WHEN Tony Blair at the Labour Party conference invoked ‘the patient courage of the changemaker’ to describe the mission of his third term, he was making three colossal assumptions:

1) change is good

2) change will be unthinkingly resisted

3) given sufficient patience and courage, one-off change can be achieved by managerial effort, after which the organisation will have been successfully turned round and will be facing in the direction the changemaker intended.

When the Prime Minister added that in every case in retrospect he wished he had pushed his reforms further, he was effectively turbo charging these assumptions.

Yet each one of them is as trustworthy as an Alastair Campbell denial. That change is inevitable, non-stop and pervasive as never before is the biggest management cliche of all. As Chris Grey, professor of organisational theory at the Judge Institute, puts it in his indispensable and subversive Studying organisations, change has become a fetish.

Yet this self-serving narrative is undercut time and again by both statistics and common sense. Job tenures have not shortened, and full-time employment is still the norm. On many measures the world economy is no more globalised now than at the end of the nineteenth century. Despite the internet, the laws of economic gravity still operate. And it is hubristic narcissism to think that change today is more wrenching than it was, say, during the Industrial Revolution in the late eighteenth century.

In fact, the most salient fact about today’s change is how much of it, rationalised by the fetish, is both self-created and self-defeating. The fatal starting point is the idea that change can – and must – be imposed by the ‘changemaker’ top down. Thousands of examples show that this is a fantasy, and both theoretical and practical considerations suggest why.

Remote atop the already distant management factory, the change leader has no way of knowing how his/her decisions, however ‘courageous’ and ‘patient’, will play out on the ground. So unintended consequences abound – targets being a prime example. But even if managers could foresee the myriad theoretical consequences of a course of action, they would still run up against human agency.

On the one hand, organisations can’t afford to switch human initiative off: a leader can’t do everything alone. But on the other, agency has unpredictable results – people disagree. In the presence of agency, the idea that organisations can be redirected like machines is futile.

Either way, top-down change is an unwinnable battle against unintended consequences, which eventually mandate further change to mitigate the damage. In this sense, as Grey puts it, ‘change management’ is ‘a perennially failing venture’, doomed to reproduce itself in a never-ending loop: change as stasis.

There’s no better example of this self-perpetuating tread mill than the original English patient, the NHS. As Polly Toynbee noted recently in The Guardian , since 1948 the NHS has been ‘reformed’ on average once every six years. New Labour has easily surpassed that. The current overhaul is not only the third in eight years it neatly returns the service to where it was when it came in, although under different terminology.

In this orgy of motionless change, the work is not managing hospital beds or patients, let alone health, but change itself: the mad bureaucracy of targets, relationships that have to be reforged, jobs redescribed and reapplied for – and now new IT and office systems embedded to implement payment by results.

In only one respect can this round of ‘reform’ be said to be succeeding – that of deliberately destabilising the service. The avowed aim is to make it easier to import change. But that is a dangerous game, the likely consequences magnified by the fact that in dealing with the NHS the government doesn’t seem to be able to distinguish between an organisation and a market.

This matters. An organisation is not a market. It has different functions and logic, and treating one as the other is a howler, as sure a means of creating confusion and make-work as the other self-generated reforms. The changes are designed to make health (and education, and as much of the public sector as possible) into a market. To work, a market needs clear rules and strong competition so that good solutions come to the fore and weaker organisations have an incentive to improve.

But where does strong competition come from? From – duh – vibrant organisations, with the autonomy, confidence and capacity for real change: to devise new and better ways of meeting the needs of customers (this is called R&D). The market disposes, but it needs organisations to propose in the first place. The two are symbiotic. The situation in the public sector, with complicated pseudo-markets and organisations crippled by central targets and constant interference, is the worst of all worlds, rule-bound, bureaucratic and unpredictable.

In the final analysis, as Chris Grey suggests, the narrative of change is most often not one of rationality but of ideology: a power play, a cover for the attempt to impose one version of ‘efficiency’ (the market) over another, and to discredit those who disagree as self-evidently retrograde, if not evil. Not so much the patient courage of the changemaker, then: more the self-righteous delusions of the fundamentalist.

The Observer, 16 October 2005

WHY DOES a company spend $1 billion on training? In a word, ‘growth’, says Tom Quindlen, vice president and chief marketing officer of GE Commercial Finance.

With $152bn in revenues and $17bn in net income, GE is one of the powerhouses of the US economy. But although it is one of the world’s smoothest takeover artists, absorbing more than 100 companies a year, its size means that as a matter of arithmetic it takes a bigger and bigger acquisition fix to have an effect on the top line.

As CEO Jeff Immelt has emphasised for some time, the company has to rely for extra performance on organic growth.

If not from buying extra sales, or squeezing costs to boost the bottom line, where will the performance improvement come from to meet the company’s brutally demanding targets? The answer has been termed the ‘middle line’: get ting more from what the company does already every day.

The industrial arm of the 126-year-old, Connecticut-based firm turns out everything from light bulbs to aero engines, medical scanners to environmental technology. But, growing out of customer finance, it also has an increasingly powerful financial services side. GE Commercial Financial Services, previously part of GE Capital, is now the largest single GE division, accounting for $230bn in assets and $4.5bn in earnings last year. Europe accounts for roughly one quarter of those totals.

GE’s long experience of the industrial arena already differentiates it from traditional banking and financial service providers and has served it well among the mid-sized customers which are GECF’s staple buyers. But to meet GE’s growth and earnings goals it needs more. ‘When a customer is making the next buying decision, I don’t want them even thinking of anyone but us,’ says Quindlen. The division is also targeting the very largest corporations, which have historically preferred conventional standalone finance houses, and where the company’s customer base is small.

This is where training and education come in. To get where it wants to be, GE knows it must be smarter. It needs to bulk up its intellectual capital. But to make the most of the stock that it has, it needs something else again. As the director of HP labs once sighed: ‘If only HP knew what HP knows.’ Increasing the middle line means not only GE knowing what GE knows, but being smarter about what it does with it. Unparalleled history and vast accumulated experience are not enough on their own. Being able to mine them for useful knowhow requires social as well as intellectual capital, the type of thing that can only come from networks of formal and informal contacts built up over time across the group.

