AS RECENT headlines attest, placebos – sugar pills and sham operations – make people feel better. Less widely known is that they work just as well in management, where their effect is both huge and almost completely ignored. Indeed, it’s not too much to say that the combination of placebos and systems (similarly neglected) turns management into an unparalleled force for good or an unparalleled force for ill.

The reason placebos and systems are both so powerful and so invisible is one and the same: because they deal with messy and malleable human beings, they are incapable of being expressed in the reductive equations of the rational-choice economics that underlies today’s management theory. So management theory doesn’t recognise them. Yet their consequences are no less real, especially when, instead of working simply on individuals, the power of belief is propagated throughout whole systems.

Consider, for example, the experiment in an Israeli army boot camp recounted in Bob Sutton’s quirky book Weird Ideas That Work. Incoming recruits were randomly assigned to three undifferentiated groups. Their instructors were (falsely) informed that one group had been singled out as having ‘high command potential’, unlike the other two, whose potential was average or unknown. Only the instructors knew about the rankings the soldiers had no idea they were in a trial. Yet by the end of the 15-week course, the ‘high potential’ group were objectively better shots, better navigators and better judges of tactics than the other groups. The placebo had worked. The evidence of this and many other studies is incontrovertible: that confidence, even if misplaced, makes people perform better.

Or, in a different context, take Apple’s Steve Jobs. Jobs has been much lampooned for his ‘reality distortion field’, his supposed ability to evoke a parallel universe where the apparently impossible is treated as not only possible but routine. But the joke is on the mockers: there is a distortion field, within which those who absorb the belief (mixed, it must be said, with a liberal dose of fear) perform feats of innovation that other companies only dream about. Henry Ford once said: ‘If you think you can’t, you’re right: you can’t.’ As Jobs shows, the reverse is equally true: if you think you can, you’re well on the way to doing it, even if by any objective criterion the odds against it are high. Hence the formulation of Sutton’s seventh ‘weird idea that works’: decide to do something that will probably fail, then convince yourself and everyone else that success is certain.

These examples show how ‘placebo power’ works: by altering reality into its own image, expectations become self-fulfilling. ‘The self-fulfilling prophecy is, in the beginning, a false definition of the situation, evoking a new behaviour which makes the originally false conception come true ,’ noted Robert Merton, the sociologist who first described the phenomenon in the 1940s. ‘The specious validity of the self-fulfilling prophecy perpetuates a reign of error. For the prophet will cite the actual course of events as proof that he was right from the very beginning.’

This is exactly what has happened in management. Left to themselves, almost no one recognises in themselves the self-interested, rational utility-maximiser – homo economicus – of conventional economics. But studies show that when people are taught conventional economics and the management that is based on it, that’s what they become. If people are taught that greed is good, it’s hardly surprising they become greedy if they learn that financial incentives motivate, they come to expect incentives and targets. Thus is the ‘reign of error’ perpetuated. As management professor Robert Frank put it, through the placebo effect, ‘our beliefs about human nature help shape human nature itself’.

In this way, systems and placebos turn management into a potent instrument of social engineering, and the organisation into a battleground for competing world views. Do we believe that people want to work, are basically honest, and are motivated by the job itself? Or do we believe that they are shiftless, untrustworthy, and only motivated by money? The choice has to be made – and the answer matters, because it shapes the outcome.

To its everlasting shame New Labour, by gullibly accepting the crude, self-interested model of human behaviour in the private sector, and actively promoting it in the public sector, has done its best to make that behaviour come true. Fortunately, its limitations have become glaringly evident in today’s turmoil. The City in general, and private equity in its corporate form, are the purest expression of the trustless economy, and their collapse is testimony to the latter’s unsustainable contradictions. Conversely, we should be all the more grateful for the success of companies such as John Lewis, Marks & Spencer and others, whose most important product may turn out to be not what they sell, but what they expect.

The Observer, 6 April 2008

Not much more than a decade ago, the second of the UK’s ground-breaking reports on corporate governance was headed by a certain Sir Richard Greenbury – who happened to be M&S’s combined chairman and chief executive at the time. Sir Stuart Rose must be reflecting ruefully that, far from being attacked for combining those two roles, his predecessor was invited to pontificate on directors’ pay.

Greenbury was building on the original report on governance by Sir Adrian Cadbury. Since then the edifice has been further altered and extended by others of the great and good: Hampel, who reviewed Cadbury and Greenbury (1998) Turnbull on internal controls (1999) Myners on investment (2001) Higgs on non-executive directors (2003) and Myners (again) on voting (2004). Between them they have constructed a comprehensive array of advice that has today acquired the force of holy writ.

