companies are forever forgetting what’s happened many times before,’ Orsmond says.

Despite the hype of the computer vendors, most companies are forgetting rather than learning organisations. While the amount spent per customer on CRM goes up, the yield on their data assets goes inexorably down. Never in the history of commerce has so much been known about so little, to such small effect.

In fact, the effect is not just negligible, it is negative. Instead of being an ‘enabler’ (like ‘solution’, a word that should make managers pull a gun on anyone who utters it) IT has become a disabler, a screen that effectively distances consumer from company. Think of the on-hold music, the interactive voice response (‘press one for…’), the codes and passwords you have to negotiate before actually being able to talk to anyone.

These are barriers. ‘Behind all the data, customers are becoming invisible – and more and more alienated,’ Orsmond says.

Because of these failings, companies are unable to make even the most elementary distinctions between callers and types of call. One glaring gap is that all the measures and responses are geared to the company’s idea of the existing buyer. It’s as if the non-buyer didn’t exist.

As a result, ‘there’s no whole-market view,’ complains Orsmond. If, for example, the IT is driven by orders rather than, say, marketing, it won’t allow call-centre agents to spend the extra few seconds finding out about callers who might have made a purchase but in the end didn’t.

Look no further for the reason why call centres, which ought to be the eyes and ears of the company, are so often barriers rather than contributors to corporate knowledge.

The consequence of patchy integration, badly designed measures and poor processes is that there is a yawning gap between company and customer expectations.

‘There’s huge undetected customer dissatisfaction and very large concealed defection in all sectors,’ Orsmond says. Financial services are particularly bad. As evidence: telemarketing results are plummeting, as are customer- satisfaction levels all over the spectrum. Meanwhile, call-centre traffic – aka complaints – is going through the roof (necessitating the building of more call centres, thus negating the cost-cutting rationale for these establishments in the first place).

Perhaps equally interesting is the take-off of online transactions. According to Interactive Media in Retail Group, UK online retail sales growth is now 40 times that of bricks-and-mortar retailers – e-tail was 36 per cent up year-on-year in May at pounds 1.5 billion, while the physical high street is at its lowest since 1947. This, remember, is before the July bombs.

The significance of internet shopping, of course, is that a half-decent website makes it easy, or less hard, for customers to ‘pull’ the service they require, which, at least in the case of relatively simple products, is a substantial improvement on what is otherwise on offer.

The success of eBay in providing a market place not only for individuals but also, increasingly, for companies to sell their wares direct to consumers, is eloquent testimony to the same thing.

At Warwick Business School, Professor Harry Scarbrough, director of a research programme on business knowledge, notes that companies can hardly be surprised if customers feel alienated: ‘They want you to be data, because it’s more cost-effective. They don’t want you to be a person. For vast numbers of people, they want to commoditise service: that’s been the banks’ strategy, for example, for the past 20 years.’

The snag comes when, as now, people begin to revolt against the simplistic versions of human behaviour on the IT model. ‘When people fall through the net, when the data doesn’t match the dataset incorporated in the software, they can bounce around the system for ages,’ Scarbrough says.

The error is to think that these problems can be resolved at the same level they were created – by throwing yet more computer power at it. But it’s a systems, rather than IT system, issue. Put simply, it’s the wrong kind of data.

Most service industries are in much the same situation as manufacturing before the shakeout of the 1980s, Orsmond believes. The early service adopters of the new technology then on offer simply applied it to the old processes.

Just as manufacturing had done so earlier, services (particularly financial services) proudly reinvented themselves as mass-producers, driven by economies of scale, specialised production factories and standard products. That’s a good description of most modern call centres. They may be selling mortgages or mobile phone contracts rather than the Model T, but the logic is exactly the same: ‘You can have any model so long as it’s what we want to sell you and it takes no more than two minutes to explain and close.’

With technology plunging in price and soaring in capability, it is all too easy, says Orsmond, for firms to persuade themselves that what they need is ‘go-faster boxes and pipes, forgetting that there are all kinds of switches, taps and gauges between them, with people opening and shutting off the flow.’

The result is still the same old data leaks, explosions and blockages in short, confusion and complexity and little clean knowledge. Instead, the greatest value will come from a system with the shortest pipes and smallest number of moving parts, through which data can flow quickly and without hindrance to create real knowledge that people can act on. As Orsmond points out, this is often actually cheaper, requiring little in the way of capital expenditure, and the results drop straight to the bottom line.

