THE WORLD’S gone upside down. First, there’s David Cameron championing the public sector ethos and suggesting there’s more to politics than economic growth then last week 14 of the UK’s corporate great and good, including establishment firms such as Shell, Tesco, B&Q and Standard Chartered Bank, trooped along to Downing Street to lobby the government for tougher targets on greenhouse gases. Something wrong, surely. Shouldn’t it be the government that’s The Guardian of the greater good, while business resists any limitation on its ability to make profits?

The CBI, which always predicts disaster if business is obliged to take responsibility for its externalities, certainly says so. But that, just like the government’s chronic reluctance to take a lead on the environment, is based on a misunderstanding of business’s real functions, which has become so ingrained that last week’s initiative came as a shock, albeit a welcome one.

A correspondent attributes New Labour’s target obsession to a cultural cringe towards business coupled with some extremely unrealistic mental models of what it actually consists of – a fatal combination. These models have proved unshiftable in the face of incontrovertible evidence that they are wrong. This is behind the disastrous misapplication of ‘efficiency’ and ‘performance management’ concepts to schools and universities for example (see last week). But it is also to be seen in oversimplified attitudes to business itself, and especially, as in the environmental paralysis, the inability to understand the relationship between organisations and markets.

Companies and markets form a system: companies innovate and markets provide feedback. Markets can’t innovate because they are blind: they don’t have conscious purpose. Their function is to identify winners and losers. Organisations on the other hand are intentional entities – purpose is their point. They can choose, for example, to forego a part of present profits to develop new products. Consider the semiconductor industry. For the past 30 years, it has been powered by fierce competitive innovation in which companies (usually Intel) race to introduce new generations of microchips for which they charge premium prices. Eventually other companies catch up and competition between them – ‘the market’ – erodes the premium. There’s no problem with take-up of new technology, even though it is initially expensive, because everyone has wanted faster computers (at least salespeople have convinced us that we do).

Environmental products are a different market. Customers won’t buy them if it’s cheaper to offload their environmental costs onto society as pollution. There are no rewards for good behaviour. The 14 companies that went to No 10 last week were asking for government to correct this market failure with sticks and carrots: strengthening the EU’s existing emissions trading scheme, making building regulations stricter and cutting business rates for energy-efficient buildings.

James Smith, the chairman of Shell UK, said: ‘We need EU governments to set clear targets to 2025 so that our businesses can have the confidence to make long-term investments in reducing emissions.’ They want the government to create a larger, more vibrant market.

Breaking with other lobby groups, they argue that such regulation will not damage the economy – in fact the reverse. This is because they understand how powerfully the market ecology works. They have confidence in the power of competitive innovation to lower costs (which curiously the lobby groups always deny), and they know that creative regulation can generate very large individual markets. The environment is now a pounds 25bn business. But not least because the UK has dithered so long over regulation, we are not among the world leaders in this growing and possibly planet-saving industry. Danish and German companies lead in wind turbines the US and Japan are ahead in solar.

When in the name of ‘the free market’ lobby groups campaign against society-friendly regulation and governments back off from taking tough decisions, both are denying their proper roles and acting against their own (as well as our) interests. As my correspondent helpfully noted, there is actually no such thing as ‘the’ market. There are markets , each with its own frameworks which can be shaped by society. Thus there are tighter rules for selling financial services than semiconductors. We don’t allow an official market in slaves or violent pornography – although we do in footballers. By contrast ‘the’ market is an ideological fiction, used very successfully for the past 25 years to paralyse politicians and prevent them creating or reshaping the framework of markets , such as those for environmental products.

In this case, big business has got it right, as Friends of the Earth, for one, has recognised. ‘This is exactly what is needed if we are to tackle climate change and ensure the British economy reaps the rewards of going green,’ it said last week. It is business’s responsibility to help save the planet – it’s time that government decided to let it.

The Observer, 11 June 2006

THERE ARE no neat strike actions. But the increasingly bitter university pay dispute, which saw lecturers refusing to call off their exam-marking boycott last week and some universities retaliating by docking pay, is a classic case of long-term public-sector mismanagement. After years of fudge, bullying and refusal to will the means to match the ends that have been decreed, Britain’s universities are in a profound malaise of which the strike is only the outward symptom.

On the surface, today’s argument is about money. Since the 1980s, academics have lagged other professions in the pay league – the average lecturer gets about £35,000, in real terms much the same as 20 years ago. At the same time productivity has greatly increased. Over the last 10 years full-time staff totals have fallen from 111,000 to 107,000 while annual numbers of graduates climbed from 286,000 to 444,000 – an increase of more than 50 per cent. As a result, staff-student ratios soared from 1:9 to 1:20 or 1:25 – in some new universities higher than in secondary schools.

One catalyst for action has been top-up fees, for which university vice-chancellors lobbied (and some Labour MPs voted) partly to allow them to bump up pay. In April 2004, Alan Johnson, the then minister, told Parliament that ‘at least a third’ of the money would be spent on salaries, helping to tackle ‘a very serious and deep-seated problem’.