Somewhat to its surprise, the combined codes have made the UK the corporate governance capital of the world, its principles-led rules being widely thought an advance on the rules-based regime of US. However, not everyone shares this Panglossian view. Critics charge that the effect of the combined codes is to enshrine shareholder value as the sole purpose of companies, and that, by focusing on principal-agent problems (how to ensure manager and worker ‘agents’ carry out the wishes of shareholder ‘principals’), they simultaneously overemphasise the control function of the board at the expense of creation and entrepreneurship, and complacently sanction rocketing executive pay.

Moreover, although researchers have found evidence that investors would be willing to pay more for what they see as ‘good governance’, at least in its official version the latter doesn’t appear to make companies work better: a 1998 meta-analysis of 85 separate studies showed that the proportion of independent directors on the board and the separation of the role of chairman and chief executive had no effect whatever on company performance.

Of course it’s conceivable – although impossible to prove – that the codes have improved performance negatively, by preventing some otherwise-dominant individuals from leading their companies to perdition. On the other hand, they are certainly not foolproof. They were unable to stop manifest governance failure at Northern Rock, where the board comprehensively failed to challenge a high-risk lending strategy when conditions changed last year.

Indeed, the same could be said for the disarray of the financial sector in general. It seems a bit rich that those who failed to notice the impending systemic scandal of the credit crunch should now be quaking with horror at the idea of Rose’s elevation to executive chairman at M&S.

Do the words ‘swallowing camels while straining at gnats’ come to mind?

The Observer, 6 Apreil 2008

ON TRIAL in the credit crunch is not the ‘banking system’ or the ‘international financial system’ or even the markets in which they operate. It is the fundamentalist model of management by which our institutions are governed.

Like a drunk at the wheel of a supercar, we’re careering full tilt up the wrong side of the motorway, bouncing from one pile-up to the next. Today’s financial wreck was always going to happen. It is the son of Enron, Tyco and WorldCom, just as they were the offspring of the dotcom boom and the grand-offspring of the great bull run of the 1990s. The crunch was as inevitable as the next England sporting humiliation – just as the next one will be if we don’t mend our ways. It couldn’t be otherwise when that’s what companies are set up to produce, through the blind folly of governments and regulators, backed up by a panoply of self-serving supporting interests.

What do the following have in common: sub-prime mortgages collateralised debt obligations and other instruments by which those mortgages are sliced, diced and sold on and excessive leverage, whether by banks, private equity or hedge funds? They are all reck less and conscious mis-selling, the product of an amoral, deterministic system that expects and gives individuals the incentive to maximise their gains, while barring them from taking into account the costs their profit-making imposes on society as a whole.

It is not just that ‘Wall Street is predicated on greed’, in the phrase of a former Bear Stearns director last week. ‘Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible,’ obligingly warned Milton Friedman, the patron saint of market fundamentalism. How the great financial centres have taken him at his word! Indeed, the present crisis brutally underscores the limitations of the social responsibility movement: what price ‘responsibility’ initiatives when most of the product range of the financial services industry – on which we’ve banked our future – is shot through with irresponsibility and moral hazard?

Together, markets and companies have in the past been a formidable driver of economic welfare. Without the dynamic of organisations and markets – the company proposes, the market disposes – no country has, or could, aspire to the levels of wealth achieved by the economies of the West. Indeed, the centrally planned economies broke in the attempt.

However, this is not the result of some immutable, pure, ‘free-market’ design, as the fundamentalists would have it (for real free markets, try Haiti, Nigeria or early post-Soviet Russia), but of man-made rules that foster creative interplay between the economic actors. So far, the rules have, just about, kept the balance sheet positive. No longer. As a former senior Esso executive, Oystein Dahle, predicted, while ‘socialism collapsed because it did not allow prices to tell the economic truth… capitalism may collapse because it does not allow prices to tell the ecological truth’.

He was using ‘ecological’ in the sense of ‘green’, but it could equally apply to the financial ecology. In fact, planetary and financial warming have much in common. They signal that the price of continuing the game under present rules, in which benefits accrue to a tiny group of insiders while the catastrophic externalities are borne by society as a whole, is too high. Returns to the present governance system are no longer diminishing: they’re negative. So no more extra time.

‘The Americans have invented a system with no commitment, trust or long-term relationships,’ wrote Will Hutton in this newspaper last week. This is not aberration, but design. Behind the City and Wall Street firms that epitomise, in Indian business guru Sumantra Ghoshal’s words, the ‘ruthlessly hard-driving, strictly top-down, command-and-control-focused, shareholder-value-obsessed, win-at-any-cost’ management model stands the invisible weight of half a century of agency theory, transaction-cost economics and game theory – as taught in business schools, solemnly embodied in corporate governance codes, reinforced by consultancies, aped by the public sector and duly absorbed into the executive bloodstream.