So far, the underlying effect of IT in service industries has been to depersonalise the relationship between company and customer almost completely – the customer as data, in Scarbrough’s terms.

The key question is whether it can also be used to swing the pendulum back. Consumers are crying out for dealings that treat them as people, and there is growing evidence, says Orsmond, that they will reward companies that make the effort to do so. But just 12 per cent of UK companies are currently able to recognise even the most basic differences between them, so ‘you could say that there’s 80 or 90 per cent headroom for improvement.’

The Observer, 14 August 2005

THERE’S a new book out called Everything Bad is Good for You. With management it’s the other way round. Everything conventionally regarded as good is actually toxic.

Not enough people are aware that almost everything treated as axiomatic in today’s management is intellectually shaky and riddled with contradictions and practical difficulty. Things that we accept as inevitable aren’t inevitable at all in time, they will come to be seen as part of a primitive and finally destructive paradigm that was only held together for so long by unquestioned assumptions and the resigned (but wrong) acceptance that there is no alternative.

Start at the very top, with corporate governance. Current prescriptions, based on threadbare agency theory, are increasingly undermined by academic research. For instance, according to two new studies presented to the Academy of Management annual meeting last week, heavy use of stock options, still the main component of CEO pay for many companies, significantly increases the chances of poor strategic management and financial misrepresentation. In plain English: options give CEOs incentives to do dodgy deals and cheat. For all its box-ticking, America’s Sarbanes-Oxley Act on financial disclosure does not address the issue of these underlying incentives, and is itself a contributor to the problem rather than the solution.

In fact, bits are falling off the official edifice wherever you look. Another Academy of Management paper knocks on the head the idea that multiple directorships are necessarily bad on the contrary: multiple directors turn out to be more diligent, and for the largest firms they are linked to slightly better shareholder returns. As in previous years, Booz Allen Hamilton’s 2005 CEO succession survey shows that companies with combined CEO-chairmen deliver measurably better returns than those where the roles are separated. Booz Allen also suggests that insider CEOs are at least as good as outsiders and European firms are sacking poor performers too quickly: ‘In 2004, CEOs removed for poor performance were in office for a median tenure of two and a half years, an astonishingly and counterproductively brief of time.’

But then, whether at the top of or lower down the organisation, performance management in most organisations is a nightmare. Because performance measurement is dependent on other people and the system, it is nearly impossible to establish one that is fair and accurate in any case, because the measures are attached to budgets or activity rather than work itself, they usually measure the wrong things.

Naturally, that also means that appraisal, as conducted by 99 per cent of organisations, is similarly dishonest, counterproductive and coercive, particularly when connected to pay. On the other hand, where measures are attached to the work and throw light on the purpose, the need for ‘appraisal’ as such dissolves. Appraisal and performance management are locked in place by the annual budget, another on the list of bad management masquerading as good. Every single organisation in the world grumbles about the budget – GE’s Jack Welch called it the bane of corporate life – but very few are trying to do anything about it. The problem with the budget is that it is a target, and, like all targets it is subject to Goodhart’s Law – the moment it is used to manage by, it is worthless as a measure because it sets up powerful incentives for people to cheat.

The havoc caused in the brutalised and punch-drunk public sector by the abuse of targets and specifications is incalculable (although this column has done its best) the harm that it does to private companies is often glossed over. In the private, as in the public, sector, managing by the numbers drives up costs, ruins service and demoralises those who do the work.

In relations with the outside world, we all know by now that most – say 70 per cent – of acquisitions fail to deliver the expected benefits. Yet companies continue to indulge their wishful thinking. A similar picture is emerging with out sourcing. In a Deloitte Consulting study, 70 per cent of respondents had had ‘significant negative experiences’ with outsourcing, and one in four were bringing services back in-house. Researcher Gartner found that 80 per cent of outsourcing projects failed to save money, the savings on transactions (cheaper calls or contacts) being more than outweighed by the defection of dissatisfied customers and other hidden costs.

