RESPONDING TO an article on the outsourcing frenzy, a reader lamented that managers had forgotten how to manage: their first reaction was to look for packaged solutions that offloaded responsibility for anything difficult on to someone else. This resonated with the observation by a council chief executive that young managers were so reliant on targets they had become incapable of managing without them. Confronted by the need to use judgment, they were at a loss.

Such behaviour is part of the burgeoning phenomenon of management lite – managing by numbers and formulas rather than judgment and method. What this dumbing-down of the discipline means in practice was captured with brutal clarity last week in the Panorama investigation into apparently dubious food-preparation and labelling practices at Tesco and Sainsbury. To refresh your memory (if not your palate), the programme alleged that in some stores workers had altered sell-by dates, invented records and sometimes even reprocessed foods for resale. To which the companies replied, more or less in chorus, that they took such allegations seriously, were satisfied that these cases were aberrations, and had retrained staff to ensure they didn’t happen again.

No doubt top managers believe that they are telling the truth. But let’s unpick it a bit. Why would workers go to such lengths to protect Tesco’s profits? Love of the company or loyalty to shareholders? According to the staff in question, time and understaffing pressures were one answer, while others feared for their job prospects if the stores went over tight waste budgets.

Yet we’ve known for years about the consequences of such a work climate. Statistician W Edwards Deming (whose UK Forum met last week to honour and build on his work) noted half a century ago that where there was fear, there were also phony figures. Targets are a classic substitute for the hard work and thought needed to understand real demand and how to organise work to satisfy it. They have the dual effect of conveying fierce performance pressure downward while absolving those at the top of responsibility for or knowledge of the methods used to achieve them. For those on the receiving end, it’s their job against the integrity of the only thing under their control – the figures they give their bosses. As Deming noted, no prizes for guessing which is the casualty.

This is why, under any such a regime, whether the NHS, the police (the subject of the previous week’s target nonsense) or shelf-stacking at Tesco, cheating is never just an aberration – the province of ‘a few rotten apples’ – but the rule the figures collected to monitor them are worthless and managers wholly unaware of what is happening on the ground.

While targets actively corrupt, as the same reader noted, many other management initiatives promoted by successive governments – BS 9001, EFQM, Investors in People – are more about assessment, conformance and verification than how to take action: clipboard thinking, in his words. Still others, such as the adoption of ‘solutions’ ranging from CRM and call centres to the current favourite, shared services, reflect a naive and gullible belief that technology and data can somehow take the place of reflection and method.

The hollowing-out of management helps explain some otherwise puzzling contradictions. In theory, with more university students at both undergraduate and graduate level studying business than any other subject, our organisations ought to be better run than ever. Yet there is little evidence of this. Rather, the ability to execute seems if anything to be getting worse. In the public sector, the debacles of Hips, junior doctors’ appointments, botched Scottish elections and the Rural Payments Agency are a succession of cases in point. The setting aside of no less than an extra pounds 400m to project-manage the Olympics is an extraordinary vote of no confidence in the UK’s ability to oversee large projects – but then again, after the Dome, the Scottish parliament and Wembley, it’s hardly an unreasonable view to take.

Dumbed-down management does no favours to executives, those they manage, or the organisations they work for. In London recently, management writer Ken Blanchard described the job of leaders as creating a framework within which frontline workers could be trusted to use their brains independently of rules and regulations – the opposite of the Tesco and Sainsbury experience.

Managers are not mechanics who pull (or push) levers to make things happen. As Don Sull at LBS once put it, other than in finance, there aren’t global business laws. ‘There are useful generalisations, but in management, context, timing, personality and history are everything. The challenge lies in developing judgment, knowing which tool to use rather than reaching for the hammer every time.’ It’s not the counter staff who need retraining: it’s the managers.

The Observer, 27 May 2007

DO YOU have to be an asshole to succeed in business? Many would answer ‘yes’ – the rueful witnesses to the fact that in business, as in baboon troops, alpha males (and females) end up on top, where the combination of success, domineering natures and fawning underlings quickly turns them into horrible creeps.

This is why in a list of the world’s greatest assholes, business would take a disproportionate share – Kozlowski and Ebbers, ‘Chainsaw Al’ Dunlap, Trump, Eisner and much of the top management at Enron. Although in the UK maybe only Maxwell would make the A-list, we could supply a richly unpleasant supporting cast, including many trading managers in the City of London.

But the asshole imperative is self-serving fallacy. As Bob Sutton notes in his entertaining and important The No Asshole Rule (Sphere), succeeding in business is not the same as having a successful business – in fact without careful management, the abrasive qualities that the unscrupulous use to elbow others out of their way as they move up can, and often do, tear the fabric of the organisation to bits. Assholes may ‘succeed’, but they often wreck the business in doing so.

