THERE is a minister for it, an academy for it, and companies and managers are signing up for it in droves: corporate social responsibility (CSR) is rapidly becoming management’s new conventional wisdom.

JK Galbraith, who invented the term, pointed out that conventional wisdom becomes so by being repeated so many times by those with axes to grind that it becomes the default position irrespective of its merits. As such, all conventional wisdom bears the beadiest scrutiny. CSR is no exception: what is actually going on behind these blandly reassuring words? Should it be welcomed or is it a dangerous distraction from business’s real role?

This is the question posed by David Henderson in The Role of Business in the Modern World (Institute of Economic Affairs, pounds 12.50). Henderson, a prominent academic economist and former head of economics and statistics at the OECD, is a CSR sceptic. But his scepticism derives not from the common reproach that CSR is trivial, a fig-leaf for runaway capitalism that does nothing to change it. His charge is that CSR may be too powerful, undermining the ‘primary purpose of business’ as the vehicle of economic progress and thereby damaging, rather than increasing, welfare.

Henderson has aired some of these concerns before but it’s a measure of how far the debate has moved on that he now aims not so much at the possible consequences of adopting CSR on the individual firm – he accepts that in some cases CSR can contribute to long-term profitability – as on the economy as a whole.

‘It is the possible economy-wide effects of CSR which are especially worrying,’ he says. His fear is that if managers allow corporate political correctness to take primacy over red-blooded entrepreneurialism, market opportunities will be neglected and competitive pressures weakened, making people in general worse off. ‘Such a trend towards a more regulated world, with social pressures serving to weaken competitive pressures, would cause the primary pur pose of business to be less well performed… The case against the general adoption of CSR by businesses… is not that it would necessarily be bad for enterprise profits, but that it would reduce welfare.’

There is a case to be made against CSR but this is not it. In fact, the overall welfare – and companies themselves – are far more at risk from the traditional ‘economic’ approach that he supports than from the ‘global salvationism’ or ‘new millennium collectivism’ that he identifies as the main danger.

Let’s agree with Henderson that, particularly over the last half-century, capitalist economies have produced huge increases in material welfare for their citizens and that companies, as the main engine of capitalist evolution, have an essential role to play in bringing new products to market and opening up new ones.

We live, in fact, in an organisational economy. Unfortunately, like almost all free-market economists, Henderson fails to take the logical next step and make the essential distinction between organisations and markets. A vibrant economy, to increase welfare, needs both, each fulfilling its own function: companies innovating to create temporary advantage for themselves, and markets competing that advantage away and handing the benefit on to consumers.

For companies, the real trouble comes not when they adopt CSR but when they obey the injunctions of free-market economists, which cause them to imitate markets. These are: to put short-term efficiencies before the creation of new resources through innovation to pursue profits or shareholder value explicitly at the expense of customers, suppliers and employees and to neglect the fact that, unlike blind economic forces, they are intentional entities with long-term purpose and choices.

It may well be true, as Henderson suggests, that in some areas corporate behaviour is in danger of becoming overregulated – in corporate governance, for instance, there is little evidence that companies that separate chief executive and chairman’s role or that have a preponderance of outside directors on the board do better than those that do neither. The codes may (possibly) deter wrongdoers, but they don’t make it easier for companies to be entrepreneurial.

But what brought about such regulation? Not companies pursuing CSR, but firms such as Enron and WorldCom that single-mindedly maximised profits – the preferred economic approach – at the expense of other stakeholders. Less spectacularly, Shell and Marks & Spencer have fallen from grace not because they neglected their profit-making function but because they put it before the maintenance of their values. As always, when the financial target becomes the corporate purpose, real priorities suffer.

Ironically, CSR only exists as the obverse of the misguided strict economic approach. It is the understandable response of managers and companies that feel obliged by conventional wisdom to focus on the economic imperative but are uneasily aware that their actions are increasingly having harmful effects, such as obesity, climate change, declining fish stocks, growth of allergies, asthmas and chemically induced ill nesses. No wonder CSR is growing so fast: it’s corporate guilty conscience.

As CK Prahalad points out in his stirring new book, The Fortune at the Bottom of the Pyramid , CSR is a sideshow compared to the need – and opportunity – to bring the world’s 4 billion poor into the global economy.

That requires firms to recommit themselves to their proper vocation of innovation – rather than philanthropy – to meet social need. In the same way, it’s not CSR that requires managers to be as frugal as possible in their use of resources and their emission of harmful wastes: it’s their duty as trustees of the company’s long-term future, a role of which Henderson approves.

‘The search for profit is fully compatible with professionalism, humanity, and the wish to act honourably,’ he writes. But current economic doctrine, by putting the need to make profit first, explicitly absolves managers from any sense of moral responsibility.

As the late Sumantra Ghoshal wrote in his last published piece, what we badly need are theories that acknowledge the patent reality that ‘companies survive and prosper when they simultaneously pay attention to the interests of customers, employees, shareholders and perhaps even the communities in which they operate’.

In other words, those that bring responsibility in from the cold and place it inside the firm. At that point, we all can happily agree that CSR is an irrelevance: it no longer needs to exist.

The Observer, 22 August 2004

YOU MIGHT imagine that the dotcom boom is over. So it is, in the private sector. Among companies, investment in internet ventures dried up more or less overnight three years ago. It now exists as a kind of residual hangover – a fading if embarrassing reminder that overindulgence in hi-tech investment can damage corporate health.

The news doesn’t seem to have percolated through to the public sector, however, which is in the middle of a binge that, if it happened in a pub, would be subject to agonised hand-wringing and questions in Parliament.

