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

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

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

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

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

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

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

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

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

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

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

The Observer, 9 April 2006

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

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

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

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

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

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

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

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

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

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

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

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

So let’s keep the City in perspective.

The Observer, 2 April 2006

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

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

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

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

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

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

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

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

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

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

The Observer, 25 March 2006

TO LOSE one top executive may be regarded as a misfortune. To lose two, even if the second is honorary president, looks like carelessness. Pace Oscar Wilde, the boardroom ructions at Vodafone, the world’s largest mobile phone company, are earnest rather than funny, speaking volumes about succession and leadership assumptions in the UK’s largest companies.

It is often argued that succession planning is, or should be, one of the most important roles that boards undertake. Yet despite the lip service, most large firms have either unsatisfactory succession plans or none at all, according to US research (and the US is better than elsewhere). The reason is partly psychological. Although a temporary contingency plan for what happens if a chief executive falls under a bus is obvious common sense, formal succession is like planning your own funeral – even more sensitive because the current CEO may not be the best judge of the successor.

As a result, although it is inevitable, the need to replace a leader always takes a company by surprise. The results of this permanent unreadiness have been all too visible at Marks and Spencer, Rentokil, and J Sainsbury as well as Vodafone effects include leaders who stay too long (or who hang around in emeritus positions looking over the shoulder of the new person, as at Vodafone), abrupt strategy lurches, compromise appointments, and drooping performance because senior managers take their eyes off the ball to plot against each other rather than competitors.

In a further twist to the tale, sagging performance leads to briefer CEO encounters and more short-termism, in turn creating greater pressures on the next one in the hot seat. According to consultancy Booz Allen, underperforming European chief executives get just 30 months before they are given the boot (compared with 4.5 years in the US), ‘an astonishingly and counterproductively short period of time… the threat of rapid dismissal focuses existing CEOs on short-term performance, preventing them from completing (or even launching) the transformations that many European companies need’.

But Vodafone’s travails illustrate something else. Of course who is in charge matters, but it matters more at Vodafone – where differences over strategy are reflected in a struggle between the new and old guards – than it would at a more stable firm. To illustrate, consider the acknowledged Exhibit A of succession planning, GE. GE makes a fetish of management development. Its chief executives are always appointed from within, enjoy tenures vastly longer than the norm, and are regularly feted as the world’s best managers of their day.

But you can turn that around. The reason that GE’s CEOs are so effective may be that they are the products of, and work in, a brilliantly effective system. Crudely, it may not have mattered if it was Jeff Immelt or one of his internal rivals who inherited Jack Welch’s mantle. Part of the CEO’s importance is symbolic. As as former GE manager points out: ‘Jack did a good job, but everyone seems to forget that the company had been around for over 100 years before he ever took the job, and he had 70,000 other people to help him.’

In other words, good firms don’t need leaders to make a vast difference. Bad ones do. One motor industry study found Toyota was unique in that a change of CEO made no difference to its performance at all. Changing CEOs at the firm, notes Stanford University’s Jeffrey Pfeffer, is like changing lightbulbs: the system is so robust that the difference from one to the next is minimal.

In turn, this gives some clues about what succession committees should be recruiting leaders to do. If the company is successful, the successor should probably be internal and incremental. If the firm is wobbling and there is a presumption in favour of change, an outsider may be the best choice. Beware of charisma, however. Strong egos who believe their own hype are some of the most dangerous people on the planet, habitually overestimating their power of control and the degree to which success is due to them alone, and underestimating the difficulty of change.

In fact, large-scale change has such a poor record that companies need to be absolutely sure they really need it. Is it Vodafone’s global growth strategy that is running out of steam, or its execution? If the latter, then a strategic review won’t help just as the replacement by the present Vodafone CEO of old-guard senior managers will not buy much time if the system they work in is flawed.

A good succession arrangement, on the other hand, is one that reverses the vicious circle of constant change. It makes each succeeding appointment decision easier – by making execution the strategy and building a reliable system that delivers it over and over again. The job of the leader is to make the transition to the next one as boring and unremarkable as possible. In light of which, the column inches devoted to Vodafone’s need for strong leadership may bode ill for investors. As Oscar Wilde also noted: ‘When the gods wish to punish us, they answer our prayers.’