I could go on, in general and in detail: customer relationship management and other IT-intensive ‘solutions’ to the wrong questions interactive voice response sales promotions. corporate social responsibility… Why is so much that managers do a waste of time, if not worse? And why do they still persist in trying to make it work? To Answer the second question first: because we’re locked in. Precisely because we all know things don’t work, a whole ecology of improvers – consultants, IT vendors, outsourcers and peddlers of tools of all descriptions – has grown up with a promise to make it better. Everyone has a vested interest in the setup, even business schools producing the research that discredits it.

The reason that none of these things work, and never will, is that they are being put to the service of a clapped-out model. The paradox of today’s capitalism is that we’re still trying to manage it by central planning. Managers at any corporate headquarters or ministry in Whitehall would have been quite at home in the Soviet ministry of planning. They estimate what the market will be, allocate resources and schedule production to match the estimate.

Most of the toxic techniques are attempts to make the predictions and scheduling work better or to mitigate the model’s disadvantages. This they can often do at the margin, but at ever-increasing cost, so that now more and more management effort goes into managing the overhead, and less and less into the real work.

This is like painting go-faster stripes on a Trabant, a fruitless, bootless exercise if ever there was one. It’s also why, ironically, the management exhortation of last resort – work harder! – actually makes things worse. As the original quality guru W Edwards Deming caustically put it: ‘Having lost sight of our goals, we redoubled our efforts.’

The Observer, 7 August 2005

LIKE IT or not, companies increasingly inhabit a deal economy. Put baser motives like ego and self-aggrandisement to one side impatience, competition for investor attention and the globalising world economy are reasons why many chief executives these days feel compelled to pay as much attention to mergers, acquisitions and divestments as to products, services and customers.

With investors breathing down their necks, many CEOs find organic growth too snail-like to impress – particularly where turnarounds are concerned. Couple investors’ shrinking attention span with the need to react quickly to changing conditions, add in ready access to global capital and the attractive targets (and hungry rivals) emerging in new economies such as India and China, and it’s hardly surprising transactions are the newest field of strategic competition.

Last year, says a new report from Ernst & Young, corporate transactions totalled more than $1.5 trillion in deal value, $700m of that in Europe. No less than 88 per cent of European and 96 per cent of US companies studied were planning a merger or acquisition in the next two years, and only slightly fewer had divestment projects in the pipeline. Transactions of all kinds, sums up the report, ‘are an ever-increasing part of the way corporations do business, expand, and adapt to changing circumstances’.

In turn, the growing strategic importance of the deal has consequences for the way firms are managed. In the past, transactions would have been handled by the finance director or chief financial officer (CFO). Today, as a result of the Sarbanes-Oxley Act and ever-beadier investor scrutiny, the finance department is increasingly tied up with compliance and reporting. A separate specialist function, sometimes reporting to the finance director but more often directly to the CEO, is growing up to handle the transaction side of strategy: the corporate dealmaker (there’s even a new magazine of that name) or chief development officer (CDO)

The corporate development function had its origins in the internet era, when every company in search of a business model was desperately looking to make alliances and deals. Now that feeding frenzy has died down, the emerging function is striving to articulate a role, and the attributes needed to carry it out, for a world in which transactions have become as much part of mainstream strategy as a new-product launch or branding. Indeed, charting the evolving CDO role is what the EY report – ‘Corporate Development Office European Study Findings 2005’ – is all about.

The overriding concern noted by EY is the need for greater professionalism. Externally, the imperative is to face up to mounting competition for the best deals from increasingly aggressive and streetwise private-equity (PE) funds. PE is not only ubiquitous – there are now more than 7,000 groups active worldwide, EY reckons – it also enjoys some inbuilt advantages. With their lower cost of capital, shorter time horizons, and greater dealmaking experience (that is all they do), PE funds can often pay more and react faster than company rivals.

None of this is lost on canny venture capitalists and other investors, who are becoming adept at playing off PE funds, trade buyers and even initial public offerings against each other to push sale prices higher. Last year PE funds accounted for 15 per cent of global mergers and acquisitions activity, rising to 22 per cent in the UK and 37 per cent in Germany.

Eventually, like all bandwagons, the PE phenomenon will hit the buffers, either overreaching itself like the corporate raiders of the 1980s or competing its own advantage away. But for the moment, competition from this source is steadily intensifying. At a recent CDO gathering in London, half the participants admitted losing a deal to private-equity rivals in the past year.

