Monday, 14 April 2014

LET’S CONSIDER A FEW DIFFERENT ISSUES



Austerity and wincing.  Despite all the talk, most of the reductions of public expenditure have not yet started.  Information from the Office for Budget Responsibility (OBR) shows total spending fell by 3.5 percentage points of Gross Domestic Product (GDP) to 43.5% since 2009/10.  The formal plan is to lower these outgoings by another 5.5 percentage points before 2018/19.  This will take public expenditure as a share of GDP to its lowest since 2001/02.  The government has not made a case for a smaller state.  Is there evidence that such objectives would boost economic growth and reduce the rising inequality?  Or has the UK’s political elite come to a silent conclusion that the private sector is not able to fill the gaps left by a shrinking state?  Maybe they have lost the ability to argue about big ideas and values?  Or perhaps they are being told by mandarins that cuts are unlikely to be offset by gains in efficiencies, meaning deteriorating services?

The Audit Commission has said costs of management in local authorities have increased by ten per cent in the past ten years.  This watchdog examined the cost of central management functions, such as finance, human resources, information technology and property.  It has called for greater scrutiny.  The Commission’s chairman, Jeremy Newman, alleged an analysis had been undermined because only 223 councils had a complete record of outgoings on central functions.  How is it known they are value for money?

The oddities of 2015’s general election.   The pollsters are working hard and getting headlines in the national newspapers.  When Andrew Neil has difficulties in finding hot topics for his Daily and Sunday Politics, these programmes devote time to speculation on prospects for the political parties.

Little is said in these punts of the media about the Liberal Democrats’ special skills in retaining seats in the House of Commons.  Once they are incumbents, they tend to be re-elected, however low the party’s position is nationally.  There are fifty-nine MPs for Scotland – one Conservative, forty-one Labour, six Scottish National and eleven Liberal Democrats.  If there is a ‘yes’ vote in the referendum on independence, will these jobs in Westminster cease?  And what about Ukip?  Bear in mind that the UK uses the first-past-the-post system for elections to the national parliament – though there is a form of proportional representation for the European Parliament and the Scottish Assembly.  A majority of electors voted against many MPs.  Labour has strongholds in the North of England.  If Ukip has a high vote in such constituencies, the Labour members will still be in place.  However, Ukip seems likely to attract Conservative votes and this will hit marginals in the South.  Predictions from polls are not as simple now we cannot assume that at least 80% of votes will go to either the Conservatives or Labour.

Quality beware.  Managers who rely on exhorting the workforce to ‘do the job right first time’ or ‘accept that quality is your responsibility’, should be aware of the unspoken insult.  They will not only fail in the ‘search for excellence’, but also create division and conflict.  These calls imply that faults are caused by the shopfloor and difficulties are departmental.  In fact, the opposite tends to be true.  Most problems are interdepartmental.  The contribution of all people in a business is a necessity for better quality.  The idea is that everyone must co-operate in accepting that all internal and external transactions have a customer and a supplier.  This can happen only if the Boardroom demonstrates by behaviour its commitment to improvements.  Otherwise, the stance will be recalled in 2020 as one more amusing piece of managerial magic.

Use of English.  ‘I find the public utterances of permanent secretaries so predictable and completely interchangeable that I have stopped listening to them.  It has to do with Civil Servant English.  You have to squeeze all personality out of it.’  Sir Antony Jay, co-author of the TV series ‘Yes Minister’.

Obtaining an agreement.  ‘One of the things I learnt when I was negotiating, was that until I changed myself I could not change others.’  Nelson Mandela, former president of South Africa. 

Monday, 31 March 2014

ARE WE RELUCTANT TO MEASURE WHAT WE DO?



Productivity puzzle.  The economy is growing and the deficit (not debt) is coming down.  Significantly, though, our official and independent watchdog, the Office for Budgetary Responsibility (OBR) concluded in December that the ‘surprising’ surge in growth of the past year is ‘cyclical  ......... rather than indicating stronger underlying growth potential’.  And the Bank of England’s decisions to maintain a low interest rate reminds us the economy is still in difficulties.  The factor now standing in the way of the UK’s sustained better results is low productivity.  It is 21% below the average for G7 (developed) countries as measured by output per hour.  This is the widest gap for twenty years.  In terms of output per worker, it is 25%.  There are good reasons to suggest that part of the falls in productivity are because of temporary factors;  for example, weak demand and turmoil in the financial sector.  Inadequate fiscal policies and failures to address problems in banking properly have exacerbated the problems but will not hold back a sustained rebound indefinitely.  The lack of investment (machines!) for each worker is a real hindrance for productivity.  The fall in hours per employed person has not helped the situation, but has a smaller impact.  Better measurement of pivotal ratios would allow managers to pursue relevant targets.  The systems and technology are on the shelf.

