A WEEK in which Bernie Ebbers, the unlovable former chief executive of WorldCom, was convicted of an $11 billion fraud, and another prominent US CEO was forced to resign on suspicion of fiddling the figures, seems an uncomfortable one in which to query the direction of current corporate governance.

Yet while the crooks deserve everything that the law flings at them, it’s harder to see the greater good that was served by the sacking of Boeing’s chief executive, Harry Stonecipher, for having a fling with an (unmarried) Boeing employee.

Stonecipher’s behaviour may not be admirable, but it does not seem a hanging offence. Yet such is the climate of corporate correctness that conformance to the letter of the law now takes precedence over all other considerations – with the very real danger that corporate governance ‘improvements’ are starting to have the opposite effect to the one intended, making senior recruitment more difficult and destroying the cohesion of the board.

Anecdotal evidence certainly points this way. US headhunters say prominent companies now have to settle for ninth or 10th choice when recruiting outside executives for the board.

According to a survey by PricewaterhouseCoopers, for 70 per cent of UK chief executives governance and compliance activities represent pure cost, rather than investment, and less than half believe they could be a source of competitive advantage. Even in the US, where CEOs are more positive, a different survey a year ago showed that fewer than one-third of directors thought that new governance standards would improve board operations, ensure detection of unethical behaviour or better protect shareholders. Overwhelmingly, boards were spending more time monitoring accounting and governance practices and financial performance rather than on more positive issues.

Special pleading? Academic evidence gives little support to the official line. For example, a Henley Management College study found that companies with many executive directors on the board did better than those with a high proportion of non-execs. This finding – which echoes those of two Australian surveys – contradicts two of the tenets of the combined code on board structure and director tenure. Other studies say the same thing over and over: the forms that are currently accepted as a prerequisite for ‘good governance’ do nothing for company performance.

Do they have an effect on wrongdoing? Probably, says Professor Vic Dulewicz, co-author of the Henley paper, but he warns that no amount of rules will deter the real villains. Enron is notorious proof that the form of best practice is worth very little without the content.

But some go even further. Said Business School’s Chris McKenna, author of a forthcoming book on the history of management consulting, believes that, the best intentions of the US Sarbanes-Oxley Act on corporate governance notwithstanding, the stage is unwittingly being set for more Enron and WorldCom type scandals. He argues that making directors personally and financially liable for mismanagement – in a January settlement Enron and WorldCom directors agreed to stump up $31m to shareholders – will not only have the effect of pushing up directors’ salaries and liability insurance premiums to match the increased risks it will also cause board members to offload ever more responsibility on to outside advisers, consultants and auditors. It was just this tactic of bringing the audit inside – acting as ‘insurance policy’ to management rather than independent regulator – that caused Enron’s advisers to lose their objectivity.

‘The likelihood of another long cycle that repeats the past 20 years and ends with another crisis of corporate governance is high,’ McKenna concludes.

He doesn’t add it, but the equal likelihood is that the next crisis will trigger yet another round of regulatory corset-tightening, further increasing bureaucratic drag. Meanwhile, as Anthony Hilton in the Evening Standard has pointed out, a boardroom split between power centres – chairman, lead non-exec, heads of remuneration and audit – and where non-execs are forbidden to trust the execs, is a recipe for dysfunctionality, not teamwork. It is difficult, notes the Henley paper, ‘to envisage how 50 per cent non-executive director representation is calculated to do other than encourage adversarial friction with executive colleagues.’

How have we got into this mess? The fuel of the governance arms race, whether Sarbanes-Oxley or the UK’s combined codes, is an American doctrine known as ‘agency theory’. Under this ideology, the function of the board is to ensure that managers (agents) act on behalf of the shareholders (principals) to maximise shareholder value without this surveillance, the theory goes, managers will exploit their inside knowledge to advance themselves at the expense of the principals.

