In one of two voluminous reports on the disaster of the Mid-Staffs Hospital Trust, where between 400 and 1,200 people may have died unnecessarily, Robert Francis QC noted that those giving evidence used the phrase ‘in hindsight’ 378 times.

In hindsight, his reports write the damning epitaph not just of a dysfunctional hospital organisation (Mid-Staffs was ‘the most shocking failure in the history of the NHS’, according to Health Secretary Jeremy Hunt), not just of the national healthcare system , but of the entire public-sector management paradigm.

The first Francis report graphically described the appalling suffering caused by and to individuals under the regime of ‘targets and terror’ in a single organisation.

The second equally mercilessly documents the failure of every one of the plethora of watchdogs, regulators, inspectors and superior management tiers, up to and including the central NHS cadres in Whitehall, to notice what was happening, let alone raise the alarm or do anything to stop it.

The failure was complete, embracing every actor in the drama, from lowliest auxiliary to the minister and top civil servant in charge. To provide the finishing touch to this masterpiece of failure, it is Teflon-plated, not a shred of accountability or responsibility attaching to any of the parties involved.

Unlike politicians and the press, which assume that every management debacle has special causes, mostly in the shape of flawed individuals, no one who has thought even for a minute about the organisation as a system will be surprised by this cascade of failure.

It is built into a system that might have been designed to fail every practical and human test.

As to why, a Scottish TUC research report published last week under the self-explanatory title ‘Performance Management and the New Workplace Tyranny’ handily describes just the cycle of work intensification, cost cutting, task-standardisation and IT-monitoring that (often coupled with outsourcing) decisively broke the link with compassion and care.

This is the morally and economically bankrupt ‘deliverology’ that New Labour built, the public-sector variant of the ideological shareholder-first, externalising travesty that in the private sector presented us with sub-prime, Lehman, and the financial meltdown. Unwittingly emphasizing how closely they are related, David Cameron’s dismal addition to Francis’ 290 recommendations is to propose performance-related pay for clinical staff – the very thing that in the finance sector almost brought the walls of capitalism tumbling down.

Performance management, with its relentless focus on individual targets, is the link between the two. Targets simplify, fragment and pull teams apart, focusing workers (whether clinical or professional, public sector or private) on themselves, bosses and regulators rather than customers or patients. Targets being invariably arbitrary, bearing no relation to the capacity of the system to make them, the only way workers can reliably meet them is by working on the one thing they can control: the numbers. They cheat. As a recent Guardian article noted, ‘’target-based performance management always creates ‘gaming’ ‘. Not sometimes. Not frequently. Always’.

This means that the numbers managers receive are wrong. This matters, since as Francis observed, Mid-Staffs managers managed by numbers and abstractions rather than interaction with the front line. Here is one reason why they were blind to what was going on under their noses.

But they are usually the wrong numbers anyway. To serve as a guide to improvement, a measure must be related to purpose from the customer’s point of view – the end-to-end time to let a property, do a repair, diagnose and treat a patient. Most of the measures managers are obsessed with (standard response times, call-handling times, agreed service levels) measure activity, not purpose. So even if the numbers had been correct managers would have still been in the dark: in the blackest of satire, patients died while managers fretted about people meeting irrelevant targets.

Let’s sum up. The NHS is an organisation where staff face in the wrong direction, the numbers are fiddled and the measures irrelevant, and managers spend the vast majority of their time beating up on individuals instead of attending to their real job, seeing to the system.

In this light the only surprise is that there aren’t more mistakes; brutally, if lives are saved it is despite, not because of, a system that mass-produces care packages to meet abstract meta-targets – cutting MRSA by half, a four-hour wait in A&E – rather than to respond to individual need. The system simply isn’t set up to do care and compassion. But since people experience care as individuals, even when targets are hit patients feel no improvement. Try boasting about success in cutting MRSA to those still infected, for example.