This forceful plea by Sutton – management professor at Stanford and co-author of Hard Facts, Dangerous Half Truths and Total Nonsense – for workplace civility is founded on a mass of psychological and management research demonstrating that the idea of ‘the brilliant bastard’, the star who is also an asshole, is, organisationally speaking, an oxymoron.

In terms of hard cash, one business estimated only the most obvious management, legal and HR costs of dealing with an ‘untouchable’ but obnoxious performer at $160,000 a year; adding in the indirect losses to the firm through stress, demotivation, absenteeism and knock-on effects for customers takes the Total Cost of Assholes, or TCA, multiples higher. More cheerfully, high TCA means the results of getting rid of assholes are invariably less financially damaging than expected and often more than offset by the positive effects – freer flow of ideas, fewer leavers, better morale and more time to spend on customers rather than staying alive.

There are, Sutton admits, one or two exceptions to the ‘No Assholes Rule’. Managers sometimes need to do ‘bad cop’ as well as ‘good’, not least to deal with the clueless, spiteful and lazy – assholes, in fact. In some people it’s hard to tell whether good or bad cop predominates. When he googled ‘Steve Jobs’, Apple’s mercurial chief, with ‘asshole’, Sutton got 89,000 hits compared with just 750 for Oracle’s equally notorious Larry Ellison. Jobs is undeniably both brilliant and impossible, capable of making underlings believe he is either the devil or a hero. But research shows that fear motivates less well than positive reward. Playing the asshole, Sutton concludes, is a dangerous game, the most likely outcome of which is that you are one, in which case you’ll almost certainly do far more harm than good.

The reason is that human emotions, including fear, contempt and rage, are contagious while conversely, personality has little influence on how people behave in particular circumstances. Negative interactions have five times more effect on mood than positive ones.

The upshot of this triple whammy is that ‘assholes breed like rabbits’. Worse, if the plague isn’t stifled at birth, it can kick off a vicious circle in which asshole behaviour becomes institutionalised, generating expectations that reinforce it. Managers who rule by fear and loathing foster cynicism, resistance and indifferent performance that seem to justify yet another turn of the screw.

In some areas – Wall Street and the City of London, Hollywood, the music industry and increasing swathes of the UK public sector – asshole management is endemic, raising the spectre of the horror-film scenario in which our organisations reprocess us in their own malign and shrunken image. In Sutton’s chilling phrase, ‘Assholes are us’.

This is not an idle threat. While the reverse process also holds – civilised behaviour begets civilised behaviour – many of the things organisations do in the name of management encourage rather than dampen asshole tendencies. For example, hundreds of research studies confirm the adage that power corrupts. Increasing status and power differences turns alpha natures into assholes (who as a result make worse decisions) and inferiors into underperforming wimps.

Powerlessness corrupts, too. Many organisations aggravate the problem with ‘performance cultures’ that constantly rate and rank people, garland a few stars and ignore the rest. Yet the evidence is clear and easily understandable: ‘if you want to have fewer assholes – and better organisational performance – reducing the status differences between the highest- and lowest-status members… is the way to go.’

Oh, anyway, sod it – this book is a blow for humanity as well as management. Life is too short.

The Observer, 20 Many 2007

OUTSOURCING of information technology – and to a lesser extent business processes such as finance, administration or human resources – is now so prevalent that it has become the default: companies, and particularly the public sector, have to explain themselves if they don’t outsource, the underlying assumptions being that they are (a) missing out on automatic cost reductions attendant on shedding routine operations to specialists and (b) by the same token, handing competitive advantage to those who do.

Yet outsourcing is going through ‘a mid-life crisis’, according to Compass, a management consultancy. When Compass analysed 240 large outsourcing contracts in Europe and the US, it found that fully two-thirds were unravelling before the contract’s full term. Far from cutting costs, in many cases outsourcing ended up costing more than keeping the services in-house.

Terminating a contract in mid-term is expensive, but some buyers are finding that the cost of remaining locked in to an inflexible deal is higher still. Sainsbury and JP Morgan are two firms that have scrapped multi-million-pound deals (with Accenture and IBM) over the past couple of years to bring IT operations back in-house others probably would (and should) do the same, except that they no longer have the necessary expertise to do so.

Ironically, the inflexibilities are often negotiated into the contract by buyers, whose faith in the existence of large cost advantages is akin to a belief in alchemy, according to Scott Scarrott, Compass’s head of business development. ‘There’s no magic,’ he says. An outsourcer has to be 20 per cent better than the in-house operation just to cover set-up costs and break even. Factor in a margin for risk, overhead and profit and that rises to 40 per cent. That’s a handicap that can’t be offset by simple ‘labour arbitrage’ even in low-wage countries such as India, where high labour turnover and low productivity compound the disadvantages.

Yet buyers still insist on negotiating heavily legalistic, cheapest-possible deals with almost no ‘wriggle room’. They usually live to regret it. Two or three years in, buyers find that hardware costs have come down, while – under heavily back-end-loaded deals – costs are rising rapidly. By the end of a seven-year contract, some companies examined by Compass were paying 40 per cent more for their outsourced services than they would have by doing them themselves.