Meanwhile, an ominous new precedent is the SunGard deal, in which three large PE groups are combining to take the US IT security firm private for a total of more than $11bn. Dave Read, global vice chair of transaction advisory services at EY, notes that as PE firms start to hunt in packs they are even more formidable competitors: ‘They have access to large quantities of reasonably priced capital, can move quickly and don’t generally have to worry about the difficulties of integrating businesses. Transactions are their core skills.’

But it’s not enough for corporate dealmakers to match private-equity counterparts for speed and opportunism. Investors are putting increasing pressure on companies to improve on the estimated 70 per cent of mergers and takeovers that fail to live up to projections: as well as doing deals, corporate dealmakers need to make them work.

Badly targeted and badly executed transactions can have a dramatic effect on corporate performance, Read points out. ‘CDOs are taking greater end-to-end responsibility for transactions and their outcomes,’ he says. ‘Not only are CDOs today responsible for originating, assessing and managing deals, they are also becoming more involved in integration, corporate strategy and risk management. In effect, CDOs are the new CEOs of transactions.’

The pressures on the role are compounded by the need to look abroad for growth opportunities. While most of Europe (especially) is stuck in the economic doldrums, emerging economies led by China and India are expanding too exuberantly to be ignored. Some CDOs also contrast favourably the increasing ease of doing business in such countries with growing regulatory, compliance and liability issues at home. For many large companies, dipping a toe in foreign waters is a matter of when, not if – with all the legal and cultural baggage that entails.

Businesses have always felt the need to reshape their portfolios from time to time. What is different now is the need to do so at speed, worldwide and in competition not just with traditional industry rivals but with well capitalised finance groups worldwide. In short, the ability to do deals well is becoming a source of strategic advantage, just as inability is a strategic handicap.

But although ‘corporate development’ will involve some management innovation – managing virtual teams, measuring transaction success, developing working relations with the board and other stakeholders – ultimately it won’t do to get carried too far away from the basics. Most deals still fall down because no one has thought who will manage the merged operation or how the success of an entity in one context can be fully preserved in another. As one CDO quoted by the EY report noted wistfully: ‘Financial capital is easier to deploy than human capital.’

The Observer, 31 July 2005

AS WE have all known since we won the right to host the 2012 Olympics, 300 languages are spoken in London. It’s just a pity the natives can only manage one.

The British are Europe’s language dunces – less willing and able to express themselves in a foreign language than Hungarians, Poles, Turks and Bulgarians, let alone Dutch and Swedes. Luxembourgers are eight times as likely to speak another language as the natives of the world’s most cosmopolitan city. Merde , even the French are twice as good at it as we are.

Does this matter? After all, the reason everyone else is better is the same reason we’re so bad: everyone has to speak English. Combined with a booming economy, English, as Simon Kuper perceptively noted in the Financial Times last Saturday, rather than the English, is why London has become such a vibrant city. English is the language of the internet, of science, of business. Indirectly, it was English wot won London the Olympics. Yet the victory of English is both exaggerated and a two-edged sword. Paradoxically, only 6 per cent of the world’s population are native English speakers, and 75 per cent speak no English at all. Meanwhile, for monolinguists, English is a one-way membrane that all too often filters out the rest of the world. London’s rich linguistic medley passes through, and is connected by, English but since the English don’t speak different languages, cosmopolitanism is in London but not really of it. That impervious membrane means native speakers are unconscious of many of the linguistic enclaves, or ghettoes, that exist on the other side. You can’t understand the culture without knowing the language. Now, above all, what once sounded like a joyous babel can take on a more sinister ring.

The filter’s debilitating effects are everywhere. It means we’re most susceptible to American economic and management ideas than European ones. For individuals, where everyone else is multilingual, monolinguists, even where the language is English, are a card short of a full hand. Thus, foreign footballers have profited hugely from the English game (and graced it at least equally with their intelligence and articulateness), but not vice versa. How many British footballers are fluent in French or Spanish?

While European students queue to do exchanges with UK universities, there are few takers the other way round. They are getting fewer still. Language studies are falling off a cliff. CILT, the National Centre for Languages, says that in 2001-2, just 11,000 undergraduates started courses in French, 4,500 in German and 455 in Chinese. Seventy per cent of language students are women. Few men have any foreign language skills when they start work. In some multinationals, UK managers are effectively barred from advancement because of their lack of language skills.