The management of the NHS has itself become a disease. Responding to the Mid-Staffs disaster by piling on more regulation and inspection, setting service standards for compassion, intensifying the performance management regime and threatening criminal charges is like trying to bludgeon a patient back to life. Instead, we need to start at the other end, with the patient, and design an organisation that can respond to patients,’ not ministers’ or commissioners’, needs. Unless and until the NHS sickness is wiped out, there will be more Mid-Staffs (five more hospitals are being investigated) not fewer.

As any blues singer will remind you, you never miss your water till your well runs dry. The same is true of trust – just ask the consultants at Arthur Andersen, which dematerialised overnight in the wake of the Enron collapse in 2001, or more recently the News of the World journalists whose livelihoods went up in a puff of smoke in the chain reaction triggered by the phone-hacking revelations of July 2011. This – and the subsequent arrest of News International hacks – throws into sharp relief questions of individual and collective trust that were explored in an illuminating discussion at the launch of PR firm Edelman’s 2013 Trust Barometer, now in its 13th year.

The Barometer tracks attitudes to trust in various institutions and individuals in 26 countries across the globe. For one panellist at the UK launch, FT.com managing editor Robert Shrimsley, there was a twinge of sympathy for some NOTW journalists caught up in a culture not of their own making: if everyone else is getting otherwise inaccessible stories by employing private eyes and bugs, it takes a conscious and public effort to go against the cultural grain. (For a less charitable professional reaction, see Sir Harry Evans, the long-time Sunday Times editor, here.)

But this is exactly why the role of the individual in trust is crucial, noted another panellist, the academic Sarah Churchwell, who made a crucial distinction between accountability and responsibility (something I have also written about). Accountability is imposed from the outside – something owed to a customer or, more problematically, a hierarchy or central regulator. Responsibility on the other hand is internal – an inner voice that tells you what is right or wrong. It may involve expressly refusing the mechanisms of bureaucratic accountability (ticking boxes, doing things right) in the name of doing the right thing. Whistleblowing or choosing to be accountable to citizens rather than inspectors or regulators are cases in point.

At News International, the generalised collapse of trust in the shape of a mass withdrawal of advertising was the direct result of irresponsible behaviour by journalists in the performance of their jobs. Interestingly, the macro story mapped out by Edelman in this year’s Barometer makes also makes a link between the individual and the wider evolution of trust in general, albeit a slightly different one.

Perhaps the most striking development in the narrative of the last few years is the growing trust gap between institutions and their leaders. Thus while with some exceptions (banks, media in the UK) trust in institutions has gradually been recovering ground since the low point of 2008, the same cannot be said of institutional leaders, who their underlings view with a much more jaundiced eye. Among the general population, only 13 per cent say they trust government leaders to tell the truth, compared with 41 per cent trusting government as an institution, the equivalent fitgures for business being 18 per cent and 50 per cent. These differences are unprecedented and ‘nothing short of extraordinary’, according to Edelman.

There are of course some obvious reasons for the thumbs-down for individuals – Edelman singles out the continued high-profile outing of individuals such as former McKinsey managing partner Rajat Gupta, Barclays CEO Bob Diamond and Chinese government official Bo Xilai, together with the drip-feed of poison from the ongoing Libor and phone-hacking affairs.

But together with other complementary findings, they have some sobering implications for CEOs and business leaders. In 2008, before the full implications of the financial crisis had hit, corporate reputation depended above all (76 per cent) on operational excellence: the ‘what’ of performance. In 2013, in another ‘extraordinary transformation’, executing well has become just table stakes – one of the basic competences necessary to get into the game. More important for reputation, and getting more so, are ‘how’ questions about the way business is done: does the company behave ethically, is it a good employer, does it put customers before profits and is it transparent and open in business affairs – all issues that in the past could be dealt with with a bit of lip service, but which in practice interfered little with the drive for shareholder value

That alone should put many traditional CEOs on red alert. But even if they start making the right noises now, it won’t be enough – for the very good reason that, as we have seen, people don’t believe them any more. According to Edelman, people now need to see or hear something three to five times in different places before they’ll accept it’s true.

But there’s more. If not their bosses, who do people believe? Experts and academics is one answer, but also peers – ‘people like us’ – who are twice as credible as CEOs or government officials.