Scarrott stresses that this is not the type of deal vendors prefer, but it is the one that cost-obsessed buyers insist on. ‘For every bad vendor there are at least five bad buyers,’ he says. The mistakes are all the bad old management habits, speeded up and updated for an IT-enabled world: short-termism, wrong yardsticks (speed and labour costs rather than anything connected with the business), failure to retain know-how to manage the new relationship, inadequate attention to governance, and an unappealing combination of greed, laziness and cowardice that is manifested in the all-too-common practice of ‘lift and shift’ – simply taking an inefficient operation and handing it over to someone else to deal with, often, in the medium term, by sacking people. In short, outsourcing has become a classic management fad.

Depressingly, the public sector is a serial offender, adding to poor procurement a dogged failure to learn: a contract’s true value can only be evaluated after two or three years, but since those who do the deals are only concerned with procurement, that rarely happens. So outsourcing is frequently the worst of all worlds: the wrong solution to the wrong problem, done badly.

Given that IT outsourcing is three generations old, you might expect the lessons to have been learnt by now. A few companies, having found out the hard way, are indeed beginning to take a more selective attitude to the practice: lowering cost-saving expectations, bringing back some operations and retaining much more expertise even in those they outsource. However, Compass sees many of the same mistakes being made all over again as new industries, such as insurance, pile on the bandwagon.

Perhaps the most worrying aspect of this catalogue is what it says about companies’ underlying strategy. None of the hi-tech trappings or jargon can disguise the fact that ‘lift and shift’ represents the management equivalent of football’s ‘route one’ – heads down, hack the ball upfield and chase.

No wonder customers are unhappy. If they are cynical about customer service with a foreign accent, it’s because they know it’s an accurate reflection of suppliers’ reliance on low-cost and mass-production methods for dealing with them. That’s a model that has run its course – so shareholders should be worried, too.

The Observer, 13 May 2007

THE PAINFUL unravelling over the last year of the public and private lives of one of the UK’s most iconic businessmen, Lord Browne, is a sobering example of the pitfalls of the cult of leadership. Raising expectations far beyond the capacity of one human to fulfil them – neither BP’s successes nor its more recent failings were ever down to Browne alone – hero leaders often end up destroying themselves and wounding the companies that helped to make them.

The love affair with Leadership – capital L – is deep-rooted and pervasive, as a look at almost any copy of Harvard Business Review or Fortune will confirm. April’s HBR establishes both the tone and the assumed relationship with ‘What Your Leader Expects From You’. February offers ‘Discovering Your Authentic Leadership’, while January 2007 – a special issue devoted to ‘The Tests of a Leader’ – sports a cover picture of a shirt-sleeved executive (male, naturally) pumping press-ups on the boardroom table. ‘Leadership is for lone He-Men’ is the clear message: leaders are managers on steroids.

Of course, we need leaders to focus, decide, rally and sometimes inspire. From playgrounds to football teams to political parties, human groups do not remain leaderless for long. But the business need for heroic leadership – and its corollary, the lament for the lack of it that kicks off most articles on the subject – is something else again.

Where does the desire for heroes originate? One source is the quest for certainty. This intensifies as the world becomes more uncertain perversely, by raising expectations it also increases the likelihood that they will be dashed. Another source is the way the leader’s job is specified. Theoretically, the need for hierarchy, with a strong leader on top, stems from the idea that employees’ and companies’ interests differ, so a strong boss is needed to ensure the workforce does what is required for shareholders. The boss must also decide what they should do. Obvious, really: in any case, the alternative – running a company from the bottom up – is surely a recipe for chaos and anarchy?

Except that these notions are danger ous half-truths. In theory and in practice, hierarchy doesn’t work, and no one put the reason better then GE’s Jack Welch, himself an iconic manager. Hierarchy, he said, defines an organisation in which people have ‘their face towards the CEO and their ass towards the customer’. The more charismatic the executive, and the more centralised the power, the more perverse the effect.

Centralised power and decision-making, central planning by another name, is not only bad news for the customer. It leads to a cult of personality that wrecks good management. In Ego Check: Why Executive Hubris is Wrecking Companies and Careers (Kaplan), Mathew Hayward notes that chief executives who become celebrities are a danger both to themselves and their followers. They believe their own press, attribute success to their own brilliance and failure to the incompetence of others, and vastly overestimate their decision-making prowess. Success only supercharges this process, generating feelings of invincibility that make an eventual fall inevitable.