According to the research company Kable, which tracks public sector ICT (information and communications technology) spending, e-government – the government’s requirement that all local and central government services should be available electronically by the end of 2005 – will cost the taxpayer £7.4 billion by 2006. Since 2001, the e-government gusher has been spouting at an average rate of £1.5bn a year. Central government’s share of the total will be some £4.4bn, local government £3bn. (These figures don’t include education, health and defence.)

It’s an article of faith that e-government is ‘a good thing’. Progress towards e-government gets local authorities brownie points in their official comprehensive performance assessments – authorities that invest in ambitious computer-based ‘solutions’ such as contact centres, customer relationship management (CRM) databases and comprehensive web portals get higher marks than those that don’t. As further inducement, over the last four years they have received £675 million in central government funding for e-government projects – a figure that is, however, dwarfed by the £4bn mopped up by government departments for the same purpose.

But what’s it all for? The accepted line is that, by making essential information available online, e-government can foster democracy and inclusion and improve the quality of service to citizens and business. In theory, too, it can contribute to efficiency by cutting the cost of service delivery – electronic transactions can be much cheaper than paper-based ones.

So now, with the next election approaching and public services high on the political agenda, the pressure is on to turn the promise into reality. In the just-published expenditure round, Gordon Brown demanded returns from his expensive investment. Government agencies have been given until December to tell him how they are going to persuade the public to use their e-services.

You mean… that’s right: until now no one has bothered to find out what people actually want from e-government. As the 2005 deadline approaches, so little is known that the Office of the Deputy Prime Minister, which is responsible for pushing local authorities online, has launched a £2.5m ‘e-citizen national project’ (www.e-citizen.gov.uk) – a marketing wheeze to discover ‘what makes an e-citizen tick’ and to catapult e-government take-up to success.’

You might think that was something to be done before spending £7.4bn. As it is, while in some cases e-transactions can work well (see right), overall the picture is unpromising. Kable reckons that by 2006 savings from the e-government investment will total a princely £819m. As the graph shows, even taking the figures out to 2015, on current form e-government savings will never even equal current spending.

The reasons for this are summed up in another Kable report, ‘What do they mean by ‘yes’? Shared services and the Gershon agenda’ (www.kablenet. com/kablereport). One of the most important is that in the rush to to meet the 2005 online deadline, people have forgotten the underlying point of improving service – as always happens, the target has become the de facto pur pose, to the detriment of the real one.

The result, says one local authority boss, is ‘a field day for consultants and IT vendors’. An e-government specialist adds: ‘We’re building all these capacities and now we have to help the services find ways of using them. They’re solutions looking for problems… everyone is busy working on the solutions and no one on the problems.’

Regulatory pressures compound the issue. Councils have to invest in e-government to pass their audit tests – but putting services online does nothing to raise customer-satisfaction ratings. ‘So who are we working for?’ asks a puzzled chief executive. ‘Government inspectors, or citizens?’

In any case, while putting basic transactions online may make sense, for more complex issues, for instance around social need, human contact is needed. ‘A lot of it is fundamentally misguided, because it is people who are good at absorbing variety, not machines,’ says a systems specialist quoted by the report.

Finally, the financial approach to e-government has also been as ill-thought-out as the wildest dotcom. ‘Just adding e-government as another access channel to service is the worst of all worlds,’ complains a leading academic observer. ‘E-government as a free good, with departments allowed to do ludicrous ‘invest to save’ bids, is clearly unsustainable.’

Crap service delivered over the internet, as a chief executive puts it, is still crap. In this perspective e-government, far from being the harbinger of a brave new service economy, is turning out to be a monument to the bad old one. You can have any service you like so long as it’s what we’ve decided to provide: what better definition of the producer interest could there be than that?

Additional research by Robert Colvile

The Observer, 15 August 2004

THERE’S AN email joke going around about the latest US position to be outsourced to India: President of the United States.

Is the new appointee a bit shaky on some of the issues? To enable him to answer those he doesn’t understand, says the spoof announcement, he will be given call centre-type scripts to follow. This will allow additional savings to be realised ‘as these scripting tools have already been used by Mr Bush in the US’.

Actually, leaving Bush out of it, the joke may be nearer the mark than many people suppose. Behind press stories about the shift of call centre and low-level number-crunching jobs abroad, something much more fundamental is afoot, which will have implications for Western companies across the board.

We already know, for instance, that by using better methods, some Indian firms are producing software that is not just cheaper but of far higher quality than almost all their Western counterparts.

But in many other areas, too, from banking to shampoo to health, the testing conditions of the developing world are giving birth to cost and quality innovations that dramatically undercut the bloated business models of the West.

Some are recounted in CK Prahalad’s new book, The Fortune at the Bottom of the Pyramid (Wharton School Press). While some are well known – for example, the extraordinary success of the Grameen Bank’s microlending concept in Bangladesh – others are less so.

Take Casas Bahia, which has built one of Brazil’s largest retail chains selling consumer goods to the shanty towns or India’s Aravind eye hospital, which may be the best place in the world to have a cataract removed. At its four sites, Aravind treats 1.4 million patients and carries out 196,000 operations a year. The cost per cataract: $25, compared with $1,500-$2,000 in the US.

As these examples show, to put down today’s shifts as ‘outsourcing’ – a transfer of employment scraps from the rich man’s table – is patronising and simplistic. It’s not just the international division of labour but the whole ecology of business that’s changing. And among the prized Western entities in the front line are brands.