The hidden consequences affect the whole economy. As CILT director Isabella Moore says, the adage ‘you can buy in your own language, but you must sell in the language of your customer’, is graphically illustrated in the UK’s export figures. In Anglophone countries such as the US, Australia, Ireland and India, the UK sells more than it buys. For non-Anglophone trading partners (among them Germany, France, Belgium, Italy and Spain), which together account for 72 per cent of UK exports, the reverse is the case. But what would you expect when 80 per cent of export managers cannot trade in another language and the proportion of executives able to negotiate outside their mother tongue is half the European average? UK firms manage simultaneously to be least likely to use the customer’s language, most complacent about the need to do so and least aware of language issues overall.

The result, charges CILT, is that the pattern of UK international trade reflects one-eyed linguistic competence rather than market opportunity. ‘The approach of UK businesses is distorted by the need to avoid markets where English speakers are not likely to be found, ‘ it says. So, for instance, UK trade with Denmark (population 5 million, 79 per cent of whom speak English) equals that for the whole of central and Latin America (population nearly 400 million).

Lack of linguistic intelligence, as it might be called, affects even communication in English, supposedly our trump card. Economically, the use of English by other nations translates into increased competition. In that kind of competition, idiomatic, colourful English that makes no concession to foreigners is no advantage – in fact, the reverse. CILT quotes the case of Korean Airlines, which reportedly chose a French supplier for its flight simulators because its ‘offshore’ international English was more comprehensible and clearer than that of the UK competitor.

Apart from blimpish ignorance, government policies and targets must take a share of the blame. Ludicrously, languages are no longer compulsory for post-14 year olds, and schools take every opportunity quietly to drop them. Languages are seen as difficult, so to keep their exam figures up schools would rather students took almost anything else. For all the rhetoric, there will be no improvement while these perverse incentives exert their hidden tyranny.

The polymath and critic George Steiner once observed that while you could see with one eye, two eyes gave you perspective. It’s the same with language. What the monolingual blithely ignore is that a second language is essential to pick up the particularities in their own cultures as well as that of others. Where the one-eyed are king, it’s not surprising how often we fail to see what’s under our own noses.

The Observer, 24 July 2005

AS MANAGEMENT challenges go, they don’t come much tougher.

Here’s a firm at the centre of an industry that is one of the toughest in the world. As if that wasn’t enough, domestically it has come to symbolise gangster capitalism. The company itself is an amalgam of two erstwhile rivals that have been bought and sold on several times in the last few years, each time stripped of a little more of any saleable assets that remained.

In a capital-intensive industry, its vast plants are ancient, decrepit and polluting. Manning levels are four times higher than the industry best, nine times in the case of managers. The 65,000 or so employees (no one knows the exact number) are not just demoralised and cynical – 15 per cent are actively mutinous, bent on theft and sabotage. Oh yes, and your language doesn’t have a word for ‘performance’.

Welcome to Rusal, Russia’s largest aluminium producer.

That was the situation that greeted the new management team when the company, the third largest aluminium firm in the world, was formed in 2000 from a merger brokered by two of Russia’s billionaire ‘oligarchs’, Roman Abramovich, of Chelsea Football Club fame, and the only slightly less rich, although not so well known, Oleg Deripaska, 36, the current chairman and 75 per cent owner.

In the Soviet era, the company’s four giant smelters (including the two biggest in the world) had been ‘township-forming’ enterprises – all-embracing company towns set up near energy sources in the middle of Siberia, to which inhabitants and their families had to be imported. Now they found themselves bearing their onerous Soviet heritage in a post-Soviet environment, bereft of the most rudimentary equipment to steer by.

‘People had had no contact with the outside world,’ says Victoria Petrova, 39, the firm’s human resources director. ‘There was everything to learn.’ Could the company with its historic legacy compete in world markets? How to make profits, invest, structure how to change the attitudes of fatalism, nepotism and reliance on others that ran through the organisation.