Part of GE’s social capital therefore derives from a highly unfashionable concept: the career. Quindlen has been with GE for 21 years, which is not unusual for the company, all of whose most senior managers are insiders. His seven moves, encompassing stints in industrial as well as financial services units all over the world, are less typical, although not unique. He says candidly that the possibilities of change and diversity, underpinned by near-continuous training – in his case a formal company session for nearly every year of tenure – were a powerful inducement to stay. In GE’s system, it is training, both functional and leadership, that links personal development with company performance.

‘It all comes back to growth,’ says Quindlen. ‘The investment in training, and the ability to pursue a diverse career within the same company, are powerful inducements to recruit and retain great leaders.’ And great leadership and functional ability, combined with continuity and ‘boundaryless’ networks across the group, make it possible for the group to leverage rich resources in new ways.

One of these new approaches is something called ‘ACFC’ – ‘At the Customer, For the Customer’. ACFC is the kind of free consultancy Marks & Spencer once carried out for its customers, only more diverse and less direct. Apart from the technical stuff, says Quindlen, ‘A lot of customers ask us about the generic things we’re good at: Six Sigma, HR processes, leadership succession, or how to do acquisitions and mergers. So we had the idea of opening up our expertise to customers and partners to solve their business problems.’

In effect, it allows customers to mine GE’s accumulated experience. ‘We lend them our intellectual capital.’ The rationale is that as the customer’s business grows faster, so does its need for financing from GE. Commercial Finance has been particularly adept at this kind of knowledge transplant. It claims to have helped more than 1,200 customers to make a total of $1bn cost savings since 2002, and, although it’s impossible to quantify the impact in terms of new business for GE, most people believe it is substantial.

Particularly attractive to customers has been Six Sigma, a statistics- and tool-based improvement methodology. (A six sigma process is one with fewer than 3.4 defects per million.) But it is controversial: critics charge that it is overly complex and top down, essentially a means for getting people to meet targets.

Quindlen concedes that he was taken aback when asked to take on the job of Six Sigma champion for a commercial finance unit, but came out of it a wholehearted fan. ‘It makes you focus on your core processes from the customer’s point of view,’ he says. ‘When you ask for data, you’re always thinking about the customer.’ Six Sigma has, he notes, changed his view of leadership and made him a better leader.

Coming back to the mantra, it also, he says, helps GE to grow. Better core processes mean better service, so cus tomers come back for more. Six Sigma is in high demand on the ACFC programme, too.

‘Growth,’ sums up Quindlen, ‘doesn’t happen by accident.’ Building a sales organisation is part of it, but it is not simply about sending out more salespeople to rope in new customers. Growth outside can only come from growth inside – organic in more senses than one.

Simon.caulkin@observer.co.uk

CORRECTION: Jeffrey Pfeffer’s article referred to in last week’s column appeared in Academy of Management Review (Jan 2005), not as attributed, and Sumantra Ghoshal’s article appeared in in AM Learning and Education (March 2005). Apologies.

The Observer, 9 October 2005

Who cares about management theory? Well, you’d better. Even if you’ve never read or even heard of transaction cost economics or agency theory, these ideas are re-engineering your world as surely as religious fundamentalism, if a lot more insidiously.

That sounds hard to credit. After all, managers proudly ignore theoretical concerns. Even academics lament that the journals they get brownie points writing for are read by audiences numbering a few thousand – if they’re lucky.

Yet invisible though they are, theories matter. ‘The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood,’ wrote Keynes in The General Theory. ‘Indeed, the world is run by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slave of some defunct economist… Soon or late, it is ideas, not vested interests, which are dangerous for good or evil.’

Keynes was right, even if he greatly underestimated the phenomenon. This is because of something called ‘the double hermeneutic’: where human behaviour is concerned, if enough people believe a theory, even a ‘false’ one, it becomes self-fulfilling and therefore ‘true’.

Crudely, if managers believe that individuals will only work under a regime of sticks and carrots – controlled by hierarchy and incentivised by money – and design companies accordingly, that is what people become.

The converse is also true. Just as distrust breeds cheating and self-interested behaviour that attracts still tighter surveillance (the ‘supervisor’s dilemma’), research shows that assumptions that individuals are hard-working and trustworthy produce workplaces where people are less interested in money and co-operate more.

‘The conventional view is that theories win because they are better at explaining behaviour,’ notes Jeffrey Pfeffer, professor of organisational behaviour at Stanford Graduate Business School. ‘This stands it on its head: theories win because they better affect behaviour, becoming true as a result of their own influence irrespective of their empirical validity.’

Pfeffer, a respected senior researcher, is one of a small but vocal chorus of academics who are increasingly concerned by the damage, as they see it, that theoretical assumptions are doing to the practice of management. Just before his death last year, London Business School’s lamented Sumantra Ghoshal wrote a much-noticed piece for a US journal entitled Bad Management Theories are Destroying Good Management Practices, in which he independently reached some related conclusions. It was no good business schools being pious about Enron and WorldCom, he argued, when ‘it is our theories and ideas that have done much to strengthen the management practices that we are all now so loudly condemning’.

In this view, the damage occurs because the assumptions about human nature underlying all conventional management are overwhelmingly negative. In a paper in the American Management Review, and in a series of punchy presentations sponsored by the Advanced Institute for Management Research (AIM), Stanford’s Pfeffer traces the root of the dynamic to the core principle of economics: that every agent is actuated only by self-interest.

From this, everything else follows. If people are self-interested, they have to be motivated by incentives. Different self-interests lead to endemic conflicts, hence agency problems.

To resolve conflicting interests efficiently, markets are best. Self-interest and markets favour competition rather than co-operation, and mandate hierarchy to keep people in line. They also empty management of all moral or ethical concern. And, indeed, the typical firm has come to be structured around these principles, from governance based on agency theory and shareholder value, to internal markets and performance-related pay, sharp incentives and performance management lower down.

