HOW WOULD you appraise a vicar’s performance? By the number, length and quality of sermons? Attendance at church? Out of wedlock births? Ratio of marriages to divorce? Doctrinal purity?

This intriguing question was raised by proposals put forward last week by the Church of England’s General Synod to make incompetent vicars easier to sack, and to subject them to the kind of performance measures that apply to other workers.

Don’t laugh: even our box (see right) may be less satirical than you think. In one study, a Norwegian hospital chaplain had performance measures that counted not only bedside visits, but also the number of last rites he performed. In fact, the church’s measurement problem illustrates with blinding clarity the tensions inherent in all performance management.

The first point it demonstrates is that in all organisations the pressure to measure is inescapable. Some of the pressure is external, from regulators, inspectors and shareholders. But as in the church, it is also generated internally by the ubiquitous requirement to do more with less. By definition you can’t improve performance unless you know what the current level is. So you can’t not measure.

But although measurement is inevitable, it is also problematic. The church’s bottom line, to put it in vulgar accounting terms, is presumably saved souls. Unfortunately as an outcome salvation is even more ineffable than some public-sector targets such as improving education or health. Even in the private sector, the final goals of economic activity – happiness, well-being – are ultimately unmeasurable.

Which puts a premium on finding a proxy that’s adequate both technically and politically. Technically, the problem is that a single measure is highly likely to oversimplify, while a portfolio of measures becomes self-contradictory and impossible to prioritise. Do good sermons outweigh a poor marriage performance?

Short-term effectiveness too may conflict with long-term goals. As the trade union Amicus, which represents about 2,000 clergy, noted last week, priests’ present system of tenure gives them the job security ‘to build valuable long-term relationships in their parish to the advantage of their community’.

In this case, an effective performance measure needs to focus attention on the whole soul-saving system, not just a part of it – electrifying sermons aren’t much good if babies aren’t being baptised and the supply of believers is drying up.

Otherwise it will fall into the political trap expressed by the truism, ‘what gets measured, gets managed’. It sure does, even when the consequences are clearly counterproductive. Perverse incentives are rife throughout badly designed organisations – and not only in the public sector.

For example, the purpose of having traffic wardens is to keep traffic moving smoothly so that law-abiding people can go about their business. But measuring them on numbers of tickets, as some councils do, has the opposite effect. Milkmen, mayors, taxi drivers, postmen, emergency plumbers, undertakers, firemen and bus drivers have all been ticketed by attendants keener to make their numbers than to achieve their proper aim.

In many, perhaps most, companies, individual performance-measures implicitly encourage empire-building and competition for scarce resources at the expense of wider organisational aims. Meanwhile, largely at the behest of ministers (the political kind), some sections of the public sector have raised performance-management abuse to an art form.

For instance, policemen are encouraged to clear up as many cases as possible. This has the same effect as with parking attendants – creative arrests to make up the numbers. But wait. The next part of the system, the Crown Prosecution Service, is judged on successful prosecutions. So it takes on only the ones that it can be sure will succeed, ie as few as possible.

Again, the government announces a crackdown on car crime, makes that this year’s performance-management priority and a year later proudly proclaims that car-crime figures have plummeted. But that’s at least in part because the villains, helpfully tipped off about police priorities, have turned their attention to other petty crime where life is quieter. Is that laughing I hear, or crying?

Performance management is the classic example of both the first law of management – if it looks simple, it ain’t – and also the second – but if it’s complicated, it’s wrong. Moreover, the problems of specific perverse incentives aren’t the worst: the most devilish, as we might say, is the general one.

To improve performance, organisa tions set stricter performance measures. But the tighter the measures, the more damaging they are of commitment, initiative and trust – the things that exceptional performance depends on. Hence ‘the supervisor’s dilemma’, a vicious circle in which surveillance, monitoring and authority lead to increasing distrust and underperformance – and the perceived need for more surveillance and monitoring. Performance management destroys performance.

If performance management is both inevitable and impossible, what’s to be done? The answer is to disconnect measurement from control – to reconceptualise it, as professor Andy Neely of the Advanced Institute for Management Research has put it, as a system of learning rather than control.

For that, it has to be connected to the work so that it throws insight on what works and what doesn’t and stimulates those who do it to find better methods of getting to the ultimate aim: saving souls. That can’t be decreed from above. To make it happen, you have to let go: come to think of it, who better than the church to teach business a thing or two by making such a performance-measurement system work? As that old cynic Lou Reed helpfully put it, you do indeed need ‘a busload of faith to get by’.

The Observer, 20 February 2005

I S THE National Programme for IT in the National Health Service, the largest civil IT initiative in the world, a bold and innovative move that will push both the NHS and the British IT industry to the forefront of healthcare technology and practice? Or is it just a disaster in the making?

This pounds 6 billion question – the price tag on the 10-year NPFIT programme – is so far hard to answer. The draconian vow of omerta imposed by programme head Richard Granger (basically, any company talking to the press is putting its contract at risk), has done a good job of suppressing leaks of bad news. But it has also made it impossible to talk about the good. In this context, the National Audit Office’s recent finding that by December last year only 63 hospital appointments had been booked electronically instead of the anticipated 205,000, plus a decidedly downbeat opinion survey of doctors last week, seemed to confirm the worst.

Not everyone is depressed, or silent, however. ‘Everyone concentrates on the ‘go-live’,’ says Markus Bolton, founder of System C Healthcare, a specialist UK software company that is involved in three of the programme’s five regional ‘clusters’ or consortia. ‘But there’s a huge infrastructure that has to go in first which no one sees, and that takes time.’