Slowing and then reversing this inertia will not be easy. But by exposing the degree to which the current management system is broken – riddled with perverse incentives based on false assumptions – today’s credit crunch may have done us a favour.

The showdown between management’s ‘dark’ and ‘light’ versions has come sooner than expected. If bad rules got us into this mess, better ones – which go with rather than against the grain of humanity, community and the physical realities of the planet – can get us out again. Capitalism is too important to leave to the capitalists. So bring it on.

The Observer, 23 March 2008

ACCORDING TO the Collins dictionary, ‘reform’ means ‘improvement, or change for the better’. Perhaps only in public services could it have come to signify something like the reverse: a grim trial of strength in which the centre imposes a new set of untried methods, often free-market-oriented, on reluctant consumers and providers in an attempt to alleviate the worst effects of previous reforms, often making things worse and dearer. The GP contract, the full horror of which is still unfolding, is a good example.

The theme of reform as trench warfare ran all through Gordon Brown’s dour article in the Financial Times last week on the ‘third act’ of public sector reform. After a first phase consisting of (inevitably) targets, league tables and ‘tough inspection regimes’, and a second of focusing on ‘tackling underperformance and variation’, it is now the turn of choice and competition to lead the ‘assault on underperformance’, with ‘no backtracking… no go-slow, no reversals and no easy compromises’.

Leaving aside the implausibility of imposing choice by central planning, why should ‘choice’ now be the answer? It’s clear enough that something else is needed – as even their champions admit, targets and whatever the second phase of reform consisted of have had moderate success at best (and even that calculation discounts their enormous direct and indirect costs).

In truth, however, like them, ‘choice’ is just another finger in the air, a hypothesis rather than a proven method. A couple of dubious pilots aside, there is scant evidence that it works or that the public wants it – except in fields where anything would be an improvement on the present service. Instead, choice is based on ideology, in particular an unshakeable belief that without fierce sticks and carrots providers can’t be persuaded to do the things recipients want.

But there are two fundamental objections to it. ‘Choice’ in this definition is our old friend ‘the wrong thing righter’: an extension of the bad old system that has given us services as centrally planned units of provision, doled out to those who can get through the picket lines that providers erect to control access. Self-evidently, choice among a greater number of inherently customer-unfriendly organisations is not much of a choice, and the only incentive it provides for suppliers is to cut corners and costs.

The other objection is that choice of this kind is an admission of bankruptcy – a wholesale transfer of responsibility from provider to recipient not only for their own service but for the improvement of the system as a whole. In the NHS, getting proper treatment in a fragmented system already demands near full-time management by a dedicated family member. Even its proponents concede that full-on choice would require that role to be formalised in the shape of ‘patient care advisers’, significantly adding to cost. As for elderly or otherwise vulnerable people having to assemble their own social care packages – isn’t that what adult social care was created to avoid in the first place?

Some degree of choice – call it flexibility – is of course necessary to keep any system running smoothly. But to expect it to ‘drive down underperformance’ in a badly designed system is hopeless: a costly placebo that won’t work.

By contrast, a reform that would restore to the word some of its positive connotation would be to accept that conventional economies of scale don’t work in services and abandon the vain attempt to deliver them through markets and mass production. Instead of force-fitting applicants into categories for predeter mined service packages, give people just what they want, and no more, upfront, before their needs become serious.

This involves analysing real demand (which, amazingly enough, almost never happens in public services) and designing provision to match. Contrary to all current trends, almost all public services, from policing to health, are best delivered locally and directly, so that providers can react to the specific needs of their own patch. Where this approach is used, ‘choice’ becomes a red herring, because people get what they need. When they are no longer fighting the system, citizens’ engagement increases. Public-service workers are remotivated too, because they are doing a better job (the best, and cheapest, incentive).

Ironically, in healthcare such a personal-service model already exists. It’s called the GP’s surgery. If it worked properly, why would anyone need a ‘patient care adviser’? Unfortunately, the government seems bent on dismantling it in favour of impersonal treatment and advice factories, where no one ‘owns’ the patient – no one except themselves, aided by the fabled NHS computer.

No wonder many in the public sector are battening down the hatches at the prospect of another round of reform. The phrase on their lips is another whose meaning is unique to the UK: ‘Bohica’, or ‘bend over, here it comes again’.

The Observer, 16 March 2008

WE LIVE IN strange times. In the private sector, market rules are so degraded that it has become the role of companies in the real economy, some built up over decades, to act as chips tossed around by high rollers in the City supercasino. Meanwhile, the public sector is in the grip of a central planning regime of a rigidity and incompetence not seen since Gosplan wrote Stalin’s Five-Year Plans.