In governance terms, this requirement to police management is the basis for ‘duality’ (splitting chairman and chief executive roles), boosting the number of non-execs, incentivising managers and encouraging the market for corporate control. Unfortunately, as we have seen, these prescriptions don’t work. As Dulewicz notes, agency theory, like all the other board theories in existence (13 at the last count), isn’t particularly helpful for analysing what boards do, which is far more complex than than the mechanistic and simplistic theory suggests.

The trouble is, though, that the theory is doubly bad: not just wrong, but self-fulfilling. Assuming that managers are self-interested opportunists who need sacks full of share options to do their jobs creates managers like that. Telling them that their job is exclusively to maximise shareholder value ensures that they leave no legal stone unturned in their effort to do so. Then new inhibitions have to be put in place to temper the abuses and the whole cycle starts again.

It’s time to rethink the whole corporate governance issue – not on the basis of tightening or modifying existing codes but from an entirely different starting point. Companies don’t thrive and prosper by concentrating only on shareholder value, and agents and principals, but by simultaneously looking after all the elements that go into success – customers, suppliers, employees – and even communities. Unless it acknowledges that, governance practice will remain part of the problem, not the solution.

The Observer. 20 March 2005

IS IT THE job of business to ‘make poverty history’, in Bono’s words? Most people would answer ‘no’. Some, harbouring deep suspicion of business motives in the developing world, wouldn’t want it to try. Others would arrive at the same conclusion, but on the basis of equally deep suspicion of companies being involved in anything except making as much money as they can.

But as people don their red noses and Tony Blair’s Commission for Africa proposes yet another attack on the development conundrum, the Shell Foundation, an independent charity funded by the Shell group, is taking a rather different line. In a paper entitled ‘Enterprise solutions to poverty’ (www.shellfoundation.org), it argues not only that business involvement in development efforts is legitimate, but that without that involvement, development will fail.

The stakes are getting higher on all sides. Although there have been short-term humanitarian successes, the results of past efforts to break the cycle of poverty have overall been disappointing. After half a century and $1 trillion in development aid, more than 2 billion people still live on less than $2 a day. Indeed, some of the poorest economies are going backwards.

At the same time, in a very different way, business is up against it, too, facing a crisis of legitimacy of its own. Are companies a force for good, or do the environmental and social damage they produce demand that their powers be curtailed? There is at the very least a case to answer and against well-prepared NGOs and stakeholders their current risk-minimising approaches to corporate social responsibility (CSR) are an inadequate counterweight.

Finally, for humanity as a whole the consequences of a world growing ever more polarised between rich and poor become more hideous by the day. Neither rich nor poor can continue to tolerate today’s inequities. This round of development can’t be allowed to fail.

Yet while 2005’s political commitments and upsurge of humanitarian sol idarity show that something is stirring, they are not enough. The question remains: how do we do it? How can precious resources be used not for grand one-off projects or short-term relief, but to kick-start a process of dynamic, sustainable development that removes people from poverty permanently?

For the Shell Foundation, the missing link is business. ‘In theory, practice and common sense terms… most routes out of poverty start with enterprise,’ it says. A market economy, based on both large and small enterprise, is central to job creation, growth and sustainable development.

Yet the route of pro-poor enterprise is relatively untrodden. Why? One reason, as CK Prahalad demonstrated in his groundbreaking The Fortune at the Bottom of the Pyramid (FT Prentice Hall), is that big business doesn’t see the opportunity.

Equally important, believes the Shell Foundation, is that the wrong ‘offer’ is meeting the wrong request – it’s simply the wrong conversation. Because large, top-down interventions have signally failed to create the conditions for enterprise to flourish, donors have increasingly turned to privatisation (with mediocre results) or public-private partnerships with large firms.

But the ensuing engagement, claims the Shell Foundation, frustratingly misses the point. Civil society assumes that what big companies can best bring to the development table is money. Wearing their hat labelled ‘corporate social responsibility’, companies acquiesce with varying degrees of urgency but never as a top priority.

