SYMBOLICALLY dispatching conventional management by launching a model of the pointy-haired boss from the Dilbert comics and a copy of Frederick Winslow Taylor’s Scientific Management into lower space was easy. Following up the fireworks by getting 30 of the biggest names in management, from academic heavyweights to well-known chief executives, to spend two days in California last month figuring out what to put in their place was rather harder.

‘Inventing the future of management’ in a couple of days – the task of the ‘renegades’ convened at Half Moon Bay by London Business School’s Management Lab and its founders, Gary Hamel and Julian Birkinshaw – was an ambitious ask. Yet the very presence of such a group under one roof was eloquent testimony to the urgency of the underlying premise: management is broke and needs fixing. For both good and bad, management is today’s most important social technology, and ‘we need to debate its fundamental underpinnings’, as the distinguished scholar CK Prahalad put it.

Most participants agreed that although modern management had achieved much, like all obsolescent paradigms it had itself now ossified into a formidable barrier to progress. The charge sheet against it is long. It does exploitation better than exploration yet efficiencies are running out of steam. Consumer cynicism leads to increasing marketing budgets for diminishing returns. Employee disengagement is at record levels. Too often, internal change only comes about through crisis or coup.

Even worse than wasting resources, today’s zero-sum management imposes ever heavier burdens on society as a whole: witness the credit crunch, colossal inequalities and the pillaging of Earth’s resources without provision for the future. Citizens trust neither big companies nor their bosses. In short, a discipline that evolved as a technology of compliance to enable mass production is simply unable to address the much wider issues involved in building organisations fit for the 21st century.

Not surprisingly, much of the meeting was about ground-clearing. Why do companies (and advisers, and academics) find it so hard to innovate in the ways they get things done, as opposed to in products and processes? Has management reached the end of its history? Is it a matter of new tools and techniques, or a complete recasting of the terms of the debate? How can management become more experimental?

Firm conclusions aren’t – yet – on offer. But some pointers emerged. Strikingly, just one of the four (admittedly maverick) chief executives present had any kind of management training – which is hardly comforting news for business schools (‘Companies come to us to provide remedial training, not innovation,’ sighed Hamel).

What’s more, for all these companies – organics retailer Whole Foods Market, Indian outsourcer HCL Technologies, manufacturers WL Gore and Seventh Generation, and design group Ideo – do-it-yourself management was their strength, not weakness. All had realised that it ain’t what they did so much as the way that they did it. So while the firms showed wide managerial differences between them, they were rigidly consistent internally, reflecting fierce belief in the power of both systems and an underlying purpose beyond making money.

‘Maybe our strength is not having been influenced by other companies,’ mused Gore’s Terri Kelly. ‘We think of the organisation as a system to be optimised for all stakeholders,’ said John Mackey, of Whole Foods Market. ‘Profits are a by-product.’

Little of this, of course, is exactly ‘new’. Likewise, some of the ‘grand challenges’ emerging from the discussions – the need for higher purpose, distributed direction and strategy-making, building of community and citizenship, increasing trust and driving out fear – have a familiar ring. Indeed, although there are intriguing prospects for innovation in the internet, harnessing the ‘wisdom of crowds’ and perhaps games, for some participants the main effort should be going into propagating the essence of what’s known. ‘We already know a lot,’ said Stanford’s Jeffrey Pfeffer. ‘We need an implementation, as much as an innovation, engine.’

However, what is new, and news, is the Lutheran challenge that the renegades effectively nailed to the front door of today’s management edifice: management must break out of its sterile debates and crack the conspiracy of silence that prevents the biggest issues from being aired – building organisations fit for the planet and for humans, and ones that are as adaptable as their environments, for a start. Of course, say the organisers, this is just the first step. But Half Moon Bay makes it easier for others to follow – and harder for the rest of the management community to avoid answering the question: where do you stand?

The Observer, 22 June 2008

SOARING EXECUTIVE pay is high on the European political agenda: the French denounce ‘perfectly scandalous’ rewards for executives in underperforming firms and brandish the threat of action at European level, the German Social Democrats are pushing for legislation to curb excess, the Luxembourg Prime Minister calls runaway executive pay a ‘scourge’ and even the pragmatic Dutch are considering legislation that would step up taxes on executive windfalls and pension contributions.

And the UK? Trust New Labour to head off anything that would make capitalism less safe for the extremely wealthy. ‘We will resist calls that have been made for direct regulation of executive pay,’ the Treasury minister soothed an audience of bankers last week. ‘Of course remuneration packages should be strongly linked to effective performance, and incentives should be aligned with the long-term interest of the business and shareholders. But I’m clear that executive pay is a matter for boards and shareholders, not for governments.’

No comment, then, on the HSBC pay scheme that could see its top six executives taking home a total of pounds 120m – 12 times their annual salary – over the next three years nor to the barely credible news that despite the financial carnage of the past few months, the City paid out a record pounds 12.6bn in bonuses for the first quarter of 2008.