Confronted by a situation of such direness, the young management team responded by drawing up a strategy that went boldly to the opposite extreme. By 2013, they decreed, Rusal would be the largest and most profitable aluminium producer in the world (as the company is private, current profit figures are not available). It would double aluminium production from 2.7 to 5 million tonnes a year, make itself a top-three producer in terms of capital efficiency, improve its environmental performance – and turn itself into a Russian employer of choice.

None of this could happen without a human capital programme, which for once, although with some irony in the circumstances, deserves to be called revolutionary. One of the first challenges, says Petrova, was to isolate a minority of the workforce bent on bringing the firm down. The angriest, she says, were a group of thirty- to forty-somethings who had completed their education and training in the Soviet era and had a lifetime’s expectations laid out before them. ‘Suddenly it was all taken away from them. The result was total cynicism.’

To counter their baleful influence, Rusal looked to a group of loyalists, a ‘golden reserve’, who (despite the history) were prepared to give the company a chance and put themselves forward as the new managers. Instead of the hoped-for 300, 700 people applied. Of those chosen, around 20 per cent a year are now coming through a specially- designed training programme and becoming managers.

It’s hard to exaggerate, Petrova says, just how far attitudes needed to change. Like all large Soviet enterprises, the companies had been run in rigid top-down fashion. Managers gave orders and employees carried them out (slowly, to make the work last as long as possible). People management in the western sense was completely new. ‘Everything was centrally administered, down to where people took their vacations.’

The first year of performance management, says Petrova with feeling, was ‘a nightmare’. For a start there is no word in Russian for performance and no concept of discussing alternatives or taking responsibility – only orders.

The idea of bonuses according to the firm’s performance caused bewilderment and consternation. Once it did sink in, however, performance appraisal turned out to be ‘very interesting’, according to Petrova. It unleashed a flood of discussion about how to reach the company’s goals, something that had never happened before.

Because there were no preconceptions, she says, employees came up with extremely inventive and interesting ideas. By the second year, people had stopped ringing the human resources department to ask it to arrange their holidays and instead were inquiring about likely bonus levels.

A further breakthrough was the drawing up of a code of ethics. When the first version was posted for consultation, there were 18,000 suggestions and comments. The outcome is a notably clear and down-to-earth statement, one of the first among Russian companies of the post-Soviet era.

The cumulative outcome of these and other human resources initiatives – including monthly communication meetings, newsletters, Russia’s first e-learning programme and awards – are now feeding through in earnest. Productivity per employee has almost doubled, from 75 tonnes in 2001 to 137 tonnes in 2004. Safety and environmental performance are improving. And having proved to itself that it possesses the resilience to survive, Rusal is now looking ahead with increasing confidence to the future.

To meet its goals, says Petrova, Rusal must modernise its colossal existing smelters, build new ones and acquire other companies. But all that depends on being able to develop and attract the right people. So the company has nailed its future to developing labour conditions that are the best in Russia, expanding career opportunities and training, and building a social package that almost rivals that of the Soviet period.

Petrova concedes that Rusal still has much to prove. You can’t turn a derelict Siberian smelter into the winner of a best-kept village competition overnight. And as with all large-scale Russian enterprise, politics looms large. But provided it can steer clear of top-level controversy, the changes made on the ground give it the best possible chance of keeping its destiny where it never was in the past – in its own hands.

The Observer, 10 July 2005

THE best reality show on air over the past month, at least in any meaningful sense of the term, has not been Big Brother or Celebrity Love Island. It has been Radio 4’s The Workaday World , presented by Sir Bill Morris.

Over four programmes, a beautifully constructed montage of voices has provided a sustained discourse on what it means to work today, yanking the focus away from the abstract platitudes of management-speak to the daily realities of the job for real people: hospital porters and bankers, window cleaners and musicians, call-centre workers, partners in law firms and the first woman lighterman on the Thames.

Part of the pleasure is authenticity and immediacy: the voices of real people talking about individual issues, radio at its best. But an essential part of The Workaday World ‘s appeal is Morris’s sympathetic linking narration.

Morris, general secretary of the TGWU until 2003, says he never anticipated the level of response and is characteristically modest about his part in the series’ genesis. The approach to present the programmes came out of the blue, he says, and despite being used to the spotlight at the T&G he had misgivings about doing radio, and these were only allayed with the final result.