Yet there is little empirical evidence that the assumption of exclusive self-interest is valid. Self-interest exists, of course, but to assume that nothing else does defies common sense as well as well as research findings. Conversely, ‘There is growing evidence that self-interested behaviour is learned behaviour – and people learn it by studying business and economics,’ says Pfeffer.

In an ‘incredibly depressing’ range of studies, business and economics students have been found to be more prone to cheat, free-ride, and violate codes than those of other disciplines. What’s more, unlike contemporaries, they undergo negative moral development during their courses. In other words, they more and more resemble the rational utility maximiser – rational economic man – that is the starting assumption of their disciplines. Economics and business courses, sums up Pfeffer, are ‘hazards to your moral health’.

As both Pfeffer and Ghoshal show, the effects carry over into business itself, irrespective of whether managers have been to business school or studied the individual theories.

Institutional mechanisms such as governance arrangements, social norms – so that people assume that others are self-interested although they aren’t – and language all carry the virus around the world.

The evidence is everywhere. Downsizing (ie firing people), once a last resort, is now done pre-emptively. Incentives are ubiquitous despite zero evidence that pay for performance works. Outsourcing is going through the roof. One study found that, in larger companies, the more MBAs there were among top managers, the more likely the company was to behave illegally.

So now we can see why theory matters – not just for academics, but for everyone who works in organisations. As the psychologist Robert Frank wrote: ‘Our beliefs about human nature help shape human nature itself’ – and, as embodied in current management theory and practice, they are in danger of turning us into travesties of human beings: narrow economic actors who are expected to leave moral, ethical and even generous impulses at the door. This is not inevitable, since just as ‘bad’ theory is doubly bad, ‘good’ theory has the potential to be doubly good. But it does mean that theory is all our concern; too important, in fact, to be left to theoreticians.

Simon.caulkin@observer.co.uk

… Unless it’s a bad theory

Transaction cost economics arose from attempts to understand why, and under what conditions companies exist. In essence, companies exist only as a result of market failure, when situations are too complex for market contracts to be drawn up to cover all eventualities. As individuals are opportunistic, managers must exercise authority or ‘fiat’ to ensure they do as they are told to maximise profits, and create strong individual incentives. Implications: hierarchy, incentivisation, markets are best.

Agency theory teaches that self-interest leads to a conflict between ‘principals’ (shareholders) and ‘agents’ (managers). Managers, being opportunists, cannot be trusted to maximise shareholder interests rather than their own. The resulting ‘agency problems’ must be overcome by aligning managers’ and shareholders’ interests, typically through incentives. This was a major justification for the 1990s stock option bonanza. Agency theory is a powerful influence on corporate governance.

The ‘five forces’ strategy model asserts that companies create strategic position by developing power over customers and suppliers (and implicitly employees), increasing barriers to entry and by managing interactions with competitors. That is, profits come from restricting and distorting markets.

The Observer, 2 October 2005

L AST WEEK ‘s column – ‘Adrift in a parallel universe’ – about the perversion of management provoked an eloquent, sometimes passionate, response. The depth of concern about what is being done in the name of management, among both managers and the managed, was sobering and unmistakable.

Something is badly wrong. ‘We’ve failed,’ said one educator simply, convinced that for all its apparent advances, management is worse now than a century ago. Others noted that the bad really was driving out the good, making it ever more difficult for the voice of real management to be heard among the cacophony of fads, numbers, league tables, meaningless exhortations and hucksters selling ‘solutions’.

But, as one reader also noted, it’s not enough to resist the forces of darkness. We also need a campaign for the light. How are we to drag ourselves back from the parallel universe into the real one?

In the spirit of a positive alternative, a prime text is W Edwards Deming’s 14-point programme for transforming management, drawn up in the 1980s. Deming, now remembered as the philosopher of the quality movement, was originally a statistician who was acutely aware of what could and could not be done with numbers.

He would have been dismayed by their casual and ignorant use in public-sector league tables and targets, in the measurements applied by private-sector companies and the massive, unnecessary costs organisations heap on themselves as a result. Although honoured these days mainly in the breach, Deming’s points – and the ‘deadly diseases’ that get in their way – have as much to say now as two decades ago.

Create constancy of purpose toward improvement of product and service with the aim of becoming competitive, staying in business and providing jobs. That is, management is about providing things or services people want to buy, not financial engineering, outsourcing or doing deals. The enemy of constancy of purpose is the deadly disease of pursuing short-term profits.

Adopt the new philosophy. More than ever with the rise of China and India and increasing burdens on the public sector, we can no longer tolerate systems constructed to turn out waste and turn off customers and citizens. Time to transform management from top to bottom.

Cease dependence on mass inspection. This is equivalent to managing for defects, acknowledgement that the process (management’s responsibility) is not up to it, and applies as much to service as to manufacture – much of the cost of banking consists of employing staff to verify each other’s work. The better (cheaper) alternative is to build quality into the service from the start.

End the practice of awarding business on price alone. ‘Price,’ notes Deming, ‘has no meaning without a measure of the quality being purchased’. It’s total cost that matters. Gate Gourmet, endless friction between supermarkets and their suppliers… enough said.

Improve constantly and forever the system of production and service, to improve quality and productivity, and thus constantly decrease costs. Management’s job.

Institute training on the job. A vast amount of training is wasted. It should be on demand as necessary for managers to understand and act on the issues preventing people doing a good job, for all to understand and act on customer needs.

Institute leadership. Deceptively simple. It means helping people and machines to do a better job, no more, no less.

Drive out fear. One of the most interesting of Deming’s points. He knew that fear makes people stupid. But by forcing them to meet arbitrary targets, fear is also the biggest hidden corrupter of the statistical data essential to improving systems and processes in the first place.

Break down barriers between departments. In other words, look at the process as a whole. This single insight was later reformulated and packaged as ‘re-engineering’, making several author-consultants a fortune.

Eliminate slogans, exhortations and targets for the workforce. Targets are among the deadly diseases: ‘What do they accomplish? Nothing? Wrong: their accomplishment is negative.’ They stifle teamwork, create adversarial relationships and, in conjunction with fear, corrupt data. Kill them off.