What this means is that CEOs can no longer just push their chosen messages down to a mass audience from on high, as in the past. Just as important are continuing real-time conversations and assessments between consumers, employees and other stakeholders. The implications are profound. For the message to be believed, these constituents have to be engaged too. Or rather, the message from on high has to be consistent with the one that is being spontaneously generated from below. As Richard Edelman puts it: ‘The hierarchies of old are being replaced by more trusted peer-to-peer, horizontal networks of trust.’

Think about this for a moment. I’ve always been sceptical about the lasting significance of social media, at least in business. But could it be that the true, unexpected vocation of Twitter and FaceBook is not to peddle tittle-tattle, spread news or even organise flash crowds, but finally to kick out the foundations of top-down corporate management? The tweeting of the sacking of HMV headquarters staff this week is just a small illustration of the disruptive potency of the message from below. The emerging storyline of trust is: it can’t be pushed into existence. It’s reciprocal. That means that the individual’s role is critical, in both its creation and destruction. And accepting and exercising that responsibility just may be the most important, liberating thing that individual does.

Read my article on managment as a liberal art, FT Business Education, 28 January 2013, here

Dell, a former titan of the computer industry, is shortly due to go private in a deal worth $22bn. As the PC sector is reshaped by competition from tablets and smartphones, Dell reportedly believes that its strategic shift from commodity PC manufacturer to purveyor of business services is best carried out ‘behind closed doors’ of private rather than public ownership.

This is odd. If shareholder control and the metric of the share price, the central pillars of today’s governance, provide the best possible compass for running a company, as the dominant wisdom asserts, why would a company voluntarily forgo them? Even odder is that it’s actually not odd. Dell is far from alone. As the officially sanctioned corporate form loses its appeal, stock markets on both sides of the Atlantic are shrinking. According to research by Grant Thornton, from 1997 to 2009 the number of publicly listed companies in the US declined by 39 per cent, and Will Hutton’s Ownership Commission found a similar trend in the UK.

There’s more. Not only are investors not clamouring for companies to invest in that specifically state shareholder value maximisation as their purpose, they flock to buy shares in firms with A and B-class equity that deliberately weaken shareholder rights, such as Google, Linked in and Zynga. In other words, shareholders themselves don’t seem to value shareholder control very highly. Finally, ponder this. The UK has taken the shareholder-primacy model considerably further than the US (indeed, compared to the latter it is sometimes termed a ‘shareholder paradise’). But if the standard model were truly superior, and companies run accordingly were the most efficient, the UK would be world champion at breeding successful global companies. Which it, er, conspicuously isn’t.

So what’s going on here?

What’s going on, says Lynn Stout in her forensic study of the subject, self-explanatorily entitled The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations and the Public, is the implosion of the shareholder-value paradigm that has held business and academic thinking in a vice for the last four decades.

For sure, by the end of the 20th century the idea that the purpose of companies is to maximise returns to shareholders was entirely dominant. And it continues to hold much sway. In the UK it’s behind Vince Cable’s reforms to give shareholders a binding vote on executive pay. In the US a famous essay termed it ‘the end of history for corporate law’: ‘The triumph of the shareholder-oriented model of the corporation is now assured,’ the authors wrote in 2001, ‘not only in the US, but in the rest of the civilized world’.

Yet it’s a myth. No slogan-chanting revolutionary, Stout is a well-regarded legal scholar who in admirably clear and concise language successively demolishes every one of the props of shareholder hegemony.

In the US, shareholder value’s spiritual home, ‘corporate law does not, and never has, required directors of public corporations to maximise shareholder value,’ she writes. ‘Second, closer inspection of the economic structure of public corporations reveals that shareholders are neither owners, nor principals, nor residual claimants. Third, the empirical evidence does not provide clear support for the proposition that shareholder primacy rules produce superior results. Indeed, once we shift our focus from the performance of individual firms to the performance of the corporate sector as a whole, it suggests the opposite’.