Look at it like this. It’s now a given that you can get any commodity item you like, industrial or consumer, from the Far East without sacrificing reliability or quality. What you can’t get (yet) is a brand.

But the brand, points out Paul Pankhurst, chairman of innovation consultancy PDD, while increasingly critical, is also becoming harder to sustain. For instance, he notes that ‘there are now turn-key design services in India and Taiwan – so you can take not just the manufacture of an athletic shoe or mobile phone offshore, but the design and development work too’.

You can also mobilise a workforce the size of the population of Guildford in a week to ramp up production. Few Western firms can compete with that. The implications are profound. Brand holders have been pushed right to the top of the value chain. This means that they have less and less of the total activity to make their money from: just distribution and the brand itself.

That puts a premium on innovation. But – as companies are starting to comprehend – innov ative capacity is traditionally closely linked to manufacturing (new products often being dependent on new processes). By the same token, as the new turn-key houses are growing up, the in-house innovation capability of the brand owners is inexorably going down.

Outsourcing, as some of us have maintained all along, is not a one-way street. In return for lower costs (maybe) in the short term, ‘advanced’ firms in the developed economies have fragmented and given away increasingly high-level know-how which is being elegantly reassembled and sold back to them – and their competitors. Which means there’s a differentiation problem, too. Says Pankhurst: ‘The more you embrace outsourcing, the more you lose control.’

Testimony to the shift is his own firm, which has recently set up a subsidiary called Carbonate to develop and incubate new ideas. Carbonate’s first new product, the Deck, is a multipurpose exercise platform that was the brainchild of Loughborough University. Carbonate helped to develop and design it (in return for equity) and, crucially, matched it to a brand (Reebok) which can give it much better distribution than it could manage on its own.

The Deck, says Pankhurst, sums up many of the changing aspects of innovation. On the one hand, university departments and small companies are finding it harder and harder to mobilise the clout to commercialise their intellectual property on the other hand, brand owners are in desperate need of new ideas.

The ‘brand bit’ is now absolutely key, he says. In the past, a leading consultancy would have sold engineering and behavioural research now it’s marketing, brand planning and product mapping – ‘stuff we didn’t even think about five years ago’.

Western companies will have to have a solid brand and distribution to survive, he says. That goes for companies not just in consumer goods but also in business-to-business sectors. But they’ll have to be a lot better at it than they are now. A good start would be learning to value and husband the unique know-how they have been so nonchalantly dissipating. Without innovation, there’ll be nothing left to outsource.

the Observer, 8 August 2004

IN 1750, RECOUNTS the great historian Eric Hobsbawm, the first things the foreign visitor to England noticed as he or she stepped ashore in Kent were the tidiness of the countryside and the eye-watering prices of the inns.

Nothing much new there, then. In its latest annual calculation of living costs, Mercer Human Resource Consulting reported in May that London is now the second-most expensive capital city in the world, 19 per cent dearer than New York, the baseline, and trailing only Tokyo.

‘Start the morning with a glass of orange juice and you can forget about that vacation. Restaurants should just merge with second-mortgage companies,’ gagged a Time correspondent. Others gasp at the world’s highest rail, Tube and taxi fares. Last winter, two enterprising Londoners won headlines (but little astonishment) by recounting how they had saved money on a trip to Liverpool to watch a football match by flying via Belgium rather than taking the train.

Prices that are out of whack with the UK’s no-more-than-average wages are storing up problems for the future.

The spiralling price of housing in southern England is now both socially divisive and economically dangerous, according to Shelter. One supermarket group buses staff from Tottenham (north London) to Croydon (south London) because the low-paid can no longer afford to live near their work. Officials admit that London’s reputation for costliness is driving away not only businesses and tourism, but its own citizens: up to a third of UK residents are thinking of leaving the country in search of a lower cost and higher quality of life, according to one recent survey.

Meanwhile, a committee of MPs concluded this week that Britons aren’t saving enough because they don’t trust financial service companies not to rip them off in the future, as they have done in the past. Price comparisons and other new services that would make markets work better are stunted by telephone companies keeping broadband prices two or three times higher than in France, for example.

In theory, prices that are too high can’t exist for long in a competitive marketplace. Consumers will stop buying and new entrants will be attracted by fat profit margins. As Adam Smith pointed out, the rate of profit is naturally higher in poor countries than in rich ones, where it is normally competed away.

In a few cases, this happens according to the textbook. In scientific publishing, traditional high-price, high-margin incumbents are being challenged by new entrants with a lower-cost distribution model built round the internet. The newcomers insist they will still be profitable – but margins will be thinner.

Or take the UK’s private healthcare industry. When the government initially asked for tenders from private firms to carry out day surgery for the NHS, no domestic company made the list: UK consultants, it transpired, charged double the rates per operation of their foreign counterparts. In a more recent contest, however, UK firms were more competitive. The consultants had brought their charges into line. More cynically, you could say they couldn’t get away with it any more. And here’s a clue.

Part of the reason for high prices is high costs – at least some of which is down to poor management. The counter-intuitive lesson of ‘lean’ production methods is that poor service is always more expensive to produce than good service. Too few UK companies are lean, a factor that is reflected in the country’s poor relative productivity performance.

But another factor in price levels is the intensity of competition. Competitive intensity has several elements, one of the most important being customer expectations. Good firms tend to have demanding customers, which stands to reason: picky customers keep you up to the mark by requiring value for money and telling you if you don’t give it.