The Observer, 19 March 2006

THE WEEK before Marks & Spencer proudly announced the first high-street range of T-shirts and socks made with Fairtrade-certified cotton, accidents at three Bangladeshi factories producing garments for western firms left hundreds of workers dead or injured. The incidents went unreported in the British press. Campaigners estimate that since 1990 more than 350 people have been killed and 2,500 injured in similar incidents in Bangladeshi garment factories.

It was a grim reminder of the high price of cheap goods. In the global economy, the acts of consuming and producing are separated by ever-increasing distance and time. Behind the supermarkets, replenished overnight with the cornucopia of fresh food and the other products that construct our daily life, lies an intricate network of supply chains stretching back invisibly to every part of the world. But these links don’t just transmit goods. When the supermarkets do promotions or boast of ‘everyday low prices’, the pressures ripple back through the middlemen down the length of the line. It takes periodic pickets of Parliament by British farmers, or French smallholders strewing cauliflowers or manure over the Champs Elysees, to call attention to the harshness of life at the end of the chain, where there’s nowhere else for the pressures to go.

Sometimes, as in the Bangladeshi garment trade, the harshness is a matter of life and death. It is the same with coffee.

By value, this is one of the five most important commodities traded in the international economy. Its price is quoted on exchanges in New York and London. There are just four main buyers of the crop: Kraft, Nestle, Procter & Gamble and Sara Lee. But the beans are grown by 15 million poor farmers working smallholdings around the world 70 per cent of the world’s coffee is grown on farms of less than 25 acres.

The world’s coffee-producing zones coincide with a map of extreme poverty. So what happens when the price of coffee falls, as it did with the collapse of the International Coffee Agreement in 1989, and again in 2001, when overproduction meant that prices to producers tumbled, in real terms, to a 100-year low?

The answer is that people die. If they don’t die, they grub up the coffee bushes, take their children out of school and join the exodus to city shanty towns and slums, says Harriet Lamb, director of the Fairtrade Foundation.

When coffee goes off the boil, whole countries suffer 60 per cent of Ethiopia’s foreign earnings come from coffee. Nicaragua is similarly dependent.

The idea of fair trade comes from various sources in the Netherlands and Germany, as well as the UK. One strand derives from the old Greater London Council, where activists wanted to use its buying power to develop a counterweight to the unfair trading system.

Michael Barratt Brown, a pioneer of the movement, says former colonies depended on a single product, which they had to export to survive. Then the World Bank encouraged other countries to plant the same cash crops to pay the interest on their debts. As a result of increasing surpluses, despite growing demand, the price of these staples fell for two decades or more.

On the ground, that meant that while brokers, manufacturers and – most of all – supermarkets profited, the growers were trapped ever more firmly in poverty. The pattern is the same across many crops grown in poorer countries.

A good example is chocolate. In West Africa, where 70 per cent of the world’s cocoa-bean crop is grown, grinding poverty is endemic. Some farms were run with child slaves, the US State Department found in 2001. Child labour is still widespread, with hundreds of thousands of children doing hazardous farm jobs instead of attending school.

For several countries in the Caribbean, bananas are another key crop. In 1999, prices plunged to historic lows, while under World Trade Organisation rules, growers faced losing access to their European markets. In Dominica, the number of banana producers fell from 11,000 to 700. With nothing to replace farming, unemployment soared, the social fabric began to fall apart. Gangs formed, guns and drugs proliferated and crime rocketed.

In all these cases, it has taken a reforging of the links between the ends of the supply chain to start to break the vicious circle. The key, says Barratt Brown, whose alternative trading company, Twin, helped to launch Cafedirect in 1988, was discovering that consumer power could be harnessed to producer power. The move of fair trade from charity purchase to the supermarket shelves was critical, enabling significant quantities of the raw material to be bought at fixed, above-market prices. In turn, that allowed more producers to plan ahead, and invest in quality and sustainable methods – with some left over to put back into the community.

