RICHARD Layard is an economist and Labour peer who made his considerable name in employment economics. Now he has written a remarkable book about happiness ( Happiness: Lessons from a New Science published by Allen Lane at pounds 17.99) which effectively trashes the claim of economics to guide policy for a good society.

Happiness, not GDP, still less competitiveness, should be the overriding principle of economic policy, Layard maintains, backing up his proposition with some fascinating statistics from the ‘new science’.

Thus, money really can’t buy it: while Western countries are at least twice as well off as they were 50 years ago, they are no more content. Although richer countries are on average happier than poorer ones, in all nations, diminishing returns to happiness set in steeply once incomes reach around $20,000 a year.

One important reason for this is that people judge wealth relatively rather than absolutely: even if you were happy getting a rise, finding that a colleague has a bigger one more than wipes out your happiness increment. Competition for money and status is thus a zero-sum game and the more opportunities for comparison – rankings, league tables, advertising – there are, the greater the dissatisfaction will be.

Traditional economics fails to take account of these psychological niceties, just as it does of almost all the remarkably commonsensical things that happiness really depends on – loving relationships, fulfilling work, reasonable health, ties of community and friendship, personal freedom and values – which have more impact on it than income.

Layard is in no doubt: the economic policies of ‘rampant individualism’ – pursued for at least the past three decades by the Anglo-Saxon countries in particular – have damaged trust, fairness and social bonds and wiped out the gains in happiness that might have been expected from rising material living standards.

What does all this have to do with management? Plenty. Although largely ignored by Layard, management is economics’ essential henchman, the principal vehicle by which economic attitudes are spread. Most activity in today’s advanced economies does not take place through the invisible hand of Adam Smith’s atomistic market, but through the very visible hand of co-ordination in formal organisations.

Organisations dominate the economic and social landscape and in this world management’s writ runs. Management, of course, shares with economics the same reductive and narrowly economic view of human nature that Layard complains of. This is reflected in companies’ hierarchical controls and even more clearly in their reward systems: sharp individual incentives and targets, competitive rankings and comprehensive performance management systems.

In terms of happiness and effectiveness, this is counterproductive enough. For instance, Layard notes the ‘serious errors’ in prosecuting public sector reform through incentives and targets rather than professional norms, and roundly criticises flexibility as a mantra ‘if we want full employment and a decent quality of working life’. Yet this is made much worse by another key psychological element that is left out of economists’ accounts: the self-fulfilling nature of many assumptions about human behaviour.

As Layard notes, good behaviour elicits good behaviour trust begets more trust. But the reverse is also true. If (obeying underlying theory) managers treat employees as opportunistic chancers who are only motivated by large incentives, that’s what they will come to resemble. Likewise with shareholders and directors.

Hence the phenomenon of the ‘supervisor’s dilemma’, a vicious circle in which tight supervision generates behaviour that seems to justify still tighter control. This is a close portrait of much of today’s management, at least in the US and Britain, where people’s levels of trust in one another have halved since 40 years ago – although not in Europe, where levels have stayed much the same.

What does this mean? The implication is that companies and managers driven by the economic model of human nature are not only engines of individual unhappiness (as is largely borne out by people’s worsening experience of work) but through these self-fulfilling assump tions they are reshaping people in their own impoverished image in a way that makes happiness impossible to achieve in the future. This is a frightening prospect, and clearly illustrates why the attitude-shaping role of management is so pivotal.

But there is , appropriately, a happier aspect to all this. If Layard’s analysis casts interesting reflected light on the dark side of management, identifying exactly why so much of today’s practice is counterproductive, it also offers hope to those of us who would like to be more optimistic.

Thus for Layard a happy society is based on old-fashioned virtues such as trust, fairness and (yes) equality. Although political leaders and managers are wedded to ‘change’ and ‘flexibility’, ‘there are huge advantages to inflexibility and predictability, as continental Europeans appreciate.’

