IT WOULD BE nice to think that the recent market turmoil signalled a return to management basics. After the era of what we might call sub-prime management, in which every problem of corporate performance was a nail to be battered with the hammer of massive debt or incentives, the drying up of cheap credit for financial engineering might seem to mean we can get back to the realities of satisfying customers, investing in employees and making honest products that turn an honest profit.

Or can we? As the tide of private equity subsides, the full extent of the damage done to the foundations of conventional management becomes evident. As the embodiment of no-holds-barred investor capitalism, private equity offers a starkly simple narrative of management. Managers are hired hands whose only responsibility is to maximise shareholder returns. In efficient markets there is no distinction between the long and short term, so today’s share price is the only thing managers need to worry about. Under private equity, whatever the question, the answer is money.

Conventional management has no comparable grand narrative – only a paler version of private equity’s ultimate efficiency story. It is based on all the same assumptions – economic rationality, agency theory, hierarchy, value appropriation – but in a less extreme form. Private equity won’t go away, even if conditions are temporarily against it, and it has left ‘conventional’ management squelching on its foundations.

Where do we go from here? One place is London Business School’s MLab, or management innovation laboratory. MLab, brainchild of LBS professors Gary Hamel and Julian Birkinshaw, opened last year with the aim of making over today’s management rules. Although it brings together strands from several quarters, the immediate impulse for MLab’s establishment was Hamel’s frustration at the difficulty of persuading clients of his consultancy firm, Strategos, to innovate. Innovation, Hamel likes to say, is like getting a dog to stand on its hind legs: possible, but the moment you look away, the animal is back on four legs. Innovation requires a change of DNA.

It can be argued that innovation is the most important thing companies do. It goes beyond products, services and processes to embrace how organisations use resources. Yet while we are into Web 2.0, and technology and global interconnectedness combined make innovation and adaptability critical aptitudes for corporate survival, management is still firmly anchored in version 1.0.

‘Management is stuck,’ says Alan Mat cham, MLab executive director, who, after 10 years in the change-management practice of software giant Oracle, hardly qualifies as a woolly idealist. For 150 years, notes Birkinshaw, management has been geared to pursuing efficiency through principles of planning and control – specialisation, standardisation, hierarchy and the use of purely financial reward to motivate people. ‘Many people believe these are a given and that from now on it’s all incrementalism,’ he says.

Yet it is increasingly clear that Management 1.0 is hitting severely diminishing returns. Private equity may ‘work’ in its own terms, but at the price of force-fitting people to organisations – and it doesn’t do innovation. By entrenching the status quo, Management 1.0 has become the problem itself.

It was to get around this roadblock, and to channel the frustration of thoughtful companies running up against the inadequacy of current nostrums, that MLab was set up. It recently announced its first corporate founding partner, UBS, with which it will work ‘to accelerate the evolution of management processes and practices that will define competitive success in the 21st century’.

MLab aims to reopen all conventional management’s certainties and orthodoxies. At the level of processes, this is what its research partners are already doing. Thus, tired of the well-documented dysfunctions of budgeting, UBS is experimenting with alternatives. But behind these experiments shines the lure of an entirely new management model, one that rethinks organisations from top to bottom in light of today’s knowledge and conditions: Management 2.0, in fact.

The project is controversial. As Birkinshaw notes, MLab changes the role of business scholars from observing and describing management practice to co-creating it. And such status and legitimacy as business schools and academics currently enjoy are intimately bound up with their theorising and legitimising of today’s management model – of which private equity is the supreme avatar.

Can we make organisations fit for people? Do we need managers? Until we can answer such questions, a return to current ‘basics’ will offer little comfort or respite. ‘We want to convince the doubters that a new theory of management is possible,’ says Birkinshaw. MLab is a small step for management, potentially a giant step for mankind.

The Observer, 26 August 2007

SOME RADICAL friends didn’t share the enthusiastic reception for Lives of Others, the haunting recent film about life under the Stasi, the East German secret police. It wasn’t the acting or even the Big-Brother type plot of hidden manipulation and control that they objected to: what got up their noses was the complacent implicit assumption that the West wasn’t an equally enthusiastic user of similar surveillance techniques, even if mostly (so far as we know) for commercial rather than political ends.

They have a point. ‘We live in a surveillance society,’ was the bald assessment of a report for the information commissioner last year that catalogued in detail the technologies and processes by which we are all logged, profiled and digitised daily at work and at play – credit, loyalty, Oyster and swipe cards, mobile phones, congestion charges, work log-ins and activity monitors, interactions with public and private-sector call centres, not to mention the ubiquitous CCTV cameras.

One striking measure of the burgeoning of surveillance is the growth of the industry that provides it: in the three years to 2006 the top 100 US surveillance companies had doubled in value to $400bn. Surveillance is big business.

Even individual surveillance uses are hard to track and regulate, as technology runs ahead of the ability to foresee its implications. But in combination with ‘function creep’ (where a mechanism set up for one purpose, like a travel card, is then used for another, such as tracking movement), increasingly complex networks of information-sharing across private and public sectors, from credit-rating to benefits agencies and hospitals, make it almost impossible for people to assert their right to know the information held about them.