In fact, it was an inspired choice. Morris says with a grin that he has no intention of starting another career – ‘retirement is pretty fulfilling too’, not to mention cricket – but he’s a natural, at once instantly recognisable and distinctive, but also completely representative. Like a good pianist accompanying a singer, his unobtrusive commentary inflects the whole performance, so that the arresting individual stories are unified by his lifetime’s observation of work, 20 years of that from the vantage point of a full-time union official.

The series is good at drawing out the paradoxes of work: the fact that statistically most people still do nine-to-five jobs with tenure, yet work intensification means that the indices for burn-out and insecurity are going off the scale the rhetoric of teamwork alongside the Darwinian struggle for individual survival the deeply schizoid effects of technology. George Cox, previously of the Institute of Directors, notes that time after time we can see what technology does, but hopelessly misjudge what it means. A banker reflects: ‘Computers don’t make work more productive, just more busy.’

One of the strongest themes in the series is the idea of work holding meaning. This has little to do with status or pay. In one juxtaposition, two people talk on either side of a plate-glass window in Canary Wharf. On one side is a high-flying banker, on the other a window cleaner (or ‘vision technician’, as he ironically refers to himself). But it’s the banker who feels alienated (‘Sometimes I feel I’m in a sweatshop’) and unsure of her contribution the window cleaner surer of his worth and more confident of giving his best: ‘My side of the glass is greener.’

Meaning depends on being able to see the big picture. Morris tells the story of the gardener at Nasa who, on being asked by the visiting president what his job is, replies: ‘Putting a man on the moon’. This is a very Morris story. He thinks that too many people are preoccupied with the next job at the expense of getting the full meaning from the present one. If more people were allowed to see the context of their work, he says, the world would be a happier, less frustrated place – and the jobs would be done better.

Morris’s own career is a remarkable illustration of his own precepts. He describes himself as ‘incredibly lucky’, but most people would say he’s just got back what he put in. He says the T&G job was so fulfilling he would have done it even if it wasn’t paid – even the earlier years in the motor industry. Now, 50 years after arriving in Birmingham as an immigrant from Jamaica, he is a director of the Bank of England, among a clutch of other public appointments. He describes his job thus: ‘We help to set interest rates. Not directly, of course, that’s the MPC’s job. But we have a statutory job to oversee the MPC. It’s extraordinarily interesting. Interest rates touch the lives of every individual in the country. Attending court and understanding the analytical stuff is one of the most satisfying contributions to public policy that anyone could make.’

Morris admits that his view of work is a romantic one. Yet he is well aware of its dark side, too. One programme dealt with the miseries and inhumanities of work, and here too the micro-narratives poignantly illustrate how little, under the soothing HR platitudes, work has really changed. Individuals are still brutally sacked and exploited. Call centre workers speak of the tyranny of targets, being monitored when they go to the toilet, of being treated not as people but as extensions of their VDU. One worker comments sadly: ‘I’m not as nice a person as when I started here.’

Noting the indignities, Morris regrets one large omission in the stories told by the programmes. ‘Not a single one of these unhappy people mentions a trade union or joining one,’ he laments. ‘For me, that raises fundamental questions about the position of the unions in today’s economy. The issues have multiplied, but people no longer see unions as a recourse or as advocates. There’s been no fightback over the abuses in the call centres, no fightback over Rover and Jaguar, or over pensions. There’s a huge amount of rethinking to do.’

The unions’ mistake, he believes, was to focus too narrowly on their members and the pay packet, surrendering the right to speak for the whole community. The collapse of communities around mining, steelmaking and shipbuilding and the failure to make inroads in the technology industries has hit the movement with a double whammy – or a treble one, since the individualisation of work is now so complete that ‘the only thing call centre workers have in common is that they are all equally abused’.

The unions still have a part to play, Morris insists, this time in speaking for the invisible and silent workforce – the twilight shift, the cleaners, carriers and shelf-stackers that actually make the new, 24/7 economy work. In this respect also, the fundamentals of work have not changed. Another series, perhaps?

The Observer, 3 July 2005

SHOULD we fear for the future of business in Europe? Yes, was the gloomy response of 70 per cent of a pan- European group of journalists gathered at a seminar hosted by Unisys in the south of France last weekend.