In his vision, there is no overwhelming need to work harder to keep up materially security and family-friendly policies are more important than absolute income. Targets, incentives and performance-related pay aren’t the best way of running companies or revolutionising public services. A fulfilling job allowing pride in the work, challenge and autonomy, is its own reward and the best motivator. Since people care more about losses than gains, repeated reorganisations may produce more harm than good.

Phew. But although this list runs counter to many of the assumptions now made about management, it’s certainly not incompatible with economic success. In fact, it fits extremely well with what a minority have argued about management all along: that a model based on a more rounded idea of human nature is more realistic and hence more effective than the present, stunted version. A company run on these lines is likely to be ‘better’ in both senses of the word.

Word has it that Layard has presented his Benthamite ‘felicific calculus’ in Downing Street. We’re not told whether the reaction to his book was frowns or the reverse. But for those of us who believe that companies should be a force for happiness rather than exploitation and despair: read it, and take heart.

The Observer, 10 April 2005

PEOPLE used to cluck about police officers apparently getting younger by the day. They don’t any more, because how would they know? They rarely see any.

The issue of where all the coppers went is (rightly) a sensitive one, particularly around election time. Nottinghamshire police chief Steve Green practically had to go into hiding himself after unwisely confessing that he couldn’t keep up with murders on his patch because too many of his officers were sitting at their desks filling in forms.

Green was showered with brickbats, but he was only voicing, in extreme form, the frustration that many police officers experience every day: they know they could be so much better at preventing crime, collaring villains and reassuring the public (their three main tasks) if they weren’t spending so much time fighting the system rather than the criminals.

The nagging problem is that although police numbers and spending are at record highs and crime levels are down, the public hasn’t noticed any difference. Whatever the reason, there is a large disproportion between the effort going in and the perceived result.

Does this sound familiar? It should. Public cynicism about claimed service improvements bedevils the NHS and local government too, and for exactly the same reasons. The official yardsticks and specifications that the government imposes and judges by – waiting lists, proportion of e-enabled local services, even national crime levels – are out of register with public concerns. As far as voters are concerned, much of the extra billions spent on public services is missing the point. Policing is a brilliant example of this mismatch. Today’s policing is designed as a response system – you call the police and an officer arrives (or is supposed to) pronto. That sounds a good idea – until you dis cover that, predictably, just 1-2 per cent of calls (in business terms, demand) represent real emergency.

The remaining 98 per cent don’t require a bobby on the doorstep, or at least not immediately. But where the default is response there is no systematic way of responding to the overwhelming majority of non-urgent requests. They get shunted around between the specialist units (community, neighbourhood, schools liaison, witness protection) that are constantly being set up to deal with political hot potatoes.

The result of this compartmentalisation is that intelligence gets lost, the public gets cross – and costs go up, because people are ringing a second or third time to find out what happened to their previous call. About 40 per cent of 999 calls – and an even higher proportion of non-emergency calls – are preventable in that sense.

Meanwhile, the police are tied up sorting out what to do with the non-urgent calls, frustratingly compromising response to urgent ones. According to Richard Davis of Vanguard Consulting, in a police command unit of 350 people, at any one time just five or six officers may be available to respond to calls. Hence the obsessive calls for more resources to answer the phones, deal with paperwork and ‘put coppers back on the front line’ on the one hand and public ingratitude on the other.

It helps to understand how we got into this situation. In the 1970s and 1980s, faced with rising demands, expectations and costs, governments decided to go for economies of scale. They took calls out of police stations, transferring them to dedicated call centres, and consolidated response atlarger stations. Astonishingly, police stations are still being closed at a rate of three a month.

The result was a two-part (them and us) system much resembling that of the banks or IT help desks – a front office to field calls which it sorts and passes to back-office specialists for response. Unfortunately, just as with the banks and IT help desks, the arrangement made matters worse rather than better, raising costs and worsening service. This was the inevitable outcome of feeding varying demand (‘Help!’, ‘I have something to tell you’, ‘Can you tell me…’, ‘Please do something about these noisy schoolkids’) through a standard mass production line (‘You can have any colour so long as it’s navy blue’).