In other words, the 40-year-experiment proves that shareholder primacy is a con. It has neither descriptive nor normative value. Not only is it not a panacea; prescriptions based on it are the cause of many of the things that are going wrong.

Although CEOs and some hedge fund managers have done exceedingly well, it has failed to live up to the promise of making shareholders as a class better off. Worse, says Stout, it encourages amoral, selfish behaviour that erodes the commons and undermines the economy as a whole. Its fingerprints are all over the succession of scandals that culminated in the meltdown of 2008. It is implicated in the slowdown of innovation, the rise of outsourcing and offshoring, and the demise of pensions. In its name, the salaries of CEOs soar while those of ordinary workers are held down. Shareholder value fuels the inequalities that destabilise societies and keep economies in the doldrums.

Shareholder value may be a zombie, but the undead grip is still strong. Why? The central idea has the virtue of being simple and easily understood by the public and the press, for which it plays into the need for strong stories, and by managers too, even when it is leading them astray. By lending itself to numbers and equations, shareholder value serves the academic need for management to look like a science; and it’s hard for scholars to accept that more than a generation’s worth of work was futile. It’s no less difficult to convince shareholders long used to being theoretical emperors that they have no clothes. And CEOs who have grown fat on the comfortable idea that they deserve to be rich as benefactors of shareholders have too much at stake to give up without a struggle. More subtly – and this Stout only hints at – by teaching that the baser instincts are not only normal but desirable in the shareholder interest, it turns the fiction of homo economicus into reality, with incalculable consequences for the future.

There is no longer room for doubt: recovery from the crisis is not a matter of business as usual with an added layer of regulation. It’s kicking out the shareholder-value paradigm and the destructive management model that goes with it. By taking her sharp legal axe to the accepted framework, Stout continues the urgent demolition work begun by Rakesh Khurana’s magisterial account of the betrayal of the business schools, From Higher Purpose to Hired Hands, and Roger Martin’s Fixing the Game (see my interview with Martin here). Stout demonstrates that the edifice was all front and no foundation from the start. Now the cracks are on the outside. So all together now: a few more coordinated shoves and we’re there.

It’s no pleasure to see the once-great (and make no mistake, Gérard Depardieu is, or was, the most charismatic French actor since Jean Gabin) turn themselves into a laughing stock. But the sheer grotesqueness of the mountainous actor’s tax-evading cavalcade through Belgium and Russia should not be allowed to obfuscate the important lessons it contains about the nature of the 1 per cent and how they get and keep their status.

A street kid who grew up on the wrong side of the tracks, and intermittently the law, in the unprepossessing French town of Chateauroux, Depardieu – as he recounts it – was saved from a life of petty crime or worse by the discovery that he could act. He started out on the stage, but stardom, and wealth, were a consequence of his breakthrough in the cinema in a string of arthouse and commercial successes from the 1970s on.

Now, Depardieu was rightly rewarded for his remarkable acting gifts, and if he has successfully parlayed his cinematic earnings into a business empire comprising vineyards, restaurants and property worth €120m according to one count, chapeau to him.

But raw talent was only one element in his financial success. The other was the existence of a thriving film industry and vibrant film culture that recognised and valued his talent. And one reason why the French film industry is in good enough health to do that – only Holly- and Bollywood turn out more films a year than France, and only the US exports more – is that it has benefited from enlightened and consistent long-term state support, primarily in the shape of levies on ticket and DVD sales and internet access that are ploughed back into film production.

So when le grand Gérard exports himself to Belgium or Russia to avoid paying taxes in France, it is not just an issue of an individual’s right to do what he likes with his own money. It is an indirect attack on the industry that nurtured him.

In that, as in other things, Depardieu is a true member of the 1%. He systematically underestimates the role played in his success by the industry ‘commons’, ie collaborative effort, and the support contributed by the state. Put another way, the risks and rewards applying to the different economic actors are out of sync, in both time and space. Increasingly, risk-bearers and reward-takers are different people, the benefits disproportionately accruing to a few prominent individuals who have positioned themselves directly under the tap to gobble the jackpot when it pays out. It’s perhaps not an accident that the Depardieu affair (‘Obélix chez les Belges’, as a newspaper headline dubbed it in a nod to the Asterix films in which he plays the plucky Gaul’s enormous egg-shaped sidekick) coincides with a furious row in France over the ‘bloated’ fees demanded by the most bankable French stars, alledgedly undermining the prospects of even the most popular films.