The unions are furious that the employers’ offer of 13.1 per cent over three years fails to honour this promise – and their resolve to hold out for 23 per cent is stiffened by the knowledge that their bosses’ pay has leapt by 30, 40 or in some cases even 60 per cent over the last three years – vice-chancellors’ pay is particularly sensitive because of the ostentatious way it rubs academic noses in the ascendancy of the managerialist agenda in university affairs.

Margaret Thatcher, who hated the universities (and vice versa) started this – but New Labour has driven it forward with such fervour that many academics believe it has turned them into bureaucrats fulfilling five-year output plans rather than teachers and seekers of knowledge. Some pressures stem from the clash of conflicting targets. How, for instance, are institutions supposed to admit 50 per cent of the school-leaver cohort but not drop standards, or increase undergraduate diversity while still treating every case on its merits – all without spending more on staff? More insidious and toxic, however, have been the effects of the dreaded teaching and research audits, which are an even more compelling demonstration than the NHS of the way quantifying management methods can destroy the object of their focus.

Because funding and student applications depend on research and teaching ratings, universities go to great lengths to improve their scores. Even though the next Research Assessment Exercise (RAE) is two years off, institutions are already drafting submissions, conducting mock inspections, hiring consultants to coach (or hide) weaker departments and individuals, and setting up PR and marketing campaigns to spin results. Before the cut-off date in 2007 a buzzing transfer market in star researchers is ratcheting up overall costs for no additional gain in quantity or quality.

According to official estimates, the 2008 RAE will cost £45m. This seems peanuts compared with the £15bn spent on higher education as a whole – but it takes no account of the colossal indirect costs noted above, nor of the uncountable damage to morale and enthusiasm. The fact that universities are full of sharp people who learn quickly how to play the game (while detesting themselves for participating in what they know to be a farce) only increases its perversity: for every new edition the auditors have to refine and extend the rules, while more academic brainpower is diverted into finding ways around them. Although the even more bureaucratic teaching audit has been abandoned in favour of supposedly ‘lighter touch’ inspection, the damage has been done. Audits have become instruments of central control, dividing scholars and university managers, distorting research and teaching priorities and turning off bright young researchers from taking up an academic career.

The daft thing is that universities already had measurable ‘outputs’ – degrees, and books and articles in peer-reviewed journals – so well-connected schools knew exactly which departments were good ones. Ironically, target pressure means that neither measure is now reliable: grade inflation is rife, and journals whose only purpose is to publish articles for RAE purposes have proliferated. Some lecturers feel uneasily that their unions have missed a trick by not making RAE – the real enemy – the focus of today’s strike, rather than exams, which pits them against students. Whatever the result of the dispute, the festering underlying grievance will simmer on.

* Many thanks to the numerous readers who responded to last week’s article. Some pointed out that the iPod is only incompatible with Windows music files, others noted that LaVern Baker’s ‘Saved’ is now on iTunes, and a few helpfully sent downloads. Much appreciated.

The Observer, 4 June 2006

LIKE THOUSANDS of others, I got an iPod nano for Christmas. It’s a gorgeous object. But in use the striking thing about Apple’s iconic music player is neither its sexy looks nor even its playback performance – which is much the same as that of a dozen rivals. This tiny object does a lot more than play music: as part of a larger system with iTunes and the iTunes music store, it defines a new relationship between customer and producer and reshapes an industry. One day all products and services will be like this.

The first unexpected thing the iPod has done is make estranged customers like me music buyers again. I haven’t bought music regularly for years – CDs aren’t attractive in themselves, prices and reissuing policies are as cynical as ever, and the ‘retail experience’, hunting for what you want in the big record stores, is about as tempting as a visit to an emergency ward. (I don’t need to add that today’s bands are crap.)

But iTunes changes all that. Via the music store, I know when the Rolling Stones or Dr John have a new album out (what a giveaway). What’s more, it’s possible to buy on impulse: hearing something on a film soundtrack or radio show, you no longer have to go to HMV or Amazon (or more likely just forget about it), you download it straight away – instant gratification. The saviour of the industry is not ‘pounds 50 man’ but ’79p anyone with broadband’. No thanks to the record industry, but I’m enjoying being a customer again because it’s on my own terms.

And that’s the second thing about the iPod: it puts you, not them, in control. Basically, the record labels are devotees of the Henry Ford business model: ‘You can have any music you want so long as it’s what I want to give you.’ But using the cyberspace jukebox, you’re no longer at their mercy. You don’t have to pay for the four filler tracks on every album. You don’t have to buy albums at all. You can put country next to classical, punk next to jazz, Barry Manilow next to Placido Domingo (wait, that’s a joke).

And you can play them in the same way. Indeed, by plugging the iPod into a pair of speakers, many people are dispensing with a traditional home hi-fi set up altogether. The sound quality isn’t as good (purists say), but it’s good enough, and for many – perhaps most – of us the gain in control and simplicity easily outweighs the disadvantages. So the iPod signals the end of another, if less malign, producer tyranny – hi-fi manufacturers beware.