Perhaps the most damaging aspect of the present mass-production system is the loss of intelligence – fairly critical for policing, you might think. ‘Intelligence is disintegrated from the call in the hand-off from the call centre to the specialist unit, and the officers then have to reintegrate it afterwards,’ says Davis.

But (again as with banks or IT help), there is a smarter way. In the West Midlands force, two of its 21 operational command units are trialling ways of putting the intelligence back by reunit ing the two halves of the broken system and treating response as an end-to-end process. The approach involves setting up a ‘clean room’ on the real frontline where telephone agents and officers can figure what each call is really about and what would be needed to take it to a conclusion.

The characteristics of each geographical area for policing purposes vary, of course, but predictably so. ‘What you learn is that the demand for policing is hugely predictable, in terms of time, place and even people involved,’ says Davis. Once the predictables have been established, the appropriate resources can be put to handle them on the front line, with specialists on hand as needed. Technology, in the form of superior communications and analytical tools, backs them up.

‘We don’t use technology for its own sake,’ says WMP Superintendent Jo Byrne, ‘but to maximise the intelligence coming in so that we can do the right thing at the right time for each call.’

It is relatively early days, but results are already visible, especially in call-handling – ‘one of the most critical parts of policing’, according to Byrne. ‘Every contact leaves a lasting impression. If we get it right here, we reassure the public, we prevent repeat calls and rework, and we create extra capacity in the system.’

That should benefit both detection and prevention, turning the circle from vicious to virtuous. The aim may be ambitious, but it’s also simple.

Byrne says: ‘It’s a whole system, everyone is engaged in understanding the work, and the role of managers is to remove the barriers to making it better. It really is an intelligence-led system.’

Better performance, less pressure for increased resources and greater reassurance leading, at last, to public acceptance that things really are improving – elementary, my dear Watson.

The Observer, 3 April 2005

WHO SAYS television doesn’t do business? Anyone watching Jamie’s School Dinners or Sir Alan Sugar’s The Apprentice these past few weeks has been taking part in a masterclass in contrasting business attitudes and management styles. Rarely have two rival versions of business been so clearly juxtaposed, their incompatibility neatly symbolised by their clash on the schedules: since they aired at the same time, it was one or the other. Take your pick.

The Apprentice undoubtedly corresponds the more closely to the business stereotypes of the day. The website instantly reveals the tone. ‘I seek success as a result of my own achievements,’ is the credo announced by the lead-in.

‘Fourteen bloodthirsty entrepreneurs compete in the ultimate boardroom drama to become Sir Alan Sugar’s Apprentice ,’ it continues. ‘Throughout the series, the candidates will live together in a luxury eight-bedroom mansion on the banks of the Thames and experience a taste of the high life they aspire to. The tasks continue until the last man or woman standing becomes Sir Alan’s Apprentice ‘.

Perhaps surprisingly, the description is cruder than that used by the US programme it was modelled on. The American version of the show, now in its third series, has the ineffable Donald Trump, exhibitionist extraordinaire, in the role of manager and executioner-in-chief, and its website assumes viewers have a higher level of business nous.

Common to both versions, however, is the cast of power-dressed young women and aggressive, sharp-suited men with spiky haircuts and of course the cutthroat nature of the exercise. This is summed up by the catchphrase shared by both programmes: ‘You’re fired!’ In America this has become a national cultural reference, on a par with ‘You’re the weakest link!’ But for the UK version, rumour has it that Sugar only reluctantly agreed to adopt it.

In truth, however, the catchphrase would be difficult to take it out. The show assumes that business is a simple, zero-sum game. Winner takes all, and every winner requires there to be many more losers. Consequently, whatever words are found to say it, ‘You’re fired!’ is central to the show’s functioning and audience appeal.