And we are not demanding enough customers – something that enrages visitors almost as much as the prices. As the Time writer put it: ‘New Yorkers believe an almost-sort-of-affordable city is a civil right, and anyone who threatens that right deserves to be screamed at and tipped really poorly. Londoners believe a city is a noble and costly test of endurance.’

There is academic support for the idea that this does us no favours. Customers, says Chris Voss, professor of operations management at London Business School and leader of a team which has compared consumer behaviour in the UK and US, play a vital part in develop ing service quality. Confirming the stereotype, his research found that the British complain less about poor service than do Americans. ‘We don’t give as much feedback, so organisations have less knowledge about how to improve service: sometimes managers don’t know just how bad it is,’ Voss says.

The cause is cultural, but the result is a self-fulfilling prophecy: service is bad because that’s what we expect and let companies get away with. Alongside government and managers, consumers can’t escape their responsibility for making the economy more competitive.

You can see what’s coming next. If we get the service we deserve, the conclusion is self-evident. Stop suffering in silence. Loosen the stiff upper lip. Go on: rant, rave, whinge, moan, shout, scream and complain. Be as embarrassing as possible. It’ll make you feel better – and it’s your personal contribution to raising the standard of British management.

The Observer, 1 August 2004

FIFTY YEARS ago this month, a 19-year-old white truck driver walked into a recording studio in Memphis and almost by accident cut two lithe, sexy and ferociously self-confident tracks that redefined a culture and set the music industry on its ear.

Actually, Elvis Presley was far from the first recording idol. ‘That’s All Right’ certainly wasn’t the first rock’n’roll record, and although it was a sensation locally it wasn’t even a national hit. For Memphis to claim 2004 as the 50th anniversary of the birth of rock’n’roll is self-serving braggadocio to rival some of the early rock’n’rollers.

Still, that’s showbiz, an industry whose relationship with reality has never been more than a one-night stand. Ironically, 2004 is more likely to be remembered for the traditional music industry’s funeral – killed off by the new economy in the shape of Apple’s iTunes and GarageBand. These two innovative products, from a different industry altogether, let consumers download and share files over the internet and make their own music – that is, do what they wanted all along.

In fact, for anyone with a sense of history, the ghostly reverb of 1950s guitar solos is plainly detectable behind the unmaking of the industry today. For the downfall of the majors – the merger approved by the EU last week between Sony and BMG is the last bar of a knackered old record rather than the first of a new – is not so much the new economy as the repetition of a very old pattern of behaviour: such rapaciousness and stupidity was already well in evidence as rock’n’roll was born.

So hear my story, sad but true… Like many adults (‘Who is this Elmer Prescott?’ asked my mother bemusedly), despite today’s rewriting of history, the music establishment was initially baffled by rock’n’roll, missing and then denying the real significance of those first Memphis recordings as unerringly as it would do several subsequent industry turning points.

What Presley invented (and if he hadn’t, someone else would) wasn’t a new musical form but a new image for an old one. Quickly reinforced by a stream of contemporaries, he created a mass market for a black-inflected music that white radio stations would play and white kids could buy – which they did, in their millions.

The music industry was appalled. The effect of the incomprehensible words and sexed-up rhythms on the kids was one thing, but to the record majors the wider import of songs like ‘Tutti Frutti’, ‘Great Balls Of Fire’ and ‘Rip It Up’ was as clear as a ringing bell: they were losing control of the business. The inmates were taking over the institution and needed to be put back in their place.

By 1959 the establishment had pretty much succeeded. It bought up the indies’ best artists, covered the originals with polite white singers, and watered down the lyrics. It helped that many of the main protagonists (Presley, Buddy Holly, Chuck Berry, Eddie Cochrane and Little Richard) had self-destructed or were otherwise out of commission. After just five years, the first wave of rock ‘n’ roll was dead.

Trouble was, in reasserting control, the industry had also flattened the market that the rock’n’rollers had created. It was only resurrected by another injection of self-generated energy, this time not from southern America but, improbably, from a north British seaport. In context, the surprising thing about the Beatles is not that an unfortunate A&R man turned them down, but that anyone had the gumption to pick them up. The same could be said of punk a decade and a half later.

Incomprehension and short-sightedness was also the story in technology, which twice baled out the industry in spite of itself. Tapes had the unfortunate drawback of allowing consumers to record what they wanted, but the record companies were soon reconciled by the discovery that the demand for music on the go didn’t oblige them to do anything new, just sell the old stuff in a new format – a wheeze that was even more satisfying when pulled off again, more expensively, with CDs.

But the whirligig of time, as a more elevated wordsmith once wrote, brings in his revenges.

When, in the final instalment, the internet arrived, the music companies again missed the beat. It took ingenious young consumers and a computer firm to figure out how to make and distribute music in digital form. But by now the industry was out of luck as well as tune, its credit with both consumers and musician/suppliers as usable as a worn-out 78. They had been ripped off too often by poor quality, excessive prices and cynical issuing policies to experience anything but pleasure when technology at last offered them the chance to help themselves. Unsurprisingly, a commercial policy of suing the keenest consumers for piracy turned out to have limited effect.

Rock’n’roll is long gone, and Presley (another irony of today’s celebrations) ended up not the king but the perfect symbol of the music’s decay, corrupted into a grotesque parody of the sentimental ‘entertainment’ the music industry preferred.

But what rock’n’roll had briefly but exuberantly hinted at, the internet confirmed: although companies can control what, when, and how a product is delivered for a while, it can’t do it forever. At that point, it’s too late to discover that it’s the customer that really matters, not the technology. Fifty years on, with a little help from their friends, customers have killed off the seller’s market and the music companies that exploited it for so long. Read my lips: awopbopaloobopalopbamboom.