When CEOs become celebrities, their firms’ performance starts to decline, Hayward finds. Before their downfalls, Martha Stewart, Enron’s Ken Lay, Hank Greenberg at AIG, Sunbeam’s Al Dunlap, Dennis Kozlowski at Tyco, and WorldCom’s Bernie Ebbers all figured in laudatory cover stories in prominent business magazines. He also discovered that companies with starry CEOs pay more for acquisitions. And consider this: by acting as positive feedback, stellar pay can reinforce executive hubris and its damaging effects. Hayward writes: ‘By fostering false confidence, greater compensation can actually diminish our resourcefulness and productivity.’

At bottom, the cult of leadership is based on a false opposition. The opposite of top-down hierarchy is not bottom-up anarchy. It is what John Seddon of Vanguard Consulting calls ‘outside-in’, or, to reverse Welch’s image, turning the company through 180 degrees to face the customer rather than the boss.

Making the organisation demand-led instantly changes the role and requirements of the CEO. Of course, courage and judgment are still necessary. But they are no longer arbitrary, the product of supposed omniscience. Nor is the job any longer one of coercion, but rather to support front-line employees in serving customers. In short, the leader sets the context in which the interests of company and employees can, as far as possible, coincide.

As ever, be careful what you wish for. Outside-in, demand-led companies don’t need hero leaders, we should beware of creating them, and they should beware celebrity’s duplicity. As for investors, when a CEO makes the front cover of Fortune, or appears at the head of a ‘most admired’ list – sell.

The Observer, 6 May 2007

Anyone looking at New Labour’s decade through a macroeconomic lens might conclude it was the best of times.

After an uninterrupted run of growth, employment is consistently high and inflation (despite the recent blip) is low. The UK rates as one of the most market-oriented, business-friendly economies in the world, with (whatever the CBI says) a favourable tax regime and the lowest levels of product and labour market regulation in the OECD. The stock market is booming. For proof of the strength of the economy, look no further than sterling which, apart from a brief moment in the early Nineties, was last worth $2 in Mrs Thatcher’s day.

Yet reverse the lens and the New Labour decade looks very different. Since 1997 manufacturing has lost a million jobs, including those of the last British volume car manufacturer – a symbolic demise if ever there was one. Record company profitability notwithstanding, fewer people can look forward to a secure old age most will have to work longer, and harder, for their retire ment. Levels of engagement and trust at work are obstinately low. Since real salary increases have been hogged by the best paid, inequality with even medium earners has grown by leaps and bounds. The country is running the biggest trade deficit since records began. Meanwhile, much of the public sector is in disarray.

Most strikingly, despite being the focus of intense government effort, relative to traditional rivals the productivity performance of UK firms is mediocre – in terms of output per hour, free-market Britain still lags not only the United States but regulated Germany and even supposedly sclerotic France. It was, in fact, the worst of times.

How can two such different accounts apply to the same economy? Clues can be gleaned from a series of studies being carried out by the Advanced Institute of Management Research (AIM) which suggest that ministers’ views of management are naive. Broadly, the government thinks that improving company performance is about supply-side economics and best practice. To this end, the Treasury has singled out five ‘levers’ of productivity – competition, innovation, enterprise, investment and skills – and subjected each to major programmes of reform.

But both these concepts are problematic. Productivity, the researchers suggest, is not primarily about inputs but the messy, complex, human process of turning them into usable outputs – ie, management, not economics. Since the Treasury’s levers are unconnected with what happens inside the firm, supply-side push has little effect: the supply of skills may have increased, but employers’ ability to use them hasn’t the world is awash with credit, yet companies still refuse to invest as much as counterparts abroad competition pushes companies on to the ‘low road’ of cutting costs and competing on price rather than changing strategy to move up the value chain.

This is bad enough. But there is more to come. AIM’s work on UK companies’ notorious reluctance to take up advanced management practices shows that the idea that there is something called ‘best practice’ that can be bodily transferred from one context to another is simplistic. Instead, companies need to look within themselves as much as outside to develop their own unique ‘signature’ processes. This is why Toyota remains way out in front of other car firms, despite all attempts to imitate it.

Establishing such processes involves building human and organisational capital – patient, painstaking work. But today’s institutional context might have been designed to make such long-term organisation-building impossible. The havoc visited on the public sector in the name of competition is the government’s deliberate attempt to match today’s deal-making frenzy in the City, and both make good practice harder.

The AIM research shows that, disquietingly, the UK productivity gap is even wider in services than in manufacturing. But what price Boots or Sainsbury’s developing distinctive processes when they are being turned upside down by private equity, or the threat of it or the NHS when it is being reorganised every two years by a government that doesn’t understand what management is?

The tale of the two economies is thus not just that they are growing apart. The two are increasingly at odds, with the function of what used to be thought of as the ‘real’ one more and more to supply the raw material for the bids, deals and exotic instruments keep the weightless one miraculously aloft. As Anthony Hilton wrote in the Evening Standard last week, ‘the entire UK economy has become, in effect, a giant hedge fund with a massive one-way bet on financial services – and no Plan B for the day when the City goes off the boil.’ If and when it does, the costs of the government’s failure to understand the managerial economy will be high – for all of us.

