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

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

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

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

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

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

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

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

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

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

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

The Observer, 22 April 2007

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

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

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

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

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

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

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

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

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

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

The Observer, 15 April 2007

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

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

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

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

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

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

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

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

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

Enjoy your Sunday lunch.

The Observer, 8 April 2007

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

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

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

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

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

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

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

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

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

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

The Observer, 1 April 2007

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

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

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

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

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

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

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

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

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

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

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

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

The Observer, 25 March 2007

I GROANED last week when, as happens to business journalists several times a year, I was rung up by a polling firm canvassing my views as an ‘opinion former’ on how a client company ranks across a range of criteria. The interviews are tiresome and (I think) pointless the only reason for doing them is the contribution to charity that the company makes in return.

But that creates problems. The honest answer to most questions (‘How do you rate x for innovation?’) is, ‘I haven’t a clue’. But it’s embarrassing to admit that. (These are well-known companies, you’re an ‘opinion former’ and they’ve paid for your views.) So instead you extrapolate from what you do know, usually financial performance. If it’s a successful company, it’s a fair bet it’s OK at innovation, too. The reverse is also plausible.

In other words, you infer a correlation between performance and something else. But in the words of the immortal Bo Diddley, ‘You can’t judge one by looking at the other’ – it’s an optical illusion, a ‘halo effect’, and it renders most of that expensive ‘opinion-former’ research worthless. The same fault vitiates grander surveys, such as Fortune ‘ s ‘most admired’ list, out with the usual fanfare this month. When a company such as Dell or Sony tumbles sharply down the list it’s usually because of poor financial results, but the rankings under all the eight headings that make up the index tend to fall in tandem.

Does this matter? More, perhaps, than you think. As Phil Rosenzweig charts in his feisty and entertaining new book The Halo Effect, from which these insights come, problems of research methodology and corrupt data bedevil much management literature, turning it into reassuring parables rather than reliable guidance based on empirical evidence. Such data are particularly dangerous, he charges, when used to support prescriptions about how to succeed – the ‘mother of all business questions’ – which has generated a lucrative line of management best sellers from Peters and Waterman’s In Search of Excellence (1982) on.

Most of them, Rosenzweig shows, are undermined by halo effects, among other manifestations of pseudoscience. Unusually, Rosenzweig, a professor at Swiss management school IMD, has the temerity to name names. For example, In Search of Excellence , the original management blockbuster, is taken to task for the elementary error of looking only at ‘excellent’ companies, which is like trying to identify what causes high blood pressure without using a control group of non-sufferers. It is also a good example of the halo effect at work. If you start by choosing a group of successful companies and ask managers to account for that success, it would be surprising if they didn’t mention listening to customers, good people management, strong values and strategic focus. But these are a rationalisation after the event. Describing success doesn’t explain what caused it – strong values could equally well be the result of success as its cause. ‘Whether these things drive company performance, or whether they’re mainly attributions based on performance, is a different matter. Peters and Waterman went searching for excellence, but they found a hatful of halos.’

Rosenzweig also gives a seeing-to to Jim Collins and Jerry Porras’s Built to Last and Collins’s Good to Great , perhaps the most influential management volumes of recent years. Both earn ticks for comparing the ‘great’ exemplars with a control group of less successful companies. But each is riddled with halos and other delusions: delusions of rigorous research (it’s quality not quantity that counts), of lasting success (company performance fluctuates, with a tendency to revert to the mean), and of ‘organisational physics’, the idea that, to quote Built to Last , there exist ‘timeless principles of enduring greatness’ that apply everywhere.

One reason they don’t and can’t is the especially treacherous ‘delusion of absolute performance’: performance is relative, not absolute, which means that the idea of a company achieving success by following a simple formula, irrespective of what competitors do, is just a myth. The margin between success and failure, what’s right and wrong, is deceptively narrow, and (despite Bo Diddley) the one can become the other almost overnight.