The Observer, 25 Julay 2004

CAN IT be done? Will it be done? Although the headlines in last week’s papers were all about the 100,000 civil service jobs scheduled to go in the government’s latest spending round, whether it can achieve its goals will depend not on downsizing but on the biggest shakeup of the way government does business in 100 years.

As acknowledged in Sir Peter Gershon’s efficiency review, which was published last week, taking more than 16 per cent out of central government running costs, removing pounds 21.5 billion from administration and converting it into hospitals, schools and policemen requires nothing less than the transformation of the relationship between central government and the front line.

This is why, when 40 top central and local government officials were interviewed for a report on what the ‘reforms’ looked like to those who would have to carry them out (www.kablenet.com/ kablereport), the research team, of which I was a part, found a paradox: while everyone agrees that the scope for improvement in efficiency is huge, actually getting there would be a heroic achievement. Cuts, yes. But not many insiders believe they will benefit ordinary citizens.

Why is it so difficult to do the bleeding obvious? After all, it is stupid and unacceptable that every government department has its own non-communicating payroll, human resources, finance and property management arrangements; that the public sector has 30,000 back offices collecting and processing information, only 2 per cent of which are big enough to stand alone; or that, as Soham horribly underlined, there is no national criminal intelligence system, partly because the 52 separate police authorities’ computers (and sometimes officers as well) won’t talk to each other.

The barriers are formidable. ‘There is no culture of sharing across Whitehall’, noted one report respondent – rather the reverse. Civil service incentives favour empire-building, not sharing for the common good, and distrust between departments is pervasive. Each Yes, Minister rerun scores a palpable hit: Sir Humphrey is alive and well in every department.

Local service providers, which handle 80 per cent of official interactions with the public, bitterly resent one-size-fits-all policies and methods handed down from on high without regard to local circumstances.

‘Central government takes a central-government-centric view of public services. Elsewhere people are quietly – and sometimes quite efficiently – getting on with it,’ says a commentator. If the reforms are seen as just another top-down cost-reduction target – ‘bend over, here it comes again,’ as one cynic described them – they will fail.

Likewise for technology. So far the government has committed pounds 8bn to obliging the public sector to e-enable service delivery, with no evidence of payback or customer appeal. If – as seems likely from Gordon Brown’s statement – it does the same with back-office services, mandating investment without regard for the citizen/customer, the results will similarly fall short.

The reality is that the government, let alone the rest of the public sector, is not a unified whole but a vast and untidy agglomeration, with thousands of decision-making locations bristling with different agendas.

Like a pile of random iron filings, the interests of the myriad actors point every which way – downwards to customers, upwards to ministers, inwards to themselves, switching unpredictably with political currents. These randomised interests can’t be managed on traditional lines. They can’t be aligned by fiat, appeals to efficiency, nor, as the government seems desperately to hope, by IT. There are no levers to pull.

In his review, Gershon noted that success of the programme depended on political will, incentives for managers to take tough efficiency decisions, and the creation of ‘change agents’ to get things done. But this is the wrong way round. The spending round has lost sight of the reason and purpose for the activity in the first place: the customer/citizen.

The only force strong enough to magnetise the filings to face in the same direction is focus on the citizen: improving service at the point of delivery.

It’s not enough just to command more infantry into the front line. There needs to be a method. How many doctors, teachers and policemen? What kind of support services? It’s only by going back to the customer – establishing real demand, measuring current capacity against that purpose and then reorganising the work to do it better – that method can be established and competing interests pulled into line.

As hundreds of initiatives across the wider public sector have demonstrated, starting from customer needs pulls everything into place after it. It tells you how many people you need and where. It tells you what services can be shared, and what kind of automation you need to do it. In short, it tells you what can be cut and what needs to be spent.

And that is invariably less than the centre supposes. For the best news is that this dynamic dispatches the assumption (perversely as strong in government as anywhere else) that better service costs more. On the contrary, bad service always costs more to deliver than good. The better the service, the less need for regulation, inspection and audit (cost: pounds 7 billion a year), the less need for targets, corrections and rework, and management interference. It goes beyond management by compliance and gives public servants back their vocation. As our report concludes, it is possible to achieve public-sector efficiency by improving service to the customer – but not the other way round.

The Observer, 18 July 2004

THE ACCOUNTANCY profession is in denial, betraying its past and endangering the present. Five years after the dotcom bubble, three years after the collapse of Enron and the evaporation of Arthur Andersen – then one of the globally pre-eminent audit firms – the business world is no nearer any reliable means of valuing the intangible assets that are critical to the way things are made.

In fact, says Clive Holtham, professor of information management at Cass Business School in London, the situation is worse than five years ago. ‘The issue of measurement and reporting of intangibles is not only being ignored, there are active efforts afoot to play down its significance by the accountancy profession,’ he claims.

When, in the late 1990s, UK companies were given greater flexibility to report intangibles, not one top-100 finance director showed any interest, according to a Loughborough University report. Most companies are indifferent or hostile to new measures, Holtham believes.

The result is a dangerous paradox. With 75 per cent of wealth-creation now reckoned to be attributable to intangible assets such as knowledge and information, rather than physical assets, the numbers accountants give to investors, bankers and indeed their own managers are increasingly irrelevant.