The Observer, 29 April 2007

PERMANENTLY CAST in the long shadow of Whitehall, local government has long been the poor relation of politics – the purveyor of bins, parking tickets and Asbos as opposed to high strategy. But, as yet unreflected in dismal voting totals, things are stirring in some town halls, which are the scene of an ‘untold story’ of change and new thinking about what a local authority should be doing, according to a defiant Moira Gibb, chief executive of London’s Camden council.

Camden is a good test case. Including the airy heights of Hampstead and Primrose Hill, as well as the less salubrious areas around King’s Cross station, the borough is ethnically, linguistically and socially diverse, populous and challenging. Labour-controlled for nearly four decades until last year’s local elections, it has always been an unrepentantly ‘big-government’, high-spending council. Yet although it was highly rated, financial pressures (for example, staff costs had soared by 37 per cent since 2002) were forcing the council to scrutinise every aspect of its organisation, cost structure and ways of providing service.

Caught in the jaws of a cost squeeze, and facing rising expectations and inflex ible government targets, many local authorities are tempted by a big-bang, ‘solutions-driven’ approach, usually involving partnership with an IT supplier to install large-scale contact centres and computer systems, with applications and services back-fitted into them. Camden considered and rejected this option, choosing to ‘solve problems’ rather than ‘apply solutions’, with the aim of transforming itself one step at a time.

The first fruits are a council-wide efficiency programme with the avowed aim to do things better as well as cheaper. ‘It’s a job convincing people that the two things go together,’ admits Gibb most, including a vociferous local press, believe that the only way of doing more is by increasing resources. But the better (and cheaper) way of increasing capacity is to stop doing things that add no value, such as bureaucratic processes, and do more valuable things instead.

Unlike the ‘solutions’ approach, this in turn involves spending time first to understand the problems that need to be fixed and what residents actually want, which usually has more to do with how the council interacts with residents.

A good example is the council’s work on housing. Faced with demand for housing that vastly outstrips supply, Camden had created a bureaucratic industry to defend itself. The penny dropped, says Michael Scorer, deputy director for customer service, when the council began looking at the issues through the lens of the resident with a problem, rather than that of a landlord.

Instead of obsessing about its own scarce accommodation, Camden now offers people options, including moving out of London, or into the private sector, which it undertakes to help them achieve. Some residents have been helped on to the first rung of the property ladder none, claims Camden, is left in B&Bs or hostels. As the emphasis shifts from doing what’s legally compliant to addressing real needs, results improve. The critical moment is the first, says Scorer: asking people what they want. ‘That puts them in the driving seat – they make the decisions. And the whole bureaucratic industry is gone.’

Even better is Camden’s treatment of the homeless and rough sleepers: new arrivals are quickly identified, assessed and plugged into a well-honed procedure for getting them back into a more settled, independent life. Clearly better, it is also cheaper to tackle the issue directly and early. Scorer claims some ‘inspiring stories’ – not a phrase that is often associated with local government.

‘Better and Cheaper’, announced last October, has a distance to run before it becomes a way of life. One component – ‘workforce remodelling’, including cutting staff costs – has aroused suspicion among some of Camden’s 4,200 non-teaching staff, but Gibb believes that in the main they are responding positively to the ‘simple, friendly, fair and enabling’ values that the borough’s services need to embody – and to residents’ reactions to the improvements in visible services, such as housing and parking. Not to mention the budget: this year Camden froze its council-tax take and increased spending on services by 4.3 per cent.

As confidence grows, many councils like Camden, high-performing in government terms, are chafing at what they feel are obsessive controls exerted by Whitehall. If the idea of ‘place-shaping’ – jargon for moving the emphasis from providing services to a broader role of advancing the wellbeing of a community and its citizens – is to mean anything, councils must be free to exploit their great asset: being close to the ground. Gibb says: ‘The government isn’t taking advantage by moving to the next step.’

‘Place-shaping’, for once, is about purpose, not process. Having imagined the end, government needs to will the means.

The Observer, 22 April 2007

BY TURNING ITS 2007 annual report into a 454-page, 1.5kg WMD for the postal system, HSBC may have been hoping to bring down the current reporting regime at a stroke. Yet while there is widespread agreement that present rules leave much to be desired, reducing the reporting story to the need to slash overweening bureaucracy is disingenuous to say the least.

It is certainly true that regulation has increased, is increasing and, in some areas, probably ought to be diminished. The HSBC report contains 133 pages of notes explaining how the figures are affected by the application of the International Financial Reporting Standards (don’t ask), which came into force in 2005. Some senior executives complain that IFRS makes many company results harder, not easier, to understand.

But it is worth asking how we arrived at this unsatisfactory position. The background is that for a supposedly ‘hard’ discipline, accounting is actually surprisingly ‘soft’, a matter of opinion as much as fact (one measure of the fuzziness of today’s accounts is its failure to illuminate the often enormous gap between balance-sheet values and what a com pany is actually worth, tellingly ascribed to ‘intangibles’). As a result, one longer-term trend has been an attempt to make the numbers paint a better picture by adding more and more of them.