You think I exaggerate? Well, as Exhibit A, consider the hedge funds that borrow company stock in order to vote for or against a proposal – a merger or takeover, say – not to further the interests of the company, but to make their previous bet on the firm’s share price come true. For Exhibit B, name another government since Leonid Brezhnev’s that prescribes 198 targets for local government, numbers and postings of junior doctors, reading methods for teachers in primary schools, cleaning techniques used in hospitals and how GPs should organise their appointment diaries.

Already individually dysfunctional in their own way, in combination these diametrically opposed management extremes deliver not the fabled ‘third way’, or at least not in any man ner intended, but an unholy mess, from which we get the worst of both worlds.

How have we got to this position? As a reader reminded me last week, our most illuminating guide may be the lamented Jane Jacobs. When she died in 2006, obituarists emphasised the Canadian writer’s regeneration opus, The Death and Life of Great American Cities. But in Systems of Survival (1992), she also put forward startlingly original and equally penetrating observations about the way economic life in general is organised.

From sources ranging from The Observer to medieval law and anthropology, Jacobs concluded that humans had developed two ways of gaining a living: ‘taking’ and ‘trading’, or ‘conquest’ and ‘commerce’. She also found that each of these survival systems had a corresponding ‘moral syndrome’, built out of precept and tradition, modified over time. For example, it’s hardly surprising to find that commerce thrives on a syndrome of honesty, competition, respect for contracts, initiative and enterprise, optimism, thrift, willingness to collaborate and agree, and avoidance of force.

The other syndrome, which Jacobs dubs the ‘guardian’ syndrome because it derives from territorial protection, by contrast emphasises loyalty, honour, tradition, prowess, exclusivity and the distribution of largesse. Trading is anathema to it. This syndrome governs the behaviour of governments and their bureaucratic and other agents, including police, armed forces and judges (also, incidentally, organised religion).

Three points are essential to understand how the syndromes work. The first is that they are practical and internally consistent, not arbitrary: they are ‘what works’, as evolved over time. Second, though mutually exclusive, they are also interdependent: commerce needs ‘guardians’ (the state) to establish and police the rules, guardians need commerce to provide energy and innovation, not to mention taxes. Finally, and crucially, they are systems. One characteristic of systems is that the parts work together and are self-reinforcing.

But by the same token it’s impossible to change or remove individual elements without causing unintended consequences all along the chain. In this case, so sensitive to tampering are the syndromes that combinations of the two produce not a milder median, but what Jacobs calls ‘monstrous hybrids’, with the perverse property of turning virtues in one syndrome into vices in the other.

The classic case is the Mafia, a rigidly ‘guardian’ organisation put to the service of commerce, making travesties of honour, loyalty, competition and industriousness in the process. But hence also the dysfunctional examples with which I began this piece. In fact, in 1992 Jacobs was already anticipating the buyout boom, which she interpreted as companies abandoning commercial morality (thrift, innovation, enterprise) to treat other firms as plunder.

Conversely, the disastrous results of the GP contract can be traced directly to the government’s determination to turn an essentially guardian organisation into a commercial one. GPs have responded to incentives in textbook fashion, by finding ways to meet the targets. The government has changed their motivation from intrinsic (the work itself) to extrinsic (outside rewards). But, as a patient, which GP would you rather consult, one motivated by money or by doing the best medical job?

The point about the syndromes is that one isn’t better than, or replaceable by, the other: they’re symbiotic. It follows that the ability to navigate between them, maintaining their integrity but knowing when to switch, is vital. If, as Jacobs suggests, such a capability is a mark of civilisation, we can only conclude we are going in the opposite direction to what New Labour intended: backwards.

The Observer, 9 March 2008

IN HIS witty column last week, my colleague William Keegan recalled Gladstone’s description of finance as ‘the stomach of the country, from which all the other organs take their tone’. Well, that stomach currently being convulsed by binge-induced indigestion and nausea, and the tone set for the other organs (which means for us) is a throbbing hangover, the effects of which are likely to get worse before they get better.

Coming after the dotcom debacle of 2000, today’s sub-prime saga – which still has some way to run – this indigestion confronts us with an urgent question: how to prevent the stomach’s chronic urge to binge again in another five or 10 years, maybe causing not just a bad headache, like this time, but a cardiac arrest.

One answer could be tighter international regulation: financier and philanthropist George Soros, French President Nicolas Sarkozy and Prime Minister Gordon Brown, to name but three, have all called for reform of international finance. But this is like trying to control obesity or binge-drinking by regulating global supplies of food and drink. What we need is for certain individuals to change their diet.