To put the effort in perspective, the north west-West Midlands cluster Bolton is authorised to talk about is in itself a pounds 1bn programme embracing six strategic health authorities, 140 trusts, 2,500 general practices and 281,600 staff. All these entities have to agree how to share information and learn the new systems – a process, incidentally, that has not been helped by the tight-lipped communications policies decreed so far.

‘This is a big, big project,’ points out Bolton, an entrepreneur with a record of plain speaking about NHS IT. ‘It’s an extraordinary challenge. Very few people have worked on anything this size. It’s evolving as we go along, but we’re genuinely making enormous progress.’

NPFIT’s effects are not confined to the NHS. As intended, it is already transforming the healthcare IT market. Before the programme, computerisation in the NHS was so cumbersome and fraught with political difficulty that few companies deemed the effort worthwhile. So the supplier base was small and fragmented. System C, with six electronic patient record systems delivered to hospitals in the past few years, was one of the more substantial yet it was still a small company, with a workforce of 70 and turnover of about pounds 5 million.

Overnight, NPFIT changed the rules of the game. Unable or unwilling to respond to the demands of the national programme, a number of companies have withdrawn from the business, while new international companies – such as the US firm CSC – have come in. In the middle, companies such as System C, with replicable experience but without national reach – there are 50 hospital trusts in the north west cluster alone – have had to find a new niche.

Anticipating some (though not all) of the changes, System C took the gamble of expanding fast when the programme was announced in early 2003, consolidating a lot of the highly skilled, and increasingly scarce, manpower released by others. In two years it has trebled in size – but it no longer majors on its own products. Instead, it is working across the board as a ‘general domain adviser’, using its experience of working with clinicians on the design, development and installation of working systems to help speed the implementation.

Working in a big group is new territory and has required changes in System C’s small-company management style. ‘A show as important as this has to be run by the rules,’ notes Bolton. ‘One of the big changes for us has been the emphasis on process, and in many ways it’s been very good for us.’

Used to working at hospital level, the company has developed a healthy respect for the industrial-strength project-management disciplines and the experience of colossal technical infrastruc- tures brought to bear by CSC. Bolton believes that the learning developed between the alliance members is in itself an important gain for the future. So is the ability to plan forward: with multi-year contracts to run, System C, like other companies, can start working on other elements of the programme – such as electronic prescribing – which are not due until later.

Working for the national programme, Bolton reflects, has changed the company’s focus. It still believes in its own products and will continue to develop them for possible international and private sales. But the programme has subtly changed participants’ ambition. ‘We’re fully committed to helping iSoft [a much bigger rival] put in the best possible systems,’ he says. ‘As an organisation, we’re doing everything in our power to make this whole project work. That goes for all of us.’

Digitisation of the NHS’s antiquated and unjoined-up systems has to come, he reasons. ‘It’s essential for better patient care and helping staff to do their jobs as effectively as possible.’ It could have been done a number of ways, but they all have pros and cons, so there is no use fighting those battles any more.

Is he more confident about the outcome than a year ago? ‘Yes,’ he says, without hesitation. Some over-ambitious target dates may be missed, and not every contract will deliver at the same speed. But that does not mean the project is a failure. On the contrary, ‘With the infrastructure going in, we think people will see things in action soon. Yes, it will work – we’re going to make it work.’

The Observer, 13 February 2005

HOW ARE public services to achieve the colossal shift of resources to the front line demanded by the government? Although last year’s efficiency review was as short on examples as it was long on numbers, the assumption seems to be that ‘big’ and ‘remote’ are somewhere in the answer: outsource, share services, combine procurement into mega-agencies and persuade groups of councils to do things jointly.

But here’s a different approach:

* Understand what customers want and only do work that improves their experience of the service

* Ensure work goes out 100 per cent perfect, taking whatever time is needed and drawing on all necessary resources

* Manage the customer through to the end of the process, keeping them informed of progress and the service levels they can expect

* Organise work so that it is as error-proof as possible

* In meeting demand, work on the principle of ‘first in, first out’ seek to improve the end-to-end flow of work through the system every day

* Use measures that tell staff how well they are achieving things that matter to customers, not official specifications.

To top civil servants fretting about high-level targets, such a recipe will seem trivial – what on earth does all this have to do with finding pounds 21 billion? For the answer they should visit Swale Borough Council in Kent to see how using these down-to-earth principles helped transform a typical council service, assessing and paying housing benefit, from the worst in the country to one of the best in the space of a few months, with no extra resources and never a CRM system, shared service or call centre in sight.

Rewind to May 2004, when Swale’s housing benefit backlog was so bad that the press and local MP were baying for blood. The department was taking more than six months to pay a claim, and at the nadir nearly 8,000 people had cases outstanding, 20 times the norm. The benefit fraud inspectors were due to visit for a near-unprecedented third time, and the council’s reputation was in tatters. It’s fair to say that in any popularity con test in Sittingbourne, Mark Radford, Swale’s director of corporate services, would not have come top.

Despite temporary improvements from hit squads and improvement teams, Radford became increasingly convinced that these weren’t the answer. The problem couldn’t be solved using existing methods, he reasoned, because they were causing the difficulties in the first place. Even on the rare occasions when there wasn’t a backlog, one was waiting to happen, and duly did for the slightest cause.

A quick assessment by consultants confirmed that every aspect of performance – service, efficiency, staff empowerment, performance management – was as bad as anticipated, if not worse. The only way of bringing the backlog down was to use unfeasible numbers of assessors. ‘We couldn’t see the wood for the trees,’ Radford admits. ‘We weren’t looking at the process from the claimant’s point of view. There were two separate parts, inquiry and assessment, and no one was looking at it end to end, the way the customer experiences it. People were doing what the system told them to do, not the customers.’