This, be it emphasised, from organisations that were founder members of the ‘Gadarene sub-prime club’ described by Robert Heller here two weeks ago, HSBC having had to earmark pounds 5.3bn to cover bad loans, while the bills for the rest of them are unknown but almost certainly still climbing.

Such insensitivity in the middle of a credit crunch for which these institutions bear partial responsibility could only be perpetrated by people as remote from the concerns of their customers and employees, not to mention the larger society, as the man in the moon. The isolation effect is, of course, one reason why huge pay differentials are so invidious, and why they cause such offence in the rest of Europe.

It’s worth reminding ourselves of the assumptions embedded in such largesse, here taken for granted, to which other cultures object. Consider the notion, implicit in the HSBC differentials, that each of these privileged executives is at least 100 times more important than their minions on average pay. This seems less than self-evident to continental observers, who point out that not only is there no evidence of correlation between high pay for top individuals and superior corporate performance, but a striking number of corporate outperformers, even in the Anglo-Saxon world, pay their high flyers conspicuously modestly – John Lewis, Whole Food Markets (the most productive US retailer), Southwest Airlines, Amazon and Japanese Toyota. This may be no coincidence, since there is evidence that where work settings require even modest interdependence and co-operation, companies with the widest pay differentials do worse than more egalitarian rivals.

Or take the assumption that ‘alignment’ of top executives with shareholder interests through large bonuses is necessary and desirable. For non-market fundamentalists, that is the problem, not the solution. Today’s credit crunch is at least in part attributable to the crazy incentivisation of Wall Street’s and the City’s finest, without regard to the wider interest. After all, it wasn’t ordinary HSBC employees who blew pounds 7.5bn on the company’s floundering US sub-prime arm, or devised the derivative depth charges that are blowing holes in the financial sector all over the world.

More generally, those outside our system can see that sky-high salaries are a direct consequence of the doctrine of shareholder value, which requires a small group of identifiable individuals to be held responsible for the performance of the whole enterprise, heaped with incentives and given carte blanche to do anything that shifts the share price fast – never mind that it is a travesty of how companies really work.

Hence the grotesque two-tiered management edifice that has grown up in Anglo-American companies over the past 20 years, in which the menial work of operations – producing, dealing with employees, suppliers and customers – is almost entirely divorced from that of those on the top floor, whose activities are to do with financial engineering, masterminding deals and issuing performance standards for everyone else to enable the company to fulfil the promises made to the capital markets.

In this light, even if some political capital is being harvested, continental scepticism about the boardroom pay hijack is both understandable and logical. As for us, having made a considered and decent intervention to temper the excesses of low pay, an equivalent at the other end of the scale is now urgently needed. A High Pay Commission, anyone?

The Observer, 15 June 2008

YOU MIGHT not immediately think of the TV show Who Wants To Be A Millionaire? as a cutting-edge guide to business decision-making. But consider the panicky moment when contestants have to reply to a question to which they don’t know the answer. Should they: a) phone a friend b) eliminate half the answers to leave a 50-50 chance or c) ask the audience? The final answer, Chris, is c): the combined insights of many make an appeal to the audience a much more reliable joker than a call to the brainiest, most supportive individual friend.

Now think of a corporate chief executive making decisions – in effect, answering questions about the future. Like a Millionaire contestant, he or she will be able to call the answers in some cases, intuit in others – and quite often, with only partial knowledge about an uncertain future, will just have to guess. In that case, our chief will probably call in ‘experts’ (consultants) or consult one or two like-minded colleagues on the board. Unfortunately, to their unfailing discomfiture, experts are not only often not right, they are nearly always outgunned by a large enough group of non-experts. (In a small way, it has been shown that the best-informed people in a company are usually smokers – because the shivering huddle outside the entrance is a random sample from different departments who would never normally meet and trade information.)

So, unlikely as it sounds, breadth trumps depth. Take, for example, the experience of giant US electrical retailer Best Buy, which has just bought half of the retail business of our own Carphone Warehouse. Unhappy with the way its sales forecasts were working out, Best Buy ran experiments inviting a broad range of employee volunteers, armed with a bare minimum of historical and current information, to estimate future sales performance. In each case, the crowd was around 99 per cent accurate, substantially better than the supposed ‘experts’ – the sales teams that traditionally compiled the figures.

Management Innovation Lab co-founder Gary Hamel notes that it’s near impossible for a tight group of senior executives to foresee all the consequences of big, complex decisions. This is why so many projects – for example, merger and change programmes – go off the rails. Even senior executives admit they get a quarter of their big decisions wrong, a proportion that their underlings would probably double. To broaden the basis of decision-making, Hamel suggests that firms should set up an internal ‘market for judgment’, a virtual stock exchange giving workers the opportunity to trade securities based on big new projects which would pay out only if those projects were successful. In such a scheme, the price would clearly reflect employees’ estimates of the likelihood of success.