Even the Mediterranean sun failed to dispel the gloom cast by the shambles in Brussels the week before, and the lack of political direction that was felt to have caused it. More shock and awe was generated by the extraordinary figures emerging from China and India – where labour costs are 50 US cents and 70 US cents an hour compared with $21.30 in the US and $30.50 in Sweden, and predictions by Shell and Goldman Sachs that by 2050 China would be the dominant economy in the world, with India number three. Deepening the depression was general agreement that Europeans were too attached to their lifestyle, too complacent and too sleepy to bother to compete.

True, all these seem like grounds for concern. Yet they all have a reverse side. This writer still found himself in the minority of optimists, agreeing (more shock horror) with a top French civil servant that the self-flagellation was overdone. European companies hold their fate in their hands (see sidebar). They are not at the mercy of Brussels, any more than of blind economic forces. Companies have will and ingenuity they form strategies and build resources to maximise strengths, and invent advantages out of difficulties. Despite the scare stories, Europe has satisfactory numbers of engineers and scientists. It’s not short of capital, or ideas. It just needs to make better use of them.

Although Brussels can make a small contribution here, that’s fundamentally a job for management, not for politicians. It is companies and individuals that will, or won’t, make Europe a successful economy – in fact, success can only be achieved at company level, not by financial engineering (which is what much outsourcing is) or by acquisitions, but by more effectively creating goods and services that customers want to buy.

The customer, in fact, was strangely missing from most of the Unisys debates, which were all about the supply side – cost, regulation, competition – rather than demand. This, of course, accurately mirrors what happens in companies, which despite their protestations are overwhelmingly organised for the convenience of production rather than the convenience of the customer.

Yet this is a mistake, and the biggest European opportunity. One of Europe’s best assets is demanding customers – the French of food, Germans of cars, Scandinavians of furniture and mobile phones, Italians of clothes and shoes, Britons of, er, garden tools and TV shows. Satisfy them and you can satisfy anyone.

Alas, as we know, European customers are far from satisfied. Three out of four UK garages provide shoddy service, complaints about mobile phones and airlines are going through the roof, and don’t get me started on call centres again. One speaker noted that companies were becoming ‘unreachable’, elaborating with a cartoon showing one businessman saying to another: ‘The new automated ordering system has really speeded up our business. We’re losing customers faster than ever before.’ Quite so. In short, customer service stinks.

European companies can’t compete on cost alone. If they do, they’re doomed: as hopeless a bet as a British winner at Wimbledon. Nothing Brussels does can alter that. But equally nothing prevents firms from quitting the bumpy playing field that is cost, and choosing another, quality of customer service, that better suits their historical attributes.

Focusing on customers does another thing. In his presentation to the seminar, Unisys CEO Joe McGrath underlined the need for companies to ditch their command-and-control style of management and move to something more collaborative and co-operative.

This is nothing to do with being nice to people (Unisys is a US company). It’s to do with effectiveness. At a time when the marketplace is changing by the hour, the world is way too complicated for a company to be run by one person from the top. In a traditional, hierarchical, top-down company, as Jack Welch memorably put it, people ‘have their face toward the CEO and their ass toward the customer’, which is neither comfortable nor sensible.

Most companies, of course, whatever they may say about customers and employees, adopt just that posture. They are still command-and-control empires. In fact, the paradox, the dirty little secret of late western capitalism, is that its most important institution is the last redoubt of central planning.

As with Soviet Russia, such empires are so freighted with bureaucracy that they can scarcely move. A slide at the seminar quoted Jeff Immelt, General Electric’s CEO, saying that 40 per cent of the group (widely considered one of the most leanly managed in the world, remember) now consists of administration, finance and backroom functions.

Immelt wants to reduce that by 75 per cent in three years, and that can only be done by turning the company to face the customer, and distributing leadership. That’s what European companies should be looking at and emulating, rather than throwing up their hands in despair, demanding protection from Brussels and looking resentfully at India and China.

The late Sumantra Ghoshal once wrote that third-generation managers were running second-generation organisations with first-generation management. Developing a third-generation management model, one that works by harnessing ingenuity and loyalty rather than compliance, that enhances humanity rather than driving it into the ground, is both consistent with Europe’s past and its best hope for the future. It’s also achievable and is a DIY grand vision which owes nothing to Brussels.

The Observer, 26 June 2005