So far, so normal. As in a great many public and private service organisations, Swale’s system indeed required ‘reform’. But the next step was crucial.

An astonishing number of organisations, says John Seddon of consultants Vanguard, rush into reorganisation, often buying off-the-peg IT ‘solutions’, without basic knowledge of what the system is trying to achieve and its real capacity for doing it. For instance, just because a department gets a certain number of calls and contacts doesn’t mean they all qualify as ‘demand’: some calls will be repeat calls from claimants chasing up progress or trying to find out about something that should have happened already. Such calls are effectively waste: and switching off this ‘failure demand’, says Seddon, is one of the of most powerful ways of both increasing capacity and bringing down service costs.

In most organisations, and not just in the public sector, such fundamental information is lacking. The only way to get it is to set a team of frontline workers (because they are the ones who deal with customers) to study actual contacts and analyse what they mean.

The results were a shock. In Swale’s case (not unusual, according to Vanguard), only around one-third of letters, phone calls and visits were new claims. All the rest were ‘waste’: demand resulting from a previous failure. Only 3 per cent of claimants had their claim settled in one visit to the office most came in at least three times some up to 10. No wonder the council couldn’t conquer the backlog. It was drowning in its own waste, made worse by self-created duplication, rework, and endless hunts for lost information. When scanning documents into the system it sorted them three times and checked them eight times. As realisation dawned, there was a turning point when one staff member confided to Radford: ‘We’ve forgotten our purpose. We’re pushing paper to satisfy official specifications, not the claimants.’

Once purpose had been re-established by the whole representative team – get clean information, assess it, pay as quickly as possible to those entitled – redesigning the system, again using the frontline teams, was easy. As the call analysis had established, the real bottleneck was not assessing claims, the presumed culprit, but getting clean information in the first place. So the council formulated a bargain: if claimants provided all the right documents it promised to deal with the claim immediately, or within days if it had to be referred elsewhere.

The results, says Radford, were ‘instant and transformational’. After a three-week pilot it was clear that redesigning the system into a single flow allowed staff to cope with claims in days if not hours. Rolled out without ado to cover all 60 benefits staff, it quickly began to reel in the backlog. Live claims have come down to 300, and staff are coming to terms with unaccustomed gifts of flowers and cake instead of brickbats. Morale and quality are up extra capacity has been delivered to the front line at no extra cost.

Radford, meanwhile, is not only intent on maintaining and improving this level of performance in benefits, but is also looking, with colleagues, at extending the same principles to other council services.

As he notes, ‘There is always another way of doing things to provide resources to the front line.’ Gordon Brown should be pleased.

The Observer, 23 January 2005

A READER grumpily greets the new year by noting that a century of management research doesn’t seem to have fundamentally got us any further forward. Organisations, whether in the public or private sector, are just as poor at providing consistent service and value as they ever were.

This, alas, is pretty much the truth. But it’s actually worse than that. The ineffectiveness is self-inflicted. Most companies are badly run not because there’s too little management but because there’s too much doing the wrong things. One academic, tongue only partly in cheek, suggests that one of the reasons for Britain’s notorious productivity gap is the large number of managers self-importantly making non-productive work for one another- one person to do the job and another two to check the job is done. The wood is lost among the trees. So here, in the spirit of a fresh beginning, are some new year resolutions for management.

Stop ‘managing’ and start doing

Management has no sense or meaning in the abstract. Its only value lies in getting the job done: no more, no less. The job is something of value to a customer. A priori , any activity that doesn’t contribute directly to delivering value to a customer, or improving it, should be kept to a minimum or, better, abandoned.

A surprising number of standard management practices fall into this category. Budgeting, for instance. Or appraisal. Or the ceaseless round of standard- and target-setting and controlling outcomes that passes for ‘management’ in most companies and also, unfortunately, in the public sector. Managers should spend most of their time ‘doing’: working with people on the front line to understand customers and satisfy their needs better.

Concentrate on operations,

not financial figures

The financials are the scoreline, the result of how well you are playing, not something to manage by. If you do the things you need to do to please your customers, and only those things, the financials will look after themselves. What’s more, since most companies are so poor at operations, operational excellence becomes a highly viable – perhaps the best – competitive ploy.

Managers don’t need to spend time and energy devising complicated and detailed strategies. Just do more of what you’re good at. Look at Dell. If it can make money making computers, it can also very likely make money turning out TVs, digital jukeboxes and handhelds, which is precisely what it is doing. It is its operational excellence that makes it look a brilliant strategy.

Think small

The challenge is not doing large, but the opposite. Today’s management is much like today’s software: bloated, full of features that no one wants, and full of bugs. As with software, manufacturing and service, management needs to go lean, stripping out waste and increasing its capacity for productive contribution.

Keep it simple

Why are we doing this? Peter Drucker once said that every few years a company should question the rationale for every one of its processes and their underlying assumptions. Complication should be taken as a warning sign of probable waste, as complexity feeds on itself. Note that simple doesn’t necessarily mean easy. Judgment is still needed, but it’s easier to distinguish the wood from the trees when unnecessary complication is removed.

Think ‘pull’ and ‘flow’

The principles behind simplicity are ‘pull’ and ‘flow’. The starting point is customer demand, triggering an order, which pulls delivery of a product or service from the organisation. The smoother the flow of products or services through the system, the less wasted effort and the more efficient it will be. Improving the flow is the manager’s job, and pull tells him or her how to do it. Should you do more training? Probably. What kind? Whatever is needed to enable people to improve the flow of work through the system.