The wisdom of crowds (identified in James Surowiecki’s book of the same name) suggests that the democratisation of decision-making is not a matter of woolly liberalism – there is a strong economic, practical and political justification. Put bluntly, it could help avert corporate disasters and smooth the path of big changes. If the crowd had been consulted on the likely outcome, would Northern Rock have relied on the money markets so long, or the investment banks have pushed securitisation of sub-prime mortgages to such elaborate extremes?

As well as making for more robust decisions, putting the crowd to work could help eradicate another widespread corporate ill: chronic lack of engagement. In its latest global survey, Towers Perrin finds that just 21 per cent of employees around the world are positively engaged with the organisation they work for, in the sense of being willing to go ‘the extra mile’ to make it a success. Fully 44 per cent are disenchanted or positively disengaged, while a further 42 per cent are ‘enrolled’ – meaning well-disposed but not to the extent of providing the discretionary effort of the fully engaged.

And that makes a difference: TP calculations show that firms with the highest proportions of engaged employees sharply outperform those where engagement is lower. Perhaps the key factor in engagement is making people feel that they matter and that includes respect for their qualities, and using those qualities, particularly their intelligence, to the full. Surowiecki writes: ‘The only reason to organise thousands of people to work in a company is that together they can be more productive and more intelligent than they would be apart.’ The bigger the decision, the more important it is to bring the collective intelligence to bear – and the more likely, alas, that most companies do the opposite, holding discussions behind closed doors and announcing courses of action only when there is no going back.

But in theory and in practice, hierarchy is not a solution to problems of cognition or co-operation. In the words of management researcher Warren Bennis, reflecting on the strength of ‘great groups’: ‘None of us is as smart as all of us.’

The Observer, 25 May 2008

ADULT SOCIAL care, on which the Prime Minister has just launched a public consultation, is widely considered a financial timebomb. A postcode lottery, social care for the elderly and vulnerable is both expensive (£13bn) and bad. And it is getting worse: a combination of an ageing population and stretched budgets means that people have to be ever needier to qualify. Even official figures concede that already 280,000 people with real need get no care at all. With more over-65s than children, and with over-85s the fastest-expanding population segment, at this rate the costs of care will quadruple over the next half century.

A gloomy picture, then. Yet there is another side of the equation. Commentators and politicians alike, locked into the tunnel vision that capacity increase can only come from extra resources and obsessed with who pays the bill, are ignoring an equally critical issue: how the services are delivered. Here the bad news – the dire performance of the present care system – has an unexpected silver lining.

Think of it this way. By definition, the capacity of any system comprises activity that adds value – that helps meet a person’s need – and activity that doesn’t. At present, the care system is so full of non-value-adding activity (chasing paper, duplication and form-filling) that there is huge potential for improvement. ‘It’s chock-full of waste,’ says one insider.

Ironically, although we know the ‘cost’ of care, we know almost nothing about its true economics. Because councils are geared to meeting the standards of regulators rather than the demands of individuals, care suffers simultaneously from a surfeit of information about activity – the ‘what’ of care – and a dearth of information about real demand.

For the same reason, official ratings give no guidance to the real experience of users. It is a familiar story: a council can meet all its targets (two days to make an appointment, 28 days to make an assessment or pass it on to someone else), yet the bewildered recipient waits months, even years, for care from departments that are set up to ration standard chunks of provision, not handle individual variety. It may be only then that the needy person finds they can’t afford the financial contribution required or they have got worse in the meantime, so the process starts all over again.

The government’s prescription for this nightmare is the same as it applies to all other public-service ills: ‘choice’, in the form of personalised budgets that allow users to buy their own care, and scale. Both are problematic. Care workers note that personalised budgets, arising from frustration with the awful state of present arrangements, will probably benefit some well-placed, articulate users. But since they offer no help in understanding or improving the system, the most vulnerable may need advocates to use them – surely the role of social care in the first place.

Scale, meanwhile, largely means outsourcing to drive down costs. Carers are often appallingly paid and turnover is high. At the same time, the traditional supply of volunteers has been extinguished by the need for certification and training. Dedicated social workers spend their energy fighting the system to do the best for their clients. For all their efforts, the result is a fragmented, impersonal universe in which attempts to manage costs in the short term drive them up in the long. ‘It’s a lobotomised system,’ says another close observer, that can’t even see how bad it is, or the dynamic that is making it worse. Continuity and reliability are non-existent, while dissatisfaction is off the scale, in turn ratcheting up further demand on the system.

What is the alternative? We badly need to understand real demand for care (as opposed to what councils deliver). To do that, some local authorities are experimenting with reversing current practice: rather than ‘dumbing down’, they are ‘smartening up’ the system by placing expertise in the front office, where people can reach it directly. By putting the brains back in the system, care workers can assess need on the spot, cutting delay from months to days. And by understanding and meeting need directly, care workers can keep people independent longer by simple means – a walk-in bath or shower, or social activity, for example. If they later need further provision, it can be supplied quickly without more form-filling, since the case is already known.