In their paper The Risk-Reward Nexus, academics William Lazonick and Mariana Mazzucato show how writ large a similar process of value-extraction (pillaging, in less decorous terms) operates to stunt innovation, hold back growth and promote inequality over whole economies, particularly the US and UK. Their examples are CEOs and top managers of venture-capital and hi-tech electronics and biotechnology firms operating on a scale that makes even Depardieu’s financial appetites look puny. But the mechanism is the same.

The role of venture capitalists and entrepreneurs in creating new economic value is as exaggerated as any Hollywood epic, they claim, while the state’s part is written out. Thus, it may surprise many to learn that the algorithms used in Google’s search engine, some of the technologies in the Apple iPhone, nanotechnology and indeed the internet itself, all emerged from publicly-funded rather than private research. The US National Institutes of Health currently spend $30bn a year, double the real levels of the 1990s, to develop the biotech and biopharmaceutical knowledge base, without which ‘the US, and probably the world would not have a biopharmaceutical industry,’ according to the authors.

Having the public fund innovation in this manner absolves firms from the hard work of doing R&D or building human capital and frees them to do other things with their profits – like paying them out to shareholders, which they do with abandon. To take just one example, Lazonick and Mazzucato calculate that in the decade to 2010, the $170bn that Microsoft spent on dividends and share buyback (directly benefiting its own executives as shareholders) amounted to a stunning 138 per cent of net income. Public funding also helps explain the phenomenon of PLIPOS, or ‘product-less IPOs’ – the launch on the stockmarket of speculative start-ups which might strike it rich but generally don’t, but in the meantime provide players for hedge funds and others to bet and make money on even in the absence of products. Given the amounts of money raised in this way, returns in terms of innovation have been small, note the authors, ‘while financial interests, including highly remunerated… executives have done very well’ from a truly alchemical business model.

The final insult is that, like Depardieu, companies such as Google, Amazon and others make a virtue out of paying as little tax as possible (it’s called maximising shareholder value) and often lobby to reduce the government spending that has underpinned a part of their success. As Depardieu’s odyssey all too graphically illustrates, at these levels of wealth both individuals and their companies have become ‘loose’, unmoored, unconstrained by ties to place or norms such as fairness and solidarity, loyal only to others of their class and their own pocket books.

Tell you what – when he’s finished his next screen project playing Dominique Strauss-Kahn, another rotund French 64-year-old who’s fallen foul of the authorities, shouldn’t he make a film about it?

Read my piece for the Foundation on ‘From muck to brass’ here

Christmas poses the problem of management in microcosm. Never mind the quality, feel the width. Factories, shops and delivery services straining every nerve to meet Christmas demand and deadlines – management as heroism. Yes, but going full tilt to turn out singing plastic fish, belly-button brushes, electric shaving-foam warmers and other such items that will be landfill before you’ve finished singing ‘The 12 Days of Christmas’ is management as absurdism. As Peter Drucker put it, ‘There is nothing so useless as doing efficiently that which should not be done at all’.

There was a time when abundance was in itself something to celebrate, the long climb out of penury a monument to human exuberance, imagination and betterment. But at least in the developed world, that innocent age is long past. The 100th segmentation of yoghurt or the 45th fragrance of washing powder is not an addition to human happiness or even choice – it’s a burden that, without getting too killjoy about it, oppresses consumers and the planet can no longer afford.

Up till now, management has been most concerned with efficiency, what we might call process. Goodness knows, given the misguided routes taken by so many organisations, there’s still vast scope for improvement on this score, particularly in resource efficiency. But as Russ Ackoff never tired of saying, doing the wrong thing more efficiently actually makes things worse. ‘Therefore, it is better to do the right thing wrong than the wrong thing right. This is very significant because almost every problem confronting our society is a result of the fact that our policy makers [and corporate managers] are doing the wrong things and trying to do them righter.’