Three researchers at the London School of Economics have done some excellent preliminary scrutiny.  They are:  John Van Reenen, Anna Valero and Joao Paulo Pessoa.

Corporate obesity.  Maybe the government ought to pay as much attention to this illness as it does to the difficulties of humans?  Jeffrey Immelt, the chief executive of GE (America) said in his latest letter to shareholders, ‘We attempted to managed volatility through layers and reviewers.  Like many companies, we were guilty of countering complexity with complexity – more inspectors, multiple reviewers’.  The result was a ‘higher cost structure, an artificial sense of risk management and we were insulating our people from the heat of the market’.  Mr Immelt has launched a programme of simplification, including lower overheads and a smaller head office.  This is an important initiative.  Also, a study by Sven Kunish at the University of St Gallen in Switzerland revealed the ease with which big organisations expand head offices.  The challenges to corporate extravagance are moving into place.  Many large organisations would benefit from a close look at their overheads.  Zero-based budgeting insists that all expenditure must be justified from first principles each year.  The approach is back on agendas.  The Economist has noted encouraging trends.  A rise in job satisfaction after action is one important outcome.

Pawns and playthings in Europe.  One aspect of integration in the European Union has been obscured by the post-Maastricht dramas.  This is about the need to overcome difficulties between business philosophies and managerial cultures.  There are radically divergent concepts of companies as entities and what their relationships should be with the state and individuals.  The notion that companies are personalities in their own right and not pawns in a game played by a small group of powerful people remains just an idea in most continental countries.  A corporate sector run by a few mighty industrialists is challenged in the Anglo-American axis.  But it is still the norm in the rest of Europe.

The view that control itself is a valid strategic objective contradicts the Anglo-American belief that free markets are the best guarantee of an efficient allocation of resources.  Herein lies the row about the ‘unlevel playing field’ on cross-border acquisitions.

Does the slowboat still leave on time?  The government of PR China has published its first guide to investing overseas.  It concentrates on the basics of entry into the UK and describes twenty successful initiatives.  The authors recommend that Chinese companies consider opportunities in the UK’s biosciences, digital sector, infrastructure, manufacturers and professional services.

Benn gem.  ‘If one meets a powerful person, ask her/him five questions: ‘What power have you got?  Where did you get it from?  In whose interests do you exercise it?  To whom are you accountable?  How can we get rid of you?’  If you cannot get rid of the people who govern you, you do not live in a democratic system.  Rt Hon Tony Benn, 1925 – 2014.

Not Karl.  ‘Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.’  Groucho Marx quoted in The Week.

Monday, 17 March 2014

CONSPIRACIES ARE FASCINATING THOUGHTS. COCK-UPS ARE OFTEN REALITY.


Is it a plot by HM Government?  Unlikely, but between October 2008 and February 2009 interest rates were reduced six times.  On 5 March 2009, the Bank of England’s Monetary Policy Committee (MPC) decided on a cut from 1% to 0.5%.  This was claimed as an emergency measure, a short-term response to an extraordinary crisis.  And five years on, the rate remains at 0.5%.  We know that this is the lowest figure since records began in the 1600s.

There have been dramatic winners.  They include anyone with a mortgage s/he should not be able to afford, banks, big companies which have been able to take out cheap debt, the growing number of buy-to-let landlords have done well.  Many businesses have been kept alive by cheap borrowings.  But there have been many losers.  Holders of cash (savings) have suffered in real terms (after inflation).  Employers with defined-benefit schemes have been in huge difficulties.  Low interest makes their future liabilities look higher and higher.  The prospects have collapsed for anyone buying an annuity.  First-time buyers of domestic property have been hurt by continuing high prices.  ‘Normal’ interest rates (inflation plus 3/5%) would almost certainly have corrected the relationship between incomes and cost of property.  A major beneficiary is HM Government, the biggest borrower of them all.  Its ministers’ constant mantra is reduction of the national debt.  The interest has gone down and the Bank of England helpfully buys the debt – this is called quantitative easing.  Governor, Mark Carney, has indicated that he expects base rate to be 3% by 2017.

There is a lot of talk about cities.  Those who wish to govern our lives have ambitions, opinions and some influence.  Their proposals are imprecise.  Cities are the ‘in thing’.  How can we make sure that workers and residents in urban developments will benefit?   Do they take part in discussions and decisions?  There are intensive explorations about hi-tech transport infrastructures, the place of universities, brands, accommodation and bio-tech innovation.  It is notable that the ‘big boys’ take a close interest in the activities.  Brother, BT, Cisco, clearing banks, IBM, Intel, large practices of accountants and lawyers, local authorities, Peel Holdings, Samsung, United Utilities, Westinghouse and more are there – watching, waiting and lobbying.  These are wise things to do.  But cities are complex entities.  They contain technical, social and physical systems.  It takes a long time to overcome an error.  The people living in cities outnumber the decision-makers.  It is essential to make sure they are not disconnected from the assumption, plans and proposals.  By the way, the population of Greater Manchester (ten metropolitan boroughs) is approximately the same as Chicago.