In the long term, prevention at the first sign of need is likely to be much cheaper than cure when it becomes critical – even more so because it removes knock-on burdens on other public services, such as the NHS. It also clearly reveals other wasteful elements in the system, like the reporting bureaucracy, for what they are. Finally, when all the progress chasing, duplication and recycling of applicants is stripped out, some of the double- and triple-counted demand simply evaporates. Some councils report an effective increase in capacity of 30 to 40 per cent. Maybe, speculates one insider, ‘the timebomb isn’t as fearsome as we thought’.

The Observer, 18 May 2008

TO PIECE TOGETHER the fragments of today’s worldwide crisis is to grapple with a sense of deja vu. The sweep of globalisation strident inequalities (last weekend’s FT ran a breathless piece about the Bond-style security mechanisms built into the luxury homes of the international superclass – alongside stories of food riots) vast intervention by central banks to prop up the banking system the origin of the crisis in the explosive mixture of masters and leftovers of the universe – what does all this remind you of?

It takes a reading of Francis Wheen’s concise and lucid Marx’s Das Kapital – a biography (Atlantic) for the penny to drop. The cantankerous ghost hovering over the global turmoil and glorying in the discomfiture of its chief agents is that of Highgate Cemetery’s most eminent denizen and the UK’s great revolutionary. The sense of the grinding of the gears of history, the shifting of the political and economic plates, comes straight from Karl Marx (although some might also want to add an element of Groucho). When the governor of the Bank of England talks of protecting people from the banks, and plaintively recommends that graduates should consider a career in industry as well as the City, shimmering eerily through his remarks is the Gothic vision of alienation and auto-destruction that Marx outlined 150 years ago.

Here in the middle of plenty is the grotesque exploitation of the poorest (last week, in a new report, the TUC astonished even itself with findings of workplace exploitation that are in a direct line from those observed by Marx and Engel). Here, too, is the appropriation of the spoils by the extraordinarily privileged few, and the socialisation of the losses on to the many. Marx would have been unsurprised to learn that on average we now work one-seventh more hours than 25 years ago for less financial security in old age, or of the painful lack of engagement (also recently highlighted in a new report) of most people in labour that feeds the machine of capital rather than the individual. Above all, the overweening economic dominance of the City would have provoked a grim nod of recognition – never has Marx’s ‘enslavement to capital’ seemed less hyperbole and been more visible than today.

Marx’s work is usually discredited by association with the failed centrally planned economies of eastern Europe and elsewhere, and by the failure of capitalism to collapse as he had predicted. But Marx’s Marxism was never a prescription – it was Lenin and Stalin who ‘froze it into dogma’ – much more a developing argument and as Wheen notes, any errors ‘are eclipsed and transcended by the piercing accuracy with which he revealed the nature of the [capitalist] beast’.

In fact, apart from the predictions of capitalism’s impending demise, it is remarkable how much its sharpest critic got right. Along with creeping monopolies, growing inequality and the all-absorbing momentum of the capital markets, Marx foresaw many of the effects of globalisation, which he called ‘the universal interdependence of nations’, not least the effects of an international ‘reserve army of the unemployed’ in disciplining and depressing the wages of workers in the developed economies.

His description of the ‘cash nexus’ foreshadowed the economic rationality at the centre of today’s mainstream economic and management theories. Most prescient, as writers as different as the Austrian economist Joseph Schumpeter and the billionaire trader George Soros acknowledge, was Marx’s insight that capitalism’s most potent enemy was not outside but inside: market fundamentalism, in Soros’ term, or, for Schumpeter, the waves of creative destruction that would eventually swamp whole economies. Capitalism, as is now clear, has most to fear from capitalists.

Marx vividly characterised capitalism as a kind of Frankenstein which would end up destroying its creator: man’s work exists ‘independently of him and alien to him, and begins to confront him as an autonomous power’. As graphically, in Das Kapital’s sprawling chapter on the working day, Marx described capital as ‘dead labour which, vampire-like, lives only by sucking living labour, and lives the more, the more labour it sucks’.

That is as different from today’s dry economic discourse as it is possible to get. And this, as Wheen notes, is the point. Das Kapital is notoriously incomplete. Only the first of six projected volumes was completed before his death, and three more posthumously from notes and fragments. Marx displaced much of his energy into fighting creditors, conducting polemics and indulging in the occasional pub crawl up Tottenham Court Road. But capitalism is incomplete and chaotic too, as today’s turbulence proves. Marx reminds us of the uncomfortable things we have grown so used to that we no longer see – including the ability and need to change. ‘Philosophers have interpreted the world in various ways,’ he noted. ‘The point, however, is to change it.’

The Observer, 11 May 2008

IT’S TIME TO face up to the unpalatable truth – Labour’s public-service reforms have failed. Determined to liberate public services from producer interests, the government itself has turned into the oppressor. It is now locked into a nightmare cycle in which each round of reforms makes things worse, justifying further reforms which founder in their turn because (you’ve heard this before) in attempting to do the wrong things righter, they actually become wronger.