Eliminate quotas on the production floor and management by numbers and numerical goals. Substitute leadership. It takes a statistician to say that – and to compound it by adding that the most important figures for managing a business ‘are unknown and unknowable’.

Remove barriers that rob both workforce and managers of their right to pride of workmanship. This means getting rid of performance and merit rating and annual review, according to Deming one of the most virulent of management diseases. Statistically, a fair rating is impossible because of variation in the system, which is the overwhelming determinant of performance but in any case, though alluring in concept, the effect of merit rating ‘is exactly the opposite of what the words promise. Everyone propels himself forward… The organisation is the loser.’

Encourage education and self-improvement. It’s hardly rocket science, is it?

Put everyone to work to accomplish the transformation of management practices. It’s everyone’s business.

Some of Deming’s points seem disarmingly simple, others counterintuitive. Note that there is nothing about shareholder value, or, at the other extreme, about being nice to people – just a powerful system for focusing everyone’s attention on doing the important things better. As he often remarked, observing the huge amounts of waste created by management methods in most companies: ‘Doesn’t anyone care about profit?’

The Observer, 4 September 2005

BA must be reflecting that there’s no such thing as a cheap lunch. When it sold off its in-flight catering arm to Swissair in 1997, it only seemed to be doing what everyone else was. Outsourcing, together with its sibling, offshoring, has become a seemingly unstoppable management bandwagon.

Outsourcing adviser TPI estimated that major outsourcing deals – those worth more than $40 million (£22m) – totalled $58 billion last year, while adding in smaller deals and related consultancy would multiply that figure several times. The UK spent £2.5bn on outsourcing advice alone in 2004, much of it in the public sector. BA itself has more than 2,000 outsourcing relationships in place.

For BA, as for other companies, there is a management rationale for outsourcing a function previously done in-house. The doctrine of ‘core competencies’ suggests that an organisation is better off cultivating the few things it is distinctively good at and farming out the rest. This is not new: companies have always had to make trade-offs between making or buying.

However, what made outsourcing a hot ticket was its application in the 1990s to IT, which not only lent itself to outsourcing as a function by the same token, other functions based on it, such as HR and administration of all kinds, could also be hived off to third parties. Services as well as manufacturing could be taken apart, farmed out, then reassembled seamlessly at the point of delivery.

As a result, a growing army of eager vendors queued up to offer an increasing range of processes that went deeper and deeper into the heart of the firm. At the height of the internet boom, excitable observers were suggesting that conventional companies would eventually disappear, being replaced by fluid networks that constantly reconfigured themselves. ‘Outsource everything except your soul!’ exhorted arch-guru Tom Peters.

As with much in management, however, outsourcing has a less obvious agenda. To find out what is really driving its exponential increase you have to look at the incentives. The major impetus is not what it does to operational but to financial performance.

Taking assets off the balance sheet increases reported return on assets at a stroke, just as the reduction in headcount boosts revenues per employee. Moreover, it is far easier for the firm that is outsourcing to use market pressure to cut costs – by threatening to switch suppliers – than it would be to do so internally. In effect, it offloads the difficult task of operational improvement to the supplier.

Lower costs drop straight to the bottom line higher earnings leveraged by high price-earnings ratios boost the share price rising shareholder value increases executive pay – at least in the short term.

The financial engineering angle explains why outsourcing is so much more important in the Anglo-Saxon economies, with their emphasis on shareholder value, than in continental Europe. By the end of the 1990s, US manufacturing firms were outsourcing between 50 and 70 per cent of the value they added. But in the long run operational considerations have a nasty habit of reasserting themselves – as is happening with BA.

Suppliers’ margins cannot be squeezed ad infinitum, particularly when there are only two of them, as in the case of global airline caterers, and both are in financial trouble. BA has already had to improve the terms of its contract with Gate Gourmet to allow it to survive, thus negating part of the point of the deal.

As many companies are finding, outsourcing has hidden costs that over time diminish its apparent advantages or even wipe them out. These are simply not captured in the economic model. The most obvious is control when things go wrong, as at Heathrow.

But basic operational knowledge is also a casualty. When Gate Gourmet’s new owner, Swissair, collapsed, the caterer was bought by Texas Pacific, a private-equity group. Private equity, too, is all about finance: companies are loaded with debt and sweated mercilessly with a view to being sold on as soon as possible. So Gate Gourmet was under huge pressure to drive down costs (mostly labour) from both its customers and its owners.

If the airline had still been in charge, it would have known the strain and risk to which it was submitting its supply chain. It would have also known that its baggage handlers and support staff were not only members of the same trade union as the catering workers – they were their husbands and brothers. Whatever they say in public, companies typically outsource to cut costs. But because they fail to look at the process as a whole, they often end up increasing them.

In BA’s case, the airline estimates that the summer chaos has cost it at least £30m, but who knows the real total in terms of damaged reputation and lost custom in the future?

Conventional wisdom says that companies should never attempt to outsource problems or risk, and for once it is right. The only way to make outsourcing work is to know as much about the function and to put as much work into managing it as the company you have handed the job to. In which case, of course, you might equally well do it yourself.

The Observer, 4 September 2005 2005

IN ONE of Jorge Luis Borges’s haunting, enigmatic fictions, Tlon, Uqbar, Orbis Tertius, the narrator comes across an encyclopedia reference to an invented parallel universe. With its own language and literature, complete in every detail, the planet Tlon operates on a seductively different logic from that of the ordinary world, which by the end of the story it is well on the way to supplanting.

Borges wrote his story in the 1940s. Writing today, he would set his story among the mirrors, labyrinths and forking paths of management, which often seems to be constituting a similar parallel world with its own hermetic laws and behaviours. One of the telltales of this world is a language that has become untethered from normal meaning. Sometimes it floats free of reality altogether.

Gourmet, as in Gate, is a good example. I mean, I’ve had airline food that didn’t actually taste awful. I’ve even had airline food that was OK. But gourmet? Come on.