All the while, both sides are ignoring the one critical ingredient that only business can furnish, which is – business: in other words, the ability to help the poor not to consume scarce aid resources but exploit them to meet the needs of the market. This, as Peter Drucker well described it 20 years ago, was the real social responsibility of business: the alchemy of transforming social need into ‘economic opportunity and eco nomic benefit, into productive capacity, into human competence, into well paid jobs and wealth’.

There are some tough corollaries to this proposition, though, for business and the traditional development community. Since both financial viability and the ability to go to scale are essential to multiply the effect of the original intervention, donors need to think in terms of investing, not giving. There needs to be unfamiliar discipline imposed on both sides.

‘Make it hurt’, advises the Shell Foundation report: those given grants should be held accountable for their promises, and donor- managers should be judged on the growth of pro-poor enterprises and whether benefits flowed to poor peo ple as a result. Debt relief and other macro-interventions should be linked to the same imperatives.

Likewise, for companies, poverty partnerships should be like business partnerships, argues the report. They need to matter, not just in terms of alleviating poverty, but in generating returns to business in a currency that it values and at a scale appropriate to the risk involved.

An example is the funds for small business put together by the foundation in South Africa and Uganda. For local banks, the funds were worthwhile because thriving small business has an appetite for bank loans, while the Shell Foundation demonstrated to other institutions that investing in small enterprise was good business.

Is this an attempt to bring one more area of life into the market and subject to the profit motive? Well, yes. But note two things. First, the impetus to enlist business principles comes from the development world, not companies. The aim is to make business the servant of the poor, not its master.

Second, it requires big business, perhaps paradoxically, to be more businesslike in a true sense, too. Many development projects fail because at bottom they are focused on satisfying donor agendas rather than those of the people on the ground. Where have we heard that before?

The challenge for companies is to stop playing at CSR (their own agenda) and focus their efforts on meeting the wants of their most demanding customers – the world’s poor. Now that really would be a revolution.

The Observer, 13 March 2005

LORD BROWNE of Madingley, aka the chief executive of BP and one of Britain’s few businessmen of world stature, raised eyebrows a few weeks ago by questioning the use of ‘pseudo-markets’ in the public sector. He raised the issue in unscripted remarks at the World Economic Forum in Davos and then, to be sure there was no mistake, repeated them in an interview in the Daily Telegraph

‘Public service and business are different,’ he insisted. ‘To take business techniques into the public sector lock, stock and barrel can be damaging and dangerous.’ Using market forces to deliver public-sector services could damage the professional ethos in hospitals, universities and prisons, he argued – and unleashing the commercialism of markets where they weren’t appropriate could provoke a backlash against business generally.

Browne’s remarks should be seen in the context of a steady reappraisal of economic forces which is throwing up some unlikely reversals. Thus, some of the most creative thinking about markets is coming from the moderate left. It has realised that markets don’t operate in a vacuum – their power is directed by rules, and the rules are man-made.

For example, business-sophisticated NGOs have twigged that the combination of competitive markets with creative regulation can be a potent catalyst for environmentally friendly innovation, leaving traditional business organisations, which oppose all regulation, in the invidious position of trying to deny that markets work.

Likewise, developmentalists in despair at the failure of traditional aid remedies to take hold in poverty-stricken nations in Africa and elsewhere are pushing the merits of ‘pro-poor enterprise’. As the (charitable) Shell Foundation puts it in an important position paper this week, ‘in theory, practice and common sense, most routes out of poverty for poor people start with enterprise’.

As Browne intimates, however, this doesn’t mean that market forces apply everywhere. There are some areas where the market doesn’t belong. The chief of these is within organisations themselves – including companies.

In fact, education is a market, in the sense that people (if they are wealthy enough) or governments can choose to buy it from competing suppliers, whether their own or from organisations in the private sector. So is healthcare (although not law and order). But that doesn’t mean schools or hospitals are markets – even fee-paying, for-profit ones.