Shake-up of hierarchies.  A report by Accenture predicts that an increasing use of social media will shift the balance of power in organisations and ‘disrupt’ their structures, hierarchies and job titles (the badges of alleged status).  Employees will find it easier to create and share information and ideas, and many will grasp an opportunity to define their own learning, career paths and feedback on performances.  This is likely to replace conclusions by senior management or centralised departments.  LinkedIn’s HR director, Louise Gibney, pointed out in January’s edition of HR magazine that, ‘You only need to look at the number of young people coming into the workplace who use LnikedIn.  Last year, we registered 30 million students and graduates on the site – the fastest growing demographic. ‘   Of course, they will expect businesses to have a presence on social media and to use its potential beyond marketing and messages.

They come and go.  Bill Bonner recorded in MoneyWeek (10 January) that in the 16th century, Spain had the world’s leading currency.  In the 17th century, the Netherlands was number one.  France’s turn was in the 18th century.  The British pound was dominant in the 19th.  And in the 20th century, the US dollar was as good as gold.  Now we are in the 2000s and a new power has its elbows out.  Since 1980, America’s economy has doubled in size per capita.  Over the same period, China has grown 13-fold.  Will this continue?  No.  But China’s economy is still growing twice as fast as the US.  China is poor and getting wealthier.  America is rich and getting poorer.  Maybe Africa is the next winner and opportunity?

Process, process!  ‘Nothing will be attempted, if all possible objections must first be overcome.’  Samuel Johnson (1709-84).  Biographer, poet and lexicographer.

That’s so.  ‘In innovation, as in any other endeavour, there is talent, there is ingenuity and there is knowledge.  But when all is said and done, what innovation requires is hard, focused, purposeful work.’  Peter Drucker (1909-2005).

Monday, 3 March 2014

THINGS TO DO



A productivity crisis?    The economy is mired in problems and excuses relating to productivity (GDP per hour worked).  The latest estimates from the Office for National Statistics (ONS) show that the gap between performances in the UK and those of other leading countries are now at their widest since 1992.  In 2012, output per hour in the UK was 21 percentage points below the average for major G7 industrialised economies.  And results in this country fell from 2011 to 2012.  Canada, France, Germany, Italy and USA were all more productive than the UK in 2012.  Managers have a lot to do.

We have a toe in the stream of recovery.    However, these encouraging trends are driven by growth in the service sector.  It produces 80% of output.  Financial services, leisure and retail are the frontrunners.  Great Britain needs a successful and expanding London to offset the deficit in trade of goods.  Pushing so-call ‘balance’ contains important ambitions.  We would be unwise to disturb the London model.

EVA is not a musical.  EVA has entered the lexicon of managers.  Unusually for an acronym, the advocates refuse to say what the letters mean.  Economic value added?  Well, possibly, but ... .  There is common ground that in the 50s it was called ‘residual income’ by General Electric of America.  The formula is:  EVA = (return on capital – cost of capital) x capital.  The enthusiasm has all the signs of a fad.  EVA, we learn, is not merely a financial resource, nor simply a method or running a business and engaging everybody in the process: it is way of life.  This stimulates our caution.  EVA is offered as a sure technique for marrying financial incentives to a system for measuring performance.  There is no doubt that this approach is a step forward.  It is not a panacea.  Recall your hard lessons from previous nostrums.  They might be : allow a year;  have small working parties of operational people;  do not move a muscle without knowledge and support at the top;  keep it simple;  take it slowly;  communicate uncomplicated examples, not mathematic formulae.  If you incentivise, start with the five or six senior people.  Bear in mind always that incentives should connect with things the particular people can influence.

‘Greedy sods’ is the reaction when an independent body (Independent Parliamentary Standards Authority) suggests MPs ought to have an increase in pay.  MPs are too scared to accept.  Their leaders express horror at such a decision.  No one says it is pointless to debate money when we do not know what we want from our representatives.  The business of governing, opposing, communicating and winning elections is done by a handful of MPs and so-called professionals in each of the three main political parties.  These people are said to be up-to-the-job. An MP has to be seen as showing concern for the locality and being a social worker.  Maybe they compete with local councillors?  Or is it possible there are too many MPs, councillors and ‘public’ institutions and appointments?  A debate is essential on an MP‘s duties, responsibilities and relationships with other political/elected jobs.  When we resolve this matter, we can answer the other questions.

Good sense.  Big business is not dangerous because it is big, but because its bigness is an unwholesome inflation created by privileges and exemptions it ought not to enjoy.’  Woodrow Wilson, former president of America in his acceptance speech at the Democratic National Convention in 1912.