Think for yourself

Just because competitors are outsourcing and offshoring doesn’t mean you should. The same goes for ‘improvements’ that are nearer home. Off-the-shelf tools, processes, formulas and acronyms are a bit like patent medicines: of doubtful utility used singly, and potentially dangerous in combination.

It’s not just that context is important (although it is). Quite often, different tools and techniques contradict each other, or the overall system in which they are being implanted. You wouldn’t expect to marry bicycle parts with those of a car or computer: all too often that is what managers in effect attempt to do, with the predictable consequence of making systems less stable and harder to manage than they were before. From quality circles on, the technique or tool is often less important than the thinking behind it mistaking the one for the other is one reason why ‘change programmes’ so often fail to live up to ambitious expectations.

IT – just say no

The most seductive tool of all is computers. Of course, computers are important and necessary in many applications (not least the one in which these words are written). But they are not ‘solutions’. A computer is a tool, like a hammer, and the only strategy a company needs for it is to use where appropriate. It’s a racing certainty that 2005 will see a new crop of IT failures as buyer credulity combines with vendor overselling to create ambitions that are simply unsustainable. Make it the year that hope is finally trumped by experience – and a happy one at that.

The Observer, 9 January 2005

Does it matter who owns the London Stock Exchange, now under siege by Frankfurt’s Deutsche Börse? Yes, it does, and for several different, but interlocking, reasons. In the first place, it matters because of the direct implications for the City. Many – though not all – would support the view that there is scope for European consolidation and cost-cutting among exchanges. Indeed, that process has already begun. But on whose terms?

The initiative for the present £1.3 billion merger attempt, the second in four years, comes from Deutsche Börse. Importantly, Frankfurt’s approach to the business is different from London’s.

Although Deutsche Börse is making conciliatory noises about respecting ‘established market models’ and leaving existing London management intact, this resembles a takeover rather than a merger. Leaving aside the question of which business approach is better for customers, it is scarcely unreasonable over the long term to expect the benefits to be calculated to accrue to the bidder – Frankfurt – rather than the target – London. ‘Bums on seats may be in London, but the brains will be in Germany,’ one insider predicts.

Given the different approaches, the general view in the Square Mile is that in the long term there is room for only one main European financial centre, just as there can be only one headquarters for a combined company; this tips the balance away from London, the present leader, in favour of Frankfurt.

The German bid may, of course, flush out others, which would give a different outcome more favourable to London. Even so, there are other reasons to fret about the bid.

Financial services, after all, are something the UK is supposed to be good at. The continuing pre-eminence of the City of London, and what has been dubbed the ‘golden prize’ of the Stock Exchange within it, is complacently used to justify everything from staying out of the euro to abandoning manufacturing. So what does the possible sale of the jewel in the crown say about City management? As Angela Knight, chief executive of the Association of Private Client Investment Managers and Stockbrokers, wrote in the Financial Times , ‘the most astounding part of the story is that the LSE now finds itself in a situation where it is the target rather than the bidder’.

But just as extraordinary is the fact that, in another sense, this is perfectly normal. Although pension and insurance funds remain in British hands, few other institutions of importance in the City are now UK-owned. City investment banks, stockbrokers and fund-management groups are all in foreign ownership.

If that represents ‘Wimbledonisation’ – having the most beautiful grass courts in the world but no tennis players – selling the LSE is like flogging off the All England club as well.

The worrying thing, of course, is that this has happened before. It is a rerun of the trajectory of large parts of manufacturing. The motor industry is emblematic. No one needs reminding that Rolls-Royce and Bentley, along with Jaguar, Aston Martin and Land Rover, have gone the way of volume carmakers, into foreign hands. This is also the pattern in many other industries and sectors of the economy.

In one respect that may actually be an advantage: foreign-owned manufacturing plants in the UK are more productive than UK ones, and there is no doubt that intensive courses in competitiveness at the hands of Japanese, US and continental plant managers have greatly benefited UK plc as a whole. Yet that has not prevented the UK manufacturing sector from shrinking faster than in many rivals.

Its share of the total economy, at around 17 per cent, is larger than in the US or the Netherlands but smaller than France and Italy and considerably smaller than in Germany and Japan. And despite dozens of investigations and initiatives, industry productivity obstinately trails that of France, Germany and the US.

Economists often argue that the move from manufacturing to services is inevitable and makes little difference in terms of wealth creation. But, like many economists’ theories, this is only half the picture. Management counts, too. While economic forces are strong, being blind they can be trumped by clever managers using deliberate strategy. In manufacturing, while the economist is right to say that ‘wage and other costs are lower in India and China’, a manager can counter: ‘But we can organise better to offset that advantage and offer higher-quality goods.’ This is also true of services.

Looked at from a managerial point of view, manufacturing and services aren’t alternatives but part of a continuum. Each trades with, and is dependent on, the other. Likewise, shifts of ownership in manufacturing affect services, and vice versa. Thus, foreign manufacturers buying into the UK often bring their domestic insurers and bankers with them. No big decision about global car advertising is currently taken in the UK.

While it’s not the whole picture, the surrender of large swathes of manufacturing may have contributed to what happened, and is continuing to happen, in the City.

One of the big questions for the future of the economy is whether a country that has proved notoriously poor at managing the complexity of large-scale manufacturing can expect to make a better fist of high-value services.

Anecdotal evidence is that services are way behind manufacturing in work organisation and productivity in general. The hollowing of the City is not reassuring in this respect.