The desire for ever greater quantification has been evident in all areas of management, even in non-financial areas. For at least half a century, managers and management academics have conspired to play down judgment and play up numbers as the basis for decision-making – managers with the aim of making management ‘easier’, and academics to render the discipline more ‘scientific’.

Management can’t somehow be made simple or scientific – it was WE Deming, a statistician (although strangely ignored in the mainstream management literature), who observed that the most important costs in business are unknown and unknowable. Some senior managers now lament that their juniors are so addicted to numerical targets that they can’t work without them – their ability to make anything more than the simplest judgments has almost disappeared.

The tendency for detail to proliferate has been abetted by another enduring trend: the aggressively rules-based approach to accounting of many US firms, which takes the view that anything that isn’t specifically forbidden is allowed. The result is a constant testing of the boundaries of the permissible, and a minuet with regulators in which every accounting innovation is greeted with a new regulation to block the loophole. Sometimes the boundary-pushing becomes so fierce that legislators are provoked into drastic action, as at the end of the last decade with the excesses of Wall Street, Enron et al. The resulting Sarbanes-Oxley Act is a monster that, while not addressing reporting as such, has become a monument to the box-ticking and compliance approach which now dominates many annual reports.

There is a third reason why authorities have found the urge to tinker with reporting rules irresistible: for all their length, most reports are amazingly uninformative. Yet none of the specifications makes it impossible to paint a true, fair and even entertaining picture of a company’s performance.

Take Berkshire Hathaway, a large conglomerate with widely spread interests and revenues of $99bn. Its annual reports consists of 82 pages all told. It contains a letter from the chairman and CEO, Warren Buffett, which is not only a model of clarity about the company’s situation, warts and all it is also a great read, studded with one-liners, anecdotes and nuggets of real wisdom about investment and management in general.

Companies may be right that reporting rules are confusing, and that regulation has reached the point where the preoccupation with preventing miscreants from getting away with bad stuff is making it disproportionately difficult for the good guys to do their legitimate job. But for all the above reasons – bad maths, bad behaviour and bad English – they deserve limited sympathy: they have largely brought the rules and regulations they complain of on themselves. As long as they continue to behave as in the past, testing the edges of legality, and sometimes crossing it, they are unlikely to persuade either legislators or the public to get off their backs. The remedy is therefore in their own hands.

No one reading Berkshire’s report could fail to understand the nature of the business, the principles on which it is run, the mistakes it has made in the past, the influences on its present and future performance, and, not least, the character of those who run it. If more companies could show they understood their business so well, they would remove much of the pressure for ever more detail – as well as making the postman’s lot a happier one.

The Observer, 15 April 2007

EATING OUT is one of life’s greatest pleasures. Part performance art, part physical gratification, a good meal refuels spirit as well as body. Yet when did you last have a memorable – not just expensive – meal in a restaurant? What’s on the plate has to emulsify perfectly with service, atmosphere, expectation and, not least, the bill. If just one element fails to gel, the pleasure seeps away.

That makes running a restaurant one of management’s stiffest challenges and one that most establishments fail. The food is uninspiring, the performance pretentious or sloppy, and all too often you come away feeling vaguely cheated, whether by ambitious prices and mean portions, pressure to buy expensive extras and wine, or mistakes on the bill.

But it doesn’t have to be like that. In his fascinating Setting the Table: The Transforming Power of Hospitality in Business (HarperCollins), Danny Meyer recounts how he built one of America’s most consistently successful restaurant groups, both gastronomically and financially, by giving, not taking. As the subtitle of his book suggests, Meyer, who made his name with the Union Square Cafe and now presides over 11 New York establishments, has made his creed ‘enlightened hospitality’, and it is what distinguishes his restaurants from the rest.

Hospitality, Meyer suggests, exists when the other party to the deal is on your side. If that sounds glib or gushing, it’s a measure of our cynicism, since deep down we have learned that most businesses are not on our side: they are out to fleece us of as much as possible while still keeping a straight face about customer service (small print, hidden extras, unfathomable tariffs – you name it). But service, Meyer insists, is not the same as hospitality. Service is the technical delivery of the offering; hospitality is how the service makes the recipient feel. Hospitality is an individual transaction, which is, crucially, what prevents the performance becoming rote. Both are needed for restaurant success.

This is a management philosophy built on optimism and generosity, and it runs right through the operation. It also inverts the usual business priorities. Because performance depends on everyone being at the top of their game, it starts with the staff, who are recruited for attitude over aptitude (there is no shortage of good applicants fleeing the fear-driven kitchens of others). Their priority is being hospitable to customers. Next comes the community. Most of Meyer’s restaurants have been launched in run-down areas that needed a boost – good business in two senses, because rents are lower, while investing in the community generates the proverbial rising tide that lifts all boats. Investors come last, after suppliers – but they aren’t complaining either, since they too have received rich portions from Meyer’s patient, generous approach.