It’s like a ‘first life’ version of the virtual-reality website Second Life: whether we like it or not we all have shadowy ‘avatars’, digital doubles of ourselves, assembled by computer from dozens of different database components, that are logged and managed in ways of which we are only dimly aware. Although untethered from the office by mobiles and laptops, some remote workers find their digital selves more controlled and monitored than before. For consumers and citizens, racial and postcode profiling and credit rating are just the beginning. When you contact some call centres you are categorised by level of spending and served accordingly Amazon can price goods differently for different customers.

Not all surveillance is bad – accurate records can protect the innocent as well as identify wrongdoers – and some of it, as the information commissioner notes, is an inescapable part of being modern. The technology itself is neutral, as Lives of Others demonstrates, however the use made of it can be anything but. The report warns that it is naive and dangerous to sleepwalk into a world where gathering, processing and sorting personal data is no longer just an overlay, like CCTV cameras, but a part of life’s basic infrastructure, without debate or understanding what it means.

Part of the danger is cock-up rather than conspiracy: at a very basic level so much of the information gathered is just wrong. One study found that 22 per cent of a sample of entries into a police computer contained errors, even when double-checked. Names are misspelt and addresses wrongly coded. The impact of such errors is compounded by sharing what’s more, they are not remedied by the enthusiastic addition of more technology – as the IC report points out, a managerialist solution that often makes the original problem still harder to unravel, as well as locking us in to technology and expertise beyond democratic control.

At the same time, to a computer your digital identity is more real than the physical one indeed, if you don’t have a computer identity you don’t exist at all. Hence the phenomenon of the invisible consumer and the unreachable company, separated by the impenetrable barrier of the computer. When, as is the way of technological advance, the monitoring of information is taken away from humans in the name of rationality and given over to algorithms, the wrongness can become surreal. If computers decide who gets passports or is employed, we really are rattling the bars of sociologist Max Weber’s bureaucratic ‘iron cage’.

Surveillance is a substitute for trust. At work or as citizens, some people break trust, so surveillance is necessary. The dilemma is that by fostering suspicion and making people feel mistrusted, it increases the chances that they act in ways that seem to justify the surveillance. Lives of Others plays out this tension, before ending on a note of wry individual redemption. A small victory for humanity. Yet in real life the nightmare prospect of surveillance managing us rather than the opposite is apparent, and it will take more than fiction to reverse it.

The Observer, 19 August 2007

THE FRENCH philosopher Jean Baudrillard, you may remember, declared that the Gulf War (the first one) took place only on television. He would be unmystified by today’s broadcasting fakes, in which the reality as constituted on TV is the mirror opposite of that experienced by everyone else – as different as life is from death, in fact. Far from being just an aberration at the BBC, faking is now revealed to be endemic: it’s the way TV works.

We should hardly be surprised. Faking it – hiding one version of reality with another – is increasingly what management is about profit is the product of an arbitrage between the company’s image of reality and yours. Consider Penelope Cruz’s eyelashes, or any number of airbrushed model images. Almost all advertising and much media production is faked in some sense.

We’re not talking about honest mistakes here, but the more insidious practice of cutting corners and stretching reality. Articles that don’t live up to sensational headlines or stories that are bulked up to justify front-page billing dispel any illusion that the print media are immune to the ’embellishing’ temptations that broadcasting colleagues have succumbed to.

Many companies practice deception as a part of their business model – sometimes without even knowing it. In the June issue of Harvard Business Review, Gail McGovern and Youngme Moon describe how companies in a range of industries, from banking and hotels to mobile phones and travel, use a variety of tricks to make you pay more than the service warrants.

All service companies compete in advertising superior customer service. Yet many profit as much by extracting value as creating it. A substantial proportion of retail banking profits, for example, comes from penalising customers for breaking arbitrary, complicated rules about minimum balances, credit limits and payment deadlines. Mobile phone companies make much of their money out of the minutes we don’t use. Hotels and travel operators make it hard to find out about discounts or upgrades some airlines have computer algorithms that run so often that it is impossible to identify what the ‘normal’ price of a flight ought to be.

Why do companies persist with such pretences? First, because they can. In the Photoshop era, any image – any digital entity – can be manipulated by the most junior computer user in the company. Which it often is, because, second, there are financial pressures to do so. Technology and financial pressures have propelled the wave of outsourcing and freelancing, by means of which much of what used to be companies’ core work is done outside, by contractors and sub-contractors.

This cuts direct costs (although not by as much as managers think), but carries heavy hidden costs. One is that freelances and outsourcers also work for competitors, reducing differentiation and making it more likely that customers will switch. Another, as the broadcasters have found, is that if the gap between competing realities becomes too large to bridge, cheap is actually dear as trust evaporates and customers turn elsewhere.

The BBC, as a public-service broadcaster dependent on a licence fee, is particularly vulnerable to charges of trust abuse, and foolhardy for perpetrating it. But the danger for non-publicly supported organisations is just as great. In mobile phones and financial services, churn is so great that a substantial part of company resource is deployed on expensive recruitment of new custom ers to replace those who leave. That is called running to stand still. In the case of newspapers, could it be that it is lack of trust that has created such reader keenness to set up their own blogs and websites – that we have created our own competition?