Some of us have long suspected this is the case. But now we have Systems Thinking in the Public Sector (Triarchy Press), a new book by John Seddon (full disclosure: I helped to edit it) which pinpoints in detail why the reforms have gone wrong – and how to put them right.

Seddon pins the blame squarely on the coercive ‘deliverology’ regime dreamt up (the correct expression) by the Prime Minister’s Delivery Unit (PMDU) in Tony Blair’s first term. As he shows, New Labour embraced the ‘public choice’ theory that had so excited right-wing intellectuals under Margaret Thatcher: basically, applying economic principles to politics. The problem was that civil servants, like any ‘producers’, tended to put their own interests above those of the public they were supposed to serve.

Since they could not use the ‘perfect democracy’ of the market to tell public-service providers what to do, Blair and the delivery unit eagerly enlisted centrally set targets instead. They were reinforced by carrots and sticks wielded by inspectors and other enforcers, with the PMDU at the apex.

Unfortunately, while they congratulated themselves on having disenfranchised one set of producer interests – the professionals – the deliverologists neglected to notice that they were installing a more pernicious one in its place: themselves. Instead of making providers accountable to citizens, the new regime made them accountable to ministers and the burgeoning bureaucracy of performance management.

Do quotas and targets enforced by a regulatory bureaucracy remind you of anything? Yes: they’re called central planning and don’t work any better in UK local government offices and police stations than in Soviet tractor factories.

One of the strengths of Seddon’s diagnosis is that, as a consultant, he has seen almost every public service from the inside. From trading standards to planning and housing repairs, all exhibit the same dysfunction, being forced to conform to a work design that starts from the wrong end – the requirements of government rather than those of the citizen. The design fills the system with error and waste, driving quality and effective capacity down and cost up. Because they are facing the wrong way, actors in the system can be meeting all their top-down targets while delivering awful service to a cynical public below.

More sinisterly, Soviet-like coercion and corruption are institutionalised at the heart of the system. For providers, querying official ‘guidance’, Seddon notes, is risky, since guidance quickly becomes mandatory through the mechanism of inspection. Inspection is increasingly concerned with compliance rather than what works, and compliance becomes evidence of success. The inspection industry, Seddon concludes, has become ‘an instrument of the regime, a political instrument’. Ask yourself what that does, for example, to the constitutional position of the police.

In Squandered (Constable), another incendiary book on the public sector, David Craig estimates at more than pounds 1 trillion the extra this government has spent on the public services since 1997. Yet today’s ‘to-do’ list remains exactly the same as a decade ago: crime, education, health, anti-social behaviour, pensions and re-engagement with politics. Seddon posits that the colossal costs of deliverology (not only direct costs of targets and inspections, but also vast indirect ones of being forced to do the wrong things and associated staff demoralisation) have absorbed a disproportionate amount of the total, as well many of the 800,000 extra public-sector employees.

It’s not all bad news. Some 60 courageous authorities and other agencies are using the systems thinking of the book’s title to show it is possible to achieve performance across the whole range of services that makes the official targets look risible – a week to pay housing benefits instead of 56 days, a month for planning applications, a week or two instead of months or even years for care. In a coda, Seddon notes how improving local services in this way can help to trigger the re-engagement with politics that politicians are desperate to ignite.

The snag, of course, is that by definition these are only small guerilla exceptions to the awful general rule. Real reform and real savings can only begin when the deliverology regime is swept away. Trying to reform it from the inside, using the measures and controls that got us into this mess, is a logical absurdity. As Seddon says: ‘It’s the system, stupid.’

The Observer, 4 May 2008

THE BIG business idea of the last 20 years is going rancid. Last week, Boeing’s embarrassed chief executive announced the third major delay to its much-hyped 787 Dreamliner project.

Unbelievably, although nearly 900 of the aircraft have been sold, its profitability is in question as the firm’s global supply chain cracks up. At the heart of the problem is the ‘Dell model’ (after the computer manufacturer), applied to the project’s funding and management. Industry researchers say that Boeing’s attempt to minimise financial risks by maximising the number of development partners has had the opposite effect: outsourcing on this scale (80 per cent, including large and complicated components) has actually increased the risk of project and management failure.

Boeing should have paid heed to the experience of Dell, which posted a powerful warning on the dangers of paying more attention to the supply than the demand chain: being good at giving customers what they get is not the same thing as being good at giving them what they want. But it’s not only computer and aerospace companies that are learning these lessons. One automotive component maker was shocked to discover that parts arriving for final assembly in the US had spent up to two years shuttling between 21 plants on four continents – when it had only actually taken 200 minutes to make them. Much of the work was done in China to benefit from lower labour costs, but any advantage was more than offset by the costs of managing and scheduling inventory in the tortuous supply line. With hindsight, the China move was rated ‘a disaster’.