Which, of course, is the decisive counter to the inevitable reaction that all this is too good to be true in today’s unforgiving environment. Consider that restaurants are one of the most brutal (in all senses) businesses in the world, legendary for failure rates, overpowering egos, staff turnover and chef burnout – and that New York adds to these a fickle public and the toughest critics around. Yet Meyer’s restaurants evoke extraordinary loyalty and come consistently high in their respective rankings year after year. This is no flash in the pan.

In any case, as Meyer makes abundantly clear, optimism and generosity are by no means a soft management option. There’s no getting around vicious competition, so standards are uncompromisingly high. Meyer talks of the ‘blood sport’ of competing for the city’s best staff. Yet he is just as uncompromising about the destructive effects of internal competition – as when an award turned the head of a young waitress at the Union Street Cafe, causing deep disruption and resentment (the opposite of hospitality) until she left.

Setting the Table is far more than an engaging book about establishing and running restaurants: it is studded with reflections that have wider application to business and management. By basing his enterprise on a cheerful, optimistic vision of human nature, Meyer sets up a direct challenge to the dominant game theorists, transaction-cost economists and management scholars who put economic man, the rational utility-maximiser, at the heart of their desiccated equations. While he cordially accepts that there are other ways to run an organisation, by recognising that management can be a powerful amplifier of energy and excellence or the reverse, Meyer has effectively turned his restaurant group into a purveyor of hope, optimism and humanity as well as good food. It’s an uplifting message. ‘There is almost no downside to a hospitable, charitable assumption,’ Meyer asserts.

So nice guys do win. Or, as he puts it: ‘No amount of generosity has so far succeeded in putting us out of business.’

Enjoy your Sunday lunch.

The Observer, 8 April 2007

OUTSOURCE EVERYTHING except your soul,’ the excitable guru Tom Peters once exhorted. And companies all over the world have responded with a will. Want someone to build you a computer or a fridge? Old hat. How about a complete car or even a house? Done.

Increasingly, it’s not just making things but the services attached to things that are on the move. For example, quietly doing away with the need for a local distribution centre, some Western companies are carrying out critical parts of their distribution activities – sorting, labelling and even placing goods in displays – alongside factory operations in the Far East, ready for direct shipment to individual stores in the UK or France.

But you ain’t seen nothing yet, according to some interested parties. Expanding at anything from 30 to 60 per cent a year, the IT services companies that have been India’s economic growth engine for the last 15 years are living proof that outsourcing appetites are growing rather than shrinking. And leaving behind routine coding and customer-service centres, firms such as Tata, Wipro, Infosys and Satyam have their sights fixed on the wider services sector that makes up two-thirds, to a value of pounds £3 trillion, of the world’s GDP. Although, notoriously, haircuts remain immune to export, an increasingly variety of services will be ‘virtualised’ – sliced and diced at different global locations before being reassembled for final delivery.

‘Just like manufacturing,’ says Ramalinga Raju, founder and chairman of £750m Satyam Computer Services, the fourth-largest of India’s leading IT posse. Healthcare, where a scan may be carried out in one country, processed in another, and sent to a third for another opinion before being sent back home again, is one example. Animation for filmmakers is another. So is architectural and other design – and why not legal and other professional services, asks Raju, who believes that even the smallest service firms will soon be able to take part in the globalisation tango.

India’s exuberant IT firms have come a long way since their founding by a few hopeful pioneers in the wake of the economic reforms of 1991. Then regarded with amused condescension – like Japanese car manufacturers in the 1970s – they were given a boost when the Y2K panic and massive international over-investment in optical fibre combined to multiply both demand and the subcontinent’s ability to meet it remotely.

However, there’s no fluke about their subsequent continuing rise, although Indian firms concede that US suspicion of foreigners since 9/11 has helpfully made it easier to export work from the US than to import people. From their early status as ‘body shops’ – providing cheap invisible programming grunt work – Indian firms have steadily increased in both confidence and competence, simultaneously grabbing market share and moving up the industry value chain.

IT services now account for 8 per cent of Indian GDP, and industry revenues could total £50bn by 2010, according to estimates. These runaway totals suggest that customers buy the story that Indian suppliers can undercut big international vendors such as IBM and Accenture on price and beat them on quality.

While Indian companies are still small relative to the international giants, they are growing much faster – and the multinationals are increasing their Indian presence. ‘An Indian company as the next Microsoft? Why not?’ muses one IT executive. The industry confidently believes it is set to become the service hub for the world, just as China is in manufacturing. For this, however, the Indian outsourcers must meet some tough challenges. One is a looming shortage of qualified manpower, aggravated by high labour turnover rates – more than 100 per cent in some call centres. Depressingly, India has not managed to free itself from some of the West’s worst management habits, just as it has enthusiastically adopted its most excruciating jargon.