Organisations that want to maintain customers’ trust have two ways of avoiding broadcasting-style fakes. If they are outsourced, they need robust governance in the shape of explicit rulebooks and contracts (this is one reason why outsourcing turns out to be less cheap than expected – it needs more formal, and visible, management, not less).

Old-style unitary companies have better, and often neglected, technology at their disposal. The word ‘values’ has been so overused it is almost meaningless. But if values are strong and unambiguous enough they are both cheaper and more foolproof than the alternative, since the rules are internalised and organic, rather than external and imposed.

Of course, some companies, pleading the pressure of the capital markets, will claim they have no choice but to fake it. Investors don’t care how the numbers are made, only that they are. This is not so much the Jean Baudrillard as the Groucho Marx school of management. As he put it: ‘The secret of success is honesty and fair dealing. If you can fake those, you’ve got it made.’

The Observer, 5 August 2007

‘THERE WAS only one catch and that was Catch-22.

‘Orr would be crazy to fly more missions and sane if he didn’t, but if he was sane he had to fly them. If he flew them he was crazy and didn’t have to but if he didn’t want to he was sane and had to. Yossarian was moved very deeply by the absolute simplicity of this clause… ‘That’s some catch, that Catch-22,’ he observed. ‘The best there is,’ Doc Daneeka agreed.’

Joseph Heller’s brilliant, excoriating 1961 novel, set on a fictional US airbase in the Second World War, was always about capitalism as much as war. But to read it again is to be struck by how much nature has come to resemble art.

In business, too, there is a trap – a catch in whose ‘spinning reasonableness’ and ‘elliptical precision’ individuals seem helpless. Well before capitalism’s global triumph, Heller imagined today’s organisational configuration in which the individual revolves around the system, rather than vice versa. Ever pondered the logic of companies taking away career and pension and upping work intensity, for your own good? Or the fact that you can buy any insurance you please, except for the things that you know you’ll need? Or that companies are delighted to give loans to anyone who can repay them but not to those who can’t, ie those who need them? Welcome to Catch-22. Only a few years in the future lay its ultimate expression in Vietnam in the shape of the My-Lai school of management, in which to save something it became necessary to destroy it.

For John Yossarian, Heller’s quirky contrarian protagonist, it slowly dawns that his life is in as much danger from the corporate ambitions of his own side as from enemy bullets. Not just the enemy – everyone is out to get him.

Thus, the naive and fabulously successful mess entrepreneur, Milo Minderbinder, successfully sells defence to the Germans, because he knows where the Americans will attack, and attack to his own side, because he knows where the German defences will be – despite the resulting carnage a victory for private enterprise, he points out, since both armies are socialised institutions. (‘Frankly,’ he confides, ‘I’d like to see the government get out of war altogether.’)

When Yossarian opens a first-aid kit to comfort a dying airman, he finds the morphine gone and a note its place with the words: ‘What’s good for M&M Enterprises is good for the country’ (everyone, as Milo insists, has a share in the syndicate). With his opaque deals and magical profits, Milo anticipates both the role of the private sector in modern war (think Iraq) and today’s private-equity and hedge-fund claims that it is somehow possible for purely financial instruments to conjure up perpetually higher returns than those earned on the underlying investments.

In real life, as in the book, Catch-22 is alive and well today in bureaucracy, provisos and small print. Corporate risk-management systems are sophisticated forms of it, being designed not to eliminate but to pass on risk. But the apotheosis of its diabolical reasonableness is undoubtedly numerical targets. Targets seem hard and tangible, the stuff of modern management. But the instant they are used to manage by, they melt: the figures can no longer be relied on, since people whose only control is over the numbers will instantly find ways around them. Hence a paradox of an elegance that Heller would have loved: targets are necessary and should be used, but in use they are useless and should be abandoned.

Not surprisingly, in this world of paradox, language too is mangled as it is forced to embody rival versions of reality. The novel features constant linguistic battles over meaning, characterised by blizzards of negatives and positives (‘I always didn’t say you couldn’t punish me, sir’). Much less wittily, corporate language reflects a similar struggle to reshape meaning – hence the excruciating circumlocutions and euphemisms which accurately express the conflicted objectives beneath. Try ‘workforce culture re-engineering’ and ‘leveraging supply-chain solutions’ (I leave the meanings to your imagination).

At the end of the book, by playing out his personal version of the dilemma – ‘jeopardising his traditional rights of freedom and independence by daring to exercise them’ – Yossarian is a danger both to himself and the system. He is offered the classic deal for the rebel down the ages: wealth and fame in return for accepting the system. Initially tempted, he refuses, and then has no option but to desert (’You’ll have to jump’. ‘I’ll jump’. ‘Jump!’ Major Danby cried. Yossarian jumped’). Nowadays, with no other game in town, it’s harder to opt out the challenge is to tackle Catch-22 from within. But Heller’s weapons – anger, surreal humour and a brilliant eye for human absurdity – are as important, perhaps more so, than ever. In the roster of alternative books about business, Daneeka’s right: this one is the best there is.