As important as anything, agree Lamb and Barratt Brown, is the sense of empowerment that fair trade gives: equipped with a computer to look up prices on world exchanges, a coffee or banana growing co-op is no longer a group of marginalised dirt farmers but small-scale international businessmen with choices and links to the consumer.

Neither Lamb nor Barratt Brown exaggerates the gains. ‘We’re just on the starting blocks,’ says Lamb. But if the problem is huge, there is evidence that, within its limits, fair trade works, bringing more benefits, including intangible ones such as cultural revival, than even its champions expected. People don’t have to wait for governments, human beings people don’t have to be prisoners of markets. They can move them.

‘The need is as great as ever,’ adds Barratt Brown. ‘But it gives hope. It’s worth fighting for.’

The Observer, 12 March 2006

HEROIC LEADERS are a disaster. Seventy per cent of mergers fail. In most organisations, financial incentives cause more problems than they solve. There is no connection between high executive pay and company performance (well, there is – the wider the pay differentials, the lower the commitment of the less well paid). The main result of many consultancy assignments is another consultancy assignment. All ‘silver bullet’ or ‘big ideas’ on their own are wrong.

These are not theories, but facts. Yet companies trip over themselves to buy others, launch change initiatives, introduce pay for performance, flit from one big idea to the next – and pay their CEOs stratospherically. It’s hardly surprising so many go belly up. If doctors were as cavalier with the evidence, a lot of their patients would be dead and many medics would be behind bars.

The last is a line from what bids fair to be one of the management books of the year. Hard Facts, Dangerous Half-Truths and Total Nonsense (Harvard Business School Press), by Stanford professors Jeffrey Pfeffer and Robert Sutton, is a compelling tour of management conventional wisdom and why it so often turns out to be unwise, untrue and a stranger to fact – bollocks, in fact. Every potential manager should be made to read it before they are allowed to be in charge of anything, even a whelk stall.

So why don’t managers make judgments on evidence, as doctors at least try to do? The book pinpoints a number of factors, many of which come down to the human factors economic theorists carefully exclude. They overestimate power, fail to cut losses, underestimate cost and difficulty, and ignore the lessons of failure. They put too much faith in superficial impressions and repeat what worked in the past. Or they fall back on unexamined but deeply held ideologies. (An unqualified belief in anything, except the likelihood of being wrong, is a certain predictor of tears ahead.)

Another factor is the messiness of the market for ideas, not least the quantity of information and the self-serving interest of gurus in talking up successes and downplaying the side effects of their prescriptions. People prefer simple solutions, even if there aren’t any: ‘If someone tells you they have the answer,’ one candid guru noted, ‘they probably haven’t understood the question.’

Less obvious is the effect of facts on conventional leadership. If only the facts matter, it shouldn’t matter where they come from. That undercuts the traditional justification for hierarchy: that the boss knows best. Facts force the boss to choose between being ‘in control’ and being right. Many choose the former.

All this sets up a bizarre corporate amnesia – a kind of conspiracy not to learn in which organisations find new ways of repeating mistakes in an endless loop. They are suckers for half-truths – more dangerous than total nonsense because they are not entirely wrong, except when treated as whole truths, in which case they become total bollocks. Pfeffer and Sutton line up a number of these, often naming names, showing how some of management’s ingrained habits of thought cause them to undermine their own organisations.

Thus, leaders do make a difference, but not as much as you might think, and more on the downside. Yes, strategy and recruiting good people are important. But strategy is usually overrated, to the detriment of implementation and overestimating raw talent can impede learning. It’s no use putting good people to work in a crappy system conversely, putting people in a good system and expecting them to improve increases their individual and group capabilities – another example of the (ignored) self-fulfilling nature of so many assumptions.

Incentives do incentivise – but be careful what you wish for. As W Edwards Deming said, people with sharp enough targets will probably meet them even if they have to destroy the company to do so. And what about change or die?The trouble, they say, is that companies are so bad at it that ’empirically it is change and die’.

It’s a weird paradox. Despite management’s obsession with hard numbers, many organisations are a fact-free zone, swirling with untested assumptions. Horrifying sums of money are committed on superstition or whim. Thus, fact-based management is really triple-distilled common sense. It’s hard. It requires judgment, practice, help, humanity and wisdom. It needs scepticism and experimentation. It needs reasoned optimism and learning, and, as F Scott Fitzgerald put it, the ability to function while holding two contradictory ideas in your head at the same time.