Understand that this is not a puff for Apple. The iPod is certainly not perfect. Incompatibility with other formats means that at one level it perpetrates its own version of Henry Fordism: ‘You can have anything you like so long as it’s Apple.’ This is the more irritating because the music store’s coverage is by no means universal.

Nevertheless, the things it has got right hold key lessons for companies trying to woo customers in any industry, whether product- or service-based.

One lesson is the importance of using the right medium, and executing it properly. The iPod is a textbook example of getting applications – for playing, organising and buying music – to work seamlessly together through the net without dropping you between the gaps. The second is simplicity. The more complicated the product, the harder it has to work to make you love it. A large part of the iPod’s appeal is how easy it is to use – put another way, the fact that nothing gets between you and what you want from it.

This leads to the third, most important and least obvious of the iPod’s trumps: the power of ‘pull’. Most companies distribute their product by ‘push’. They estimate demand, build according to the estimate and then sell (‘push’) what they have built. This is essentially business as central planning, and it works little better at company than at country level – hence the need for advertising and promotional price-cuts to reconcile sales with estimates, extra features to help sell the product and, finally, huge computer power to keep track of all the product variations, sales estimates and production plans.

When, as with iTunes, the product is ‘pulled’ by the customer, on the other hand, the engines required for ‘push’ are redundant. It’s like using gravity instead of fighting against it. Pull inherently uses fewer resources tells managers directly what consumers want and above all delivers on customers’ own terms.

In their book The Support Economy, Shoshana Zuboff and Jim Maxmin charge that the rising tide of consumer discontent amid material plenty is the result of companies failing to change along with their customers. People are no longer grateful for what companies give them they want what they want, in the form they decide. Part of the iPod’s phenomenal success is that as one of the first of a new breed of products to put customers on equal terms with producers, it begins to respond to this need.

That said, don’t go thinking you don’t have work to do, Apple. Some colleagues were grousing that you can’t download sleeve notes from iTunes. It’s ridiculously hard to transfer a track downloaded for one iPod to another. And why does the database still not contain LaVern Baker’s ‘Saved’?

The Observer, 28 May 2006

WELL, I was right about targets and foreign criminals. According to a Panorama special aired last week, the reason so many villains with exotic accents have vanished unhindered into the countryside at the end of their prison sentences is that, until last month, officials at the Immigration and Nationality Directorate weren’t answering prison officers’ phone calls asking what to do with them – they were too busy working out how to fulfil the Prime Minister’s party conference pledge to deport more failed asylum seekers than were applying to stay. ‘Losing’ prisoners in this way, of course, had the useful added advantage of heading people off from becoming asylum seekers in the first place.

Einstein said that doing the same thing over and over and expecting a different result was a definition of insanity. That’s what the obsession with targets is. Whether in business or public service, misuse of targets is the single most important reason for public cynicism, rock-bottom employee morale and failed improvement efforts. Targets wreck systems, driving up costs and making things worse. Can we dispose of them once and for all? Let’s try.

What’s wrong with targets? Yes, everyone has them – but whether in the public or the private sector, they have the same perverse results. The attraction of targets is their simplicity. But it’s a fatal one. As part of the misguided managerial obsession with quantification, they misapply partial, linear measures to a complex, shifting world. As Blair’s undertaking to magic away asylum seekers shows, they are basically a wish. Bearing no relation to the ability of the system to deliver it, they are arbitrary – they might as well be plucked from the air.

None the less, the pressure to meet them is real enough. As the Panorama interviewees confirmed, after Blair’s conference pledge, panicked managers in the immigration directorate ordered immigration officers to stop everything else and pursue failed asylum seekers. This is a good example of the way arbitrary targets become the de facto purpose of the system to the detriment of its wider goals. There are countless examples of this phenomenon: just last week a critical report on maths achievement noted that students were learning to pass the tests (thus meeting teachers’ targets) but not to do the calculations – they knew the answers but couldn’t add up.

Some targets do work- and that’s one of their biggest problems. Because they are products of one world view applied to another – reductive mechanical measures applied to non-mechanical systems – targets have unpredictable and quickly ramifying consequences. To cut waiting lists hospitals do easier, rather than more urgent, operations to meet exam pass rates schools exclude difficult students or encourage them into easier subjects and to hit City earnings targets companies overstate profits or cut advertising or R&D budgets. Enron was the most target-driven company on earth, and to meet its targets it tore itself apart. The reply to ministers’ repeated refrain that ‘the private sector has targets’ is: look at Enron.

Where they are accompanied by strong incentives, another side effect of targets is to undermine the integrity of the figures they are meant to apply to. An unfortunate primary school head was jailed for altering pupils’ exam marks, so he said, to make them reflect candidates’ real abilities in an under-resourced school. He got caught many others don’t. Everyone in the public services with experience of the way the figures are gathered knows they are a fiction, ‘managed’ or finessed as the only thing under the control of people caught in a dishonest and unjust system.