Markets and organisations are different things with different functions. Markets are part of the economic ecology within which organisations, whether public or private sector, operate. As in any ecology, each is necessary to the other, and the health of the economy as a whole depends on the vibrant interaction of the two. Since organisations are by definition not markets – otherwise why should they exist? – it’s not surprising that the rules by which they operate are different (or should be) too.

In fact, even though it operates in a market, behaving like a market internally is a recipe for disaster for any organisation, whether prison, university, corner shop or, for that matter, BP. Markets are blind. They thrive on competition, choosing the ‘best’ through the separate choices of many individuals and by the same means rejecting the weakest. As economist John Kay puts it, markets achieve coordination without the intention of a coordinator.

But organisations are not blind. They have ‘intentionality’ and the power to make choices. For example, to reach their goals they can sacrifice present efficiencies for the sake of larger gains in the future. That’s why they spend money on R&D. Or they can choose to subsidise weaker parts of the business while they build them up to the point where they become self-sustaining. They can choose not to outsource a department or func tion to a ‘cheaper’ specialist because the expense is outweighed by the contribution it makes to the wider whole.

Organisations therefore thrive on co-operation and reflection on how best to fulfil their intentions by collective means. In these circumstances, importing market rules, such as performance management based on sharp, market-like incentives, is counterproductive. Why, in team sports such as cricket or football, aren’t players rewarded on individual feats of run-making or goal-scor ing? For the good reason that teams intuit (as many private and public sector organisations fail to) that this would wreck the co-operative effort required for the broader goal of winning.

Interestingly, Lord Browne’s BP tempers its incentives with mechanisms that encourage managers to co-operate. Its system of ‘peer review’, in which managers have to win approval for their year’s plans from their colleagues at the same level, is complemented by ‘peer assist’, an arrangement where top-per forming units take on responsibility not for taking over bigger empires but for mentoring and nurturing the performance level of the laggards up to the best.

But many organisations in both public and private sectors are being torn apart by the application of market measures to non-markets. The effects are particularly visible in the public sector. ‘Pseudo-marketry’ of this kind explains why some universities are shutting down even well-respected academic departments which don’t make the top research rankings rather than take a rounded view of what they contribute to the institution as a whole, let alone the nation or in others why departments have to pay to hire the lecture halls or auditoria they teach in.

Pseudo-markets are also the reason why universities have expensive PR departments and why administrators are paid many times more than top academics.

Pseudo-markets destroy co-operation among teachers, schools and hospitals. Particularly in association with targets, their constant companion, they wreak havoc, as Browne suggests, with the professional ethos, turning doctors, local government officers, teachers and police into frustrated box-tickers. A recent survey funded by the Economic and Social Research Council shows that job satisfaction among UK workers is falling because of heavier workloads combined with less work autonomy: exactly the conditions that pseudo-markets create.

Pseudo-markets are what Jane Jacobs in her wonderful book Systems of Survival called ‘monstrous hybrids’: corruptions and contaminations of two separate logics, getting the worst of each. They are half-baked. As Charles Handy has remarked, markets are a mechanism for sorting the efficient from the inefficient: they don’t tell you how people in organisations should behave.

The Observer, 6 March 2005

IT’S NOT exactly spring, but the sap certainly seems to be rising among chief executive dealmakers. This week’s announcement of Novartis’s $8 billion acquisition of the German drugs firm Hexal puts the seal on three months of M&A activity that bears comparison with the bull market of the 1990s.

In the US alone, in the three months to the end of January there were 48 deals worth more than $1bn, to a total value of $357bn. A whacking $57bn of that was accounted for by the single takeover of Gillette by Procter & Gamble. Merger activity among smaller US companies and in Europe was bubbling up nicely, too.