The quote has a respectable pedigree.  The avoidance of taxes is the only intellectual pursuit that still carries any reward.’  John Maynard Keynes (1863-1946).

Monday, 17 February 2014

THE WIDER VIEW



Mark Carney, the Bank of England’s governor, has dumped his ‘forward guidance’ and moved the goalposts.   He told the nation last summer that the Bank would consider higher interest rates only when unemployment fell to 7%.  This figure seemed a long time away.  However, a rapid rebound in the economy has seen the number of jobless fall quickly and is already close to 7%. Mr Carney says the Bank will measure ‘spare capacity’ now – the amount of slack in the economy.  This approach determines how fast it can grow without causing inflation.  We were told also about an upward estimate for growth of gross domestic product (GDP) in 2014, from 2.8% to 3.4%.

There are reasons for concern.  The Bank knows prediction of unemployment is difficult.  The output gap (spare capacity) is more unpredictable and notoriously tough to quantify.  Current estimates of its size range from almost zero to 6% of GDP.  The information is essential to the outlook for inflation.  If it is small, demand in the economy is nearly matching supply, so growth will bring pressure towards higher inflation. Plenty of capacity left under-used by the recession gives flexibility without inflation. As MoneyWeek has noted, studies indicate recessions after financial crises tend to wipe out a lot of capacity.  The mistaken investments caused by loose credit are killed-off.  City AM reckons another boom and bust period ‘is all too possible’.  Mark Carney will need all his skill and care.

Is an economist a scientist?  You know the definition of such a claim, ‘Systematic observation, measurement and experiment and the formulation, testing and modification of hypotheses’.  There are doubters relating to this group of practitioners.  Economists have had a long period as respected commentators and forecasters on all issues associated with managing the UK ... and the world.  There has been a premise of training and a profession.  In the five years since the collapse of Lehman Brothers, these prominent and self-appointed experts have had an uncomfortable spotlight on their inner workings and assumptions.  There are now assertions there is something fundamentally wrong with the structure of western economies.  In addition to the financial crisis, the world faces rising inequality and pressing issues of sustainability.  Maybe we ought not to be surprised by people’s conclusions that economists have got it all awry?  Even Robert Peston (BBC) has said there is a mystery about Britain’s recovery.  The Office for Budget Responsibility (OBR) suggests survival is driven by households spending more than expectations. This is happening at a time when real disposable income has gone down and living standards have fallen for most families.  Homes are in debt at 140% of available revenue.  Five to nine million families would struggle to keep their heads above financial water if interest rates rise to normal levels.  The OBR’s predictions for GDP’s growth rely on continued reduction in personal savings and rising liabilities.  Does this make sense when businesses have not followed consumers’ lead, and sit on their cash rather than invest?

Some say any recovery is OK, so shut up.  But is a binge of credit the road to recuperation we need?  So, back to the activities of economists.  Some insist we should concentrate on the big picture – the importance of institutions, regulation, distribution of income, central taxes and so on.  This is essential before the studies of individuals and markets (microeconomics).  But the overview does not direct us to effective action. Despite centuries of study, there is no agreement on such basics as what causes recessions, or how to prevent them.  There are some simple and unglamorous matters that do work, but demand persistence.  We might be wise to follow physicists and teach/do those things that work.

A different breed of chief executive?  Companies amend their strategies to fit the marketplace.  The job of chief executive changes too.  A top manager once spent years at a company operating one aspect of the business.  This is no longer good enough.  Today’s senior executives have to be fast, nimble and adaptable. They need a range of skills way beyond a business degree.  The search is for global mindsets and international experience.  Continental Europe is a good place to find them.  It will soon be commercially dangerous to regard the rest of the world as ‘foreign markets’.  Working in other countries used to be dangerous.  It kept one away from the corridors of power and sponsors.  The base at home is now less crucial as companies independently manage several operations simultaneously.  More managers than ever before are hands-on.  They get out of the office to do the moving around once delegated to other people. The new technologies allow travel and daily management.

And so say all of us.  In Summer Lightning, PG Wodehouse dubs Lord Emsworth’s secretary as ‘the efficient Baxter’.  ‘We have called Rupert Baxter efficient and efficient he was.  The word, as we interpret it, implies not only a capacity for performing the ordinary tasks of life with a smooth firmness of touch, but in addition a certain alertness of mind, a genius for opportunism, a genius for seeing clearly, thinking swiftly and Doing It Now.’

That’s it.  ‘Any activity becomes creative when the doer cares about doing it right, or better.  John Updike (1932) – prolific novelist, poet and critic.

Opportunities.  ‘When one door of happiness closes, another opens;  but often we look so long at the closed door that we do not see the one that has been opened for us.’  Helen Keller (1880-1968), American author in We Bereaved.