It’s time, in fact, to give purpose back its central management importance. Writing recently in the FT, Janan Ganesh impatiently laid out the conventional view: ‘There are first principles that politicians must relearn. Business exists to make a profit within the law. It contributes to society by employing people and producing goods and services, not by attempting the modish fad of “corporate social responsibility”’. I’m pleased to say that he was then ticked off readers making the point that the role of business is to serve the ends of society and culture, not the other way round, and that in the aftermath of 2008 we are all contemplating close up the dire consequences of elevating profit into purpose. Purpose comes before profit: profit is what makes purpose possible, and the score as to how well it is doing it. Sorry; past success has so altered the present that a new formula is necessary. Producing goods, services and employment is no longer enough to outweigh the growing burden of externalities that business imposes on society in the sacred name of profit in terms of inequality, exclusion and financial and global warming.

Of course, Ganesh is perfectly right that this does represent the prevailing view, incorporated into governance codes and authorised by academic theory. He is therefore also correct that if politicians don’t like it (and they’re right not to), they’re being naive if they think that handwringing and begging Amazon, Google and Starbucks to please pay a bit more tax will do anything to change it. Management is a powerful paradigm, anchored by vested interest and entrenched ideas, and shifting it will require action on many different fronts – political campaigning, possibly some law changes, more rigorous competition policy, and, just as importantly, academic and other effort to build a credible alternative.

And consumers? Yes, we have a part to play too. There’s a chink of light in the reaction of Starbucks to consumer pressure on the tax issue, inadequate as it is, and Apple to revelations about the pay and conditions of Foxconn workers in China assembling iPhones. We can make a difference. To do so, we need to keep up that pressure, both vocally and in our buying habits. On ‘Buy Nothing Day’ (24 November, in case you missed it), the New Economics Foundation launched a manifesto and pamphlet for a New Materialism: How our relationship with the material world can change for the better – a call not for a rejection of stuff, but for a more adult, less spoilt relationship with it. The new materialism, says author and NEF fellow Andrew Simms, ‘is about an economy of better, not more. It is rich in the good quality work created by providing useful services, making things that last and can be repaired many times before being recycled, allowing us to share better the surplus of stuff we already have’.

The new economy is beginning to emerge in things ranging from furniture, to tools, cars, fridges, clothes and food. DIY chain B&Q is rethinking its business model around leasing rather than selling. Marks & Spencer is selling suits made for easy disassembly and recycling, and offering fashion lines made from recycled wool. M&S director of sustainability Richard Gillies says that the group is proceeding as fast as it can down this route, but it can’t get too far ahead of of its customers: it is waiting for unambiguous signals that we are ready to sign up for not a hair shirt but one that is made with care, to last, and then be cycled round again. Among the items on NEF’s work-in-progress manifesto: Cherish, tend and respect what you have. Look after it. If possible, make, buy and keep things that are designed to last at least 10 years. By buying well, and, just as important, refusing to buy badly, consumers can do their bit to send the old management paradigm packing and help a new and better one emerge.

I can’t think of a better Christmas present tp us all.

Here we go again. Handing headteachers the responsibility for deciding teachers’ pay increments according to performance sounds plausible – indeed, who could be against it? We need good teachers, don’t we? So what better way of attracting and encouraging stars than rewarding them accordingly?

Actually, if ministers consulted their history, they’d find that they are by no means the first to whom this bright idea has occurred. Victorian Gradgrinds thought it was plausible enough to try it more than 100 years ago. But, alas, as they also discovered, it’s in the large category of things (like George Osborne’s shares for rights) that only makes sense to those who don’t know the first thing about management.

In their essential book on evidence-based management (or more accurately the lack of it) Hard Facts, Dangerous Half Truths and Total Nonsense, Stanford Professors Jeff Pfeffer and Bob Sutton demonstrate that ideas that seem like common sense in management generally aren’t. They devote a number of pages to showing why merit pay for teachers is a classic example.