The Observer, 29 July 2007

BRITISH POLITICIANS enjoy lecturing their continental European counterparts on the virtues of a deregulated and flexible economy. But on the subject of what the flexible economy is supposed to deliver, namely superior company performance and productivity, they fall strangely silent. This is because, measured by output per hour, the UK still lags rather than leading. Recent figures show that in 2004 American workers added 34 per cent more value per hour than their UK counterparts, Germans 11 per cent more, and the French 25 per cent more.

This frustrates and perplexes ministers and their advisers, who have spent the last 30 years using the UK as a testbed for a no-alternative economic experiment in the abovementioned flexibility and deregulation, only to find that while the macroeconomic levers they can pull do affect productivity, it’s the microeconomic processes inside companies that they can’t reach (at least not directly) that matter more. It’s not the economy: it’s management, stupid.

Reinforcement for this view comes from a new report from the LSE’s Centre for Economic Performance, McKinsey & Co and Stanford University entitled Management Practice and Productivity: Why They Matter , which supports the common-sense notion that the way firms are managed is one of the most important ways of distinguishing between them. Scoring 4,000 medium-sized European, Asian and US manufacturing companies on the quality of their operations, performance and talent management, the report suggests that, as with productivity, the UK is in the second league for management, behind the top tier of the US, Sweden, Japan and Germany, alongside France, Italy and Poland, and ahead of the dunces of Greece, India and China.

However, these figures conceal some interesting subtexts. The difference in national averages is largely accounted for by the ‘tail’ of badly run firms – on the chosen criteria, 8 per cent of UK companies fall into this category compared with 2 per cent in the US. In India, 20 per cent of companies are badly run, yet the best Indian firms are a match for anyone. Multinationals operating in India, for example, are among the best-managed anywhere, with the top 30 per cent of Indian firms being better managed than the average in the UK. As the researchers note, combined with low labour costs, this makes them formidable competitors, irrespective of national averages.

Ownership matters too. Multinationals, particularly US ones, are the best managed everywhere. Interestingly, private-equity-owned firms aren’t notably better managed than the UK average, and are less well managed than the top tier of national leaders, multinationals and firms under dispersed shareholder ownership. So much for the supposed performance advantages conferred by their governance arrangements.

The researchers argue that the study is good news for companies, ‘suggesting that they have access to dramatic improvements in performance simply by adopting good practices used elsewhere’. For policymakers, the challenge is harder – getting the good-practice message across to the poor-performing tail that brings the average down.

But not so fast. In a kind of infinite regression, complementary research in progress under the aegis of the Advanced Institute of Management Research (AIM) hints that ‘adopting good practices used elsewhere’ is anything but simple. That is because managers are astonishingly bad at assessing their own performance. More than 85 per cent of managers in the LSE study believed their company was better managed than the average, and self-assessed scores ‘have almost no link’ with firm performance or the marks awarded by the researchers.

More broadly, the AIM research identifies the context for good practice as critical. Indirect support for that comes from the LSE finding that although there are relative differences in national scores (the UK scores well for people management and less well for operations, for example), ‘no single dimension provides the key for improved management performance’ – good firms are well managed across all performance aspects. The implication is that a firm can’t just import an attractive practice: it has to have the underpinnings in place to support it – including the awareness that it is needed in the first place.

So when it is said that British managers are notoriously reluctant to adopt promising practices, this is true but not very helpful, tantamount to saying that the UK is not very good at management. To break out of the circle of inertia, the key seems to be to get managers looking both outward – as much to customers as to other companies, to get an accurate bearing on their real competitive position and inward – to develop their own ‘signature’ practices, based on their own values and history, that will distinguish them from others in the eyes of customers. As with fruit and veg, home-grown is best.

The Observer, 22 July 2007

Amid the doom and gloom of the book trade – the disappearance of an independent bookshop every week, deep price discounting by the supermarkets, the pike-like eagerness of the large publishing houses to swallow their smaller brethren whole – it’s easy to conclude that there’s no life left outside the ranks of the big corporates.

Yet independent publishers continue not only to survive but thrive. Astonishingly, industry sources put the number of UK independent publishing houses at more than 3,000 – and though some are amateur or ‘plain daft’, the number remains remarkably constant, according to Philip Kogan, chairman of Kogan Page, by some distance this country’s largest indie publisher of business books.

‘Forty years of obduracy!’ is his self-deprecating description of the company’s ability to hold the road over long periods and difficult terrain but on closer questioning there’s a bit more to it than that.

‘There’s a lot of very good management going on around here,’ he says, a tribute to daughter Helen, who took over day-to-day running of the family-owned firm a couple of years ago, and also to colleagues who have seen KP through a number of ups and downs over the years, including the failure of a US distributor, which temporarily hit the group hard, and the periodic need to cull burgeoning publishing enthusiasms back to a core list that both marketing and sales wings can adequately service.

‘You could argue that as independents we have to be better than the big companies to survive,’ Kogan says. The range of skills even the smallest publisher has to embrace – business, design, print buying, editing, selling and marketing, distribution, not to mention web-mastery – stretches far beyond what any manager in a large conglomerate firm (‘not houses any more’) would have to envisage.

That’s a challenge, but also part of the fun of being an independent. ‘The fundamentals of publishing don’t change. It’s about acquiring good intellectual property and getting it to market’, Kogan notes. Proof of the primacy of shrewd commissioning, and something he is most proud of, is a core of titles still going strong 30 or 40 years down the line.