So isn’t the answer to set fewer, better targets? That’s what ministers always say. But ‘fewer, better’ is an oxymoron. The fewer the targets, the broader they have to be. The broader they are, the wider the range of unintended consequences and the more attempts to exert control multiply. Targets manage the remarkable feat of simultaneously imposing oppressive controls on people and losing control of the system. As the statistician W Edwards Deming observed tartly: ‘Targets achieve nothing. Wrong. Their achievement is negative.’ Since centrally set targets are the problem, the solution isn’t fewer of them: it’s to get rid of them altogether.

There is an alternative. Forget centrally set targets (which always wildly underestimate possibilities for improvement) and start at the other end – the customer or citizen. First, find out what demand is and how well it is being met (these basic figures are usually unavailable and invariably shocking when they are – see asylum seekers) second, redesign the system to remove all the things that don’t contribute to meeting that demand (lots) and improve those that do then measure the results and start again. The object for everyone engaged in the process is unchanging and relative: to make it ever easier for customers to ‘pull’ what’s of value to them and make it ever smoother for the system to deliver it. Since, in the case of asylum, the customer is the government, wouldn’t this be a good place to start?

The Observer, 21 May 2006

ANY COMPANY simultaneously suffering a succession crisis, a workforce in revolt, customers complaining about service quality and value, failing computer systems and a sex scandal would either be bankrupt or threatened with dismemberment by a private equity fund.

It can’t happen to a government. But that’s about the only consolation Blair and Brown can have as they contemplate their wrecked reputations for competence. It is ironic that an administration that sets such store by efficiency and private-sector methods should end up resembling Fawlty Towers. It is doubly so that with policy differences between the two parties hardly visible, the only terrain of differentiation is execution, or ‘delivery’, as Whitehall calls it: when management is the new politics.

It would be unfair to pre-judge the Tories as managers on their past performance in office. But what is unarguable is that with the exceptions of the Iraq war and John Prescott, all the government’s difficulties stem from faulty, or Fawlty, management at the highest level. While ministers submit every other part of the public sector to audit and inspection, it is their own failure that came back to bite them in last week’s local elections. In management terms, central government is not so much a black box as a black hole.

Here are some howlers a management audit of the government might pick out:

* Bungled succession planning The most glaring mistake is entirely self-made. Like all bungled successions, the Blair-Brown stand-off wounds both individuals and the collective, wasting energy and paralysing decision-making. Succession crises are by no means unknown in the private sector, but even the weakest board would have fired one or both of the feuding pair by now.

* Confusing ends and means, and cause and effect This causes ministers to do things the wrong way around. Reform is a result, not a starting point – it’s impossible to know in advance, before establishing real demand and capacity and removing the waste from the system, what resources will be needed for a task. A textbook case of how not to do it is the campaign of the Department of Work and Pensions (DWP) to cut 30,000 jobs to meet arbitrary efficiency targets. The result: strikes, permanently engaged phones at call centres and increasing violence in benefits offices due to deteriorating service. This is reform in reverse: raising costs and worsening service.

* Poor procurement Having outsourced IT and management capability, Whitehall is a sucker for computer and consultancy salesmen. Bad clients get expensive and overdue projects. The total cost of the new NHS computer systems could in one estimate reach pounds 40bn. Minor in comparison, Defra’s new computer system for making farm payments is now five months late if, as is likely, it has not made them by the end of June, the department will face a pounds 20m EU fine.

Having obliged the public sector to install IT-enabled call centres, supposedly to free resources for the front line but actually doing nothing of the kind, ministers are perpetrating the same mistake on a much larger scale by bullying councils, police forces and even research councils to set up vast IT factories to handle routine administrative functions. These units will cut little cost and make waste harder to remove since it is now hidden in computers.

* Overestimating the gains and underestimating the cost of change projects The travails of the DWP is one example. So is the near meltdown of the NHS, which has been reformed so often (in fact subjected to every known form of mismanagement) that it no longer knows its arse from its elbow. More than anything, the howling down of Patricia Hewitt by NHS nurses is a symptom of change fatigue. Meanwhile, HM Revenue and Customs is so busy restructuring that it is unable to prevent VAT fraudsters making off with up to pounds 7bn this financial year, the equivalent of 2p on income tax.

* Failure to take a joined-up view The Treasury pensions catastrophe – Labour’s worst failure – is the most glaring example. At the ‘seriously dysfunctional’ Home Office – an extraordinary admission from a government that has run it since 1997 – the inability to get prison and immigration services to talk to each other is indeed a comprehensive systems failure problems in the probation service and the courts are nearly as bad. Managing by target aggravates the fragmentation. For example, some suspect that the Home Office’s carelessness with criminal deportees can be traced back to Tony Blair’s airy promise to waft away half of all asylum seekers in 2004. Simply releasing foreign criminals at the end of their sentence is one convenient way of reducing the numbers.

The late JK Galbraith once remarked that left-wing governments’ penchant for intervening meant that they needed to be better at management than right-wing ones. The truth is that practically the only areas the government has got half right – the economy and the railways – are the ones it has removed itself from. Everywhere else, ignoring Galbraith and its own heritage, Labour has marched management backwards. Meet the new boss, same as the old boss.