It’s not just that done according to the letter almost all appraisal-based performance pay systems quickly crumble. Either they create such acute problems of perceived fairness (the aptly named teacher’s pet syndrome) that they demotivate as many people as they encourage. Or managers compensate for the waves of bad feeling created by giving everyone satisfactory appraisals. If merit pay for teachers worked, it would already be in place. In fact, it is always more trouble than it is worth and quietly buried a few years later.

But leaving aside the practical difficulties that affect all such schemes, consider the conditions that would need to be fulfilled for performance incentives to be effective in the specific case of teaching. Are teachers’ effort and motivation (since intelligence is unfortunately insensitive to incentives) the single or most important causal factor in student learning and achievement? Are teachers motivated by money? Are tests and exam results a reliable guide to a student’s educational achievement? Is teaching a solo activity requiring little cooperation with others in the school?

A nanosecond’s reflection indicates that the answer in each case is ‘no’. Much the most important factor in student achievement – more than anything that happens at school – is the home environment. The logic of incentivising teachers rather than parents or indeed students themselves is therefore unclear. On the whole people motivated by money are more likely to go into the City or highly-paid private-sector occupations than teaching. Whether we would want teachers to be motivated by money is anyway moot: giving people incentives to influence something that is not directly under their control (students’ exam results) is an invitation to do so by other means, including cheating. Sure enough, research cited by Pfeffer and Sutton shows that in these conditions cheating is a predctable outcome, and one ‘quite sensitive’ to the size of the incentives on offer. Exam results are a reliable guide only to the ability to pass exams. Right on cue, the CBI recently complained that current emphasis on exam results was not supplying employers with the rounded individuals capable of joined-up thinking that they need. And of course school culture, quality of resources and facilities, and peer support and learning from colleagues all play an important part in teachers’ performance. Since the strings being pulled aren’t attached to any levers, it’s not surprising that trying to relate teachers’ pay to performance is ineffective. ‘Merit-pay plans seldom last longer than five years and […] merit pay consistently fails to improve student performance,’ conclude the authors.

Ironically, it’s a safe bet that those behind today’s scheme who automatically assume that teachers are motivated by money would forcefully deny that they are so influenced themselves. This persistent bias explains why even people who ought to have a clue about management consistently overestimate both the effects of money and the extent that it can be used to compensate for management shortcomings in other areas. In fact, money is what is HR folk call a ‘hygiene factor’: while not enough of it is a powerful demotivator, the reverse is not the case. Beyond a certain point it has little positive motivational effect. The bottom line: the bad news is that the effects of bad management can’t be undone by applying a dusting of cash. The good news is that the best thing to do with pay is to uncomplicate it: pay people enough that it isn’t an issue, so that they (and you) can stop obsessing about it and concentrate on the job instead.

Strikingly, the incentives in the government’s Work Programme, where private-sector providers are rewarded for for getting the unemployed back into work, are based on similarly dubious assumptions. Since it’s not in the job agencies’ gift to create new jobs from thin air, it’s not obvious why incentivising job agencies would be more successful than incentivising, say, the Chancellor to create the economic growth of which jobs depend. Expect, then, the scheme not to work very well, or if it does seem to be working, for there to be evidence of fiddling the books. It doesn’t, there is, and the case rests. Incentivising people to do things that are outside their control falls squarely in the third of Pfeffer and Sutton’s title categories. As the old saw has it, never try to teach a pig to sing. It wastes your time and annoys the pig.

Read my article in FT Business Education, 3 December 2012, here

If there’s one practice that the same time embodies both the triumph and bankruptcy of management 1.0, it’s outsourcing.

Its triumph, obviously, is that, pushed by consultancy-cum-IT firms that profit directly from it, mandated by governments using it as a form of stealth privatisation, and seized on by firms desperate to cut costs, everyone does it. Industry researcher Gartner estimates that IT outsourcing alone was worth $250bn in 2011. Manufacturing, HR, payroll, customer service, and management itself (hospitals, prisons, schools) would add hundreds of billions more. ‘Outsource everything but your soul!’ once exhorted an excitable Tom Peters – and to their shame, of course, some companies have even tried that.