Trivial, perhaps. But it matters because the name is an affront to common sense and makes you query the company’s good faith, grasp of reality, or both. The uncertainty deepens as you read the company’s website’s references to ‘passion’, ‘world class’ and (full house!) ‘our most valuable resources – employees’. When you get to ‘We communicate in an open way and promote inspiring teamwork we treat our colleagues, customers and suppliers with respect and dignity we pay market competitive salaries and offer adequate social security,’ you know you’re no longer in the universe inhabited by most people: you are deep in Tlon.

As in the Borges story, management’s parallel universe is supported by a comprehensive literature in which imaginary concepts and attributes are earnestly described and referenced, as if they really existed. ‘Passion’ and ‘delight’ are such parallel concepts. So is ‘excellence’ (well to the fore on the Gate Gourmet website).

In Hard-core Managemen , Jo Owen notes that there is a huge gap between the ‘excellence industry’ touted in the literature and the daily reality of management.

He observes tartly that, although the official story of management over the past 20 years is one of transformed professionalism through re-engineering, core competencies, customer relationship management, outsourcing and shareholder value, the reality for customers has not changed. We still spend 20 minutes getting a reply from a call centre and tear our hair trying to make a new gadget function.

In fact, like ‘excellence’ and ‘delight’, any management superlative is suspect and should probably be shot on sight. ‘Best practice’, for example. Best practice doesn’t exist except in the world of ideals, and never will, because it is contingent. It implies there’s one right way, which is a mirage, and that anyone using it has reached nirvana. As Owen also remarks, there are no final answers in management: the key is knowing the right questions.

This is one reason why ‘solution’, as in IT and increasingly management in general (even The Guardian sells ‘recruitment solutions’), is also a giveaway of parallelism. ‘Solve’ is transitive a solution without a problem has no function, like yin without yang. Translated into most people’s language, a ‘solution’ is a consultancy for mula or fancy piece of IT kit looking for a buyer. ‘The solution of every problem,’ Goethe figured out two centuries ago, ‘is another problem.’

Parallelists often concede that the value of IT solutions is not intrinsic – IT is an ‘enabler’. This is another paranormal idea. In our world, IT often crashes, locks in, disables other courses of action and obliges people to obey its rules rather than the other way round.

In the managerial world, on the other hand, it effortlessly ‘enables’ almost everything a manager finds desirable – its apogee being a current TV ad for networked services, showing literally a parallel world in which fish, desks, phones, people, bikes and other elements fly together and apart somewhere over an urban skyscape while a voiceover intones about seamless, secure, personalised transactions taking place (naturally) 24/7.

Some of this is so abstract it is almost devoid of meaning. A bank currently claims to be ‘leveraging its global footprint to provide effective financial solutions for its customers by providing a gateway to diverse markets’. Some is wishful thinking. But it’s not always harmless. As on Tlon, the abstractions of the invented world progressively impinge on the real one.

At the university where my wife works, professorial salaries used to be set by the vice-chancellor using his judgment on the basis of a one-page letter written by the academic. To increase ‘transparency’, a new vice-chancellor introduced two new written steps in the procedure involving department and faculty heads and a system of ‘feedback’. As a result, salaries are no more transparent, but the process has become twice as cumbersome and bureaucratic.

It transpires that ‘transparent’ in the management universe does not mean ‘see-through’, it means ‘formal’. Ironically, the new ‘improved’ process can be instantly bypassed by any professor who invokes the brutal (and actually much more transparent) law of today’s academic transfer market: pay me more or I’ll take my research record somewhere else.

In Borges’s book, the invented universe is a hoax, the all-encompassing creation of a secret society. But that does not prevent it taking over the world. Is management a hoax? In a recent survey of 3.5 million employees worldwide, research firm Sirota Survey Intelligence found that most workers did their best work when managers were out of the way. Management bureaucracy, blame-placing, inconsistent decision-making, delaying and time-wasting all interfered with their ability to do their work properly. In other words, the less management the better.

Preventing ourselves falling into the parallel universe is partly about questioning management’s self-replicating assumptions. But it’s also a matter of language. In the words of another famous parallelist: ‘When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean – neither more nor less.’

‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’

‘The question is,’ said Humpty Dumpty, ‘which is to be master – that’s all.’

The Observer, 28 August 2005

A READER – the source of most of this column’s best subjects – sent me an interesting chart last week (right). It shows the incidence of reported crimes near a pub in Bromley, Kent, from August 2000 to November 2004. Is there a link between extended drinking hours and more violence? In the case of the Tiger’s Head, the answer is yes – violence doubled when hours were extended. When the late-drinking licence was revoked after 18 months, crimes fell again, to less than half the previous level.

The chart looks like a simple graph. In fact, it’s much more. ‘It’s immensely powerful – there are so many applications in local government and the public sector,’ says Bromley councillor Tony Owen, who drew this one. It’s a ‘control’ or, better, a ‘capability’ chart, and it measures a process’s capability and variation – failure to understand which, according to quality prophet W Edwards Deming, is ‘the central problem in management and leadership’.

As targets are to conventional, dysfunctional, management, measures of capability and variation are to the positive systems alternative. The exact opposite of the poisonous ‘WMD’ (weapons of management destruction) described on this page two weeks ago, such measures are, alas, criminally neglected – utterly ignored by boards, ministers and Whitehall policy wonks alike. Yet it is no exaggeration to say that their better understanding and use would do more to stabilise the NHS, improve public finances and raise UK productivity generally than all the government targets and interventions put together. (Actually, the latter necessarily make things worse, and not the least of the beauties of capability/control charts is that they show you why. Read on.)

The control chart was invented by Dr Walter Shewhart, godfather of the modern quality movement and mentor of Deming, in the Twenties. ‘Control’ here is slightly misleading: Shewhart saw it above all as an aid to predicting performance and thus management judgment and decision-making. It can take many forms, but at its simplest – as in the Tiger’s Head example – it depicts the working of a process over time.

A critical component of the chart is its control limits, based on the calculation of standard deviation, which show the extent of natural variation in the system. Around the Tiger’s Head, under standard opening hours, reported crimes per month could total anywhere between 12 and zero and under extended hours 25 and zero. Anything inside the control limits is ‘normal’, part of the system, and the process is stable or in control. A point outside the control limits, on the other hand, is evidence of an abnormal external cause that needs to be investigated, and if necessary removed, to make the process stable again. Only when the process is stable is predictability renewed.