The Observer, 14 May 2006

WHAT SHOULD we think of failure? Personally, disappointment in the case of fired chief executives walking off with golden goodbyes, possibly rage or in the face of such unequivocal evidence of life’s manifest unfairness, perhaps more rational would be to join them and take the suckers for as much as you can.

In City Slackers (published by Cyan), Steve McKevitt charges that in today’s business the best route to success is failure: 85 per cent of grocery launches flop in the first year so do a similar proportion of new magazines, music releases and infant companies. In these circumstances, he says, the best way to the top is not to do something but to brand it, puff it or write it up. Hence the massive growth in marketing, public relations and media, self-serving sectors that connive with each other to part the client from the maximum amount of money with minimum accountability.

Slackers, he says (I interpret), are the apparatchiks who have learned that it is more profitable to manage the image than the substance. ‘There’s never been a better time to fail. The mediocre have inherited the [business] earth.’

It is true that companies contain huge amounts of waste and the vast sums (£2.5bn on PR in the UK alone) that companies spend to persuade people to buy stuff they don’t want suggests there’s something seriously wrong. Shouldn’t they be making what people want to buy?

Unfortunately, McKevitt doesn’t throw much light on this specific kind of failure. Marketers are addicted to fancy presentations and Powerpoint. Well, blow me! Lots of PR is a waste of time, and some journalists are fond of freebies? Wow! Ironically, he fails to realise more generally how fascinating failure is as a subject. If it’s any consolation, far from being a today phenomenon, failure is ubiquitous and constant.

In his brilliant Why Most Things Fail (Faber), economist Paul Ormerod notes that failure is ‘probably the most fundamental feature of both biological and human social and economic systems’. Of all biological species the world has known, 99.99 per cent are extinct. Ten per cent of all US companies fail every year. Notwithstanding huge quantities of computer- and brain-power, not to mention taxpayers’ cash, most government policies fail, even the most basic ones: poverty isn’t history, social mobility is falling, happiness is not increasing. There is an ‘Iron Law of Failure’, concludes Ormerod, ‘which is very hard to break’. Nor is this surprising. Even with a simple product, business is a complex process. There are just too many interconnections and interrelations for planning to have even a small chance of success. Big bets have unintended consequences that feed back into the system until it becomes too complicated to fix.

The solution is to recognise failure for what it is: essential to success. Success can only be defined against non-success – failure. A world without failure exists only in the general equilibrium equations of conventional economics. Everywhere else, success emerges from what economist John Kay calls ‘disciplined pluralism’ – the programme of competitive experiment, failure and fresh experiment that drives an innovative economy.

Failure is as much part of innovation as success. Successful small advances become failures as they are leapfrogged by rivals. Feedback loops often work within an industry even as they fail in a company: Kay shows how today’s PC industry has been built on a mound of initiatives – remember Sinclair, Osborne, VisiCalc, the BBC Micro, IBM’s OS2? – that are now defunct. ‘Most initiatives which were crucial to the development of the industry were ultimately unsuccessful,’ he says. If success is the plant, failure – cynical, hopeless, or just unlucky as it may be – is the essential compost from which it springs.

The excitable Tom Peters once declared: ‘It’s not enough to fail. You must fail often and you must fail BIG!’ Of course, the caveat is that failure only works its magic if you learn from it. To borrow another of Kay’s examples, GE is successful not ( pace the press) because of the genius of its chief executives but because it allows challenge, argument and experiment. Small experiments fail, but they allow adjustment without betting the company.

Evidently, there are slackers everywhere who for their own ends deny the lessons. But blaming people who are set up to fail by the system they work in is equally culpable, and far more common. While failure that is learnt from is, paradoxically, a source of advantage, failure that is swept under the table makes more failure inevitable.

Ultimately failure will take care of City slackers (and overpaid CEOs and authors), just as it has taken care of slide-rule manufacturers and roughly 1,980 of the 2,000 automobile manufacturers that existed in 1919 – the more successful slackers are in extracting revenues from their clients, the more likely the latter will fail. ‘Evolution is cleverer than you are’, Francis Crick, co-discoverer of DNA, used to say. Out of today’s failure grows tomorrow’s (temporary) success. Welcome to the compost heap.

The Observer, 30 Aprtil 2006

LABOUR’S BEST management decision was to eschew management when it made the Bank of England independent. Its worst has been to ignore this example everywhere else. Despite its professed dedication to market disciplines, New Labour is the most micromeddling administration in history, creating detailed specification and prescription for everything from school lesson planning to the way documents are processed or calls answered in local government offices.

Since the government’s understanding of management is stuck in a mass-production model circa 1970 (similar to the one that has brought General Motors face-to-face with bankruptcy in the US), the results are not just mediocre: they are disastrous, full of perverse consequences that make the public sector harder to manage, and raise rather than cut overall costs. Ministers as managers are making things worse, not better.