Rosenzweig attributes the success of the management blockbusters to the authors’ ability to spin reassuring, inspiring folk tales which hold out the promise that high performance is within reach of anyone with persistence and focus. In themselves, of course, these things probably aren’t wrong, and may even help. But although necessary, they are not sufficient. There are no simple answers to complex questions with many interdependent variables, and managers who believe that there are simply end up taking their own press at face value, a recipe for (relative) failure. As Field Marshall Slim once wisely put it: ‘No news is ever as good or bad as it seems at first sight.’

The Observer, 18 March 2007

THE SPANKING new steel and glass buildings housing India’s exuberantly growing IT companies could be in Reading or California – until you visit the dusty, worn emergency staircases at the back, which seem 25 or 50 years older, as in a sense they are. Although new buildings are mushrooming, along with demand for contact centres to handle the world’s IT infrastructure and customer service needs, cranes on Indian building sites are rare. Much of the lifting is done by hand or hoist: hence the worn steps. During construction, the stairs serve as home to entire families of builders.

Although the glancing relationship – and glaring contrast – between the rich and poor Indias has struck onlookers for decades, the rise to world prominence of the country’s IT industry has given it new poignancy. Some go as far as to argue that up till now the financial benefits of India’s remarkable IT success have been felt as much by foreign companies and their shareholders as by Indians, apart from a wealthy few.

It wasn’t out of order, mused Nobel economics laureate Amartya Sen last month, to wonder whether the IT firms couldn’t be doing more to connect the rural poor to their thriving economy. India has defeated many attempts to bridge the divides of caste and wealth, but that just might be about to change, as the first generation of IT entrepreneurs starts to bring its wealth, confidence and technological prowess to bear on development. The results have implications far beyond domestic borders.

There is one reason for optimism here: self-interest. As well as the need to avert a backlash against the sector’s ostentatious material success, Indian IT firms are running out of suitable staff to run their burgeoning call centres. One option is to offshore, in turn, to Vietnam or the Philippines. But what if they could find a way of using the country’s 700 million rural poor – many undereducated or uneducated, and nearly half earning less than a dollar a day for a family of five?

This is the solution pioneered by the Byrraju Foundation, a not-for-profit organisation whose initial funding was provided by Ramalinga Raju, founder of India’s fourth-largest IT services company, Satyam. The foundation, which claims to be the first non-profit group run on Six Sigma quality lines, initially aimed to target rural health. But it rapidly became clear, recounts partner Verghese Jacob, that lasting health gains were impossible without better education and sanitation and that even together these advances were at risk unless they could be locked in place by new village livelihoods. The foundation now espouses the larger intent of securing ‘holistic, sustainable rural transformation’ by releasing human potential.

The need for sustainability has triggered real innovation – for example in water treatment, sanitation and waste management systems, which are handed over to be run, at a small profit, by the villages, and franchised on to others.

IT is employed for its ability to achieve rapid increases in the scale of these advances, and others in education, adult literacy and the virtual delivery of healthcare. Remarkably, the adopted villages (currently all in the central state of Andhra Pradesh, where Satyam is located) are achieving 100 per cent targets in literacy and coverage of diabetes and hypertension patients, and are driving startling improvements in India’s dysfunctional education system.

But the headline-grabber is undoubtedly the three village call centres the foundation has set up with Satyam (all its operations are handled through public-private partnerships, which leverage the initial funding four or five times). The contact centres are small, with about 100 places, and work two shifts, allowing employees, often women, to balance other commitments. Jacob reckons there is a pool of up to 90 million villagers to do data- and transaction-processing tasks such as reconciling expenses and sorting resumes.

So far, customers are Indian, but Jacob sees no reason why the centres shouldn’t move up the value chain to serve global customers who need help by telephone.

Suffering none of the employee churn that bedevils urban establishments, the village contact centres turn out work that is ’50 per cent cheaper and 25 per cent better’ than their city counterparts, claims Jacob.

So is this – along with an unrelated Satyam-supported non-profit initiative to establish India’s first comprehensive ambulance emergency service – just another worthy but token genuflection to corporate social responsibility? Perhaps not. First, say the foundations, the effort is sustainable. Second, taking a lead from the Indian software industry’s formidable quality reputation, the processes are proven, capable of being replicated and scaled up.