The origins of today’s financial crisis lie not in the mysteries of the global financial architecture but in the pay-for-performance practices of Wall Street and the City. Basically, these practices push the perverse incentives contained in all such schemes to the extreme. What marks out the financial sector is its offer of unlimited upside for inventors of clever wheezes like collateralised debt obligations (don’t ask) or mortgage-backed securities, with no downside. Not only are the fabulous bonuses paid before the toxic effects on the rest of the body are evident (and sometimes brazenly even when they are: see Stan O’Neal’s $161m and Chuck Prince’s $42m exit packages at Merrill Lynch and Citigroup respectively) – even worse, participants in the system are cynically aware that, as with Northern Rock, they can’t be allowed to go to the wall for fear of bringing down the whole structure.

The upshot is the ultimate moral hazard: as Martin Wolf has powerfully argued in the FT , the financial sector is an industry ‘that generates vast rewards for insiders and repeated crises for hundreds of millions of innocent bystanders’ who, to add insult to injury, then are obliged to pick up the pieces with their taxes. In the terser formulation of playwright Bertolt Brecht: ‘Every 10 years a great man. Who paid the bill?’

We did. And it is at this point that the non-dom issue swims murkily into the picture. Of course, there are non-domi ciled, low-tax-paying UK residents of all trades, shapes and sizes – ship owners and business-school lecturers along with City traders and bankers. But be sure that most of the irritating high-pitched drone you’ve been hearing these last few weeks comes not, as you might have imagined, from the famous ‘mosquito’ device for dispelling rowdy teenagers in our town centres but, just as repellent, from high-earners in the City whingeing about the preposterous idea of having to pay tax on all their earnings.

Putting the two things together, let’s see if I’ve got them straight. To make the City safe as the world’s premier financial centre it needs to be free to pay unlimited salaries to incentivise people to devise ever more arcane, risk-bearing financial vehicles in the future, while it is the job of the authorities to pull out all the monetary stops to keep the music playing, in Chuck Prince’s infamous phrase. But not only that those whose extravagant pursuit of riches actually created the mess are now demanding partial exemption from responsibility for paying the clear-up costs, otherwise, like the Mad Hatter, they’ll move on to the next clean plate. Or am I missing something here?

Of course, we want London to continue to innovate and be a magnet for the financial sector, but for the right reasons, not the wrong ones. Maintaining a dubious status as an offshore tax haven, as the IMF named the UK last year, which is home to the largest community of non-dom tycoons in the world, figures among the latter rather than the former.

London owes it to the world, as well as the rest of the economy, to innovate in ways that improve the sustainability of the body as a whole rather than undermine it. That means embracing transparency and accountability, including, especially, the ways its big shots pay themselves. A system that generates colossal rewards for the few and crises and losses for the many is unsustainable in the long term even if it doesn’t auto-destruct in the short.

The UK’s stomach is out of control, demanding to continue consuming at the present rate even if it threatens to absorb all the other organs in the process. It needs to go on a healthy diet that will also nurture the rest of the organism. If it doesn’t, more unpleasant medicine may be needed. It could take a number of forms, but all of them will taste much nastier than paying pounds 30,000 a year to maintain their non-dom tax privileges.

The Observer, 2 March 2008

FOR SUCH an important announcement, the launch of the government’s ‘world-class apprenticeships’ scheme has evoked a curiously muted response. After all, the unsatisfactory interface between education and work is one of the UK’s most vexatious and long-running sores, crimping the lives of millions and helping to confound all efforts to raise the UK’s lagging productivity. In this context, guaranteeing every qualified school-leaver an apprenticeship by 2013 and boosting overall numbers to 400,000 by 2020, as the scheme requires, is nothing short of revolutionary – potentially the biggest change for 50 years.

Such worthy subjects have been thoroughly overshadowed by the latest turns in the City vaudeville show. But it is striking that while employer and professional bodies such as the EEF and Chartered Institute of Personnel and Development (CIPD) are broadly in favour of the initiative, they are hardly brimming over with enthusiasm.

One reason for the shortage of enthusiasm is that, as educationalists point out, this is a purely government initiative. In any other European country, a scheme of this magnitude could only have emerged as a joint commitment between government, employers, trade unions and the education system. The apprenticeships, by contrast, are a product of, and the main instrument in, the government’s plans to keep teenagers in full-time education or training until 18, and increase the stock of national skills. As Alison Wolf, professor of public sector management at King’s College, notes, the figures are top-down calculations derived from policy requirements rather than commitments of demand and supply on the ground, leaving question marks about the feasibility, and even appropriateness, of the numbers.

Many of the misgivings can be traced back to this central weakness. Everyone agrees that structured, flexible and appropriate apprenticeships combining training and education are a huge benefit to individuals, to companies that know how to make use of them, and to the economy as a whole. Schemes run by Rolls-Royce, BT and a number of other large companies, for example, have great cachet, set high standards and are greatly oversubscribed. Such companies run apprenticeship schemes because they believe they are essential for their future – the best way to prepare for key jobs.