Failure to come up with a robust way of measuring intangibles was at the heart of the dotcom boom and bust, the most spectacular miscalculation and misallocation of capital since the South Sea Bubble. A convention of fortune tellers would have blanched at the analysis used to justify some investment decisions, says Holtham. ‘Yet the accountancy profession appears to be using the Enron scandal to retreat into seeking reliability of traditional tangible financial statements, and paying even less attention to extending reporting.’

This can only increase the risk of the same thing happening again.

The accounting retreat betrays not only investors, but companies too. Whether companies choose to report on ‘soft’ issues – brand, reputation, human capital, learning, innovation – or not they do, like investors, have to allocate resources. That’s hardly made easier when the accountancy stance gives credence to the view that measuring intangibles is both unimportant and impossible.

The absence of agreed overarching accounting principles at least has the advantage that companies can choose how they measure intangibles internally, points out Holtham, since they don’t have to satisfy formal stock exchange requirements.

As to importance, consider Shell, whose current travails are a classic case of knowledge mismanagement. Some high-level officers were clearly aware of the discrepancies in reserve estimates and the dangers they posed to the company’s reputation, but their doubts were suppressed. There also appears to have been a strong element of groupthink on the board. Shell has always prided itself on being a socially responsible company, but it evidently didn’t devote enough resources to nurturing the cause.

‘At some stage something happened to Shell’s values that made it acceptable to put up figures that weren’t completely above board,’ Holtham says.

On the other hand explicitly managing intangibles, as elusive and unpindownable as they seem, can bring substantial benefits. This is because, as the Shell and Enron cases demonstrate, managing intangibles is closely linked to issues of risk and sustainability.

In a report entitled Unlocking the Hidden Wealth of Organisations, Cass researchers have developed a framework for looking at intangibles and identified a group of organisations that, despite the lack of official encouragement, have decided to cultivate their intangible production factors.

They include B&Q (sponsor of the report), Whitbread (‘from manufacturer to brand manager’), Bloomberg, the UK Fire and Rescue Service, MMO2, Italian cosmetics company Intercos, the Austrian Research Centres and Swedish learning consultancy Celemi. Together they chart some of the different ways in which companies can cherish their invisible assets and use them as a source of competitive advantage and wealth creation.

But it shouldn’t be left to practitioners to pioneer new accounting methods, says Holtham. He contrasts the timid approach of accountants and most managers to devising measures for the things that matter with physicians’ commitment to accumulating a deepening evidence base. ‘Medicine as a profession has a deep belief that it can use evidence to develop better ways of making decisions than in the past,’ says Holtham. ‘You can’t but marvel at that compared with what’s not happening in business.’

Holtham, himself accountancy trained, notes that the first written script, cuneiform, was devised in Mesopotamia 5,000 years ago not by storytellers but (in effect) by accountants, to record transactions and stock levels for an increasingly settled society – a brilliant social and economic inven tion. Other accounting innovations such as double-entry bookkeeping in 15th century Venice and today’s financial accounting were equally daring intellectual advances.

We’re now desperately in need of a new cuneiform for the knowledge era, but there’s little chance we shall get it from a profession that seems determined to disavow its illustrious intellectual heritage.

The Observer, 4 Julay 2004

MANAGEMENT is in crisis and the MBA, the flagship course of most business schools, bears a substantial part of the blame. Such is the thesis of Henry Mintzberg’s indignant and stimulating new book, Managers Not MBAs

Although the headline message itself is not new, having been refined over at least 15 years in countless revisions, this is nonetheless a powerful statement and a terrific read: Mintzberg is a fine writer with a caustic turn of phrase and to make his case he draws on inside knowledge as both member of the academy (professor of management at McGill University, Montreal) and a distinguished strategy researcher in his own right.

But what gives the book its resonance is that it is ‘a book about management education that is about management’. Both the MBA and its practitioners are deeply troubled, in Mintzberg’s view, but locked in an infernal embrace which means that ‘neither can be changed without changing the other’.

This is because the assumptions of the classical US-based MBA – some accidental, some ideological, many self-contradictory – have worked themselves deep into the body commercial and politic, where they are rarely questioned. The consequences, Mintzberg believes, are deeply corrupting of education, management itself and the wider society.

He starts from the principle that try ing to teach management to someone who has never managed, as most MBA programmes do (Mintzberg specifically exempts some UK courses from his criticism), is as misguided as ‘trying to teach psychology to someone who has never met another human being’.

Worse, by elevating management ‘science’ (analysis) over its equally important components of craft (experience) and art (vision), current business teaching equips unsuitable people with both potential weapons of mass destruction and the massive overconfidence to use them. Paradoxically, MBAs teach little about the real, messy, difficult business of managing: they teach business functions and management disappears in the interstices between them.

‘MBAs haven’t been trained to manage, and many don’t have the will for it,’ Mintzberg writes. ‘But they are determined to lead. So a trajectory has been developed to take them round management into leadership. The trouble… is that many of these people make dreadful leaders, precisely because their hands are off the business. In fact, the landscape of the economy is now littered with the corpses of companies of headstrong individuals who never learned their business.’

An exaggeration? If MBAs are so disastrous, how come the US, the home and capital of the MBA, is still the most vibrant economy and its companies the most powerful in the world? Mintzberg’s answer (implied, not fully spelled out) is that American companies have succeeded despite rather than because of current business education. A striking number of the most admired managers (Jack Welch, Bill Gates, Warren Buffet, Michael Dell) don’t have MBAs, and plenty of MBA-led firms, with Enron at their head, have plunged to disaster.