Development and transformation as proven routines? If that’s the case, it’s not only the poor who should be taking notice.

The Observer, 11 March 2007

THE COMPANY is a remarkable invention – in its public, limited-liability form, it is capitalism’s most influential social and economic innovation, a crucial component of the modern economy. The organisational revolution triggered by the joint stock company in the mid-18th century was just as important for the take-off of British living standards as the more familiar industrial one.

The historic genius of the 1862 Companies Act was to enshrine a bargain in which shareholders won the controversial prize of a limit to their liabilities if the company got into trouble, while the company was granted a distinct legal personality. In return for a lessening of their responsibilities, shareholders forfeited the claim to outright company ownership the company’s overriding obligations are to itself, including all its members.

It is to this delicate balance of interests that the company owes its resilience, its ability to co-opt and amplify diverse inputs, and its record of distributing its benefits widely. But it is also this balance which is now under attack, ironically not from anti- but from ultra-capitalists – top managers and their City counterparts who, in the name of short-term efficiency, are undermining the institution’s long-term role as the engine of economic progress.

Some of the besiegers are external and evident, notably the private equity (PE) and hedge funds hogging today’s financial headlines. Others are internal, in the shape of firms’ own senior managers. At first sight – and according to conventional theory – these two groups are in competition for the right to direct the firm’s resources on behalf of shareholders. This is the assumption behind today’s corporate governance, which sees the board’s job as ensuring management’s devotion to the shareholder’s cause by drawing up and monitoring performance contracts. Tighter ownership control over management is also one of the most important arguments made in favour of private equity.

A more persuasive diagnosis, however, is that internal and external groups are in cahoots, not primarily to create value, but to grab it from the company they are meant to be serving – a task eased by the fact that the heist takes place in private.

Out of the public company limelight – and conveniently unacknowledged in mainstream finance theory – a growing group of actors around the top of large companies – not just PE and hedge funds, but also investment bankers, traders and professional advisers – have a strong vested interest in what Karel Williams and other academics have christened the ‘economy of permanent restructuring’: a continuous round of deals, capital reorganisations and financial engineering that generates not only lucrative transaction fees but also, and increasingly, capital gains for intermediaries such as investment banks through their own PE and hedge funds.

You wouldn’t guess it from the self-congratulatory hype surrounding the City’s activities, but this asset-shuffling provides no benefit for investors as a whole (Warren Buffett, perhaps the world’s canniest investor, estimates that intermediaries and advisers now relieve equity investors of 20 per cent of the earnings of US business they would otherwise have received: ‘For investors as a whole, returns decrease as motion increases’).

Worse, by concentrating only on present efficiencies, the attackers make it harder for companies to focus on their most important job, which is to bring about as yet unknown future efficiencies through innovation.

The ultras view companies simply as a bundle of contracts and revenue streams, to be bought and sold like any other commodity, ‘a continuation of market relations by other means’. But enduring performance is more than an economic enterprise. Innovating means forgoing a portion of current returns to create the opportunities for greater returns in the future. To make it bear fruit in practice requires nurturing security, trust and the kind of stable human relationships that allow risk and experiment and tolerate mistakes. It requires treating all stakeholders as investors, not just shareholders – and reporting to them publicly.

If the public company didn’t exist, it would have to be invented. Even the raiders need it: without public equity, there would be no material with which private equity could have its way, and no way for it to sell its purchases back to the retail investor. Accountability is still the best way of ensuring that the company pays its dues to employees and society as a whole, rather than to shareholders or unscrupulous owners – which, of course, is what creates advantage for the raiders in taking it private.

The public company has its faults, but none so bad as when it adopts the balance-destroying methods of the raiders. Bad as they sometimes are, its inefficiencies pale beside the lack of transparency and monstrous distribution inequalities of the alternatives.