That includes some, he concedes, that are frankly boring – British Qualifications or the Industrial Training Yearbook, anyone? – so much so that he jokes that when he set it up he was tempted to call his venture Boring Books Ltd (‘but vanity prevailed’). Four decades on, British Qualifications , a must-buy for libraries, is in its 38th edition and paying a new generation of salaries and overheads: a testimony to the continuing vibrancy and viability of niche publishing, and to the ‘complete set of satisfactions’ provided by being able ‘to have and make work a good idea, no matter how simple or tedious’.

What has changed though, is the route to, and economics of, getting books to market. Ten per cent (for some specialist book and journal publishers almost the totality) of sales are now online and the same again through the supermarkets, and both segments are growing strongly. At the same time, with Borders up for sale and Waterstones cutting selling space by 10 per cent, the number of outlets is shrinking (and with it the range of books on offer to the public) while the cost of getting shelf space goes through the roof. As Kogan sighs, the days of the 30 per cent publisher’s profit margin are now a distant memory.

Kogan admits that his first love is the bookshop – ‘I’d rather browse and buy something I’ve discovered than chuck a discounted bestseller in the trolley with the toilet paper’ – and is delighted with the success of enterprising exceptions such as Daunts and the rejuvenated Foyles in London. He believes there’s much that could be done with some university campus bookshops. Yet there’s a saving grace in the impersonal new retail world: ‘All publishers are equal in the eyes of the internet’, he points out, and Kogan Page has adopted it with a sprightliness belying its age and low-tech exterior.

The internet is a boon to outfits such as Kogan Page which, with a list of 140 or so titles a year and a back catalogue of 1,500, sell mostly small numbers of a large number of titles spread over many years. There are exceptions to the ‘long tail’ model – Great Answers To Interview Questions sells 30,000 copies a year and is into its fifth million worldwide. But blockbuster sales can’t be relied on: ‘The smell of a title in a publisher’s nostrils is not enough: he, or she, must know, be sure of, the channels to market.’ They must also exploit all revenue sources, including internet selling and online publishing, audio, not neglecting sponsored publishing and selling ad space in books and online.

Despite being a bit of a worrier – he rings me a day after the interview fretting about an anecdote concerning a supplier – Kogan’s ease with the new world of online is no surprise. Unusually for a publisher, he’s a scientist by training. After school in east London he took a degree in physics, then spent 10 years in R&D, specialising in dielectrics (‘insulators for those who are more familiar with dialectics’). He might have continued in that vein, but for an appraisal where he was shown a graph plotting where he would be in eight years’ time, at the age of 40.

‘I’d be 40! Horrors!’ The next weekend he applied to be chief editor of a schools partwork called Understanding Science , which, to the consternation of his family, he got. The company he joined, Sampson Low, was a rambling outfit which also owned Jane’s Fighting Ships and published Enid Blyton. From its ‘able and eccentric’ boss, David White (who numbered the invention and exploitation of Little Noddy among his credits) and his wife, Kogan acknowledges learning much, including the virtues of producing copy to tight deadlines and explaining complicated concepts simply.

He also developed an itch to start out on his own. First, however, he did two more ‘off-the-wall’ jobs, with an educational technology firm and then Cornmarket, an innovative careers publisher run by Clive Labovitch, co-founder of Haymarket Publishing with a certain Michael Heseltine. When Cornmarket ran into trouble, Kogan, with a £2,000 loan from brother Ben, was on his way. With the help of a minority partner, the late Terry Page, an industrial journalist, he put together the first Industrial Training Yearbook in four months and wrote a direct mail brochure that had a scarcely believable response rate of 30 per cent.

Page dropped out after a few months, but the firm has never looked back. Now 77, Kogan shows no sign of doing that either, arriving at the company’s Pentonville Road warren most days to ‘deal with the horrible authors and do lots of strategy’. Neither is there any notion of selling up, although there’d be no shortage of takers. ‘I’m a recidivist,’ he says.

In any case, with succession assured, a proven formula and a pragmatic realism that has allowed the firm to play to, and adapt, its strengths to all the changes the trade has thrown at it, why would he? Despite regrets (and the running down of the science and cultural base local government profligacy), ‘We accept the world as it is. Provided we get organised, keep agile and have the right product, we can compete with anyone.’

THE CV

Name: Philip Kogan

Born: 1930 Stratford, London

Education: Stratford Grammar School, Universities of Reading and London (physics)

Career: Ten years as physicist in industrial research before changing profession to take up several jobs in publishing. Launched Kogan Page as part-time occupation in 1967 with the aid of partner Terry Page and a £2,000 loan. Past chairman of the Independent Publishing Guild and treasurer of the Publishers’ Association

Hobbies Tennis, reading, music

Family Married, two daughters, one son

The Observer, 15 July 2007

LAST CHRISTMAS a legal firm sent me a mug. On the front was the legend: ‘Do you have a risk assessment for THIS?’, and on the back: ‘Have you: Tested the kettle’s connection? Checked for vermin faeces in the tea bag? Ensured the milk is within its sell-by date? Checked the handle is secure? Waited for the tea to cool to a safe temperature?’