By now it’s a business truism that, although initially good for ego, megamergers are a rickety vehicle for personal (see the demise of Carly Fiorina at Hewlett-Packard) as well as corporate ambition. Conservatively, two-thirds of deals end up destroying rather than creating value, often wrecking jobs and livelihoods in the process. So is this time likely to be any different?

Although the companies involved will argue strenuously that they are special cases, they probably aren’t. We have been here many times before. Rising stock markets bring out takeovers the way spring brings out green shoots, by hotting up the value of acquirers’ shares. But while an inflated currency may make deals easier to sign, it does not make them easier to bring to success on the ground.

This is partly a matter of mathematics. Most acquirers have to fork out a premium over the current value to persuade shareholders in the target company to sell. The mark-up – sometimes up to 30 per cent – means that for the deal to break even the acquired company must now do better than what the market had already priced into the shares like the Red Queen in Alice , it must run faster to stand still.

For the deal to hit the money, it must speed up still further – in effect, shift to a new and steeper growth path. The snag is that, in a rising market, expectations, as expressed in price/earnings ratios, may already be challenging. And the benefit of chopping headquarters, headcount or back offices can only be taken once.

So permanently improving the growth rate is a big ask. To take the P&G/Gillette case, Stern Stewart in the US calculated that, although the premium was relatively small, Gillette would still have to increase profits by 12 per cent a year for the next five years for the deal to be rated a winner – three times the historic rate.

The equation becomes more problematic if you look at some of the managerial assumptions underlying the mathematics.

First assumption: melding the businesses is costless. It isn’t. Even in the (rare) cases of companies that are well practised at doing takeovers (GE, Cisco, the Hanson of old) there is almost always fallout in the shape of FUD (fear, uncertainty and doubt), culture clash (HP and Compaq) and at least a temporary drop in commitment and energy levels as people take their eye off the ball. Culture may not figure in accountants’ merger calculations but, for takeover virgins, the costs of ignoring it are as real as any other, and often higher.

Second assumption: synergies will ride to the rescue. Unfortunately, synergy is the the managerial equivalent of the accountants’ goodwill – a last-resort justification for optimism when all the more quantifiable variables have been used up. Like the abominable snowman, synergy is the subject of much excited speculation but rarely seen in captivity. One of the most important reasons why it so regularly fails to materialise is that it’s a construct of the proposer – the producer – rather than the customer. And it is the customer who disposes. This means that all too often it is simply a wish, fuelled by unspoken greed rather any probability of consummation.

A service one-stop shop sounds logical to a producer, but that doesn’t mean the customer will want to use it. Or take AOL and Time Warner. Five years ago AOL bet $183bn it could find synergies between the distribution and creation of internet content. It, or rather shareholders, lost.

The third assumption is that acquiring company B will somehow make company A more efficient. Unless it is reversing into a much better-run firm or purchasing an unassailable market position, this is another case of wishful thinking. On the contrary, for any less- than-exceptional company, a bid should be considered a warning sign.

How could it be otherwise? However long it tries to put it off by takeovers, reorganisations, write-offs and other one-off improvements, the only lasting test of a company is its performance in improving ability over time to deliver goods or service to customers at a profit. If a company cannot wring exceptional performance from its existing operations, it’s unlikely, to say the least, that it will do better with something it knows less well.

The other way round, operational excellence on the part of the acquirer, makes it relatively easy to predict merger success. Having steadily squeezed costs and raised margins in its existing Dutch and UK operating companies, for instance, household goods group Reckitt Benckiser could be confident of doing the same thing with any acquisition.

The Catch-22 is that companies whose strategy is operational excellence rarely do acquisitions. There are exceptions, such as Cisco, but on the whole they don’t need to. When Dell went into printers, it used its own superior supply chain and business model to start its own operation from scratch. Or why would Toyota pay a premium to buy someone else’s luxury car operation when it knew it could do it better itself?

Takeovers make headlines and give the impression of purposeful activity. But, managerially and mathematically, the odds against them paying off are as high as they ever were.

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

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

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