Yet undeterred, service industries are now making exactly the same mistakes. In theory, since there is nothing physical to make or transport, services are ideal candidates for disembodied processing and reassembly by low-cost labour in foreign parts. But state-of-the-art call centres and distant graduates are quite often the wrong answer to the wrong question. A friend trying to get to Norwich over Christmas spent ages on the phone to India working out how to do it without taking 24 hours. When he got to Liverpool Street the man on the spot told him: ‘Go to King’s Cross, mate: trains to Cambridge aren’t affected, then change for Norwich.’ Similarly, when your cable broadband is down, you don’t need someone thousands of miles away reading from a script, but a spotty youth around the corner who will sort it out for pounds 60 and a supply of cola or coffee.

Why do companies – and public-sector organisations – continue to get this so wrong, pursuing the will-o’-the-wisp of cost reduction with measures that end up increasing them? Aided and abetted by consultants and computer firms that should know better, they are prey to three management myths.

One is economies of scale. Manufacturers and service outfits alike think they can cut costs by mass-producing processes in vast specialist factories. They can’t, because of all the unanticipated costs noted earlier: carrying and transport costs (for physical inventory) ramifying the possibility and consequences of mistakes, re-work (mopping up complaints about things not being done or being done wrongly), knock-on costs up and downstream, and finally the management costs of sorting it all out. If consumers no longer rush to pick up undifferentiated products that companies can mass-produce and toss over the factory wall, economies of scale lose their point, becoming diseconomies.

The second myth is that there’s no alternative because quality costs more. Yet quality – in the sense of giving cus tomers what they want, no more, no less – costs less, not more. This is because if you do just that, a) you don’t incur the cost of giving them what they don’t want, and b) indirect costs fall too, since there are fewer mistakes to rectify.

Third, browbeaten by free-market fundamentalists, companies habitually overestimate the coordinating power of markets (and thus the attractiveness of short-term outsourcing to India and China) and underestimate the role of organisation. But while the internet can undeniably cut the cost of some market coordination, for any complex task a good organisation can still out-compete what can be supplied unaided by the market – which is why we still have organisations in the first place.

For both products and services, the principles are the same. Supply chains should be as short as possible in both time and distance small and local, from police stations and GPs’ surgeries to banks and computer firms’ call centres, almost always beats large and remote. Expertise should be upfront, whether on the production line or the phone, where it can respond immediately to the customer. The title of a report from the Cambridge Institute for Manufacturing, Making the Right Things in the Right Places , says it all: in a globalised, virtual world, location and supply-chain decisions are more critical, not less.

The Observer, 27 April 2008

The Warrington Hotel, an imposing, lovingly restored Victorian boozer in Maida Vale, London, is buzzing. The bar downstairs is heaving upstairs, the restaurant has been largely full since it opened in February. The Warrington, the third in a chain of pubs-with-restaurants Gordon Ramsay built, glows with confidence. Clearly, there’s money in pubs.

But for every Warrington, there are perhaps half a dozen where the only building work is demolition or transformation into bijou flats. Last year 1,400 of the UK’s 58,000 publicans called time on their premises, says the British Beer and Pubs Association (BBPA), the fastest closure rate in history. Pub shares have suffered ‘extraordinary underperformance’ compared to a stock market that is itself hardly jumping, notes Kate Pettem of Landsbanki Securities. Many have retreated 50 per cent from their 2007 highs. Several chains, embracing high-street names such as the Slug and Lettuce, Hogshead and Walkabout, have collapsed or been forced to sell.

Campaign for Real Ale information manager Iain Loe notes that whoever is benefiting from binge-drinking, it’s not pubs, which continue to dry up at a lick that is leaving whole swathes of Britain shorn of locals, just as other outlets with important community functions, such as post offices, are also closing. ‘For the first time since the Domesday Book, more than half our villages are without a pub,’ Loe warns. Pettem has ‘no idea’ when the current closures will stop – most observers think 6,000 to 8,000 establishments are in the firing line, though she quotes estimates as high as 10,000 or 20,000.

Yet it is too early to write the local’s epitaph. Pubs and brewers are among the UK’s oldest and most resilient institutions, as well as a national treasure. Youngs, the London brewer, traces its line back to 1533, Greene King to 1799. Of Roman origins – pre-dating the university – the pub is even more venerable, having survived hangovers resulting from attacks by Puritans as well as fierce competition from the coffee shop and the gin trade. Today’s meltdown was foreshadowed a century ago with the bursting of a pub property bubble fuelled by a stock exchange boom, which left highly leveraged brewing and pub empires with debts they could not service from beer sales.

Plus ca change – except that this time the toxic combination of falling property prices and high debt is compounded by a number of 21st-century concerns. These include the smoking ban rent increases as pub owners try to compensate for declining beer sales rising prices of food, energy and beer increasing thickets of red tape competition from supermarkets and beer sales which, relative to outlets such as supermarkets, have been falling for 30 years. According to the BBPA, beer sales over the bar are at their lowest since the Great Depression.