This is a joke, but it’s not much more extreme than the notice seen recently at a cricket ground warning that cricket is a game played with a hard ball that could hurt if it hit you. Or the council that advised residents to take out liability insurance costing hundreds of pounds a year for an allotment rented for £5. Or, at a completely different level, the US Sarbanes-Oxley legislation that obliges companies to have internal controls to prevent future Enrons or WorldComs.

What all these examples have in common is a growing obsession with risk management. At first blush, the managing (and implied minimising) of risk sounds uncontroversial, even beneficial. But is it really true that the world is suddenly so risk-ridden that it justifies what LSE’s Professor Michael Power described in the title of an eloquent Demos pamphlet as ‘The Risk Management of Everything’? OK, we used not to have terrorists, but neither did we have statins to control cholesterol or smoke-free pubs – and when was a spectator last killed by a cricket ball? Or is risk management just another artificial bogeyman set up for consultants to charge huge amounts to charm away?

It’s more subtle, and pernicious, than that. The term ‘risk society’ was coined by sociologist Ulrich Beck in the early 1990s to describe a modern society organised in response to the idea of risk. But Power dates the rise of the risk-management industry to 1995, when the oil storage platform Brent Spar and the collapse of Barings Bank suddenly brought into focus the twin objects of risk fetish: internal controls and reputation.

The downing of Barings by rogue trader Nick Leeson triggered a quest for internal control that culminated in Sarbanes-Oxley. And with Brent Spar came the realisation that perception of events and motivations could be life- threatening – a revelation underlined when Arthur Andersen, the largest auditor in the world, vaporised after the disclosure that it had shredded Enron documents.

‘Reputation has become a new source of anxiety where organisational identity and economic survival are at stake,’ Power writes. ‘And if everything may impact on organisational reputation, then reputational risk management demands the risk management of everything [RMOE].’

Unfortunately, the consequences of RMOE are potentially more damaging than the first-order risk it was supposedly designed to control. Internal controls are about process – paper trails and arse-covering, in the technical term witness the Sarbox ‘reign of terror’ which absorbs so much corporate energy (and cost) that there’s no one left to look out for ‘unknown unknowns’, by definition beyond the scope of risk management until they occur.

Internal control blueprints, concludes Power, are largely fantasy, an incantatory naming and taming designed to ‘project comforting images of controlling the uncontrollable’. Meanwhile, reputational risk takes us into still more troubling territory. Reputation is secondary risk, the risk to a company’s image of making a primary mistake, but, as Andersen demonstrates, it is a potent one. The response is defensive: either direct, so that schools cancel trips and auditors stop auditing high-risk clients (ie, those who most need it) or indirect, by acting as before but attaching warnings everywhere (like the mug and the cricket notice).

Power believes we are entering a phase where organisations are more concerned with second-order, reputational, risk, than the primary one of getting things wrong in the first place. This is manifested in the public sector by universities and hospitals managing league tables and stars rather than students and patients, and in the private sector by the subsuming of corporate responsibility into the risk management agenda. Instead of being about doing the right thing, CSR is just another risk-management ploy. The spin and the small print are more important than the substance.

The pathology of risk management presents in many other absurd and tragic ways. Organisations may be safer, but at the price of offloading risk on to individuals who can’t pass it on – which is why public confidence in organisations does not increase. And pity the professionals, teachers, doctors and accountants, who hide their expensively gained expertise rather than express it for fear of the retribution that an honest mistake will bring down on their organisations and ultimately on themselves.

Thus does risk management multiply risk for the collective. In other words, my mug isn’t a joke. It’s deadly serious.

The Observer, 15 July 2007

ONE OF THE innovations that Gordon Brown inherits from Tony Blair is the Prime Minister’s delivery unit (PMDU) at Number 10. To the uninitiated that may not sound interesting, but governments around the world have leapt on the experiment with alacrity.

It’s not hard to see the appeal. The delivery unit – a small performance-management unit at the heart of government – offers the promise of driving public-service improvement from the centre, acting as a transmission mechanism between the motor of prime ministerial edict and the wheels of the individual departments.

The story of the PMDU is fluently recounted in Sir Michael Barber’s new book, Instruction to Deliver. Barber, who set it up and ran it from 2001 to 2005, was Blair’s ‘Mr Targets’, the enforcer of the government’s, but particularly the Prime Minister’s, priorities during his second term, extending to the railways, hospital waiting times, street crime and other areas the methods he had previously used as a special adviser at the education department to drive through improvements in literacy and GCSE results.

It’s an instructive narrative, if not always in the way Barber intends. A loyal Blairite, he is eloquent on the frustrations of an impatient government which has, surely correctly, identified public-sector productivity as the defining issue of domestic politics. The recalcitrance of the professions, the venom of the media and the languid wordiness of the civil service are givens. He vigorously defends the target regime and its achievements – illustrated, true to caricature, by a series of Powerpoint bar charts. The usual suspects (rising expectations, time lags, the media – natch) are evoked to explain why we aren’t suitably grateful for the results.

Barber’s team of ferociously bright and focused young things undoubtedly provided a salutary jolt to a system in which delivery was secondary and a job in execution as welcome as a stint in the salt mines.