More generally, they form the backbone of the whole employment system in Germany, where they provide an accepted guarantee of shared commercial and technical knowledge. Such apprenticeships are a key economic strength. But both the EEF and CIPD wonder how quickly demand and supply of such high-level programmes can be expanded. Currently, more young people want apprenticeships than can be accommodated, and overall numbers declined this year.

‘Apprenticeships aren’t costless,’ says the CIPD’s John McGurk, and require long-term commitment to set up and run. Both bodies warn that rebranding other lower-level initiatives under the apprenticeship banner to meet numbers would devalue the status and defeat the object. There are other doubts.

German Industry UK, an umbrella body for German companies employing upwards of 500,000 people in the UK, has long been concerned with the shortage of suitably qualified new recruits for skilled jobs – to the point where it set up its own vocational training school to complement on-the-job company training. Last year it met David Lammy, the minister responsible for apprenticeships, to air German concerns and offer help. ‘It’s not a question of saying Ger many is best or the only system,’ insists Bob Bischof, a board member of the association and 40-year UK resident. ‘But we do have a lot of experience – of apprenticeships in particular and of representing the interests of the ‘real’ economy, as opposed the chimerical world of the City, in general.’

This, he believes, gives the German opinion some weight – German employers believe further education arrangements are too complex, suffer from too many overlapping initiatives and fail to offer suitable curricula for serious business. Dividing responsibilities for apprenticeships between two new education ministries and changing the funding arrangements doesn’t help either.

Meanwhile, no one knows what the government’s new ‘diplomas’ are supposed to be for and how they fit with the other components of the system. In a wider context, Bischof says, most people ignore the fact that 50 per cent of German apprenticeships are in the nuts and bolts of commerce itself, providing an essential common structure of understanding for anyone going into business.

Without similar glue to stick it together, the latest in a long line of vehicles for getting non-academic British teenagers on to a worthwhile career path may come apart before it leaves the workshop.

The Observer, 24 February 2008

THE POLICEMAN’S lot is not a happy one. The force exhibits in extreme form the organisational stupidity that successive governments, particularly this one, have visited on all public services by imposing designs and procedures that make it impossible for them to learn. This is why, despite a 39 per cent increase in real resources over the past decade (an extra pounds 5bn) and a 25 per cent boost in manpower, effectiveness and morale has never been lower. The public now trusts the police less than it does doctors, teachers, judges or the NHS.

This is not their fault. ‘They, and we, deserve better,’ says Vanguard Consulting’s Richard Davis, who has worked on policing as a system with several forces. Will Sir Ronnie Flanagan’s long-awaited Review of Policing, which thudded on to ministerial desks last week, provide it? Not of itself, Davis believes. Flanagan knows policing is ‘at a crossroads’, the implication, rightly, being that it needs to change direction. Ultimately, however, he is himself too banged up in the dysfunctional system that created the problems to do more than tiptoe around the main issues.

Thus, the report doesn’t go near the fear of many insiders that the reforms introduced by David Blunkett as Home Secretary were, intentionally or not, an attack on the fundamental duty of protecting the public and in danger of turning the force into an executive arm of the state. They worried that the systematic removal of police discretion was making the service a creature of the inspection and compliance regime, and hence government, rather than the citizen.

Flanagan treats this as an issue of bureaucracy. Police bureaucracy is indeed grotesque – at any one time, notes Davis, out of a command unit of about 350 officers, just 10 will be out policing, the rest behind desks recording data and form-filling – a colossal waste of resources that urgently needs pruning. But it is a symptom, not a cause, and palliatives such as ‘civilianisation’ (recruiting civilian pen-pushers to take the place of officers behind desks) or less intensive incident recording are just that.

The cause of the bureaucracy is the Soviet-style ‘deliverology’ regime developed by the Prime Minister’s Delivery Unit under Tony Blair – ‘targets and terror’, as the equivalent became known in the NHS. In the police, the bureaucratic effects of deliverology were twofold. The first was that each target generated a standalone, ring-fenced sub-unit to deal with it. So every command unit has separate boxes for witness protection, offender management, domestic abuse, child protection, neighbourhood policing, crime prevention, intelligence, ‘volume’ crime, victim support, CID, firearms, licensing, schools liaison, together with the obligatory call centre with the forlorn task of routing calls to the right one (within 15 seconds). Co-ordination is a nightmare, with extra layers of staff drafted in to manage it.