The surprise 40 per cent rise in GPs’ salaries since 2002-03 is just the latest manifestation of management naivety. It is the outcome of a crude performance-management system that allots points for targets (for instance, seeing patients within 48 hours) and pounds for points. Last year, the first year of the new contracts, GP practices were expected to tot up 700 points out of 1,050. People with sufficient incentives almost always meet their targets, usually at the expense of unmeasured aspects (try booking an appointment with your doctor more than two weeks ahead). In fact the average score hit 950. This year it is higher.

The argument is not that GPs didn’t deserve extra pay, just that the government has learned nothing about system dynamics. It is now making a similar but opposite mistake with dentistry. Dentists, like GPs, are self-employed. Determined not to give away too much, ministers are driving dozens of practices outside the NHS altogether, with whole swathes of the country becoming toothcare-free zones.

Back in 1995, Sovietologist Ron Amann, then chief executive of the Economic and Social Research Council, delivered an elegant public lecture, ‘A Sovietological view of modern Britain’, which remains a telling and prescient analysis of modern public-sector management in the UK. The parallels between the two systems have become greater in the intervening years, not less. Paradoxically, the UK’s planning culture stems from the opposite impulse to the Soviet one: a desire to strengthen the market rather than control it. Hence the recasting of the public sector into quasi-markets, and the sharp division between purchasers and providers. But crucially they weren’t real markets with real customers: ‘The purchasers were an organisational proxy for the final customer, using their allegedly superior inside knowledge… to secure value on society’s behalf. From such little acorns do the great oaks of planning grow.’

And so do the games-playing and bureaucracy that all planning and budgeting exercises engender. The first casualty is the integrity of the figures as providers hide capacity to get an easier deal and purchasers second-guess them. With the mind-games comes distrust, leading to ever-intensifying attempts to quantify and rank performance. But as with GPs, providers learn quickly how to play the game, resulting in yet more measuring refinements – and more slippage in the figures, which are no longer comparable even if they could be trusted. The result is the worst of both worlds, information overload combined with imperfect knowledge, perfectly symbolised by aircraft hangers full of unread university and schools inspection documentation. Audit becomes the manufacture of ‘comfort certificates’, an elaborate exercise in self-deception that allows both sides to claim fulfilment of their targets but is fundamentally out of control – revealed by surprises like GP earnings figures or NHS financial deficits.

It is not just that the resulting system is inefficient, systematically underproducing and overconsuming, like the old Soviet Union. The ‘new’ culture now permeates every corner of the public sector. The auditable drives out the non-auditable, even where the latter is more important, defining organisational purpose and the priorities of employees.

A new stratum of managers materialised to juggle the pressures and technicalities of the phoney markets. In this light it’s not surprising that productivity gains from Labour’s extra public spending are so debatable. Much of it is auto-consuming, devoured by the direct and frictional costs of proving that it is not being wasted, or of devising methodologies to make things work better.

And the madness is not going away. Tellingly, commenting on the Chancellor’s budget speech, the FT’ s Martin Wolf likened it to a Soviet commissar’s discourse on tractor planning, containing plans and targets for every cranny of British life – children, skills, education, science, environment, enterprise and even (most Soviet of all) Olympic athletes. It took 75 years for Soviet central planning to crumble under the weight of its own contradictions. E-enabled and computer assisted the UK version may be, but it’s still a Soviet tractor at heart.

The Observer, 23 April 2006

ALL CHANGE! The traditional cry of the London bus conductor at Tottenham Court Road seems to have become the working slogan of every organisation in the land. According to consultants McKinsey, at any time up to 15 of the FTSE 100 are ‘transforming’ themselves and a further 50 changing in less extreme ways.

At the same time, there seems almost no part of the public sector immune from being turned around or inside out. After three major reorganisations, seven substantial ones and another one planned in nine years’ time, the NHS may be spending more doctor- and nurse-hours being reformed than practising medicine.

The need for constant change is now so accepted that few people question it. But the results of all this frantic activity should give pause for thought. McKinsey’s research underlines just how high the stakes are. Successful transformation (BP and RBS come to mind) can and does turn ugly ducklings into swans even leaders have huge headroom for improvement. ‘In value terms, successful change pays off big time,’ says Colin Price, a director in the London office.

On the other hand, failed transformation a la Marconi is far more common than success. Confirming previous research, McKinsey calculates that more than 70 per cent of corporate metamorphoses turn the ducklings into something even uglier if they don’t end up barbequeing them: 61 of the Forbes 100 companies of 1987 had disappeared from the list by 2003.

McKinsey naturally wants organisations to continue to change, so it accentuates the positive. Despite the poor average results, successful change, it says, is a matter of getting a number of things right at the same time: a rigorous programme architecture, emphasis on both short-term performance and long-term corporate health, high aspirations, embedding gains in processes in procedures, changing employees’ behaviour and transforming leadership. None of these is optional, McKinsey insists. They have to work together as a ‘bundle’. Conversely, the minute something is thought of as a silver bullet it stops being part of the solution and becomes the problem.