The Observer, 4 March 2007

TO ITS DEFENDERS, private equity is a new and purer model of capitalism: a different asset class which delivers sustainably superior returns, irrespective of the behaviour of stock markets. In its preferred narrative, private equity creates growth, sustains jobs and leaves better-performing companies in its wake. By contrast, TUC general secretary Brendan Barber described the phenomenon last week as too often the work of ‘amoral asset-strippers after a quick buck’.

Which is it? The answer matters. Last year private equity (PE) funds splurged $440bn on buying publicly traded companies and taking them private. This year investors, including banks, pension funds and insurance companies, will add an estimated $500bn (pounds 250bn) to PE war-chests. The funds are swelling and the prey is getting larger. This month a US real-estate company was taken private for $39bn. Sainsbury’s, at pounds 11bn, is in PE’s sights. Industry figures suggest $50bn and even $100bn deals are only a matter of time, potentially putting almost every company in the world ‘in play’.

But as PE stretches towards the biggest prizes, its claims are coming under fire. Business Week, hardly anti-capitalist, entitled its October 2006 cover story on PE ‘Gluttons At The Gate’, charting ‘a story of excess’ in which the fast-money mindset was leading to ploys at the edge of legality. An important US academic study found that while some PE funds provided high returns, when the enormous fees were stripped out, on average investors would have done better putting their money in the S&P.

Now a group of UK academics at the Centre for Research on Socio-Cultural Change (Cresc) casts further doubt on the official line. In two working papers, Karel Williams, Julie Froud and others describe a PE business model almost entirely based on the mathematical effects of leverage and, instead of benefiting the mass of investors, is designed to enrich a tiny minority of partners who set up and run the funds.

Private equity is the smart new name for the 1980s technique popularised as the leveraged buyout. Here’s how it works. Funds raise money from wealthy individuals and institutions, which is used to buy a portfolio of operating businesses. A vast global pool of cheap capital allows the purchase to be highly geared, the fund putting up no more than 30 per cent of the purchase price and borrowing the rest. Returns on the debt (which is often sold on) are capped, so that when the company is sold or re-floated, the gains accrue to the PE funds as equity-holders. When the fund is wound up after 10 years or so, investors get their capital back plus a share of any profits.

The CRESC authors suggest that this model is not about value creation but value capture. PE is about ‘selling used companies’, says Williams, usually after having subjected them to a sharp cost haircut by closing factories or cutting the workforce, selling off freehold properties, or requiring them to pay a special dividend. Sometimes such measures impose discipline on lazy managers, in other cases it simply reduces the business’s future options. But in any case, what really makes the difference is leverage: shorn of its arithmetical magic, buyout funds would have underperformed public equity over the past two decades, the writers show.

What is special to PE, on the other hand, is the exceptional rewards it affords to the tiny group which runs the funds. These come from an annual management fee of up to 2 per cent of funds managed, and a 20 per cent share of the profits (the carried interest, or ‘carry’) when the fund is wound up. For a $15bn fund with a 10-year lifespan, management fees could total $3bn (irrespective of performance), while for a successful fund the carry could be several billion.

For two funds whose accounts the authors inspected, UK partners stood to take home pounds 7.5m and US partners $72m – each – after just five years. After 10, it could be much more.

There are two disturbing conclusions to be drawn. The first is that the official PE story is threadbare. As Michael Gordon, chief investment officer of Fidelity Investment, notes, PE ‘provides little real diversification from equities over time comes with higher risks because of leverage has far less transparency than a portfolio of listed stocks – and [commands] premium fees’. Like the buyout boom of the 1980s, it is a bubble that will end in tears – although whose is unclear, since no one knows who holds the ultimate debt that has funded the spree. Our pension funds, perhaps?

But the second worry is what PE leaves behind. Its hijack is confirmation that the traditional configuration in which the City existed to provide services to clients has been well and truly reversed. It is now the function of clients to make an ever more dominant City oligopoly richer through ‘an economy of permanent restructuring’. When a German politician described PE funds in 2005 as ‘locusts’ he was mocked. But by and large he was right.