The control chart has been aptly described as ‘the voice of the process’. Unless it is heard, managers have no way of knowing if any particular number is a natural variation or something that warrants intervention. This is a critical distinction: if managers mistakenly tamper with a stable process, believing an occurrence is exceptional, they introduce an external cause, which destabilises it. Targets do the same thing.

If a system is stable, as a matter of logic you can only force it to deliver a target beyond its limits by improving it, distorting it or fiddling the numbers. It’s impossible to know where and what to improve without a process voice to tell you – so, in the absence of capability measures, distortion and fiddling are the inevitable result. If the system is unstable, meeting the target is useless, because you have no way of knowing if you can do it again. Thus does the current public-sector regime of targets and interventions make systems work worse, raising costs and destroying morale thus Deming’s insistence on the importance of the leadership task of interpreting and acting on variation.

Traditionally, control charts have been thought of, if at all, in terms of manufacturing industry. But this is a misconception, says Cranfield Management School’s Steve Mason: ‘There are many applications they could be used for, including at board level. We need to get boards away from looking at columns of spreadsheet numbers to something more meaningful.’

Another strong advocate, no stranger to these columns, is John Seddon, whose consultancy, Vanguard, puts capability measures at the heart of a philosophy that has helped a number of public- and private-sector organisations to performance improvements that make a mockery of official targets: benefits payments in four or five days against an official target of 50, or cutting resolution of IT helpdesk enquiries from days to hours. ‘The test of a good measure is whether it helps in understand ing and improving performance,’ he says. ‘That’s exactly what systems measures – of which control charts are one – do, and targets don’t.’

The puzzle is why these measures are so scandalously neglected. ‘There are few of us teaching them, and they don’t figure in MBA curricula,’ says Mason. It probably doesn’t help that they are part of the unsexily titled subject of ‘statistical process control’, identified exclusively with nerds in white coats. Another reason is that so few people in the public sector have worked in environments where their virtues are recognised. ‘Where I worked, at Philips, if we supplied Sony with more than a couple of faulty parts per million, we’d be out as a supplier,’ says Owen at Bromley council. ‘Here, 20 per cent of the holes in the road are unfilled.’

But although no one who ‘gets’ systems measures ever returns willingly to targets and specifications, even in the private sector the gains are all too often reversed by senior managers who take fright at the implications. This, says Seddon, is because those measures are part of a package – a systems view of the organisation – and can’t be applied piecemeal as a handy ‘tool’.

It’s hard for managers to accept that, from a systems perspective, their function of devising top-down financial plans and budgets is the source of all the subsequent variation with which the inhabitants of the system have to cope (or not) as best they can. What is that if not the biggest leadership issue there is?

The Observer, 21 August 2005

IT’S THE great paradox of the information age: companies – indeed, organisations of all kinds – are drowning in customer data but starved of useful knowledge. The consequence, says John Orsmond of Data Vantage, a database specialist, ‘is corporate amnesia on a grand scale’.

Every customer contact generates data. But the more companies fall over themselves to invest in contact centres and accompanying customer relationship management (CRM) and other expensive and complex database ‘solutions’ to collect and store it, the less they seem to have in the way of ‘answers’. ‘Companies are forever forgetting what’s happened many times before,’ Orsmond says.

Despite the hype of the computer vendors, most companies are forgetting rather than learning organisations. While the amount spent per customer on CRM goes up, the yield on their data assets goes inexorably down. Never in the history of commerce has so much been known about so little, to such small effect.

In fact, the effect is not just negligible, it is negative. Instead of being an ‘enabler’ (like ‘solution’, a word that should make managers pull a gun on anyone who utters it) IT has become a disabler, a screen that effectively distances consumer from company. Think of the on-hold music, the interactive voice response (‘press one for…’), the codes and passwords you have to negotiate before actually being able to talk to anyone.

These are barriers. ‘Behind all the data, customers are becoming invisible – and more and more alienated,’ Orsmond says.

Because of these failings, companies are unable to make even the most elementary distinctions between callers and types of call. One glaring gap is that all the measures and responses are geared to the company’s idea of the existing buyer. It’s as if the non-buyer didn’t exist.

As a result, ‘there’s no whole-market view,’ complains Orsmond. If, for example, the IT is driven by orders rather than, say, marketing, it won’t allow call-centre agents to spend the extra few seconds finding out about callers who might have made a purchase but in the end didn’t.

Look no further for the reason why call centres, which ought to be the eyes and ears of the company, are so often barriers rather than contributors to corporate knowledge.

The consequence of patchy integration, badly designed measures and poor processes is that there is a yawning gap between company and customer expectations.

‘There’s huge undetected customer dissatisfaction and very large concealed defection in all sectors,’ Orsmond says. Financial services are particularly bad. As evidence: telemarketing results are plummeting, as are customer- satisfaction levels all over the spectrum. Meanwhile, call-centre traffic – aka complaints – is going through the roof (necessitating the building of more call centres, thus negating the cost-cutting rationale for these establishments in the first place).

Perhaps equally interesting is the take-off of online transactions. According to Interactive Media in Retail Group, UK online retail sales growth is now 40 times that of bricks-and-mortar retailers – e-tail was 36 per cent up year-on-year in May at pounds 1.5 billion, while the physical high street is at its lowest since 1947. This, remember, is before the July bombs.

The significance of internet shopping, of course, is that a half-decent website makes it easy, or less hard, for customers to ‘pull’ the service they require, which, at least in the case of relatively simple products, is a substantial improvement on what is otherwise on offer.

The success of eBay in providing a market place not only for individuals but also, increasingly, for companies to sell their wares direct to consumers, is eloquent testimony to the same thing.

At Warwick Business School, Professor Harry Scarbrough, director of a research programme on business knowledge, notes that companies can hardly be surprised if customers feel alienated: ‘They want you to be data, because it’s more cost-effective. They don’t want you to be a person. For vast numbers of people, they want to commoditise service: that’s been the banks’ strategy, for example, for the past 20 years.’