It’s easy see outsourcing’s appeal. It makes perfect sense to managers who have been brought up to believe that companies are machines, people are a cost to be minimised like any other and shareholder value is the only thing they have to look out for – with management 1.0, in fact. Outsourcing is the economist’s obsession with specialisation, economies of scale and unit activity costs translated into management practice. When IT made it possible to break services down into their separate activities and then recombine them later, wow! Outsourcing seemed finally to promise the Holy Grail of optimising the cost of each and every part.

Which is how its purveyors present it. But it’s a fraud. It doesn’t have to be – in itself, outsourcing is neither good nor bad but neutral – but most of what’s done in its name fails on at least one of three different counts: it’s the wrong thing to do (or done for the wrong reason), it’s done wrongly, and the contract is likely to be rigged in favour of the provider.

Take the latter first. Many of the big consultancies have a vested interest in selling outsourcing, since they are providers too. As you would expect, having had a lot of practice they are good enough at it to make it handsomely profitable for themselves.

Often less so, however, for customers. Whatever they say, the chief reasons companies outsource are to cut cost and shed responsibility. These are both self-defeating. Outsourcing is usually only cheaper because outsourcers’ pay and conditions are worse, which does not make for a happy and productive workforce. Offloading responsibility is similarly a false economy because eventually it comes back to bite you in a tender part of your reputational anatomy, as Nike, Apple and countless other companies have found to their cost.

‘Cheaper’ is in any case usually an illusion. Outsourced industrialised processes are only cheaper in terms of unit costs. But total costs are end to end, and by fragmenting the end-to-end flow, industrialisation invariably drives costs up, while worsening service for the customer.

Conventional outsourcing of this type is the exact opposite of systems thinking, and relying on it has precisely the effect that systems thinkers predict, namely to drive up costs elsewhere in the system. (As W. Edwards Deming insisted: ‘If the various components of an organisation are all optimised, the organisation will not be. If the whole is optimised, the components will not be.’)

As the chickens flap home to roost, the reputational and literal costs of outsourcing are spiralling, more than wiping out any unit-cost gains. The opprobrium visited on the big banks, the utilities and, alas, much of the public sector in response to their charmless, dehumanising service, is one such cost. As Apple among many others is discovering, in a connected world it is no longer possible to decouple supply-chain responsibility from the brand by outsourcing. So if Marks & Spencer outsources garment manufacture to Bangladesh, it will have to pay production workers a living wage, whatever it says or doesn’t say in the contract. Starbucks, Google and Amazon can testify that even laundering technical decisions over tax through accountancy no longer washes whiter.

At higher level, the costs are even more pervasive. Irony of ironies, in order to manufacture in the US, as Foxconn is now proposing, the Taiwanese firm is having to invite dozens of American engineers to its Chinese plants to learn how to do it: US firms have outsourced too long for them to be able to bring production lines back home unaided, Foxconn CEO Terry Gou told President Obama on a recent visit.

It goes further. It is not just that outsourcing has hollowed out the US (and UK) economy to the point where it may be impossible to recreate a viable manufacturing sector: the ‘designed in California, made in China’ model followed by the likes of Apple, far from improving matters makes them worse. By sourcing and assembling abroad, the iPhone alone reportedly contributes $2bn to the US trade deficit. Nor does it create the secure, well-paid industrial jobs in the US that sustained a middle-class lifestyle for those without an advanced degree. Instead, those unfortunates have been obliged to seek employment in services, depressing wages in an already low-paid sector and increasing inequality to the point where it is unsustainable. Systematic outsourcing has contributed to similar structural imbalance in the UK.

As with many other areas of management, the moral of the outsourcing story is: be very careful what you wish for. When viewed in system terms, something that seems obvious and advantageous for conventional managers in an individual firm turns into the economic equivalent of ash die-back, disastrous for the economic ecology as a whole. The outsourcing short cut has turned into a very long way round indeed.