Meanwhile, the target measurements being no help with public protection, their second effect is to generate an additional, valueless (value-eating, since it consumes resources) task of recording figures for government inspectors and auditors, the all-powerful apparatchiks of today’s public-service regime. Their word carrying such weight, a cadre of internal auditors has grown up within police forces whose sole job is to check useless figures before they are reported, still more wasteful bureaucracy that prevents police from doing their job.

Remarkably, without that hindrance the job is perfectly do-able. The astonishing real story about crime is this: when police demand is analysed locally, much of it is predictable by type, time and geography, and perpetrated not by shadowy master criminals but a few offenders of distinctly average intelligence, already known to the authorities via school, social services or the police themselves.

So local policing isn’t a nice-to-have, a sop to the public, it’s essential to doing the job properly. Where some brave officers have ignored the official boxes, worked out the local issues and positioned themselves to respond to it, what happens? Crime falls, officers have more time to respond to calls, public respect and engagement increase. Unfortunately, less crime conflicts with the official target of more detection, so a sergeant on a peaceful patch will come under heavy pressure at month-end for more arrests and detections. This leads to criminalisation of playground squabbles, mobile phone insults and other absurdities. ‘No wonder so many officers lose the will to live,’ sighs Davis.

Flanagan doesn’t deal with the baleful effects of deliverology perhaps politically he couldn’t. The best to be hoped for from the report, therefore, may be the cover it provides for a few enterprising officers to reassert obligation to the public rather than government and quietly reconstitute whatever initiative and discretion hasn’t been kicked out of them by the Home Office, their chiefs and HM Inspectorate of Constabulary.

The Observer, 17 February 2008

IF THERE’S one management platitude that should have been throttled at birth, it’s ‘what gets measured gets managed’. It’s not that it’s not true – it is – but it is often misunderstood, with disastrous consequences.

The full proposition is: ‘What gets measured gets managed – even when it’s pointless to measure and manage it, and even if it harms the purpose of the organisation to do so.’ In the truncated version, there are two lethal pitfalls. The first is the implication that management is only about measuring. Way back in 1956, the academic V F Ridgway famously noted the dysfunctional consequences of managers’ tendency to reduce as many as possible of their concerns to numbers.

Quality guru W Edwards Deming went further, putting ‘management by use only of visible figures, with little consideration of figures that are unknown or unknowable’ at No 5 in his list of seven deadly management diseases. Henry Mintzberg, the sanest of management educators, proposed that starting ‘from the premise that we can’t measure what matters’ gives managers the best chance of realistically facing up to their challenge.

In the past few years, of course, spu rious measurement has proliferated beyond, well, measure. Although regulation comes into it, this is often the consequence of IT systems that can measure anything that moves – the number of telephone rings, how long calls take and cost and how many calls a person makes an hour, for instance. The figures can be on a manager’s desk the same evening.

But just because you can measure it, doesn’t mean you should. All the above, although standard in call centres, are generally pointless, because they only tell you about levels of activity, not about how well the call centre’s purpose is being achieved. Thus, a call centre may boast high productivity and low costs per call but that’s irrelevant if most of its activity is mopping up customer complaints about poor service. Activity measures prevent managers from seeing that cheaper calls aren’t the answer: better to improve the service so that they don’t need a call centre with all its associated costs in the first place.

It gets worse when activity measures form the basis of contracts with suppliers, as they often do in the hard-nosed-sounding guise of ‘payment by results’. Payment by results, whether for calls answered, appointments made or patients seen, is actually ‘payment by activity’ – activity that doesn’t necessarily advance and may actually obstruct the overall purpose. As in the call-centre example above, a contractor paid by ‘results’ (ie activity) has no incentive to improve service, which would reduce the number of calls, and hence payment, and every incentive to worsen it, by cutting the time spent on calls as they inexorably increase in number.

Here we encounter the second problem with the measurement-management equation. All too often in a kind of Gresham’s law (which said bad money drives out good), the easy-to-measure drives out the hard, even when the latter is more important. Strategy writer Igor Ansoff said: ‘Corporate managers start off trying to manage what they want, and finish up wanting what they can measure.’

What happens when bad measures drive out good is strikingly described in an article in the current Economic Journal. Investigating the effects of competition in the NHS, Carol Propper and her colleagues made an extraordinary discovery. Under competition, hospitals improved their patient waiting times. At the same time, the death-rate following emergency heart-attack admissions substantially increased. Why? As targets, waiting times were and are measured (and what gets measured gets managed, right?). Emergency heart-attack deaths were not tracked and therefore not managed. Even though no one would argue that the trade-off – shorter waiting times but more deaths – was anything but a travesty of NHS purpose, that’s what the choice of measure produced.

As the paper observes: ‘It seems unlikely that hospitals deliberately set out to decrease survival rates. What is more likely is that in response to competitive pressures on costs, hospitals cut services that affected [heart-attack] mortality rates, which were unobserved, in order to increase other activities which buyers could better observe.’