Although McKinsey is concerned to isolate the secrets of success, in mirror-image the analysis also casts light on failure. Because change works as a whole, you can’t pick off parts of it. Successful change generates energy, says Price unsuccessful change consumes it, using it up as friction instead. In this light, the desperate attempts to salvage General Motors and its former subsidiary, parts-maker Delphi, through massive downsizing, look more likely to turn lights off than on. It seems obvious that many public-sector ‘reform’ programmes are similarly a drain on the batteries rather than a boost, pitting as they do different parts of the system against each other.

In a revealing interview in the British Medical Journal last week, the previous deputy chief medical officer noted that reform in the NHS had been a ‘deceit’. There was an extraordinary gap, he said, ‘between highly motivated frontline staff and the systemic dysfunctionality’ they work in. As well as better work organisation, they needed to focus on using processes and technology to deliver high levels of quality of care. Short of that, ‘throwing money at the problem only allows us to do more of what we have always done’.

Just as successful change is self-reinforcing, each round of bad change makes the next one more difficult. In the NHS, successive waves run into each other before the last one is completed, leading to cynicism and tacit resistance. ‘The cycle of perpetual change is ill-judged and not conducive to the successful provision and improvement’ of services, the Health Select Committee said of the most recent changes.

In truth, something as large and complex as the NHS is simply not amenable to a ‘big fix’ imposed from the centre. There are too many actors and interests and no lever to pull them all in the same direction. Centrally planned change of this kind, replete with targets, awards for effort and elaborate substitutes for markets, works little better in Whitehall in 2006 than in the Kremlin in the 1980s and for all the same reasons: perverse incentives, distorted priorities and corrupted information.

Structural reorganisation and strategic change allow CEOs to be seen to be doing something to justify their salaries, but activity isn’t the same as improvement. Companies ignore the much profounder transformation that comes free from paying attention to humble work organisation and incentives.

The invisible secret of the best companies is that they are always changing, because it is part of the job of frontline workers and managers to improve the system every day. You might call it ‘distributed change’, which manages to combine continuity with a constant adjustment to the market that makes more wrenching transformation much rarer. As Don Fabrizio sums it up in The Leopard , Giuseppe Di Lampedusa’s marvellous novel on political and social change: ‘Everything must change so that everything remains the same.’

The Observer, 9 April 2006

GORDON BROWN’S establishment of a panel of the world’s biggest business cheeses to advise on globalisation and competitiveness, and another to ‘promote London as the world’s leading international centre for financial and business services’, prompts a question that will almost certainly never be raised in either forum: are these objectives compatible? Or will the City’s continued rise make it harder rather than easier ‘to achieve what we have not achieved since the first days of the Industrial Revolution – to become the best location for scientific R&D and world leaders in the new enterprises of the future’, as the Chancellor earnestly put it last month?

Questioning the country’s most vibrant success story might seem perverse. As charted in a Treasury budget paper, the City of London is the leading international financial centre in the world: global No 1 in foreign equity and foreign exchange trading, cross-border bank lending, derivatives and as a secondary market for international bonds. It is the fastest-growing hedge-fund market. Whereas rival financial centres in New York and Tokyo largely serve domestic economies, London’s growth is global. This is reflected in the pounds 19bn trade surplus chalked up by financial services in 2004, up 9 per cent over 2003.

The City of London increasingly dominates the UK economy. Financial and business services account for 45 per cent of the UK corporate tax take. The financial district’s high earners (on pounds 100,000-plus) pay 25 per cent of all income tax. Forty per cent of the capital’s employment is provided by the financial sector.

Given that all advanced economies are increasingly service-based, what does the emergence of what might be called the derivative economy mean for non-City businesses? Well, recall that banks and financial services grew up to serve industry and commerce, and it is from industry’s revenues (as well as from individuals) that their own still have to come.

Recall, too, that despite Brown’s assiduous attentions (hence the new panel) UK productivity and investment, including financial services, remains low compared with rivals. Is there a connection to be made here? Plenty of people would argue yes.

At least three recent reports have catalogued how corporate directors increasingly feel obliged to dance to a speeded-up, short-termist City tune. One suggests that the UK investment climate is the least favourable in the world for building high-tech and knowledge-based companies.

This should be a reality check, at the very least, on the Chancellor’s ambitions for the UK as a technology hub. A minion might also alert him to the absence of UK firms from today’s tech-based sectors. That ought to tell him something about the relationship of productivity to the City – as should the fact that, apart from GlaxoSmithKline, the sole large native high-tech firm available to represent the UK on his advisory panel on globalisation and competitiveness is Rolls-Royce.

He would have been better off with two items of readily available reading matter. As a helpful reader suggests, one would be anything written by the late WE Deming, who was practising joined-up management 50 years before New Labour thought it invented it.

The second is Warren Buffett’s 2005 letter to Berkshire Hathaway shareholders. Buffett is the world’s most successful and least active investor. Berkshire Hathaway doesn’t have an ‘exit policy’ for its investments because it never intends to sell them. Berkshire eschews debt and invests in simple companies (‘if there’s lots of technology we won’t understand it’) with good management: insurance, utilities, Coca-Cola, AmEx and a variety of manufacturing and service sectors. Berkshire has conjured growth in book value of 305,134 per cent since 1965, an average annual gain of 21.5 per cent.