Last month’s Budget measure, which put 4p on a pint, was the final straw for many, seen as hitting pubs particularly hard while supermarkets, which already use off-sales as potent loss leaders, are better placed to lean on suppliers and absorb the cost. Critics charge that this will accelerate the move from the pub, while doing nothing to curb cheap-booze-fuelled binge-drinking. ‘We seem to be entering a new era of prohibition,’ says Loe. ‘Pubs are harangued by councils and tied up in red tape. They should be treated as the solution, not the problem.’

Yet not everyone is drowning their sorrows. ‘There’s a real flight to quality,’ says Simon Emeny, managing director of London brewer Fullers’ Inns. ‘Yes, the market is oversupplied – we’re drinking less and eating out more – but good outlets with investment behind them and great staff will continue to do well.’ He looks forward to a rebound after the adjustment to the smoking ban is over. But further ahead, he believes that Fullers – along with other regional brewers sharing a long-term perspective, deep knowledge of the industry and a strong investment record – are well placed to sit out today’s ‘perfect storm’ and sift the pickings when the waves subside. They will lead continuing consolidation. More vulnerable, he says, are companies with shorter-term business models that have borrowed heavily to make a fast buck: ‘You can see that in the groups that are currently up for sale or refinancing.’

You can also see it in the shabby fittings of pubs at the opposite end of the spectrum from the Warrington. Some have changed hands so many times in recent years that locals no longer know who owns them. These are the pubs that are doomed to vanish, leaving a smaller, undeniably more upmarket, estate in their place – but also a niche that other, with luck better managed, establishments may come to fill in the future.

‘Throughout their history pubs have had to offer something distinctive,’ says Pettem. ‘At one stage beer was healthier to drink than water, at others they were the only places to sit and talk. Now bedrooms and kitchens are the places to invest in.’ If it does that, she says, the pub will still be entrancing tourists – and giving locals something to gripe about – in 100 years’ time.

The Observer, 20 April 2008

THE MBA is 100 years old this month. Is it a happy birthday? It all depends how you look at it. In numbers terms, things could hardly seem rosier. The first intake for Harvard’s newfangled Master of Business Administration comprised just 33 trailblazers according to the Financial Times , this year 500,000 will graduate globally with the coveted degree, 30,000 of them in China. In the UK alone, there were at the last count around 120 business schools turning out 27,000 MBAs from full- and part-time programmes.

MBAs are important both as brand flagships and a source of revenue: a two-year programme at a top business school costs up to pounds 45,000. But, successful as it has been in both those respects so far, the future is looking cloudier than the past.

One set of reasons is to do with market dynamics and demographics. On the demand side, much of the UK’s MBA growth has come from overseas, mainly China, India and the EU. But after a steep 10-year rise, student recruits from China are falling as the country increasingly grows its own graduates. And in the EU, the landscape of European business education will change radically from 2010 with the implementation of the Bologna Declaration, which seeks to improve professional mobility by aligning all European degree-granting arrangements. Hundreds of new business courses, many of them in English, some of them MBAs, are now being planned to compete for a more mobile student body. Falling within the subsidised university sector, some will charge minimal tuition fees, sharply undercutting high-cost courses.

Increasing competition does not only apply to students. MBA students paying dearly for their qualification demand good teachers, and these are in short supply. The Advanced Institute of Management Research (AIM) reckons that 4,000 UK business-school profs will retire in the next decade, far outpacing the supply of PhDs to replace them. In addition, even with fat consultancies available to professors at top schools, the rewards of an academic career are insignificant beside the mega-bonuses paid to their former students in the banking sector.

The other concerns surround what the MBA is actually for. Harvard’s original ambition was to make management a fully fledged profession. But that high-minded project withered on the vine and now the MBA’s basic, often explicit, proposition is the advancement of the career prospects – and, notably, the pay packets – of its students.

In this the qualification, at least from a top school, is largely successful: even today, a newly minted 28-year-old MBA will be picking up $100,000 or more at a Wall Street finance house. Much more problematic is what and how they are actually taught. In the past few years, a string of academic heavyweights have lined up to cast doubt on the offerings. Henry Mintzberg of McGill University in Montreal argues that ‘conventional MBA programmes train the wrong people in the wrong ways with the wrong consequences’, turning out ‘trivial strategists’ and desiccated number-crunchers rather than people able to exercise craft and judgment. The complaint is echoed by the University of Southern California’s Warren Bennis, who laments that messy, multi-disciplinary reality gets lost in the business schools’ misguided emphasis on a ‘scientific’ research agenda.

Gary Hamel of the London Business School has noted that teaching too often focuses on what passes for ‘best practice’, challenging neither the underlying paradigm nor the practices based on it. And in perhaps the most wounding intervention, a group including the late Sumantra Ghoshal at LBS, Stanford’s Jeffrey Pfeffer and Harvard’s Rakesh Khurana have charged that some of the concepts taught on MBA courses led directly to the corporate excesses that have discredited the past decade or so.