But the casualties of those two small words are important: co-operation and trust. As each episode ends, the losing project leader (especially if it’s a woman) makes a half-hearted attempt to defend the team, but eventually has to offer up two members as candidates for the chop. When the axe falls, recriminations and reciprocal accusations fly the team is destroyed. In this apprenticeship, the subjects in the curriculum are how to avoid risk, hoard the credit and not leave yourself vulnerable. Management is about covering your arse and sacrificing the team to get to the top.

But it’s only a game, surely? If only. A better defence, ironically, would be that this is a good preparation for how business really is. Under former chief executive Jack Welch, for instance, GE was famous for its yearly forced ranking of managerial grades, under which the ‘worst-performing’ 10 per cent received Apprentice -style marching orders. Many other companies have copied its lead.

Whether on TV or in real life, this is management by fear, not reason. Fear ‘works’, in the sense that the wielder gets his way, or an apprenticeship with Sugar or Trump but in the wider context, the unseen losses are always more than the gains – in teamwork, initiative and intelligence itself. Stress, as Daniel Goleman noted in his book Emotional Intelligence , ‘makes people stupid’.

Pace The Apprentice , the truth is that all business isn’t ‘kill or be killed’, or driven by personal greed. For the evidence, turn now to Jamie’s Dinners. You may or may not be susceptible to the lad’s mockney charm, but leaving personalities out of it, what does the school meals saga say about business? First, that it’s about real issues. ‘Feed me better’ is the website tagline. In this version, the drive is supplied not by a craving for ‘the high life’ but something more fundamental: the desire to make a difference.

Yet, the fact that this entrepreneurship is socially rather than monetarily motivated doesn’t make the challenge ‘softer’ or less rigorous. In fact, the reverse. It is fair to say that making fresh food for schools across a borough using a de-skilled workforce on a budget of 40p a portion represents business ambition on a Himalayan scale compared with any of the apprentices’ tasks.

In this circumstance, far from being the result of individual achievement, success can only be the result of co-operation and teamwork. The conversion over the course of the series of the formidable Nora Sands from chief barracker to Jamie’s indispensable henchperson is a wonder to behold. So is the enrolment of the rest of the Greenwich dinner ladies.

This can’t be done by order or fear. ‘You’re fired!’ is not on the menu. Instead, the under-equipped, de-skilled teams are cajoled and supported until they have the confidence to deploy the new skills involved in serving fresh food. Leadership is critical: Oliver puts himself on the line, faces up to the people issues, adapts quickly and – crucially – shields the team. When during one episode, his restaurant Fifteen, where he taught disadvantaged teenagers to be chefs, is singled out for criticism by the press, he responds angrily: ‘They’re attacking my kids!’

The other lesson is the light the programme throws on the limitations of conventional business measures. W Edwards Deming, the American quality guru, once said that the most important costs and benefits of business were unknown and unknowable. That sounds baffling, especially coming from a statistician. But consider the revelatory moment in the series when an assistant almost casually remarks that pupils no longer need asthma pumps after meals now that they are eating properly, or that behaviour and attention have improved in the classroom. The cumulative benefits of children eating healthier meals are, strictly speaking, incalculable – just as the costs of the blind, blithering, idiotic decisions of the 1970s and 1980s to cost school meals on narrow accounting measures alone are only now emerging.

It’s tempting to compare the two approaches to business to junk and real food. One is a managerial takeaway, pre-processed, high on fat, salt, sugar and instant gratification, but lacking nourishment and ultimately creating greater problems than those it solves. The alternative, requiring fresh ingredients cooked from scratch, initially takes longer, but in the long term builds both the demand and skills to become self-sustaining. Tempting, and true. If Sugar didn’t have qualms about the diet The Apprentice was offering, he should have.

The Observer, 27 March 2005

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