The truth is that the London Stock Exchange has been outthought, outsmarted and outmanoeuvered – outmanaged in fact – by a smarter overseas rival, just like City fund managers and investment groups, electronics and car manufacturers before it. What happens when there’s no more family silver left to sell?

The Observer, 19 December 2004

It seems heartless to say it when the begging bowls are out, but aid doesn’t work. Despite the $1 trillion spent since 1950, debt relief on $33 billion of loans and modestly fairer trade, the share of world income of the poorest fifth of the planet’s population has halved in the last 40 years. Three billion people still exist on less than $2 a day. Appallingly, Africa is 25 per cent poorer than at the time of the first Live Aid concert 20 years ago.

Yet many of the elements of a solution to the development problem are to hand. It’s not the poor’s fault. They have to be endlessly ingenious and resourceful to survive. Aid gets to some of them, but not enough. Markets and individual incentives work well in some places (see China and India) but all too often ignore the poorest.

Meanwhile, much-vaunted corporate social responsibility is too small, too impermanent and simply not core enough to make a difference. When companies can’t see a business case for developing medicines to cure the diseases of the poor, it is pointless to think that charity will do the trick.

The result is an unjoined-up system that is infinitely less than the sum of its parts, a set of impotently spinning gear wheels rather than a motor of change. In these circumstances, no amount of money will make it work..

One has only to look at the negligible impact of IMF/World Bank lending on the growth rates of developing countries (see graph right) to see that this is so. According to Chris West, deputy director of the Shell Foundation, financial viability must be central to the war against poverty.

‘It is the same set of questions about delivery, access and affordability that business addresses every day,’ notes West. ‘Simply put, how do you deliver basic services that are affordable for the poor but still offer a livelihood to those providing them?’

The Foundation, an independent body with an endowment of £250 million from Shell, thinks it has an answer: nurturing small enterprise in poor countries, thus providing a vital link between the market and the poor. It is hoped that this will connect the gear wheels and release the energy latent in the system.

In the foundation’s case, this so far takes two forms. The first is underwriting investment funds (one for $5 million, another $25 million) for small energy-sector businesses in east and South Africa. It is drawing not on Shell’s money but on its brand and business clout and deep knowledge of the energy sector to provide forms of collateral.

‘The public sector – donors and NGOs – look at the private sector as a set of deep pockets when its real value is in its ability to solve problems and, crucially, go to scale,’ says West. The money already exists in African and other banks: connecting it to potential clients through referrals and then supporting the new businesses with mentoring support is key to sustainability.

If the funds work – and West is confident they will – this could be big. There is plenty of money waiting in the wings, and not just in Africa.

What’s in it for Shell? In the first place, nurturing small enterprise develops a local supply base. In South Africa, where black empowerment and entrepreneurship are high on the political agenda, doing business with small black firms may become a regulatory requirement. But the same reasoning applies to any country.

Foreign direct investment, in development terms, is another ‘spinning wheel’. It hasn’t had the anticipated catalytic effect because most of the money flows straight back out of the country to foreign suppliers. ‘Engaging the core business catalyses the social returns from FDI,’ says West. ‘Contributing to pro-poor small business is the key to unlocking growth in the developing world and getting poverty on the run. But it also means big business can contract more local suppliers and boost jobs. This strengthens its licence to operate and reduces costs without incurring unacceptable risk.’

In the longer term, of course, all development contributes to energy demand. Much the same thinking informs the Foundation’s other main project, which is applying business thinking to the problem of indoor air pollution. Inhaling smoke from open fires kills around 1.6 million poor people a year. The problem is well-known but so far has resisted NGOs’ attempts to address it.

The issue, emphasises Foundation project manager Karen Westley, isn’t technology – most of the deaths could be averted by the use of very basic cookers – but a viable market infrastructure in a segment that is way below the radar of large companies.

Accordingly, the Foundation is conducting pilot projects to reengineer the supply chain from the customer’s point of view. Poor consumers won’t just accept what they’re given, says Westley. A robust supply chain giving consumers what they want and can afford is the first essential step to scale.

This is real ‘bottom of the pyramid’ innovation, linking business and development thinking in a way that challenges both. In particular, it goes well beyond conventional ideas of CSR. Business itself must recognise that sustainability is not about money, West insists.

‘If a large corporation is serious about generating societal and developmental returns, it need only look at how its core business solves problems,’ he says. ‘This is about its ability to organise, launch, develop and scale up successful business operations in all parts of the world.

‘So whether it is devising goods and services, mapping supply chains or selling to customers, success rests on financial viability and scaling up. There is a role for big business to play in nurturing small enterprise in poor countries and a business case to support it, but I wouldn’t describe it as CSR.’

The Observer, 19 December 2004

EXECUTIVE pay is among the most extraordinary (some would use another word) social and economic phenomena of our time.

Conventionally, chief executives’ pay is determined by markets and performance. An influential branch of academic inquiry, agency theory, has legitimised the idea that pay should be used to incentivise managers to boost performance to the benefit of shareholders.

Corporate governance codes have striven to put this into operation – last week the Association of British Insurers (ABI) was congratulated in the press for updating its remuneration guidelines and announcing that 70 per cent of the FTSE-100 met standards designed to ensure that executives are generously rewarded only for outstanding performance.

They must be joking. The best efforts of US and UK researchers have failed to unearth a link between pay and corporate performance in the short term. But some explosive research from academics at Manchester and Royal Holloway business schools* blows away the idea of any correlation between CEO pay and performance in the long term as well.