The snag comes when, as now, people begin to revolt against the simplistic versions of human behaviour on the IT model. ‘When people fall through the net, when the data doesn’t match the dataset incorporated in the software, they can bounce around the system for ages,’ Scarbrough says.

The error is to think that these problems can be resolved at the same level they were created – by throwing yet more computer power at it. But it’s a systems, rather than IT system, issue. Put simply, it’s the wrong kind of data.

Most service industries are in much the same situation as manufacturing before the shakeout of the 1980s, Orsmond believes. The early service adopters of the new technology then on offer simply applied it to the old processes.

Just as manufacturing had done so earlier, services (particularly financial services) proudly reinvented themselves as mass-producers, driven by economies of scale, specialised production factories and standard products. That’s a good description of most modern call centres. They may be selling mortgages or mobile phone contracts rather than the Model T, but the logic is exactly the same: ‘You can have any model so long as it’s what we want to sell you and it takes no more than two minutes to explain and close.’

With technology plunging in price and soaring in capability, it is all too easy, says Orsmond, for firms to persuade themselves that what they need is ‘go-faster boxes and pipes, forgetting that there are all kinds of switches, taps and gauges between them, with people opening and shutting off the flow.’

The result is still the same old data leaks, explosions and blockages in short, confusion and complexity and little clean knowledge. Instead, the greatest value will come from a system with the shortest pipes and smallest number of moving parts, through which data can flow quickly and without hindrance to create real knowledge that people can act on. As Orsmond points out, this is often actually cheaper, requiring little in the way of capital expenditure, and the results drop straight to the bottom line.

So far, the underlying effect of IT in service industries has been to depersonalise the relationship between company and customer almost completely – the customer as data, in Scarbrough’s terms.

The key question is whether it can also be used to swing the pendulum back. Consumers are crying out for dealings that treat them as people, and there is growing evidence, says Orsmond, that they will reward companies that make the effort to do so. But just 12 per cent of UK companies are currently able to recognise even the most basic differences between them, so ‘you could say that there’s 80 or 90 per cent headroom for improvement.’

The Observer, 14 August 2005

THERE’S a new book out called Everything Bad is Good for You. With management it’s the other way round. Everything conventionally regarded as good is actually toxic.

Not enough people are aware that almost everything treated as axiomatic in today’s management is intellectually shaky and riddled with contradictions and practical difficulty. Things that we accept as inevitable aren’t inevitable at all in time, they will come to be seen as part of a primitive and finally destructive paradigm that was only held together for so long by unquestioned assumptions and the resigned (but wrong) acceptance that there is no alternative.

Start at the very top, with corporate governance. Current prescriptions, based on threadbare agency theory, are increasingly undermined by academic research. For instance, according to two new studies presented to the Academy of Management annual meeting last week, heavy use of stock options, still the main component of CEO pay for many companies, significantly increases the chances of poor strategic management and financial misrepresentation. In plain English: options give CEOs incentives to do dodgy deals and cheat. For all its box-ticking, America’s Sarbanes-Oxley Act on financial disclosure does not address the issue of these underlying incentives, and is itself a contributor to the problem rather than the solution.

In fact, bits are falling off the official edifice wherever you look. Another Academy of Management paper knocks on the head the idea that multiple directorships are necessarily bad on the contrary: multiple directors turn out to be more diligent, and for the largest firms they are linked to slightly better shareholder returns. As in previous years, Booz Allen Hamilton’s 2005 CEO succession survey shows that companies with combined CEO-chairmen deliver measurably better returns than those where the roles are separated. Booz Allen also suggests that insider CEOs are at least as good as outsiders and European firms are sacking poor performers too quickly: ‘In 2004, CEOs removed for poor performance were in office for a median tenure of two and a half years, an astonishingly and counterproductively brief of time.’

But then, whether at the top of or lower down the organisation, performance management in most organisations is a nightmare. Because performance measurement is dependent on other people and the system, it is nearly impossible to establish one that is fair and accurate in any case, because the measures are attached to budgets or activity rather than work itself, they usually measure the wrong things.

Naturally, that also means that appraisal, as conducted by 99 per cent of organisations, is similarly dishonest, counterproductive and coercive, particularly when connected to pay. On the other hand, where measures are attached to the work and throw light on the purpose, the need for ‘appraisal’ as such dissolves. Appraisal and performance management are locked in place by the annual budget, another on the list of bad management masquerading as good. Every single organisation in the world grumbles about the budget – GE’s Jack Welch called it the bane of corporate life – but very few are trying to do anything about it. The problem with the budget is that it is a target, and, like all targets it is subject to Goodhart’s Law – the moment it is used to manage by, it is worthless as a measure because it sets up powerful incentives for people to cheat.

The havoc caused in the brutalised and punch-drunk public sector by the abuse of targets and specifications is incalculable (although this column has done its best) the harm that it does to private companies is often glossed over. In the private, as in the public, sector, managing by the numbers drives up costs, ruins service and demoralises those who do the work.

In relations with the outside world, we all know by now that most – say 70 per cent – of acquisitions fail to deliver the expected benefits. Yet companies continue to indulge their wishful thinking. A similar picture is emerging with out sourcing. In a Deloitte Consulting study, 70 per cent of respondents had had ‘significant negative experiences’ with outsourcing, and one in four were bringing services back in-house. Researcher Gartner found that 80 per cent of outsourcing projects failed to save money, the savings on transactions (cheaper calls or contacts) being more than outweighed by the defection of dissatisfied customers and other hidden costs.

I could go on, in general and in detail: customer relationship management and other IT-intensive ‘solutions’ to the wrong questions interactive voice response sales promotions. corporate social responsibility… Why is so much that managers do a waste of time, if not worse? And why do they still persist in trying to make it work? To Answer the second question first: because we’re locked in. Precisely because we all know things don’t work, a whole ecology of improvers – consultants, IT vendors, outsourcers and peddlers of tools of all descriptions – has grown up with a promise to make it better. Everyone has a vested interest in the setup, even business schools producing the research that discredits it.