In other words, what gets measured, matters. Measures set up incentives that drive people’s behaviour. And woe to the organisation when that behaviour is at odds with its purpose. Imagine the cost to NHS morale (one of Deming’s unknown and unknowable figures) of the knowledge that managing to the measure resulted in more deaths – the grotesque opposite of its aims. Hospitals are the extreme example of a general case. As such, they allow us a definitive rephrasing of our least favourite management mantra. What gets measured gets managed – so be sure you have the right measures, because the wrong ones kill.

Yjr `pbserver, 10 February 2008

‘SPECULATORS MAY do no harm on a steady stream of enterprise. But the position is serious when enterprise becomes a bubble on the whirlpool of speculation. When the capital development of a country becomes the by-product of a casino, the job is likely to be ill done,’ wrote Keynes in 1936, during the depression that followed the Great Crash of 1929.

Writing today, he might add that a position where the economy is managed not to promote enterprise but to keep the whirlpool of speculation turning is beyond serious and becoming surreal.

Far be it from me to say I told you so (well, all right then), but the bill for entrusting the capital development of the country to the casino is now falling due – and the price will be high. As the waters drain out of the whirlpool, what’s left of the UK economic miracle makes a soggy sight.

It turns out the UK’s famous growth economy is built not on prudence and good management but on tick and soaraway property prices. The UK savings rate is negative: total personal debt is now around pounds 1.5 trillion and increasing at nearly 10 per cent a year. About pounds 1.2 trillion of that is mortgages as people chase house prices that nearly trebled in the decade to 2006 (in London, considerably more). We have thus managed the remarkable trick of transforming bricks and mortar into gauzy insubstantiality – a bubble containing thin air.

The architects of this transformation, of course, have been the City alchemists who, as we now know, vastly inflated the bubble by slicing, dicing and selling on the debt to other clever fools. But that is almost entirely the City’s function today. The time is long gone when its job was to provide a service to the economy it’s now the job of the rest of the economy to provide the material for its trades. Consider the foreign exchange market, where pounds 1 trillion is traded every day. Just 20 per cent of this is currency needed for trade or tourism. Eighty per cent is speculative – gambling, in other words. The tail has wagged the dog off its feet.

Even though the definition of a bubble is that the values are unreal, it’s the real world that gets to pick up the pieces. Even at the height of the credit boom, the City was uninterested in start-ups, much preferring buyouts of established firms on which it could weave its financial magic. Now, with the air hissing out of the bubble like a deflating tyre, the word is that start-up capital for the real economy is drying up.

Another casualty of City culture is the patient, human and organisation-building skills that underpin success in the material economy. Alas, computers can’t do everything, even in finance. It’s telling that the most sophisticated surveillance technology was unable to spot Societe Generale’s rogue trader piling up $50bn of trades – but didn’t anyone notice his behaviour?

For contrast, turn for an instant to somewhere that, for the last 15 years, has been as sexy as Horlicks. Germany, throughout the go-go decade, has been regarded by Anglo-Saxons with barely concealed scorn. Who cared about making things when all that could be done in China? Well, Germany has just put out an economic report for 2008 noting that its resilience to external shocks has ‘improved substantially’. Engineering, its economic heart, is expecting growth of 5 per cent this year (11 per cent in 2007) jobs, too, will increase.

Overall, German unemployment remains high, but the country is still the world’s largest exporter. Alone among industrialised countries, it has increased its export market share since 2000. Not only is its manufacturing sector ‘defy ing the laws of economic gravity’, as one analyst put it, Germany also has high hopes for its unregarded services sector. It has twigged that manufacturing and services aren’t alternatives they travel together. So where German exporters boldly go, Deutsche Bank and SAP follow close after. Unfortunately for the UK, the reverse applies. With nothing to piggyback on, UK services are no longer expanding to offset manufacturing’s balance of payments deficit they add to it.

The jewel in the German economic crown is not the famous global names but the Mittelstand – the medium-sized, family-owned companies that employ 70 per cent of German workers and power its export performance. These firms thrive on long-term relationships with employees, customers, suppliers – and banks, which see their job as providing continuity and support rather than doing deals. This is why the private-equity ‘locusts’ arouse such fear in Germany: imported Anglo-Saxon attitudes would tear its economic fabric apart.

Back in the UK, timid recognition that there is still life outside the casino came with last week’s announcement of a boost to the UK’s apprenticeship scheme – partly, it is rumoured, under pressure from German employers, who persist, oddly, in seeing the UK as a manufacturing base. It seems churlish to carp. It is indeed welcome – just 25 years too late.

The Observer, 3 February 2008