The results, says Manchester’s Professor Karel Williams, one of the authors, are ‘pretty devastating’. They show that from 1983 to 2002:

* Real CEO pay in the UK and US rose by 25 per cent a year, come rain or come shine, compared with sales and profits growth of less than 3 per cent

* Aggregated, while real sales and pre- tax profits of FTSE firms increased just over 50 per cent over the period, CEO pay shot up more than 500 per cent over his (and we do mean his) tenure of seven years, a chief executive could expect to see his salary double twice

* While the real market value of the firms increased substantially (350 per cent), this indicator has least to do with management, being largely the product of the long stock-market boom and steady additional flows of investment funds

* Although meaningful markets for top managers do not exist, a ‘going rate’ for FTSE-100 CEOs has been established at around pounds 1 million, regardless of the level of performance

* While soaraway CEO pay has towed other senior managers in its wake, there has been no spillover to average employee pay. The cats are relatively as well as absolutely fatter: CEOs now pocket around 50 times as much as ordinary employees compared with nine times 20 years ago. In the US, disparities have risen from 50 to 281 times.

In terms of individual companies, the value creation vs pay story is even less ‘outstanding’. Of FTSE survivors, only GlaxoSmithKline showed long-run real sales and profits growth in line with extravagant increases in CEO pay, the paper says. Of the three other companies where CEO pay had gone up most – more than 1,000 per cent – Aviva had seen pre-tax profits plunge by 152 per cent, GUS by 22.3 per cent and Marks & Spencer 25 per cent.

Of course, such calculations are greatly affected by the chosen beginning and end points. But in sales terms a surprising number of the companies were actually smaller than 20 years before.

The fundamental points, says Williams, are that giant firms are ‘GDP companies’ – they grow more or less at the speed of the economy, whatever happens but although managers do little to create long-term value, they are ‘uniquely positioned to enrich themselves without obvious victims as neither shareholders nor labour lose directly en masse’.

In this light, says the paper, ‘pay for performance’, and corporate governance in general, can be seen more as ideological incantations designed to sell ‘market capitalism with responsibility’ and high pay as an element of that, rather than a realisable programme.

Paradoxically, the academic theory that sets out to explain performance pay and the regulatory framework to keep it in check have served to free it from any other sort of control. As the paper notes, time after time outcry over ‘excessive’ pay has preceded ineffectual attempts to regulate it that have only succeeded in setting a higher baseline.

Pointing out that the emperor has no clothes arouses indignation. But, as Williams says, breaking the link between pay and performance allows for very different thinking about executive salaries – and a more promising agenda than bankrupt agency theory debates.

On the first, the paper suggests that today’s corporate managers are somewhat like landed aristocracy in the 19th century, or political elites of the Third World: the benefits they receive, and any value they create, are the result of the prevailing form of development rather than any real functional contribution. That leads to important questions, some of which will be studied at a new Economic and Social Research Council centre for studying socio-cultural change, and in a forthcoming book.

What is strategy in giant firms growing no faster than GDP? Shouldn’t inclusion embrace top earners soaring out of sight as well as the bottom? Why should one set of managers be paid on a completely different scale from others having tasks of at least equal complexity and responsibility – prime ministers, permanent secretaries and generals, for example? And what should be the going rate for a large company CEO? On a long-term view, how many deserve any increase at all in the years ahead?

*’ Pay for corporate performance or pay as social division: rethinking the problem of top management pay in giant corporations’ by Ismail Erturk, Julie Froud, Sukhdev Johal and Karel Williams

The Observer, 12 December 2004

SCIENCE, INNOVATION and skills is the new government mantra for UK plc. Gordon Brown’s emphasis in the pre-Budget report on the three magic words only reinforces the message delivered by the five-year science strategy and the DTI’s sudden metamorphosis from dull trade and industry bureaucrat to the caped miracle worker of technology and innovation. British enterprise needs to turn off the crowded ‘low road’ of competition through low wages and other input costs and join the more select class of competitors purring along the ‘high road’ of high wages, high investment, and high added value.

Few would disagree with this prescription. There’s little future in competing on commodity products and services with China and India. The CBI may be exaggerating slightly when it says there will soon be no unskilled job vacancies in Britain, but not by much.

However, although in that sense the notion of ‘moving up the value chain’ is uncontroversial, let no one think it will be easy. It is much more than individual firms deciding to spend more on R&D. Innovation and non-innovation are not the mirror image of each other, but completely different things. Shifting the economy from one to the other poses the biggest peacetime challenge to the economy for at least a century.

The challenge is twofold. The first, emerging from research by the Advanced Institute of Management Research, is to do with the institutional framework which conditions the way business operates. To a marked degree, economic policy over the past 20 years has favoured market-type reforms: privatisation, labour and financial market liberalisation, curbing trade union power. Britain is now one of the least regulated, most business-friendly countries in the world.

The good news is that the companies which have survived this dose of market discipline are fitter than they were. The bad news is that ‘business-friendliness’ is a two-faced ally. In Britain’s case, market-based institutions have encouraged firms to compete through just those low-cost production factors – particularly cheap, flexible labour – that are now keeping it in the slow lane. Outsourcing is a striking example of service companies playing the cost card (when a portion of its customer base, incidentally, might prefer quality).

So one task for managers and policy-makers is to ween companies off today’s institutional supports (eg, financial engineering and cheap labour) and proactively begin to craft new ones – close-coupled supply chains built on trust and a more skilled workforce, for example.

The second challenge is transforming the institutions of the firm itself – and that may be even harder. In a research report commissioned by Microsoft on the future role of trust in work, LSE’s Dr Carsten Sorensen points out that innovative services cannot be managed in the way companies have always managed mass production.