Buffett understands all about productivity. In his letter, he notes that, despite record losses from Hurricane Katrina, Berkshire’s insurance companies still made a profit, largely because of productivity gains that mean they can offer customers outstandingly good value at low prices. Rocket science or what? He also understands what undoes productivity. In an aside on ‘how to minimise investment returns’, he notes that the ‘frictional costs’ to investors of employing brokers, managers and other professional help (some of it bearing ‘sexy names like hedge fund or private equity ‘) may now be eating up 20 per cent of the earnings of US business.

Buffett also describes Berkshire’s great difficulties (and losses) unwinding derivative contracts entered into in the 1990s by its reinsurance business. He believes they should be a warning to all managers and regulators – the more so since the victim was a minor player with a conservative owner.

Since then, the number and complexity of global derivative contracts has mushroomed beyond calculation, with unknowable consequences in the case of a financial Katrina. When Berkshire exits derivatives, Buffett sums up, his feelings ‘will be akin to those expressed in a country song, ‘My wife ran away with my best friend, and I sure miss him a lot’.’

So let’s keep the City in perspective.

The Observer, 2 April 2006

IT USED to be said that people were more likely to change their spouse than their bank. Getting a cheque book was the first service relationship and, having signed you up early, the bank could expect loyalty (or inertia) to keep you a customer for the rest of your life.

Today, a person’s first commercial relationship is likely to be with a mobile-phone company, and for a third or more of customers it will last less than a year. Mobile phone penetration in several countries, including Britain, is now more than 100 per cent, meaning that a growing number of customers have two or more handsets, and some young ones are so technologically savvy that they reportedly switch Sim cards between phones to take advantage of special rates at different times of day.

So where does that leave loyalty? How can companies retain customers who are so quick to trade in, up and out? This matters a lot to industries such as mobile phones which initially experience such heady growth in an expanding market that defections don’t matter. But with every available customer signed up, sometimes more than once, the industry’s free minutes have run out. In future, one company’s growth can only be another company’s shrinkage.

As the retention war hots up, churn rates have if anything increased, now hovering around the 30 per cent mark, even higher in pre-pay, where customers are still more promiscuous. Churn deals operators a crashing double whammy, reducing revenues as it raises the cost of customer acquisition. Last year a report by researcher Analysys found that the cost of winning a new customer could be 12 per cent of the total lifetime revenue he or she brings in. In all, churn in 2003 cost western European operators more than pounds 6.5bn, the report estimated.

In this context, finding loyalty does still exist is both a surprise and something of an indictment of industries such as mobiles that have ignored it. ‘Given the death of deference and authority, we wouldn’t have expected loyalty to be valued for itself,’ says Bob Tyrrell of Global Futures Forum, who researched the issue for mobile operator O2. ‘But we were surprised to find very positive attitudes. A comfortable majority say that loyalty matters as much as ever – particularly young people.’

However, that does not mean it is easily given. Businesses lag far behind family and friends, workplace relationships and clubs in evoking feelings of loyalty, Tyrrell found. That might be expected – but less so is the fact that many of the things firms do to serve customers actually make things worse. Loyalty being closely linked to personal interaction, impersonal responses from automated call centres evoke huge hostility (when will they learn?). Interestingly, loyalty marketing can itself be damaging. ‘Customer apartheid’ – different levels of service for different segments – is resented, and rewards tend to provoke cynicism rather than faithfulness.

‘Loyalty is a powerful word,’ says Charlie Dawson of The Foundation, a marketing consultancy. He points out that the mobile industry has brought the situation on itself by training customers, in effect, to look for the best deal. ‘If you don’t switch, you’re left on the mug’s rate and that hardly makes you feel great.’

O2 says the research is helping it to take these issues to heart. ‘As an industry, we haven’t served customers as well as we would have liked,’ admits customer director Cath Keers. In recognition of the need for a better human touch, the company, Britain’s largest mobile operator, hired 2,000 new workers to deal directly with customers and culled 500 managers. It also decided to tackle the damaging perception that serial one-night stands are more advantageous financially than a long-term relationship. Here, as well as rewarding good customers, Keers says it is building on the idea of ‘episodic loyalty’ – attachments that vary over time. Prolonging these episodes is a matter of keeping pace with the growth of the customer, says Tyrrell, so that when a pre-pay customer moves to a contract they will be happy to move within the company rather than shop around.

The key is to stop resisting what the evidence is saying (that current marketing methods are part of the problem), then be bold enough to simplify hugely overcomplicated products and tariff structures. ‘They are completely tied up in their own technology,’ Dawson says of most of the operators. ‘They just can’t see it from the customer’s point of view.’

Keers points to the figures to show that O2 is moving in the right direction. In the year to December 2005, churn rate for pre-pay was down from 37 to 30 per cent, and for contract from 30 to 27 per cent. Overall customer numbers were healthily up in the last quarter, and service indicators are improving. It’s only the start, she concedes, but given a few more years, maybe the mobile operators will be in a position to teach the banks something about the difference between inertia and loyalty – and not before time.

The Observer, 25 March 2006