The Observer, 25 February 2007

IN 2005, I wrote a piece singing the praises of the computer company Dell, along the lines that although Apple’s far sexier machines garnered all the hype, the real thing of beauty was Dell’s ‘direct business model’. By cutting out the retailer and delivering direct to the customer, this refined supply chain seemed destined to pull the company steadily away from its rivals. In the long term, therefore, the better bet was Dell.

How do those predictions look now? Far from sweeping all before it, Dell has lost market share and been overtaken as the world’s largest computer maker by a revived HP. After a run of missed targets, CEO Kevin Rollins, who had dwelt dreamily on the prospect of Dell becoming a $100bn company, has been swept away too, and founder Michael Dell has taken back the operational reins.

Meanwhile, Apple has gone from strength to strength on the back of the ubiquitous iPod and a strategic decision to aim its hardware at the home entertainment market. Even its computer market share has begun to pick up – the ‘halo effect’ from the iPod – although it still remains tiny compared with HP and Dell. And the launch of the hysterically ballyhooed Apple iPhone is still to come.

At the time, several readers responded sharply to the favourable portrayal of Dell. They accepted its supply chain was, and still is, a logistics marvel. But that didn’t mean that the customer service was the same. Dell had become so entranced with its own processes, they suggested, that it had lost sight of the fact that customers don’t buy supply chains, they buy computers. They couldn’t care less that Dell can assemble a computer in five minutes and dispatch it two hours later. They do care, however, about getting the right computer with the right parts and if they don’t, they do care, very much, about being able to talk to a real person about it – something that Dell, with its maddening automated phone menus and inscrutable website (two of its sources of pride), got badly wrong.

Dell made the classic nerd’s mistake of underestimating the human factor – the first and last link in the supply chain – and trying to fill it with IT. As most companies do, it put computers in charge of the thing humans do best and vice versa, thus making everyone unhappy.

Apple, on the other hand, has been much more successful with the way it relates to the customer. Wrong-footing the pundits, it has proved retail stores are the right way to sell devices that demand to be touched and seen. Its products’ ease of use and Apple’s seamless integration of software and hardware go some way to justifying the closed proprietary system the company has maintained. iTunes and iPod tantalisingly foreshadow a future where customers can ‘pull’ with minimum effort just the elements they need rather than having products bristling with features they don’t want foisted on them by costly marketing and increasingly intrusive ads.

But – a very big but – Apple has come a cropper at the opposite end of its operations. The murkiness surrounding the backdating of Apple stock options, including, allegedly, a batch to CEO Steve Jobs himself, betrays an equally significant flaw (in fact, Dell may have to restate its earnings too, although the issue is reportedly not stock options).

Interestingly, each company reflects the strengths and weaknesses of its founder – both now firmly in control – as if they were imprinted in their genes. Jobs’s ‘reality distortion field’ sets the high expectations that drive Apple’s brilliant innovation cycle but it may also have persuaded the company that it wasn’t subject to the normal rules of governance. Michael Dell’s obsession with low costs and perfecting the supply chain have fuelled impressive profit and revenue growth, but ultimately caused the company to disregard the rules of customer service. Both are forms of arrogance that ought to give shareholders serious pause for thought.

In Apple’s case, the seriousness is not just that the company is in Jobs’s image the company is Jobs. If he were forced to resign, it’s hard to see how it could survive the loss of its driving force. For Dell, the issue is the reverse: it’s not clear how putting the founder back in control will remedy a problem that he as chairman failed to see, and which the system that he designed so clearly ignored.

Either way, the moral of the story is that strong differentiation and character is necessary, but not sufficient, to keep a company successful. The genius and charisma of a founder in one domain shouldn’t blind either them or the company to the need to complement them in others where they are weak. It’s a reminder and a warning that, in the long run, the company that thrives is the one that satisfies all its stakeholders, from customers and employers to society as a whole in the shape of its regulators. They are the ones that decide its fate, not Steve Jobs or Michael Dell.

The Observer, 18 February 2007