The reason that none of these things work, and never will, is that they are being put to the service of a clapped-out model. The paradox of today’s capitalism is that we’re still trying to manage it by central planning. Managers at any corporate headquarters or ministry in Whitehall would have been quite at home in the Soviet ministry of planning. They estimate what the market will be, allocate resources and schedule production to match the estimate.

Most of the toxic techniques are attempts to make the predictions and scheduling work better or to mitigate the model’s disadvantages. This they can often do at the margin, but at ever-increasing cost, so that now more and more management effort goes into managing the overhead, and less and less into the real work.

This is like painting go-faster stripes on a Trabant, a fruitless, bootless exercise if ever there was one. It’s also why, ironically, the management exhortation of last resort – work harder! – actually makes things worse. As the original quality guru W Edwards Deming caustically put it: ‘Having lost sight of our goals, we redoubled our efforts.’

The Observer, 7 August 2005

LIKE IT or not, companies increasingly inhabit a deal economy. Put baser motives like ego and self-aggrandisement to one side impatience, competition for investor attention and the globalising world economy are reasons why many chief executives these days feel compelled to pay as much attention to mergers, acquisitions and divestments as to products, services and customers.

With investors breathing down their necks, many CEOs find organic growth too snail-like to impress – particularly where turnarounds are concerned. Couple investors’ shrinking attention span with the need to react quickly to changing conditions, add in ready access to global capital and the attractive targets (and hungry rivals) emerging in new economies such as India and China, and it’s hardly surprising transactions are the newest field of strategic competition.

Last year, says a new report from Ernst & Young, corporate transactions totalled more than $1.5 trillion in deal value, $700m of that in Europe. No less than 88 per cent of European and 96 per cent of US companies studied were planning a merger or acquisition in the next two years, and only slightly fewer had divestment projects in the pipeline. Transactions of all kinds, sums up the report, ‘are an ever-increasing part of the way corporations do business, expand, and adapt to changing circumstances’.

In turn, the growing strategic importance of the deal has consequences for the way firms are managed. In the past, transactions would have been handled by the finance director or chief financial officer (CFO). Today, as a result of the Sarbanes-Oxley Act and ever-beadier investor scrutiny, the finance department is increasingly tied up with compliance and reporting. A separate specialist function, sometimes reporting to the finance director but more often directly to the CEO, is growing up to handle the transaction side of strategy: the corporate dealmaker (there’s even a new magazine of that name) or chief development officer (CDO)

The corporate development function had its origins in the internet era, when every company in search of a business model was desperately looking to make alliances and deals. Now that feeding frenzy has died down, the emerging function is striving to articulate a role, and the attributes needed to carry it out, for a world in which transactions have become as much part of mainstream strategy as a new-product launch or branding. Indeed, charting the evolving CDO role is what the EY report – ‘Corporate Development Office European Study Findings 2005’ – is all about.

The overriding concern noted by EY is the need for greater professionalism. Externally, the imperative is to face up to mounting competition for the best deals from increasingly aggressive and streetwise private-equity (PE) funds. PE is not only ubiquitous – there are now more than 7,000 groups active worldwide, EY reckons – it also enjoys some inbuilt advantages. With their lower cost of capital, shorter time horizons, and greater dealmaking experience (that is all they do), PE funds can often pay more and react faster than company rivals.

None of this is lost on canny venture capitalists and other investors, who are becoming adept at playing off PE funds, trade buyers and even initial public offerings against each other to push sale prices higher. Last year PE funds accounted for 15 per cent of global mergers and acquisitions activity, rising to 22 per cent in the UK and 37 per cent in Germany.

Eventually, like all bandwagons, the PE phenomenon will hit the buffers, either overreaching itself like the corporate raiders of the 1980s or competing its own advantage away. But for the moment, competition from this source is steadily intensifying. At a recent CDO gathering in London, half the participants admitted losing a deal to private-equity rivals in the past year.

Meanwhile, an ominous new precedent is the SunGard deal, in which three large PE groups are combining to take the US IT security firm private for a total of more than $11bn. Dave Read, global vice chair of transaction advisory services at EY, notes that as PE firms start to hunt in packs they are even more formidable competitors: ‘They have access to large quantities of reasonably priced capital, can move quickly and don’t generally have to worry about the difficulties of integrating businesses. Transactions are their core skills.’

But it’s not enough for corporate dealmakers to match private-equity counterparts for speed and opportunism. Investors are putting increasing pressure on companies to improve on the estimated 70 per cent of mergers and takeovers that fail to live up to projections: as well as doing deals, corporate dealmakers need to make them work.

Badly targeted and badly executed transactions can have a dramatic effect on corporate performance, Read points out. ‘CDOs are taking greater end-to-end responsibility for transactions and their outcomes,’ he says. ‘Not only are CDOs today responsible for originating, assessing and managing deals, they are also becoming more involved in integration, corporate strategy and risk management. In effect, CDOs are the new CEOs of transactions.’

The pressures on the role are compounded by the need to look abroad for growth opportunities. While most of Europe (especially) is stuck in the economic doldrums, emerging economies led by China and India are expanding too exuberantly to be ignored. Some CDOs also contrast favourably the increasing ease of doing business in such countries with growing regulatory, compliance and liability issues at home. For many large companies, dipping a toe in foreign waters is a matter of when, not if – with all the legal and cultural baggage that entails.

Businesses have always felt the need to reshape their portfolios from time to time. What is different now is the need to do so at speed, worldwide and in competition not just with traditional industry rivals but with well capitalised finance groups worldwide. In short, the ability to do deals well is becoming a source of strategic advantage, just as inability is a strategic handicap.

But although ‘corporate development’ will involve some management innovation – managing virtual teams, measuring transaction success, developing working relations with the board and other stakeholders – ultimately it won’t do to get carried too far away from the basics. Most deals still fall down because no one has thought who will manage the merged operation or how the success of an entity in one context can be fully preserved in another. As one CDO quoted by the EY report noted wistfully: ‘Financial capital is easier to deploy than human capital.’

The Observer, 31 July 2005