Barber is proud of the fact that when asked in 2005 if the unit should be abolished, initially suspicious departments all voted to keep it. Yet the book raises more questions than answers. Barber’s final plea for a fully-fledged Prime Minister’s department to strengthen the central delivery chain still further seems an unlikely way forward, at least on its own. On Barber’s own estimation, the four-year treatment administered by the PDMU has only raised the standards of the public services from ‘awful’ to ‘adequate’. More seriously, that improvement has been won at enormous cost, both financial and in terms of the collapsed morale and sometimes downright hostility of the public-service professions.

Unfortunately, that compromises the ability to achieve better things in the future. Even Barber concedes that getting from ‘adequate’ to ‘good’, let alone ‘great’, can’t be done by central fiat. It needs to enlist hearts and minds. It also requires the ability to look at and manage the system as a whole. Barber acknowledges the need for ‘whole system reform’ in passing, but only in passing, and gives no hint of the extent to which the blunt, soviet-tractor-style techniques of PMDU Mark 1 (targets, carrots and sticks) are incompatible with it.

As someone said, carrots and sticks are useful for donkeys and if the object is direct and simple. Likewise targets. Of course, as Barber writes, it is important to know what success is and devise measures to track progress towards it. But it’s bad faith to try to motivate people with financial incentives then complain they are self-interested and disin genuous to pretend that the unintended consequences of crude numerical targets are trivial.

Two weeks ago the Economist , a publication Barber approvingly quotes, carried a piece querying the Blair educational achievement that he oversaw. New research, it reported, suggested that improved GCSE pass rates had only been achieved by pupils taking easier subjects and the much-trumpeted improvement in 11-year-olds’ literacy and numeracy was partly a reflection of being taught to the test.

As an easy solution to a complex problem, this is what targets do. It’s not that they are too ambitious or can’t be made to work, at least temporarily it’s that optimising the parts is the enemy of the much greater returns that only system reform can deliver. Barber shrewdly notes that in many cases a ‘legacy’ depends not on the achievement handed on but what a successor does with it. This is the case with Blair and the PMDU (Barber has moved on to join consultants McKinsey). If Brown uses it to go beyond ‘flogging the system’ and institute a systems-approach delivery improvement, it will be a lasting and important one. If he doesn’t, it will go the way described by a public servant in the book: ‘Reforms are like London buses it really doesn’t matter is you miss one because there’ll be another one along in a minute.’

The Observer, 8 July 2007

AFTER LAND Rover and Jaguar, ICI looks likely to be the next British manufacturing icon to fall under foreign control (see page 4). Even more than the carmakers, ICI’s history is full of painful ironies, the most poignant of which is that its eclipse is entirely home-made. The brutal truth is that ICI has imperilled its independence by dutifully complying with the approved nostrums of financial management over the last two decades.

It’s worth emphasizing that the old ICI wasn’t just the UK’s largest and most successful manufacturing firm for much of the 20th century. As economist John Kay has pointed out, it was also one of the main progenitors of the country’s most celebrated (in fact, its only) hi-tech industry.

After the war, ICI’s board decided that the future of chemicals lay in pharmaceuticals. Among the clever young scientists it hired was James Black, whose discovery of beta-blockers laid the foundations for ICI’s pharmaceuticals division, later Zeneca. Black took similar concepts to SmithKline, where he won a Nobel prize for his work on a stomach-ulcer treatment that became Tagamet, the blockbuster that indirectly begat Zantac – for many years the best-selling drug in the world and the one on which Glaxo’s fortunes were based.

It took no less than 20 years for ICI’s pharma operations to break even – but patiently growing its stock of resources was what ICI was for , as its mission statement of the time made clear. As late as the 1980s, its stated aim was to be ‘the world’s leading chemical company, serving companies internationally through the innovative and responsible application of chemistry and related science. Through achievement of this aim, we will enhance the wealth and wellbeing of our shareholders, our employees, our customers and the communities which we serve and in which we operate.’

It is possible to identify the exact moment when all that changed. In 1991, Hanson, a company which in many of its methods anticipated today’s private equity houses, bought a small stake in ICI which was widely thought to be the precursor of a full bid. It wasn’t, but – rather like the Cadbury Schweppes demerger today – the threat, sensational at the time, was enough to spur the company to do exactly what the raiders wanted: break itself up, float off pharma and arm itself with a new, managerially correct mission statement that was more in tune with the age of shareholder value: ‘Our objective is to maximise value for our shareholders by focusing on businesses where we have market leadership, a technological edge and a world-competitive cost base.’

Instead of growing through its own R&D (‘the innovative and responsible application of chemistry’), ICI now saw its strategy as dealmaking – dumping commodity chemicals and buying its way up the value chain in the shape of fragrances and a sheaf of speciality chemicals acquired from Unilever. So far, so fashionable. But ICI went one better. Again anticipating what is approved practice today, it burdened itself with pounds 4bn of debt to do the Unilever deal. Unfortunately, it failed to sell off the old assets as quickly as it hoped, turning the debt into a millstone that prevented it from doing anything else. Earnings and share price declined. The chief executive left.