Moreover, the costs of today’s paradigm – ‘training the wrong people in the wrong ways with the wrong consequences’ – are escalating all the time. In the grip of their own business goals, business schools are legitimising practices they should be challenging. Businesses are frenziedly becoming leaner and meaner, driving people harder and exploiting both workers and customers in the name of (academically sanctioned) shareholder value. Startlingly, Mintzberg argues that, rather than producing flexible, progressive entrepreneurs (on the whole, MBAs aren’t particularly entrepreneurial), MBAs are breeding a new race of big-company bureaucrats, at home in the world of formal analysis and control but ill-equipped to operate in the webs, networks and teams of today’s evolving organisations.

As for society as a whole, how strange, notes Mintzberg, that an America so proud of throwing off the yoke of British aristocracy should now be congratulating itself on producing one all of its own. America, particularly, he argues is a society tilted crazily out of balance, its public sector distorted and demeaned by ‘MBA management syndrome’, ‘ambling around like an amnesiac pretending to be business’, developing mission statements, looking for ‘customers’ to serve and merging everything in sight.

Is there any light amid the gloom? Some. Mintzerg exonerates the UK from blanket criticism, noting the growing number of specialised MBA programmes (MBA without the A), including for public-sector managers, and long-established courses for practising managers (the right people at least).

A growing number of academics accept, at least in private, that something is amiss with a system that is as fragmented and departmentalised as the commercial firms it criticises, and that competes primarily on the basis of the salaries graduates can command rather than more fundamental criteria. Mintzberg is not alone in believing that breaking vested academic interests is an important part of the way forward.

Finally, thoughtful practicising managers are becoming increasingly troubled by the contradictions that MBA management leads them into. Although some corporate social responsibility is cynical PR, its huge and instant popularity can also be viewed as something more hopeful: a massive pent-up desire for legitimacy which today’s officially approved management models can’t provide.

Again counterintuitively, what management education needs is not ‘relevance’ and ‘practicality’, as the parrot cry has it. Managers, as Mintzberg points out, live practice every day. What they really need is insight: theories or models that enable them to make sense of practice, learn from experience and reach better judgments. That’s what business schools should be for, not turning out MBAs.

Managers not MBAs, published by Financial Times Prentice Hall, £24.99

The Observer, 27 June 2004

THE OBESITY crisis is the sharpest (no, weightiest) test yet of the contradictions at the heart of the corporate social responsibility movement.

It’s a striking fact that many large companies involved in the food chain, whether manufacturers or retailers, are among the most admired and feted in the management literature. Coca-Cola is famously the most valuable brand in the world, McDonald’s not far behind. Nestle, Pepsi, Kellogg, Unilever, Heinz, Danone and Sara Lee all figure among Fortune ‘s globally most admired companies: Wal-Mart is No 1 (McKinsey approvingly reckons that, by itself, the world’s biggest retailer is responsible for 35 per cent of the impressive efficiency gains made by the entire US retail sector).

Tesco is Britain’s most admired company. Cadbury Schweppes and other UK chocolate makers (although none now independent) pride themselves on their staunch Quaker antecedents.

As a glance at any website will show, all these companies make much of their citizenship credentials, sporting value statements, philosophies, social and environmental reports galore. So why do they at the same time compete to load up their products with sugar, salt and fat, which they know will harm their customers? Why do they charge more for healthier products, run promotions to make people eat (and drink) more and, in the case of retailers, pile up sweets at checkouts and hide healthy items at the back?

Why do their executives, who presumably don’t beat their wives and want the best for their own children, pride themselves on devising viral marketing campaigns to persuade other people’s kids to pester their parents to buy them food that makes them fat? Why do they lobby against regulations that would oblige them to accept the responsibility that they claim through CSR? Why, in short, do companies and individuals set out to damage overall welfare, doing things in business they would never permit themselves in private life?

The answer is that they have been persuaded (fairly easily, it must be said), to subscribe to the idea that in a market economy the sole function of business is to make money for shareholders and that social ambition is a destructive dereliction of that duty.

Thus, companies are ‘admired’ in the Fortune or Management Today sense because they are very and consistently profitable. The difference between the Marks & Spencer of a decade ago – winner of so many ‘most-admired’ awards on the trot that one was discontinued – and now is less its ethics than its ability to keep profits moving upward.

Conversely, Wal-Mart, Microsoft (third in the Fortune table) and GE (fourth) have sustained precious little damage to their admiration quotient from their sometimes dubious employment and business methods.

It’s the virtue of the House of Commons health committee report on obesity that it makes these contradictions impossible to ignore. The idea that it could be a legitimate function of business to enrich shareholders at the expense of undermining the financial basis of the NHS simply collapses under the weight of its own grossness it fails the test of common sense.

Equally absurd is the proposition that work in the community or support for sport or a symphony orchestra could compensate for behaviour that contributes to the wave of amputations, blindness and heart disease that the committee theatrically predicts, or helps to make today’s children’s life expectancy shorter than that of their parents.

It’s time to recognise such theories for what they are: junk, self-serving and as harmful to corporate health as fat and salt-laden convenience meals are to individuals. Although individuals and communities have undoubtedly benefited from initiatives done in the name of CSR, its essential function is to act as a fig leaf for shareholder-value theories that cause managers to undermine society, delegitimise their own companies and induce corporate and individual schizophrenia.

As the FT put it in an admirably trenchant editorial, food companies now have no option but to swallow hard, embrace the report and reverse their present strategies: cut fat and salt levels, make, label and promote healthier products and wholeheartedly channel their competitive energy into the public campaign for healthier living. In other words, they must put CSR where it belongs – at the heart of the purpose of the firm. Real social responsibility is innovating for the public good anything else is corporate social hypocrisy.