In a seller’s market, where the only issue was to meet production quotas, companies could get by turning out standardised products using command-and- control methods with a hierarchy to enforce them – basically, central planning. That never worked very well – see the Soviet Union – and still doesn’t, but for services the results are even worse.

This is because services, and even more innovation, are subject to huge variation at the point of delivery. This means that the knowledge critical to delivering them is ’emergent’ – it appears as part of the process.

‘It is at the front line of the supply chain that decisions emerge they cannot be decided in detail beforehand,’ says Sorensen. In other words, they cannot be commanded. Traditional command-and- control breaks down. There is no alternative to a bottom-up approach.

In Sorensen’s view (and naturally Microsoft’s), technology and trust have the potential to reconcile the need for individual autonomy on one hand with that of performance management on the other. Indeed they do. But that does not make it a foregone conclusion. Even Microsoft accepts that technology on its own is not the answer: used to command and control, it can actually erode trust and make innovation less likely, not more.

And for many reasons, command-and- control is heavily ingrained in the British management psyche. One is the institutional framework already referred to. Another, as Sorensen perceptively notes, is culture. This is partly a matter of class: in the UK, management is a position, not a role, and the position is one of superiority, ie, command. In contrast to Sweden, where highly paid individuals are trusted to manage themselves, ‘there is perhaps in the UK with significantly lower labour costs a tradition of employing one person to do the job and two to check the job is done’. Piquantly, the UK’s obstinate productivity gap may be something to do with the proportions of chiefs and indians: having too many managers who add no direct value and not enough skilled workers who do.

This may be why, in another piece of Microsoft research, British workers are so lowkey about the prospects for innovation. Six out of 10 office workers complained that it was complicated and difficult to get good ideas turned to money-making account, and three out of 10 feared they would lose ideas or fail to gain support to put them into action.

Strengthening the UK science base, persuading companies to do more R&D and getting them to invest in the skills of their workers are all a necessary part of making UK plc more innovative. But they may be the easy part.

As Microsoft UK managing director Alistair Baker puts it, unless there is a change in the historical command-and-control management mentality, ‘no amount of IT investment, however innovative, will deliver the desired productivity gains that we must see to keep Britain competitive’.

The Observer, 5 December 2004

GOODHART’S Law – an insidious Catch-22 decreeing that targets are fine until you start using them to manage by, at which point they are irredeemably corrupted and therefore useless – is not just a public sector phenomenon. As a reader points out, it is alive and well in corporate governance, where it has the same debilitating effects.

John Drummond, chief executive of consultancy integrity works.com, told a Chatham House conference last week that corporate governance was becoming ‘a mile wide and an inch deep’.

He notes that lots of indices and specifications have been developed for use by investment groups to establish governance quality, but most of them put the emphasis on structural elements – type, quality and independence of non-executive directors, separation of chairman and CEO and so on.

‘All companies are being judged this way, with little regard for how employees are enlisted in the quest for good governance and sound conduct,’ he complains. ‘This disconnection means that the surface is getting lots of attention and what really matters – the culture – is getting none.’

In theory, everyone is against the deflection of attention from substance to form that has become known as box- ticking, but many believe that that is what is happening. Even in the UK, where the Higgs reforms were business-led or at least formulated, there is talk of ‘governance fatigue’ in the US, discontent with the Sarbanes-Oxley act is reaching mutiny proportions.

Enacted in 2002 with the attention of heading off more Enron and WorldCom-type scandals, Sarbanes-Oxley runs to 1,100 sections and complying with it, companies grouse, has become an industry in its own right. Meeting its requirements costs large firms about $9 million a year each, according to one survey, and the burden of detail is leading some European companies to considering delisting from New York to escape it.

Of course, many people would shrug and say that companies have brought tighter regulation on themselves. It wouldn’t have happened if they hadn’t misbehaved in the first place. Although there’s some truth in that, there’s a deeper issue. The late Sumantra Ghoshal pointed out that meta-analysis of 85 separate academic studies showed that neither the proportion of non-execs on the board nor splitting the top two roles had the slightest bearing on company performance. As for promoting better governance, Enron had in place many of the things that today’s codes recommend: independent directors, separate chairman and CEO, independent directors in charge of key committees and regular self-evaluation by the board.

Because of the underlying assumption that the board’s primary job is to police the actions of opportunistic and untrustworthy executives, Ghoshal argued, the codes had put in place a set of prescriptions based on ‘ideologies, unfounded opinions and myths’. Not only did they not prevent wrongdoing; they had the effect of making it harder for the board to do its job of encouraging innovation and legitimate risk-taking.

At the same time, by prescribing precise legal limits, they encourage executives to work right up to them rather than change their behaviour. Anything that isn’t forbidden is permitted compliance is with the letter rather than the spirit of the law. In fact, corporate governance is a particular subset of a larger case. The more extensive and detailed any regulation is, the greater the scope for unintended consequences (what we might call Goodhart effects). Take the financial services industry, where it is at least arguable that poor regulation has had the opposite effect to that intended. In the effort to foresee and forestall abuses, the rules are now so complicated and draconian that it’s actually quite hard to buy or sell savings products. The result is that pension firms are closing funds and people who should be saving are buying property instead. Abuses may be fewer – but an improvement bought at the price of a property bubble and a pensions crisis is a Pyrrhic one.

Let’s be clear. The argument is absolutely not the free-market one that there should be no regulatory constraint on companies’ ability to make money for shareholders, nor the often mealy-mouthed plea for self-regulation as a way of softening the options. Rather the reverse: safeguards are needed, but they need to be real rather than bolt-ons.