To be sure, MBA programmes are not uniform. With many specialised courses catering largely for practising managers, the UK is exempted from some of the sternest criticisms. And the system is tolerant enough that the professors cited above can continue to earn their living while voicing their strongly held views.

Yet the MBA is still in essence an Anglo-American cultural institution that has internalised the latter’s basic values. Perhaps this homogeneity explains why it has resulted in so little management innovation. Unlike in, say, medicine, all the management advances of the century, from divisional organisation to the Toyota Production System, have evolved out of practical experiment before becoming the subject of theoretical analysis.

In a recent discussion paper, AIM recommends that business schools embrace a range of different approaches to confront the more difficult times ahead. Experimentation and innovation will be needed in MBA programmes, too. After a century, the benefits of the pre-eminent business qualification to individuals are clear – but as for its impact on businesses and society, greater thought and application are called for. Must try harder.

The Observer, 20 April 2008

WE’RE SO used to the idea of business as separate from the rest of life that the extent of family business initially comes as a surprise. But look around: Ford, Wal-Mart, Sainsbury, Cadbury, Porsche, Michelin, Cargill, Samsung, Ikea, BMW, News International, LVMH… the list of major companies controlled or managed by members of a founding family, sometimes over many decades, goes on and on. According to one calculation, two thirds of the world’s businesses are family firms, contributing the same proportion to GDP. Among them are some of the world’s biggest – one third of the Fortune 500 are substantially family-owned or family-controlled companies, for example.

A moment’s thought, though, suggests that many, even most, firms start off as family enterprises, their name (sometimes with ‘and son’ appended to underline the point) emblazoned above the door and their genes embedded in the corporate culture. So family dynamics matter in business right from the start. Indeed, once remarked on, the relationship between companies and families is close and striking.

Logically enough, good firms aspire to ‘familiness’ – the mixture of trust, loyalty and openness that at best permits honest discussion and quick decision-making without recourse to bureaucracy or formal rules. Conversely, bad firms often reflect paler versions of the seething jealousies, denials and Oedipal conflicts that make dysfunctional families hell.

The degree to which business outcomes in even substantial companies are shaped not by the rational calculations of the textbooks but by unpredictable, sometimes violent, family relationships emerges with startling clarity from Family Wars (Kogan Page), by London Business School’s Prof Nigel Nicholson and Grant Gordon, fifth-generation scion of a UK family drinks firm.

In 24 case histories, ranging from Guinness, Pathak, Gucci and Lur-Saluces (Chateau d’Yquem) in Europe to IBM, Seagram and the Gallo and Mondavi wine families of the US, the authors elucidate some of the most lurid business feuds of the 20th century and their (usually) sorry aftermath.

The stories are fascinating. All entail massive damage to the families involved – in the cases of Gucci, Gallo and the extraordinary Shoen tribe, founder of the US trailer firm U-Haul, up to and including murder. The businesses suffer too, but not always to the point of collapse. In some cases the name and brand prove more resilient than the family (Guinness, Chateau d’Yquem). A very few, like Reli ance, the Indian conglomerate, emerge rejuvenated and re-energised.

Although, following Tolstoy, each unhappy family is unhappy in its own way, the unhappiness of business families plays out in ways that are instantly recognisable to students of corporate behaviour. Many business patriarchs are great creators who through lack of self-knowledge and self-discipline become equally potent wreckers. Thus, a founder’s obsessive business focus is strikingly often accompanied by abysmal parenting skills – the favourite child is really the firm – so destructive behaviour patterns are replicated over generations. ‘Genetic politics’ – the biological forces that both bind and separate families – supercharge everything, ensuring, for example, that bad blood breeds bad blood, seemingly aggravated rather than soothed by power and wealth. The failure of so many companies to establish succession plans is surely the psychological equivalent of the business patriarchs who (in extraordinary number) die intestate – a reflection of denial of mortality and unwillingness to let the children grow up to (challenging) maturity. The obverse of loyalty and familiarity is an insularity that discourages and even rejects outside advice. Very few of the firms described seek external counsel for their mounting problems – and none takes it.

Of course, not all family firms turn in on themselves or become psychotic – as the very partial list at the beginning of this article shows, many are doing just fine, thank you. Evolutionarily speaking, the family is (fortunately) a powerful and successful unit, even if individual ones can go spectacularly and tragically awry. Likewise for firms. In both, as the authors note, the key is to be aware of the strengths and weaknesses of gene

politics (successors will inherit 50 per cent of the founder’s genes, but which ones?) and build checks and balances accordingly.

At its best, family control can give firms a strength of purpose, insulation from the short-term pressures of the public market, and a flexibility that can be compared to a benign version of private equity. All it takes is psychological awareness, mentoring and parenting skills, exercising authority without authoritarianism, and perhaps above all fine judgment of when your time is up. Management as life, in fact.

The Observer, 13 April 2008