The government has a part to play here. This is a problem in which its own short-termist expediencies are substantially to blame. For instance, the economy-led suppression of school meals and sale of playing fields are panting ponderously home to roost. Appealing to companies’ better nature is not enough. Instead, it should grasp the nettle and alter the system conditions by hard or soft regulation to encourage firms to behave well and penalise them if they behave badly – taxing fat, for example. Calling on firms to do more CSR (a policy roundly rejected by the voluntary sector last week) is abnegation.

For a while before New Labour came to power, it had worked up some enthusiasm for a more inclusive stakeholder model of capitalism. In office, it hastily backtracked in the face of massive vested interest and its own bedazzled admiration (that word again) for US enterprise. You were right the first time, chaps – shareholder value can’t take precedence over the health (literally) of the wider system of which it is a part. The one thing that can be said in favour of obesity is that it kills shareholder value stone dead.

The Observer, 6 June 2004

IN OCTOBER 2002, when Network Rail took over management of Britain’s rail estate of track, stations, bridges and tunnels the rail network was in the grip of what was memorably described as a collective nervous breakdown.

Still numb after the Hatfield crash, in the limbo of administration after Railtrack went bust, the railway definitely wasn’t getting there. Blanket speed restrictions had been imposed, pushing punctuality below 80 per cent. Costs had increased sharply. ‘Corporate discipline had been non-existent,’ splutters chairman Ian McAllister. ‘Chaos.’

It’s a measure of how far the network has pulled itself together that last week it underwent the second largest structural change since privatisation in 1996 – and no one noticed. Last Monday what had been a geographically based organisation was replaced by a ‘functional’ structure aligned around routes and customers, cutting out layers of management and bringing train and track operators closer together than at any time since denationalisation.

The change marks a significant step in accelerating Railtrack’s coming of age, shedding the disastrous legacy of Railtrack.

‘It’s been an incredible journey,’ says Iain Coucher, deputy chief executive and driver of many of its myriad projects. ‘We’re pushing through a 10-year programme in three years. It’s exhilarating and, for some people, a bit scary.’

Of course, blaming previous incumbents is a traditional management sport. But there’s no doubt that the organisation inherited by the incoming team (basically six senior people) was dysfunctional. At its heart was a conflict of interest between shareholders and customers, both vying for the same resources. Like much of Britain’s infrastructure, the network was fragile and overstretched, a monument to underinvestment and political short-termism compounded by a 30 per cent increase in traffic since 1996.

It was organisationally flawed, too. There was little commonality between the regional operating fiefdoms, each of which had its own operating procedures. Maintenance and renewal costs varied wildly and the centre had no idea what it was getting for its money. The asset register was nearly useless because there was no record of its condition – priceless knowledge lost at privatisation, says McAllister.

And because of the way the system incentives were set up, network and train operating companies (TOCs) were at each others’ throats.

The first step in restoring the network’s sanity was to get a grip on pro duction by stabilising the system: redefining accountabilities, standardising operating procedures and installing basic management disciplines.

Half of the top 100 managers were replaced. ‘In the first six months we didn’t improve, but we stopped the slide,’ says Coucher. ‘In the second half of the year we improved performance by 20 per cent, and it has continued at that level. Every department and project is on time and within budget.’

There were blips such as last summer, when the heat again exposed gaping holes in the maintenance record, but the system came under control and the network began a second phase of improving efficiencies. The starting point, unexpectedly, was to in-source rail and computer maintenance.

It became blindingly clear, says Coucher (who, ironically once worked for outsourcer EDS) that bringing maintenance back inside was the only way of getting a grip on costs and understanding the state of the assets. Payback has been instantaneous and spectacular. In the Thames Valley, the first area to come in-house, delays fell by 41 per cent in five months, and in Wessex 19 per cent in three months.

That has a direct and multiple effect on cost: out go the middleman’s profit, management duplication and transaction costs and down goes compensation to the TOCs, which last year ran at pounds 500m. Response is quicker and coordinated.

Sophisticated maintenance is at the heart of the network’s risk management, variability and asset life. ‘Rail and ballast was the most important split on the railway, not rail and wheel,’ says Jeremy Long, managing director of First Rail, who warmly welcomed the decision. The second big change was last week’s ‘functional’ reorganisation, a move that is also cautiously welcomed by train operators.

The new climate of cooperation has been accompanied by the setting up of joint improvement teams – such as the one that has helped Midland Mainline improve punctuality by 20 per cent in a year – and joint control centres, where TOC and Network Rail managers sit side by side to oversee operations. In time the hope is that growing trust will lead to the establishment of truly integrated teams under one overall manager.

‘We always said it would take 18 months for the public to see a difference and five years to give them a responsive modern railway,’ says Coucher. But although the train is making good time, there’s still a long way to go.

To get there the company must spend the staggering total of pounds 14m a day -pounds 26bn over the next five years – to renew the 100-year-old infrastructure and increase capacity while at the same time meeting the regulator’s requirement to slash costs and improve performance by one third in the next five years. In the short term it is facing a Department of Transport rail review, due by July, not to mention threatened strike action by the RMT.

‘Yes, we’ll get there,’ asserts McAllister. ‘There’s a huge reservoir of loyalty and pride in the rail tradition here – it’s unique. What we’re doing is giving them the leadership and direction to put it into the biggest rail job in the world.’

The Observer, 30 May 2004