As with corporate social responsibility, the only way of circumventing the diabolical consequences of Goodhart is to bring regulation inside the company. Internal regulation enforced by values is both more efficient and more effective than external regulation enforced by the compliance police.

In this context it’s perhaps depressing to note that the Institute of Business Ethics, which among other things monitors the ethical temperature of the business world, notes declining interest in ethics in business schools – especially on MBA courses, where ethics, if it exists at all, is often taught as an elective rather than a mainstream part of business.

This, too, is a Goodhart effect, at least partly the result of business-school rankings that are heavily weighted towards before-and-after salaries as a criterion of merit.

Corporate governance is a means, not an end. Apparently impeccable behaviour on all the dimensions of Higgs or Sarbanes-Oxley, which drives out enterprise, may in the larger picture be a sterile bargain. The two don’t have to be in opposition but reconciling them requires everyone in the company to know what their purpose and values are and stick by them. As with quality, you can’t inspect good governance in after the event. Like letters in a stick of rock, it has to run all the way through.

The Observer, 28 November 2004

THE OBSERVER is moving offices next week, and I’m dismally contemplating a life-endangering heap of business books on my desk that I shall have to deal with before the removal men arrive. Why, oh why, are there so many? Do I have to read them all? Why, as Mark Twain once put it, do most of them seem like ‘chloroform in print’?

The short answer is that, despite the health hazards, like chemical substances they are addictive. Although publishers say that appetites are more discriminating than in the roaring 1990s, when almost any management title would sell, business is still good business. People buy basic ‘how to’ and ‘self-help’ titles year in, year out, there is a sizable textbook market (business is the single most popular undergraduate and postgraduate course), and while blockbusters have become fewer with the fall of the charismatic CEO, a big autobiography – Giuliani or Jack Welch, say – can still turn out to be a bestseller.

But business books are much more than commodities. Publishing can be seen as an essential part of the the much larger ‘management ideas industry’, where the prizes are much higher. In the volatile market for ideas, business books form a key conduit linking idea-producers (often consultants or academics) with their target manager-consumers.

Moreover, in a neat piece of positive feedback, books recycle ideas back into the business schools, where as teaching aids they indoctrinate a fresh crop of potential consumers. So as well as being consumer items, books are also producers – of gurus and stars, of fashions, and thereby also, crucially, of markets for consultancy, whose rewards dwarf those of publishing.

A successful book, itself often an expanded version of an article in Harvard Business Review, can easily catapult an author from humble academe to the consultancy stratosphere. The speaker circuit alone can bring in a seven-figure income. Quick to twig the benefits, consultancies have become rich closed-loop publishing markets in themselves – both writing and then buying large numbers of books as selling tools and as a means of demonstrating so-called ‘thought leadership’.

Management books are thus more slippery and complex than they might appear – at once a product and a vehicle, the medium and the message. As products, it is easy to dismiss most of them as trivial or worthless. As in any other branch of publishing, or indeed any other human endeavour, the 80/20 rule applies: ‘Ninety per cent of everything is crap,’ as science-fiction writer Thomas Sturgeon more colourfully put it. There’s a less dismissive way of looking at it, however. The crap is the soil from which the stuff of real value grows. In any field you can’t have only masterpieces: masterpieces grow from, and define themselves against the lesser material.

Paradoxically, while the unappealing pile on my desk serves a boring but necessary function, the ‘masterpieces’, or at least the bestsellers, are much more problematic. This is because, like cookbooks but unlike fiction, people act on them. As Keynes famously remarked about the impact of economists, practical men, who believe themselves immune to intellectual influences, are usually the slaves of some defunct theorist, in managers’ case acting out in their daily lives the ideas of Adam Smith (division of labour), FW Taylor (mass-production techniques) or even Dilbert (fear, uncertainty and doubt).

A poor recipe is unlikely to kill you. But bad management advice can, and regularly does, lay waste whole companies. Fortunately for the rest of the world, ‘Chainsaw Al’ Dunlap’s brutal version of shareholder capitalism was discredited before his book Mean Business could make too many converts. Not so Michael Hammer and James Champy’s phenomenally successful Re-engineering the Corporation. Although the success of re-engineering (the concept) is moot, Re-engineering (the book) certainly caused mayhem: at the height of the fashion in the mid-1990s, three-quarters of large US and UK firms were reportedly engaged on three re-engineering projects each, and 500,000 people lost their jobs.

Books on theory may seem dull, and many are. But ironically, it’s the absence of theory that makes many ‘practical’ books potentially much more dangerous. Without a robust underlying theory, giving managers bold prescriptions about re-engineering or transformation is like giving me a scalpel and sending me off to do a little brain surgery.

Lack of a theoretical tether, too, encourages fashion bubbles as managers rush all over the place to adopt the next thing, while the practices of the book trade only increase the publishing churn. The result is not only that all those predictions of change and turmoil become self-fulfilling prophecies, but also that the noise makes it harder for more reflective, less prescriptive texts to be heard, or perhaps even written in the first place.

So what is the thinking manager browsing the airport bookshop – or me surveying my desk – to do? Caveat emptor, is the answer – understand where these books are coming from and the motivations that brought them into being. It’s not that they’re all bad. The best are clever and thought-provoking, even inspiring. Just remember that you can’t outsource responsibility for reflection, contextualisation and critical judgment as to how applicable they are.

As Stanford’s Jeffrey Pfeffer has noted, managers ‘must decide whether they will be swept up in the fads and rhetoric of the moment or will recognise some basic principles of management and the data consistent with them’. Unless, of course, managers are so anaesthetised by the din that their mind is already made up. Perhaps Twain was more literally right than he supposed.

The Observer, 21 November 2004