Ironically, applying such honed common sense is a great recipe for competitive advantage because so few do it. Despite the heroic efforts of the professors, this will almost certainly continue. As Peter Drucker says: ‘Thinking is very hard work. And management fashions are a great substitute for thinking.’

Which is why most companies and managers will continue to ignore the facts, make the same mistakes and perpetrate the same old bollocks: not fact-based so much as voodoo management.

The Observer, 12 March 2006

AS THE CBI trawls for a new name to succeed Sir Digby Jones as director-general, it’s worth pondering the question: what is the organisation for ? The obvious answer is to represent its 240,000 members. But its claim to be ‘the voice of business’ is problematic. Whose voice, exactly? CBI members are so diverse, covering all sectors and sizes, that about the only thing they have in common is that they all employ people. On many issues what the CBI really represents is the views of some of its members.

Take the case of the Operating and Financial Review. To the delight of the CBI, this much-discussed addition to company annual reports was axed by the Chancellor just months before it was due to come into effect. But a chorus of protest, not least from large companies which spent millions preparing for the change, has forced the government to backtrack and reopen consultations.

Take pensions. Last week the CBI’s warnings that Lord Turner’s proposals could bankrupt small companies by forcing them to contribute to a national pensions saving scheme were apparently contradicted by a survey showing that employers were more likely to find the proposed levy too low than too high. Few were likely to change their pension arrangements as a result of Turner, the survey said.

This matters, because the views that the CBI expresses carry a large – perhaps disproportionate – amount of weight. One reason is that the media uses it as a convenient one-stop shop for business views, a role it accepts with alacrity. The government also has little choice but to take the CBI’s, and other trade associations’, word. The CBI and DTI, and to some extent Defra, are bound together because part of these fatally split departments’ remit is industry sponsorship – championing industry’s cause.

The trouble is that too often what the CBI reflects, and government takes seriously, is the view of the UK’s industrial rearguard – the worst of British business rather than the best. The OFR episode is typical. The kneejerk reaction is: all regulation bad free market good leave business alone to get on with the business of making profits.

If this is a caricature of the views of the best UK companies, so are the results imputed to policies that transgress the Neanderthal norm. These are invariably apocalyptic: the costs exaggerated and the benefits ignored. The minimum wage was resisted on the grounds that it would cost jobs and kill small firms environmental legislation is unaffordable and if all the ‘last nails in coffins’ the CBI has predicted as a result of EU legislation had materialised, the UK would by now be an economic desert.

Unfortunately, this relentless nagging often works. Hence the paralysing timidity of policy in such areas – the emasculating of the climate-change levy, constant nibbling at emissions targets and the feebleness of ‘sustainability strategies’ (a limp food-industry version is expected next week). This backwardness is economically as well as environmentally irresponsible – as the CBI should know, since it was spelled out by a former director-general, the same Lord Turner.

In his thoughtful Just Capital , Turner showed that market-based regulation was no handicap to growth or jobs – and there was a good case for more of it. Well judged regulation benefits society (and shareholders) by giving companies incentives to innovate competitively rather than exist on the rents of their present franchise, to dream up new products and processes that more than offset the apparent costs of any clean-up.

That’s a company’s job, as most are well aware – but you wouldn’t know it from the CBI submissions. In accentuating the negative, it misses the opportunity of setting a positive agenda. ‘I don’t see much sign of it supporting companies that want to take a lead on issues like ethical consumerism, climate change, or even bird flu,’ says Ed Williams, who used to work in this area for a major retailer. ‘These are all moving from the periphery into the business mainstream.’

Instead of blaming everyone else, the CBI should turn its gaze to a different quarter. Though manufacturing is shrinking and the productivity gap with other countries refuses to close, these causes are not something to which the CBI devotes its famed lobbying talents. As reports from McKinsey make clear, the main difference between the UK and its rivals is management – despite the fact that governments have granted everything on the CBI’s wish list: weakened unions, a flexible economy and swathes of the public sector to make hay with. We manage people poorly, are slow to adopt good practice and, despite soaring profits, invest less in R&D and capital equipment than almost ever before.