Under the latest regime, ICI is thought to have done quite well, paying down the debt and beginning to grow again. But it has paid dearly for the five-year period when it was paralysed by debt and you might say that, in the longer term, the Dutch bid is its reward for having faithfully reflected in its strategy the financial orthodoxy of the time, an orthodoxy that it helped create.

It is important to stress that ICI wasn’t just any old company, but a genuine world leader. It was managed by the great and the good, individuals who headed commissions and bequeathed us today’s governance rules, among other things. As such, the reason it finds itself in the position it does today is not dishonesty, roguery, or irresponsibility. It is not even bad management – or, rather, it is, but it’s institutionalised bad management of the kind that ticks all the boxes of the narrow playmakers by whose rules the UK’s corporate economy now runs.

You won’t be surprised to know that ICI has crafted itself yet another vision. This one is ‘to become the leader in formulation science, creating complex mixtures that deliver the effects valued by consumers and customers’. It continues: ‘To achieve this leadership goal, and through this create superior returns for shareholders, the group is building a portfolio of businesses that are leaders in their respective industries, bringing together consumer understanding, outstanding knowledge of customer needs and processes, and leading edge technology platforms to provide a distinctive, competitive advantage’.

I’ll leave you to decide which of the three mission statements provides the most appropriate guidance for a developing, world-leading company, and which reads most like an epitaph.

The Observer, 24 June 2007

THE FATE of Jaguar and Land Rover (see Oliver Morgan, pages 4-5) will be a key indicator of the state of 21st-century UK plc. That the most likely buyer is private equity already tells us much – not least because in our City-dominated economy there are no large manufacturing candidates left.

If they are snapped up by private equity, will two of the best-known names in UK manufacturing go the ‘propertification’ way of Rover, their assets seen to be worth more as shopping malls and offices than factories employing people to make things? Or will they be turned round, their pipelines stocked with new models and returned to the stock market in rude, restored health?

That is the official private equity scenario, of which the motor companies will be an acid test. But the test track will not be ownership as such. Some of the best-performing motor and ancillary companies are already privately controlled, with a strong family influence – think of Toyota, BMW, Porsche and Michelin.

Yet these companies work to time frames and visions that are in many ways the antithesis of private equity. All are the result of patient organisation-building that stretches far beyond building a product and selling it. Toyota makes its own microchips (thus saving itself the electronic glitches that damaged Mercedes’s quality reputation) while in Michelin’s idiosyncratic structure the tyre brand is underpinned and spread by its maps and restaurant guides. How long would those last if the private equity funds got their hands on the French tyre-maker?

The testing ground is management. The corporate world is increasingly dividing into two rival visions of how to manage performance. Private-equity-driven management is a kind of turbocharged version of the existing command-and-control orthodoxy, but vastly bidding up both its inducements for success and the penalties for failure, and bidding down the human angle. Generic, numbers-driven, financially-motivated, it claims to be able to manage anything.

In a kind of Gresham’s Law, private equity-style management is driving out longer-term, more people-oriented alternatives. Pressure from the capital markets is one factor, leading companies to try to head off the attentions of private equity or to respond to activist shareholders (such as those on the case of Cadbury and Vodafone) by pre-emptively adopting their own behaviour.

A second, less acknowledged, reason is the lure of quantification: managers find numbers easier to manage (and manipulate) than humans. A striking testimony to this clash of values is the conflicting attitudes of executives around HR. In a worldwide survey by the Economist Intelligence Unit and Deloitte, while 85 per cent of senior executives said people were ‘vital’ to business performance, 63 per cent admitted they never consulted HR leaders on mergers and acquisitions, and in three-quarters of firms HR barely contributes to strategy formation.

By piling on the pressures to dispense with underperforming assets and wring the utmost from existing resources, private equity favours present efficiency. Whether the same reductive appeal to financial motivation and quantification is as effective when applied to the less certain process of innovation is moot – let alone the investment in people, products and the organisation that leads to enduring outperformance in a sophisticated industry such as car manufacture.

While it is greatly to the taste of the capital markets, the private equity management style runs up hard against what people say they want from work. According to studies such as Roffey Park’s annual ‘management agenda’, most people are still more motivated by making a difference, by recognition and by doing a good job and feeling good about it than anything else. Put bluntly, beyond a certain point most people want meaning from work rather than money.

Such concerns might seem to cut little ice in the face of the high returns being claimed by the most successful private equity and hedge funds, quite apart from the extraordinary amounts being pocketed by those in charge of them. Despite what people privately think, money talks louder than anything else, doesn’t it?

Yet even in this ultra-hardnosed world, the human factor has a habit of biting back. Last week the Financial Times noted that staff at top investment banks in London, struggling to cope with record deal volumes, were so overstretched that they were in danger of making costly mistakes. One consultant noted: ‘The temptation is to drive your people harder. But there is a limit. There could be a danger of people slipping up.’

It’s a delicious irony: the boiler room of today’s voom-voom capitalism at risk of blowing up under the pressures it is imposing on others in the name of the virtuous disciplines of private equity. Down on the shop floor, whether in the City or a Land Rover plant in Solihull, you take the ‘man’ out of management at your peril.

The Observer, 17 June 2007