In terms of offerings, they must match software quality with an ability to innovate and lead. ‘Customers are no longer coming to us to cut costs – that’s a given. They are saying, ‘What can you do for us that will transform our business?’&’says one senior executive. In effect, through the virtualisation of services, customers want their suppliers to provide not just computer programming or applications, or even the management of their entire IT infrastructure, but entirely new business models – the as-yet-unimagined equivalents of the downloads that have altered the music business forever.

Can the Indian firms go beyond IT to innovate? The best argument that they can is the rapid and imaginative evolution of their own business models. In time, though, a la Tom Peters, they must surely run up against the corporate version of the body-mind problem. Can a company have a soul without a body? Just how much can a company outsource and still keep its own identity? Indian software is pretty good, but it hasn’t yet solved that one.

The Observer, 1 April 2007

IF I SUGGESTED that there was a link between, on the one hand, Gordon Brown’s commitment last week to ‘greater choice, greater competition, greater contestability and greater accountability’ in public services, and on the other MAD, the doctrine of mutually assured destruction that underpinned nuclear strategy during the Cold War, you might conclude that the strain of writing about management for a living had finally taken its toll.

But in that case, you haven’t been watching The Trap, Adam Curtis’s BBC2 three-parter on the genesis of our current ideas about freedom. If you had, you would know that the connection is the Nash Equilibrium – the creation of the eponymous mathematical genius John Nash, portrayed by Russell Crowe in the 2001 movie A Beautiful Mind

Nash was one of a group of theorists at the Rand Corporation, a military think- tank, who worked on game theory to model likely Russian responses in a nuclear confrontation. The equilibrium – for which Nash won a Nobel Prize – was a model showing that if every player acted with self-interest and suspicion and tried to outwit opponents, no one would have anything to gain from unilaterally changing strategy: the outcome would be a balance of terror.

If such thinking ‘worked’ in international relations (there was no nuclear war), could it apply to social and economic behaviour too? Yes, chorused a posse of US economists led by James Buchanan, who, borrowing from Adam Smith, eagerly theorised that the interplay of individuals rationally pursuing their own selfish interests could produce not warfare or anarchy, but the opposite: a dynamic, self-adjusting social order.

You can sense a near-religious fervour here. We already have a system – the free market – under which consumers can vote every day for what they want, instead of every five years as in politics! And that’s not only more democratic but also cheaper, because it means we can get rid of all those bureaucrats, who as we now know have just been (rationally) feathering their nests at our expense! There is no such thing as society! Order out of freedom: no wonder it looked like the end of history, the final triumph of democracy and free markets.

This in crude form is the ‘public choice’ theory that was at the heart of Thatcherism and Reagonomics, and that finds its echo in the Chancellor’s words last week. Still not convinced? Then we can telescope the connection into just one degree of separation.

One of the revelations of The Trap is that Alain Enthoven, the guru behind Thatcher’s internal market NHS reforms of the 1980s, was US assistant secretary for defence under President Johnson, and before that – one guess – nuclear and game theory strategist at the Rand Corporation. ‘Consumer choice, competition and strong incentives to modernise’: no, not Brown, but Enthoven’s NHS prescription for New Labour, circa 2000.

The Trapss bringing together of a number of strands, including psychiatry, medicine, politics, economics and management, is wide-ranging and controversial. But a virtue of its broad historical context is to bring into sharp focus otherwise-puzzling aspects of the agenda that New Labour has pursued since 1997 even more zealously than the Tories before them.

In this perspective, the assault on professionalism – teachers, doctors, lecturers, police – suddenly appears not an unfortunate byproduct of policy: it is the policy. Ministers want doctors and lecturers to be motivated by money and league tables. It is only by ridding them of pesky notions of doing good or knowing best that game theory and public choice can be made to work.

Left to themselves, humans obstinately refuse to be bad enough for these grotesque theories to come true. When Nash tested his system games on Rand secretaries, he was bemused that they insisted on co-operating instead of betraying each other every time. Only later did it transpire that Nash himself was suffering from paranoid schizophrenia, believing everyone, including work colleagues, was out to get him. In fact, it turns out that the only people to reliably exhibit the behaviour required to make the equations work are psychopaths and economists.

That sounds bleakly funny, until you consider the implications. As the economists’ experience suggests, self-interest can be learned. The trap is that this is what organisations in both public and private sectors, all based on the same reductive assumptions about human nature, are teaching us. Slowly but surely, organisations are remaking us in their own stunted and cynical image. If this extraordinary and unprecedented experiment ‘succeeds’, the ‘Stalinist’ epithets attached with such glee to Brown last week will also take on a new and more sinister meaning.

The third part of The Trap is on BBC2 at 9pm tonight.

The Observer, 25 March 2007