The reason for that is an investment framework that rewards short-term profits at the expense of long-term health and is the least conducive to nurturing growing technology-based organisations of any in the world.

There’s something for campaigners to get their teeth into. Will it be among the qualities sought for in hopefuls for the DG’s job? A view of the short list will give us a good guess.

The Observer, 5 March 2006

WHATEVER HAPPENED to joined-up government? One of New Labour’s favourite mantras when it came to power, it dropped out of the lexicon in the second term. This is perhaps understandable, since there is precious little of it about. But that, too, is not surprising, because the management methods the government favours make joined-up anything almost impossible to achieve.

Joining things up implies looking at elements of a problem as part of a whole – a system. Since ultimately everything is part of other bigger systems, systems thinking poses problems of delineation (at what level to tackle the issue) andof measurement (how best to measure performance of a system, the NHS, say).

But if concentrating on parts of the problem initially seems easier, it always ends in tears, adversely affecting the system as a whole, raising costs and making it harder and harder for managers to see the link between causes and effects.

A perfect example in microcosm: according to a Nuffield Review, students going to university increasingly struggle with work that requires them to think independently or make connections between narrow areas of study – when called upon to show joined-up thinking, in other words. Because of excessive emphasis on modular courses, results and league tables, students are taught to pass exams, not to think for themselves.

‘Learners who may have achieved academic success by such means at A-level… are increasingly coming into higher education expecting to be told the answers,’ the review says. Passing exams has become the unspoken purpose of the system. Ministers boast that results are improving but ignore the purpose of the system as a whole: preparing students for adult life as thinking, connecting beings.

Again, from a systems viewpoint, there is no mystery about the state of the NHS. How can the organisation be simultaneously meeting all its performance targets and in financial crisis, despite absorbing record amounts of money? Because, in the absence of a systems view of improvement, performance goals can be met only at the expense of missing others, in this case financial ones. The lack of overall systems improvement has been disguised by the high spending. But now that is tailing off, better financial and operating performance can only be achieved through method, which the NHS doesn’t have.

NHS trusts have become good at ‘passing exams’ (hitting targets and pass ing inspections), but the casualty is the system as a whole. Some interesting systems work is going on within the NHS at the level of individual trusts, with encouraging results, but these are exceptions, in part because it involves downplaying, at least temporarily, the targets that are the chief feature of the regime, as well as the cause of the failings.

The third, even more devastating, example of failure to see things in joined-up terms is pensions. Leave aside for the moment the unintended results of the Chancellor’s decision to do away with the advanced corporation tax break, thus triggering the initial panic. That pales into insignificance compared with the consequences of the regulatory and other changes that, in the name of greater precision, have caused companies to calculate pension liabilities in terms of the yields on long-dated gilts. This simple change has set in motion a classic case of Goodhart’s Law.

To remind you, Charles Goodhart was a chief adviser to the Bank of England who observed that as soon as governments tried to regulate a category of financial assets, it could no longer be relied on as an economic indicator because the institutions just invented new kinds of assets. In other words, the minute a measure is used to manage by, it ceases to be useful as a measure. It can be one or the other, but not both. Turning gilts in effect into both target and measure was asking for trouble, which has duly arrived. Supposedly to reduce risk and match assets more closely with liabilities, companies have sold equities and poured money into gilts, which has had the perverse effect of raising prices and depressing yields, nominally increasing, not decreasing, their pension deficits.

The only systems that really turn government on are IT ones, whose importance it vastly over estimates. Organisations are remodelled around flashy IT systems that usually institutionalise the disjointed present arrangements, optimising parts of the system at the expense of the whole. One example is the 100 or so shared-service operations being planned to carry out the public sector’s routine back-office functions on a smaller scale are call-centres mandated to take customer calls for the police, ambulances and other services. The idea was that people answering phones would clear others to do real work. But without system measurements, this just moves work from one place to another, adding a layer of cost in the process.

New Labour was right in 1997 that joining up public-sector management was its biggest challenge. Unfortunately, in 2006, it still is.

The Observer, 26 February 2006

BUSINESS OUGHT to be a natural for reality TV. There’s drama, high stakes and issues that affect everyone on the planet – and that’s before you have to choose between hating or fancying the participants. The fact that there is currently almost nothing on the box that makes the business world seem either interesting or comprehensible both increases the opportunity and makes it more important to get the formula right.

So it’s a pity we’re stuck with the travesty of The Apprentice , the second series of which kicks off on Wednesday. A surprise hit for BBC2 last year, the programme, fronted by the irascible Sir Alan Sugar, comes up in its second manifestation with much the same ingredients as before, only more so: the same gabby, over-assertive young men and women in power suits competing to complete a series of business-related tasks, the same catch phrase ‘You’re fired’ greeting one of the 14 candidates at the end of each episode.

After the 12 tasks, in case you missed the first series, the last one standing is taken on as Sugar’s apprentice at a salary of £100,000. This time, however, the main programme will be accompanied by a follow-up, perhaps inevitably called You’re Fired , an interview with the sacked candidate, while a website will offer programme repeats, clips and videos of auditions.

The problem with The Apprentice is not, in its gruesome way, watchability – there is a certain grim satisfaction in seeing insufferable candidates getting their comeuppance after having tried to rat on fellow team members, and in marvelling at the depths of humiliation they will undergo for the chance of that £100,000.

The trouble is the relentlessly reductive and trivialising view of business that it puts forward. True to form, the first episode shows the ‘girls’ team tarting themselves up to persuade market traders to give them free fruit and veg etables to sell, and the ‘boys’ simply descending to the hard sell. Many of the 12 tasks seem to involve buying and/or selling: nothing wrong with that, except that in The Apprentice the qualities favoured seem to be the gift of the gab, smooth patter and manipulation. Success is putting one across on someone else rather than a straight, tough deal.

The usual line of defence to this is, where’s your sense of humour? It’s only a game. But this is undercut in a number of ways. First, as Sugar himself grimly counters, it’s actually not a game, and £100,000 is there to prove it. Second, the spin-off book from the series (subtitled How to Get Hired, Not Fired ) purports to distil the lessons of the experience ‘to show you how to become a success in business and test your stamina and leadership potential’: in other words, it does have a real-life application. (In fact this is false: while apprenticeship suggests learning, craft and a body of knowledge, the only learning in the programme is about how to avoid responsibility for failure, collect as much credit as possible for success and scheme rivals out.)

Finally, as Lynn Barber put it in a witty interview in this paper, if it’s a game, it’s a pretty counterproductive one: the world it presents is ‘so cut-throat, joyless and frightening’ that it’s hard to imagine any young person wanting to have a part of it, let alone work for Sugar, if it wasn’t for the cash prize.

The point is not that business isn’t tough or stressful or competitive of course it is, as anyone knows who has made a pitch to venture capitalists, faced a tough interview panel or been dressed down for failing to meet demanding sales or production targets. But all business, even the most cut-throat, is a mixture of competition and co-operation. This version, focusing relentlessly on individual greed and ambition, has space only for temporary tactical alliances that dissolve in recriminations and accusations when mistakes are made. Winner takes all, the team is destroyed. The Apprentice offers a crude, brainless version of business in which success is down to individual plausibility and pleasing the boss rather than learning and teamwork, as in a real apprenticeship.

If this seems excessively PC, consider a more insidious objection. Because of their real-world effects on actions and decisions, assumptions about business and human nature can easily become self-fulfilling. If you expect people to be opportunistic schemers and treat them accordingly, opportunism and scheming are thereby legitimised and that’s what they learn to be. The reverse is also the case: assumptions of trust and co-operation tend to legitimise more of the same. So assumptions matter. The Apprentice is a good example of the self-fulfilling process at work, both within and between the series. Thus, people have learnt that success is about outcompeting the others at scheming and being opportunistic in pursuit of £100,000 The Apprentice provides a course in doing just that – and in the end the biggest asshole wins.

Business doesn’t have to be like this, and neither does reality TV. If indeed it’s what business is about, then programmes like this bear their responsibility for making it so.

The Observer, 19 February 2006

WHEN TONY BLAIR, David Cameron and the Department of Health all want a piece of the same action, cynics start to wonder. When the bigwigs in Davos jostle to get in there too, wondering turns to suspicion. Can ‘social entrepreneurship’ really be the white hope for British health, bringing water to Third World slums and alleviating world poverty?

For once, the cynics may be wrong. Olivier Kayser, the European head of Ashoka, an organisation whose founder Bill Drayton pioneered the idea of social entrepreneurship 25 years ago, believes that any indication that official thinking is catching up with reality is welcome. There is a ‘small risk’, he concedes, of governments promoting a tame or ‘lite’ version of the concept which would relieve the idea of its revolutionary ambition and reduce it to a purely economic remit. But ‘the train is rolling’, he says. ‘It doesn’t depend on governments or the public sector, and it’s not going to stop.’

What is social entrepreneurship? ‘Inspired pragmatism’ is one answer. Its is perhaps best captured by Ashoka’s version of economic history. In this narrative, business discovered entrepreneurship with the Industrial Revolution, triggering huge economic growth but also a growing gulf with the rest of society’s activities. The social sector remained untouched by entrepreneurship because it was sheltered by government as a monopoly tax gatherer and service provider. Hence the growing contrast between the dynamic the private sector and the sclerotic public.

In about 1980, the gulf between the two became too wide to bear. The logjam broke, entrepreneurs emerged who had learned the system-changing power of new product and delivery ideas combined with a variety of incentives, and a wave of entrepreneurship began to transform the competitiveness of the non-commercial parts of the economy.

The unsung story is that the not-for-profit, third, or social sector, as it is variously known, is rapidly catching up on corporations in productivity and sometimes surpassing them in creativity. It is seeing explosive growth. A John Hopkins University study of the economies of 26 countries in 2003 found that in the mid-1990s the non-profit sector accounted for $1.2 trillion in expenditures worldwide, employed 31 million full-time equivalent workers (nearly 7 per cent of the non-agricultural workforce) and was growing fast – throughout the 1990s non-profits were taking on staff at more than twice the rate of the economy as a whole.

Social entrepreneurship claims many of its greatest successes so far in poorer countries where social needs are greatest. The idea of micro-credit developed by the Grameen Bank and its founder Muhammad Yunus (who sits on Ashoka’s world council alongside the likes of Rajat Gupta, ex-managing director of McKinsey, and Sir Shridath Ramphal, formerly secretary-general of the British Commonwealth) is one such. So is Aravind Eye Hospital in India, which carries out 220,000 cataract operations a year, two thirds of them free. Aravind runs the largest and one of the highest-quality cataract operations in the world – and it comfortably covers its costs.

But the power of these ideas is such that their influence spreads much further than the locality where they were born. Thus Aravind’s innovative methods and processes are beginning to change healthcare economics in the richer world. A cataract sufferer in Britain could spend a leisurely week in India and have the operation for less than a private operation at home. David Green, the social entrepreneur who helped develop Aravind, is now engaged on a project that will similarly undercut the exorbitant price of hearing aids. Meanwhile, micro-lending has been adopted in the US and UK as well as in other parts of the developing world.

Now many people believe social entrepreneurship’s time has come in the rich nations, where fresh thinking is badly needed to find solutions for intractable social ills: the French suburbs, physical regeneration and environmental pressures are a few examples among many. New Labour has been quick to spot the political possibilities in the sector. While farming out provision of health and education services to the profit-making private sector is viewed with hostility by much of the population, not-for-profits are another matter. A sign of the times: NHS nurses in Surrey have been encouraged to form a non-profit company to sell services to the local primary care trust and the Department of Health recently set up a ‘social enterprise unit’ to help others do the same.

Kayser accepts that as the third sector expands, it will run up against competition from companies that will not necessarily welcome new entrants on their patch. ‘But we absolutely welcome it,’ he says. ‘We’re entrepreneurs, and entrepreneurs intuitively understand innovation, change and risk.’ Social entrepreneurship is about systems-changing ideas, wherever the repercussions may lead.

The Observer, 12 February 2006